Weekend Update #98
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.
This week saw surprising resilience to benchmark performance overall, despite some of the biggest tech names being taken down post-earnings. The likes of Google, Meta, Amazon, and Apple each shared their quarterly performance this week; these are four of the top 20 names in the benchmark S&P 500 index.
On Tuesday Alphabet, Inc. reported mid-single digit revenue growth, but the biggest concern in the company’s report came from the YouTube ad revenue miss. Analysts expected a 3.0% increase in ad revenues, but the platform actually produced a -2.0% loss during the quarter. Shares of GOOGL slid 9.0% on the news.
Also on Tuesday, Microsoft Corporation reported better-than-expected sales and EPS for 1Q23, but still tumbled 7.0% after the company indicated that cloud revenue was lighter than they had hoped for. Guidance was also below analyst expectations with revenue coming in lower and margins slightly narrowing.
On Wednesday, Meta Platforms reported a third quarter earnings miss and offered weaker-than-anticipated forward guidance. Analysts expected the company to address costs and increase profitability, however contrary to those expectations, Meta will be increasing its capital expense as it builds out its Metaverse platform via reality labs. Shares of META fell over 24.0% in post-market trading on Wednesday afternoon.
Amazon and Apple both reported earnings Thursday afternoon, with Amazon reporting a topline miss with particular weakness in the AWS segment. Amazon’s fourth quarter revenue guidance was underwhelming, coming in at $144 billion, lower than Refinitiv estimates of $155 billion. Apple stock experienced better reactions to their quarter, closing out its best day since April of 2020. The company reported fiscal fourth quarter sales growth of 8.0%, Mac business growth of 25.0%, and EPS $1.29 which beat estimates of $1.27.
Despite poor quarterly reports from several mega-caps, markets still found a leg higher this week. The S&P 500 closed up +3.02% for the week, the Nasdaq composite edged higher by +2.24%, while the Dow Jones Industrial Average gained +4.38% on the week.
In other news, Elon Musk completed his purchase of Twitter and took some remarkable actions by replacing the CEO and bringing a sink into the headquarters on Wednesday before closing the deal.
Last week Liz Truss resigned from her position as U.K. Prime Minister after failing to control federal budgets and market turmoil. Truss only held office for 44 days, making her the shortest-term serving prime minister in British history.
Thank you Blue Room Analyst IAN CARTER
Earnings Summary
Amazon reported $127.1 billion in top-line revenue, a 15% year-over-year increase driven by strength in physical store and third-party seller services revenue. However, subscription and AWS revenues came in below expectations, with the latter generating only 27.5% in year-over-year growth, indicating a continuing trend of decelerating growth since Q4 of last year. Operating income has steadily decreased, shrinking from 3.2% in Q1’22 to 2.0% in Q3’22. Further, capex has outpaced operating cash flow for three consecutive quarters, resulting in negative free cash flow during that period. The company guided toward operating income of $0 to $4 billion in the fourth quarter, indicating it will be likely the negative FCF trend will continue.
Consumer sentiment confirmed the preliminary reading earlier this month at 59.9 — inching up just 1.3 index points from September. With sentiment sitting only 10 index points above the all-time low reached in June, the recent news of a slowdown in consumer spending in the third quarter comes as no surprise.
This month, buying conditions for durables surged 23% on the basis of easing prices and supply constraints. However, year-ahead expected business conditions worsened 19%. These divergent patterns reflect substantial uncertainty over inflation, policy responses, and developments worldwide, and consumer views are consistent with a recession ahead in the economy.
While lower-income consumers reported sizable gains in overall sentiment, consumers with considerable stock market and housing wealth exhibited notable declines in sentiment, weighed down by tumult in those markets. Given consumers’ ongoing unease over the economy, most notably this month among higher-income consumers, any continued weakening in incomes or wealth could lead to further pullbacks in spending that would reinforce other risks of recession.
BUSINESS DESCRIPTION ~ FROM PINTEREST
Our mission is to bring everyone the inspiration to create a life they love.
Pinterest is where 400 million people around the world go to get inspiration for their lives. They come to discover ideas for just about anything you can imagine: daily activities like cooking dinner or deciding what to wear, major commitments like remodeling a house or training for a marathon, ongoing passions like fly fishing or fashion and milestone events like planning a wedding or a dream vacation.
Most consumer internet companies are either tools (search, ecommerce) or media (newsfeeds, video, social networks). Pinterest is not a pure media channel; it is a mediarich utility.
REVENUE RECOGNITION
Pinterest recognized revenues for both brand and performance ads, with performance making up 67% of revenue for the year ended December 31, 2021. Performance revenue is billed to customers when an advertiser optimizes an ad campaign around “performance” objectives like click or conversion events. Brand revenue is billed when an advertiser optimizes an ad campaign around “brand” objectives like impressions or video views.
CFO Outlook Commentary:
We expect Q4 2022 total revenue to be in the range of $30-32.5 billion. Our guidance assumes foreign currency will be an approximately 7% headwind to year-over-year total revenue growth in Q4, based on current exchange rates.
To provide some context on the approach we are taking toward setting our 2023 budget, we are making significant changes across the board to operate more efficiently. We are holding some teams flat in terms of headcount, shrinking others, and investing headcount growth only in our highest priorities. As a result, we expect headcount at the end of 2023 will be approximately in-line with Q3 2022 levels.
We have increased scrutiny on all areas of operating expenses. However, these moves follow a substantial investment cycle so they will take time to play out in terms of our overall expense trajectory. Some steps, like the ongoing rationalization of our office footprint, will lead to incremental costs in the near term. This should set us up for future years, when we expect to return to higher rates of revenue growth.
