Author: Sarah Kanwal

ADBE 3Q Results

Current Price:   $631                  Price Target: $710

Position Size:    2.9%                  TTM Performance: +40%

 

Key Takeaways:

  • Q3 results were only a slight beat which seemed to weigh on the stock after they reported. Results were impacted in part by some summer seasonality (see quote below). Despite that, it was a very strong quarter with positive commentary on the call.
  • Long runway for growth – FY21 guidance of ~$15B implies only ~10% penetration on TAM expectations of $147B. That includes ~$85B for Digital Experience and ~$62B for Digital Media (~$41B for creative, ~$21B for document). 
  • Quotes from the call…
        • “As anticipated, with regions beginning to reopen across the globe, we saw pronounced summer seasonality in Q3. This is consistent with the experience of businesses across industries, as evidenced by data from the Adobe Digital Index, which showed that June and July marked the highest consumer travel season in 2 years. This correlated with lower web traffic, while individuals enjoyed their summer holidays. We do see continued recovery in the SMB segment associated with the reopening.”
        • “Creativity has always played a central role in the human experience. Over the last year, we have all witnessed the way creativity has sustained us. We’ve shared photographs with loved ones on different continents, taught art classes to students at their kitchen tables and launched entirely new businesses online. Building on decades of leadership, Adobe continues to pave the way in core creative categories, including photography and design, while pushing the boundaries across a wide range of emerging categories such as AR and 3D.”
        • “Our offices are slowly reopening to fully vaccinated employees on a voluntary basis. As we look ahead to the future of work at Adobe, we will remain hybrid and flexible…”
        • “return to business travel is expected to ramp slowly.”
    • Digital Media segment ($2.87B, +23% YoY; ~71% of revenue): “unleashing creativity & accelerating document productivity”
      • Comprised of Creative cloud (~60% of total revenue, +21% YoY) and Document Cloud (11% of total revenue, +31% YoY). Q4 total segment growth guided to +20%. Segment Annualized Recurring Revenue (“ARR”) grew to $11.67B w/ Creative ARR of $9.87 billion and Document Cloud ARR of $1.79 billion.
      • Creative Cloud is benefiting from “exploding” content creation and consumption across phones, tables and desktops. Seeing strong retention and renewal across all Creative products and customer segments.
      • Growth drivers in creative cloud – continuing to drive innovation and extending products to new surfaces with Illustrator on iPad and Fresco on iPhone. And increasing focus on new and emerging content creation categories including video, 3D, Virtual Reality and Augmented Reality.
      • Document Cloud – “accelerating document productivity by powering the paper-to-digital revolution.” Using the power of AI with Adobe Sensei, Document Cloud is automating workflows across web, desktop and mobile. Going forward, Document Cloud will increasingly make up a larger mix of net new Digital Media ARR.
    • Digital Experience segment (revenue was $985m, +26% YoY; ~29% of revenue): “powering digital businesses”
      • Digital Experience subscription revenue was $864, +29% YoY. Q4 guided to +22%. Segment revenue includes: subscription revenue, professional services revenue, and “other”, which includes perpetual, OEM and support revenue.
      • Key customer wins at Accor, the Australian Government, Bertelsmann, Capital One, CVS Pharmacy, Daimler AG, Facebook, Ford Motor Company, Fidelity Brokerage Services, Honeywell, Real Madrid and The Gap.
      • Beneficiary of growing e-commerce penetration – Adobe offers a digital commerce platform (Magento) that competes w/ Shopify and BigCommerce which benefits from growing e-commerce spending.
      • Named a 2021 “Leader” in the Gartner Magic Quadrant for Digital Commerce
      • Q3 Experience Cloud highlights including new personalization capabilities to help customers move from third-party cookies to first-party data strategies.
    • 2021 Guidance: indicated they are “clearly on track” to exceed fiscal 2021 guidance for revenue of ~$15.45B, +20% YoY. Street estimates are already ahead of that guidance.
    • Adobe is a rare company w/ >90% recurring revenue, double digit top line growth and ~40% FCF margins. Accelerated secular tailwinds around digital transformation will be a long-term benefit.

