News of the Week (November 27 - December 1)
Zscaler; Salesforce; Snowflake; Workday, Intuit & Okta; Disney; Uber; Amazon; PayPal, Shopify, Lululemon, Adobe & Mastercard; Nanox; Macro; Portfolio
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Rest in peace, Charlie Munger:
Rest in peace, legend. The investing world lost an icon this week in Charlie Munger. He lived a hell of a 99 year life, and is someone who I admire, look up to and constantly learn from. Most of you probably know him as Warren Buffett’s right-hand man. I prefer to think of him as his partner who steered Buffett’s success more than he gets credit for. He changed Buffett’s mindset from being a pure bargain hunter to balancing deal-hunting with the pursuit of high quality business models. He shared abundant wisdom at shareholder meetings and thoroughly entertained with his opinions on everything from Apple to Crypto. His view that reputation is our most important asset motivates my full transparency and intolerance of any shady behavior. He was, is and always will be a legend. RIP.
1. ZScaler (ZS) — Earnings Review
Zscaler is a next-generation, predominantly cloud-based network security company. It competes with firms like Palo Alto and Cloudflare.
a. Demand
Zscaler beat revenue estimates by a comfortable 4.9% and beat its own guidance by 5.0%. Its 51.6% 3-year revenue compounded annual growth rate (CAGR) compares to 53.5% as of last quarter and 55.9% 2 quarters ago.
Billings were roughly in line with consensus, but about 2.4% below the buy side hedge fund surveys that I had access to.
b. Margins
Beat EBIT estimates by 25.6% & beat its EBIT guidance by 26.3%.
Beat $0.49 earnings per share (EPS) estimates by $0.18 & beat its same EPS guidance by $0.18 as well.
Beat free cash flow (FCF) estimates by 68.0%.
GAAP & non-GAAP gross profit margins (GPMs) were both comfortably ahead of consensus estimates.
c. Balance Sheet
$2.32 billion in cash & equivalents.
$1.1 billion in convertible senior notes. No traditional debt.
Share count rose by 2.9% Y/Y.
d. Fiscal Year 2024 Guidance
Raised revenue guidance by 1.8% which beat estimates by 1.6%.
Reiterated billings guidance which missed estimates by 0.5%-1% depending on which data source we use.
Raised EBIT guidance by 8.2% which beat estimates by 7.6%.
Raised $2.23 EPS guidance by $0.23 which beat estimates by $0.22.
Reiterated low 20% FCF margin for the full year.
Next quarter guidance was similarly ahead of expectations across the board. It does not guide to billings on a quarterly basis.
e. Call & Release Highlights
Zscaler & Zero Trust 101:
ZScaler’s Zero Trust Exchange is its latest and greatest cloud security platform. It blazes a trail between users (remote and in-office), apps and devices across eligible networks. Zero Trust is exactly what it sounds like: never trusting a device or end user. The exchange constantly vets and verifies all endpoints and users as they move within a company’s perimeter. It does not allow bad actors to breach a vulnerable infrastructure or freely move about it thereafter without any subsequent verification. ZScaler assigns risk scores for requests to assess needed levels of verification.
This approach replaces an antiquated network security philosophy that every device and user within a perimeter automatically getting unconditional access. So? Zero Trust is safer AND allows remote workforces to responsibly work from anywhere. Zero Trust is rapidly replacing firewalls and virtual private networks (VPNs) to reduce security risk and enhance productivity. As all strong software platform plays do, Zscaler’s Zero Trust infrastructure also cuts costs by diminishing the need for on-premise security apps and through vendor consolidation.
I know readers are most familiar with endpoint security and CrowdStrike based on what I’ve most closely covered. While Zscaler and CrowdStrike do compete in some areas, they partner more frequently and even offer joint products.
More Sector Definitions:
Secure Access Service Edge (SASE) provides access to software for users regardless of where they’re working.
Virtual Private Cloud (VPC): These are subsections of public cloud environments. They offer users more autonomy with their network and apps. They also allow for secure connections between cloud and self-hosted (on-premise) environments with no public network exposure. This is especially key for highly regulated industries.
Virtual Desktop Infrastructure (VDI): Allows software to be accessed on remote devices. Zscaler’s Zero Trust Exchange ensures this is done safely and securely.
Firewall is a legacy form of network security that uses a fixed set of rules to authorize outbound and inbound traffic.
Zscaler Product Definitions (which exist under the Zero Trust Exchange Platform):
Zscaler Internet Access (ZIA) protects internet connections. It’s the middleman between a user and a network which ensures proper authorization & access.
Zscaler Private Access (ZPA) offers remote access to internal apps. This is an upgraded VPN by “connecting directly to the required resources without public exposure” per Zscaler filings.
Zscaler Digital Experience (ZDX) ensures high quality and always on performance of loud apps. It sifts through networks to identify sources holding back performance to be remediated.
Risk360 flags vulnerabilities and offers end-to-end risk quantification with intuitive next steps for remediation.
