Author: Sarah Kanwal

Key takeaways:  

·         Disney reported slightly better than expected revenue and missed on EPS. However, estimates have been wide ranging given the broad based nature of virus impact to their business.

·         Parks hit the worst: Biggest hit from Covid-19 was to Parks business. Parks were tracking well ahead of expectations before virus hit. Shanghai Disney is opening on May 11 w/ requirements for masks and temperature checks. Date of domestic parks opening is still undetermined.

·         Disney+ tracking ahead of expectations: 33.5m DTC subs at end of the quarter. As of May 4 they had 54.5m DTC subs. They’ve added ~26m subs in 3 months.

·         Cut July dividend and reduced capex to preserve liquidity. They will re-visit potential reinstatement of dividend in 6 months (their dividend is semi-annual, not quarterly).

·         No guidance.

·         CEO Bob Chapek said… “We are seeing encouraging signs of a gradual return to some semblance of normalcy in China.”

Continue reading “Disney 2Q20 Results”

Key takeaways:

 

·         Visa beat on revenue and earnings. No 2020 guidance. Cutting expenses. Share repurchase plans and dividend remain unchanged.

·         Dramatic fall in volumes but slight stabilization emerging: intra-quarter volume trends decelerated w/ early April volumes in the US and cross-border declining >20% and >40%, respectively. However, volumes stabilized/recovered somewhat in late April. More details below.

·         Food & Drug category spending saw only increase: >20% of U.S. spending on Visa’s network comes from food and drug stores and that was the only category to post an increase in April, up +20%. Among the hardest hit categories are travel, restaurants, entertainment and fuel.

·         Cross-border headwind until travel recovers: Visa warned “the road ahead will likely be challenging for a number of quarters,” though declines in spending on their network did begin to moderate in April. This is partly due to lower cross-border volumes which are more profitable for them. Cross-border volumes are basically a mix of travel and e-commerce. For the quarter, cross border was down 2%. However, 2Q will be worse. Exiting April, overall cross-border volumes were down 44%. Travel is 2/3 of volume and was down -80%. E-commerce is the other 1/3 and was up +25% in April.

·         Current environment could be secular growth catalyst: While cross-border will be headwind for the foreseeable future, current environment may be a catalyst to further displacement of cash aided by faster uptake of contactless and higher e-Commerce penetration.

·         CFO Vasant Prabhu said… “It is very likely that this crisis could accelerate trends that were already underway, like the shift to e-commerce and the shift to digital forms of payment… it is speeding up tap to pay adoption and driving growth of new flow use cases.”

 

Additional Highlights:

·         Revenue grew ~8% constant currency YoY and EPS was +9% YoY.

·         Key metrics: Payments volume was $2.1T, up 5% (credit +1% and debit +9%), cross-border was -2%. Total cards grew 4% to 3.5B cards (1.1B credit and 2.4B debit). Client incentive were up 15%, stepped up due to high renewal activity.

·         COVID-19 impact:

o   Discussed trends occurring after the quarter ended more than they normally would.

o   US payments volume:

§  strong growth in January and February payments, but by the last week of March payment vols were declining 28%.

§  Credit spending harder hit than debit.  

§  Through April 28, US payments volumes were down 19%, debit was down 6% and credit was down 31%.

§  Credit was down at least 25% every week in April, and debt was down mid-teens then spiked into positive territory in both week three and week four as the first wave of economic impact payments were distributed.

§  e-commerce volume excluding travel up 18% in April and card present volume down 45%.

§  20% of volumes = food and drug stores (along with Walmart, Costco and Target) and are the only categories still growing – up approximately 20% in April – essentially all this growth is coming from online spending up over 100% in the last two weeks.

§  33% of volumes = categories that are declining between 15% to 50% such as retail automotive, healthcare, education and government.

§  25% of volumes = the hardest hit categories – including travel, fuel, restaurants and entertainment all declining over 50% in April. The travel decline affects all sub-sectors and is the deepest at around 80%. Within restaurants quick service restaurants are holding up better.

§  Categories showing more resiliency include home improvement within retail and medical equipment within healthcare. Gaming is up over 200%. As economic impact payments have been distributed, they’ve seen significant increases in home improvement, automotive, healthcare and some retail goods and services categories.

o   International payments volume:

§  Major markets in Europe and Canada have trends similar to the US

§  India with a rigorous and sudden lock down has experienced one of the fastest and deepest declines.

§  Hong Kong dropped in early February, along with the rest of China and appears to be recovering in April.

o   Cross-border:

§  Volume declines exiting March of 44%.  Volume remains down 43% through April 28.

§  The majority of the cross-border spend decline is travel related (2/3), and was down 80% in April. E-commerce is the rest of volume and is growing faster than pre-crisis levels.

·         Nothing has changed w/ their major growth initiatives: consumer payments, new flows and value-added services.

