Weekend Update #128
Welcome to Blue Room's Weekend Update. Each week, we're sharing what companies we're researching and the what, the who and the how that we think makes the companies interesting and unique. This roundup is brought to you weekly by a group of interns, creative minds, artists and investors who believe that through best in class investing along with the democratization of financial education we can do great things together. Enjoy, Explore and Share.
Despite the ongoing stalemate between Democrats and Republicans in the effort to raise the U.S. debt ceiling, mega cap tech stocks fueled a mid-week recovery in the S&P 500 as Nvidia beat revenue expectations by the most in 5 years and forecast sales 53% above consensus expectations for the upcoming quarter. On Thursday, NVDA shares rose 24.4% — for the 3rd biggest single-day market cap gain in history — in a sign that, even with the recent stock market excitement around large language models, the impact of an AI revolution may be coming faster and bigger than most expected.
In economic news for the week, the revised Q1 2023 GDP reading surpassed expectations at 1.3% QoQ. Showing similar strength, New Home Sales continued their rebound to a one-year high and surpassed expectations in April. The May S&P Global Services PMI data also showed that business activity reached its highest level since April 2022, however, weakness did show in the Manufacturing PMI reading. The broad trend of better-than-expected economic strength continues, but with demand remaining resilient, upside risks to inflation still remain. On Friday, both Personal Spending and the PCE Deflator, the Fed’s preferred inflation gauge, showed reacceleration in April and were higher than consensus estimates. Similarly, the University of Michigan Consumer Sentiment reading showed long-run inflation expectations increasing to their highest levels since 2011. Despite economic readings contrary to what the Fed would like to see to bring down inflation, U.S. equity markets continued to show resilience.
Other significant events included Disk Network’s rumored plan to sell wireless phone plans through Amazon, weak guidance from Snowflake suggesting a pullback in cloud software spending, and a Costco earnings miss as merchandise costs continued to climb during the quarter. In a warning for the deadline on raising the debt ceiling, the U.S. Treasury’s cash balance fell to $49.5 billion on Wednesday — a low since December 2021
Friday’s Close (Weekly Performance)
S&P 500 4,205.45 (+0.32%)
Nasdaq 12,975.69 (+2.51%)
Dow Jones 33,093.34 (-1.00%)
Thank you Blue Room Analyst JARED FENLEY
Summary
Zoom beat their top-line and profitability guidance in Q1 with non-GAAP gross margin of 80.5% (exceeded their long-term target).
Zoom closed the acquisition of Workvivo, a modern employee communication and engagement platform, which they believe will generate a lot of data and can help them more in the long-run.
Zoom unveiled Zoom IQ's new set of in-beta features, leveraging generative AI to support chat and email compose, and meeting summary. They are also building new features to summarize long chat threads, catch up tardy meeting participants on what they missed, and brainstorm in Whiteboard.
Zoom’s partnership with Anthropic will allow Anthropic's AI assistant, Claude, to be integrated across Zoom's entire platform. They plan to begin by layering Claude into their contact center portfolio, which includes Zoom Contact Center, Zoom Virtual Agent, and, now in beta, Zoom Workforce Engagement Management.
Zoom has developed their internal AI team a few years back and also, has embraced some open-source models available, like Anthropic’s model.
As per monetization of AI, Zoom gives an example of Zoom IQ for Sales product and they think that there are a lot more opportunities as AI empowers their product features.
Zoom is hiring additional contact center specialists who will act as an overlay team and support the account executives.
Zoom has seen a very positive reaction to the price increase, with better-than-expected retention rates in response.
Zoom expects both online and direct revenue to start reaccelerating as they get to the back half of this year and that the net dollar expansion rate is going to trail behind that.