Risk360 has already closed more than 10 deals.
Breach Predictor is a newer Zscaler product. It uses GenAI models to “anticipate potential breach scenarios.” It eliminates those scenarios before they even surface.
Strong Demand:
Zscaler enjoyed a record quarter for $1 million+ customers. Its pipeline reached new records and its net revenue retention rate remained at a strong 120%. As a clear sign of the platform and vendor consolidation approach working, roughly 50% of its new client wins purchased ZIA, ZPA and ZDX. Similarly to CrowdStrike this week, outperformance despite no improvement in macro. The firm continues to overcome elevated deal scrutiny and sales cycle elongation. Importantly, while those headwinds aren’t abating, they are also not getting worse. Whether it’s due to growing attack instances, new SEC disclosure requirements, the Biden Administrations Zero Trust executive order, or a combination, demand remains resilient.
Inbound requests to replace firewall-based SASE continue to briskly rise as Zero Trust is increasingly known as the superior option.
Deal Highlights:
Leading software firms shifted to Zero Trust Exchange after firewall-based SASE failed miserably and expanded the attack surface too widely. Zero Trust shrunk the attack surface by blazing a more direct and secure connection between apps and networks. The client went with ZIA, ZPA and ZDX.
Expanded with a Fortune 500 travel and hospitality service provider, which doubled their annual data protection spend.
Won a Fortune 200 financial service firm. It used ZScaler’s full product suite to safely migrate to the cloud and shed half of its data center requirements. It was able to do this despite operating in one of the most tightly regulated sectors. It expects to enjoy a 500% return on investment.
Scaling:
Zscaler is enhancing go-to-market efforts. This move is to cater to strong demand and rising adoption of and interest in its full platform. It hired Mike Rich as its new Chief Revenue Officer and President of Global Sales. Dali Rajic, who had been handling some of these duties, will now be fully focused on his other role as COO. Rich was most recently the President for Americas at ServiceNow. Joyce Kim was named its new Chief Marketing Officer. She previously led marketing teams at Microsoft, Arm and Twilio.
Public Sector:
The firm delivered 90% Y/Y growth within the public sector. It now has 12 of the 15 cabinet level agencies as customers. These types of clients usually start small and offer significant expansion opportunities if products work well over time. For example, it expanded ZIA and ZPA deployment from 25,000 users to 100,000 users for one of these agencies while cross-selling ZDX to all 100,000 of these users.
Billings and Free Cash Flow:
Total billings fell a bit more sharply than expected Q/Q due to a $20 million “upfront billing on a multi-year deal” last quarter. The billings pull-forward last quarter meant outperforming cash collections this quarter and propped up its free cash flow margin. The firm continues to expect a low 20% FCF margin for the year.
Generative AI:
Zscaler is enjoying a 20% average spend uplift with clients opting for its newer GenAI products. 95% of organizations are now using GenAI in some capacity while 48% of them think it’s a threat. This puts Zscaler in an ideal position for future up-selling.
Final Notes:
1/3 of its customers are using its newer cloud workload protection tool. It added real-time cloud resource discovery as a new tool for this offering.
Gross margin was helped by extending the useful life of some cloud infrastructure from 4 to 5 years. Google and Meta did the exact same thing. Nothing shady here.
f. Take
This quarter resembled the strong results from other vendor consolidators and platform plays in software. They’re winning through better efficacy and efficiency with lower cost. That’s what Zscaler provides within the realm of network security. This quarter is simply more evidence. Some will pick at the mere reiteration of billings guidance. If I were a shareholder, as long as it doesn’t become a trend, I’d take that as a sole negative 10/10 times.
2. Salesforce (CRM) — Earnings Review
Salesforce is the 3rd largest enterprise software firm on the planet. It provides a broad suite of products to help clients optimize customer interactions, sales and marketing efficacy. The overarching niche is called customer resource management (CRM). Its products are delivered through dedicated cloud services (like the Service, Marketing and Sales Clouds) as well as other popular tools like Tableau (acquired in 2019).
a. Demand
Met revenue estimates & beat guidance by 0.1%. Its 17.2% 3-year compounded annual growth rate compares to 18.6% as of last quarter and 19.2% 2 quarters ago.
Current Remaining Performance Obligation (cRPO) growth of 14% was well ahead of its 11% growth guidance.
b. Margins
Margin expansion is the current Salesforce story. What had been a company focused on growth and M&A is now laser-focused on delivering operating leverage. It has effectively tightened its belt and seen margins explode higher. In testament to its new philosophy, it dissolved its M&A team to focus on organic execution. The margin explosion has been far more meaningful than the company or virtually any analyst expected.
Beat EBIT estimates by 3.0%.
EBIT is operating income.
Beat free cash flow (FCF) estimates by 100%.
Beat $1.04 GAAP earnings per share (EPS) estimates & beat its same guide by $0.21 each.