 

 

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

 

$ADBE.US

[tag ADBE]

[category earnings]

 

 

CRM Earnings update

Current Price: $268          Price Target: $320

Position size: 2.5%           Return since inception (8/11): +11%

 

Key Points:

  • Beat expectations – Reported a top and bottom line beat. Revenues were $6.3B, up 23% YoY. Op margins expanded 20bps. Guiding to +24% FY21 revenue growth.
  • Attrition improved – was between 8% and 8.5%, an improvement from last quarter’s 9% to 9.5%.
  • More details on Slack strategy coming at Dreamforce/analyst day – “with Slack, we’re bringing a whole new dimension to salesforce.”
  • Setting the stage for margin expansion – mgmt. continually reiterated their focus on cost discipline and efficient growth.
  • Extremely positive demand commentary – saw strong demand across all of their products, regions and customer sizes. Sales cloud growth accelerated to 15% YoY, service cloud growth has accelerated to 23% and industry cloud growth was 58% (~$2B ARR, but an increasing part of the mix).
  • Contracted revenues underscore demand strength and provide visibility – Remaining performance obligation (RPOs), representing all future revenue under contract, ended Q2 at ~$36B, +18% YoY. And Current RPOs or cRPO (all future revenue under contract that is expected to be recognized as revenue in the next 12 months) was ~$18.7B, up 23% YoY.

 

  • Quotes from the call
    • “Our products are more relevant than ever. I have never seen this kind of momentum in the business. Honestly, that’s because CRM is more strategic now than it’s ever been. Every digital transformation begins and ends with a customer and that’s why around the world more and more companies are putting their trust in salesforce to help them get back to growth; that’s the agenda on every CEOs mind.”
    • “IDC just released their April 2021 SaaS vendor ratings that survey more than 2,000 companies worldwide and salesforce is rated #1 in trust, #1 in product, #1 in industry specialization, and #1 in value for the price.”
  • ESG comments…
    • They’ve progressed from being a “net zero company” to being “fully renewable.”
    • “A lot of the companies that I met with [recently] were mostly Fortune 100 CEOs, they crave to have that same net zero and renewable profile, which is very exciting to see the world having this kind of sustainability focus.”
    • Companies are using salesforce’s sustainability cloud to track their carbon footprint and other climate related initiatives.
  • Reasonable valuation & strong balance sheet
    • Expect CapEx to be ~3% of revenue in FY ’22 resulting in FCF growth of ~15% to 16% – excluding the anticipated impact of M&A, this would have be +22% to 23%.
    • Net leverage ratio <2x. During the quarter they issued $8 billion of senior notes (to fund Slack deal) with a weighted average interest rate of 2.25 % and weighted-average maturity of 20 years. Concurrent with that, S&P upgraded their credit rating to A+.
    • Trading at ~8x calendar ’22 revenue. Inexpensive given multiple secular tailwinds driving double-digit growth at scale for a high-quality, high moat company trading at a big discount to peers.

 

Investment Thesis:

  • Strong moat – dominant front office software that is mission critical and productivity enhancing to customers with high switching costs and an ecosystem advantage
  • Solid long-term secular growth drivers – digital transformation, multi-cloud, industry verticals and international expansion
  • Improving unit economics – growth strategy should yield higher quality (lower attrition) and higher recurring revenue cohorts which should improve margins over time and support their multiple
  • Reasonably valued – high quality franchise, growing double-digits and trading at a discount to peers

 

 

 

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

 

CSCO Q4 2021 Results

Current Price: $57                           Price Target: $62 (raising from $58) 

Position size: 3.2%                          TTM Performance: +35%

 

Key Takeaways:

  • Beat expectations on broad based demand growth – driving a top line and EPS beat, aided by gross margins up 60bps.
  • Short-term headwind from supply chain delays and chip shortages – this caused FY22 guidance to be lower than expected. Revenue guidance of 5-7% for FY22 assumes a deceleration from current quarter trends of +7.5%-9.5% due to these temporary headwinds which should last for at least 1H22. They’re taking price increases to offset impact to margins.
  • Secular drivers ramping – they are benefiting from digital transformation w/ the ramping of associated key technology transitions (Wifi 6, 5G, 400 gig, edge) that are catalysts to companies modernizing their aging network infrastructure. They’ve been investing behind these big market transitions for a long-time, they’re finally starting to come to life and will be long-term growth drivers for their business.
  • Mix shift to software and recurring revenue continues – subscription revenue was +15% YoY for the full year, as an increasing number of their products are to be offered this way. They now have one of the largest software businesses in the industry with an annual run rate well over $15B (~$13B of that is subscription). 

