On Friday, we initiated in Kingsoft Cloud. Please keep in mind, KC carries risk as the company has disclosed its earnings statements are not audited. As stated on the forum by our readers, the United States House is set to consider a measure this week to force U.S. listed Chinese companies to comply with audit terms. We cover additional risks below and Knox goes into the levels he is watching and how he plans to manage risk for this particular position.
We want to give a few bullet points here as to why we initiated despite the fact KC.
Overview:
We like Cloud IaaS in China and this is the basis for our Alibaba position. I mentioned this on the forum here. The United States cloud IaaS market is about $45 to $50 billion while China recently surpassed $5 billion – which reveals an important gap for this massive population.
According to some numbers, Kingsoft Cloud is the #3 cloud provider second to Alibaba and Tencent. According to others, Kingsoft Cloud is a close tie with Baidu in the #4 spot. Here is the quote from the S-1 filing: “We are the third largest internet cloud service provider in China with a market share of 5.4% in terms of revenue from Infrastructure as a Service, or IaaS, and Platform as a Service, or PaaS, public cloud services in 2019, according to Frost & Sullivan.”
Kingsoft could see multi-cloud as a tailwind due to being the largest independent cloud provider. Also, companies like Bytedance and iQIYI use KC to avoid using Tencent (direct competitor). The concentration of Bytedance and others is a risk.
Although market is undecided about Xiaomi’s involvement due to large customer concentration, we see this particular customer/backer as a positive. We like the Xiaomi has done well in China and we also like the focus on 5G, video content and health care/medical IoT to help KC find an edge against Alibaba, Tencent and Baidu. Xiaomi is the number two smartphone in China ahead of Apple and we think this resilience is a positive. In fact, we would not have invested without a strong backer in either AI or 5G so Xiaomi as an early investor, co-chairman and 14% of revenue is primary to our interest.
Kingsoft is focused on verticals, such as video streaming, gaming and health care. We like this approach as it shows an understanding of competitive positioning and clear differentiation from the larger competitors.
Kingsoft Cloud is scheduled be added to the MSCI China All Shares Index on November 30th at market close.
Net dollar retention rate is 155% in FY 2019
Revenue increased 72.6% year-over-year. This represents 48.1% growth from public cloud services and 257.3% growth from enterprise cloud services. Some of this was a rebound in enterprise from a covid deceleration. The company is expected to grow revenue 62% next year to $1.62 billion. To compare, Tencent Cloud is in the $3 billion range.
Adjusted gross profit was $16.9 million and adjusted EBITDA of -$3.9 million.
Risks
There are currently over 200 Chinese companies that are listed on U.S. exchanges. However, unlike U.S. companies that must comply with strict regulatory requirements, China-based audit firms are not in compliance with the U.S. Public Company Accounting Oversight Board (PCAOB) inspections required under the Sarbanes-Oxley Act of 2002 (SOX Act), which is supposed to apply to all U.S. listed publicly traded companies.
The NASDAQ is requiring additional listing requirements for Chinese firms, while the U.S. Senate passed S. 945, the Holding Foreign Companies Accountable Act. This Act requires foreign companies to prove that they are not owned by governments, as well as requiring them to disclose to the SEC information that allows the PCAOB to perform inspections.
This change in U.S. regulations was soon followed by the Luckin Coffee fraud. The Chinese competitor to Starbucks admitted to falsifying their sales by roughly $2.2 billion yuan. This not only led to a sharp selloff in the stock, but also caused the NASDAQ to delist the stock.
The above reasons led to valuations in Chinese tech companies that are hard to come by in today’s markets. Because of the above risks, we will still invest in ideas we like, but with risk controls in place. Our two Chinese positions are Alibaba (BABA) and Kingsoft (KC), both of which now have stops in place. This will allow us to participate in the growth stories, while at the same time minimize our exposure to the macro and regulatory risks going on within China today.
The national debt to GDP ratio of the U.S. economy is estimated to be around 98% of GDP by the end of 2020, with the largest increase in government debt. In a similar response to the GFC, the Chinese government also attempted to stimulate their economy through debt, and is currently looking an unsustainable debt to GDP ratio of 317%, with the largest focus in corporate debt.
Basic Technical Analysis
From a basic Technical Analysis perspective, we have a nice base that has formed, which provides a clear breakout zone.
Note the large volume spike accompanied by a long green candle. This suggests that the sellers have dried up, leading to a rush of buyers. Seeing Friday close above $39.25 is promising. The next level of resistance will be $43.
Elliott Wave Analysis
If we dived deeper into the price structure, we can get further support of a potential breakout on the horizon.
The above chart outlines my structural analysis of the current price action in KC. First off, from its all-time low, we have a clear 5 wave move to the ended just below the $43 level. Each wave within this structure (in green on the left), moved along standard extensions, further supporting a wave 1 within a larger uptrend (in blue).
We then saw a symmetrical retrace to the 50% retrace level of the first wave. Once again, we typically see 2nd waves terminate around the 50% retrace level. The structure of this retrace also was symmetrical. In other words, the length of the c wave in red was around the same length of the a wave in red.
This retrace was then followed by another 5 wave move up, and smaller retrace, suggesting that we are in the early stages of the larger degree 3rd wave in blue. The move on Friday further supported this thesis when we saw a high volume breakout above the $39.25 resistance. If we see a further breakout above the $43 level the above targets will be in effect.
We will use a wider stop than normal in this starter position. We always start small, and if we analyze a trend accurately, which is confirmed by an increase in price, we tend to build on that position along the uptrend. We will have a stop at $31.90 based on the closing price.
This article was originally published on Forbes on Nov 12, 2020,09:01pm ESTForbes on Nov 12, 2020,09:01pm EST
Roku
Roku reported Q3 earnings on November 5th. The 73% year-over-year revenue growth the company announced was 23% above consensus expectations. Gross profit rose 81% YoY while gross margin rose 216 basis points in total to 47.6%.
Roku added 2.9M active accounts in the quarter (+43% YoY). Total streaming hours increased by 0.2 billion hours over the last quarter to 14.8B (+54% YoY), while ARPU grew 20% YoY to $27.
Roku was a beneficiary of the rebound in ad spend, as the company saw Q3 monetized video ad impressions grow 90% YoY vs. 50% YoY growth last quarter. Roku is anticipating that Q4 revenue growth will likely be in the mid-40% range, similar to the growth rate seen in the last few holiday seasons. Per the earnings call, the company is being cautious about holiday spending with this forecasted guidance.
ROKU shares briefly hit all-time highs immediately following the announcement of these results.
Brands like DraftKings are shifting budgets especially as TV sports have been canceled and delayed. Roku also pointed towards CPG brands as a large driver for ad revenue in the current quarter.
We have got brands like DraftKings, for example, who is a big sports spender, had to shift budgets out of TV as sports were canceled and delayed. Has moved a significant portion of their budget into OTT.
In the earnings call, management felt confident the migration from linear TV would be a long-lasting trend after COVID.
We are not going back to the way it was to be clear. I mean, I think, COVID did — COVID triggered a lasting durable change in how CMOs and marketers are thinking about their TV ad spend. In Q3, we saw a 17% drop in linear viewing, Roku was up 54%, 92% of Roku cord-cutters are very satisfied with their decision to cut the cord and aren't planning to go back.
So I really think this is a one-way transfer function. We don’t go back to the older spending patterns, because the audience isn’t there, marketers need to follow the audience into OTT. And they stay, they stay because of the enhanced capabilities.
Roku also tackled the question of Wal-Mart and Comcast partnering. The CEO reiterated that Roku is the #1 TV operating system and software operating system in the United States and now Canada with a world-class team of software engineers. He also emphasized that Walmart is a large partner with Roku and has carried many Roku OEMs:
In terms of Walmart, I will just say a few words. I mean, Walmart is a big retailer, a very strong partner of Roku’s. We have a great relationship with them. They sell millions of Roku players a year. They sell millions of Roku TVs for various Roku OEMs, including TCL, Hisense, RCA, Philips, JVC.