·         Contactless penetration: Seeing increasing penetration of tap to pay. This should help drive displacement of cash for lower ticket purchases.

·         Partnerships: Several announcements around new and renewed partnerships –Truist (6^th largest issuer in the US), Barclays (UK), Groupe BPCE (France), Comdirect (Germany). Entered into an agreement for B2B virtual cards with ICBC, the largest bank in China. Visa is the global co-brand leader, and extended that this quarter w/ Accor.

·         Digital wallets: As payment industry evolves, Visa continues to partner to stay at the center like with Tencent in China, Paytm in India, M-Pesa in sub-Saharan Africa and Lydia in France. They now have relationships with wallet providers that give them the potential to embed Visa credentials in 2 billion wallets.

·         Cost cutting: pulling back on discretionary spending, especially related to personnel, travel, professional services and marketing. Expectation for expenses to be flat in 2H. They’ve pledged to their 20k employees no Covid related layoffs in Calendar 2020.

·         Balance sheet:

o   Ended the quarter with $13 billion of cash.

o   At the end of March they raised $4B in fixed-rate senior notes with maturities ranging between 7 and 20 years, and interest rates from 1.9% to 2.7%. The weighted average interest rate was 2.16%. They have a $5 billion revolver, which remains undrawn.

·         Capital allocation: YTD FCF of $5B with $5.6B in share repurchase and $1.3B in dividends. Plan to buyback over $9B (so another $3.4B) in stock this fiscal year remains unchanged and their dividend policy remains unchanged.

·         Valuation: trading at a 4% FCF yield on 2021….reasonable for a company w/ high moat, powerful  brand, vast global acceptance network and LT secular growth – despite near term headwinds.

 

 

 

Sarah Kanwal

Equity Analyst, Director

 

Direct: 617.226.0022

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square, Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

 

$V.US

[category earnings]

[tag V]

 

Key Takeaways:

·         Better than expected results. Sales growth of 2.6% in line with guidance. Estimated impact from COVID-19 on sales during the quarter was approximately -1.5%.

·         They are seeing strong DIY sales (+double-digits) which aided same store sales (SSS) in their paint stores. DIY aided by stay-at-home orders. Should switch back to DIFM. In areas in the US that are less hit by Covid-19 they are already seeing a return of contractors getting estimates for projects. Positive comments on housing and new construction outlook.

·         Big GM expansion (270bps improvement), driven by strong volume, improved pricing, and lower raw material cost. Raw materials expected to be down low-single-digits for the year compared to prior estimate of flat.

·         Guidance: Unlike peers they gave full year guidance (more details below). For Q2 they expect sales down low to mid-teens percentage YoY. For their worst case scenario of full year guidance (which assumes economic conditions don’t improve until 1Q 2021) they could see 2020 sales down HSD. This would be partially offset by raw materials down low-single-digits.

·         Dividend increase: While others are cutting their dividend, SHW just approved a 19% dividend increase on April 22, underscoring the strength of their balance sheet and resiliency of their business right now.

·         DIY Business is strong: CEO John Morikis said, “Our DIY business is strong as consumers are nesting and using stay at home time to work on affordable home improvement projects such as painting.” And….”We believe we’re seeing a pause in demand in many of our end markets rather than destruction of demand. We believe the long-term fundamentals remain intact. We intend to continue strategic investments to support profitable growth.”

 

Additional Highlights:

·         Sales increase due to higher SSS in N. American paint stores and increased sales in the packaging and coil divisions w/in their Performance Coatings Group (across all regions). This was partially offset by impacts of COVID-19, continued demand softness in some end markets outside the US and unfavorable Fx translation.

·         Residential repaint customers are delaying interior work related to having painting contractors in their homes. They expect this demand to return gradually and they expect exterior repaint work to gain momentum near-term (already up double digits), which will help to offset some of the interior softness.

·         They expect DIY trend to fade as stay at home orders ease and that it will return to DIFM trend. “if you look at the underlying principles that have us believing that this gradually shifts back to the Do-It For Me as opposed to DIY primarily because we think those are still intact. Those are the aging demographics, the home appreciation, aging housing stock.”

·         Reassuring commentary on housing: Mgmt. gave a lot of positive commentary around the LT fundamentals of the housing market being intact. This is a positive read through for HD. “Activity should eventually improve as mortgage rates are low and the supply of homes is limited”…” in new residential, we feel there is a pause that there’s a fundamental need for housing in the country.” All top 10 of their builder customers have reached out to ensure SHW’s supply chain will be able to serve them.

·         Similar to other retailers, modifying their operations for the current environment is leading to permanent change as they plan continued investment behind omni-channel. In their stores SHW shifted to curb-side pickup and delivery.

