Author: Sarah Kanwal

Disney Q2 earnings

 

Current Price: $170     Price Target: $215

Position size: 2%          TTM Performance: +35%   

 

 

 Key Takeaways:

  • Revenue was a slight miss, but they beat on earnings w/ weaker than expected Disney+ subscriber numbers – after a few quarters of big beats on subs, this quarter they beat on Hulu and ESPN subs and missed on Disney+ subs. The stock was down on this news. Weaker numbers not concerning and are partly impacted by delayed launch in LATAM and Covid related content delays.
  • They had 104m Disney+ subs vs expectations for 109m subs. Despite this quarters numbers, overall Disney+ is still ramping way faster than expected, faster than NFLX and with no change to long term targets.
  • Positive commentary on theater re-openings – announced two films opening exclusively in theaters in Aug (Free Guy) and Sept (Shang-Chi) amidst “recent signs of increased consumer confidence in movie-going.”
  • Parks are recovering – parks are open (except Paris), operating at capacity limits, showing promising signs of future demand and open parks contributing to profitability. Shanghai Disney Resort is operating above FY ’19 levels.

 

Additional highlights:

  • They now have 159M subs across Disney+, Hulu and EPSN+. That is second only to Netflix, which has about 204M. Disney+ now has 104M subs, Hulu is ~42M and ESPN has ~14M. Goal is 230-260m Disney+ subs by 2024.
  • Weaker subscribers not concerning – subs this month were weaker than expected and they gave sub guidance for Q2 below consensus. Weaker numbers in part driven by Covid crisis in India and by pushed back launch in Latin America (timing the launch w/ key sports content). Despite that, in general they are ramping faster than anyone expected, they’re still in the early stages of their global rollout.
  • ARPU was lower than expected but should steadily rise over time – ARPU at Disney+ Hotstar was down significantly versus Q1 due to lower advertising revenue as a result of the timing of IPL cricket matches and the impact of COVID in India (~1/3 of Disney+ subs). They had planned price increases in some markets that were put in place at the end of the quarter that haven’t had an impact yet. Lower Disney+ fees are largely driven by lower fees outside the US, but they will gradually continue to 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.  
  • Content updates…
    • Returning to full production at their studios
    • Searchlight’s Nomadland (now on Hulu) took home Oscars for Best Actress, Best Director (w/ Chloe Zhao becoming the first woman of color to win the award), and Best Picture.
    • Pixar’s Soul (now on Disney+) took home Oscars for Best Animated Feature and Best Original Score
    • Moving more content to ESPN+ over time will mitigate cord cutting – “While our overall strategy is still very supportive of our Linear business, given the important economic value it drives for the company, we are also building out our ESPN+ Direct-to-Consumer offering. And with every deal we make, we are considering both the Linear and DTC components.” They’ve had some recent key ESPN+ additions w/ UFC, NFL, NHL, MLB, the PGA Tour, La Liga and Bundesliga (Spanish & German soccer leagues).
  • Park re-openings…everything but Paris is open. Parks and resorts that were opened during the quarter all operated at significantly reduced capacities, yet all achieved a net incremental positive contribution during the period they were open – meaning revenue exceeded the variable costs associated with being open. They are not seeing labor shortages in terms of bringing cast members back to the parks.

 

 

 

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]

 

Update on Semi Shortage

Thought I would send a note with some thoughts on the chip shortages we are seeing that are effecting a wide range of products from cars to game consoles to appliances…

 

Why do we have shortages? Perfect storm of a structural increase in long-term demand and a short-term imbalance in the supply chain.

  • Pandemic demand shift – demand increased for a wide range of semiconductor intensive products as the pandemic accelerated digital transformation and increased demand for electronics tied to from work/learn from home and for home appliances, TVs etc. Accelerated demand in many areas will have a long tail (e.g. 5G, IoT).
  • Rapid demand recovery coupled w/ lean inventories – The auto industry is a perfect example of this. Heading into the pandemic, autos were already weak then Covid weakened demand further. The problem arose when demand suddenly picked up in Q4. The long and complex auto supply chain, w/ tight inventory mgmt., couldn’t respond to the demand swing quickly (particularly w/ increased semi demand from other places, see previous bullet)…from chip production to car production, it takes ~6 months with several tiers of suppliers in between.
  • Stockpiling – there is inventory hoarding that is making a tight supply situation even worse, in part to ensure supply b/c of geopolitical tensions and in part in response to supply chain disruption due to Covid.
    • Huawei, for example, began building up inventory to buffer themselves from US sanctions set to cut them off from key suppliers. Overall, China’s chip imports increased ~15% to ~$380B in 2020, up from $330B in 2019.
  • Confluence of weather and disasters
    • Semi manufacturing can be water intensive. Taiwan suffered its worst drought in decades…TSMC, one of the 3 largest foundries is located there.
    • A plant in Japan that’s a major provider of automotive chips was damaged by fire in March.
    • Weather related power outages at Texas facilities impacted TSMC auto chip supplies and Samsung SSD controllers for PCs.