We expect 2022 total expenses to be in the range of $85-87 billion, updated from our prior outlook of $85-88 billion. This includes an estimated $900 million in additional charges related to consolidating our office facilities footprint that we expect to record in Q4 2022. We anticipate our full-year 2023 total expenses will be in the range of $96-101 billion. This includes an estimated $2 billion in charges related to consolidating our office facilities footprint.
R&D PIPELINE
Cystic Fibrosis
Vertex is conducting two Phase 3 global, randomized, double-blind, active-controlled clinical trials evaluating Vertex’s new once-daily investigational triple combination of vanzacaftor/tezacaftor/deutivacaftor, formerly known as VX-121/tezacaftor/VX-561, in patients with CF 12 years of age and older. The SKYLINE 102 and SKYLINE 103 trials will compare the efficacy and safety of vanzacaftor/tezacaftor/deutivacaftor to TRIKAFTA. Enrollment in both trials is on track to be completed before the end of 2022.
In parallel to SKYLINE 102 and SKYLINE 103, Vertex has also initiated a study of vanzacaftor/tezacaftor/deutivacaftor in children with CF 6 to 11 years of age, which is ongoing.
In collaboration with Moderna, Vertex is developing a CFTR mRNA therapeutic to treat the underlying cause of CF by programming cells in the lungs to produce functional CFTR protein for the treatment of the approximately 5,000 people with CF who do not produce any CFTR protein. IND-enabling studies have been completed, and Vertex is on track to submit an IND for this program in Q4 2022.
Earnings Summary
Apple beat on key fronts, starting with topline revenue of $90.1 billion (vs $89.8 expected), Mac ($11.5 billion vs $9.8 expected) and Accessories ($9.7 billion vs $8.8 expected) and also beat on EPS $1.29 (vs $1.26 expected). iPhone sales of $42.6 billion were relatively in line with expectations, while Services of $19.2 billion came in below the $20.7 billion expected, with Apple citing digital advertising and App Store gaming as weaknesses. The company declined to provide Q1 revenue guidance, citing a challenging macroeconomic environment.
Preview Into Earnings
In last quarter’s earning results, Apple generated revenue of $83 billion which was better than expected, despite enduring supply constraints, strong foreign exchange headwinds, and the impact of their business in Russia. Apple saw June quarter records in both developed and emerging markets, with strong double-digit growth in Brazil, Indonesia and Vietnam, and a near doubling of revenue in India. They also saw great enthusiasm for their products and services, resulting in an all-time record for their installed base of active devices.
Additionally, Apple saw a June quarter record for both revenue and switchers to iPhone as it “remains the gold standard” for smartphones. Apple launched the MacBook Air and a 13-inch MacBook in June but experienced supply constraints but was encouraged by the strong response from customers. This was also the case with iPad.
Prepared Remarks
Harley Finkelstein — President
Merchants continue to succeed on Shopify and are using more of their tools
Shopify’s tools are a business’s central operating system
This is especially important today with rising interest rates and inflation
That’s a key reason why merchants choose Shopify — they make the important things easy and everything else possible1. Building Buyer Relationships:
Discovering and connecting with more buyers is critical to create long-term success
Shopify has a suite of products both online and offline
Shopify POS is quickly becoming the POS of choice for SMBs and larger retailers
The outsized pace of offline growth continued
Brought 8 new large merchants
Commercial teams are increasingly selling to larger retailers
Plus merchants accounted for 35% of all POS Pro sales, up from 13% a year ago
Showfields and Totoma implemented Shopify POS Pro in Q3
Over half of the adoption is being driven by new SMB retailers
Over 1/3 are from established offline retailers who are completely offline or only selling on POS
In late September, Shopify launched POS Go to meet consumers wherever they are and want to purchase
In just 3 weeks since launch, POS Go has seen strong adoption and performance out of the gate
Shopify is equipped for the influx of orders and volume of Black Friday and Cyber Monday
Today, brands have to be more sophisticated
GMV through native checkout integrations on Facebook, Instagram, and Google more than tripled from last year
Shopify is enabling buyer relationships through Shopify Audiences
Since launch in May, it’s significantly improving conversion rates, return on ad spend, and other metrics
Hiya, a children’s wellness brand, onboarded to Audiences and saw ROAS increase +172%, +158% increase in conversion rate, while seeing a 35% decline in cost per acquisition
Nathan James attributed over 500 new customers to their use of Shopify Audiences, saw a 200% increase in purchases, achieved 5.6x return on ad spend in the targeted campaign, over $100,000 in new revenue, and saw a 52% decline in cost per acquisition
Additionally, Shopify is excited to continue to deepen the partnership with Google
Launched Shopify Collabs in early-access mid-August to bring brands and creators together
Generated 50 million organic impressions across social channels in less than 2 months
Corporate Profile:
Caterpillar is the world’s leading manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives. We are a leader and proudly have the largest global presence in the industries we serve.
For more than 95 years, along with our customers, we’ve helped make the world a better place to live. And it’s surprising how much the world has changed during that time. From providing power that brought Neil Armstrong’s first words from the moon, to protecting more than 11,000 miles of the world’s greatest rivers, to building the Panama Canal, and more. We’ve taken a place in history alongside our dealers and customers.
A lot has changed since the Caterpillar Tractor Co. was born. And as the world continues to spin, changes seem to happen faster than ever. There will always be work to do. We’ll be there helping our customers make the planet a safer, more sustainable, and better place to live.
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FUND ONE 2022 Q3 EARNINGS REPORT
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