Weekend Update #125
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.
Concerns in the banking industry continue as we opened the first week of May with JP Morgan acquiring First Republic, becoming the third prominent U.S. bank to fail within the past two months. Regional banks across the board saw stock price declines, including PacWest (PACW) — which fell more than 50% after the company said it was actively talking with potential investors while considering all of its options, and First Horizon (FHN) — which fell nearly 40% as its merger deal with TD Bank fell apart due to regulatory concerns.
Earnings season continued this week with Apple and other tech companies, with the majority of beating analyst expectations.
In economic news, the Fed announced an additional 25 bps hike on Wednesday, bringing the federal funds rate to 5.00%-5.25%. The Fed has signaled that it may finally be ready to pause on additional hikes, depending on incoming economic data.
Friday’s jobs data showed the economy added 253,000 jobs in April, significantly more than economists’ estimates of 180,000. Additionally, the unemployment rate fell to 3.4%, the lowest level since 1969, showing the continued resilience of the labor market.
Treasury Secretary Janet Yellen on Monday wrote to House Speaker Kevin McCarthy to tell him that the U.S. could default on its debt as early as June 1.
Next week, key economic data include NFIB Small Business Optimism (Monday), CPI (Tuesday), PPI (Wednesday), Univ. of Michigan Consumer Sentiment (Friday)
Friday’s Close (Weekly Performance)
S&P 500 4,136 (-0.80%)
Nasdaq 12,235 (+0.07%)
Dow Jones 33,674 (-1.24%)
Thank you Blue Room Analyst NICK PEART.
Federal Reserve Chairman Jerome Powell
Good afternoon. Before discussing today's meeting, let me comment briefly on recent developments in the banking sector. Conditions in that sector have broadly improved since early March, and the U.S. banking system is sound and resilient. We will continue to monitor conditions in the sector. We're committed to learning the right lessons from this episode.
And we'll work to prevent events like these from happening again. As a first step in that process, last week, we released Vice Chair for Supervision Barr's review of the Federal Reserve's supervision and regulation of Silicon Valley Bank. The review's findings underscore the need to address our rules and supervisory practices to make for a stronger and more resilient banking system. And I'm confident that we will do so.
From the perspective of monetary policy, our focus remains squarely on our dual mandate to promote maximum employment and stable prices for the American people. My colleagues and I understand the hardship that high inflation is causing, and we remain strongly committed to bringing inflation back down to our 2% goal. Price stability is the responsibility of the Federal Reserve. Without price stability, the economy does not work for anyone. In particular, without price stability, we will not achieve a sustained period of strong labor market conditions that benefit all. Today, the FOMC raised its policy interest rate by a quarter percentage point.
Since early last year, we've raised interest rates by a total of five percentage points in order to obtain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time. We are also continuing to reduce our securities holdings. Looking ahead, we will take a data dependent approach in determining the extent to which additional policy firming may be appropriate. I will have more to say about today's monetary policy actions after briefly reviewing economic developments.
First quarter gross margin decreased by 590 basis points sequentially, from 62.2% to 56.3% primarily due to lower capacity utilization
Compared to first quarter guidance, actual gross margin exceeded the high-end of the range due to more stringent cost control efforts
Second quarter gross margin set to decline from 56.3% to 53% at the midpoint due to lower capacity utilization and higher electricity costs
“In 2023, our gross margin faces challenges from lower capacity utilization due to semiconductor cyclicality, the ramp-up of N3, overseas fab expansion and inflationary costs, including higher utility costs in Taiwan”
To manage profitability in 2023, the company is working on internal cost improvement efforts while continuing to sell their value; they have forecast a long-term gross margin of 53%, and higher is achievable
TSMC expects 2023 capital budget to be between $32 billion and $36 billion (the company spent $36.3 billion in 2022)
“Our commitment to support customers’ structural growth remains unchanged, and our disciplined CapEx and capacity planning remains based on the long-term market demand profile”
“We will continue to work closely with our customers to plan our long-term capacity and invest in leading edge, and specialty technologies to support their growth while delivering profitable growth to our shareholders.”
