Black Knight 3Q21 Earnings

Current Price: $75           Price Target: $96

Position Size: 1.8%          TTM Performance: -25%

 Key Takeaways: 

    • Beat estimates: similar to last quarter, they beat estimates on strong new customer adds and cross-selling progress aided by their recent acquisition, Optimal  Blue. 
    • Increased their long-term growth targets: this is very positive and the stock reacted to that today. “Based on the ongoing successful transformation of our business, we are updating our long-term revenue growth expectations to 7% to 9%, an increase from our prior view of 6% to 8% that was in place since our IPO six years ago.”
    • Data & Analytics segment continues to be key growth driver (+10% YoY): seeing continued improvement with cross-selling Data & Analytics (~16% of revenue), which could be a solid future growth driver for them and aided in their higher LT growth targets.
    • Headwind from foreclosure moratorium set to reverse in 2022.

 Additional Highlights:

    • Seeing robust organic growth, ahead of LT targets: Revenues increased 21%; organic revenue growth of 11%.
    • Increased guidance: Now expect FY revenue growth of 18-19% (prior 17-18%) on organic revenue growth of 9.5-10% (prior 8-9%)
    • Limited impact from higher rates/end of refinancing boom:
      • Interest rates drive mortgage volumes but BKI revs are more tied to loans outstanding than the cyclicality of volumes.
      • Revenues tied to origination volumes are a relatively modest percentage of total revenue (sub-10%… or  ~18%  of  origination  revenues  and  26%  of  data  & analytics).
      • The rest of their revenue is recurring (>90%) with 5-7  year contracts and price escalators (adds ~1.5% to top line annually).
    • Focus on innovation and integrated offerings: their strategy is to continue to deliver innovation and selectively pursue acquisitions to further strengthen their end-to-end offerings across the mortgage life cycle. Example of new innovation: earlier this year they launched their underwriter assist solution, which uses AI enhanced automation to review loan package documents more efficiently, reducing the overall cost by reducing manual review time and supporting effective decision-making by underwriters.

Data analytics segment (~16% of revenue) revenues were up 10%. Driven by growth in their property data and portfolio analytics businesses.

    • Organic revenue growth of ~7%; 160bps of margin expansion.
    • Trending ahead of LT targets in recent quarters on strong cross-sales related to new client deals, as well as renewals.
    • Current situation is highlighting their unique data sets and analytics. They are the only company with real-time visibility into the majority of active mortgage loans in the US. 

Software Solutions segment (~84% of revenue) up 23% YoY

    • Organic growth of ~10%; 60bps of margin expansion.
    • Servicing (mid-60’s % of revenue) was up 9%
      • Cross-selling aiding growth – i.e. MSP (their core servicing software) clients adopting their Loss Mitigation Solution and Servicing Digital Solution (a web and mobile solution that provides end customers with customized information about their mortgages as well as self-service capabilities).
      • Foreclosure moratorium headwind coming to an end: the federal moratorium has expired, they will see revenue benefit in 2022 as foreclosures make their way through the legal process. The moratorium was a $37m headwind (~3%) in 2020 and ~$48m headwind (3%) in 2021.
    • Originations (~20% of total revs) – made up of new loans, refi’s and HE– revenues up 66% (organic rev +14%)
      • Growth driven by Optimal Blue acquisition and new clients.
      • Originations are down >20% YTD, but only a 4pt headwind to this segment revs.
      • Strategy is to create a comprehensive end-to-end solution to digitize the origination process and increase efficiency through automation and AI to reduce the costs to originate a loan.

Valuation:

    • “bought back $100 million of shares in recognition of strong cash flow and our stock trading at levels that we believe is meaningfully below its intrinsic value.”
    •  Trading at >4% FCF yield on 2022 –valuation has gotten less expensive more recently and is supported by growth potential, strong ROIC with a recurring, predictable revenue model (>90% recurring revenue) and high FCF margins, which is aided by high incremental margins and capex which should taper as they grow.
    • They should see high-single-digit top line growth and margin expansion in both segments – LT mgmt. goal of 50-100bps total per year – that, combined w/ modest share buybacks, should drive low-double-digit FCF/share growth.
    • Net leverage ratio at 3.4x
    • Capital allocation priorities include debt pay down, opportunistic share repurchases and acquisitions.

Thesis:

    • Black Knight is an industry leader with leading market share of the mortgage servicing industry. 
    • Digitization of real estate transactions is still in early stages
    • Stable business with >90% recurring revenues, long-term contracts and high switching costs.
    • BKI has high returns on capital and high cash flow margins.

 

.UA

[tag BKI}

[category earnings]

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

 

$BKI.US

[category earnings]

[tag BKI]

 

 

BKNG 3Q Results

Current Price: $2,437      Target price: $2850 (raised from $2,400)

Position Size: 1.8%          TTM Performance: +35%

 

 

Key Takeaways:

  • Booking trends well ahead of expectations ($23.7B vs $21.6B) as they saw meaningful sequential improvement
  • Beneficiary of strong leisure and European recovery aided by higher rates

·       Weak environment strengthens their position w/ suppliers (i.e. hotels) as they are a key source of demand

  • They look to reinitiate return of capital to shareholders in 1H22.

 

Additional Highlights:

  • Beneficiary of strong leisure and Europe recovery, led by higher rates:

·         Bookings recovered to 94% of 2019 levels (vs 88% of 2019 last quarter). Bookings declined less than the decline in room nights, due to the increase in average day rates.

·         Recovery driven by rate – average daily rates up 10% vs 2019 (part of that is geographic mix – excluding that, ADRs were up ~4%). This is similar to what we heard from Hilton – rate is strong, particularly w/ leisure, which is Bookings focus.

·         Room nights recovering but still lagging 2019 – Compared with 2019, Q3 room nights were down 18% (an improvement from down 22% in July and down 26% in Q2). Improvement since July was primarily driven by stronger room night trends in Europe. They’ve seen a further improvement in room night trends in October, including early signs of a pickup in room night trends in Asia.

