Author: Sarah Kanwal

GOOG Q1 Earnings Update

Current Price: $2,434     Price Target: $2,750 (increased from $2,210)

Position Size: 4.6%         TTM Performance:+96%

 

Key takeaways:

  • Broad beat with total net revenue up 35% on search growth accelerating to +30% YoY and YouTube accelerating to 49%.
  • Digital ad spending surging – seeing broad based growth in ad revenue as companies return to spending with vaccine rollout.
  • Cloud strength continues – revenue +46% YoY with segment losses narrowing
  • Capex spending resuming– after reducing spend on offices and data centers last year, they are resuming their spending levels. Notably, they largely plan to return to the office in September and not maintain a big WFH presence. Lots of tech firms coming out w/ greater degree of return to office than expected.
  • Big buyback announced – $50B repurchase authorization announced.

 

Additional Highlights:

  • Some quotes from the call…
    • “data suggests that investment in startups is at an all-time high”
    • “we are seeing an acceleration in the shift to digital”
    • “consumers are spending more time online, they’re buying more online, they were willing to try new brands and they’re eager to support local businesses, SMBs. So, searches for support local businesses are up significantly since last year. And we’ve been focused really on helping SMBs with simpler tools, so they can actually embrace digital a lot faster. And that’s where we have really invested over the year, making everything simpler. We had a very wide range of solutions to help them get online, get discovered across all of our key products, Search, Maps, YouTube and so on. And there is multiple, multiple fascinating stories from them coming back to us.”
  • More ad tailwinds to come…
    • Consumer activity ramping as global economy re-opens, aided by government stimulus
    • Hardest hit industries, like travel, brick-and-mortar retail, restaurants and entertainment, are significant sources of ad spend and are just starting to ramp back up
    • Some geographies further behind on re-opening or facing renewed shutdowns w/ a re-acceleration of cases, so ad spend recovery is delayed
    • SMBs are becoming more digitally capable post-pandemic
  • TAC – Total traffic acquisition costs down slightly. Content acquisition costs for YouTube are a big driver of this.
  • Op margin expansion: sizable operating leverage again. Q1 operating margin was 36% (off of net rev), up 230bps QoQ.
  • No commentary on 2H outlook – “it is too early to tell” how consumers  will  behave. However, they have some easy compares ahead and broad ad momentum as the global economy re-opens in stages and marketing budgets ramp up.
  • “Search & Other” revenue ($32B) accelerated to +30% (from +17% last quarter).
    • Particular strength in retail (local searches +80% YoY)
    • Seeing strong interest from users looking to plan their next trip, even before they’re ready to book. GOOG helping airlines add routes in response to consumer destination interest.
    • Maps will be adding over 100 AI powered improvements this year, such as indoor live view, which helps you navigate airports, transit stations and malls using augmented reality.
    • Google News Showcase – their $1 billion investment in the news industry…they’ve added more than 170 publications across 12 countries with more coming soon. Trying to get ahead of regulators.
  • YouTube ad sales ($6B) were +49%,
    • YouTube Shorts, their competitor to TikTok, logged 6.5 billion daily views as of March, up from 3.5 billion at the end of 2020.
    • According to a recent study by Ipsos, 77% of respondents said they used YouTube in 2020 to learn a new skill.
    • Growing faster than search revenues as advertisers are turning to streaming platforms like YouTube to reach people who are no longer watching TV and as audiences become more fragmented. 
    • In the U.S., >100 million people watch YouTube and YouTube TV on their TV screens each month. 
    • YouTube helps advertisers reach younger audiences they can’t reach anywhere else – YouTube reaches more 18- to 49-year-olds than all linear TV networks combined.
  • Network ad revenues: $6.8B, +30% YoY. This is revenue from ads placed on sites other than their own, like an ad placed on the NYT site.
  • Google cloud = Google Cloud Platform (“GCP”) + Google Workspace (i.e. collaboration tools): was $4B, +46%.
    • They don’t break out GCP growth separately. All we know is the growth rate was again “meaningfully above” the Cloud segment overall. Very positive commentary on GCP – they are accelerating their investment in this business.
    • Called out 3 trends driving their strong cloud results…
      1. Data cloud – their expertise in real-time data, AI & ML are helping them win customers like Twitter and HSBC
      2. Customer focus on operational efficiencies & reduction of IT costs in a multi-cloud environment
      3. Hybrid work – GOOG continues to deliver helpful innovations to enable hybrid work with Google Workspace. This includes digital tools for front line workers like nurses and retail store workers, as well as new security offerings. These innovations have helped grow their revenue per seat and the number of seats in the last quarter.
  • Capex – will be up YoY after big cuts last year. In 2021, in the US alone, they plan to invest over $7 billion in offices and data centers
  • ESG – Continue to make progress on their sustainability goals. They matched their operations with 100% renewable energy for the past four years and they are working towards operating on carbon-free energy round the clock by 2030.
  • Valuation – They ended the quarter with $110B in net cash, that’s ~7% of their market cap. The stock is still reasonably valued, trading at a ~3.4% FCF yield on 2021.