·         Cost cutting: restricting travel, hiring freeze, some reductions in force, cutting some G&A expenses, cutting capex. They put a pause on spending related to their new headquarters and R&D facility projects.

·         America’s Group:

o   Same store sales grew 7.4% in 1Q, inclusive of a significant downturn in sales during the last two weeks of March due to COVID-19.

o   Higher paint sales volume led to 140bps segment op margin expansion.

o   Had a very small number of North American stores closed intermittently during the crisis related to varying government orders. The vast majority of stores remain open.

o   2Q guidance for down LDD to mid-teen. Seen improvement week-to-week. April toughest comp vs year ago.

·         Consumer Brands Group:

o   Decreased 4.9% due primarily to softer sales in Asia Pacific, partially due to impacts of COVID-19, and the planned exit of the ACE business, partially offset by higher volume sales through most of the Group’s retail customers in North America and Europe. 

o   Demand in North America continues to be strong. Stay at home mandates have increased home improvement demand. Sales to home centers and other retail channel partners continue to perform well – encouraged by growth prospects with multiple customers in this channel.

o   2Q guidance for sales up high-single-digits to low-double-digits.

·         The Performance Coatings Group:

o   Sales decreased -1.1%. The decrease was due to softer end market demand in some businesses in Asia Pacific and Europe, partially due to impacts of COVID-19, and unfavorable currency translation rate changes. This was partially offset by increased sales in the packaging and coil divisions.  

o   “We have started to see some recovery in China at a slower pace than anticipated.”

o   Lower miles driven and lower oil prices weakening some end markets.

o   Supporting industrial customers in mission critical areas, such as food and beverage packaging, health care equipment, food manufacturing, water treatment and energy infrastructure.

o   “During the crisis, we have delivered critical coatings product to producers of ventilators, oxygen tanks and hospital bed frame. At this time, all major architectural and industrial plants and distribution service centers are in operation.”

o   2Q guidance for sales down high-teens.

·         Guidance: Somewhat surprisingly and unlike peers they gave full year guidance. Competitor PPG withdrew its 2020 guidance last week, said it sees demand hurt by Covid-19 and guided aggregate sales volumes down 30% to 35% for 2Q.

·         For the full year SHW said, if economic conditions begin returning to normal in Q3 2020 and continue improving through Q4 2020, they anticipate full year sales to be flat to down a low-single-digit percentage. And if economic conditions do not materially improve until the first quarter 2021, they anticipate full year 2020 sales to decrease by a mid-to-high single digit percentage. This is compared to their previous full year 2020 sales guidance of an increase of 2% to 4%.

·         FY 2020 guided to a range of $19.00 to $21.00 (from prior guidance of $22.70 to$23.50, current consensus $20.26).

·         The revised FY guidance is premised on the following segment performance:

o   Americas Group: Flat to down mid-single-digits

o   Consumer Group: +/- low single digits

o   Performance Coatings: down high-single-digits to low-double-digits

o   Raw Materials: down low-single-digits

·         Well positioned from a balance sheet and liquidity perspective. They have $239 million in cash and $2.5B of unused capacity under their revolving credit facilities. No big near term maturities.

·         Capital allocation: increased dividend by 19%, share repurchases on hold, reduced capex.

·         Valuation: Stock is inexpensive, trading at >4% FCF yield.

 

 

 

 

Sarah Kanwal

Equity Analyst, Director

 

Direct: 617.226.0022

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square, Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

 

$SHW.US

[category earnings]

[tag SHW]

 

Key Takeaways:

·         Apple reported better than expected results with revenue of $58.3B (+1% YoY, +2% constant currency) vs consensus $54.8B and EPS of $2.55 vs. $2.26 consensus. They were on the path for a record second quarter before the virus hit.

·         Broad beat – relative to lowered expectations, they saw better than expected revenues across all products, with a quarterly record for Services and for Wearables, Home & Accessories.

·         Supply chain is back to a normal operation.

·         They’ve seen improvements in the second half of April despite continued social distancing…improvements have been across geographies and products. The attribute this partly to the stimulus. China demand/foot traffic not back to pre-virus levels, but continues to improve.

·         No specific guidance for Q3.

·         Increased buyback & dividend – with huge cash balance and FCF generation they continue returning capital to shareholders – increased buyback authorization from $40B to $90B and raised the dividend by 6.5%

·         Tim Cook said, “I think many people are finding that they can learn remotely and so I suspect that trend will accelerate some. I think that’s probably also true about working remotely.”

 

Additional Highlights:

·         Installed base of active devices reached an all-time high and newly launched products iPad Pro, MacBook Air and iPhone SE have all received “outstanding customer response.”

·         No specific guidance for Q3 – but they did say that they expect iPhone and Wearables to see worsening YoY trends in the June quarter versus March, and iPad and Mac to see better YoY trends (benefiting from WFH related purchases). They also expect a hit to Services revenue on lower Apple Care and Advertising.