·         Opening of US borders on Nov 8 should be a demand catalyst

    • Mobile bookings, particularly through their apps, represented 2/3 of total room nights. Direct bookings aids their ad spending efficiency which is key as this is a major expense for them.

·         recently rising COVID case counts in many countries including several important European countries adds to the uncertainty around how November and December trends will progress

  • Quotes from the call:
    • Guidance: “Given the ongoing uncertainty around COVID, it’s difficult to predict how room nights in November-December will compare with a 10% reduction we saw in October. Looking forward to November-December the rising case counts across many important Western European countries and across much of Eastern Europe as well as a start of the winter season in the Northern Hemisphere, which in 2020 contributed to an increase in COVID cases creates unpredictability.”
    • Pent-up demand: “we absolutely know there is huge pent-up demand because anytime, any government let’s go restriction, we see immediate demand.. So for example, the announcement, that November is opening for people to come to the US, immediately we saw demand in the UK, when they changed restrictions… immediate demand.”
  • Connected trip, payments & alternative accommodations are long-term growth drivers – The long-term vision for them continues to be the “connected trip.” The idea is to be a platform for not just hotel, but a portal for all aspects of travel including flights, activities, restaurants etc. A key part of this is building up the “supply” (e.g. tour operators). The current environment could be a catalyst for supply as weaker travel trends spur suppliers to look to Booking as a necessary source of demand. They continue to invest behind this despite the current environment including their payment platform (1/3 of bookings) which enables alternative forms of payment like WeChat, it enables payment to companies like tour operators through their platform, and offers buy-now-pay-later offered via partnerships with 3rd parties. This is a multi-year endeavor to transition from their accommodation only focus in the past.  As these grow over time it will drive a mix shift that will add revenue and grow profit dollars, but at a lower margin than traditional accommodations. An offsetting factor to this could be increased direct book (especially via their app), lower customer acquisition costs and lower performance marketing. Alternative accommodations are 30% of the mix and are skewed towards Europe, but they are focused on growing their US business particularly w/ building inventory w/ multi-property managers.
  • Will see an impact to profitability as travel recovers that is just a timing factor– with continued recovery in 2021, there will be more bookings made in 2021 that will check-in 2022 than there were bookings made in 2020 that checked-in 2021. This timing factor will have a negative impact on revenue as a percentage of gross bookings and drive some deleverage in their marketing expenses b/c they incur the majority of marketing expenses at the time of booking.

·       Stock is not expensive and expectations are reasonable. Trading at ~4.8% yield on 2022. Consensus is now for revenue to recover to 2019 baseline in 2022.

 

 

 

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

 

$BKNG.US

[category earnings ]

[tag BKNG]

 

Hilton 3Q21 Results

Share Price: $141            Target Price: $160 (increased from $150)

Position Size: 2%              1 Yr. Return: +64%

 

 

Key takeaways:

  • Very positive quarter and strong progress on recovery as RevPAR continues to recover faster than expected leading to better than expected Q3 results. Q2 system-wide RevPAR continued to improve vs. 2019 baseline, w/ RevPAR for the quarter down -19% vs 2019.
  • Seeing very robust demand trends – trends continued to improve into the current quarter, leisure demand is exceptionally strong and business travel is recovering.
  • Solid unit growth, ahead of guidance (+6.6% YoY) – this provides key support to LT growth story, as industry leading RevPAR premiums continue to drive a high quality pipeline.
  • China is not a problem – China is an important part of their pipeline and growth there is intact. Commentary around China was very optimistic.

 

 

Highlights:

  • Demand is recovering…despite (now easing) headwinds from international travel restrictions
    • Leisure is leading the recovery w/ record performance; leisure rates are already exceeding 2019 levels
    • Bookings for all future periods are just 8% below 2019
    • Roughly 40% of system-wide hotels have exceeded 2019 RevPAR levels in October month-to-date.
    • Business transient is improving, Group will be last to recover.
      • Business transient room nights were roughly 75% of prior peak levels and group RevPAR was approximately 60% of 2019 levels, both improving meaningfully from 2Q.
      • Outlook for business travel is very strong. Currently business is being heavily driven by SMB demand, which is more rate sensitive. About 80% of their corporate demand is from SMBs – they’re getting close to 2019 levels while large corporates are down 40% from 2019.
      • Group demand takes longer to recover given planning lead times for large social events and business conferences. Future group booking are occurring at higher rates than 2019. They are seeing huge amounts of pent-up demand and think 2022 will be a “barn burner” year for their group business. “Rates are up because we’re being super disciplined recognizing that there is a limited amount of meeting space is going to be a gargantuan amount of demand and we can be a bit patient.”
  • Margins going up…in an inflationary environment, they have pricing power and a significant portion of their revenues are royalties tied to top line. Franchising is almost 2/3 of EBITDA and tied to top line, managing is another 25% of EBITDA where the fee stream is a mix of base management fees (% of room revenue) and incentive management fees (% of hotel profitability). So, in an inflationary environment, pricing power = margin expansion. This margin tailwind is in addition to cost efficiencies gained through Covid, including lowering labor intensity.
  • Inflation and pricing power…
    • “the laws of economics are alive and well. Why is leisure so strong in rate? why are we able to price above historically high levels? because they’re crazy amounts of demand. Like our weekend demand is off the charts, we’re running 85% to 90% system-wide in the US on the weekends. And we’re pricing over ’19 levels, obviously because we have a lot of demand.”
    • “typically it’s a grind to build back occupancy and rate lags significantly, ….rate is leading the charge.”
    • we’re in an inflationary environment and guess what? We can re-price our product every second of every day we’re a very good hedge in that way to inflation and we’re being very thoughtful about how we’re pricing our product.”
    • “we’re going to have more inflationary environment broadly. Thank you, Federal Reserve and the US Congress for fiscal and monetary stimulus, …we could debate transitory or otherwise. But those things are translating into broadly, a more highly inflationary environment and that applies to us too, and that obviously is helping from a pricing power point of view.”
  • Pipeline – Stable unit growth underpins the story
    • Development activity continues to gain momentum across the globe as the recovery progresses.
    • China development activity is particularly strong – China net unit growth rising due to new franchising  initiatives and rapidly growing demand for mid-scale hotels in China. The say the addressable market there is enormous (easily 20K hotels or more). This will be a LT source of growth for them.
    • Unit growth in Q3 was 6.6% YoY and the pipeline increased to >400K rooms. That represents 40% room growth from their current installed base of rooms and more than half are under construction (helps underpin several yrs. of predictable growth).
    • 62% of their pipeline is located outside the US (mid-tier focus tied to growing global middle class)
  • Continued strength in their market leading RevPAR index. RevPAR index is their RevPAR premium/discount relative to peers adjusted for chain scale. I.e. Hampton Inn (35 year old brand) has a RevPAR index of 120. They are the market leaders – this is helpful because it’s what leads to pipeline growth (hotel operators want to associate w/ the brand that yields the best rates and occupancy) and is helpful in a macro downturn because it’s even more crucial for a developer to be associated with a market leading brand to get financing. The thought is that they would likely take more pipeline share if lending standards tighten and that’s exactly what we’ve seen during Covid. The other countercyclical aspect of their pipeline growth is conversions (an existing hotel changes their banner to Hilton). They continue to see a record number of conversion signings which were 1/3 of total signings in the quarter.
  • ESG – named the number three World’s Best Workplace by Fortune
  • Shareholder returns should improve w/ recovery – likely will resume 1H22. In 2019 they returned more than 8% of their market cap to shareholders in the form of buybacks and dividends. They intend to return to their historical capital return model.