 

Additional Highlights:  

  • Revenue was $13.1 billion, up 8% YoY, coming in at the high end of their guidance range.
  • Strongest product order growth in a decade – +31% YoY (up 17% from pre-COVID Q4 levels in FY 2019) driven by strength across all of their end markets
  • Analyst Day in September may be a positive catalyst
  • Quotes from the call…
    • On supply chain issues: “While we are seeing increasing demand for our technology, we are also continuing to manage through the component shortage challenges that nearly every company is experiencing. Our world-class supply chain team as always, is doing an incredible job navigating this complex situation by working with our global suppliers to meet customer demand as quickly as possible. Looking ahead, we expect the supply challenges and cost impacts to continue through at least the first half of our fiscal year and potentially into the second half.”
    • On IT budgets: We are seeing IT budgets grow as companies begin to implement their critical future plans and business confidence increases.”
    • On broad demand strength: “We saw double-digit growth in every one of our customer segments. This strength is being driven by stronger customer investment in substantial network upgrades to help modernize and secure their environments to support the new way of working.”
    • On growth investments: “You will see us continue to invest in our key growth areas in technology shifts like hybrid cloud, hybrid work, 5G, Wi-Fi 6, edge and security”…”given the momentum we’re seeing in our business, we have more conviction than ever that we are investing in the right areas and we’ll continue to extend our competitive advantages and drive growth.”

  • Growing mix of recurring revenue should expand their multiple –Software mix is close to 1/3 of revenue w/ >80% of software sold as subscription. That means over 1/4 of total sales is from software subscriptions sales (or ~$14B). Additionally, ~22% of rev is services with much of that from maintenance/support which tend to be recurring. So overall recurring revenue could be ~45% or more (they don’t break it out specifically). They have a growing “as-a-service” portfolio driving the mix shift happening w/in their business which should be supportive of their multiple and their margins. They continue to offer more products this way including Cisco Plus their new network -as-a-service offering.
  • Momentum w/ web-scale cloud providers –commentary continues to be very positive. This is an important area of growth for them. They had record performance with over 160% order growth – seeing early traction of their 400-gig solutions, a huge testament to the investments they’ve made. This is an end market where they lost share to Arista in the past, but their positioning is improving w/ new products launched last year. That being said, this is still early stages – mgmt. indicated it may take a year or two for this to be a meaningful top line contributor. Could see performance vary quarter to quarter, due to the timing of large deals, but they are “incredibly confident” around their prospects in this area. Recently extended their webscale product offering – broadened their Silicon One platform from a routing focused solution to one which addresses the webscale switching market, offering the highest performance, programmable routing and switching silicon on the market.
  • During Q4, closed five acquisitions, Kenna Security, Socio Labs, Slido, Sedona Systems and Involvio – consistent w/ strategy of complementing R&D with targeted M&A to strengthen their market position growth areas.
  • Valuation: trading at a 6.5% FCF yield on fiscal 2022, which ends in July. This is well below S&P average of <4%, for a strong balance sheet, high FCF generative business (~30% FCF margins) w/ a growing mix of software and recurring revenue. Fundamentals continue to be supported by business transformation/digitization trends (which are accelerating) at a reasonable valuation while much else in tech has seen substantial multiple expansion. Additionally, their valuation is supported by a 2.6% dividend yield which they easily cover. They grew their dividend for the 10th consecutive year and are committed to returning 50% of FCF annually to shareholder through dividends and buybacks. They have ~$13B in net cash on their balance sheet, or >5% of their market cap.

 

 

 

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

 

 

$CSCO.US

[category earnings ]

[tag CSCO]

TJX Q2 Results

Current Price:   $73                        Price Target: $83 (raising from $75)

Position Size:    3.7%                      TTM Performance: 31%

 

Key takeaways:

  • Better than expected SSS drove revenue and EPS beat. “Open-only” SSS were +20%. These open-only comp store sales compare FY22 sales (this fiscal yr.) to FY20 sales (calendar 2019).
  • Positive margin commentary – Freight and wage pressure is being more than offset by higher merchandise margin (driven by strong inventory availability, rebounding sales and category mix shift). When freight pressures abate, margins will expand.
  • Launching HomeGoods e-commerce site next quarter – overall, Home continues to be their strongest category/segment
  • Apparel continues to rebound– this is a strong driver of SSS as apparel & footwear are about half of sales
  • Seeing extremely plentiful inventory buying opportunities which bodes well for the future.
  • International still weighed down by store closures – Canada, Europe and Australia each faced challenges with temporary store closures and occupancy restrictions

 

 

Additional Highlights:

 