 

 

$GOOGL.US

[category earnings ]

[tag GOOGL]

 

 

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

 

Accenture Q2 Earnings

Current Price: $267     Price Target: $295

Position size: 4.2%       Performance since inception (3/11): +61%

 

Key Takeaways:

  1. They beat estimates and issued strong guidance. Revenue (+8%) ahead of high end of guidance range and highest street estimate. Upped full year revenue growth guidance to +6.5% to +8.5%, from previous guidance of +4% to +6%.
  2. Broad based improvement in demand – digital transformation is long-term secular growth driver to their business.
  3. Strong bookings and they continue to take significant market share, signifying solid business fundamentals. Bookings were up 13%.
  4. CEO Julie Sweet said…“For digital leaders, we see them no longer strictly competing for market share, but to build their vision of the future faster than the competition. And for digital laggards, they are determined to not simply catch up, but to leapfrog. While COVID has accelerated the demand, the reality is that the extent of transformation ahead is enormous. The move from approximately 20% to 80% in the cloud alone is a huge undertaking and it is just the start, as companies will then continue to invest to grow and innovate on their new cloud foundations.”

 

Additional highlights:

  • Revenue $12.09 billion, +8% YoY, estimate $11.84 billion. Included 2pt reduction from reimbursable travel costs which are a pass through. Adjusted EPS of $2.03 (+10% YoY) vs. consensus $1.90, driven by 30bps of op margin expansion.
  • Consulting revenues were $6.4B, up 4%, which includes a 3pt headwind from lower travel reimbursement.
  • Outsourcing revenues were $5.6B, up 14% YoY
  • Geographic breakdown: “growth markets” were up 6%, Japan was strongest, up double-digits. Europe was up 3% (Italy & UK were strongest), North America was up 7%.
  • Strong bookings of $16B, up 13% YoY – 18 clients had bookings >$100 million. Overall book-to-bill of 1.3. Consulting book-to-bill of 1.2 and outsourcing book-to-bill of 1.4.
  • Hardest hit end markets are showing improvement – they saw broad-based improvement across industries and geographic markets
    • Similar to last quarter, ~50% of revenues came from 7 industries that were less impacted from the pandemic that, in aggregate, accelerated from HSD to low-double-digits growth.
    • ~20% of revenue from clients in highly impacted industries – declined mid-single-digits, but seeing continued improvement this includes travel, retail, energy, aerospace & defense and industrials.
    • This underscores the benefit of diversified industry end markets.
  • Digital transformation imperative is long-term secular growth driver to their business. Before Covid there was already exponential technology change taking place with every business becoming a digital business. Mgmt. thought it would take a decade, now they think it is more like five years. “We are rapidly moving to a complete re-platforming of global business… it is hugely significant.” Accenture has been positioning themselves to be a leader in digital capabilities since 2014, which is why they are the leader, continue taking share and are well positioned in the future. Accenture’s unique positioning of trusted partner w/ leading edge technology expertise (they have their own network of R&D labs) combined with strategy and consulting practitioners that bring deep industry expertise are key to this. No competitor has their scale, breadth of services and cross-industry insights, which gives them an advantage in serving “compressed transformations.” “Our clients know that through our investments and focus on innovation, we will help future-proof them.”
  • Accenture shines from an ESG perspective. They are a real leader in addressing how they create value for all of their stakeholders (employees, customers, vendors, shareholders) – it’s a constant theme on their calls, particularly w/ respect to their employees which is important as the “social” factor for them is very material b/c their industry is a “people business” w/ ~537K employees across the globe. For instance, they had a special employee bonus paid this quarter to employees below MD level, they’ve been heavily investing in upskilling their employees and they are now ~45% women; on track for their 2025 goal of a 50-50 gender balance. They also recently started their “360 degree value initiative” – aimed at helping their clients achieve responsible business goals – they say their clients are increasingly focused on sustainability, inclusion and diversity (rise of ESG is a catalyst to this) and that they are in a unique position to help companies w/ this.
  • Capital allocation: they now expect to return at least $5.8 billion in cash to shareholders through dividends and share repurchases, compared with previous guidance of $5.3 billion. Dividend up 10% YoY. They’ve made investments of $1.1B in acquisitions (19 transactions) in the first half of the year and they expect to invest at least $2B in acquisitions this fiscal year.
  • Valuation:
    • The stock is undervalued trading at a >4% forward yield. They have an easily covered 1.3% dividend and no net debt.
    • Multiple underpinned by ACN being a best-in-class company with stable growth that’s buffered by geographic and end market diversity and long-standing client relationships (95 of their top 100 clients have been with them for >10 years).
    • They have $8.7B in cash on their balance sheet. The only debt they have on their balance sheet are capitalized leases, which were added last fiscal year due to an accounting change. Substantially all of their lease obligations are for office real estate.