 

New hotel to keep in mind if you’re headed to Japan….. Roku Kyoto…https://lxrhotels3.hilton.com/lxr/roku-kyoto/

 

$HLT.US

[category earnings]

[tag HLT]

 

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 Earnings Update

Current Price:   $328                     Price Target: $375 (from $340)

Position Size:    8.3%                     TTM Performance: 62%

 

Key takeaways:

  • Broad beat with 22% YoY revenue growth and +27% op. income growth.
  • Azure continues to be key growth driver – continuing to take share in the public cloud with revenue growth of +51% YoY (+45% constant currency), similar to last quarter.
  • PC Market better than expected despite supply chain headwinds –  Windows OEM numbers blew away their guidance and guidance for December quarter was also way above what investors were expecting. “The future of how we work, connect, and play, one thing is clear: the PC will be more critical than ever. There has been a structural shift in PC demand emerging from this pandemic.”
  • CEO, Satya Nadella said“Digital technology is a deflationary force in an inflationary economy. Businesses – small and large – can improve productivity and the affordability of their products and services by building tech intensity.”

 

Additional Highlights:

 

  • More quotes…
    • On labor market: “We are experiencing a great reshuffle across the global labor market as people are rethinking not only where and how they work, but why, and as more people change jobs than ever before.” Hires on LinkedIn were +160% YoY.
    • “Cybersecurity is the number one threat facing businesses today.”
    • “will need to watch the advertising market through the quarter because obviously their willingness to spend is entirely connected to their supply as well.”
    • On inflation: “in an inflationary environment, the first place any business should go to is, how to really ensure that they’re able to get productivity gains and, even dealing with constraints for example, if you have supply chain constraints one of the things you want to do is run your factories at the efficient frontier. That means things like digital twins, simulation are the ones where you are going to make sure that every production run has the least amount of wastage. So I think any which way you look, whether it’s in the knowledge worker, first-line worker, whether it’s actually digital twins and simulation, all of those things are going to be the best way for any company to deal with inflationary pressures, so that they can in fact have the best productivity and thereby the best ability to be able to meet aggregate demand out there. So that’s why we are very, very excited about sort of making sure our software products are available to our business customers all around to be able to manage through this inflationary environment.”
  • Commercial cloud, which aggregates Azure, Office 365, the commercial portion of LinkedIn and Dynamics accelerated by 500bps sequentially to +36% YoY cc growth reaching >$80bn run rate (Azure is high $30B’s run rate, so approaching half). They continue to see significant growth in the number of $10 million plus Azure and Microsoft 365 contracts. Cloud gross margins increased 400bps (excluding the impact of an accounting change).
  • While Microsoft benefited from accelerated digital transformation from the pandemic, they are well positioned to capitalize on a number of long-term secular trends that will continue to drive mid-to-high teens earnings growth. Secular drivers include public cloud and SaaS adoption, continued digital transformation, AI/ML, BI/analytics, and DevOps. As organizations become increasingly digital, MSFT’s products are evolving from being primarily productivity tools to being more strategic tools. This suggests an improving value proposition to customers, which is key to the durability of their LT growth and profitability.
  • Productivity and Business Processes ($15B, +22% YoY):
    • LinkedIn – revenue increased 42% (up 39% in constant currency) driven by Marketing Solutions growth of 61%. LinkedIn now has nearly 800 million members. And now has 15K enterprise customer for LinkedIn Learning and seeing high demand for upskilling/reskilling employees.
    • Office 365 Commercial (rev +23%)- driven by installed base expansion as well as higher ARPU.
    • Dynamics 365 (rev +48%) – Power Platform (low-code, no-code tools, robotic process automation, virtual agents and business intelligence) now has nearly 20 million monthly active users up 76% YoY.
  • Intelligent Cloud ($17B, +31% YoY):
    • Server products and cloud services revenue increased 35% with Azure revenue growth of 50% (48% cc). Exceeded their expectations across consumption and per user Azure businesses as well as their on-premises server products business.
    • An increasing mix of large, long-term Azure contracts can drive quarterly volatility in the growth rates. Leader in hybrid cloud and have more datacenter regions than any other provider – and continuing to add data center regions, including new regions in China, Indonesia, Malaysia, as well as the US.
  • More Personal Computing ($13.3B +12% YoY):
    • Windows OEM revenue increased 10%
    • Surface was weak (down 17%) as constraints in the supply chain continue
    • Gaming revenue increased 11% (7% in constant currency). Xbox hardware revenue grew a 166%, driven by demand for new consoles and better than expected supply. Xbox and content and services revenue increased 2% against a high prior year comparable.
    • Search advertising revenue increased +40% YoY as companies pick up spending on digital advertising
  • Valuation:
    • 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. Stock is trading at <3% forward FCF yield; a premium to the S&P, but supported by their high moat and solid secular growth drivers.