Zoom’s long-term target operating margin is much lower than where they are operating today. If the opportunity arises to enhance topline revenue, they will trade
YEAR FORECAST
Sees revenue $844 million to $853 million, saw $836 million to $853 million, estimate $849.5 million (Bloomberg Consensus)
Sees Adjusted EBITDA $227 million to $231 million, saw $220 million to $228 million, estimate $227.7 million
Sees Adjusted EPS $4.00 to $4.10, saw $3.90 to $4.05, estimate $4.02
FIRST QUARTER RESULTS
Revenue: $215.3 million, estimate $211.4 million
E-Commerce revenue: $119.8 million
Enterprise revenue: $95.5 million
Revenue per download: $4.41
Paid downloads: 42.7 million
Adjusted EPS: $1.29, estimate 95c
Images: 615.0 million
Video clips: 47.0 million
Product development expense: $15.4 million
Analyst Takeaways:
Summary of the current quarter:
Nvidia reported revenue for the first quarter of fiscal year 2024 of $7.192 billion (+18.8% sequentially, and up +14.2% year-on-year), beating both BLUE ROOM estimates for $6.542 billion and consensus (Bloomberg) estimates for $6.505 billion. Revenue growth was led by a much stronger sequential quarter from the Data Center segment (record high revenue), complemented by sequential rebounds in the Gaming (+22.3% sequentially) and Professional Visualization (+30.5% sequentially) segments. Both segments were down on a year-over-year basis, as the company entered the final phase of channel stabilization. Automotive segment revenue also outperformed, increasing to a record-high $296 million (+114.5% year-on-year and 0.70% sequentially).
Gross margins came in at 64.6%, on a GAAP basis, and 66.8% on a non-GAAP basis. That represented a sequential increase of 128 bps largely catalyzed by higher mix of Data Center revenue combined with the inventory recovery in the Gaming and Professional Visualization segments.
Operating profit margin of 29.8% (GAAP) increased 898 bps sequentially and 722 bps year-on year as the company anniversaries the failed Arm Holdings acquisition, for which Nvidia took a $1.35 billion restructuring charge. Sequentially, R&D expenses fell by $76 million. These factors, in addition to total revenue increasing by $1.14 billion, led to the expansion we saw in the GAAP operating profit for the quarter. Non-GAAP operating income expanded to 42.4%, from 36.8% in 4Q23, but decreased from 47.7% in 1Q23 attributable to the add back of the failed acquisition as noted earlier.
GAAP net income was $2.043 billion (+22.4% year-on-year and +71.4% sequentially) for the quarter, ahead of the BLUE ROOM estimates of $1.489 billion and consensus (Bloomberg) estimates of $1.511 billion. Non-GAAP net income came in flat year-over-year at $2.713 billion, above BLUE ROOM estimates of $2.157 billion and consensus estimates of $2.277 billion.
GAAP and non-GAAP earnings per share was $0.83 and $1.09, respectively. BLUE ROOM estimates were for $0.60 (GAAP) and $0.87 (non-GAA) while consensus forecasted EPS of $0.64 (GAAP) and $0.92 (non-GAAP).
Summary
Zuora beat consensus on all key metrics, showing its resiliency to maintain growth on the topline while managing its operating expenses. The company also raised its full year revenue guidance range by $3 million, with the low end coming in higher than Bloomberg consensus estimates. Zuora also estimates it can achieve a 7% adj. operating margin which represents a 100 bps increase than their initial guidance on the previous earnings call.
Zuora customers’ behavior and demand remained stable in the Q1, similar to the Q4. Buyers still remain cautious, however, and Zuora has adjusted its focus to execute on smaller and faster new logo acquisitions in order to accelerate customer onboarding. This strategy resulted in closing more new logos in the first quarter than in any quarter in fiscal 2023. Zuora also closed more deals year-over-year for its Revenue product, while increasing the average selling price year-over-year of cross-sell deals in its existing Zuora Revenue customer base.
Furthermore, the company achieved its lowest churn rate ever as a percentage of entering annual recurring revenue (ARR) for the second quarter in a row. At the same time, 60% of customers expanded their footprint with Zuora during the quarter.
Despite some macro and foreign exchange headwinds, Zuora expects acceleration in the latter half of the year. The company also announced it will be unveiling new product developments at its Subscribe Live event on June 21st, including expanding Zephr to other verticals beyond media publishing, introducing new connectors with major CRM and ERP players, and showcasing a power admin tool to streamline billing and revenue management across environments. These initiatives aim
Peloton Interactive announced a brand relaunch on Tuesday, May 23rd to better align marketing materials and brand identity with the full range of exercises and equipment lines that the company offers — taking a step away from the cycling-first image that many associate the Peloton brand with. This is a step in Peloton’s broader strategy to drive growth through the subscription revenue segment that has recently eclipsed physical hardware sales, has much more attractive margins, and could be a recurring source of revenue from each user for many years.