 

What is it impacting?

  • Shortages are particularly apparent in certain areas like lower end chips (like display IC’s and power mgmt. chips vs CPUs & GPUs), but the impact is pervasive b/c they go into a lot of stuff…laptops, webcams, printers, contactless payment equipment, TVs, air purifiers, cars, washer/dryer etc.

 

Implications?

  • Tons of spending aimed at increasing semi manufacturing…including in mature nodes.
    • Intel unveiled plans in March to spend $20B to build two new factories in Arizona.
    • TSMC ramping its capex to $100B over the 3 yrs., including about $30B in 2021 (~80% of the 2021 capital budget will be allocated for advanced process technologies, including 3-nanometer, 5-nanometer, and 7-nanometer), from a record $17B last year.
    • Samsung plans to spend $116B over the next decade to compete w/ TSMC.
    • SMIC has plans for a $2.35B plant with funding from the city of Shenzhen.
    • US, Europe and China are all being aggressive about building domestic capacity, aided by gov’t stimulus.
      • Biden looks to spend $50B to support semiconductor manufacturing/research and may offer tax incentives for a proposed $12B TSMC plant in Arizona and a potential $17B Samsung facility in Texas.
      • The EU has a goal to double chip production to 20% of the global market by 2030. They are looking for TSMC and Samsung to potentially build advanced semi fabs there.
      • China has a 5 yr. plan that includes significant spending aimed at producing cutting-edge chips.
  • Inflation – shortages are leading to higher prices. Goldman estimates that this could have a 3% impact on effected goods…chips are an important production input to ~12% of GDP…so they say this could boost inflation by 40bps…
  • Delaying revenue – For example, the car industry expects a negative $61B impact this year and Apple said it would see a $3-4B revenue hit as it would impact availability of Macs and iPads.
  • Capacity expansions increasing talk of next cycle – The semiconductor industry has cycles that are generally supply driven (though it is less cyclical than it used to be), so the massive increases in supply bode watching, particularly w/ mature nodes.

 

How long will it last?

  • Opinions vary, but this could last into 2022, maybe 2023. The bottom line is that this is temporary as there are massive amounts of supply set to come on. Timeline also varies by type of chip. Massive amounts of supply are coming on that will alleviate this, but adding capacity takes time. TSMC forecast in April the shortages could extend into 2022, but said they would see some improvements next quarter.

 

 

 

 

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]

 

CCI Q1 2021 Results

 

Current price: $183          Target price: $201 (up from $190)

Position size: 2.3%           TTM Performance: 16%

 

Key takeaways:

  • Encouraging guidance – CCI beat estimates and raised full year guidance.
  • Solid AFFO/share growth – should be low-double-digits in 2021. Carrier investments in 5G are increasing; higher growth targets aided by recent VZ tower deal.
  • 11% dividend increase – ahead of long-term 7-8% dividend growth target
  • 5G investment cycle is (finally) ramping…CEO Jay Brown said, “Following a period of building excitement and anticipation, we have seen a significant increase in activity as our customers have started to upgrade their networks to 5G at scale.”