Beat $2.06 EPS estimates & beat its same guide by $0.05 each.
c. Q4 Guidance
“We continue to assume a measured customer buying environment.” – CFO Amy Weaver
Slightly missed Q4 revenue estimates.
Beat $1.04 in Q4 GAAP EPS by $0.22 or 21.5%.
Beat $2.18 in Q$ EPS by $0.07 or 3.2%.
Based on the Q3 beat and Q4 guidance, annual revenue guidance was reiterated. Profit guidance was raised across the board (most meaningfully for GAAP EPS). EBIT margin was raised from 30% to 30.5%. CEO Marc Benioff jokingly told CFO Amy Weaver on the call that she “better beat that.”
d. Balance Sheet
$11.8 billion in cash & equivalents.
$9.4 billion in debt ($1 billion is current).
Share count fell by 2.5% Y/Y.
Year to date buybacks of $5.93 billion vs. $1.68 billion Y/Y.
e. Call & Release Highlights
Key Products, Definitions & Progress (Salesforce 101):
Salesforce offers a variety of cloud services to its customers. These all enable digital management and optimization of a certain piece of a firm’s customer relationships. There’s a Sales Cloud which perfects consumer touch-points. There’s a Commerce and Marketing Cloud to build online storefronts and augment promotional activity. There’s a Service Cloud to handle customer issues and inquiries. This directly competes with firms like Shopify and Wix. There’s also a platform cloud which includes Slack.
Most recently, it debuted its Data Cloud. This is an aggregated client database to ingest, organize & glean insight from 1st party data. MuleSoft and Tableau are both key pieces of this Data Cloud. MuleSoft integrates apps and data to allow for management of these products and interfaces within Salesforce. Tableau is a data visualization tool to create automated progress reports and suggestions for leveraging findings. The Data Cloud competes with formidable players like Databricks and Snowflake and is currently its fastest growing cloud (aside from industry-specific products). Finally, as alluded to, it offers industry-specific clouds for sectors like healthcare. These are more customized to meet specific regulatory and operational needs. All of these clouds and products make up the firm’s subscription & support revenue which represents 93% of its total business. Professional services make up the rest.
Separately, Salesforce offers a product called Einstein. This is a full set of AI tools including outcome prediction, chat bots, image recognition, sales and sentiment analytics and more. It’s considered a general-purpose AI platform infused into various Salesforce products. Most recently, through an OpenAI partnership, it debuted Einstein GPT. Einstein existed before the GenAI wave but is now getting an upgrade thanks to it. Einstein GPT allows Salesforce clients to plug into language models (including OpenAI, Anthropic and Cohere) to make workflows more productive, intuitive, conversational and automated. It infuses familiar GenAI services across products like Slack and pretty much all others. It features a low code tool set to reduce the barrier for non-experts to build applications and boasts expert-level tools to build more complex apps. 17% of the Fortune 100 now uses Einstein GPT.
Recent growth by cloud category:
Sales Cloud revenue rose 10% Y/Y vs. 12% Y/Y last quarter and 13% Y/Y 2 quarters ago.
Service Cloud revenue rose 11% Y/Y vs. 12% Y/Y last quarter and 13% Y/Y 2 quarters ago.
Platform Cloud revenue rose 11% Y/Y vs. 11% Y/Y last quarter and 12% 2 quarters ago.
Marketing & Commerce Cloud revenue rose 8% Y/Y vs. 10% Y/Y last quarter and 10% Y/Y 2 quarters ago.
Data Cloud revenue rose 22% Y/Y vs. 16% Y/Y last quarter and 20% Y/Y 2 quarters ago.
Platform Play:
Consistent readers know… the theme of this software earnings season has been the platform play cream rising to the top and separating from the pack. Salesforce is squarely part of that cream. Its ability to drive better software value, automation, efficiency and lower cost is standing out. Just like it did for ServiceNow… just like it did for CrowdStrike… just like it did for Workday… just like it did for Zscaler… just like it did for Microsoft. Greater value and lower cost is the only formula that’s working in this heightened budget scrutiny environment. Salesforce delivers that formula.
Need some evidence besides the overarching results? It enjoyed 80% Y/Y growth in $1 million+ deals. Last year’s concern over full suite, large-scale deal demand has vanished with that demand “coming back.” 9 of its 10 largest deals in the quarter included 6 or more cloud products. 9 of its 13 industry-specific clouds saw annual recurring revenue over 50% Y/Y.
Its Unlimited Plus (UE+) plan combines a lot of its products into a single subscription. Traction there has been wonderful and is delivering a 70% boost to average client spend.
Productivity & Macro:
Salesforce’s Account Executive (AE) productivity soared 30% Y/Y. It has driven greater focus, enhanced go-to-market and located talent to optimize its selling process. Clearly that’s working. It has eliminated a large chunk of its manual quoting to remove steps to deal closure and is now enjoying the results in its soaring margin profile. Specifically, GAAP sales & marketing as a percent of revenue fell 600 bps Y/Y.