·         They continue to fully compensate retail employees despite store closures.

·         Affordability – This is a growing focus right now as a way to grow their installed base. They just launched the iPhone SE @ $399. Compelling phone for the price – faster than all Androids on the market. They have payment plan iPhone when purchased on Apple Card. They plan to do that for other devices as well. Trade-in programs also focused on this.

·         Supply chain – back to normal operations. When questioned about whether they would consider changes to their supply given disruptions from this pandemic, Tim Cook commented that how quickly the supply chain operations recovered provided defense for its current structure…it was a testament to its “resiliency and adaptability.” He also said that people tend to focus too much on where final assembly is (mostly China), but that for components the supply chain is truly global. He did slightly equivocate though by conceding that they’re always looking to tweak their supply chain structure and would make changes if they felt it was optimal, but he considers any changes to be competitive information that he wouldn’t share.

·         Tim Cook said, “During uncertain times historically, we have continued to invest in the business and this remains our philosophy.” Specifically mentioned investing behind the baseband business they bought from Intel.

·         iPhone ($29B, -7% YoY)

o   iPhone supply and demand were affected by the impact of COVID-19

o   Expect worse performance for iPhones in Q2

o   active installed base of iPhones has reached an all-time high.

o   exited the quarter in a good supply position for most of their product lines.

·         Services ($13.3B, +17% YoY)

o   Record Services performance. App store revenue grew by strong double digits as paid accounts grew to 515m, up 125m YoY.

o   Expect to meet long-standing goal of doubling FY16 Services revenue in FY20.

o   For the Services segment in Q2 they expect better performance with App Store, video music and cloud…but worse performance with Apple Care and advertising.

o   App store paid accounts grew to 515m, up 125m YoY and 35m sequentially…the highest sequential growth they’ve seen. Goal is for 600m subs by year end.

o   Third-party subscription increased >30% YoY. Apple Music and Apple Care hit record highs, up “strong double-digits.”

o   Face Time and messages set new all-time records for daily volume

o   Launching a joint effort with Google to enable to use Bluetooth technology for contact tracing.

o   As stores shift to become fulfillment centers for online orders organizations are leveraging apps for remote shoppers and food delivery to reduce foot traffic.

·         Wearables, Home and Accessories ($6.3B, +23%)

o   Now the size of a Fortune 140 company

o   >75% of Apple Watch purchasers were new to the product

o   Expect worse performance in Wearables in Q2

·         Mac ($5.4B) & iPad ($4.4B)

o   Launched a brand new iPad Pro and a MacBook Air with significantly improved performance at a lower price.

o   Expect better performance for iPads and Macs in Q2.

o   Half of the customers purchasing Macs and iPads around the world during the quarter were new to that product and the active installed base for both Mac and I iPad reached a new all-time high.

o   Deploying major orders of iPads to school systems working to support distance learning including tens of thousands in Ontario, Canada, Glasgow, Scotland and Puerto Rico. 100,000 to the City of Los Angeles and 350,000 to New York City, their largest educational iPad deployment ever.

·         Valuation:

o   Trading at a ~5% FCF yield. Higher than the S&P. Apple’s FCF generation is about the same as the other FAANGs combined.

o   Ended the quarter with net cash of $83B ($193B in cash and debt of $110B) or about 6.5% of their market cap.

o   Returned $22B to shareholders during the March quarter, including $18.5B of repurchases and $3.4B in dividends.

o   Maintaining target of reaching a net cash neutral position over time.

 

 

Sarah Kanwal

Equity Analyst, Director

 

Direct: 617.226.0022

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square, Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

 

$AAPL.US

[category earnings]

[tag AAPL]

 

 

Key takeaways:

·         MSFT beat across all segments. Total revenue growth accelerated to +16% on a constant currency basis vs +15% the past two quarters.

·         COVID-19 had minimal net impact on total revenues as strength in some areas offset weakness in others. Cloud strength was a key theme.

·         Guidance better than feared…high end of their guidance for Q4 was ahead of consensus. Assumes advertising spend levels from March do not improve in Q4, which will impact Search and LinkedIn.

·         Satya Nadella said, “we’ve seen two years’ worth of digital transformation in two months. From remote teamwork and learning, to sales and customer service, to critical cloud infrastructure and security”…”There is both immediate surge demand, and systemic, structural changes across all of our solution areas that will define the way we live and work going forward.”

 

Additional Highlights:

·         Cloud strength was a key theme. They saw increases in cloud usage, particularly in Microsoft 365/Teams, Azure, Windows Virtual Desktop, advanced security solutions and Power Platform. Azure sales were +61% constant currency. Gaming along with Windows OEM and Surface also benefitted from these trends, partially offset by supply chain constraints in China that began improving in March. Strength in cloud also slightly offset in the last few weeks of the quarter by a slowdown in transactional licensing especially in SMB and LinkedIn ad spending.