 

 

 

Sarah Kanwal

Equity Analyst, Director

 

Direct: 617.226.0022

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square, Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

 


$ACN.US

[tag ACN]

[category equity research]

 

Home Depot Q4 Earnings

Current Price: $267                     Target Price: $324

Position size: 2%                          Performance since inception: +36%

 

 

Key Takeaways:

·        HD reported strong Q4 results, beating estimates. Stock was down on guidance. No formal guidance for 2021 given uncertain environment. If demand level stays where it is currently at, they would see flat to slightly positive SSS.  They lap difficult compares from last year. Improvement w/ Pros should help offset weakness from DIY as trends shift w/ a decrease in social distancing.

·        Incredibly strong SSS continues for now (overall SSS +24.5%; US SSS +25%). They continue to take share in home improvement with sales that were well ahead of expectations.

·        Omni-channel strategy continues to shine. E-Commerce sales were mid-teens % of sales in the quarter, up+83% YoY, with 55% of online sales picked up in store.

·       Announced 10% dividend increase

·        Mgmt. quote from call…” At the beginning of the year, I would have never thought it possible for the business to grow over $21 billion in 2020. For context, it took us 19 years as a company to achieve the first $20 billion in total sales and we outgrew that in this year alone.”

 

 

Additional Highlights:

·     While HD will be lapping difficult comparisons this coming year, multiple tailwinds still persist. Nesting effects from Covid have been a tailwind – continued WFH/hybrid work environments should continue to support “nesting” to a degree despite a vaccine. Additionally, strong housing fundamentals should continue to be supportive to sales – including higher household formation w/ suburban migration and an aging housing stock. Also, record low inventory and low interest rates support pricing which supports investment in the home. Finally, they should see tailwinds w/ pent-up demand from Pros as social distancing caused a delay in inside projects. 

·      Omni-channel model continues to shine – E-commerce sales were +80%. Omni-channel strategy differentiates them from peers helping to drive share gains. Express car and van delivery service that covers over 70% of the U.S. population.

·      Margin expansion potential – elevated opex due to Covid will abate, but an offsetting factor is that GM will see a hit from higher transportation costs.  During fiscal 2020, they  invested ~$2 billion on enhanced compensation and benefits for associates – they made about half of those increases permanent. In Q4 enhanced compensation caused 105bps deleverage while gross margins were 30bps lower on pressure from higher mix of lumber, shrink and transportation costs.  

·       SSS Details:

o   Broad-based strength across the store and all geographies. All of top 40 markets posted double-digit comps, while Canada posted comps above the company average, and Mexico posted double-digit comps in local currency.

o   SSS above 20% in the US for 36 of the last 39 weeks

o   All merchandising categories saw double-digit growth. Lumber & indoor garden were the strongest.

o    Saw strong double-digit growth from both the Pro and DIY customers. Large pro customers seeing an increase in backlog.

o   Both ticket and transaction were up double digits. Inflation from core commodity categories positively impacted average ticket growth by 220bps.

o   Big ticket (over $1000) transactions were +23%..similar to last quarter. Strength in appliances, vinyl plank flooring and vanities.

 

·        Capital allocation: resuming share repurchases this quarter and dividend increased by 10%. Remain committed to growing over time.

·        Valuation: Strong balance sheet, benefiting from strong housing trends but also has defensive qualities and reasonable valuation, trading at ~4.9% 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]

 

 

Black Knight 4Q20 Earnings

Current Price: $81           Price Target: $96

Position Size: 2.4%          TTM Performance: +9%

 

 

Key Takeaways: 

·       BKI reported a strong quarter and guided revenue and EBITDA in line w/ consensus. The stock is lower on weak EPS guidance – driven by higher depreciation, interest expense, and earnings on non-controlled interests.

·       Exceeded expectations on in both segments w/ higher origination volumes and continued improvement in data and analytics sales.

·       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 will likely continue until 1H22 w/ the moratorium extending through Sept.

·       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:

·        Q4 Revenues were $342m, +14% (Optimal Blue added $32m) and adj. EPS was +11%.

·      Segment organic revenue guidance: Servicing software +mid-single-digits, origination software +low-double-digits, D&A +mid-single-digits puts total company +6%.