 

Additional highlights:

  • They now anticipate 11% growth in AFFO/share for the full year 2021 (a recent VZ tower agreement aided this), meaningfully above their long-term annual target of 7% to 8%. They expect to grow the dividend in line w/ AFFO growth.
  • Quote from the call….
    • “We’re obviously very, very encouraged by the activity that we’re seeing among the carriers. We’re not surprised by the urgency that our customers are showing in deploying 5G. The level of commitment that they showed during the C-band auction was really a clear sign that they’re going to invest heavily in 5G. And so, the activity we’re seeing I think just flows from that. We’re seeing that turning to actions as they’re deploying significant amounts of 5G networks and we’re really encouraged by the activity that we’re seeing.”
  • CCI can leverage the synergistic value of their shared infrastructure (>40K towers; ~ 80Ksmall cells on air or committed in backlog; 80K route miles of fiber concentrated in the top U.S. markets) to increase capacity utilization w/ continued lease up activity, growing their ROIC, AFFO/share and dividends. With LT AFFO/share growth of 7-8% and ~3% dividend yield, they should compound total returns double-digits over a long period of time as demand for their shared infrastructure offering across towers, small cells and fiber is all tied to robust mobile data growth (~ 30% annually).
  • Multi-year tailwinds to drive leasing activity > 5G, spectrum deployment & densification
    • Data demand drives the need for additional spectrum and the only way spectrum can meet demand is to deploy it on towers and small cells.
    • Densification – In addition to deploying more spectrum, cell site densification has always been a key tool that carriers have used to add network capacity to get the most out of their spectrum assets by reusing the spectrum over shorter and shorter distances. The nature of wireless networks requires that cell site densification will continue as the density of data demand grows, particularly given the higher-spectrum bands that have been auctioned in recent years.
    • 5G Spectrum deployment – Leasing activity will increasingly be driven by spectrum deployment for 5G. Mid-band (C-band) and high-band (mmWave) spectrum are both are relevant for 5G and will drive lease up activity for CCI.
      • Mid-band (C-band) spectrum deployment –C-band 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. Carriers just spent a lot of money at recent c-band auctions, now they need to spend to deploy the spectrum – they announced a significant new VZ tower agreement related to this.
      • High-band (mmWave) spectrum is 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. 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.
    • 5G phones as a catalyst – CEO says ” we saw an important milestone and the march towards greater network densification, when Apple announced that all iPhone 12 models sold in the US support millimeter-wave spectrum bands…This announcement reminds me a lot of 2007. At the time the wireless carriers in the US had accumulated a vast supply of 3G capable spectrum, but there were no use cases identified requiring that much capacity. At the time phones were used for talking and in limited cases texting. Ringtones were the exciting feature you could download to personalize your device. Then Apple launched the original iPhone and the world changed.” The introduction of the iPhone kicked-off an era of wireless innovation that spurred unprecedented investments in wireless networks. 
    • The situation is similar now. The new iPhone was launched for spectrum bands that are not yet deployed at scale. The use cases for 5G are few, but as the iPhone 12 proliferates, the installed base grows the incentive for new applications to be created and for the relevant spectrum to be deployed. Step function increase in latency and bandwidth will spur innovation and efficiencies across industries. CCI makes money off of the infrastructure and Apple makes money off of the applications.
  • Balance sheet strength – They continue to methodically reduced the risk profile of their balance sheet. In Q1, they lowered weighted average borrowing costs and extended the average maturity of their debt. Since they achieved their initial investment grade credit rating ~ 5 yrs ago, they have increased average debt maturity from 5 yrs to 10yrs, reduced average borrowing costs to 3.1% from 3.8%, increased mix of fixed-rate debt to > 90% from < 70% and reduced reliance on secured debt to ~15% from ~50%. No meaningful near term debt maturities and ~$4B of undrawn capacity on their revolving credit facility.
  • Reasonably valued, trading at ~3.7% 2021 AFFO 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

 

$CCI.US

[category earnings]

[tag CCI]

 

Black Knight 1Q21 Earnings

Current Price: $74           Price Target: $96

Position Size: 2.3%          TTM Performance: +6%

 Key Takeaways: 

·      Q1 results that beat on revenues and adjusted EPS and they raised guidance for FY21. The revenue beat was driven by strong growth in data and analytics. 

·       Data & Analytics strength (+17% YoY): Seeing continued improvement with cross-selling Data & Analytics (~15% of revenue), which could be a solid future growth driver for them.

·       Lower foreclosures is a headwind: as they indicated last quarter, they are seeing lower foreclosure-related volumes in their Specialty Servicing software business due to the foreclosure moratorium. This should ease 1H22.