Quotes from the call…

  • Gaining share: “This presents an unusual opportunity for us to continue to gain more market share because of our branded content being really second to none.”
  • Inflation benefit: “we are convinced that our relentless focus on value is a tremendous advantage. In an inflationary environment we believe even more consumers will be seeking out value. We are confident that our value position will be a very attractive option for consumers looking to stretch their dollars without sacrificing on quality and brands.”
  • Strong demand trends: “we continued to see an increase in our average of basket across all divisions, driven by customers putting more items into their carts.”
  • On inventory availability: “Our buyers are doing a great job sourcing merchandise and have been able to chase the goods we need to satisfy the current strong consumer demand. To reiterate, the availability of merchandise is excellent.”
  • On their moat: “We’ve spent decades establishing relationships with vendors and landlords, and building out our global buying offices, distribution network, systems and infrastructure. Further, we have expansive country-specific knowledge of consumer shopping habits, and have earned customer loyalty. We believe our well established global off-price retail model and level of international expertise is our tremendous advantage and our size and scale would be very difficult to replicate.”
  • Sales are tracking ahead of pre-pandemic levels…
    • Overall sales were $12.1B, over $2 billion more than the same quarter pre-pandemic. That includes $300-$350 million headwind due to temporary store closures during the quarter.
    • Open-only comp sales vs pre-pandemic (fiscal 2020 but calendar 2019)
      • Overall: +20%
      • Marmaxx U.S. +18%
      • HomeGoods U.S. +36%
      • Canada +18%
      • International +12%
  • Higher merchandise margins continue to mitigate covid costs, higher wages and higher freight–They expect freight to likely persist for the remainder of the year. HomeGoods margin is disproportionately impacted by freight increases due to its product mix.
  • Real estate and market share opportunity w/ retail store closures – better locations and lower rents. “Our relationships with vendors will grow even stronger as other retailers close stores.”
  • Long-term thesis intact – Relative to other brick-and-mortar focused retailers, TJX  continues to have a superior and very differentiated model. They acquire their inventory from an enormous (and growing) network of vendors, acting like a clearing mechanism for the retail industry…essentially opportunistically buying leftover/extra product that constantly flows from retailers, branded apparel companies etc. Growth of e-commerce has led to better inventory opportunities/ selection, not worse. They leverage their massive store footprint and centralized buying to merchandise their stores and e-commerce sites w/ current on-trend product. No one else does this at the scale they do. They have very quick inventory turns and can be nimble and re-active w/ their inventory buys and are an important partner to their sources of inventory. It’s a powerful model that continues to take share and, while they have a growing e-commerce business too, their store model has been very resistant to e-commerce encroachment. Moreover, they have a thriving Home business, a growing e-commerce presence, an expanding international store footprint and a track record of steadily positive SSS. Prior to last year, in their 44 year history they only had 1 year of negative SSS (this is unheard of!). So, with steadily positive SSS, a slowly growing store footprint and an emerging e-commerce business, TJX steadily grows their topline w/ consistent margins that are about double that of department stores.
  • Valuation: Balance sheet continues to improve (reduced outstanding debt by $2.75B this year and lowered interest expense by >$90m), they’ve returned to their capital allocation program w/ dividend and buybacks. The valuation is reasonable at ~3.5% FCF yield on next yr.

 

 

 

 

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

 

 

$TJX.US

[tag TJX]

[category earnings]

 

Home Depot Q2 Earnings

Current Price: $320                     Target Price: $340

Position size: >2%                        Performance since inception: +57% (4/16/20)

 

 

Key Takeaways:

 

  • Comparable store sales were 4.5% (a big deceleration from +31% last quarter) as they lap the pandemic home improvement spending surge from last year and as the benefit of stimulus checks wane. E-commerce (mid-teens % of sales) were flat YoY as they lapped 100% growth last year.
  • Talk of “peak growth” not concerning  – despite slowing SSS, multiple secular tailwinds persist.
  • Pro sales growth now outpacing DIY as consumers resume large projects and return to pre-pandemic activities. 
  • Still not giving guidance
  • Quote from the call…”“We are at a point now where the housing stock of the United States is over 20% more valuable than it was two years ago….and so as we look forward, not only have we seen that home price appreciation….but the homeowner balance sheet is incredibly healthy, the state of mortgage-finance is incredibly healthy, and so that’s some of the reasons why we’re optimistic.”