Macro headwinds remain as the “buying environment remains measured.”
The Data Cloud:
As we’ve explored numerous times, GenAI models insatiably consume data. Salesforce’s Data Cloud meshes seamlessly with GenAI. Models are worthless without effective data seasoning. Salesforce, like Snowflake, tears down data silos to unleash a firm’s COMPLETE database. It’s hard to overemphasize how big a piece of its GenAI strategy truly is. Benioff called it the “foundation of every AI transaction and large deal for the quarter.” It is simply paramount for the firm to maintain its proclaimed position as the leading AI CRM. And traction is building. 6 of its 10 largest deals from the quarter included the Data Cloud while $1 million+ wins doubled Q/Q. That’ll work.
“It's not like companies are going to run their AI off of Reddit or off of some kind of big public data set. They have to have their data set together to make AI work for them, and that is why the Data Cloud is so powerful for them.” – Founder/CEO Marc Benioff
Final Notes:
Salesforce sees its “trust layer” as a key GenAI selling point. It separates and secures a customer’s data to eliminate impermissible access to it from model builders.
Salesforce products are available for purchase on the AWS marketplace as part of a deepening partnership. The two announced deeper product and AI integrations during the quarter.
It continues to selectively hire mainly within Data Cloud and AI roles.
f. Take
This was another rock-solid quarter. Since the firm’s pivot to focus on margin expansion, growth has not suffered materially, and profit growth has far surpassed estimates. The same has been true for only the highest quality firms in tech. This is a wonderfully boring company in the best of ways. Elite leadership, stable growth at massive scale and more execution. As margin expansion from the pivot draws to a close, Salesforce will need to keep finding demand to deliver compelling profit compounding. There’s good reason to believe that it can.
Well done.
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3. Snowflake (SNOW) – Earnings Review
Snowflake serves as a unifying layer of disparate data sources. It provides scaled storage and organization, as well as insight gleaning from that data in a secure environment.
a. Demand
Beat its product revenue guidance by 3.9%.
Beat total revenue estimates by 2.9%.
Please note that 135% net revenue retention is still excellent. Anything above 120% is considered to be very, very good.
“I’m not going to guide to net revenue retention. We do see it stabilizing, but it could dip a little more.” – CFO Michael Scarpelli
b. Margins
Beat EBIT estimate by 131% and beat EBIT margin guidance by 580bps (bps = basis point = 0.01%).
Beat $0.16 EPS estimate by $0.09; Beat FCF estimate by 27.7%.
The gap between GAAP EBIT and EBIT is related to stock compensation.
c. Balance Sheet
$3.60 billion in cash & equivalents.
$950 million in long-term investments.
No debt.
Share count rose by 2.9% Y/Y. It has bought back $592 million in shares year to date to offset some dilution.
d. Guidance
For the full year, Snowflake raised its product revenue guidance by 1.9%. It also raised product gross profit margin (GPM) guidance from 76% to 77%, raised EBIT margin guidance from 5% to 7%, and raised adjusted FCF margin guidance from 26% to 27%. All three raises surpassed analyst expectations.
“Consumption trends have improved. We are seeing stability in customer expansion patterns. Our guidance is based on observed patterns and assumes continued stability of consumption.” – CFO Michael Scarpelli
All long-term demand targets, including the path to $10 billion in annual revenue by 2028, were reiterated.
e. Call & Release Highlights
Snowflake 101:
Snowflake’s overarching platform is called the Data Cloud. The infrastructure unlocks the ability to affordably store, organize, query and learn from data sources with gigantic scale. The architecture naturally separates the functions of data storage and computation unlike legacy data warehouse solutions. That means data consumption capacity is untethered from public computing resources. This removes the computing capacity bottleneck and enhances the scalability of data storage.
Under this framework, I can store as much data as I want without the requirement to immediately process all of that data, as legacy offerings require. Processing utilizes computing capacity. In Snowflake’s case, the storage is done in a centralized data repository in the Snowflake Data Cloud. It’s processed only as needed. Data is utilized virtually, which removes the need for dedicated hardware. This scalable or “elastic” reality limits waste and cost. Snowflake does all of this for clients in a managed fashion to diminish client talent and infrastructure needs.
5 Key Products to Know & Some Progress Reports:
The Snowflake Data Warehouse is where structured data is stored and (on command) processed. Structured data is formatted data. It’s utilized for record keeping and report creation. Data can be easily fetched via structured query language (SQL).
It just added a new data streaming tool called dynamic tables. It’s in early preview and allows for more automated data querying. With it, reports are automatically updated with current data as that data is ingested by the Data Cloud.
Snowflake Data Lake does what the warehouse does for unstructured data. Unstructured data is unformatted and used for uncovering new insights and patterns.
This debuted in 2020 (Warehouse in 2014). Unstructured data consumption is growing like crazy. It’s up 17x Y/Y.