 

 

 

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 Q3 Earnings

Current price: $318         Price target: $330

Position size: 4%              TTM Performance: 38%

 

 

Key Takeaways:

  • Results being weighed on by supply chain constraints that are resulting in raw materials shortages. Mgmt. had already cut guidance in the beginning of September.
  • Price increases are lagging higher raw materials costs which is weighing on margins now, but will improve. Committed to fully passing through higher raw materials which they now expect to be in the low-20’s percent increase for the year vs expectations for mid-teens previously.
  • Underlying demand trends continue to be strong and mgmt. feels shortages are starting to improve. Strong housing market and improving industrial end markets bode well for demand.
  • DIY demand is normalizing after pandemic driven surge. Increased demand from Pros, commercial and industrial are offsetting.
  • Quotes from the call
    • the demand environment remains robust across our pro architectural and industrial end markets. Many external indicators and, more importantly, our customers remained highly positive. Demand is not the issue
    • raw material inflation remained persistently high and raw material availability failed to improve.”
    • “We are aggressively combating raw material inflation with significant pricing actions across each of our businesses. We implemented multiple price increases in the quarter. We will continue to do so as necessary. We continue to work closely with our suppliers on solutions to improve availability sooner rather than later. At the same time, we’re exploring every avenue to better control our own destiny going forward, including our recent announcement to acquire Specialty Polymers.”
    • “we are confident we will see significant margin expansion as availability and inflation headwinds eventually subside.”

 

 

Additional Highlights:

  • Revenue and margin headwinds will subside…
    • Supply chain disruptions are temporary headwind to growth – sales increased 0.5% as raw material availability negatively impacted sales by an estimated high-single-digit percentage.
    • Gross Margins will improve – similar to past cycles, price increases come at a lag to higher raw material costs which are 80-85% of COGS for paint. The result is a near term hit to gross margins, but they will maintain pricing and see gross margins expand as some of the temporary drivers to higher commodity costs recede. A 630bps hit to GM was partially offset by 90bps lower SG&A.
    • They’re taking action (all of which is aided by their scale & pricing power) – price increases, vertical acquisition (specialty polymers) that will aid supply, and they continue to invest in growth initiatives – they have significant production capacity available today and are bringing 50 million gallons of incremental architectural production capacity online over the next two quarters.
      • “We’re leveraging all of our assets, including our store platform, our fleet, our distribution centers and more, to let us come up with unique and creative customer solutions that others simply can’t”…” We are unique in the fact that we have our own fleet of vehicles, we have 860 tractors and 2,100 trailers that we use to expedite these raw materials into our plants and in many cases right now from our plans to customer projects, so it’s the entire supply chain… working to expedite and cut out as many days as possible.”
  • America’s Group ($3B), -0.4%:
    • Significant raw material availability headwinds; same store sales decreased 2.8%
    • Pro architectural demand remains robust; expect delayed projects to be completed with improved product availability.
    • DIY sales down double-digits, driven by difficult prior year comparisons and consumers returning to the workplace
  • Consumer Brands Group ($647m), -23%:
    • Lower DIY demand was a big drag (but is their smallest segment) resulting in lower sales volumes to their retail customers – this was partially offset by selling price increases. Also saw drag from raw material availability and a divestiture.
  • The Performance Coatings Group ($1.5B), +17%:
    • Sales increased 17.4% with growth in all divisions and regions
    • Packaging and General Industrial had highest YoY  increases and positive in every region; Coil strength continues globally. Auto Refinish solid as miles driven nearing pre-pandemic levels. Industrial Wood impacted by customer shutdowns in Southeast Asia due to COVID.
    • Acquiring Specialty Polymers, should close by year-end – they’re a US based leading manufacturer of water-based polymers used in architectural and industrial coatings. This adds to their existing internal resin manufacturing capability.
  • FY Guidance: expect high-single-digits percentage sales increase
    • TAG: up high-single-digits percentage
    • CBG: down mid-teens percentage – includes negative 4% related to Wattyl divestiture
    • PCG: up low-twenties percentage
    • Raw materials: up low-twenties percentage
    • Continue to expect margin expansion over the long-term and maintain their gross margin target in the 45% to 48% range…from <42% now.
  • Balance sheet remains strong – leverage ratio is ~2.6x. Debt is 92% fixed rate.
  • Strong history of returning capital to shareholders continues – In 2020, they increased their dividend 19%, marking the 42nd consecutive year they increased their dividend.
  • Valuation – trading at ~3.1% forward 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]

 

Apple Q4 Earnings

Current Price: $149                                                    Price Target: $166

Position Size: 6.7% (our smallest active position)TTM Performance: +29%

 

Key Takeaways:

 

  • Issues with supply, not demand: quarterly results and guidance are being negatively impacted by supply chain constraints, but they continue to see record demand. The revenue miss for the quarter was entirely supply driven (semi shortages and Covid related manufacturing disruptions in southeast Asia).
  • China continues to be strong – +83% YoY growth, significantly growing the installed base.
  • Guidance – Supply constraints will be a bigger impact in Q1 (December quarter) than in Q4, but still expect to set a new revenue record for the December quarter. Supply constraints will be biggest w/ iPad – expect YoY revenue growth for each product category, except for iPad. Expect Services growth to decelerate. Expect gross margin to be between 41.5 and 42.5% (from <40% in 2020).