 

Additional Highlights:

  • Talk of “peak growth” not concerning…
    • Growth rate slowing doesn’t mean the business is shrinking or that the multiple will contract. While the rate of growth (after this extraordinary year!) will clearly slow, their business will continue to grow over time. Their long-term opportunity is to continue to consolidate a fragmented market in home improvement w/ DIY & Pro, grow their more nascent MRO business (particularly after HD Supply acquisition) and leverage their best of breed omni-channel model.
  • Secular tailwinds persist…more homes need to be built. This should be a LT secular driver for HD.
    • Undersupply of homes continues to support pricing and years of underbuilding has shifted the age of the existing US housing stock – both of which support home improvement spending.  
    • According to a recent study by the National Association of Realtors, due to years of underbuilding, the US is short 6.8 million homes.
    • Building would need to accelerate to a pace that is well above the current trend…. To more than 2 million housing units per year vs a ~1.6m annual rate for starts.
    • From the NAR report released in June…“Following decades of underbuilding and underinvestment, the state of America’s housing stock, which is among the most critical pieces of our national infrastructure, is dire, with a chronic shortage of affordable and available homes to house the nation’s population. The housing stock around the nation has been widely neglected, with a severe lack of new construction and prolonged underinvestment leading to an acute shortage of available housing, an ever-worsening affordability crisis and an existing housing stock that is aging and increasingly in need of repair.”
  • Higher inflation –they can pass through pricing, inflation is a tailwind to SSS which drives some operating leverage
  • Best of breed omni-channel model drives productivity 
    • By adding specialized warehouse capacity and enhancing digital capabilities (online and in the store), HD is uniquely positioned to leverage their existing retail footprint (not really growing stores) and drive steadily high ROIC that is ~45% (which is incredible).
    • They dominate the category, are the low cost provider, have a relentless focus on productivity and can continue to flow an increasing amount of goods through their big box stores w/ omni-channel. This is a highly efficient model as 55% of online sales are picked up in-store which HD can fulfill from the store or nearby warehouses.
    • Their express car and van delivery service covers over 70% of the U.S. population w/ coverage continuing to improve.

·        Capital allocation: they’ve resumed share repurchases and remain committed to growing their dividend over time

·        Valuation: Strong balance sheet, benefiting from strong housing trends but also has defensive qualities and a reasonable valuation, trading at ~4.6% 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

 

 

$HD.US

[tag HD]

[category earnings]

 

 

Disney Q3 earnings

Current Price: $185     Price Target: $215

Position size: 2%          TTM Performance: +35%   

 

 

 Key Takeaways:

  • Better than expected Disney+ subscriber numbers – after slightly weaker than expected subs last month, they reported a small beat this quarter. In general, Disney+ has been ramping far ahead of initial expectations. However, still no change to breakeven guidance for their DTC platform, as they increase investment on content.
  • Strong Parks results – parks segment returned to profitability
  • Seeing success w/ hybrid film releases – flexible distribution strategy of being able to release content in both theaters and direct to Disney+ is an advantage
  • Capital return still paused – Still not paying a dividend or buying back shares, but they do expect to return to both.

 

Additional highlights:

  • Quotes from the call…
    • “we will maximize the synergy of our unique ecosystem to further deepen consumers connection to our characters and stories. And we will use the power of our far-reaching platforms and emerging technologies to better anticipate what our consumers want and deliver them a more seamless and more personalized entertainment experience.”
    • “Last month, we completed our first cruise since the start of the pandemic with the Disney Magic, which is currently sailing short-term staycations for U.K. residents, and a Disney Dream set sail on its first U.S. based cruise this week. Future bookings for all of our ships remain strong with bookings in the third quarter, in particular, having benefited from the announcement of our fall 2022 itineraries and the successful marketing launch of our fifth ship, the Disney Wish, which will set sail in summer of 2022.”
  • They now have 174M subs across Disney+, Hulu and EPSN+. That is second only to Netflix, which has a little over 200M. Disney+ now has 116M subs, Hulu is ~43M and ESPN has ~15M. Goal is 230-260m Disney+ subs by 2024.
  • Global rollout will continue to support sub growth – Disney+ is available in a limited capacity in Japan, expanding to the full market in late October, followed by additional APAC markets, including South Korea, Taiwan and Hong Kong in mid-November. Launch of Disney+ in Eastern Europe has moved from late 2021 to the summer of 2022, primarily to allow for an expanded footprint that will include parts of the Middle East and South Africa.
  • ARPU should steadily rise over time – overall ARPU this quarter was $4.16 (ex-Hotstar, it was $6.12). Their ARPU is weighed down by lower Disney+ fees outside the US, but they will gradually raise prices over time and they have ways (other than sub fees) to make money off of their content w/ advertising, parks and consumer products (especially w/ content like Pixar, marvel, star wars).
  • Flexibility is a key component of their distribution strategy. They have 3 approaches for distributing films. 1) Release in theaters with a simultaneous offering via Disney+ Premier Access, 2) release straight to Disney+, and 3) traditional exclusive theatrical releases. Hybrid releases mitigated the impact of theater closures, but theaters are re-opening and they intend to continue to use this model.  
  • Improving parks and lots of content on the horizon bodes well for future results…
    • Content updates…
    • Park re-openings…everything is open. Generally operating at or near current capacity limits w/ robust guest spending trends and strong reservations.

