Quick Thoughts: Earnings – What Have We Learned So Far?

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SEE LAST PAGE OF THIS REPORT Paul Sagawa / Tejas Raut Dessai

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February 10, 2020

Quick Thoughts: Earnings – What Have We Learned So Far?

  • Last week was busy for TMT investors, but it gets quieter from here. GOOGL missed top line but offered a peek at previously hidden businesses. DIS and QCOM beat handily, but spooked investors with Corona Virus risks. TMUS and ZEN beat and raised but the response was a bit muted.
  • GOOGL avoided a sell off by opening the curtain on the strong growth from YouTube and Google Enterprise – both showed great growth, with the cloud platform likely up 80%+. The sales miss looks largely related to very weak device sales (i.e. Pixel 4) and from the company’s stubborn refusal to give any forward guidance, leaving analysts to more or less guess.
  • DIS and QCOM both had killer Dec. quarter results but couldn’t talk away the risks from the Chinese Corona Virus contagion. DIS also faces brutal compares – no Endgame or Star Wars this year – and the deterioration of its linear TV franchises – ESPN subs were down 4.5% YoY. We think both are due for some downtime after big runs in 2019.
  • TMUS (and DISH) are spinning their wheels a bit while they wait for a ruling on the Sprint merger. Like TMUS management, we are bullish but a bit frustrated by the delays. Meanwhile, ZEN had 36% YoY growth in their beat and raise quarter, staying on trajectory. We think consensus is way too pessimistic. Finally, TWTR posted 21% YoY growth in “monetizable daily users”, surprising the street and sparking a jump in the stock despite a margin miss and tepid forward guidance. We think TWTR is a bit underappreciated and see further upside.
  • This week will see AYX and NVDA report. We expect upside from both. Analysts keep calling for AYX and other SaaS bellwethers to slow down, but the beats from NOW and ZEN suggest that those calls are seriously premature. It is also a big takeout candidate. NVDA should benefit from the datacenter spending called out by INTC and seen in the GOOGL, MSFT and AMZN reports.
  • Final takeaways: Corona virus looks like a serious problem for any company that depends on China for significant sales or for major parts of their supply chain. Caution for AAPL, QCOM, SWKS, QRVO, Samsung, DIS, BKNG, etc. – really any company involved in smartphone hardware, travel, or movies. In contrast, the cloud isn’t missing a beat – the cloud hosts (AMZN, MSFT, GOOGL, even IBM), SaaS leaders, etc. are delivering upside (and have relatively little Chinese exposure).

Alphabet could really help itself out by offering a bit more guidance (and by returning a bit more capital to shareholders – dividends anyone?). They missed the putative consensus sales expectations by almost 2% but had given the street very little context to model revenue for the quarter. When they miss, and they miss a little too often for our taste, it’s often for things that they claim to have anticipated but hadn’t bothered to tell us. This time it was continued weakness in the low priority 3rd party ads segment (which showed no growth at all) and from “Other” which once you unpack the strong enterprise results that they finally tipped,

meant poor sales from hardware (Pixel phones and other devices) and Google Play. Meanwhile, enterprise is growing 53%, with the Cloud Platform piece considerably faster than that (probably 80%+) and the whole thing running at better than $10B. YouTube posted 31% growth on a $15B run rate – sell side guesses pegged the business around there plus or minus $5 billion. Those reveals staved off disaster, as the stock rallied a bit after the market digested the report. We remain very bullish, but still frustrated.

Disney reported great 4Q numbers, with the Star Wars IX and Disney+ debuting in the quarter. Investors were impressed by the 27M subs for the streaming service after just 7 weeks of service, but the House of Mouse has considerable exposure to the Chinese economy – its two parks are closed and no one is going to the movies – so the response to the beat was hardly enthusiastic. We also note that despite strong ad sales at Disney Networks, ESPN subscriber declines accelerated to -4.5% YoY, a very bad sign for the most profitable part of the Disney portfolio.

Qualcomm also reported a strong quarter – the resolution of the royalty dispute with Apple certainly helped out there. It too will have to grapple with the near shut down of the Chinese consumer economy. Even if the stores were open – and many are not – a new smartphone that costs a month’s salary or more is a frivolous purchase when risks are so high. We also note that Xilinx poured cold water on expectations of a big 5G buying spree, given clear guidance that network deployment had slowed considerably. Corona Virus won’t help on that regard either – we note that the annual wireless confab Mobile World Congress in Barcelona next week is seeing big companies cancelling their events in recognition of the impact of the potential epidemic.

Exh 1: Analysis of Outcomes for Wireless Prisoner’s Dilemma – TMUS-S benefits

Exh 2: History of Quarterly Top Line Surprises for AYX, 1Q17 – 3Q19

T-Mobile is one of those carriers that are holding up 5G deployment – in their case it is because they are waiting for a ruling on the antitrust lawsuit that had been brought against its planned merger with Sprint by 13 state attorneys general. Management was very confident of a positive verdict, and given reports of DISH CEO Charlie Ergan’s testimony, we can see why. We think the carrier would pop on a positive announcement (Exhibit 1). Zendesk reported terrific numbers, in keeping with strong reports from the cloud world. Response was a bit muted for now, but there is a lot of runway left and we see many beats in the future against overly conservative expectations. Finally, Twitter reported user growth that actually surprised and pleased investors, sending the stock up double digits last week. We generally think that the information distribution platform is unique and far more powerful than what is credited.

Now on to this week. The TMT earnings season is largely over, with stragglers and odd fiscal calendars on the docket. Cisco is on Tuesday – we are non-committal, as the datacenter strength seen in Intel numbers may not really apply. We are more confident in Alteryx, which reports Thursday (Exhibit 2). Given sizeable beats by Service Now and Zendesk, we see no reason that Alteryx, which has a unique position in data analytics, will disappoint. Finally, Nvidia. The worst of the inventory glut is behind it and it will be all over by March, meaning forward guidance should be pretty confident. Moreover, datacenter spending looks very strong – note that pending Nvidia acquisition Mellanox had a monster quarter. Look for a beat and a big raise in guidance (Exhibit 3).

Exh 3: NVDA Historical and Consensus Top Line Growth Estimates – easy compares, strong cloud capex, and MLNX deal offers plenty of room to surprise

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