Weekend Update #101
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.
Markets remained relatively flat as earnings season plowed ahead with retail-oriented companies reporting this week. The S&P 500 shed 69 basis points, closing at 3,965; the value-focused Dow gained 59 basis points, closing at 33,745, and the tech-heavy NASDAQ eeked out a positive one basis point, closing at 11,146.
Tyson Foods missed Q4 EPS estimates but beat on revenue as consumer demand remained strong across their various protein units despite high inflation. Walmart beat Q3 EPS and revenue estimates on a 9% increase in sales despite lower volumes, while Home Depot also beat on both EPS and revenue as customers opted for home renovation in lieu of purchasing new homes amidst near-record high mortgage rates. Target saw a 50% decline in profit and reduced their Q4 forecast, leading to a 13% fall in share price. Meanwhile, Nvidia beat Q3 revenue estimates thanks to its data center and gaming units.
On the economics front, earlier in the week investors felt compelled to bid up the market following a lower-than-expected PPI reading of 0.2% month-over-month and 8.0% year-over-year, but were immediately warded off by a 1.3% increase in US retail sales in October, prompting fears of further Fed rate hikes. To wit, Fed Speak during the week was primarily hawkish, with various Federal Reserve governors signaled that said rate hikes were far from over. Elsewhere in markets, the FTX fiasco continued, prompting a spread of the crypto contagion. Meanwhile, the new FTX chief, John Ray, who oversaw the Enron proceedings and is now handling the FTX bankruptcy, said “never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.” You’ll find this and more in this week’s Blue Room Weekend Update.
Thank you Blue Room Leader OMAR GUZMAN.
Vertex Pharmaceuticals at Jefferies London Healthcare Conference
November 16, 2022
Participants
Stuart Arbuckle — Executive VP and Chief Operating Officer
Michael Yee — Jefferies
Michael Yee — Jefferies
Good morning, everyone. Well, thank you for joining us on day two of the 2022 London Global Healthcare Conference here at Jefferies. I'm Michael Yee, Managing Director and Biotechnology Analyst. I'm really happy to have up here with me, Stuart Arbuckle, Executive Vice President and Chief Operating Officer of Vertex. Obviously, Vertex has a ton of stuff going on, both commercially and in the pipeline. I know Stu, you want to give a brief overview and some quick highlights, and then we'll go into some of the present topics and issues, and we'll have a good discussion.
Stuart Arbuckle — Executive VP and Chief Operating Officer
All right. Thank you, Mike, Thank you to you. Thanks to Jefferies for the invitation to be here. Great to see so many people in the room, and good morning/good afternoon to those on the webcast. First thing I would like to draw your attention to our safe harbor statement. I'll obviously be making forward-looking statements. There are inherent risks and uncertainties. Full details you can find in our SEC filings.
So I'm really pleased to be here today Mike. This is a really, really important time for our Company. We see ourselves as being, what we like to describe as a really strategic inflection point for our Company. We believe we have a unique and differentiated strategy, and that strategy is kind of playing out before our very eyes. And I just wanted to spend a couple of minutes, talking about that and what we see are some of the highlights, and then we can go wherever you want to go, Mike.
Robert E. Landry - Exec. VP, Finance and CFO at Regeneron
I will. Akash, thanks for the invite. So, let me open up five minutes. In terms of, I'd like to talk about what happened in the third quarter. We just had our earnings on November 3rd. So we are fresh off of that. We have a lot of data, I feel like there's been a lot of tailwinds at our back, certainly through 2022 and hopefully, we can get to some of those with Akash.
So third quarter, we had 11% top-line growth and that's excluding COVID, as you know we have a pretty big comparison issue with regards to REGEN-COV and all the pre-sales that Roche had coming off of 2021, but even with that, we're very pleased with the growth levels that we had.
In September, early September we came out and I'm sure, we'll get into some detail with regards to our 8mg data, which we were super pleased with. People were talking about 30% to 40% kind of being table stakes, if you got to 40% in terms of the number of patients, you can over a 40-week -- 48-week trial you can keep at 16 weeks, 40% would be great, we cashed-in at 77% for wet AMD and 89% for DME. Just to tell you that is way beyond what the company thought we're going to do and we're very, very pleased with how that turned out.
Question & Answer Session
On the software business, there was a shift in the guidance for 2022. The macro is quite dynamic. Geoff, can you talk about what you’re seeing with customers and for this year?
Geoff Porges — Chief Financial Officer
They have a very broad customer base
It’s relatively concentrated
The 80/20 rule applies
80% of Schrödinger’s revenue comes from 20% of the customers
Overall, they have 2,400 customers globally
There’s been a shift in the marketplace
There aren’t as many emerging biotechs spending on software for new medicines
Every day, there are new biotechs shutting down discovery to focus on existing programs
Schrödinger has seen single digit numbers of customers who have shut down or backed out of using their software platform
But they’re not seeing growth from new companies — That’s weighing on the Q4 revenue outlook
They also highlighted multi-year deals Schrödinger recorded revenue from
Large customers lock in their software usage for 2-3 years
Schrödinger records that revenue mainly in the first period the contract is signed
That contributed a lot to the back half of 2021, so it’s a headwind now
But the underlying growth with large customers is still there
Analyst Takeaways - BLUE ROOM FACING ONLY
Sam’s Club growth was faster than total Walmart U.S. (price pressured customers may be seeking bulk value).