We build — we help them build on branded, which is their house brand, Roku TVs, smart TVs, and that’s a business that’s been growing extremely well for them. So, it’s a great partnership and it’s a long-standing partnership, and we have put a lot of work into making sure that it stays strong.
Square
Square announced blowout Q3 results with huge beats on both the top and bottom lines. Non-GAAP EPS of $0.34 beat consensus expectations by $0.18. The company saw revenue grow 140% YoY to $3.03B, beating the consensus estimate by $950M or 46%.
Gross payment volume of $31.7B was 6% above expectations. In total, Square saw gross profit rise 59% YoY, while Cash App gross profit soared 212% YoY.
In the quarter, the number of average daily transacting Cash App customers nearly doubled from the same period last year. Square did not provide guidance for Q4, but noted in its shareholder letter that the trends they observed in Q3 remained strong through October.
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Square’s Seller Ecosystem revenue grew 5% YoY as regions began to reopen. More impressive was the growth of Square’s Cash App Ecosystem, which saw an increase of 23% in daily active users and 574% YoY growth in revenue.
Bitcoin revenue for Square grew 11x last year’s total, but even excluding Bitcoin transactions, Square grew Cash App revenue 174% YoY this quarter. This is an acceleration from the 140% Cash App growth (excluding bitcoin revenue) Square recorded last quarter, and 98% growth previous to that.
Square is focused on expanding Cash App’s utility beyond peer-to-peer payments, CEO Jack Dorsey remarked in the company’s shareholder letter: “We remain focused on increasing daily utility for our Cash App customers to products beyond peer-to-peer payments, which helps drive higher engagement and monetization.”
Square’s investments into increasing Cash App engagement continue to pay off as the company’s Cash App Ecosystem displayed an acceleration in growth across the board this quarter.
BETH.TECHNOLOGY
Jack Dorsey noted that Square is positioned to benefit in both segments moving forward:
“We continue to believe that our Seller and Cash App ecosystems are well-positioned to benefit from the acceleration of secular shifts, such as omnichannel commerce, contactless payments, and digital wallets for consumers.”
The company did not give Q4 guidance due to uncertainties yet did discuss what they have seen so far through Q4. Square's Seller Ecosystem saw a modest acceleration from Q3 in October:
“Seller GPV was up 8% year over year, which improved modestly compared to year-over-year results in the third quarter.”
Cash App has seen a modest decrease in transaction volume in October, which management attributes to the end of government stimulus programs and unemployment benefits:
“Gross profit growth in October moderated compared to the third quarter, driven by a decrease in transaction volume per active customer. We believe this was partly a result of the end of government stimulus programs and unemployment benefits at the end of July, as stored funds in Cash App have decreased since July.”.
The Trade Desk
The Trade Desk announced Q3 results that easily cleared analysts’ expectations. Revenue grew 32% YoY, beating consensus estimates by 19%. Non-GAAP EPS of $1.27 was a big beat on the consensus bottom-line expectation of $0.45. The company noted that it saw Connected TV grow over 100%, Mobile video spend grow 70% and Audio spend grow 70%.
Management issued an upbeat outlook for Q4, expecting $289M in revenue at the midpoint vs. expectations of $255.1M. At the midpoint of this estimate, The Trade Desk is expecting roughly 34% YoY revenue growth in Q4. TTD shares traded over $700 for the first time immediately following the announcement of these results.
Most impressive from TTD’s report was exceeding 100% YoY growth in their Connected TV segment. CEO Jeff Green remarked in the company’s press release that COVID has accelerated advertising innovation across the board:
"So far in 2020, we've seen several years of advertising disruption and innovation compressed into a few months. As a result, advertisers have become more deliberate and data-driven with every advertising dollar."
In the Q3 earnings call, Green talked more about how companies are adapting data-driven measurement strategies for justifying marketing budgets:
“We recently surveyed more than 200 top advertisers, around 85% of them said they are under new pressure from CFOs to justify marketing spend and to measure against business goals.”
Despite The Trade Desk’s beat, the company did not report the numbers that Snap or Pinterest did (32% growth versus 50-60% growth). TTD’s stock is trading at a valuation that has been historically very hard to sustain in ad-tech.
Rarely, does ad-tech trade over 20 forward price-to-sales even during high-growth periods. Not only is The Trade Desk well exceeding the mean but is trading roughly 200% higher than peers even though Roku, Pinterest and Snap had a better current quarter and are forecasting stronger forward guidance.
The Trade Desk stock trading 2x more expensive than ad-tech peers that reported much higher revenue growth. – YCHARTS
TTD’s forward PE Ratios (not pictured) is also outsized at 168 compared to Facebook’s 30 forward PE Ratio. Facebook’s PE Ratio has never exceeded 119 even during its high-growth quarters of 100%+ growth and/or with low EPS (law of large numbers).
Facebook’s current P/S has also never exceeded 20 even during its high-growth quarters.
This is despite The Trade Desk facing headwinds with Apple’s changes to IDFA. Apple extended the iOS update from September to an undetermined time “early next year.”
On September 3rd, Apple delays IDFA changes until early next year – @BETH_KINDIG
Although the risks are hard to quantify right now, most advertising experts are in agreement this will affect the entire mobile ad industry on iOS. Facebook has stated they would shut down Audience Network as most ad exchanges need some kind of identifier for targeting and attribution. Here is a great write-up from mobile analyst Eric Seufert on how this could affect ad prices.
The Trade Desk has stated only 10% of its inventory uses the IDFA but has made no clarifications on how it will run mobile attribution and measurement without an identifier, whether that’s Apple’s or their own. There are efforts from a collective federation of ad companies to use encrypted emails, although there is no guarantee would Apple would allow this on iOS and Safari even if the ad industry agrees to pursue this method. ATS requires users to authenticate which is another unproven factor in the work flow.
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Overall, the risk is an unknown and we will get real answers it looks like “early next year.” For The Trade Desk, it’s a risk investors need to be aware of. Notably, publisher segments can help augment targeting but this will come from the supply-side.
Datadog announced strong Q3 results and an upside outlook that cleared analyst expectations. The company grew revenue 61% YoY to $155M, representing a 7% beat above consensus estimates.
The company grew customer count by 38% in the quarter versus consensus expectations of 32% and added 92 new customers with over $100K ARR (+52% YoY), slightly above the consensus estimate of 90.
Datadog
In Q3, Datadog recorded its 13th consecutive quarter with a dollar-based net retention rate exceeding 130%. Operating margin improved to 9% in the quarter versus expectations of 0.6%, while gross margin improved 3% to 79%.
Q4 guidance was issued for $163M in revenue at the midpoint (+43% YoY) which was 5% above the consensus outlook. Datadog shares initially sold off as much as 14% on these results, but the stock pared its losses to close trade on Wednesday. The stock rebounded Thursday and is now up over 11% off Wednesday’s lows.
In its Q3 earnings call, Datadog’s CEO Olivier Pomel commented on the recovery in usage trends the company observed after a weak Q2. “Throughout the quarter, usage growth of existing customers was robust which was a return to more normalized levels after slower usage expansion in Q2…the pace of usage growth in Q3 was broadly in line with pre-COVID historical levels.”
After a period of cloud spend conservation among Datadog’s enterprise customers in Q2, the company added a record amount of ARR in the quarter. The company managed to do so profitably, as operating income, cash flow and FCF all came in above expectations.
Notably, Datadog’s CAC payback period decreased to ~12 months from ~18 months sequentially despite adding over 400 more customers in Q3 versus Q2.
The ~12 month payback period recorded in Q3 is more in line with pre-COVID levels, as last quarter is looking more like an outlier given the aforementioned headwinds the company faced in Q2.