·         Productivity & Business Processes segment and Intelligent Cloud segment were both ahead of the high end of their guidance. And for More Personal Computing –they had removed guidance in March related to potential impact to PC supply from Covid-19, but results ended up being within guidance.

·         Productivity and Business Processes ($11.7B) +16% YoY:

o   Strength across all products especially in Office 365 Commercial (up 27%), Dynamics 365 (up 49%) and LinkedIn (up 22%).  Office 365 now has 258 million paid seats.

o   Teams product is really shining for them right now. Teams now has more than 75 million daily active users. “We saw more than 200 million meeting participants in a single day this month.”

o   Organizations are realizing they need a comprehensive solution and Teams is the only solution with meetings, calls, chat, collaboration and with the power of Office and business process workflows in a single integrated user experience with strong security.

o   Teams is being used by New York state’s largest health provider to deliver telehealth. Teams powered the virtual NFL draft.

o   20 organizations with more than 100k employees are now using Teams, including Continental AG, Ernst & Young, Pfizer and SAP. Last week, Accenture became the first organization to surpass 500k users.

o   Accelerating Teams innovation, adding new capabilities each week and now support meetings of all sizes, meetings that scale from 250 active participants to live events for up to 100,000 attendees to streaming broadcast.

o   Teams is not just about having lots and lots of video meetings. Teams is about actually getting work done where meetings and video is one part. The utility of it will only increase as some people go back to working at the office.

o   LinkedIn seeing record engagement. 690m professionals. Users watched nearly 4 million hours of content on LinkedIn Learning in March, ~50% increase month-over-month. However, significant reduction in advertising spend, which impacted LinkedIn (and search).

·         Intelligent Cloud ($12.3B) +29% YoY:

o   Server products and cloud services revenue increased 32% with Azure revenue growth of 61% driven by continued strong growth in their consumption-based business.

o   With Azure they have more data center regions than any other cloud provider. This quarter, they announced new regions in Mexico and Spain.

o   “Will continue to aggressively expand our cloud infrastructure to support not only the usage surges of today, but the growing customer demand for our unique and differentiated cloud offerings in the future.”

o   Enterprise Services revenue increased 7%.

·         More Personal Computing ($11B) +4% YoY:

o   The supply chain in China returned to more normal operations at a faster pace than we had anticipated. And we saw increased demand from work, play and learn from home scenarios, benefiting Windows OEM, Surface, Office Consumer and Gaming.

o   Windows OEM revenue was relatively unchanged year over year

o   Windows Commercial products and cloud services revenue increased 18%

o   Search advertising revenue excluding traffic acquisition costs increased 1%. In Search ex-TAC in Q4, they expect revenue to decline in the mid-20% range, similar to March.

o   Xbox content and services revenue increased 2%. 19 million active users of Xbox Live. Seeing increased monetization of in-game content and services.

o   Surface revenue increased 2%

·         Commercial Cloud ($13.3B), +40% YoY

o   Called out MasterCard, Autodesk, AARP and Coca Cola having signed 5 yr. multi-cloud agreements for Microsoft 365, Dynamics 365 and Azure.

o   Gross margin percentage increased 4 points YoY to 67% on significant improvement in Azure gross margins.

o   COVID-19 has accelerated the urgent need for every business to create no-code, low-code apps. This is small for them, but important in terms of strategic positioning and future growth. The Power Platform enables non-technical employees to analyze data and create apps/workflows without coding knowledge. For example, Power Platform was used to build a new applications in hours so that first-line workers could track PPE because there was no ERP system that did that.

Valuation:

·         FCF was $13.7 billion, up 25%. They returned $10B to shareholders in share repurchases and dividends.

·         Recurring revenue is ~60% of total, underpins most of their valuation and is resilient and poised for additional growth. Particularly Azure, Office 365 and Dynamics 365.

·         Trading at ~3.5% FCF yield on next year.

 

 

Sarah Kanwal

Equity Analyst, Director

 

Direct: 617.226.0022

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square, Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

 

 

$MSFT.US

[category earnings ]

[tag MSFT]

 

Key takeaways:

·         Alphabet reported better than expected results. Revenues better than feared. Search ads saw the biggest fall off in the end of March while Cloud and YouTube fared better.

·         Exiting the quarter, search was down mid-teen percent, network ads were down low-double digits, YouTube was growing high-single digits and Google cloud platform (AWS/Azure competitor) was growing “meaningfully higher” than 52%.

·         Advertising declines weren’t as bad as some were expecting despite their mix of small-to-mid sized business and exposure to heavily hit industries like retail and travel. Facebook, which reports after the close should see a similar hit.