·       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 16%. Driven by growth in their property data and portfolio analytics businesses.

o   EBITDA margin +310bps YoY.

o   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.

o   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. This is helping w/ loan origination despite social distancing. They’ve seen significant interest in and adoption of their expedite e-close and e-sign solutions as well as their loss mitigation solution since the beginning of the pandemic.

·        Software Solutions segment (~85% of revenue) up 14% YoY.

o   Within this segment servicing (~70% of revenue) was up 2% – new client loan growth helped offset 6% ($12M) foreclosure moratorium headwinds.

o   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%.

o   Originations (~16% of total revs) made up of new loans and refi’s – revenues increased 56% as it was the first quarter that included the Optimal Blue acquisition. Lower rates help this business. Growth driven by higher refinanced volumes in their Exchange and e-Lending businesses.

  • Segment EBITDA margin down 180bps YoY.

 

Valuation:

·       Trading at ~3% FCF yield on 2021 –valuation is getting more expensive but 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 3.8x. Increased from <2x with recent acquisitions.

·       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]

 

 

Disney reported strong Q1 earnings

Current Price: $189     Price Target: $215

Position size: 2%          TTM Performance: +35%   

 Key Takeaways:

  • Broad beat – big profitability beat driven by better-than-expected results in DTC and parks.
  • Better than expected subscriber numbers across all streaming services – Disney+ has 95M subs ahead of expected 90M. They now have 146M subs across Disney+, Hulu and EPSN+. That is second only to Netflix, which has about 204M.
  • Parks showing promising signs of demand and open parks contributing to profitability

 

  

Additional highlights:

  • DTC decrease in operating loss was due to better subscriber numbers across Hulu, Disney+, ESPN+ and increased ad revenues.

  • Disney+ now has 95M subs ( goal is 230-260m Disney+ subs by 2024), Hulu is ~40M and ESPN has >12M. 

  • They had revealed 87M Disney+ subs at investor day at beginning of Dec, so subs up 8M in Dec alone. 

  • DIS DTC business generated $3.5B in revenue last quarter vs Netflix’s Q4 revenue of $6.6B.

  • Star International streaming service – announced at their investor day in December, is launching Feb. 23.

  • Disney+ ARPU down on mix given higher growth in lower ARPU international regions. Increasing prices in US and Europe by $1.

  • India is 1/3 of Disney+ – their Indian streaming service Disney+ Hotstar accounts for ~30% of global subscriptions, or about ~32 million customers.

  • Solid conversion from Verizon free promos. 

  • ESPN – in response to an analyst question about poor viewership of the Super Bowl (lowest in more than a decade), and what it means for ESPN. Chapek said they’re looking at the “long-term” trends of sports viewership and is mulling a “a more true ESPN direct-to-consumer” service. 

  • Parks re-openings…

    • 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.

    • Walt Disney World Resort (FL) and Shanghai Disney Resort were open for all of Q1. 

    • Disneyland Resort (CA) was closed and the cruise business was suspended for the full quarter. 

    • Disneyland Paris was open until the end of October, or for about one-third of the quarter. 

    • Hong Kong Disneyland was opened until the beginning of December or for about two-thirds of the quarter.

    • Disneyland and Disneyland Paris are expected to stay closed until at least the end of this fiscal quarter. 

    • Disneyland Hong Kong may reopen in the quarter.

  • Vaccination rates – are the main determining factor for reopening parks. Chapek said vaccines would be a “game-changer” for Disney if they’re distributed to everyone who wants one this year. Though he expects you’ll see mask-wearing and social-distancing in Disney parks at least until the end of 2021, and probably 2022.

  • Attendance improving – Average daily attendance at Walt Disney World is growing – a sign demand for theme parks is strong. Attendance expanded “significantly” in the last three months of the year, compared to the previous 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

 

 

$DIS.US

[category earnings ]

[tag DIS]

CSCO Q2 2021 Results

Current Price: $46                           Price Target: $58 

Position size: 2.8%                          TTM Performance: -1%

 

Key Takeaways:

·        Top line and EPS beat with better-than-expected revenue guidance.

·        Macro environment improving but still seeing uneven trends in enterprise – saw improvement in all major customer segments, but weakness persists w/ large customers in hard hit industries like retail and hospitality, while other sectors are improving. Saw continued improvement with commercial customers (SMBs). Public customers (i.e. gov) is an area of strength. And Service Providers (telecom/cloud) is improving driven by share gains with hyperscale cloud providers.

  • Secular drivers still in place – aging network infrastructure needs to be upgraded. Growing use of new technologies and increased data demand places increased importance on this.

·         Mix shift to software and recurring revenue continues as an increasing number of their products are to be offered this way.

·         Cost cutting to aid earnings power –  $1B in annual cost reductions to be implemented over next few quarters.

