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Current Price: $2,045 Price Target: $2,400

Position Size: 3% TTM Performance: 20%

Bookings reported a better top and bottom line but guidance disappointed. Total bookings for the quarter increased 21% to $25B (+12% constant currency). The source of the disappointing 2Q guidance is expectations of decelerating room night growth (+7-11% vs +13% in 1Q) caused by a reduction in performance advertising spend. Performance ad spending is primarily with Google and to a lesser extent with sites like TripAdvisor and Trivago. They are making a deliberate trade-off in reducing costlier (and fading ROI) performance ad spend, despite the impact to room night growth. The benefit is hitting margins and was the cause of the big EPS beat. This strategy is not new – rising advertising costs have been a theme across the industry and their response is consistent with what they have said the last couple quarters and is not a surprise. They are shifting ad dollars to brand advertising (like TV) in an attempt to get more direct traffic to their site as the ROI on performance advertising has gone down and as a result direct traffic is increasing as a % of the mix. After last quarter, many speculated that this may disrupt room night growth – which it has. The long-term thesis, however, is intact and they still have plenty of runway for growth.

Continue reading “Booking Holdings 1Q Earnings Update”

Aramark reported 2Q18 earnings, beating on the top and bottom line and raising the midpoint of EPS guidance. Revenue was up 6% constant currency with about 2% organic growth. The quarter included partial results from AmeriPride and a full quarter of Avendra. The key positive was the improvement in adjusted operating margins in conjunction with top line growth as the two together have been elusive. Importantly, the margin expansion was led by their core US food service business in contrast to their competitor Sodexo’s profit warning on inflation and increased competition. Sentiment was bad heading into the quarter as Aramark has had trouble hitting their organic growth and margin targets. In 2017, they disappointed with organic growth, but saw margin expansion. Then last quarter they saw meaningfully improved top line growth at the expense of 50bps in margin contraction. This was largely blamed on the onboarding of new contract wins. Management says they are on track to hit the FY18 7.2% margin target that they set in 2015, though with much of it back half weighted (implies a 7.9% adj. op. margin in 2H18 vs 6.5% in 1H18). Legacy growth was slightly below long-term target for 1Q, but they said they expect the legacy business to hit their “at least 3%” target for the full year. For 1H18 they are at 3.4%. Without adjustments, their operating profit would have been down almost 30%. Some of their adjustments and the capitalization of certain client related costs are a source of skepticism around the validity of their margins. This margin concern has been reinforced by profit issues at Sodexo and talk of rising delivery costs from their primary distributor, Sysco. Specifically, client contract incentives represent cash payments for renovations of client facilities – this hits the capex line and is in “other assets” on the balance sheet (net of accumulated amortization it’s close to $1B). Adj. operating income adds back that depreciation and, in doing so, added 80bps to the 2Q adj. operating margin. Longer term, their acquisitions will help with margins through increased purchasing scale with Avendra and better capacity utilization and route density with AmeriPride.

Continue reading “Aramark 2Q18 Earnings Update”

They beat on top and bottom line and reiterated full year guidance. Revenues were up 5%, slightly ahead of expectations. The street is at the high end of their guidance for the year. They continue to face some headwinds, but their pipeline of new business is solid which provides some reassurance on top line growth going forward. Drivers for the business primarily include new client wins, mortgage originations and total active loans. Their pipeline is strong with several new customer wins reported (e.g. added JPM to their originations solutions pipeline), but the pace of implementation has been a source of disappointment as the process for migrating new customers onto their platform, often from in-house or highly customized solutions, can be complex and slow. This was the cause of their guide down last quarter. Additionally, similar to last quarter, rising rates are negatively impacting mortgage originations, with industry volumes down 14%. That drop is driven by lower refinancing activity which now makes up 37% of originations – that’s the lowest proportion of total originations since 1995. In 2012 that proportion was 72%. This will continue as rising rates mean fewer people will be in a position to benefit from refinancing. This is a headwind in their Software Solutions segment (~85% of revenue), though originations make up only 10% of revenue and servicing is 75% and much steadier. Refi’s are a sub-segment of that 10% and, given pent-up demand in housing, purchases are going to start to outpace this. Overall, Software Solutions segment revenues were up 5% as servicing grew 7% and originations declined 4%. On the servicing side, they continue to dominate first lien loans with 62% share and are growing share in second lien loans. At the end of 2017 they had 13% share of second lien, they now stand at 17% share and expect to reach 30% once current commitments are implemented. Mortgage servicing costs continue to rise and should aid growth in this business as potential cost savings are an impetus for banks to adopt BKI’s software. Data analytics segment (~15% of revenue) revenues were up 3%. Growth going forward in this segment should be ~3-5%. M&A continues to be a focus, especially with the new CEO.

Continue reading “Black Knight 1Q18 Earnings”