·         No guidance, but 2Q “will be difficult” for their advertising business. They are guiding to spending cutbacks including slowing the pace of hiring. Though they increased hiring by 20% in 2019, so they could still see meaningful growth.

·         Planning capex down in 2020 primarily driven by reduction in global office facility investments.

·         CEO, Sundar Pichai, offered up some thoughts on what might be a lasting impact, “ultimately, we’ll see a long-term acceleration of movement from businesses to digital services, including increased online work, education, medicine, shopping and entertainment. These changes will be significant and lasting.”…” companies are thinking about their shift to digital in a deeper way.”

 

 

Additional Highlights:

·         Total revenues were up 15% on a constant currency basis. Currency was a 2pt headwind.

·         Search revenue ($24.5B) up 8.6%. Ended the month of March in mid-teens percentage decline YoY. Significant rise in search activity, but reduced spending by advertisers and shift in search away from commercial topics, limiting their ability to show ads. 

·         YouTube ad sales ($4B) were +33.5%, growing faster than search revenues. Ended the quarter w/ YoY growth rate up high-single-digits.

o   YouTube watch time has also significantly increased, particularly live streams. Andrea Bocelli’s live stream on Easter had 39m views.

o   YouTube brand advertising growth accelerated in the first two months of the quarter, but started to experience headwinds in the middle of March.

o   Direct response ads continued to have substantial year-on-year growth throughout the entire quarter.

·         Network ad revenues: $5.2B, +4% YoY, exited the quarter declining mid-double digits percent.

·         Google cloud (GCP and G Suite): was $2.8B, +52%.

o   Driven by significant growth at GCP and ongoing strong growth at G Suite. Growth rate at GCP was meaningfully higher than that of Cloud overall.

o   Saw headcount increases.

o   Some deals taking longer to complete.

o   100 million students and educators are using Google Classroom, doubled the number from the beginning of March.

o   Meet: schools and businesses, in particular, are using their secure video conferencing platform, Meet. Twitter and Shopify also use Meet. Now adding roughly 3 million new users each day, seen a 30-fold increase since January, now over 100 million daily meeting participants. “Stay tuned for much more.” Announcements coming up later this week.

·         Hardware saw a decline in device activations due to falling consumer demand globally. Just launched Pixel Buds 2.

·         Downloads of apps from Google Play rose 30% from February to March.

·         Massive increase in demand for Chromebook.

·         Other bets – revenue primarily generated by fiber and verily. Operating loss increased to $1.1 billion.

·         Margin contraction:

o   Operating margin contracted 400bps.

o   Driven by higher costs associated with depreciation, data centers, higher content acquisition costs for YouTube, headcount and a reserve for estimated credit deterioration as a result of COVID-19.

o   Partially offset by lower TAC as a percent of ad revenue, 22.1% vs 22.4%. Reflects a favorable revenue mix shift from network to Google properties.

·         Outlook: No specifics. Optimistic on the durability of their business for 2 major reasons:

o   2Q “will be difficult” for advertising

o   advertising spending closely correlates with the overall health of the economy

o   Cutting back on spending…slowing the pace of hiring. “Looking at levers we have to moderate spending.” Originally said 2020 headcount growth would be greater than the 20% growth in 2019.

o   Originally planning an increase in capex this year, now expect modest decrease. Largely driven by lower real estate expense.

o   Overall spend on tech infrastructure should be the same YoY. More spend on servers than on data center construction.

o   They are seeing early signs that consumers returning to commercial behavior. Since the close of the quarter, management noted that they have not seen further deterioration in YoY declines for search, while YouTube direct response has remained strong while and YouTube brand advertising continued to decline.

o   Given that many of the trends they are discussing were abrupt, and are from a few weeks of behavior they cautioned against extrapolating any of the trends.

·         Q1 FCF was $5.4B and they ended the quarter with cash of $117B. They have ~11% of their market cap in net cash. The stock is still reasonably valued, trading at a ~4.5% FCF yield on 2021. They plan to maintain pace of share repurchases.

·         In terms of recovery with ad spend…Pichai said, “recovery in ad spend will depend on a return to economic activity. There are two key aspects of our business that give us confidence about the future. First, as we saw after 2008, one of the strongest features of Search is that it can be adjusted quickly, so it’s relatively easier to turn off and then back on, and marketers see it as highly cost-effective and ROI based. Second, our business is more diversified than it was in 2008, for example, Cloud.”