Datadog’s platform has proven to be easily adaptable and sticky for enterprise customers migrating to the cloud, as evidenced by the increasing number of existing customers using more Datadog products. CEO Olivier Pomel remarked on this in the company’s earnings call when he said: “our platform strategy continues to resonate and win in the market. As of the end of Q3, 71% of customers are using two or more products, which is up from 50% last year. Approximately 20% of customers are using four or more products which is up from only 7% a year ago.”
CEO Olivier Pomel also commented on the partnerships Datadog announced in Q3 with Microsoft Azure and Google Cloud Platform, noting that the flow of revenue from these partnerships will not be immediate: “there's not going to be an immediate impact, but we see that as being potentially meaningful contribution in the mid to long-term.”
The partnerships with Microsoft Azure and Google Cloud Platform that Datadog announced in the quarter, along with the existing alliance with Amazon Web Services, validates the company’s leadership in cloud-native-observability and establishes its collaborative relationship with the world’s top public hyperscalers. Over the long term, Datadog expects that these partnerships will become meaningful sources of revenue growth.
Looking ahead to Q4, Datadog is confident the rebound in usage trends the company observed in Q3 will continue. CFO, David Obstler alluded to this expectation in the conference call: “Throughout the quarter, we saw usage growth that was more in line with pre-pandemic historical levels. The trend was broad-based and sustained throughout the quarter. This provides us with confidence that what we experienced in Q2 was a transitory optimization effort that were related to the challenging macro environment.”
With the normalization of customer usage trends and secular tailwinds related to digital transformation and cloud migration, management continues to believe that Datadog is very well positioned to capture a “large and growing long-term market opportunity.”
JFrog
JFrog announced earnings for Q3 in its first quarter as a public company. The company grew revenue 40% YoY, beating consensus expectations by 3%. JFrog also announced Non-GAAP EPS of $0.05, beating expectations by 5 cents.
Gross margins came in at an impressive 83% while FCF margin improved to 25% in Q3. For Q4, JFrog expects $41.4M in revenue at the midpoint vs. consensus of $40.52M. The stock has initially sold off up to 10% on the results, as the 40% revenue growth represents a deceleration from the 46% growth recorded last quarter. Even after today's sell-off, FROG still trades at approximately 30x 2021 revenue, which remains among the highest valuations in the software industry.
Here is what the Analysts ratings for the recent string of IPOs and where JFrog ranks:
Here is what the Analysts ratings for the recent string of IPOs and where JFrog ranks – BETH.TECHNOLOGY
When factoring in how fast some software names are growing, we see that JFrog still remains relatively expensive. With the deceleration, it’s likely we see an adjustment to JFrog’s valuation over the next quarter.
Growth Adjusted EV/2021 Revenue – BETH.TECHNOLOGY
We will be covering earnings again next week so consider giving us a follow.
Disclosure: Beth Kindig owns shares of Roku and Datadog, may purchase shares of Square in the near future and and she has owned shares of The Trade Desk and may again in the future. The information contained herein is not financial advice.
In the second part of my Q3 2020 tech earnings review series, I covered Roku, Square, The Trade Desk, Datadog and JFrog.
Roku
Roku reported Q3 earnings on November 5th. The 73% year-over-year revenue growth the company announced was 23% above consensus expectations. Gross profit rose 81% YoY while gross margin rose 216 basis points in total to 47.6%.
Roku added 2.9M active accounts in the quarter (+43% YoY). Total streaming hours increased by 0.2 billion hours over the last quarter to 14.8B (+54% YoY), while ARPU grew 20% YoY to $27.
Roku was a beneficiary of the rebound in ad spend, as the company saw Q3 monetized video ad impressions grow 90% YoY vs. 50% YoY growth last quarter. Roku is anticipating that Q4 revenue growth will likely be in the mid-40% range, similar to the growth rate seen in the last few holiday seasons. Per the earnings call, the company is being cautious about holiday spending with this forecasted guidance.
Square
Square announced blowout Q3 results with huge beats on both the top and bottom lines. Non-GAAP EPS of $0.34 beat consensus expectations by $0.18. The company saw revenue grow 140% YoY to $3.03B, beating the consensus estimate by $950M or 46%.
Gross payment volume of $31.7B was 6% above expectations. In total, Square saw gross profit rise 59% YoY, while Cash App gross profit soared 212% YoY.
In the quarter, the number of average daily transacting Cash App customers nearly doubled from the same period last year. Square did not provide guidance for Q4, but noted in its shareholder letter that the trends they observed in Q3 remained strong through October.
Square’s Seller Ecosystem revenue grew 5% YoY as regions began to reopen. More impressive was the growth of Square’s Cash App Ecosystem, which saw an increase of 23% in daily active users and 574% YoY growth in revenue.
The Trade Desk
The Trade Desk announced Q3 results that easily cleared analysts’ expectations. Revenue grew 32% YoY, beating consensus estimates by 19%. Non-GAAP EPS of $1.27 was a big beat on the consensus bottom-line expectation of $0.45. The company noted that it saw Connected TV grow over 100%, Mobile video spend grow 70% and Audio spend grow 70%.
Management issued an upbeat outlook for Q4, expecting $289M in revenue at the midpoint vs. expectations of $255.1M. At the midpoint of this estimate, The Trade Desk is expecting roughly 34% YoY revenue growth in Q4. TTD shares traded over $700 for the first time immediately following the announcement of these results.
Datadog
In Q3, Datadog recorded its 13th consecutive quarter with a dollar-based net retention rate exceeding 130%. Operating margin improved to 9% in the quarter versus expectations of 0.6%, while gross margin improved 3% to 79%.
Q4 guidance was issued for $163M in revenue at the midpoint (+43% YoY) which was 5% above the consensus outlook. Datadog shares initially sold off as much as 14% on these results, but the stock pared its losses to close trade on Wednesday. The stock rebounded Thursday and is now up over 11% off Wednesday’s lows.
In its Q3 earnings call, Datadog’s CEO Olivier Pomel commented on the recovery in usage trends the company observed after a weak Q2. “Throughout the quarter, usage growth of existing customers was robust which was a return to more normalized levels after slower usage expansion in Q2…the pace of usage growth in Q3 was broadly in line with pre-COVID historical levels.”
JFrog
JFrog announced earnings for Q3 in its first quarter as a public company. The company grew revenue 40% YoY, beating consensus expectations by 3%. JFrog also announced Non-GAAP EPS of $0.05, beating expectations by 5 cents.
Gross margins came in at an impressive 83% while FCF margin improved to 25% in Q3. For Q4, JFrog expects $41.4M in revenue at the midpoint vs. consensus of $40.52M. The stock has initially sold off up to 10% on the results, as the 40% revenue growth represents a deceleration from the 46% growth recorded last quarter. Even after today’s sell-off, FROG still trades at approximately 30x 2021 revenue, which remains among the highest valuations in the software industry.
It’s not every day that we see this level of consolidation across key players in the semiconductor industry.
As stated in the AMD-Xilinx PDF, Marvell’s ASICs were becoming favored in 5G for various reasons, including power consumption and lower cost over time. The 5G product-market fit compliments Inphi’s recent trials with Verizon, which were deemed successful in September for supplying interconnects across its content delivery network.
Many of my readers ask me about edge computing in relation to momentum stocks. Marvell-Inphi with customers like Samsung and Nokia on infrastructure and Verizon or AT&T for the network are at the center of edge computing.
On that note, Marvell-Inphi promises to be a challenging acquisition to analyze. For one, it is not a common household name or even among the most recognized in semiconductor names (although we have already tackled both separately). For two, Marvell’s fundamentals do not show its potential – and this is key to understanding the opportunity. Three, Marvell is taking on a sizable debt load to acquire Inphi. Fourth, the market may take time to figure out the potential of this acquisition as the synergy is forward-looking.
The conclusion here is that we are very bullish and this PDF serves as our investment thesis.
The $10 Billion Strategy Behind Inphi
I’ve seen editorials written by some journalists believe that Nvidia “wants it all” as the Arm acquisition takes the GPU-leader outside of the data center for AI and ML workloads.