·         CEO Chuck Robbins said…“we are seeing encouraging signs of strength across our business as the recovery takes shape, with all customer segments showing improvement in year-over-year growth rates”…” I am confident in our ability to capture the long-term opportunities ahead, in areas such as cloud, 400 gig, 5G, security, hybrid work and next-generation applications.”

 

Additional Highlights:  

·       Overall, business trends are improving and they are lapping easy compares this coming year amidst some aggressive cost-cutting initiatives, transition to software/subscription continues, valuation is inexpensive, and they have a high dividend yield (3.2%) that’s easily covered. 

  • Q3 revenue guided to 3.5%-5% w/ street expecting ~2.8%.
  • Strong gross margins – GM was 70%. The highest since 2006.
  • Total product revenue was $8.6 billion, down 1% – product revenue (>70% of total rev; rest is services) is comprised of Applications (flat), Security (+10%) and Infrastructure Platforms (down 3%). Infrastructure platforms is >50% of revenue and is the product area most impacted by the COVID environment.
  • Continue to see signs of gradual improvement led by order growth in Commercial, Public Sector and Service Provider businesses, which together account for nearly three quarters of product orders. The Enterprise market remains soft, driven by some elongated sales cycles and a continued pause in spending among some customers brought on by the pandemic.
  • Acacia acquisition should close next quarter. Gives them optical technology that should help their competitive position in 400G upgrades essential to meet bandwidth requirements and high-speed connectivity.

·       Improved demand commentary relative to last quarter…

    • Order trends have broadly improved QoQ across every region and customer segment.
    • From a product revenue perspective – saw strength in Catalyst 9K, data center switching, security, wireless and Webex (600 million quarterly average users) portfolios. Cat 9K momentum continues, up double-digits, aiding improvement in campus switching. Security revenue grew +10% Y/Y driven by good momentum in its cloud offerings, Duo and Umbrella.
    • “Looking ahead, we are cautiously optimistic, as recent surveys of IT spending indicate year-over-year IT budget growth for calendar 2021 and Cisco remains well-positioned among CIOs top forward-looking spending priorities, including network infrastructure, cyber-security software, as well as cloud migration and cloud infrastructure.”

·        Positive commentary points to continued software/services mix shift and strength in new products –This includes strong demand for their Catalyst 9000, security, WebEx and other SaaS-based solutions. Software mix is close to 1/3 of revenue ($3.6B in Q2), w/ 76% of software sold as subscription. That means almost 1/4 of total sales is from software subscriptions sales (or ~$12B). Additionally, 27% of rev is services with much of that from maintenance/support which tend to be recurring. So overall recurring revenue could be 40% or more (they don’t break it out specifically). So while top line growth has been weak, the mix shift happening w/in their business should be supportive of their multiple and their margins. They intend to grow this mix over time.

·        Momentum w/ web-scale cloud providers – the positive commentary from last few quarters continued. They disclosed that Webscale was 25% of Service Provider orders (larger than expected) and order growth accelerated, up >100% in Q2. 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.

·        Valuation: trading at >7% FCF yield on fiscal 2021, 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. Despite macro headwinds, fundamentals continue to be supported by business transformation/digitization trends at a reasonable valuation while much else in tech has seen substantial multiple expansion. Additionally, their valuation is supported by a 3.2% dividend yield which they easily cover. They have ~$16B in net cash on their balance sheet, or almost 8% 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]

Visa Q1 Earnings

Current price: $208        Target price: $226

Position size: 3.7%          TTM Performance: 2%

 

Key takeaways:

  • Beat estimates – Beat driven by solid top-line results and lower than expected op expenses and client incentives.
  • Sequential volume improvement – with very strong debit and e-commerce spending globally, partially offset by weaker credit and in-store spending.
  • Cross-border still a headwind but improving – improvement here is key as this is their biggest Covid headwind driven by travel restrictions.
  • CFO Vasant Pabhu said, “As we approach the first anniversary of the pandemic, where do we stand across our key business drivers relative to where we might have been had the pandemic never happened? Global payments volume is four points to five points short of where we might have been. Debit has outperformed helped by accelerated cash displacement and credit is still a drag. In the US, we are actually back to our pre-pandemic growth trajectory, with debit significantly ahead offsetting credit underperformance.”

 

Additional Highlights:

  • Revenues were down 6% YoY driven by cross-border headwinds (down 21% YoY or -33% YoY excluding intra-Europe), but partially offset by volume growth. Operating expenses were down 10%, leading to margin improvement (lower advertising, administrative, and personnel costs).
  • While cross-border spending did improve for the quarter, it remains depressed, led by travel spending, as the majority of borders remain closed. 
  • 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.
  • Within the US, Total volumes are up slightly YoY driven by growth in debit while credit has lagged. Stimulus checks helping with this. Card present transaction are down YoY, while card not present, ex-travel is up as consumers shift spending online w/ lack of travel spending benefiting other categories.