 

 Additional Highlights:

  • Q1 revenues of $350m, +20% and adjusted EPS growth of 19%. Organic revenue growth was 9% – highest rate since 2016, despite transitory headwinds related to the foreclosure moratorium.
  • Very positive commentary about YTD new customer wins in each segment and some recent product innovations. New clients drove 10 points of organic growth. Everything else (annual price escalators, loan growth, origination volumes, foreclosure volume transitory headwind) all netted out to ~1% headwind – that gets you from the 10% down to the reported 9% organic growth. So super high quality, new client, new solution driven quarter.
  • Their stake in D&B is now worth $1.3B. They invested just under $500m in their D&B stake ~1 year ago giving them a pre-tax unrealized gain of >$800m.

Data analytics segment (~15% of revenue) revenues were up 17%. Driven by growth in their property data and portfolio analytics businesses.

  • Organic revenue growth of ~11%
  • EBITDA margin +480bps YoY.
  • Trending ahead of LT targets in recent quarters on strong cross-sales related to new client deals, as well as renewals. They continue to see promising momentum in this business.
  • 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 21% YoY.

  • Organic growth of ~9%
  • Within this segment servicing (~70% of revenue) was up 4% – new client loan growth helped offset foreclosure moratorium headwinds.
  • They continue to dominate first lien loans with leading share and are growing share in second lien loans. Market share for first mortgages is >60%.
  • Originations (~16% of total revs) made up of new loans and refi’s – revenues increased 90% b/c of Optimal Blue acquisition, new clients, higher consulting revenues and higher origination volumes.
  • Segment EBITDA margin increased 80bps YoY.
  • Acquired the NexSpring cloud-based loan origination platform – a digital lending platform designed specifically for mortgage brokers that will be integrated with Empower.

Increased Guidance: FY 21 revenues expected to be +14% to 15% on organic growth of 6% to 8%. Prior range was +13% to 15% on organic growth of +5% to 7%. Includes a full year foreclosure moratorium headwind of approximately $12 million compared to 2020.

Valuation:

·       Trading at ~3.5% FCF yield on 2021 –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 3.3x

·       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. 
  • 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 1Q Results

Current Price: $2,284      Target price: $2,400

Position Size: 1.8%          TTM Performance: +64%

 

 

Key Takeaways:

  • Stronger-than-expected gross bookings, but missed on revenue and EBITDA.
  • Recovery uneven across geographies driven by the pace of re-opening. Results weighed down by slower recovery/continued lockdowns in Europe. Seeing encouraging booking trends in places benefiting from successful vaccine distribution programs e.g. Israel, the UK and the U.S.
  • Saw positive room night growth in the US in Q1 versus Q1 2019. It was their strongest performing major country. They continue to strengthen the booking.com brand in the US.

·       Weak environment strengthens their position w/ suppliers as they are a key source of demand. Demand mix shift away from business towards leisure benefits BKNG’s leisure focus.

 

Additional Highlights:

  • Room rights declined 54% versus Q1 2019, which was a 6% improvement versus decline reported in Q4. April room nights continued to show sequential improvement with a decline of 43% versus 2019 with room night declines over the last seven days April at about 38%.
  • Gross bookings declined 53% in Q1, less than the decline in reported room nights due to strong performance in their flights business and partially offset by a 1% decline in average daily rates for accommodations versus 2019 (excluding regional mix effects, ADRs were down approximately mid-single digits).
  • Airline Tickets booked in Q1 were up 49% versus 2019 driven by strong growth at Priceline and by flight processing just added on booking.com and Agoda both of which did not have it in Q1 2019.
  • Demand recovery…
    • Generally saw improving trends, but case counts are still rising in some parts of the world with corresponding increases in lock-downs and re-imposed travel restrictions that will continue to impact travel in the near-term.
    • US improved significantly during the quarter w/ positive room night growth year-on-year which is great given international business is down.
    • Europe was the least recovered region in terms of room nights booked in Q4 and it remained the least recovered region in Q1. While Europe did improve compared with Q4, trends softened towards the end of March driven by rising COVID case counts and new imposition on travel restrictions. With increased vaccinations, things improved in April versus March and Europe is now no longer the least recovered region.
    • Asia recovery retreated a bit in April w/ an increase in infections.
    • Pre-covid, their mix was about >50% Europe, ~20% Asia and ~30% US.
    • Their booking window remains shorter than it was in Q1 2019 as they continue to see a higher mix of near-term bookings.
  • 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 then 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.
  • Guidance – No specific guidance other than they expect Q2 room night declines to be a few potential points better than the decline in April (which improved from March). And they expect Q2 gross bookings to decline slightly less than room nights driven by the same trends seen in Q1.