Well, AMD-Xilinx and Marvell-Inphi are here to say that Nvidia will not “have it all.” Perhaps Nvidia will lead in general artificial intelligence use cases, and now edge devices with Arm if the acquisition is approved, but AMDXilinx will be a serious player in more complex AI and ML computing tasks, for example space and autonomous vehicles. These are two areas where Xilinx shows strong growth and AMD can lower the barrier to entry for developers. The exact use cases and demand for AMD-Xilinx would be hard to predict but will be greater than the two parts of owning CPUs and AI acceleration with FPGAs.
However, for Marvell, the door is wide open on 5G and this has been confirmed by customers in the critical hour for 5G infrastructure. The Nokia Q3 2019 earnings call, which I have referred to many times, is not to be taken lightly as it sets the stage for an important shift in the chip of choice for major 5G players. Below, we see Intel’s ongoing stock price decline and AMD and Marvell’s positive price action.
Due to the timing of this acquisition and the product road map for both Marvell and Inphi, I see this as a big move by Marvell to own 5G base stations and compute plus now photonics for edge computing (intricately linked to the 5G buildout).
The majority of analysis written on this acquisition will discuss how it strengthens Marvell’s position for the data center due to silicon photonics as Marvell is mainly copper right now. Data centers are a core market to help stabilize Marvell against competitors but the growth opportunity for Marvell (and the reason I am investing) is for the lead Marvell currently has in 5G.
We have covered both Marvell and Inphi on this site with full-length reports. You can access them here:
Last week, Marvell announced an agreement to acquire Inphi in a cash and stock transaction for $10 billion for a combined enterprise value of $40 billion. The transaction will generate an annual run-rate of $125 million within 18 months after the transaction closes.
The deal is expected to be accretive to Marvell’s adjusted EPS by the end of the first year after the transaction closes with an anticipated date in the first half of 2021. Ownership will be 83% Marvell and 17% Inphi.
Inphi is expected to add more than $750 million in annual revenue with operating-EBITDA margins in the mid-30% range. The proforma gross margins will be an estimated 63.5%.
Marvell will finance part of the transaction through JP Morgan Chase which will increase the debt on the balance sheet. The proposal is for $4 billion of new debt with $1.5 million in a committed term loan and $2.5 billion in a bridge loan commitment. Despite this, Marvell has stated in the Investors Presentation that the company plans to maintain the current dividend policy.
The new addressable market is placed at $23 billion with an acceleration in market growth of 12% CAGR.
Marvell released Q2 results on August 27 with revenue growth of 11% year-over-year to $727.3 million. EPS was $0.21 on adjusted income of $140.4 million compared to $0.16 EPS on $110 million last year.
For Q2, the company had cash of $831 million and debt of $1.4 billion. Free cash flow in Q2 was at $205.2 million. The company stated Q3 revenue would be $750 million +/- 5%. The next earnings release will be on December 3rd.
TTM revenue was $2.80 billion with net income of $1.41 billion and EPS of $2.09.
Inphi:
Inphi released results on October 29th. Revenue grew by 92% year-over-year to $180.7 million. Adjusted EPS was $0.88 on adjusted income of $47.9 million compared to $0.45 EPS on $21.5 million last year.
Management forecasted Q4 revenue to be in the range of $185 million to $189 million. Adjusted net income in the range of $47.2 million to $50.6 million at $0.85-$0.91 EPS.
TTM revenue was $598.1 million with an adjusted loss of $61 million for EPS of ($1.29).
Inphi had cash and marketable securities of $223 million and debt of $508 million as of September 30th. Free cash flow in Q3 of $13.4 million.
More on Valuation …
The acquisition to acquire Inphi will be paid in 60% stock, with the remaining 40% in cash. The transaction will include $66 in cash and 2.323 shares of the combined company for current Inphi shareholders.
The cash and stock deal will value Inphi at approximately $10B at its purchase price. Marvell shareholders will have an 83% stake in the combined company and Inphi shareholders will command a 17% stake on a fully-diluted basis.
Marvell plans to close the acquisition in H2 2021, financing the deal with current cash on hand and obtained debt financing. At the $10B purchase price, Marvell will be paying 12.4x 2021 revenue to acquire Inphi. This valuation is on the steeper side, but Inphi recorded 92% YoY sales growth in its most recent quarter compared to just 11% growth for Marvell. In this sense, the deal will be accretive to revenue growth, gross margins, and operating margins.
On a Pro Forma basis, the acquisition of Inphi will improve Marvell’s growth rate, gross margin, operating margin, and EBITDA margin. The acquisition will also double Marvell's number of $100M+ cloud & networking customers to 8.
Marvell currently trades at 7.4x 2021 revenue and the acquisition of Inphi to drive higher growth should eventually lead to a higher multiple. As stated under Financials, the deal is expected to expand Marvell’s TAM to $23B in 2023 and accelerate market growth to 12% CAGR.
1-year returns for Inphi and Marvell:
1-year forward price-to-sales across semiconductors:
What Analysts Have to Say:
10/30: Marvell upgraded to Buy from Hold at Craig-Hallum Craig-Hallum analyst Christian Schwab upgraded Marvell (MRVL) to Buy from Hold with a price target of $48, up from $44 following the company's announcement to acquire Inphi (IPHI). Schwab agrees with management that the acquisition of Inphi will help transform Marvell into a faster growing cloud and 5G player. The acquisition improves Marvell's long term growth outlook to 12%16%, from 10%-15% alone, Schwab says, adding that with synergies, the combined company offers long-term investors an attractive long-term model.
10/29: Morgan Stanley downgrades Inphi, raises Marvell price target after takeover deal. As previously reported, Morgan Stanley analyst Joseph Moore downgraded Inphi (IPHI) to Equal Weight from Overweight with a price target of $159, down from $162, following Marvell's (MRVL) announcement of a cash and stock deal to acquire the company. Moore, who thinks the two businesses "fit together nicely," raised his price target on Marvell shares to $40 from $37 following the deal announcement. He keeps an Equal Weight rating on Marvell shares, stating that although the company has used M&A to put themselves in a better position, its legacy Marvell businesses are "struggling."
10/20: Keybanc analyst John Vinh resumed Marvell coverage with overweight rating and $55 price target due to $1 billion 5G revenue potential stating "MRVL is one of the best-positioned companies to benefit from the inflection in 5G infrastructure deployments." The analyst cites 35%+ operating margins and believes Marvell will achieve over $1 billion in 5G revenues by FY23-24.
Note: this analyst is guiding up from $600M in annual 5G revenue that Marvell’s management guided previously.
Fitch: In addition to the analyst comments, Fitch Ratings revised Marvell from Positive to Stable with a credit rating of BBB-. The outlook takes into consideration that the combined revenue growth “may fall short of forecasts, and provide insufficient profitability and cash flow to return elevated leverage metrics.”
Despite Fitch expecting strong design wins and annualization of acquisitions during fiscal 2020 that drives the FCF margin into the teens from 4.2%, the debt to operating EBITDA will nearly double from 1.9X to 3.5X pro forma.
Fitch believes Marvell is stronger in market position than both Micron and Broadcom and is in-line with NXP. The key assumptions include strong design wins for Marvell especially in networking, driving growth acceleration to mid-to-high single digits compared to the overall semiconductor industry growing at low-single digits in the forecast period. Fitch also forecasts operating EBITDA and cash flow margins to expand. The company also forecasts shareholder returns to be “flattish” until debt-to-operating EBITDA returns to 2X.
Patrick Moorhead, a semiconductor specialist for Moor insights, has positive things to say about the data center opportunity with Marvell’s strong positioning in copper networking and now adding Inphi’s silicon photonics for networking. He references Marvell’s DPU and storage networking as a solid synergy with Inphi’s photonics interconnects.