Generative AI leans heavily on unstructured data for model training. This means that proliferation will directly support unstructured data consumption on Snowflake.
The Snowpark product frees developers to work with data in any source code language desired. With it, developers can process and visualize data (through Snowpark functions) and build apps (through Snowpark Native Apps). Snowpark is their data-equipped playground to build new things.
Snowpark usage is up 47% Q/Q and 500% Y/Y (newer product).
Snowpark Container Services will be soft-launched in Q4. This allows clients to deploy software containers (software packages) from Snowflake. That, in turn, enables the running of applications without needing to transfer data or manage deployment.
GenAI models are voracious data consumers. Snowpark Container Services allow GenAI models to run closer to the data that they require. This enhances performance and expedites model training. Snowpark Container Services is a key part of the firm’s GenAI strategy.
Snowflake data sharing is its secure product for, as the name indicates, sharing data among the rest of Snowflake’s participating users. As more opt in, a compelling network effect of relevant data builds and Snowflake’s value proposition deepens.
28% of its customers are now sharing their data amongst the Snowflake network vs. 22% Y/Y.
Sharing is done via “edges” which are data sharing connections between clients and a data provider.
Snowflake Machine Learning is its suite for training ML models within the Snowflake Data Cloud. This can be used to automate data querying and organization.
Snowgrid is its omni-cloud tool to unite a client’s data across the various clouds they use.
Revenue Generation:
This is not a recurring revenue business model like a CrowdStrike or ZScaler. About 90% of its revenue is recognized based on consumption levels with contractual minimums offering a tad more revenue visibility. The consumption-based model means that clients can more easily flex down data consumption during tough times than they can with subscription-based contracts. It also means improvements in data consumption efficiency from firms like Amazon and Nvidia can have a negative impact on its consumption demand. This has held back Snowflake’s growth somewhat in 2023 as customers have elected to do things like move from 5 year to 3 year data storage to control costs. Optimizations like these have also stabilized.
The flip side of this? As times get better, these same clients can more easily and rapidly grow their consumption than with a subscription-based model. Because of the variable nature of this revenue generation, annual recurring revenue (ARR) is not a relevant metric here and neither are billings. It instead focuses on product revenue and remaining performance obligations.
Margin Improvements:
Snowflake’s scale is helping its margin profile mightily. This is also giving it more bargaining power in cloud pricing negotiations which should only become truer over time. Operating margin specifically is also being helped by more business coming from renewals vs. new clients. This means lower customer acquisition costs and sales commissions.
Macro & Demand:
Snowflake echoed the same macro sentiment that we’ve heard from nearly every other high quality software name. Macro headwinds are not vanishing and they’re not even improving at this point in time. Importantly, they’re not getting worse. “Stabilization” is a motif of this earnings season. Consumption appetite does seem to be improving as 9 of its 10 largest customers grew their consumption sequentially. Its largest customer delivered stable consumption trends as expected. This is encouraging, but not all that surprising following Amazon’s similar AWS commentary. There’s a large client overlap between Snowflake and AWS as AWS clients represent 76% of Snowflake’s business.
Strong migration activity from on-premise architecture drove the successful quarter. Its 2 fastest growing customers continue to migrate to its platform. One is in its second year as a SNOW customer; one is in its eighth year. That directly shows the long, long runway of revenue expansion Snowflake typically enjoys with customers. That’s why net revenue retention is so lofty. Notably, there was a 3 week period in September where growth was faster than at any point during the previous 2 years. That made my head turn. Growth continued into November as well. This compares very nicely to earlier in the year when leadership expressed concern over week-over-week growth halting towards the end of the quarter.
“November trends are good… Thanksgiving is typically a slow week. With that said, I’m happy with the consumption we’re seeing. That’s reflected in our guidance.” – CFO Micahel Scarpelli
A subtle shot at Google Cloud:
“Google Cloud Platform (GCP) is 3% of our business. One of the reasons why GCP is not as big is that it’s so much more expensive for our customers to operate in GCP vs. AWS and Azure. And as a result, our salespeople are really not inclined to do much in GCP.” – CFO Micahel Scarpelli
Generative AI:
As he does every call, Slootman again voiced his view that “there’s no AI strategy without a data strategy.” He’s right. Snowflake wants to be an “AI enabler.” This means GenAI apps, models and tools can all be brought into the Snowflake environment via intuitive integrations. It wants firms to “bring their software to the data.” This frees more direct usage of a client’s data when building out all of these products. As a reminder, GenAI models must be seasoned (trained) to be worth anything. What trains those models? Data. Where do customers go to have access to all of their data in one place? Snowflake.
For example, Snowflake Cortex grants access to large language models (LLMs) (isn’t LLM Language Learning Models?) (like OpenAI’s and Meta’s) to be deployed from within the Data Cloud. It offers services like vectorization which allows for uncovering unstructured data patterns and locating similar data from those findings. It also allows for Sentiment Analysis which isolates opinion-based data to conclude how positive or negative sentiment is.