Sam’s club membership hit an all time high over the quarter.
Internationally, consumers are slowing expenses - inflation has been much higher abroad.
“I think this inflationary environment is going to last for a while. So people are going to be value conscious, which plays to our strengths”
- John Furner, Walmart U.S. President and CEO (last quarter)
Continued markdowns - related to WMT’s last earnings call where they explained that markdowns would take some time.
Consolidated operating expenses increased 144 basis points.
Due to charges of $3.3 billion related to an opioid legal settlement.
Negative news but hopefully a one-off impact (adj. earnings surprised to positive)
Bob Chapek — Chief Executive Officer and Director
Thank you, Alexia, and good afternoon, everyone. Fiscal 2022 was a strong year for our company as we continued our journey of telling incredible Disney stories, utilizing groundbreaking technology in order to further develop our brands and franchises while customizing and personalizing experiences to make magical memories that last for lifetime.
Those efforts resulted in truly phenomenal storytelling. Record annual results at our Parks, Experiences and Products segment, an outstanding growth at our direct-to-consumer services, which added nearly 57 million subscriptions this year to reach a total of more than 235 million. We are particularly pleased with growth in the fourth-quarter which saw the addition of 14.6 million subscriptions across our suite of services, including 12 million Disney+ subscriptions, over 9 million of which were core Disney+.
It has taken just three short years for Disney+ to transform from a nascent business to an industry-leader. That transformation is the direct result of the strategic decision we made at launch to heavily invest in our direct-to-consumer offering, a decision made knowing that achieving rapid growth would result in short-term losses.
Building a streaming powerhouse has required significant investment and now with the scale, incredible content pipeline and global reach, Disney+ is well situated to leverage our position for long-term profitability and success. Our financial results this quarter represent a turning point as we reached peak DTC operating losses which we expect to decline going-forward.
OVERVIEW
Business activity edged slightly higher in New York State, according to firms responding to the November 2022 Empire State Manufacturing Survey.
Headline general business conditions index climbed fourteen points to 4.5
New orders decreased slightly
Shipments expanded mostly
Delivery times were little changed, and inventories grew significantly
Labor market indicators pointed to a solid increase in employment and a longer average workweek.
Input prices increased about the same as last month, while selling price increases picked up.
Looking ahead, firms expect business conditions to worsen over the next six months.
This week, OPEC and the IEA released their widely read monthly reports in which they laid out their expectations for the global balance of oil in the coming months and years. Traditionally, while the reports may diverge slightly on their respective forecasts, they usually paint similar pictures about the current state of the oil market. This was the case this week, as the underlying theme of both reports was explicit: uncertainty.
On December 5, the European Union will ban the import of Russian crude and prohibit EU companies from financing or insuring shipments of Russian oil. On the same day, the price cap initiated by the leadership of the Group of Seven advanced democracies and Australia will take effect. Both of these events will have a significant impact on the Russian export of crude oil, which could greatly tighten the already strained balance of global supply and demand.
Owen Lau — Oppenheimer
So maybe to start off with our conversation, Alesia, could you please talk about what Coinbase is today? And what Coinbase will look like over the next five years? Again like we just talked about, Coinbase is widely accepted, or perceived to be, a crypto exchange, but if you can elaborate a little bit further, that would be great.
Alesia Haas — Chief Financial Officer
So I want to start that I do not have a crystal ball, and crypto, as we all have seen over the last couple of weeks, moves quickly. So let me tell you our ambition and where we're going. So we're widely perceived to be an exchange. But at the end of the day we're actually a full stack crypto company and building a platform with a suite of services and products to serve 3 distinct customer groups: retail customers, institutions and developers. So we're building platforms that will enable a retail customer, for example, to use us as our primary financial account for crypto.
We enable them to buy, to sell, to stake, to earn crypto, to lever their crypto and receive a U.S. dollar loan using crypto as collateral. Increasingly, we're letting them explore the world of Web3 various Dapps via our wallet product. We're thinking over time, the goal is to be the key platform that retail customers use for all of their crypto needs.
Similarly, for institutions, we offer a range of investment products to enable sophisticated and also everyday institutional traders to buy, sell crypto, to buy, sell derivatives products in the future. We're actively working on building out a derivatives offering. We have an exchange today. But we hope once we receive regulatory approval, we can offer direct derivative products to our customers in the U.S., fully regulated by the CFTC. We're also building out a suite of financing products, data, research, et cetera. So being a full-service broker or prime broker to our institutions. Then the most nascent of our product groups, but one that we think is critical for that 5-year vision and I think increasingly will be part of the story in five years is our developer tool products.
Analyst Takeaways:
Revenue beat expectations slightly with Gaming being the primary surprise versus BLUE ROOM expectations (see pages 4-5 for full breakdown of expectations):
Actual Gaming segment revenue was $1,574 million versus $1,342 million estimated in our model.
Slight sales misses throughout the four other sales segments offset this difference.
Other than this, there were no surprises to third quarter topline sales.
Where Nvidia struggled this quarter was within the gross profit line item, underwhelming BLUE ROOM and market expectations.
Cost of revenues came in about 800 bps higher than expected. This gap was a result of the $702m inventory charge related to accounting for unsellable A100 systems due to the lower D.C. sales outlook in China. Our model made the assumption that these A100 systems would be repurposed to service demand in other geographies.
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