Product Overview:
Inphi will add silicon photonics to Marvell’s copper-based networking. Both companies are in the networking layer with Inphi stronger on data centers and Marvell stronger in 5G (competitively speaking). Together, they will expand the footprint in both the data center and 5G arenas.
Some analysts critiqued AMD as having less-than-desirable M&A history. Marvell, on the other hand, pushed into 5G very successfully following the Cavium acquisition. This leads many analysts to believe the Marvell-Inphi acquisition will follow the same path to strengthen Marvell’s positioning in the data center.
However, as stated, I believe the impetus could be Marvell’s 5G and edge networking strategy. Networks like Verizon badly need Inphi’s interconnects to drive high-speed connections between its content delivery network servers, which are expanding their footprint for 5G. The data center is an all-out battleground with lots of big tech throwing around muscle. However, specifically in 5G, Inphi can help solidify Marvell’s lead and perhaps help dig a moat for Marvell’s ASICs.
When it comes to data center networking, however, there is no moat of any kind to be had. For example, Mellanox is a competitor on networking ethernet and has the 800-pound weight of Nvidia behind the company. Therefore, did Marvell take on a 3.5X debt-to-EBITDA ratio to be a small fish in a big pond? I don’t think so when Marvell can be the big fish in the 5G pond.
Data Center:
We discussed Inphi at length in this PDF but will summarize a few points below. You can access the Inphi full-length report here. e Inphi full-length report here.
Inphi is the leader in PAM4 electro-optics. This market has seen tailwinds due to data center spending and the need for more bandwidth from COVID’s streaming and traffic usage. As stated in the PDF, we expected Inphi’s growth to continue on an investable trajectory due to its aggressive product road map for fiber optics that connect both short distances (PAM4 DSP) and long distances (coherent DSP).
Regarding the product road map, Inphi currently supplies 400-gigabit PAM4 pluggables that are made with a 7nm process compared to a 16 nm process which reduces power consumption. Artificial intelligence and data center switching will drive the demand for 800-gigabit PAM4 modules to increase the speed of input-output and to process the data flows. Inphi announced the industry’s first 800-gigabit client-side pluggable modules earlier this year.
Part of the 2021 story for Inphi is the release of the Spica DSP (the aforementioned 800-gigabit PAM4) which is expected to be deployed in volume. This will double the throughput (bandwidth) due to an 8x100Gpbs optical transceiver. The main application for the 2021 story is the transition of optical connectivity inside and between AI clusters.
COLORZ II is the other half to the 2021 story for Inphi as the silicon photonics technology increases metro-access bandwidth to facilitate edge computing through a “network fabric.” COLORZ allows regional data centers to be linked together in the same metro region to function as one single mega data center. Verizon recently completed an important trial using Inphi’s COLORZ II optics.
In March of 2019, Marvell released a new Ethernet switch solution for edge and private data centers. The solution uses compostable infrastructure, which allows for compute, storage and networking to be managed by software and removes the need to configure by hardware. This is one example of how Inphi and Marvell can complement one another.
To elaborate more on PAM4-based connectivity …
Hyperscalers are going through an ongoing upgrade cycle that requires high bandwidth and port density. PAM4 connects networking ASICs and machines, like servers and AI machines. Digital-based PAM4 uses analog-to-digital converters to clean up the signal in the digital domain before converting it back to analog to transmit. This allows developers to configure various deployment scenarios via software. This software configurability is a compatible match with Marvell’s ASICs.
Semiconductor experts will tell you that silicon photonics connecting hyperscalers and network carriers are the future. This is the primary architecture for edge computing — hyperscalers and 5G networks connected regionally with solutions like what Inphi offers.
We mentioned in the PDF that Microsoft is a large customer for Inphi’s COLORZ DCI product including for global build-outs related to the Pentagon contract. I’ll place the quote here from the Inphi PDF – which should be strengthened under Marvell:
“As I discussed on our prior earnings call, we're still consistently expecting our ZR solution to go to production in the first half of 2021 and ramp into volume starting in the mid-2021. And so you should expect the second half of 2021 to be a significant revenue driver coming from the 400-gig ZR solution at multiple cloud data centers as well as telecom operators.” And so you should expect the second half of 2021 to be a significant revenue driver coming from the 400-gig ZR solution at multiple cloud data centers as well as telecom operators.”
Marvell supplies the data center with Thunder X2 Arm-based processors which provides the computational performance of an Arm server with I/O connectivity, memory bandwidth and capacity. Nvidia partnered with Marvell to port the CUDA-X AI libraries and tools to the platform.
Marvell also offers DPUs, which require an analysis of their own as Nvidia plans to compete here. Briefly, DPUs stand for Data Processing Unit and will become more commonplace in the future as they move data around the data center. Its roots are a system-on-a-chip (SoC) and is software programmable. Marvell will become a major player here and this is a future bull thesis for Marvell in addition to the current thesis outlined here.
5G Infrastructure:
As stated in the Investors Presentation, Marvell leads with base station compute. This sets the bandwidth bar and cadence while Inphi adds the fronthaul and backhaul interconnect.
Marvell supplies components for 5G base stations with Nokia and Samsung as customers. Although Marvell has exposure to Huawei, these two suppliers can make up for this exposure in time.
We have covered ASICs in detail in both the Marvell PDF and the AMD-Xilinx PDF. ASICs stands for applicationspecific integrated circuit and are customized to perform one very specific function. Recently, 5G infrastructure has favored ASICs over FPGAs – which is key to the success that Marvell has seen in 2020 and beyond. One driving factor is that ASICs cost less over time while rivaling FPGAs on efficiency and power.
The main point here is that Marvell has a serious opportunity to be the front-runner in 5G infrastructure. The 5G network will soon rival cloud infrastructure on data and processing, and therefore, I believe quite a bit of Marvell’s strategy with Inphi resides in the interconnects increasing the speed of the 5G network and reducing capex by removing steps in the network layer.
As stated in the Marvell PDF, the company is attempting to offer end-to-end network infrastructure with baseband DSPs, Arm multi-core SoCs (system on chips), purpose- built hardware accelerators, Ethernet connectivity engines and system-level security solutions.
Although Marvell aims to offer specific-use ASICs and semi-custom ASICs, the 5G platform that Marvell offers will be adaptable for many use cases to expand on any ASIC limitations. Adding Inphi to this will strengthen the endto-end network infrastructure offering by Marvell.
This matters when you analyze supply and demand. To me (as an investor), the data center with DPUs/Liquid IO, Thunder X Arm-based platform and now Inphi’s silicon photonics are the core business but the demand for 5G and edge networking are the tailwind and growth opportunity that I am primarily keen on for 2021. With that said, I don’t want to overlook Marvell’s potential with DPUs in 2022-ish.
With Inphi, Marvell has the potential to own edge networking with very few competitors on ASICs and silicon photonics in this arena whereas the data center is highly competitive. Inphi’s solutions connect edge switches (and core switches) over both short and long distances (the long distances being more important for 5G), which along with Marvell’s lead on base stations, is a strong combination for the 5G build-out.
This article was originally published on Forbes on Oct 29, 2020,11:49pm EDTForbes on Oct 29, 2020,11:49pm EDT
Before breaking out the earnings reports from the high-growth universe, here are the results from Big Tech earnings today. Each company beat on both the top and bottom lines. Other than Alphabet, they are all trading down after-hours following these results as the market digests the magnitude of the beats, and in Apple's case, the lack of guidance.
Snap:
Snap reported Q3 results on October 20th, beating both the top and bottom lines. The ongoing recovery of advertising budgets helped to boost Snap's revenue growth to 52% YoY in Q3, which now sits just below the 58% pre-COVID growth rate the company recorded during Q1.
Notably, the reacceleration that Snapchat reported is the highest Q3 growth rates since 2017. According to management, some of the user growth highlights from this quarter include Lens Studio, which saw creative applications to use AR as a way to try-on products from brands including Sally Hansen for nail polish and Champs for sneakers.