  • 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.
    • New Flows – $185 trillion in B2B, P2P, B2C and G2C. P2P, which represents $20 trillion of the opp., was Visa Direct’s first use case and continues to grow substantially. A key area of future growth is cross-border P2P, or remittance. Four of the top five global money transfer operators were onboarded in fiscal year 2020, TransferWise, Western Union, Remitly, and MoneyGram. In B2B, Goldman Sachs recently signed on to Visa’s B2B Connect for cross-border B2B money movement w/ corporate clients.
    • Value-added services – a few services with notable progress this quarter. As e-commerce explodes, interest in Cybersource remains strong for merchants, as well as from fintechs and acquirers looking to leverage Visa’s capabilities. This quarter, two additional leading acquirers signed on to use Cybersource, KBank in Thailand and NAB in Australia.
  • Spend categories – across categories, growth was relatively consistent with the prior quarter. Categories which have been growing above their pre-COVID levels have remained elevated including food and drugstores, home improvement, and retail goods. For categories that are the hardest hit by this pandemic including travel, entertainment, fuel and restaurants, spending remained depressed with year-over-year declines consistent with last quarter.

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. 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]

 

Growing tension between Facebook and Apple

Tensions with Facebook and Apple have been growing and in the press quite a bit recently…particularly as both are facing antitrust scrutiny. Facebook already has a lawsuit filed against them by the FTC and multiple state AG’s. Both companies seem to be helping regulators make their case against each other. The focus of each companies criticism is very much in line with how each is being scrutinized by regulators…

 

  • Facebook is upset that Apple changed software on the iPhone w/ iOS14 that will make it harder for Facebook and others to track people across apps. In the coming weeks, users will have to “opt in” to allow developers to share personal information (like location) with other apps and advertisers. Most consumers likely will not opt in, blocking Facebook from a lot of data. That won’t apply to Apple’s own apps. Facebook argues that’s an unfair advantage. Apple says that, unlike Facebook, they don’t share user data with others for advertising purposes and that the changes are meant to protect privacy.
  • FB earnings call: Last week, Zuckerberg was critical of Apple on their earnings call saying they’re just focused “on gaining share in apps and services against us and other developers” and “Apple has every incentive to use their dominant platform position to interfere with how our apps and other apps work, which they regularly do to preference their own.”
  • Increasing competition between them: on their earning’s call, Zuckerberg also brought up pending competition w/ Apple with “very significant competitive overlap” in the future on private messaging and augmented reality glasses. Facebook has Oculus and Apple is developing AR glasses.
  • Facebook may sue Apple: Rumors are now circulating that Facebook may file a lawsuit against Apple related to their App store policies. Cases like this often get settled and often don’t make it to trial. Monetary damages likely unimpactful to Apple…forcing changes to Apple’s app store rules would be much harder.
  • Tim Cook critical of Facebook on privacy: At a privacy related tech conference last week, Tim Cook criticized ad supported revenue models and their implications for privacy. “Technology does not need vast troves of personal data, stitched together across dozens of websites and apps, in order to succeed. Advertising existed and thrived for decades without it. And we’re here today because the path of least resistance is rarely the path of wisdom.” He also criticized companies for using algorithms to drive user engagement that perpetuate the spread of disinformation and conspiracy theories. He didn’t name Facebook specifically but has been critical of Facebook along these lines for a while. Privacy is a big focus of regulators as a source of harm suffered to consumer’s by Facebook’s monopoly and content moderation is at issue with Section 230.
  • Apple & antitrust…
    • Apple’s app store policies are the focus of the antitrust scrutiny against them.
    • Key issues are their 30% fee (lower in some cases) and their rules aimed at preventing apps from skirting the fee…like forcing apps to use their in-app payment service and forbidding apps to point consumers to transact or subscribe outside the app, etc.
    • Apple’s defense re: their app store is that they don’t have majority share in the smartphone market and that their app store rules protect consumers from malware and help maintain the quality of the app experience.
    • Challenges to Apple’s treatment of third-party developers could lead to lower app store fees which would be a headwind to growth in their high margin services business. However, the long-term drivers mitigating this is their growing ecosystem of devices, including wearables, and the evolving utility of applications that continually progress with new technologies. For example, as computing power in mobile devices increases and 5G delivers better connectivity we should have the ability to use their products in enhanced ways like apps that take advantage of augmented reality and Internet of Things (IoT) related technologies. Moreover, improvement in the economics to developers could spur innovation and lead to greater availability of higher quality apps.