It will soon offer Snowflake Horizon to handle all compliance and governance issues within GenAI. Similarly to Zero Trust architecture, Horizon “consistently enforces user privileges on data across LLMs and GenAI apps.” It can handle some non-GenAI governance as well.
It’s also building its own GenAI tools like Document AI. Document AI turns unstructured data from documents into more structured, organized datasets in an automated fashion.
Public Sector:
“We should have our FedRAMP high authorization literally any day. I actually thought I might have had it today. So stay tuned. You'll see an announcement on that very soon.” – CFO Michael Scarpelli
f. Take
This was a great quarter. It is clearly becoming a de-facto data warehouse (along with Databricks) and continues to land large clients with ample revenue expansion runway. The margin expansion is encouraging, the new product traction is encouraging, the GenAI setup is exciting and the company is firing on all cylinders. We are just 6 months removed from Snowflake explicitly telling us “productivity is not where we want it to be” and that consumption headwinds were building. My what a difference 6 months can make. Great quarter for one of the most expensive stocks in public markets. It will have to keep delivering great quarters like these to continue fetching the valuation premium it currently enjoys.
4. Earnings Roundup – Workday (WDAY); Intuit (INTU); Okta (OKTA)
a. Workday (WDAY)
Workday is a leading, cloud-based software firm. Its products focus on human capital and financial management.
Results:
Beat revenue estimate & guide by 1% each.
Slightly beat subscription revenue guide.
Beat EBIT estimate by 6.4% & beat guide by 6.6%.
Beat $0.22 GAAP EPS estimate by $0.21.
Beat $1.41 EPS estimate by $.12.
Beat FCF estimate by 8.5%.
Balance Sheet:
Nearly $7 billion in cash & equivalents.
$3 billion in debt.
Share count rose 2.5% Y/Y.
Fiscal Year 2024 Guidance:
Revenue guide met estimate.
EBIT guide beat estimate by 0.4%.
b. Intuit (INTU)
Intuit provides financial management software mainly to smaller businesses.
Results:
Beat revenue estimate by 3.4% & beat guide by 3.8%.
Beat $1.98 EPS estimate by $0.49 & beat guide by $0.50.
Beat EBIT estimate by 24.8%.
Balance Sheet:
$2.3 billion in cash & equivalents.
$5.9 billion in debt.
Share count fell slightly Y/Y.
Annual Guidance:
Intuit reiterated annual guidance across the board. This means the Q1 beat was timing-related as Q2 guidance was weak across the board.
c. Okta (OKTA)
Okta provides identity security services. Importantly, it doesn’t really compete with Zscaler or CrowdStrike. Although both are expanding into identity, they’re not expanding into the role of identity broker. That’s Okta’s bread and butter.
Results:
Beat revenue estimate by 4.2% and beat its guidance by 4.4%.
Beat current remaining performance obligations (cRPO) guidance by 2.7%.
Beat EBIT estimate by 55.5% and beat its guidance by 57.4%.
Beat $0.29 EPS estimate by $0.15 and beat its guidance by $0.15.
Balance Sheet:
$2.13 billion in cash & equivalents.
Basic share count rose by 3.6% Y/Y.
Diluted share count (impacted by M&A) rose by 13.0% Y/Y.
Annual Guidance:
Raised revenue guidance by 1.5%.
Raised EBIT guidance by 30.6%.
Raised $1.18 EPS guidance by $0.29.
Guidance was ahead of estimates for demand and well ahead of estimates for profit.
5. Disney (DIS) – Signal vs. Noise, Activists & a Dividend
a. Signal vs. Noise
Elon Musk gave a fiery interview this past week. In it, he told advertisers that left X (twitter) because they didn’t like his comments to “f off” and singled out Disney’s Bob Iger when doing so. This is in response to advertisers vacating the platform following inappropriate remarks from Musk on X.
Disney’s decision to stop advertising there got a lot of public blowback. I wanted to address why I think this is noise and not one of the pressing risks to a bull case. First and foremost, Musk owns X. His army of supporters flocks to that platform more than any other. So? When he loudly and virally tells a CEO to “f off,” of course his followers will pile on. That’s especially the case considering the engagement these followers received for doing so. It makes it sound like the entire world agrees when it’s really just the Twitter mob.
This has been framed as a free speech issue but isn’t one in my view. It’s a matter of advertisers like Disney growing uncomfortable with a brand presence on X. I love X, and I still entirely understand this discomfort. But let’s say the complainers are right and this violates their free speech. If that were true, they wouldn’t just be boycotting Disney. They would boycott Apple, Paramount, Warner Bros, Fox Sports, Sony, Chipotle, Walmart and the hundreds of popular brands owned by Procter & Gamble, Johnson & Johnson and Unilever. Will they? No. And why? Because this isn’t about free speech. It’s about an admiration for Elon Musk and it being popular to say “boycott Disney” on that app at this time.