·       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 1Q21 Results

Share Price: $122            Target Price: $150

Position Size: 2%              1 Yr. Return: +70%

 

 

Key takeaways:

  • Missed on revenue and EPS as current trends are tied to vaccine rollouts and changing travel restrictions and thus still highly uncertain. Owned hotels (higher op leverage) are performing worse due to their disproportionate exposure to Europe & later lockdowns, which negatively impacted earnings.
  • Recovery uneven, but progressing. US is seeing inflection – April bookings for the summer exceeding 2019 peak levels, by nearly 10%. Europe is emerging from lockdowns more slowly and China is back to 2019 levels.
  • Solid net unit growth and a stable pipeline – China development activity is particularly strong.
  • CEO Chris Nassetta said, “We do expect this momentum to continue. Vaccine distribution, coupled with relaxed travel restrictions, and increasing consumer confidence, should drive further RevPAR improvements in the coming months, and quarters. In fact, we are on pace to see record leisure demand in the US over the summer months.”

 

Highlights:

  • Quotes from the call…
    • “since we had our last call, the slope of the recovery’s been steeper than what we would have thought in all regards.”
    • “We expect continued corporate office re-openings to drive a meaningful pick up in business transient demand, towards the back, half of the year. Based on what we’ve seen in China and pockets of the US, once restrictions are lifted and offices reopen, business travel returns.”
    • “as kids in the fall, go back to school. Which at this point I think is very highly likely, you are going to see a step change into the third and fourth quarter in business transient.”
    • “there’s 3 million industry folks still out of work. I think by the time you get to September/October, I think the vast majority of those could easily be re-employed given what I think demand will be.”
  • Promising demand trends:
    • System-wide occupancy reached 55% by the end of the month, driven by strong leisure demand.
    • Leisure is strongest, but corporate and group are steadily improving correlated w/ re-opening.
    • In the US, leisure demand is already at 90% of 2019 levels and business is at ~50%. However, in states that were further along in their reopening process business transient revenue was roughly 75% of 2019 levels for the quarter. They think business transient occupancy will be ~70% of 2019 levels by Q4. Rate will be weaker. That puts full year RevPAR exiting 2021 at ~70% of 2019 levels.
    • Group bookings made in the first quarter for the back half of the year were roughly flat with 2019 booking activity. For 2022, next year, their group position is roughly 85% of peak 2019 levels, with rate increases versus 2019. And Group bookings were up in the mid-teens for 2023 versus 2019. Bigger meetings require greater lead time to plan and are benefiting 2022/23 booking trends.
    • China is running in the low 70s occupancy. Leisure and business transient demand, rebounded quickly as restrictions eased, with March occupancy in China exceeding 2019 levels (occupancy in China was at~70% pre-pandemic).
  • Stable unit growth underpins the story – unit growth was 5.8% YoY and the pipeline increased to a total of approximately ~400K rooms. That represents 40% room growth from their current installed base of rooms. More than half 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). Tightening restrictions and lockdowns across Europe delayed openings in the region. They expect an uptick in development activity as countries continue to reopen. Maintained guidance of net units in the mid-single digit range for the next several years and continue to expect growth in the 4.5% to 5% range in 2021.
  • 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.
  • Loyalty members hit 115m (+8% YoY) and account for >60% of system-wide occupancy. Loyalty members continues to grow and % penetration continues to improve – both of which bode well for LT RevPAR trends as they typically see a doubling of wallet share once a customer signs up for the loyalty, and share improves w/ status level.  They get 75-80% share of hotel wallet from Diamond Honors customers.
  • Shareholder returns should improve w/ recovery – dividends and buybacks are still halted but as the recovery progresses, they should return to historical levels – likely won’t resume until the beginning of next year. In 2019 they returned more than 8% of their market cap to shareholders in the form of buybacks and dividends.