 

Additional highlights:

 

  • Seeing record demand – Q4 revenue was $83.4B, +29%, putting FY revenue at $366B, +33%, with record performance across the board. Every product category and every geographic segment set a new annual revenue record and was up at least 20% over fiscal 2020.….despite larger-than-expected supply constraints.
  • Margins expanding – gross margins are up significantly YoY (but down sequentially) aided by higher margin Services. Services gross margin hit an all-time high of 70.5%, up 70bps sequentially, mainly due to a different mix.
  • Supply constraints:
    • Impacted Q4 by $6B which was much bigger than their revenue miss.
    • Q1 (December quarter) will see an even bigger impact.
    • Key issues were semi shortages and Covid related manufacturing disruptions. The semi shortages will continue, but the factory closures are improving. Chip shortages impacting iPhone, iPad and Mac.
    • Shortages are in legacy nodes (these are less sophisticated chips and less in their control b/c they have proprietary leading edge chips, but not their own legacy chips). “In terms of the chip shortage, the chip shortage is happening on legacy nodes, primarily we buy leading edge nodes, and we’re not having issues on leading edge nodes. But on legacy nodes, we compete with many different companies for supply and it’s difficult to forecast when those things will balance, because you’d have to know kind of how the economy is going to be in 2022 and the accuracy of everyone else demand projections. And so I don’t feel comfortable in making a prediction.”
  • Segments:
    • iPhone – $39B in Q4 revenue, up +47% YoY. The iPhone 13 family was introduced and is in very high demand. Installed base is >1 billion devices.
    • Mac – this quarter was all time record and the last five quarters for Mac have been its best four quarters ever. Revenues were up +2% YoY despite supply constraints.
    • iPad – up 21% in spite of significant supply constraints. On the 9th generation iPad, powered by the M1 chip.
    • Wearables – grew 12% YoY. Nearly 75% of Apple Watch buyers were new to the product. This quarter, they introduced Apple Watch 7.
    • Strong Services growth driven by growing installed base
      • Revenue +26% YoY; set a new all-time revenue record ($18.3B in Q4; $68B for FY21).
      • All-time record for cloud services, music, video, advertising, AppleCare and payment services
      • Now at 745m subs, added 45m from Q3; and up 160m from last yr. and 5x the number of subs they had less than  5yrs. ago.
      • Apple Card won a J.D. Power award for customer satisfaction in its very first year of eligibility
      • Introduced Apple Podcast subscriptions last quarter
  • 5G upgrade cycle – only in the early innings of 5G. If you look at their 5G penetration around the world, there is only a couple of countries that are in the double digits yet.
  • Why we still like
    • Big moat underpinned by growing installed base which drives their virtuous cycle.. More users of their devices lures developers to create better apps which lures more users. This is key to their LT growth. Apple continues to significantly expand their installed base. And they have multiple new products being launched and more in the pipeline (e.g. AR glasses, Apple car) that could be key drivers of LT growth….and, importantly, a growing services business tied to all these products. 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 their Macs, which gives them better control over performance and feature integration in their devices. This has proven to give them an advantage with the way they design their products and an advantage with developers. So, now they 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 and the relevance of their ecosystem 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 their devices in enhanced ways (w/ increased revenue opportunities) ….like apps that take advantage of augmented reality and IoT related technologies.
    • Apple is still not expensive…
      • Trading at >4% FCF yield on 2022 (in line w/ S&P) and a 0.6% dividend yield w/ another almost 3% of their market cap ($66B) in net cash on their balance sheet.
      • For reference, pre-pandemic in Jan 2020, Apple was trading at ~4.7% FCF yield and 1% dividend yield with ~7% of their market cap in net cash.
      • Their market cap has been tracking their massive increase in FCF estimates.
      • Huge amount of cash on their balance sheet w/ years of buybacks to support valuation
        • Capital returns may need to expand further to hit their net-cash-neutral target in a few years. 
        • With current net cash of ~$66B and expectations of nearly $450B of FCF over the next 4 years, shareholder returns could be ~$500B or  >20% of their current market cap.
        • They’ve returned >$530B since 2012. So, from 2012 to 2026, they may return >$1T.

 

 

 

 

 

 

$AAPL.US

[category earnings]

[tag AAPL]

 

 

 

 

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

 

GOOG Q3 Earnings

Current Price: $2,923     Price Target: $3,450 (raised from $3,100)

Position Size: 4.8%         TTM Performance:+93%

 

Key Takeaways:

  • Broad beat – gross revenues were $65.1B up 41%
  • Continued meaningful op leverage despite resumption of spending on headcount – OM expanded sequentially for the 5th quarter in a row. Now at 39% on net rev, well ahead of high 20’s pre-pandemic.
  • Digital ad spending continues to surge – saw broad-based strength in advertiser spend, particularly w/ retailers
  • Cloud strength continues – was +45% w/ losses narrowing
  • Capex spending resuming – continuing to pick up the pace of investment in office facilities and data centers… “We continue to increase the pace of investment in fit-outs and ground-up construction of office facilities to accommodate our ongoing headcount growth globally. We will continue to pursue real estate acquisition opportunities where it makes sense.”

 

Similar to last earnings call, there was a big focus on Retail/e-commerce…

  • “as the world begins to reopen, shoppers are returning to stores. Brick and mortar isn’t dead – instead, omnichannel is in full force. Searches for ‘open now near me’ are up four times globally vs. last year.”
  • Omnichannel and next-gen user experiences are core to their shopping strategy, including:
    • Easier ways for businesses to show the local services they offer across Search and Maps.
    • Local inventory ads that highlights which products are in-stock and when to pick them up.
    • Free shipping and easy return annotations across Search and Shopping.
    • AR capabilities that bring in-store moments online and let users try before they buy.
    • Instantly shoppable images with Google Lens.
    • New visual, browsable experience on Search.
  • ” There’s a lot more to come…including tapping into commerce on YouTube“. They are still in the early innings w/ e-commerce potential w/ YouTube. Possibilities include: shoppable livestream events w/ large retailers or letting viewers buy directly from their favorite creators’ videos.