Other product features released contributing to this quarter's beat include Brand Profiles, Minis, Places on the Map, Dynamic Ads, Bidded AR Lenses, Dynamic Lenses, Camera Kit, Snap ML Lenses including the Anime Lense.
The company also attributes the growth to linear TV and sports being featured on the social media platform at a time when content is seeing a surge.
Here is what the company said about Dynamic Ads and AR Ads on the earnings call:
For example, last quarter we launched Dynamic Ads globally, which combine product catalogs with our optimization capabilities to reward advertisers who invest in our platform with ROI at scale, and we are already seeing strong adoption rates from Retail, CPG, Restaurant, and Gaming verticals, among others.
While Dynamic Ads recommend items to Snapchatters based on their interests, AR try-on takes this a step further and allows Snapchatters to visualize the item in real life. For example, Clearly, an eyewear retailer, leveraged our sponsored AR Lenses to enable our community to try on different pairs of glasses, which resulted in 33 seconds of average playtime and a 5.3% share rate. Clearly was able to drive a full-funnel impact for their brand, achieving a 7-point lift in brand awareness and a 5-point lift in brand consideration while also driving a 46% lift in unique page viewers on their site and a 3.3% lift in purchases.
Daily active users rose 18% to 249M, topping the consensus of 243M. For user base demographics, Snapchat reaches over 90% of Gen Z and 75% of Gen Z and Millennials in the United States, the UK and France. This is one reason the company believes its augmented reality platform is seeing early success with brands as this demographic is more likely to engage with AR advertisements. Snapchat also has a gaming platform with new releases every quarter.
The majority of Snap’s growth came from the Rest of World category, at 43% growth. North America grew 7% and Europe by 10%. Meanwhile, North America and Europe carried the majority of the revenue growth at 56% year-over-year and 49% year-over-year, respectively.
Snap also recorded its most successful quarter ever in terms of monetizing its user base with a global ARPU of $2.73, coming in well ahead of the $2.23 consensus estimate.
Even though the company did not offer guidance for Q4 due to COVID uncertainties, SNAP stock surged over 20% following the results. Kids being schooled virtually, especially college-aged, is likely contributing to the company’s record Q3 usage and monetization.
Pinterest:
Pinterest rose with Snap following Q3 results as investors anticipated a similar recovery in ad spend for the social media company. The company delivered outstanding Q3 results that easily cleared consensus expectations.
Total revenue rose 58% YoY in Q3 with 49% growth in the US and 145% growth internationally. Monthly active users jumped 37% overall to 442M and ARPU rose 15% (US +31% and international +66%) to $1.03.
Perhaps most impressive was management’s 60% YoY growth guidance for Q4:
Additionally, we expect our business to maintain its momentum in Q4, with revenue growing around 60% year-over-year.
And then finally, this brand safety concept, especially post-July and the boycotts that we saw, I would imagine that we're seeing a sustained benefit just due to the election season. But I think it's a secular trend where advertisers want to be around positivity as they build their brands, and that that's contributing to our growth as well. That's what we're hearing.
Management did state there is a level of uncertainty with this guidance due to Covid and tailwinds the company saw from being “brand safe” during the election (i.e. attracting ad spend typically given to Facebook).
Here is what the company said when asked if the beat came from factors inherent to the product or due to the macro conditions of ad spend being thin in Q2.
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Yes, I mean, Ross, it's really hard to parse. I mean, I would love to be able to disaggregate that and say, we're getting X amounts from the technology investments we've made. We're getting Y amounts on demand returning from a macro perspective, or insights give us a certain amount and the brand safety equates to the remainder, in reality, it's the combination of all the above. Ads are working. I think we went through this a little bit on Brian's question, but making it easier for especially medium-sized advertisers to on-board and automate spending their budgets effectively against their desired online conversion and sales objectives has been a big driver for us …. [some parts omitted here for brevity]
So it's a mix of product and technology, macro recovery, the insights that we're able to deliver, and the brand safety and positivity that Pinterest uniquely brings and the world of social media.
Twilio:
Twilio pre-announced Q3 revenue would come in ahead of previously issued guidance from the company of $401 million to $406 million, with analyst consensus at $404M. Expectations were already high going into the earnings report and Twilio went on to beat revenue estimates by 10% for revenue of $448 million and growth of 52% year-over-year. This was the largest beat by dollar in Twilio’s history, as referenced by analyst Khozema on the earnings call.
Twilio also handily beat on earnings at $0.04 EPS compared to analyst consensus of -$0.03 EPS.
For Q4, Twilio expects revenue of $450M-$455M (37% YoY growth) vs. consensus of $432.1M. The net retention rate came in at 137% for TWLO in Q3. The guidance the company provided for earnings next quarter did not match expectations with an operating loss ranging between $10 to $15 million.
Twilio is on an expansion streak fueled by acquisitions. The company completed the acquisition of SendGrid in early 2019, launched the Flex platform, and has now acquired Segment to “enable developers and companies to unify customer data from every touchpoint.” The guidance provided does not include Segment which is expected to close in the current quarter and will modestly impact the top and bottom line.
On the earnings call, the company highlighted the importance of health care with Twilio’s products:
In healthcare, the innovative solutions that have been built on top of Twilio to address the COVID-19 crisis, provide an opportunity for the industry to advance the use of technology to better deliver outcomes for patients and create tools that fit seamlessly within a physician's workflow. This has always been the vision, but the coronavirus crisis highlighted the urgency, immediacy, and magnitude of that need.
Most importantly, CEO Jeff Lawson and the management does not see these trends slowing down with a vaccine or return-to-normal and specifically addressed this:
The other thing I would just point out, though, is that some of the acceleration that we've seen, for example, in healthcare and education, e-commerce, but we also think that those use cases are going to be pretty resilient. I don't think they're going to be ephemeral at all. In fact, I think we see a lot more opportunity in some of those industries. And so I think that's going to provide ongoing tailwind over the medium-term as well.
You can access the Investors Day presentation here where the company guided for 30% growth over the next 4 years.
Shopify:
Shopify announced outstanding Q3 results, with revenue growth of 96% year-over-year and Gross Merchandise Volume growth of 109%. The revenue number came in 18% above consensus estimates while GMV was 13% above forecasts.
The company announced subscription revenue grew 48% during the quarter, merchant revenue rose 132%, and monthly recurring revenue grew 47%. Non-GAAP EPS of $1.13 came in well ahead of estimates calling for $0.50, and operating margin increased to 17.6% vs. an 8.7% consensus. This compares to an adjusted loss of $0.29 EPS.
Shopify gave away a 90-day free trial with this cohort transitioning from a free trial to paid merchants in Q3, which had a “double cohort effect” on merchant revenue growth of 132%. The company does not expect the Q4 demand for subscriptions on a year-over-year MRR growth rate to match Q3. This note was addressed by Amy Shapero, CFO, in the earnings call:
So, I want to just highlight that we did have a record quarter in Q3 for merchant growth due to the double cohort effect that I talked about in my opening remarks. But I think it's really important to emphasize that even excluding the 90-day free trial as who converted in Q3, we still would have seen an acceleration in our merchant growth over pre-COVID levels, which tells you that more merchants are coming to the platform with this shift to online commerce and COVID.
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The free trial was addressed again here as to how the key metrics compare to the 14-day trial with lower conversions but higher retention:
So, the new store creations in Q2 were the new stores coming on the platform associated with the 90-day free trial. So, we were not able to count them as merchants in Q2. We saw many of them convert to paying merchants in Q3. The conversion rates that we've seen on the 90-day free trials is slightly lower than cohorts historically on 14 day free trials, but we think that's okay, because they're more intentional when they convert because they've had a longer time period. The data that we have in the three months in some of the earliest 90-day free trial cohorts and converted suggests that those merchants that have a higher retention than 14-day free trial. As we know, many of them coming online in Q2 were established businesses looking for a multi-channel platform. And so we believe that those 90-day free trials will be more sticky than the 14-day free trials cohorts historically.The conversion rates that we've seen on the 90-day free trials is slightly lower than cohorts historically on 14 day free trials, but we think that's okay, because they're more intentional when they convert because they've had a longer time period. The data that we have in the three months in some of the earliest 90-day free trial cohorts and converted suggests that those merchants that have a higher retention than 14-day free trial. As we know, many of them coming online in Q2 were established businesses looking for a multi-channel platform. And so we believe that those 90-day free trials will be more sticky than the 14-day free trials cohorts historically.