 

 

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 earnings ]

[tag DIS]

 

Black Knight 2Q21 Earnings

Current Price: $77           Price Target: $96

Position Size: 2.3%          TTM Performance: -2%

 Key Takeaways: 

·      Beat estimates on strong  new  customer adds and cross-selling progress aided by recent acquisition, Optimal  Blue. 

  • Raised full year guidance again

·       Data & Analytics strength (+16% YoY): Seeing continued improvement with cross-selling Data & Analytics (~15% of revenue), which could be a solid future growth driver for them.

 Additional Highlights:

  • Revenues of $361m, an increase of 23%; Organic revenue growth of 11%
  • Now expect FY revenue growth of 17-18% (prior 14-15%) on organic revenue growth of 8-9% (prior 6-8%)
  • Interest rates drive mortgage volumes but BKI revs are more tied to loans outstanding, not the cyclicality of volumes. They have a high mix of recurring rev > 90%+ of  mix with 5-7  year contracts.
  • Should see go-forward margin expansion in both segments – mgmt. goal of 50-100bps total per year LT
  • Their stake in D&B is now worth $1.2B. They invested just under $500m in their D&B stake giving them a pre-tax unrealized gain of ~$700m.
  • Two tuck-in acquisitions
    • Top of Mind Networks – they developed Surefire, a market-leading CRM and marketing automation platform that is designed specifically for the mortgage industry.
    • eMBS – the leading provider of performance data and analytics on agency-backed securities. Clients use this data to get critical insights that help them make more informed investment decisions and better manage portfolios of agency-backed securities.

Data analytics segment (~15% of revenue) revenues were up 16%. Driven by growth in their property data and portfolio analytics businesses.

  • Organic revenue growth of ~14%
  • Trending ahead of LT targets in recent quarters on strong cross-sales related to new client deals, as well as renewals. Demand for products within the segment has ramped as clients seek to add recapture, loss mitigation, and customer acquisition capabilities.
  • 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 (~85% of revenue) up 25% YoY.

  • Organic growth of ~11%
  • Within this segment servicing (~70% of revenue) was up 13% – driven primarily by new clients and higher usage-based revenues on MSP.
  • Added 3 new MSP clients, which brings  total to 8 new clients so far this year. With these wins, they now have 90 MSP clients.
  • They continue to dominate first lien loans with leading share and are growing share in second lien loans. Market share for first-lien mortgages is ~64-65%.
  • Originations (~16% of total revs) made up of new loans and refi’s – revenues up 61% (organic rev +6%) driven by Optimal Blue acquisition, new clients, higher consulting revenues and higher origination volumes.

Valuation:

·       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.

·       Leverage ratio at 3.2x

·       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 2Q Results

Current Price: $2,207      Target price: $2,400

Position Size: 1.8%          TTM Performance: +35%

 

 

Key Takeaways:

  • Booking trends well ahead of expectations ($22B vs $16B) as they saw meaningful sequential improvement
  • Beneficiary of strong leisure and European recovery
  • Only modest Delta variant impact – newly imposed travel restrictions from Delta variant so far has led to a “modest pullback” in July booking trends relative to June

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

  • Return of capital to shareholders remains on pause

 

Additional Highlights:

  • Beneficiary of strong leisure and Europe recovery:

·         Compared with 2019, gross bookings were down 12% and Q2 room nights were down 26%, with average daily rates up vs 2019. In the month of June, room nights continued to improve and were down only 13% from 2019.

·         US was again the strongest performing major country in Q2, Domestic room nights grew in the mid-teens versus 2019 for the full quarter, while international room nights remain down significantly versus 2019

·         Leisure is their key demand segment – has been tracking ahead of 2019 in the US

·         Europe is their primary market and saw room night growth from June 2019, a meaningfully sequential improvement driven by intra-Europe travel

·         Europe was lagging last quarter due to continued lockdowns and slower vaccine distribution

·         alternative accommodation room night growth was flat versus June 2019 – has their highest mix of alternative accommodations.

·         Asia partially offset improvements in other regions with greater room night declines in Q2 than in Q1 due to the increase in COVID outbreaks with related travel restrictions

·         Mobile bookings, particularly through their apps represented over 60% of total room nights

  • Quotes from the call:
    • “The sharp return to growth, initially in the US and then the European markets that we have witnessed this year shows us clearly that leisure travelers are eager to get back to booking trips on our platform when restrictions are lifted and customers are able to travel.”
  • Connected trip & 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 which enables payment to companies like tour operators through their platform. 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 were 30% of the mix in 2020 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 >4.5% yield on 2022. Consensus is for revenue not to recover to 2019 baseline until 2023. Consistent w/ mgmt. commentary that it will be years and not quarters before the travel market returns to pre-COVID volumes.