Heavy focus on AI capabilities on the call which is relevant across segments

Google is faring better than others from Apple’s app tracking changes…

  • Earlier this year, w/ the latest iOS release, Apple changed their app tracking policies, referred to as ATT (app tracking transparency)…now users need to opt in rather than opt out. This small change has made a very big difference in the digital ad space.
  • Google indicated only a “modest impact” to YouTube while Facebook and Snap have both indicated this as a significant headwind for their business.

 

“Search & Other” revenue: $38B, up 44%

  • Seeing broad-based strength in advertiser spend across industries, but some unevenness still across geographies depending on local regulations and vaccines.
  • Retail was gain by far the largest contributor to the YoY growth of their Ads business.
  • Media & entertainment, Finance and Travel were also strong contributors.

YouTube ad sales: $7.2B, up +43% YoY

  • Over 120 million people watch YouTube on TVs every month; that’s up from ~100 million last year
  • Strong value proposition to advertisers & positioned to capture the shift in advertising away from linear TV
    • “YouTube’s reach is becoming increasingly incremental to TV”
    • YouTube helps advertisers reach audiences they can’t reach anywhere else (especially younger audiences) and helping brands do it more efficiently
    • Nielsen found that US advertisers who shifted just 20% of spend from TV to YouTube generated a 25% increase to the total campaign reach within their target audience while lowering the cost per reach point by almost 20%.

 

Network ad revenues: $8B, up 40%. This is revenue from ads placed on sites other than their own, like an ad placed on the NYT site.

 

Google cloud = Google Cloud Platform (“GCP”) + Google Workspace (i.e. collaboration tools):

  • Revenue grew 45% YoY to $5B w/ an operating loss of $644m
  • GCP’s revenue growth was again above Cloud overall, reflecting significant growth in both infrastructure and platform services.

Other Bets

ESG:

  • They aim to operate on 24-7 carbon free energy by 2030
  • 2/3 of the electricity consumed by Google data centers in 2020 was matched with local, carbon-free sources on an hourly basis
  • New Carbon Footprint tool gives customers carbon emissions insights associated with their Google Cloud Platform usage

 

Valuation – They generated $59B in FCF in the last 12 mos. and ended the quarter with $114B in net cash, ~6% of their market cap. The stock is still reasonably valued, trading at a >4% FCF yield on 2022 and theyve been stepping up their pace of buybacks.

 

 

 

 

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

 

Visa Q4 Earnings

Current price: $219        Target price: $278

Position size: 3.3%          TTM Performance: 16%

 

Key takeaways:

  • Cross border recovery may take a while. Visa beat estimates but the stock is down on FY22 guidance and cautious commentary on the call related to the outlook for recovery in cross-border volumes given continued Covid related headwinds to travel
  • Weak guidance: Q1 revs expected to be up high-teens (expectations were +22%) and for FY22 revenues expected to be up at the “high end of the mid-teens” while expectations were for +20%.
  • Authorized a 17% increase in the quarterly dividend
  • Quote from the call, “Cross-border travel is recovering well, but still well below pre-COVID levels with the pace of recovery depends on border openings. Asia has not reopened to the degree the rest of the world has. The timing of reopening in key countries across Asia both domestically and for cross-border travel is the key variable. Most importantly, COVID variants are still with us and vaccination rates remain low in large parts of the globe. With these factors as the backdrop, forecasting the trajectory of the return to normalcy remains difficult.”

 

 

Additional Highlights:

  • Q4 trends…
    • Net revenues grew 29% YoY. Overall payments volume was a 121% of 2019. Across regions payment volumes are tracking well ahead of 2019, except in Asia which is their weakest region…up only 5% from 2019. Many countries instituted restrictions in the quarter including Australia, New Zealand, Japan and Singapore, but all have started to recover in the past few weeks.
    • Cross-border travel recovery continues to lag – Overall cross-border volume excluding intra-Europe was 86% of 2019….looking just at cross-border travel it went from 40% of 2019 in April to 50% in June to 61% in September. This is a key area for them as cross-border is highly profitable. The vast majority of the travel Visa captures on their credentials is consumer, and they are the global leader in travel co-branded cards.
    • “As we’ve seen consistently during the pandemic, there is pent-up demand for travel as bookings accelerate, when a border is opened. Latin America remains by far the strongest destination, well over 2019 levels. U.S. to Mexico travel remained robust, with spend more than 60% above 2019 levels in Q4. The Asia-Pacific remains mostly closed and did not meaningfully improve in the fourth quarter, remaining below 30% of 2019 both inbound and outbound.”
  • Improving QTD trends – QTD trends showed slight improvement vs Q4. In the US payments were +32% vs October 2019 w/ debit +44% and credit +22%. For cross border excluding intra-Europe, volumes are still lagging…at 94% of October 2019 levels. Travel-related spending versus 2019 improved four points compared to September to 65% of 2019.
  • A lot of focus on the call was related to their key growth areas…
    • Consumer payments – the pandemic has helped accelerate digitizing the $18 trillion spent in cash and check globally. This is driven by evolving modes of acceptance (tap-to-pay, online), continuing to grow merchants (grew acceptance 14%) and grow cardholders (grew credentials 7%) with traditional issuers, FinTech’s and wallets. Notably, “merchant locations” only count partners like PayPal and Square each as one. LT opportunity to grow the pie for digital payments w/ the 1.7 billion unbanked.
    • New Flows – $185 trillion in B2B, P2P, B2C and G2C. P2P, which represents $20 trillion of the opp., was Visa Direct’s first use case and continues to grow substantially. A key area of future growth is cross-border P2P, or remittance.
    • Value-added services – includes consulting, technology platforms (e.g. Cybersource, issuer processing, and risk identity and authentication), data and insights, and card benefits, all which will improve with the recovery. Opportunity to increase penetration w/ existing clients. In 2021, 40% of their clients used five or more value-added services and nearly 30% use 10 or more.
    • “We enable the disruptors” which helps to accelerate Visa’s growth
      • Visa helps the disruptors scale without picking winners and losers
      • Digital Wallets: increasingly embed Visa credentials in their wallets to aid their own growth, so the consumer can use it anywhere Visa is accepted as well as receive and send cross-border P2P payments
      • Crypto opportunity:
        • “leaning into in a very, very big way, and I think we are extremely well positioned”
        • Enabling purchases, enabling conversion of a digital currency to a fiat on a Visa credential, helping financial institutions and FinTech’s have a crypto option for their customers and upgraded their infrastructure to support digital currency settlement
        • They have nearly 60 crypto platform partners that are working with them
        • Working with Central Banks as digital currency is being explored in many nations
      • Growth in “buy now, pay later” (BNPL)
        • Nascent but growing
        • The majority of the installment payoffs are on cards today
        • Visa is working with third party providers as well as offering their own proprietary platform that would allow issuers to offer their own buy now, pay later capability
        • “We believe we’re currently experiencing BNPL 1.0. Individual FinTech’s and companies are cutting individual deals merchant by merchant. Eventually, we believe the business model will evolve to BNPL 2.0 where fintech partners issue Visa credentials to leverage our acceptance and platforms to overcome the difficulty of scaling acceptance globally merchant by merchant. We’re already seeing this evolution begin to take shape, just this quarter I signed a global brand deal to accelerate expansion and scale into several markets.”
  • While COVID continues to be a headwind for Visa, particularly in cross border volumes – the long-term thesis is intact. Visa is a high moat, duopoly company with extremely high FCF margins (approaching 50%), strong balance sheet and continued runway for secular growth driven by the shift from cash to card/digital payments and new payment flow opportunities. Getting less expensive of late, trading at ~3.4% 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