Notably, Shopify incredible B2B brand power with philanthropic efforts to support Black entrepreneurship with $130 million dedicated to supporting businesses with diverse ownership. The company also launched a Tiktok channel that allows merchants to market their products using TikTok for Business. The collaboration allows for in-feed video ads to expand their paid and organic reach.
Microsoft announced FQ1 2021 results on October 27th, outperforming on headline metrics led by strong Commercial Cloud and Azure growth. EPS of $1.82 came in ahead of estimates of $1.54 EPS while 12.4% YoY revenue growth represents a 4% beat above consensus.
Intelligent Cloud revenue of $12.99B was well ahead of the $12.73B consensus, while the 48% YoY growth in Azure was better than the expected 44% growth. Management issued a somewhat tepid outlook for FQ2, expecting weaker Consumer PC growth and intelligent cloud revenue in line with forecasts, along with stronger Processes and Business Productivity revenue.
The reason for the lower-than-expected guidance is due to softer business demand that will cut into Windows licensing revenue. We also saw commercial PCs crater 22% after support for Windows 7 ended and the coronavirus pandemic forced more people to work from home.
However, these are not the segments that would cause an investor to choose Microsoft as a portfolio holding. For the most part, the bull thesis centers around Azure and the line of horizontal products under the Azure infrastructure and PaaS umbrella: Azure Arc, Azure Synapse, Azure SQL Edge, Azure Machine Learning, Azure Space and Microsoft Cloud for Healthcare. Azure saw a slight acceleration of 1% this quarter. Gross margins on Commercial Cloud are an impressive 71% when including an accounting change on server equipment from two to four years.
Notably, when asked about the effects a decline in on-premise and transactional revenue could have on Microsoft, CEO Satya Nadella answered that the strategy for Microsoft is distributed computing with the public cloud and edge (and presumably these will make up for any decline seen from transitioning on-premise).
One is, the approach we have always taken is that distributed computing will remain distributed. So, the cloud and the edge is what will be the distributor fabric for applications. So, if you look at where our growth is coming from for the all-up number in Intelligent Cloud, it's coming from the infrastructure layer, the flexibility that we have around hybrid deployment, things like Azure Arc, a very differentiated. The same thing with data, that's one of the big future innovations, even in the last quarter was the ability to deploy, for example, Azure data in any cloud, including the edge.
The more interesting note came at the end of the earnings call by Brent Bracelin of Piper Sandler, who pointed out Azure had grown to 17% of revenue — larger than Windows – and up from 45% just three years ago, according to his model.
I wanted to follow up on Azure. This is a segment that’s grown now to 17% of revenue. I think, that’s up from 4% just three years ago. You talked about the number of petabyte-scale applications doubling. And from a size standpoint, it looks like in my model, Azure is bigger than the Windows business for the first time ever. My question really is around where are we at in the journey around Azure? How important is this to the Microsoft model? And ultimately, how big could it be looking out over the next three to five years?
This provided an important glimpse into Azure’s ongoing importance and the evolution of Microsoft.
This article was originally published on Forbes on Oct 29, 2020,11:49pm EDT
Before breaking out the earnings reports from the high-growth universe, here are the results from Big Tech earnings today. Each company beat on both the top and bottom lines. Other than Alphabet, they are all trading down after-hours following these results as the market digests the magnitude of the beats, and in Apple's case, the lack of guidance.
BETH.TECHNOLOGY
Snap:
Snap reported Q3 results on October 20th, beating both the top and bottom lines. The ongoing recovery of advertising budgets helped to boost Snap's revenue growth to 52% YoY in Q3, which now sits just below the 58% pre-COVID growth rate the company recorded during Q1.
Notably, the reacceleration that Snapchat reported is the highest Q3 growth rates since 2017. According to management, some of the user growth highlights from this quarter include Lens Studio, which saw creative applications to use AR as a way to try-on products from brands including Sally Hansen for nail polish and Champs for sneakers.
Other product features released contributing to this quarter's beat include Brand Profiles, Minis, Places on the Map, Dynamic Ads, Bidded AR Lenses, Dynamic Lenses, Camera Kit, Snap ML Lenses including the Anime Lense.
The company also attributes the growth to linear TV and sports being featured on the social media platform at a time when content is seeing a surge.
Here is what the company said about Dynamic Ads and AR Ads on the earnings call:
For example, last quarter we launched Dynamic Ads globally, which combine product catalogs with our optimization capabilities to reward advertisers who invest in our platform with ROI at scale, and we are already seeing strong adoption rates from Retail, CPG, Restaurant, and Gaming verticals, among others.
While Dynamic Ads recommend items to Snapchatters based on their interests, AR try-on takes this a step further and allows Snapchatters to visualize the item in real life. For example, Clearly, an eyewear retailer, leveraged our sponsored AR Lenses to enable our community to try on different pairs of glasses, which resulted in 33 seconds of average playtime and a 5.3% share rate. Clearly was able to drive a full-funnel impact for their brand, achieving a 7-point lift in brand awareness and a 5-point lift in brand consideration while also driving a 46% lift in unique page viewers on their site and a 3.3% lift in purchases.
Daily active users rose 18% to 249M, topping the consensus of 243M. For user base demographics, Snapchat reaches over 90% of Gen Z and 75% of Gen Z and Millennials in the United States, the UK and France. This is one reason the company believes its augmented reality platform is seeing early success with brands as this demographic is more likely to engage with AR advertisements. Snapchat also has a gaming platform with new releases every quarter.
The majority of Snap’s growth came from the Rest of World category, at 43% growth. North America grew 7% and Europe by 10%. Meanwhile, North America and Europe carried the majority of the revenue growth at 56% year-over-year and 49% year-over-year, respectively.
Snap also recorded its most successful quarter ever in terms of monetizing its user base with a global ARPU of $2.73, coming in well ahead of the $2.23 consensus estimate.
Even though the company did not offer guidance for Q4 due to COVID uncertainties, SNAP stock surged over 20% following the results. Kids being schooled virtually, especially college-aged, is likely contributing to the company’s record Q3 usage and monetization.
Pinterest:
Pinterest rose with Snap following Q3 results as investors anticipated a similar recovery in ad spend for the social media company. The company delivered outstanding Q3 results that easily cleared consensus expectations.
Total revenue rose 58% YoY in Q3 with 49% growth in the US and 145% growth internationally. Monthly active users jumped 37% overall to 442M and ARPU rose 15% (US +31% and international +66%) to $1.03.
Perhaps most impressive was management’s 60% YoY growth guidance for Q4:
Additionally, we expect our business to maintain its momentum in Q4, with revenue growing around 60% year-over-year.
And then finally, this brand safety concept, especially post-July and the boycotts that we saw, I would imagine that we're seeing a sustained benefit just due to the election season. But I think it's a secular trend where advertisers want to be around positivity as they build their brands, and that that's contributing to our growth as well. That's what we're hearing.
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Management did state there is a level of uncertainty with this guidance due to Covid and tailwinds the company saw from being “brand safe” during the election (i.e. attracting ad spend typically given to Facebook).
Here is what the company said when asked if the beat came from factors inherent to the product or due to the macro conditions of ad spend being thin in Q2.