I don’t expect this to have any material impact on the firm or my investment case. Let’s say the few thousand screenshots of canceled subscriptions turn out to be a much worse 50,000 cancellations. That’s 0.05% of the Disney+ subscriber base. I also have readers currently at Disney’s Florida Park and California Park right now. The takeaway is uniform. They’re all filled to capacity. Clearly the park goers aren’t modifying their patronage because Disney isn’t advertising on Twitter. The vast majority of the world does not care.
This is not a risk to the bull case. Run-rate streaming margins are a risk. ESPN competition without a mega-cap tech partner is a risk. Box office struggles, amplified by the convenience of streaming, are a risk. Making better films than The Marvels is a risk. This is not a risk. This is noise.
This changes absolutely nothing about my view of Disney. Actual subscriber, demand and margin metrics would need to deteriorate further to change my view. The woke blowback (which I largely agree with and see as being addressed) has been ongoing for a year. Margin recovery and subscriber growth have not suffered as a result.
b. Nelson Peltz/Trian
As previously reported, Trian has new demands as an activist investor in Disney and one of its largest shareholders. Trian wants:
3 board seats (vs. 2 previously) & more board independence overall.
Streaming consolidation.
Cost cutting & asset sales.
A clear Iger succession plan. In an interview this week, Iger told us that we will step down when his contract expires in 2026.
Restructured stock-based compensation to align better with shareholders.
Improving financial disclosures
Cost cuts and streaming consolidation are already well-underway. It has already overhauled financial reporting segments. Disney also just named 2 new, highly qualified independent board members: Morgan Stanley CEO James Gorman and Sir Jeremy Darroch (former CEO and CFO of Sky).
Aside from that, I’d be fine with the rest of these items being passed. I’m honestly somewhat confused as to why Trian is pushing for a proxy fight if this is all that they want and if Disney is already complying. The only thing that Trian wants which Disney reportedly will not provide is a sale of ABC. I want that sale to happen and am disappointed in Iger telling us it likely won’t.
In Disney’s response to Trian, it pointed out a connection between Peltz and Isaac Perlmutter (former CEO of Marvel). Perlmutter was ousted in 2015 due to claims of somewhat inappropriate remarks and his more conservative approach to growth spend vs. Iger. Iger has since pivoted from that approach to one that resembles Permutter’s. He was ousted from Marvel in 2023 as part of broad restructuring. Perlmutter owns 25 million of Trian’s proclaimed 33 million share stake.
I candidly view Disney as more of a rental than a several year holding. This could shrink that rental period which would work for me. The outcome of this proxy fight will not impact my investment case. Trian’s demands have already influenced Disney’s actions for the better where they needed to do so; I think the pressing changes that needed to be made have been made. You may point to box office flops for why that’s not true but remember that these movies were years in the making (pre-change) and consider how Disney+ cannibalizes box office demand.
This proxy fight/cage match will be resolved by May and before then if there’s a settlement.
c. Dividend
Disney reinstated a smaller $0.30 dividend this week as expected. For context, this represents about 7% of their expected 2024 free cash flow. This will not prevent debt repayment or needed investments in its high-quality parks and streaming assets. The more important point that should not be lost is that the reinstatement makes Disney eligible for investing for funds like Schwab U.S. Dividend Equity ETF. Potentially tens of billions of investible funds from major ETFS, Mutual Funds and managers are now able to invest in Disney now that the dividend is restored.
6. Uber (UBER) – New York City, The UK & S&P 500
a. New York City
New York’s state court rejected a minimum wage appeal from food delivery providers like UberEats and DoorDash. This will mean Uber must pay drivers a minimum of $18 per hour. This shouldn’t be an issue. Why? Leadership explicitly told us on the last earnings call that Uber drivers average $50 per utilized hour in earnings. They’re already doing a lot better than $18 per hour. Uber has incentive to take good care of drivers. Why? More drivers mean lower surcharges and wait times for riders. That means more riders, which in turn means more successful drivers. It’s a powerful positive feedback loop.
b. UK & S&P 500
Uber’s platform will open up to popular Black Cabs in London next year.
Uber will join the S&P 500 this month. I don’t think anyone in 2022 anticipated them becoming eligible so quickly. GAAP profits have simply ramped far more meaningfully than anticipated (like I said would happen). Sometimes I’m wrong. I was not wrong here.
7. Amazon (AMZN) – Bullish Notes
Amazon hosted its AWS re-Invent conference this past week. In it, it touted advancements in its chip sets and Bedrock model, deepening partnerships with Nvidia (with a new software and supercomputer integration), GenAI apps like CodeWhisperer and broadening foundational model integrations. It will also debut a new chatbot in the near future called Amazon Q, a new GenAI image generator and new cleanroom (layer of data security) functions for GenAI. I’d think this will be used to bolster product discovery and customer service in the marketplace. @BigBullCap on Twitter published a JP Morgan note from the event which I wanted to highlight. Thank you to him.