 

$V.US

[category earnings]

[tag V]

 

CCI Q3 2021 Results

Current price: $180         Target price: $201

Position size: 2.3%           TTM Performance: 12%

 

 

Key takeaways:

  • Beat estimates and issued solid FY22 guidance
  • Solid AFFO/share growth – Maintained AFFO/share guidance for FY21, implying +12% YoY growth, meaningfully above their long-term annual target of 7% to 8%. FY22 guidance issued ahead of the street, implying +8% YoY growth.
  • Their business is seeing tailwinds as the 5G investment cycle is (finally) ramping – first stages of 5G investments resulting in record level of tower activity. Small cell growth is slower but should improve in later stages of what should be a massive, decade-long investment cycle.
  • Dividend raised 11%. Well ahead of long-term dividend growth targets as they are growing the dividend in line w/ AFFO growth.

 

 

Additional highlights:

  • Quotes from the call: “With history as a guide, we believe the deployment of additional spectrum on existing cell sites will not be enough to keep pace with the persistent 30% plus annual growth in mobile data traffic….As a result, we expect cell site densification to remain a critical tool for carriers to respond to the continued growth in mobile data demand.”
  • “When the current cell site upgrade phase shifts to densification phase, we believe the comprehensive offering of towers small cells and fiber will be critical for our customers and provide us with an opportunity to further extend the runway of growth in our business.”
  • Seeing record tower growth now; small cell growth will be longer term driver
    • Customers upgrading existing tower sites as a part of their first phase of 5G build-out.
      • Mid-band (C-band) and high-band (mmWave) spectrum are both are relevant for 5G and will drive lease up activity for CCI.
      • Carrier spend is currently focused on deploying mid-band spectrum as this is the first stage of 5G deployment and is often referred to as the “goldilocks” band as it is an ideal balance between bandwidth and propagation (i.e. its ability to carry more data and travel far distances). It can be deployed via towers and small cell, but towers remain the most cost-effective way for carriers to deploy spectrum at scale and establish broad network coverage.
      • Carriers just spent a ton (~$90B) at the recent C-band spectrum auctions… and now they’re focused on deploying it.
      • This near-term carrier focus is on C-Band deployment is stalling small cell deployment growth.
    • Small cells are the next stage…
      • High-band (mmWave) spectrum is the next stage and is relevant for what’s often called the “real 5G” which would deliver on the huge gains in performance that 5G promises (step function increase in latency and bandwidth). It has significantly more capacity, but over a fraction of the geographic coverage area (lower propagation) which is why it needs to be deployed using small cells connected to fiber, making it ideal for dense urban areas. This densification is a driver of additional leasing as it’s a critical tool for carriers to accommodate continued growth in mobile data demand b/c it enables carriers to get the most out of spectrum assets by reusing it over shorter and shorter distances.
      • Growth in small cells should drive improving returns as they expect decreasing capital intensity for growth within their small cell and fiber business. With small cells there are “anchor nodes” and “colocation nodes” – the first “anchor” nodes are a lower ROI and additional nodes on existing infrastructure have higher incremental margins. So as lease-up activity continues, their ROI improves.
  • Balance sheet strength – They continue to methodically reduced the risk profile of their balance sheet. Since they achieved their initial investment grade credit rating over 5 yrs. ago, they have increased average debt maturity from 5 yrs. to >9yrs, reduced average borrowing costs to 3.1% from 3.8% and increased the mix of fixed-rate debt to > 90% from < 70% w/ no meaningful near term debt maturities. So limited near term exposure to rising rates.
  • Sustainability/ESG considerations…
    • Just announced goal of carbon neutrality by 2025
    • “Our business model is inherently sustainable and shared solutions limit infrastructure in the communities in which we operate and minimize the use of natural resources.”
    • “Our business finished just one ton of CO2 per $1 billion of enterprise value which is 90 times more efficient than the average company in the S&P 500 based on industry estimates.”
    • Their solutions also help address societal challenges like the digital divide in under-served communities by advancing access to education and technology. “To date, we have invested nearly $10 billion in towers, small cells and fiber assets located in low income areas.”
    • Enhanced focus on ESG may drive increased revenue opportunities from things like smart cities and “broadband for all” and lower operating costs in areas like tower lighting and electric vehicles.
  • Reasonably valued – trading at >4% 2022 AFFO yield. With LT AFFO/share growth of 7-8% and >3% dividend yield, they should compound total returns low double-digits over a long period of time as demand for their shared infrastructure offering is tied to robust mobile data growth (~30% annually).