 

If anyone is eager to book some travel, they have some nice new hotels opening…😊

 

https://lxrhotels3.hilton.com/lxr/mango-house-seychelles/

https://www.waldorfastoriamonarchbeach.com/

 

 

 

 

 

$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 Q3 Results

Current Price:   $252                     Price Target: Raising to $290 (from $255)

Position Size:    7.7%                     TTM Performance: 49%

 

Key takeaways:

  • Broad beat with 19% YoY revenue growth and +31% op. income growth. All segments grew mid-teens % or higher and saw margin expansion. Despite beat, stock traded off a bit last week after hitting an all-time high ahead of earnings.  
  • Azure continues to be key growth driver – Azure continues to take share in the public cloud with revenue ahead of expectations at +46% YoY in constant currency. A slight deceleration from +48% last quarter.
  • Teams strength – users doubled to 145M monthly active users.
  • CEO, Satya Nadella said, “Over a year into the pandemic, digital adoption curves aren’t slowing down. In fact, they’re accelerating and it’s just the beginning. Digital technology will be the foundation for resilience and growth over the next decade. We are innovating and building the cloud stack to accelerate the digital capability of every organization on the planet.”

 

 

Additional Highlights:

 

  • Commercial cloud ($17.7B, +33% YoY) and gaming (+50%) had standout performance. “Commercial cloud” aggregates the cloud businesses w/in the first two segments below: Office 365, Azure, the commercial portion of LinkedIn, Dynamics 365.
  • Improvement in advertising market continues to benefit Search and LinkedIn
  • 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. Some examples…
    • Growing their industry specific cloud presence. Introduced new industry clouds for financial services, manufacturing, and non-profits, building on existing clouds for healthcare and retail. Their pending acquisition of Nuance will increase their solutions in healthcare delivery.
    • They offer the most popular tools to help developers rapidly go from idea to code and code to cloud (Visual Studio and GitHub). They help developers infuse AI into the solutions they build…”Open AI” models are trained and hosted exclusively on Azure.
    • Power Platform (low code/no code solution) – enables non-developers in an organization to build applications, automate processes, create Virtual Agents and analyze data.
    • Teams is evolving collaboration w/in companies and w/ clients. Teams advantage is its broad integrated user experience. The fact that it’s sold bundled w/ MSFT’s other productivity offerings and its interoperability are key to its positioning. For example, Dynamics 365 can connect to Teams so that you can incorporate customer information and analytics. Teams is about actually getting work done where meetings and video is just one part – as such, its utility should increase w/ mixed office and WFH environment in the future. “Teams is rapidly becoming the de facto unified communications platform of choice for every organization.”
    • Microsoft Mesh powers shared experiences in a mixed reality platform powered by Azure. Accenture is using Mesh to build immersive virtual office experiences. https://www.youtube.com/watch?v=Jd2GK0qDtRgAs
    • Azure Digital Twins – an Internet of Things (IoT) platform that creates a digital representation of real-world things, places, processes etc. to gain insights, improve products, optimize operations/costs, and create new customer experiences. Bentley Systems is building a digital twin of the city of Dublin to reimagine urban planning. PepsiCo is simulating its manufacturing processes.
    • Dynamics 365 Intelligent Order Management helps companies support omnichannel fulfillment.
    • With Azure Cognitive Services, organizations can build applications that see, hear, speak, search, understand, and accelerate decision-making.
    • As games evolve, they are building new tools to help anyone build and sell creations on their platforms.
    • Satya Nadella: “we are innovating across the entire tech stack, as we differentiate and lead in areas that will be critical to the success of every customer going forward.”

 

SEGMENTS…

 

Productivity and Business Processes ($13.6B, +15% YoY):

  • LinkedIn – growth accelerated, revenues +25%, aided by strong growth in LinkedIn advertising business which is ~1/3 of LinkedIn’s total rev.
  • Office 365 Commercial (rev +22%)- driven by installed base expansion as well as higher ARPU.
  • Dynamics 365 (rev +45%) – helping organizations in every industry digitize their end-to-end business operations from sales and customer service to supply chain management.  
  • Teams continues to shine – they now have 145m daily active users.

Intelligent Cloud ($15.1B, +23% YoY):

  • Server products and cloud services revenue increased 23% with Azure revenue growth of 50% (46% cc). 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 ($13B +19% YoY):

  • Gaming grew 50% – with hardware up +232% and Xbox content and services revenue up +34%.  Xbox LIVE has > 100 million monthly active users and Game Pass now has ~18 million subs. Hardware growth driven by demand for new consoles.
  • Surface +12%, saw big acceleration in growth from last quarter
  • Search advertising revenue improved (+17% YoY ex-TAC) as companies pick up spending on digital advertising ahead of re-opening.