Yes, I mean, Ross, it's really hard to parse. I mean, I would love to be able to disaggregate that and say, we're getting X amounts from the technology investments we've made. We're getting Y amounts on demand returning from a macro perspective, or insights give us a certain amount and the brand safety equates to the remainder, in reality, it's the combination of all the above. Ads are working. I think we went through this a little bit on Brian's question, but making it easier for especially medium-sized advertisers to on-board and automate spending their budgets effectively against their desired online conversion and sales objectives has been a big driver for us …. [some parts omitted here for brevity]
So it's a mix of product and technology, macro recovery, the insights that we're able to deliver, and the brand safety and positivity that Pinterest uniquely brings and the world of social media.
Twilio:
Twilio pre-announced Q3 revenue would come in ahead of previously issued guidance from the company of $401 million to $406 million, with analyst consensus at $404M. Expectations were already high going into the earnings report and Twilio went on to beat revenue estimates by 10% for revenue of $448 million and growth of 52% year-over-year. This was the largest beat by dollar in Twilio’s history, as referenced by analyst Khozema on the earnings call.
Twilio also handily beat on earnings at $0.04 EPS compared to analyst consensus of -$0.03 EPS.
For Q4, Twilio expects revenue of $450M-$455M (37% YoY growth) vs. consensus of $432.1M. The net retention rate came in at 137% for TWLO in Q3. The guidance the company provided for earnings next quarter did not match expectations with an operating loss ranging between $10 to $15 million.
Twilio is on an expansion streak fueled by acquisitions. The company completed the acquisition of SendGrid in early 2019, launched the Flex platform, and has now acquired Segment to “enable developers and companies to unify customer data from every touchpoint.” The guidance provided does not include Segment which is expected to close in the current quarter and will modestly impact the top and bottom line.
On the earnings call, the company highlighted the importance of health care with Twilio’s products:
In healthcare, the innovative solutions that have been built on top of Twilio to address the COVID-19 crisis, provide an opportunity for the industry to advance the use of technology to better deliver outcomes for patients and create tools that fit seamlessly within a physician's workflow. This has always been the vision, but the coronavirus crisis highlighted the urgency, immediacy, and magnitude of that need.
Most importantly, CEO Jeff Lawson and the management does not see these trends slowing down with a vaccine or return-to-normal and specifically addressed this:
The other thing I would just point out, though, is that some of the acceleration that we've seen, for example, in healthcare and education, e-commerce, but we also think that those use cases are going to be pretty resilient. I don't think they're going to be ephemeral at all. In fact, I think we see a lot more opportunity in some of those industries. And so I think that's going to provide ongoing tailwind over the medium-term as well.
You can access the Investors Day presentation here where the company guided for 30% growth over the next 4 years.
Shopify:
Shopify announced outstanding Q3 results, with revenue growth of 96% year-over-year and Gross Merchandise Volume growth of 109%. The revenue number came in 18% above consensus estimates while GMV was 13% above forecasts.
The company announced subscription revenue grew 48% during the quarter, merchant revenue rose 132%, and monthly recurring revenue grew 47%. Non-GAAP EPS of $1.13 came in well ahead of estimates calling for $0.50, and operating margin increased to 17.6% vs. an 8.7% consensus. This compares to an adjusted loss of $0.29 EPS.
EMARKETER
Shopify gave away a 90-day free trial with this cohort transitioning from a free trial to paid merchants in Q3, which had a “double cohort effect” on merchant revenue growth of 132%. The company does not expect the Q4 demand for subscriptions on a year-over-year MRR growth rate to match Q3. This note was addressed by Amy Shapero, CFO, in the earnings call:
So, I want to just highlight that we did have a record quarter in Q3 for merchant growth due to the double cohort effect that I talked about in my opening remarks. But I think it's really important to emphasize that even excluding the 90-day free trial as who converted in Q3, we still would have seen an acceleration in our merchant growth over pre-COVID levels, which tells you that more merchants are coming to the platform with this shift to online commerce and COVID.
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The free trial was addressed again here as to how the key metrics compare to the 14-day trial with lower conversions but higher retention:
So, the new store creations in Q2 were the new stores coming on the platform associated with the 90-day free trial. So, we were not able to count them as merchants in Q2. We saw many of them convert to paying merchants in Q3. The conversion rates that we've seen on the 90-day free trials is slightly lower than cohorts historically on 14 day free trials, but we think that's okay, because they're more intentional when they convert because they've had a longer time period. The data that we have in the three months in some of the earliest 90-day free trial cohorts and converted suggests that those merchants that have a higher retention than 14-day free trial. As we know, many of them coming online in Q2 were established businesses looking for a multi-channel platform. And so we believe that those 90-day free trials will be more sticky than the 14-day free trials cohorts historically.The conversion rates that we've seen on the 90-day free trials is slightly lower than cohorts historically on 14 day free trials, but we think that's okay, because they're more intentional when they convert because they've had a longer time period. The data that we have in the three months in some of the earliest 90-day free trial cohorts and converted suggests that those merchants that have a higher retention than 14-day free trial. As we know, many of them coming online in Q2 were established businesses looking for a multi-channel platform. And so we believe that those 90-day free trials will be more sticky than the 14-day free trials cohorts historically.
Notably, Shopify incredible B2B brand power with philanthropic efforts to support Black entrepreneurship with $130 million dedicated to supporting businesses with diverse ownership. The company also launched a Tiktok channel that allows merchants to market their products using TikTok for Business. The collaboration allows for in-feed video ads to expand their paid and organic reach.
Microsoft announced FQ1 2021 results on October 27th, outperforming on headline metrics led by strong Commercial Cloud and Azure growth. EPS of $1.82 came in ahead of estimates of $1.54 EPS while 12.4% YoY revenue growth represents a 4% beat above consensus.
Intelligent Cloud revenue of $12.99B was well ahead of the $12.73B consensus, while the 48% YoY growth in Azure was better than the expected 44% growth. Management issued a somewhat tepid outlook for FQ2, expecting weaker Consumer PC growth and intelligent cloud revenue in line with forecasts, along with stronger Processes and Business Productivity revenue.
The reason for the lower-than-expected guidance is due to softer business demand that will cut into Windows licensing revenue. We also saw commercial PCs crater 22% after support for Windows 7 ended and the coronavirus pandemic forced more people to work from home.
However, these are not the segments that would cause an investor to choose Microsoft as a portfolio holding. For the most part, the bull thesis centers around Azure and the line of horizontal products under the Azure infrastructure and PaaS umbrella: Azure Arc, Azure Synapse, Azure SQL Edge, Azure Machine Learning, Azure Space and Microsoft Cloud for Healthcare. Azure saw a slight acceleration of 1% this quarter. Gross margins on Commercial Cloud are an impressive 71% when including an accounting change on server equipment from two to four years.
Notably, when asked about the effects a decline in on-premise and transactional revenue could have on Microsoft, CEO Satya Nadella answered that the strategy for Microsoft is distributed computing with the public cloud and edge (and presumably these will make up for any decline seen from transitioning on-premise).
One is, the approach we have always taken is that distributed computing will remain distributed. So, the cloud and the edge is what will be the distributor fabric for applications. So, if you look at where our growth is coming from for the all-up number in Intelligent Cloud, it's coming from the infrastructure layer, the flexibility that we have around hybrid deployment, things like Azure Arc, a very differentiated. The same thing with data, that's one of the big future innovations, even in the last quarter was the ability to deploy, for example, Azure data in any cloud, including the edge.
The more interesting note came at the end of the earnings call by Brent Bracelin of Piper Sandler, who pointed out Azure had grown to 17% of revenue — larger than Windows – and up from 45% just three years ago, according to his model.
I wanted to follow up on Azure. This is a segment that’s grown now to 17% of revenue. I think, that’s up from 4% just three years ago. You talked about the number of petabyte-scale applications doubling. And from a size standpoint, it looks like in my model, Azure is bigger than the Windows business for the first time ever. My question really is around where are we at in the journey around Azure? How important is this to the Microsoft model? And ultimately, how big could it be looking out over the next three to five years?
This provided an important glimpse into Azure’s ongoing importance and the evolution of Microsoft.