As part of the subscription-first shift in mentality, Peloton announced 3 new tiers of subscriptions for its Peloton App: a free tier, App One at $12.99 per month, and App+ at $24 per month. Barry McCarthy describes in the 2023 J.P. Morgan TMT Conference below that in the past quarter, 38% of Peloton users didn’t use any Peloton hardware along with their workouts and 62% of users on Peloton equipment were not using a Bike or Bike+. To better align with the use-cases of users, expand the total addressable market, and drive more demand in Peloton subscription services, the changes McCarthy is implementing in the business he hopes can propel the company to being a sustainable and profitable fitness business in the near term. Peloton also reaffirmed its guidance to achieve free cash flow breakeven in the coming quarter.
Along with the digital app changes, Peloton’s Fitness-as-a-Service and Certified Pre-Owned business segments will provide a tailwind for growth, but the company will need to navigate any declines in consumer spending as well as the financial impact of the recent Bike seat post recall at the same time that the company is attempting to propel itself to profitability.
Driven by excitement over tirzepatide’s potential in obesity as well as clinical data catalysts from donanemab in Azheimer’s disease, Eli Lilly’s President of Lilly Immunology and Lilly USA and Chief Customer Officer, Patrik Jonsson, discusses how the company will continue to build on recent successes for years to come at the 2023 Bank of America Healthcare conference.
Within the immunology franchise, Lilly is planning to have a total of 11 indications in the segment alone by 2025, demonstrating the level of focus the company is putting on expanding into the space. Mirikizumab and lebrikizumab will be near-term drivers of growth in ulcerative colitis, Crohn’s disease, and atopic dermatitis, with a focus on strong U.S. launches, international expansion, pipeline candidate development, and potential M&A opportunities all aiding expansion over the long-term.
Upcoming 2024 immunology catalysts include:
Lebrikizumab data in Dupixent-experienced patients
Peresolimab PD-1 Phase 2b data in rheumatoid arthritis
B- and T-lymphocyte attenuator (BTLA) checkpoint agonist data
Lebrikizumab atopic dermatitis skin of color data
Sterling Auty
We're all set. All right. Thanks, everyone, for joining us. My name is Sterling Auty. I'm a software analyst here at SVB MoffettNathanson. Very happy to have with us, Scott Belsky, who is the Chief Strategy Officer, Head of Design and Emerging Products. And Scott is going to be making his way up to the podium. As he does that, he actually brought a video to share with us to give just some highlights. So why don't we go ahead...
Love it. Scott, thanks for joining us. Really appreciate it.
Scott Belsky — Chief Strategy Officer
Yes, of course, because I was like trying to like show, not to tell, but there was a quick like myriad of assets representing some of the separate doing across the company.
Sterling Auty
Well, it's great because a number of the companies that cover its infrastructure software, you can't do anything like that to show a video. So it's great to see some of the products in action.
But maybe for those that are in the audience and joining us live on the webcast, you have a new role over the last several months. Maybe just give people a little bit about who you are, your new role within the company and where you're focused.
Scott Belsky
Sure. So I came into Adobe through the acquisition of Behance back in 2012. Behance is now a network of around 40 million creatives around the world showcasing their work on their portfolios, came in and was—I was at Adobe for about three years in my first [role] and helping develop some of the services behind Creative Cloud, Creative Cloud libraries, bringing Creative Cloud to mobile, that sort of thing. [I] left, because it had been like a 10-year journey. I was an entrepreneur through my three years at Adobe, and then had the opportunity to come back in the Chief Product Officer role, overseeing design engineering and product for the Creative Cloud business. And that was about five and a half years ago.
Following the December ECLIPSE results that missed investors’ expectations, Guardant Health has started 2023 showing strength in its Precision Oncology segment — driven by strong product adoption, positive commercial payer reimbursement decisions, a rebound in biopharma activity, and a few ways to finish the year with improving in ASPs across the portfolio.