Valuation:

  • Free cash flow for the quarter was $17.1B, up 24%. Returned $10B to shareholders in repurchases ($5.8B) and dividends ($4.2B).
  • 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.

 

 

Sarah Kanwal

Equity Analyst, Director

 

Direct: 617.226.0022

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square, Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

 

 

$MSFT.US

[category earnings ]

[tag MSFT]

 

Visa Q2 Earnings

Current price: $234        Target price: $260

Position size: 3.7%          TTM Performance: 30%

 

Key takeaways:

  • Beat estimates – earnings and revenue beat
  • Cross-border still a headwind but improving –driven by travel restrictions but Europe opening travel this summer w/ vaccines should be key to improvement.
  • Payment volumes continue to improve and their net revenue and profits are at 2019 levels even as a rebound in travel (especially cross-border travel), still remains ahead of them.
  • No guidance
  • CEO Al Kelly said, “we believe we are starting to see the beginning of the end and the recovery is well underway in a number of key markets around the world… Cross-border travel is the slowest sector to return, but there are some green shoots that offer real indication of people looking to see the world.”

 

Additional Highlights:

  • Revenues were down 2% YoY driven by cross-border headwinds (down 11% YoY or -21% YoY excluding intra-Europe), but mostly offset by growth in payments volume and processed transactions. Payments volume for the quarter increased 11% fueled by continued strength in debit as well as improving credit spending.
  • Quotes from the call…
    • “The pandemic has accelerated the digitization of cash, and we see the impact in debit and tap-to-pay. When we look at cash usage in the last 12 months just on the Visa brand, such as with ATM withdrawals, we see that global debit cash volumes have decreased by 7%, while debit payment growth has grown – payments volume has grown 16%, both on a constant dollar basis. This 20-point gap is more than double the historic gap in growth rates and relatively consistent globally, demonstrating cash digitization in both mature and emerging regions.”
    • “There is significant pent-up demand for travel, in particular personal travel” and “The decline in travel is temporary, and we’re starting to see some early signs of recovery.” The vast majority of the travel Visa captures on their credentials is consumer, and they are the global leader in travel co-branded cards.
  • Tailwinds building – pending travel recovery, re-opening beneficiary, accelerated cash digitization and growing e-commerce penetration…
    • The most notable sign of a domestic recovery was card-present spend growing 4% which is up 3% over 2019, an 8 point acceleration from Q1 led by retail and restaurant spending.
    • Credit has improved without debit slowing, pointing to accelerated cash displacement. The credit improvement was helped by increases in retail, travel, restaurant and entertainment spending mostly starting in early March as restrictions were relaxed in many states.
    • Spend categories trends are starting to shift – for categories that were hardest hit by this pandemic including travel, entertainment, fuel and restaurants, spending remains depressed but is improving with re-opening.
    • Cross border spending drives International transaction revenues which are >25% of total net revenues. As such, the steep drop is offsetting growth in service revs and data processing revs. As travel restrictions lift with the vaccine rollout, Visa will see a recovery in this meaningful piece of revenue. While cross-border spending did improve for the quarter (3 points better than Q1), it remains depressed (75% of 2019 levels), led by travel spending (down 55% YoY, still at 39% of 2019 levels), as the majority of borders remain closed.
  • 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 fintechs have a crypto option for their customers and upgraded their infrastructure to support digital currency settlement
    • They have over 35 digital currency platforms/wallets that are working with them
    • Working with Central Banks as digital currency is being explored in many nations
  • Growth in “buy now, pay later”…
    • Nascent but growing
    • 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
    • Potential for value-added services, data analytics to augment a provider’s underwriting or risk products to help some of the third-party providers.
    • “we’re doing a lot in this space. We’re committed to it… I can’t predict exactly where it’s going to land, but we are going, to the degree it takes off, we’re going to be there to be part of it.”
  • Growth areas…
    • Consumer payments – digitizing the $18 trillion spent in cash and check globally. Continuing to grow acceptance (including contactless penetration) and grow credentials with traditional issuers, fintechs and wallets. In the last two years, they’ve grown their credentials to 3.6B and physical merchant locations to over 70m, up 7% and 34%, respectively. 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. Visa Direct transactions grew almost 60% in 2Q. A key area of future growth is cross-border P2P, or remittance. Four of the top five global money transfer operators were onboarded in fiscal year 2020, TransferWise, Western Union, Remitly, and MoneyGram. In G2C, for example, Visa Direct supported the US government’s disbursements of economic impact payments to nearly 13 million Visa prepaid credentials so far this year.
    • 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 fiscal year 2020, more than 60% of their clients used at least five value-added services from Visa and more than 30%used 10 or more.
  • While COVID has been 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 more expensive, trading at <3% 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]