 

 

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

 

$CCI.US

[category earnings]

[tag CCI]

 

Accenture Q4 Earnings

Current Price: $325     Price Target: $355 (increased from $310)

Position size: 4.6%       Performance since inception: +47%

 

 

Key Takeaways:

  • Strong results and guidance. Revenue (+21%) in line w/ high end of guidance range. Upped full year revenue growth guidance to +12-15% YoY (7-10% organic) from previous guidance of +10% to +11%.
  • Broad based strength in demand – They saw double-digit growth across all markets, all industry groups and all services. Consulting revenues for the quarter were $7.3B, up 29% and Outsourcing revenues were $6.1B, up 19%.
  • Increased dividend 10% and increased buyback authorization
  • Quotes from the call…
    • “Technology is the single biggest driver of change in companies today and the depth, breadth and scale of our technology capabilities across our services is unmatched. We see the demand environment shaping up for FY ’22 to be more of the same… The vast majority of companies are early in their transformation and whether digital leader, leapfrogger, laggard or in between, all face multi-year journeys ahead of them because the re-platforming in the cloud and use of new technologies across the enterprise is a once in a digital era profound transformation.”
    • “There remain entire parts of the enterprise for which digitization and the move to the cloud has only just begun. In particular, both the things companies make and the way they make things are being dramatically changed by technology and that is the focus of our Industry X business, which we believe is the next big digital frontier. In fact, a 2021 Gartner Survey of Board of Directors indicates that 93% expect that the number one business priority that we’ll see transformational improvement from digital technology is manufacturing, distribution and supply chain.”  Their “Industry X” business is now ~$5 billion in revenue growing 36%.
    • “sustainability is a critical area for which technology is still evolving. We believe that every business must be a sustainable business and yet companies are at very early stages of figuring out how to make this shift. Last year, building on years of investment and experience, we’ve launched our sustainability services under our new Chief Responsibility Officer and Global Sustainability Services Lead. We have continued to accelerate our focus in this expanding and changing market and are proud of the work we are doing with leading partners like Mastercard as we enhance its ability to track and analyze the carbon emissions of their suppliers and help decarbonize the UK Energy system with clients such as National Grid.”
    • “With McCormick, a global leader in flavor in the food industry where we are partnering on a strategic transformation program encompassing finance, supply chain, logistics and plant maintenance. The new cloud-based platform and innovative data-driven approach will help standardize processes, increase efficiencies and support their goal of doubling in size quickly.”
  • Bookings growth demonstrating momentum in the business –  20% increase in bookings to $59 billion. Overall book-to-bill of 1.1. Consulting book-to-bill of 1.1 and outsourcing book-to-bill of 1.2.
  • Continued margin expansion – saw 30bps op margin expansion for the Q and 40bps for the full yr. despite higher attrition and significantly reinvesting in the business. They expect another 10 to 30bps expansion in FY22.
  • Elevated utilization and attrition metrics driven by strong demand trends Utilization remains elevated (~92%) as they try to keep up w/ demand. Attrition went up from 17% to 19%. This is slightly ahead of pre-pandemic levels and seems driven by incredibly high demand for talent in the current environment (as opposed to cultural issues w/ attracting/retaining talent) which could negatively impact profitability. Related to this, their record level “billable headcount” additions (~54K) this quarter is re-assuring.
  • Demand outlook remains strong & Accenture is well positioned and taking share – Digital transformation is long-term secular growth driver to their business. We are rapidly moving to a complete re-platforming of global business… it is hugely significant.” Accenture has an advantage w/ their unique positioning of trusted partner w/ leading edge technology expertise (they have >8K patents and their own network of R&D labs) combined with strategy and consulting practitioners that bring deep industry expertise. No competitor has their scale, breadth of services and cross-industry insights, which gives them an advantage in serving “compressed transformations.” “Our clients know that through our investments and focus on innovation, we will help future-proof them.”
  • Accenture shines from an ESG perspective. They are a real leader in addressing how they create value for all of their stakeholders (employees, customers, vendors, shareholders) – it’s a constant theme on their calls, particularly w/ respect to their employees which is important as the “social” factor for them is very material b/c their industry is a “people business” w/ >600K employees across the globe. For instance:
      • They’ve been heavily investing in upskilling their employees – they spent ~$900m in training this yr.
      • Their workforce is now ~46% women; on track for their 2025 goal of a 50-50 gender balance.
      • They have a top 3 ranking in the Refinitiv Global Diversity and Inclusion Index for the 4th consecutive year.
      • They now have 50% renewable energy now powering their offices globally.
      • They recently started their “360 degree value initiative” – aimed at helping their clients achieve responsible business goals – they say their clients are increasingly focused on sustainability, inclusion and diversity (rise of ESG is a catalyst to this) and that they are in a unique position to help companies w/ this.
  • Capital allocation: exceeded original guidance for capital allocation by returning ~$6B of cash to shareholders while also investing >$4B (up from $2B) in acquisitions and >$1 billion in R&D. For FY22 they expect FCF of $7.5B to $8B and to return at least $6.3B through dividends and share repurchases.
  • Valuation:
    • The stock is undervalued trading at close to a 4% forward yield and they have an easily covered 1.2% dividend and no net debt.
    • Multiple underpinned by ACN being a best-in-class company with stable growth that’s buffered by geographic and end market diversity and long-standing client relationships (95 of their top 100 clients have been with them for >10 years).
    • They have $8B in cash on their balance sheet. The only debt they have on their balance sheet are capitalized leases, which were added last fiscal year due to an accounting change. Substantially all of their lease obligations are for office real estate.

 

 

 

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

 


$ACN.US

[tag ACN]

[category equity research]