Guardant Health is implementing a major platform change with their Smart Liquid Biopsy platform this year that could enable a 5 to 10 times increase in efficiency in data collection for physicians as well as build out an ecosystem that could synergistically promote use of a wider range of Guardant Health products.
On the colorectal cancer screening side with the Shield liquid biopsy test, Guardant has continued to collect data throughout 2023 from real-world use of the test as well as feedback key opinion leaders. So far, the high adherence rates and in-line performance seem to be enough to convince physicians that Shield will be an important factor in bringing up CRC screening rates. In the Bank of America Conference below, Co-CEO AmirAli Talasaz also explains the rationale behind why the company believes an FDA panel discussion will not be necessary to approve Shield as well as why guideline groups will be receptive to the high adherence rate.
From a financial standpoint, the Precision Oncology business is only six to nine months away from beginning to generate positive free cash flow, and management is focused on minimizing cash burn throughout the whole business at the same time. With the latest $250 million common stock offering announced on May 22, 2023, Guardant may now have enough room to incrementally step up investment around its Shield product through its expected USPSTF guideline inclusion in 2026 and fund the business in its entirety through profitability shortly thereafter.
Analyst — JPMorgan
I'm delighted to have here with me, Co-CEO and Co-Founder, Roy Mann. We have Eliran Glazer, CFO. We also have a surprise visitor, Daniel Lereya, who is the V.P. of Products and R&D as well. All of you, gentlemen, thanks for coming to the conference and welcome.
Daniel Lereya — VP of R&D and Product
Thank you.
Eliran Glazer — Chief Financial Officer
Thank you for having us.
Analyst — JPMorgan
Yes, maybe, you can start with, you know, a quick intro about yourself and whoever chooses maybe talk a little bit about Monday as well.
Roy Mann — Co-Founder & Co-Chief Executive Officer
Okay, so I'm Roy Mann, Co-Founder and Co-CEO of Monday. And my background is in development R&D. I've been a developer since a very early age. And I love building products. And I love seeing people use them. And Monday, for me, is basically something I really love, because it ties all the things I love to do like design, building products, developing things people actually benefit in their lives and actually love using it. And it's still super exciting.
Eliran Glazer — Chief Financial Officer
Hi. I'm Eliran. I'm the CFO of Monday. I've been around in Monday for more than two years. And before that, I spent most of my time outside of Israel, working for companies in the U.S. and in London. Really happy to be part of Monday. I'm very happy to be here.
Consumer sentiment slid 7% to 59.2 amid worries about the path of the economy, erasing nearly half of the gains achieved after the all-time historic low from last June. This decline mirrors the 2011 debt ceiling crisis, during which sentiment also plunged. This month, sentiment fell severely for consumers in the West and those with middle incomes.
The year-ahead economic outlook plummeted 17% from last month. Long-run expectations plunged by 13% as well, indicating that consumers are concerned that any recession to come may cause lasting pain.
That said, consumer views over their personal finances are little changed from April, with stable income expectations supporting consumer spending for the time being.
Philip Cusick — JPMorgan
Welcome to the 51st Annual J.P. Morgan TMC Conference. I'm Phil Cusick, I follow the communications and media space. I'm pleased to welcome Josh D'Amaro, Chairman of Disney Parks, Experiences and Products since 2021. And coming up on your 25th anniversary of Disney. Congratulations.
Josh D'Amaro — Chairman of Disney Parks, Experiences and and Products
Yes. We started Disneyland 25 years ago.
Philip Cusick — JPMorgan
All right. Let's start with the big picture, and what you're seeing in demand at domestic parks. Just talk a little bit about what you do overall because it's not just parks. Just talk about what's going on.
Josh D'Amaro — Chairman of Disney Parks, Experiences and and Products
Disney Parks Experiences and Products, so I oversee all the theme parks around the world, I oversee our Experiences. So you can think about it as Ventures by Disney or National Geographic Expeditions, Disney Vacation Club, the Cruise lines. I oversee a part of the business called Consumer Products Games and Publishing, which I think you know quite a bit about. And it's a pretty big -- sizable piece of the Disney Company.