 

 

 

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]

 

Apple Q1 Earnings

Current Price: $138                                                          Price Target: $157 (Increasing from $145)

Position Size: 8.3% (just reduced by 75bps)          TTM Performance: +78%

 

Key Takeaways:

 

  • Beat estimates on strong iPhone sales –Beat on revenue and EPS w/ beats across all segments except Macs (though Mac sales were very strong at +21%). iPhones sales were well ahead of expectations at +17% – growth benefited from an easy compare given the delayed iPhone launch (hit Q1 instead of Q4).
  • Strong traction with new products –including 5G phones, M1 powered Macs, iPad Air, latest Apple watch and Air Pods
  • Big improvement in China – 57% YoY growth, a record quarter in China aided by quick 5G adoption rate and US export restrictions hurting Huawei.
  • No specific guidance – just guidelines, same as last quarter. They expect total company revenue growth in Q2 to accelerate on a YoY basis (seasonally smaller quarter, lapping early impact from Covid).
  • CEO Tim Cook’s response related to a question on whether they need acquisitions to grow…“if you back up and look at the ingredients that we have at this point…we have the strongest hardware portfolio that we’ve ever had and we have a great product pipeline for the future… both in products and in services. We have an installed base that has hit new highs…and we’re still attracting a fair number of switchers and upgraders. We just set an all-time services record and we have that installed base to compound that, particularly with the services that we’ve added over the last year…I still think that we are in the early stages of [wearables]. If you look at our share in some of the other products, whether you look at iPhone or Mac or iPad, you find that the share numbers leave a fair amount of headroom for market share expansion…particularly in some of the emerging markets… and we’ve been on a multi-year effort in the enterprise and have gained quite a bit of traction there. We are very optimistic about what we can do in that space. And then of course we’ve got new things that we’re not going to talk about that we think will contribute to the company as well.” (I’ve deleted some of what he said to shorten it)

 

Additional highlights:

 

  • Total revenue was $111B, +21%. Their first >$100B quarter. EPS $1.68 vs street $1.42 aided by better than expected gross margins primarily from leverage from higher sales and to a lesser extent from a mix benefit.
  • Enterprise market – positive commentary on the call related to companies switching from fixed phones to iPhones for employees and to increased Mac adoption in enterprise driven by WFH.
  • iPhone: $65.6B (+17%) vs street $60.33B. Strong response to new models, especially Pro and Pro Max, leading to both unit and ASP growth. iPhone installed base now exceeds 1 billion handsets. Aging installed base combined with increased 5G availability should be catalyst for future iPhone sales. China was a key driver of growth and is a leading indicator of 5G as a catalyst. 5G service availability in China is ahead of the US and 5G capability in the new iPhone lineup was pointed to as a big driver of the +57% growth in the region. That being said, China is different than the US in terms of how reliant they are on phones as primary devices and greater penetration of things like mobile ordering – that might suggest an accelerated relevance of 5G to consumers there, but it does still underscore 5G as a longer-term catalyst. The other driver in China, of course, was a hobbled key competitor: Huawei. Trade sanctions have cut them off from key components and from Android apps.
    • Tim Cook from the call re: China: “I think probably some portion of this was that people probably delayed purchasing in the previous quarter. As rumors started appearing about an iPhone. Keep in mind, 5G in China – the network is well established and the overwhelming majority of phones being sold are 5G phones. And so I think there were some level of anticipation for us delivering an iPhone with 5G and so iPhone did extremely well.”
  • Services: $15.8B (+24% YoY) vs street $14.9B.
    • The now have > 620 million paid subscriptions across their services platform up 140 million from a year ago. Beat their 600m goal for 2020.
    • Installed base growth (which is a driver of services) has accelerated and is an all-time high across each major product category – 1.65B in total w/ over 1B of those being iPhones.
    • Apple Pay growing as coverage continues to expand – nearly 90% of stores in the US now accept Apple Pay.
    • Antitrust – no commentary on the call specifically on antitrust – the services segment is the focus of scrutiny, specifically related to Apple’s high (~30%) fees. While no suit has been filed against AAPL, in response to the scrutiny they are facing, Apple lowered App store commissions to 15% for developers earning less than $1m/yr. The change was inconsequential to Apple as it represents a small portion of their fees but the improvement to the economics for developers could actually be a catalyst to new/better apps…Tim Cook said, “we are already hearing from developers about how this change represents a transformation in their potential to create and grow on the App Store.”
  • Wearables & Accessories: $13B (+30% YoY) vs street $11.5B.
    • Wearables business is now the size of a Fortune 120 company.
    • Apple Watch continues to extend its reach with nearly 75% of the customers purchasing Apple Watch during the quarter being new to the product.
  • Mac: $8.68B (+21%) vs street $8.86B
    • Installed based is growing w/ about 50% of purchases coming from people that are new.
    • Strong demand for the new MacBook Air, MacBook Pro and Mac Mini -all powered by brand new M1 Chip…which could have been a contributor to GM expansion in the quarter.
  • iPad: $8.44B (+41%) vs street $7.57B
    • Similar to Mac, installed based is growing w/ about 50% of purchases coming from people that are new.
    • “it’s clear that some people are using these as laptop replacements”
  • Specific guidance not given, just broad guidelines – consensus should go up as street generally raising estimates. For Q3, total company revenue, “we believe growth will accelerate on a year-over-year basis.”
  • Ended the quarter with almost $196B in total cash and $84B in net cash. Returned >$30 billion to shareholders during the quarter with $3.6B in dividends and over $24B in share repurchases (up from $18B last quarter).
  • Trading at ~3.5% FCF yield on 2021 w/ another ~3.5% of their market cap in net cash on their balance sheet.