 

Apple Q2 Earnings

 

Current Price: $133                                                    Price Target: $157

Position Size: 7.2%                                                     TTM Performance: +85%

 

Key Takeaways:

 

  • Strong beat across product segments – revenue record in each geographic segment and strong double-digit growth in each product category
  • Big improvement in China – 87% YoY growth; lapping earlier lockdowns than US.
  • Increased buyback – added $90B to the existing share repurchase program.
  • Upping investment in US plans – took their 5 yr. target spend from $350B to $430B – investments will “create 20K jobs” and support “American innovation and drive economic benefits,” including a new North Carolina campus and investments in silicon engineering and 5G technology.
  • No specific guidance again – June quarter revenue is expected to be up strong double digits, which includes a negative supply constraint impact of $3 billion to $4 billion (semi shortages primarily affecting the iPad and the Mac).
  • CEO Tim Cook said, “If you look at how the iPhone did around the world, we had the top five models of smartphone in the US, the top two in urban China, four out of the top five in Japan, the top four in the UK and the top six in Australia. And so it was a sort of across the board in some really key countries, we did really, really well. I do think that the 5G cycle is important. And we’re in the early days of it…”

 

Additional highlights:

 

  • This impressive growth is not just about lapping easy compares – They saw incredible growth across all product categories this quarter, but not b/c demand collapsed last yr. Covid did have a negative impact last year, particularly w/ iPhones and especially in China where lockdowns occurred earlier, but overall 2Q sales were up slightly last year driven by services and wearables. And sales in each product category this quarter were all well ahead of Q2 2019.  See chart below for segment growth details.
    • iPhone – Sales were up 66% vs last yr and up 54% vs Q2 2019. iPhone 12 was a key growth driver and lapping China shut down. Saw a record number of upgraders for a March quarter. Later launch of new iPhone models also shifted some demand to this quarter.
    • Mac – the last three quarters for Mac have been its three best quarters ever fueled by the M1 chip. Just announced redesigned Macs – the first major change to the computer’s exterior since 2012.
    • iPad – grew very strong double digits to its highest March quarter revenue in nearly a decade. Just announced iPad w/ M1 chip and 5G.
    • Wearables – strong performance from both Apple Watch Series 6 and Apple Watch SE. Just announced air tags and new Apple TV 4K
    • Services – record quarter in each geography; now at 660m subs, up 145m from last yr. Just introduced Apple Card family and adding podcast subscriptions. Saw a return to growth on Apple Care as stores have re-opened.
  • Putting in perspective growing installed base & new chips – 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.
  • Despite increase in price, Apple is still not expensive…
    • Trading at 4.1% FCF yield on 2021 and a 0.7% dividend yield w/ another >4% of their market cap 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.
    • For the full year 2021 (ends in Sept) and for 2022, the growth trajectory for revenue and for FCF has steepened from the last few years. See charts below. “Curr” = trailing twelve months.

 

 

 

 

 

 

$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

 

MSFT Q3 Results

 

Current Price:   $254                     Price Target: Raising to $290 (from $255)

Position Size:    7.7%                     TTM Performance: 49%

 

Key takeaways:

  • Broad beat with 19% YoY revenue growth. Despite beat, stock trading off a bit after hitting an all-time high ahead of earnings.  
  • Azure continues to be key growth driver – Azure continues to take share in the public cloud with revenue ahead of expectations at +46% YoY in constant currency. A slight deceleration from +48% last quarter.
  • Teams strength – users doubled to 145M monthly active users.
  • CEO, Satya Nadella said, “Over a year into the pandemic, digital adoption curves aren’t slowing down. In fact, they’re accelerating and it’s just the beginning. Digital technology will be the foundation for resilience and growth over the next decade. We are innovating and building the cloud stack to accelerate the digital capability of every organization on the planet.”

 

More details to come…

 

 

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