 

 

 

 

Sarah Kanwal

Equity Analyst, Director

 

Direct: 617.226.0022

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square, Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

 

 

 

 

 

$GOOGL.US

[category earnings ]

[tag GOOGL]

 

Sending an update on Apple regarding headlines today that they are planning to start selling Mac computers with Apple’s own main processors by next year. The chips likely would be in one laptop model, then extend beyond that. This would mean transitioning away from their current supplier Intel (Apple is ~9% of Intel’s sales). Taiwan Semiconductor (TSMC), Apple’s partner for iPhone and iPad processors, would build the new Mac chips. The potential for Apple to do this has been rumored/expected for a while. This isn’t about saving money (though it would), it’s about differentiating themselves and enhancing their competitive advantage…and is very much aligned with what Tim Cook said over a decade ago when he was COO, “we believe that we need to own and control the primary technologies behind the products that we make.” Part of what differentiates Apple is they design their own silicon for the processor chips that are the brains of their iPhones and iPads (…and now potentially for their Macs), which gives them better control over performance and feature integration in their devices. The cutting edge for them right now is their A13 bionic which TSMC (one of the few major semiconductor foundries) makes for them and is custom built on top of licensed ARM architecture (which underpins most mobile devices). Notably, this would further push ARM (owned by Softbank) architectures beyond mobile (where it dominates), to laptop/desktop (where Intel’s x86 architecture dominates) and some suggest could ultimately pose a threat to Intel’s data center business (e.g. chips in servers). For Apple, the advantage in doing this is that their silicon is unique to them and tailored for their operating system, iOS. This has proven to give them an advantage with the way they design their phones and an advantage with developers. Android and iOS basically have a duopoly in mobile operating systems…generally any smartphone that’s not an iPhone is running an Android operating system, which Alphabet gives away. That gives Apple about 15% operating system market share and Android about 85%, however that is split up across devices/brands. The fact that Alphabet’s mobile operating system is so fragmented (and that users are often not using the same/latest version) makes app development more complex, costly and time consuming. Moreover, Apple, which dominates the high-end smartphone market, has a wealthier installed base for developers to target. The app store is fueled by third-party app developers. Easier to develop apps and a target rich audience leads to a greater number of higher quality iOS apps created by these developers for iPhone owners to download, with a better user experience. This is great for Apple b/c they make a % of revenue from Apps sold through their App store. This latest potential development should build on this advantage. They would have Macs, iPhones and iPads running the same underlying technology which should make it easier for Apple to unify its apps ecosystem, including allowing iPhone and iPad apps to run on Macs. This advantage gets more and more important as computing power in phones increases, 5G delivers better connectivity and, as a result, we have the ability to use mobile phones in enhanced ways….like apps that take advantage of augmented reality and IoT related technologies. 4G enabled advances like Uber. 5G is a step function change from this. Along this same theme, last year Apple acquired Intel’s cellular modem business for ~$1B. These are the chips that connect smartphones to the internet. They had been using QCOM for these chips, then they shifted to Intel as AAPL/QCOM were embroiled in a lawsuit. That has been settled and now Apple is again using Qualcomm’s chips. But the long-term goal here is for Apple to make these chips themselves, furthering their goal of controlling the primary technologies behind their products…and moving away from suppliers like Intel and Qualcomm. All of this is aimed at cementing Apple’s technology and ecosystem advantage which is Apple’s moat and drives their massive installed base. This can be seen by the fact that despite only having about 15% of the global smartphone market, Apple earns almost all of the industry profits b/c they have a differentiated, proprietary product/ecosystem, while Android based OEMs don’t own the silicon and software.

 

 

Sarah Kanwal

Equity Analyst, Director

 

Direct: 617.226.0022

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square, Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

 

 

$AAPL.US

[tag AAPL]

[category equity research]

 

Some updated thoughts on Disney which continues to be one of the hardest hit stocks in Focus Equity…

 

·         Parks are shut down globally, they are seeing broad theater closures and professional sports in the US are halted. The impact of the virus should be temporary and not affect Disney’s long-term competitive positioning or brands. Overall, I think the price drop in Disney’s stock reflects mostly the impact to their Parks business, which is temporarily shut down. In terms of their other businesses (which I detail further below), ESPN is getting hit, but revenue is dominated by long-term affiliate fee contracts. Their Studio business can pivot by delaying releases or sending films straight to DTC to help mitigate the impact. And DTC is seeing a ramp in subscribers. 

·         Parks – Disneyland and Disney World will be closed indefinitely (mgmt.. previously said through 3/31). Parks/hotels/cruises may take longer to return to normal activity than other businesses. While China is returning to normal, Disney Shanghai only has some restaurants and shops open and Disney Hong Kong remains closed. They’ve furloughed a large portion of employees (labor is 40-50% of park expenses). Bob Iger recently talked about re-opening relying on the advancement of testing and contact tracing as that would be needed for consumers to feel comfortable returning to the parks.