 

 

 

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 2Q21 Results

Share Price: $126            Target Price: $150

Position Size: 2%              1 Yr. Return: +71%

 

 

Key takeaways:

  • Better than expected RevPAR and EPS. Q2 system-wide RevPAR grew 234% YoY
  • Performance was driven by strong leisure demand and rate growth
  • Expect  return  of  capital  program  in  early  2022
  • Solid unit growth (+7% YoY) and additions to pipeline, come in ahead of mgmt. guidance. Provides key support to LT growth story as industry leading RevPAR premiums continue to drive a high quality pipeline.
  • CEO Chris Nassetta said, “things have been coming back more quickly, then we would have thought. We knew they’d come back, obviously you all know, I’ve been optimistic about the recovery, but it’s even better than our thought”…”when we look back on this recovery, the most unusual thing relative to any other period in my for almost 40 years of doing this will be just the rapid return of rate.”

 

 

Highlights:

  • Demand is recovering:
    • While limited international travel weighed on overall performance, strong leisure demand and rate recovery drove improving trends. In Q2 systemwide RevPAR was down 36% from 2019. This continues to improve…w/ June RevPAR down 29% from 2019. China has rebounded with RevPAR now trending above 2019 levels
    • In the 7 trailing days prior to the earnings call, system-wide occupancy was running at 74%. This is a very short term data point, but it’s a very positive one. It’s similar to pre-Covid and implies very strong mid-week travel which requires meaningful business demand especially in certain markets.
    • Leisure is leading the recovery w/ record performance
      • For the quarter, US leisure demand exceeded prior peak levels with rates at 90% of prior peaks.
      • In July system wide leisure room nights and rate exceeded 2019 levels
    • Business transient improved meaningfully throughout the quarter
      • Recovery driven by small and medium-sized businesses. Pre-COVID, 80% of their business travel was SMBs.
      • In June Business transient room night demand was 70% 2019 levels with rate over 80% of 2019 levels. In July rates were at 90% of 2019 levels.
    • Group is expected to take longer to recover; 2022 should be very strong
      • Group performance driven primarily by social groups given seasonally higher leisure demand and ended June at more than half of 2019 levels
      • Planning lead times for large business conferences means it takes longer to recover
      • They think 2022 will be a “barn burner” year for their group business
      • Group bookings for next year are at rates above 2019 peak.
      • “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.”
  • Pipeline – Stable unit growth underpins the story
    • For 2021, expect net unit growth in the 5% to 5.5% range, above prior expectations given the pace of openings year-to-date.
    • Unit growth in Q2 was 7% YoY and the pipeline increased to a total of approximately >400K rooms. That represents 40% room growth from their current installed base of rooms.
    • 62% of their pipeline is located outside the US (mid-tier focus tied to growing global middle class) and more than half are under construction (helps underpin several yrs. of predictable growth).
    • Had a record number of conversion signings in the quarter, representing 30% of total signings
      • “The system is performing at the highest levels from a market share point of view that it’s ever performed in our history. And I think that’s a great leading indicator for opportunities to convince folks who are independents to come into the fold. As well as folks that have weaker brands that are looking for a better performance to come into the fold, both of which are happening, a little bit better than our expectations.” 
    • China development activity is particularly strong – increased regulatory activity in property sector could add a headwind to development activity.
  • Continued strength in their market leading RevPAR index. RevPAR index is their RevPAR premium/discount relative to peers adjusted for chain scale. 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. i.e. they would likely take more pipeline share if lending standards tighten. The other countercyclical aspect of their pipeline growth is conversions (an existing hotel changes their banner to Hilton). I.e. Hampton Inn (35 year old brand) has a RevPAR index of 120.
  • 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.

 

 

$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

 

 

China regulatory crackdown & Apple

Sharing some thoughts on China’s regulatory crackdown, which has been largely focused on the tech sector, and some thought on how this might impact Apple.