 

$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 Q2 Results

Current Price:   $239                     Price Target: Raising to $255 (from $225)

Position Size:    7.6%                     TTM Performance: 41%

 

Key takeaways:

  • Broad beat and strong guidance– Revenue growth accelerated to +17% with revenue across all 3 segments higher than both consensus and the high end of guidance. Q3 guidance ahead of street.
  • Azure continues to be key growth driver – Azure continues to take share in the public cloud with revenue ahead of expectations at +50% YoY growth, a slight acceleration from last quarter.
  • Op margins improved by ~400bps – better gross margins aided by an accounting change added ~200bps of this; the rest was lower op ex, 100bps of which was from cost savings due to Covid.
  • CEO, Satya Nadella said, “ What we have witnessed over the past year is the dawn of a second wave of digital transformation sweeping every company and every industry. Building their own digital capability is the new currency driving every organization’s resilience and growth. Microsoft is powering this shift with the world’s largest and most comprehensive cloud platform.”

 

Additional Highlights:

 

  • Revenue was $43B and +17%; Op. income of $18B +29%; Net income $15.5B, +33%; diluted EPS of $2.03 +34%
  • Commercial cloud ($16.7B, +34% YoY) and gaming (+51%) 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
  • Gaining Ground in Security –  has surpassed $10B in LTM revenue which represents growth of >40% YoY.

 

SEGMENTS…

 

Productivity and Business Processes ($13.4B, +13% YoY):

  • LinkedIn – growth accelerated, revenues +23%. LinkedIn advertising business had a record quarter accounting for >1/3 of LinkedIn’s total rev.
  • Office 365 Commercial (rev +21%)- driven by installed base expansion as well as higher ARPU. Strong demand for security, compliance, and voice components, drove E5 revenue growth acceleration again this quarter – that’s the highest license tier. 
  • Dynamics 365 (rev +39%) – helping organizations in every industry digitize their end-to-end business operations from sales and customer service to supply chain management.  L’Oréal is using Dynamics 365 Remote Assist and HoloLens to help technicians to repair equipment at factories when they cannot travel.
  • Teams continues to shine – they have 60m daily active users on mobile alone. 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.”

Intelligent Cloud ($14.6B, +23% YoY):

  • Server products and cloud services revenue increased 26% with Azure revenue growth of 50% (48% 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 support for “top secret classified workloads in the US.”
  • Power Platform (low code/no code solution) now has more than 11 million monthly active users, up 95% YoY. Enables non-developers in an organization to build applications, automate processes, create Virtual Agents and analyze data. The city of Kobe in Japan, is relying on Power Virtual Agents and Power Automate to keep citizens informed, building intelligent bots to answer frequently asked questions. Their vaccine registration and administration solution built on Power Platform enables governments to manage the end-to-end process from screening and scheduling to administration and follow-up.

More Personal Computing ($15.1B +14% YoY):

  • Gaming grew 51% – with hardware up +86% and Xbox content and services revenue up +40%.  Xbox LIVE has > 100 million monthly active users and Game Pass now has ~18 million subs. They are taking share in consoles…console demand significantly exceeded supply following the Xbox Series X and S launches.
  • Surface +3%, saw big deceleration in growth
  • Improvement in Windows OEM revenue to +1% from -5% driven by PC demand – this is despite a difficult compare lapping end of support for Windows 7.

Rev Guidance:

  • Productivity & Business Processes $13.35-13.6B vs street $12.9B
  • Intelligent Cloud $14.7-14.95B vs street $14.09B
  • Personal Computing $12.3-12.7B vs street $11.59B

Valuation:

  • Free cash flow for the quarter was $8.3B, up 17%. Returned $10B to shareholders in repurchases and dividends, an increase of 18% YoY.
  • 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]