·         Media – This is their cable and broadcasting businesses. Profits in this segment are dominated by ESPN.

o    ESPN is being impacted by a halted NBA and delayed MLB & MLS. Segment revenue is comprised of affiliate fees and advertising revenue. Affiliate fees are bigger than ad revenues and the NBA is far more significant than the other sports.

o    The good news is that Disney makes most of its ESPN revenue from affiliate fees which are based on long-term contracts. Estimates are that they make $8-9/sub/month or ~$100/sub/year. They’ve been losing subs, but offsetting this with increasing prices (they can b/c live TV is increasingly important to the cable bundle). Subs are ~83m. So, a bit over $8B in affiliate revenue from ESPN. That’s over 10% of total company revenue.

o    So right now, the biggest impact for Disney ESPN revenue is w/ a loss in NBA ad revenue. Estimates seem to range from a $400-$700m loss in ad revenue for Disney, with the NBA typically bringing in $900m-$1B in ad revenue annually for Disney. This makes sense given the NBA generates $600-$700m in ad revenue during the regular season and $800m-$950m during the playoffs. This is split between EPSN and Turner and the season was heading towards playoffs. All of that is assuming the NBA doesn’t re-start the season and play into the summer as they are hoping.

o    In terms of costs, the entire NBA contract is $1.4B a year, which Disney may not have to pay all of…fees are weighted towards playoffs.

o    So, the Media segment will be hit by a loss in sports ad revenues, with likely some offset in sports rights fees. Additionally, other cable and broadcasting will see an impact to their advertising revenue. In general, TV advertising is more contract oriented and cannot be toggled down as quickly as digital advertising. 

·         Studio – results will be weighed down by film production delays and theater closures. This segment is always volatile and they are lapping a strong 2019 film slate, so it was already expected to be down. Films can be released directly to DTC which should aid subscriber numbers. Halted production lowers spending.

·         DTC & Int’l – Pre-announced better than expected subs of 50m. Consensus had been for 30m at the end of FQ2 and 40m subs by the end of F20. Recently launched in parts of Europe and India. Management’s original expectations were for 60m to 90m subs by F24. 2024 was also the targeted breakeven year. Clearly, they’re tracking ahead of that – breakeven likely to be 2022.

·         Valuation & balance sheet:

o    To put this in perspective, the stock is down nearly ~30% since the virus outbreak. As discussed above, I think the decline is mostly about their Parks & Experiences business which accounts for 31% of revenue.

o    They recently raised $6B in new debt, bringing their cash balance to close to $13B. And they arranged an additional $5B credit facility. They are 2.6x levered as a result of the Fox acquisition. They were hoping to get under 2x this year, but that will be pushed out. They have enough liquidity to cover near term maturities.

o    They pay almost $3B annually in dividends (~1.7% yield)…this could be temporarily halted to conserve cash as other companies have done.

o    Disney reports results on May 5.

 

 

Sarah Kanwal

Equity Analyst, Director

 

Direct: 617.226.0022

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square, Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

 

 

 

$DIS.US

[category equity research]

[tag DIS]

 

Yesterday Apple announced a new budget phone, the iPhone SE (second generation) starting at $399. This phone completely replaces the iPhone 8, and has the latest A13 Bionic similar to the iPhone 11 which means you get all the computational power of the flagship smartphone at about half the price, but it’s smaller at 4.7″ vs 6.1″…and has fingerprint sensor instead of Face ID…full spec comparison below for anyone that’s interested. This phone expands their addressable market beyond high-end phones, where Apple dominates…low-end and mid-tier phones make up a bigger share of the market.  The mid-priced segment ($250-$500) represented 20% of total global sales and 19% of shipments in 2019, according to IDC. Apple has about 14% share globally and close to 50% share domestically. They dominate share of high-end phones and the US is the largest high-end phone market with China being the next largest.

 

 

 

 

Sarah Kanwal

Equity Analyst, Director

 

Direct: 617.226.0022

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square, Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

 

 

 

 

 

AAPL.US

[tag AAPL]

[category equity research]

 

 

Good Morning – We are buying Home Depot to 2% in Focus Equity using proceeds from IVV.

 

Investment Thesis:

1. Home Depot has a durable moat driven by scale, niche focus, and low-cost provider status with best-in-class supply chain and technology infrastructure.
2. Underlying housing fundamentals should be supportive of long-term home improvement spending trends.

3.       Home Improvement online penetration is low and Home Depot has refined an omni-channel approach that is efficient and specialized, giving them an edge and insulating them from pure e-commerce encroachment.

4. Growth opportunity in large and fragmented addressable market especially in the professional category. They are investing to enhance their capital-efficient, low-cost platform to go after incremental market share opportunities.
5. Strong balance sheet and capital efficient model leads to solid FCF generation and high ROIC. GDP plus growth with modest operating leverage combined with share buybacks and growing dividend leads to strong long-term value creation.

 

 

 

 

Sarah Kanwal

Equity Analyst, Director

 

Direct: 617.226.0022

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square, Suite 500

Boston, MA 02109

www.crestwoodadvisors.com