 

Tech crackdown…

  • The focus of actions by Chinese regulators seems to be on antitrust issues and handling of user data. These issues are very similar to the antitrust issues we’re seeing in the US. The emergence of platform companies w/ network effects that lead to winner take all or winner take most dynamics, which results in a few companies with monopoly power. There are a couple key differences however in China. The first is that they can deal w/ these issues swiftly (which they are) w/out the lengthy political process required in the US. No compromises required. And second, is that most of the tech stocks they are cracking down on are “offshore” stocks, listed outside of China. Chinese investors have limited options to buy shares of these companies. It’s created a divergence in China A share “onshore” indexes (more weighted towards industrials, financials, staples) and broader China indexes (heavy tech concentration). https://www.wsj.com/articles/tech-crackdown-hits-chinese-stocks-just-not-in-china-11623231001?mod=article_inline

 

What does this mean for Apple? … Apple is not immune however there are some mitigating factors…

  • China is a huge market for Apple and is essential to their supply chain. Greater China (which includes China mainland, Hong Kong and Taiwan) is mid to high teens % of sales.
  • Apple has already made multiple concessions to Chinese regulators on how they store Chinese consumer data and removing apps from their app store as requested. So they’ve been accommodating to the government. In 2016, China passed a law requiring that all “personal information and important data” that is collected in China be kept in China. China could shut down iCloud in the country if Apple did not comply with the new cybersecurity law. So Apple moved the personal data of their Chinese customers to the servers of a Chinese state-owned company (essentially giving the gov access). And they actively remove apps related to topics that the government forbids, like the Dalai Lama, Tiananmen Square, anything that’s critical of the Communist party etc. Chinese iPhones even censor the emoji of the Taiwanese flag and their maps suggest Taiwan is part of China.
  • https://www.nytimes.com/2021/05/18/technology/apple-china-investigation.html
  • https://www.nytimes.com/2021/05/17/technology/apple-china-censorship-data.html
  • https://www.nytimes.com/2017/07/12/business/apple-china-data-center-cybersecurity.html?action=click&module=RelatedLinks&pgtype=Article
  • China might be afraid to go after Apple too hard given Apple is a huge employer there and b/c of China’s reliance on the US for key technologies related to cutting edge semis.
    • Most of Apple’s assembly occurs in China (though China accounts for little in the value of components). The Chinese government spent years attracting the manufacturing of products like Apple’s devices. Foxconn (a Taiwanese company) is the largest private employer in China and Apple is their largest customer accounting for over 50% of revenue. Foxconn’s manufacturing facility in Zhengzhou is where about half of all iPhones are manufactured. The government reportedly subsidized the plant, built necessary infrastructure, gave tax breaks to Foxconn and created a special customs zone to make iPhone sales into China easier.  This manufacturing facility has become the lifeblood of Zhengzhou, which is often referred to as “iPhone city.”
    • China is dependent on foreign technology (especially the US) for semiconductors, particularly in leading edge semis. They have been trying for years, but don’t have the ability to produce leading edge chips which underpin basically all advanced technology products across sectors – from smartphones, to airplanes, to enabling AI.  The top priority of the “Made in China 2025” plan, which is geared at narrowing their technology gap, is developing a domestic semiconductor industry. They are doing this because they fear their dependence on the rest of the world for this technology. And also rising labor costs are narrowing their labor advantage, pushing government efforts to move up the value chain. China accounts for about 45% of global semiconductor demand, ~90% of which are imported. In fact, they spend more on importing semis than on oil. Many of those chips get sent to China and put into devices that are then exported. China’s primary input to the iPhone is low cost labor; the high value components come from elsewhere. Part of the risk for Apple is that it’s not quick and easy for companies, like Foxconn, to shift manufacturing capacity. Ultimately, China might fear damaging the US’s most valuable company given their reliance on the US for semiconductor technology.

 

Tutoring…

  • The government has also focused their regulatory crackdown on the education sector. New rules would force tutoring services for “compulsory years of education” to be run as not-for-profit operations, introduce fee standards, ban the companies from capital-raising and foreign ownership.
  • Why are they doing this? Spiraling education costs have deterred families from having more children – the government is now looking to encourage births after ending their one-child policy in 2016. In May, they increased it to 3 children. “The purpose is to ensure that kids get proper education. It’s not to wipe out the entire market and destroy everyone’s portfolios.” I’ve linked a couple interesting articles from the WSJ on the subject.

 

What’s next?

  • Authorities could later turn their focus to other areas that they consider out of control, such as healthcare and property – “These sectors are areas where the most painful reforms have to be done.”

 

https://www.wsj.com/articles/china-moves-to-ease-child-rearing-costs-in-drive-to-boost-births-11626799245?mod=article_inline

https://www.wsj.com/articles/chinas-tutoring-rules-slam-education-stocks-11627276804?mod=article_relatedinline

 

 

 

 

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 equity research]

[tag AAPL]