This is an especially important earnings season as we hear from executives for the first time since the pandemic. I’ve provided a summary of the earnings reports from this week and my takeaways.
In this update, I cover Texas Instruments, SAP, Lam Research, and Xilinx and the insights they provide on the data center. I also cover Snap’s earnings report and Netflix. I’ll cover Intel’s report on the forum tomorrow evening.
Main Takeaways:
- Data center is coming in strong as we forecasted. There are many instances that confirm this below.
- Despite Snap’s breakout, I don’t see anything that invalidates what I’ve published about ads being weak post-covid. In fact, Snap saw significant drop off between Jan/Feb ad revenue and April. I detail this below.
- Pay attention to SAP’s guidance around software. I had mentioned that instead of guessing on the various software players that it may be stronger to go to the infrastructure level and SAP could be the beginning of a few reports in weakening software.
- I cover Netflix below. Roku will see solid user growth while revenue in Q2 for Roku could go either way.
Texas Instruments:
Per the earnings call, Texas Instruments believes there is a “significant chance for a recession” and is modeling their forward guidance on the 2008 recession. In summary, the 2008 recession snapped back in two quarters time.
TI plans to run factories in Q2 2020 and Q3 2020 in the same way the company ran in Q1 2020 with the expectation they will be sitting on inventory when the demand returns in an effort to maximize optionality for customers who may not be able to forecast at this time.
Q1 revenue was $3.3 billion, down 7% from a year ago, with EPS of $1.24 per share. Texas Instruments guided for Q2 revenue in the range of $2.61 billion to $3.19 billion and earnings per share to be in the range of $0.64 to $1.04.
Although the company did not provide much insight into how Covid-19 affected various revenue segments, TI did confirm that “enterprise systems increased double digits based on strong data center demand.” The company also stated that Industrial and PCs increased while Automotive and Mobile decreased. Communications equipment declined 50% year-over-year but there was an increase quarter-over-quarter.
SAP:
SAP missed on revenue by about $10 million with Q1 revenue at 6.52 billion Euro. The company stated that cloud revenue is expected to continue with rapid growth in 2020 backed by a 25% expansion in the current cloud backlog.
Regarding Covid-19, the company stated that a “significant amount” of new business is being postponed and with software licenses revenue most impacted and falling 31% year-over-year. As of now, the company is guiding for revenue in 2020 to be in the range of 27.8 to 28.5 billion Euros down from 29.2 billion to 29.7 billion Euros.
JP Morgan came out with downgrades to software in a similar category as SAP this week.
Netflix:
Netflix added 15.7 million new subscribers compared to expected 8.2 million. The company reported mixed results, however, with EPS of $1.57 and $5.77 billion in revenue compared to expected EPS of $1.65 and sales of $5.76 billion. Earnings rose 107% and sales rose 28%. Netflix is guiding for new subscribers of 7.5 million compared to estimates of 4.1 million. The second half of the year is expected to be light on subscriber growth.
Some of Netflix’s strength is the company’s arsenal of content, which interesting enough, the debt load to create this content is what has fueled criticism of Netflix for the past few years. Free cash flow will improve from negative $2.5 billion to negative $1 billion.
I’ve covered Netflix’s additional strengths in previous editorials.
Snap:
Snap is up 35% on strong Q1 subscriber growth and a revenue beat. The company reported $462 million in revenue compared to analyst estimates of $428.8 million. Average revenue per user was at $2.02 versus $1.68 per user in the year-ago quarter. Daily active users are up 11 million users to 229 million total. In the past, Snap reported relatively flat DAU growth so the 11 million stands out despite being quite low compared to other social sites from Covid-19 usage. For comparison purposes, Pinterest is expected to add 30 million users from 335 at end of Q4 to 365 million users in Q1.
In the earnings call, management discussed the lower levels of ad demand in more detail. Revenue growth was very strong in January and February at 58% year-over-year before falling to 25% year-over-year in March – essentially slashing revenue in half.
In April, the decline continued at 3-4% per week to 15% year-over-year growth through April 19th and 11% year-over-year growth in the current week. This means revenue growth was slashed by 80%.
If the decline continues, this will put Snap at negative YoY revenue by May.
“Like everyone, we’re hearing from advertisers that the global outbreak has dramatically shifted the way that they’re thinking about marketing. Some have paused while they’re rethinking their messaging and others are cutting funding to save jobs.” -Jeremi Gorman, Co-founder and Chief Business Officer, Snap
Meanwhile, Twitter guided for negative revenue in March so it makes sense Snap would join Twitter on this trajectory.
Despite the weak forecast for Snap based on April growth, the stock surged 35%. Knox will be updating the forum on the chart and status of the short position. We may have been early on this one but I don’t see anything in the earnings report that invalidates the thesis.
Lam Research
Previously, Lam withdrew fiscal Q3 guidance in March stating it may not reach previously announced targets. Some of this was due to factories in Malaysia being shut due to government directives to shut businesses. Lam missed slightly on revenue at $2.5 billion compared to $2.58 billion expected from the December quarter. EPS of $3.98 was in-line with the revised consensus. The company has $5.6 billion in cash after drawing $1.25 billion from its revolving credit facility.
Most importantly, Lam Research confirmed that cloud and enterprise-demand remains strong while consumer markets are weak.
“The need for equipment and capacity to support work from home initiatives is causing cloud service providers to increase CapEx, creating the potential for a surge in server demand. Third-party estimates suggest that cloud capacity would need to increase 10-fold to service the peak workloads seen as shelter-in-place rules went into effect. Although these heightened workloads are likely a short-term phenomenon, this event will underscore the need for companies to invest more in infrastructure and business continuity capabilities as the daily economy and our dependence on technology continues to expand over time.” -Tim Archer, CEO
The company is exiting March with record backlog as the demand environment is strong yet the supply is constrained.
“And we haven’t seen those plans change and that demand remains kind of at the same level it was in January. And which means that we have a full order book, and we’re – really, our challenge is how to get these tools to customers. And I would say 100% of my conversation with customers right now are about how to get the tools they need to them. And I think that will continue for some period of time. And as Doug said, we will reassess after that period to see how demand is being affected.” -Tim Archer, CEO
Lam is forecasting for June revenues in fiscal Q4 to be higher than March with current operational performance. With that said, Lam is not providing exact financial guidance due to covid uncertainties.
Xilinx
Xilinx beat earnings but issued soft guidance. Revenue came in at $833 million and EPS of $0.94 cents compared to expectations of $827 million and $0.92 cents EPS. Revenue growth was 12% year-over-year and EPS growth of 8%.
Xilinx guided for revenue of $660 million to $720 million in the current quarter, down 19% year-over-year and down 9% QoQ. This is due to weakening demand for communications products and “macro-related weakness.” Xilinx did note there was strong overall growth in the data center. The company is guiding for full year revenue of $3.21 billion to $3.28 billion compared to previous full-year sales of $3.4 billion.
Xilinx is seeing issues with demand. We should know more with Intel’s report if this is a trend across semis or unique to Xilinx. Areas of weakness for Xilinx include Automotive, Broadcast and Consumer. Areas of strength included data center and wired/wireless group.
“The Data Center Group performed as expected with strong sequential growth primarily due to contributions from compute acceleration, driven by a mix of both cloud and high performance compute customers. We saw notable strengths from a hyperscaler deployment of a FPGA-based SmartNIC and our DCG opportunity pipeline continues to grow at double digits, particularly in video, HPC, database and fintech applications.” -Victor Peng, CEO