Domestic, you want to hear a little bit about our domestic business. So first of all, the business has been performing exceptionally well. You've seen that in our earnings. I'll start off by saying, I have an incredibly strong team, incredibly strong management team in our Domestic Parks and Experiences and they've navigated through arguably some of the most difficult times that we've ever had at The Walt Disney Company, certainly within DPEP.
Analyst Takeaways:
Best Buy reported earnings that beat expectations by $0.02. Revenue came in lighter than expected, but against our model it appears that the company had slightly better gross margin leverage than anticipated (actual gross profit: $2.150b vs expected gross profit: $2.082b).
Best Buy also maintains its full year outlook:
With competitors guiding more cautiously into the end of this year, Best Buy's ability to maintain their prior outlook was a welcomed surprise, implying that the company had set the expectation exceptionally low last quarter. This allows room for sales upside if the macro environment recovers.
Comparable sales forecasts for the second quarter are slightly worse than BLUE ROOM expectations:
BLUE ROOM: -4.4%
Guidance: -7.0%
Consensus: -5.0%
However, due to Best Buy maintaining the mid-point of their guidance range, a pickup in comparable sales in the back half of CY2023 is implied.
Demand for CE is expected to trough in CY2023, meaning Best Buy sales will also bottom. The strength of the upgrade cycle will depend on the macro going into CY2024, but the long run average growth in CE ASP is roughly 2.0%, with Best Buy commanding slightly higher due to the mix of premium. Longer run growth will be modeled at a minimum of 2.0% plus some margin.
Long-term, management is focused on retooling the business model to have a smaller store square footage footprint on average, with some stores specializing in fulfillment. On labor, the company shed 25,000 employees during the pandemic, and is working on upskilling in-store sales associates employees in order to tackle multiple functions, while scaling back the number of specialized employees.
Analyst Takeaways:
Shipping and freight markets improved dramatically on a year-over-year basis, which continued to fall and then in this third quarter.
While third quarter traffic remained good, increasing 4.8% worldwide and 3.5% in the U.S. during the quarter, the company’s average daily transaction or ticket was down 4.2% worldwide and down 3.5% in the U.S., impacted in large part from weakness in bigger ticket non-foods discretionary items.
Renewal rates were 92.6% domestically and 90.5% worldwide. These figures continue to make all-time highs similar to those that were achieved in the second quarter. Costco continues to drive value for their members and may lend in part to their membership fee remaining flat for six years now.
Costco likely won’t raise membership fees until there’s a clear sign that inflation is abating and that they will not lose engagement . Remaining value oriented despite record churn rates.
Gas deflation impacted growth, but is a better sign for inflation in the long near-term.
In a moderate inflation environment, Costco expects to perform roughly 300 bps higher than the market overall. That is on a comparable sales basis, and based on the historical performance that they showed, pre-pandemic.
Of concern, CFO Richard Galanti mentioned that in times of recession, consumers show higher levels of “trade-down” activity. He noted that he is seeing similar trends now, which could be a red flag.
Following 4D Molecular Therapeutics’ 4D-150 phase 1/2 wet AMD data update on April 27, FDMT stock fell more than 19% for the day as investors were disappointed with efficacy in the lower dose cohorts. However, as explained in the 2023 Bank of America Healthcare Conference below, the data provided evidence of a dose response which is exactly the signal the company needed to take to the FDA to pursue additional clinical development.
There were no adverse event safety issues or inflammation in the eye observed with 4D-150, which are all positive signs for the tolerability of the injection. 4D will discuss initiating a phase 3 trial in wet AMD with the FDA in Q4 of this year as well as release phase 2 data from the 4D-150 PRISM trial in the first half of next year. Following positive signals in wet AMD, the company is also confident that the same candidate will be successful in diabetic macular edema (DME) in the phase 2 SPECTRA trial, from which the company is planning to release data in 2024.
Enrollment demand for wet AMD patients surpassed 4D Molecular’s internal expectations, showing the desire for alternative and better treatments among patients suffering from the disease, and the broad addressable market population for both wet AMD and DME could fuel a successful product launch within the ophthalmology franchise based on the R100 vector.
Other topics that CEO & Co-Founder David Kirn and President & COO Fred Kamal discuss at the BofA conference include 4D-175 in geographic atrophy and 4D-710 in cystic fibrosis.
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