Per the institution, the event showcased a materially diminishing gap between Amazon’s GenAI capabilities and leaders in the field. It sees significant opportunity for GenAI monetization via new workload demand, more data storage demand and also apps like CodeWhisperer. I’d have to agree with them on both accounts. This is what I’ve been arguing since I started the position in May and it seems like analysts are agreeing more and more. It was silly to cast Amazon and AWS aside as unserious competitors in GenAI. It has the data, the cloud infrastructure, the talent and the balance sheet to carve out a very nice opportunity for itself. Finally and vitally, it sounded like workload optimization trends for AWS are in-line with what leadership guided to on the last call. It set a $190 price target which is less important to me than the fundamental takeaways they arrived at.
Wells Fargo channel checks also point to continued market share gains across international markets. It sees this revenue coinciding with expanding margins as well.
8. Holiday Weekend Results – PayPal (PYPL); Lululemon (LULU) Shopify (SHOP); Mastercard (MA); Adobe (ADBE) Amazon (AMZN)
What recession? Spending during the holiday weekend was robust and well ahead of expectations. Mastercard reported 2.5% Y/Y growth overall (8.5% for e-commerce) vs. 0.5% Y/Y growth expectations. Adobe reported 7.5% Y/Y growth vs. 5.5% Y/Y growth expected. It talked up some incremental discounting and price sensitivity, but not enough to hold back strong growth. Notes of outperforming Lululemon store traffic were abundant. The manager of Amazon’s second largest UK fulfillment center told us that they’re “busier than ever” with “no signs of a decline.” It also reported “record-breaking” results without quantifying. This is especially notable considering the EMEA economy is on more fragile footing than North America at the moment. Shopify growth impressively accelerated to 24% Y/Y vs. 19% Y/Y in 2022. Travel traffic set new records and in-store traffic rose faster than expected. All in all, the consumer continued to stay more resilient than some thought it would.
PayPal’s new CEO talked up some gaudy transaction and volume figures, but the lack of Y/Y comparisons makes that less relevant to me. What is relevant, however, is how well its buy now, pay later (BNPL) product is doing. Per a Statista report, 68% of those surveyed used PayPal BNPL in October and November. Amazon Pay was second at 26.5%. The sample size of 837 people is quite small, but this is still worth noting.
9. Nanox (NNOX) – “Earnings” Review
As a reminder, this is a lottery ticket. It’s 0.2% of my holdings and will not add until commercial deployments of its multi-source X-ray hardware begin. That may never happen. We’ll see. Its teleradiology and AI revenue segments are tiny and irrelevant parts of the investment case. It all comes down to the hardware. This quarter did nothing to change my opinion. There were no game-changing updates on North America or European deployment. It deployed one system in New Jersey for demonstration purposes and got approval for training in Ghana. It started the CE mark designation process in Europe. Again, nothing all that exciting.
It generated $99,000 in total X-ray revenue for the quarter with a 37% gross margin. It has 4 quarters of cash on the balance sheet left at the current burn rate.
10. Macro
The Fed Beige book was released this week. The anecdotes were unsurprising and continue to support the possibility of a rare, rare soft landing (along with cooling inflation). Most districts reported slowing growth, strong consumer credit with a modest uptick in delinquencies and improving labor supply dynamics with cooling wage inflation. This is based on Q4 observations while the 5%+ GDP reading we recently got was for Q3.
Inflation Data:
Personal Consumption Expenditures (PCE) Index for October was 3% Y/Y as expected and vs. 3.4% last month.
PCE Index for October was 0% M/M vs. 0.1% expected and 0.4% last month.
Core PCE Index for October Y/Y was 3.5% as expected and vs. 3.7% last month.
Core PCE Index for October M/M was 0.2% as expected and vs. 0.3% last month.
2 and 5 year note auctions closed at significantly lower rates than previous auctions as yields continued to fall.
ISM Manufacturing Prices for November came in at 49.9 vs. 46.2 expected and 45.1 last month.
Employment and Consumer Data:
Conference Board Consumer Confidence for November was 102 vs. 101 expected and 99.1 last month.
Initial Jobless Claims were in line with expectations.
Personal Spending M/M for October rose 0.2% as expected and 0.7% last month.
Output Data:
Q3 GDP is now coming in at 5.2% vs. 4.9% expected and 2.1% last quarter.
Chicago Purchasing Managers Index (PMI) for November was 55.8 vs. 45.4 expected and 44 last month.
Manufacturing PMI was 49.4 as expected and vs. 50 last month.
Institute of Supply Management (ISM) PMI for November was 46.7 vs. 47.6 expected and 46.7 last month.
11. Portfolio
In case you missed it, I published a CrowdStrike earnings review earlier in the week. I also trimmed 12% of my CrowdStrike position.
Hi Brad, I just wanted to say a big thank you for your terrific weekly updates, magic 👏👏 Roy