In the previous quarter, the company stated it expected fabless semiconductor inventory to start gradually reducing 4Q 2022 and they forecast a sharper reduction throughout the first half of 2023
However, due to weakening macroeconomic conditions and softening end market demand, fabless semiconductor inventory continued to increase in the fourth quarter and exited 2022 at a much higher level than they expected
The recovery in end-market demand from channels reopening is also lower than expectations; therefore, the fabless semiconductor inventory adjustment in first half ‘23 is taking longer than their prior expectation; it may extend into third quarter this year before rebalancing to a healthier level
Full year 2023 guidance: forecast for semiconductors excluding memory is expected to decline mid-single-digit percent while foundry industry is forecast to decline high single-digit percent in U.S. dollar terms
They expect their business to continue to be impacted by customers for the inventory adjustment
They now expect revenue in the first half 2023 to decline by about 10% over the same period last year as compared to mid- to high-single-digit percent decline previously
Overall revenue was in line with expectations, but growth segments varied:
Data Center: $1,295 million vs. $1,543 million expected → assumption was for a slight sequential decline around -7%
Client: $794 million vs. $1,324 million expected → assumption was for y/y decline of -37.66%
Embedded: $1,562 million vs. $945 million expected → embedded particularly outperformed with strength in industrial end-markets, likely to continue
Gaming: $1,757 million vs. $1,675 million expected → gaming was also strong, however the expectations are now for lighter growth next quarter
Next quarter outlook comes in much lighter, and our expectations for the second half of the year are being adjusted downward:
Data Center: sequential growth vs. estimates for sequential growth
Client: sequential growth vs. estimates for sequential growth
Embedded: sequential decline vs. estimates for sequential growth
Gaming: sequential decline vs. estimates for sequential decline
All of these numbers were higher in our pre-earnings call estimates which means that the revenue build up now comes out to be lower than originally expected in the new model.
Operating expenses are structurally higher, on an absolute basis, due to the full quarter of acquired operations being included in the P&L.
From a long-term perspective, the business model is heading in the right direction, pursuing AI use-cases with the MI300 chip introduction this year, the adoption of EPYC 4th Gen processors, strength of the embedded segment, and a low in the client segment revenue for this year. AMD management is leaning into the Data Center and Embedded segments for incremental growth, stating those categories as the largest opportunity. The growth of these segments were overstated in our original thesis, and AMD will be less resilient to overall market trends than initially expected. Therefore, we see a possibility of earnings coming in at least 33% lower than consensus estimates of ~90c.
Q1 net revenue grew 22% Q/Q and total operating expenses declined 24% Q/Q, resulting in a net loss of $79 million but a return to positive Adjusted EBITDA of $284 million
OpEx lowest level of expenses since Q1’21, with recurring operating expenses (technology & development, sales & marketing, and general & administrative) collectively declined 37% Q/Q
Q1 total trading volume was $145 billion, flat Q/Q with 2 fewer days than Q4, or 2%
Despite losing two bank partners in Q1 (Signature & Silvergate), Coinbase has onboarded new partners, rebuilt redundancy layers, and replaced the 24/7 instant settlement capabilities.
At the end of Q1, the company had $473 million in total credit and counterparty risk (excluding banks) — less than 10% of current cash balance
International expansion progressed with the initial launch of our international exchange and are making good progress in new markets like Canada, Brazil, and Singapore.
Launched foundational infrastructure like Base and Wallet as a Service that will enable crypto developers to more efficiently build applications
Coinbase Asset Management — acquisition of One River Digital Asset Management
First step in asset management strategy and provides a new product offering for institutional customers
Contribution to AOP and revenue expected to be immaterial in the near term, but will meaningfully reduce time to market and enable quick innovation on asset management products and services
AGCO beat earnings this quarter across the board due to better-than-expected strength in North America and Europe and the Middle East. On a constant currency basis, sales growth by region in Europe & the Middle East, North America, and South America was up 30.3%, 32.4%, and 42.2%, respectively. The impressive beat comes even despite a 5.4% foreign exchange headwind. AGCO maintains that farmer demand remains resilient and visible through 2023.
While trading was positive following the earnings call, sell side analysts on the call certainly seem to be trying to anticipate any risks that would come with the end of a strong ag cycle, but management pointed to order books already being filled into 2024 as well as structural reasons why agriculture could continue to outperform, even as the general macroeconomy softens.
On Thursday, May 4, Moderna reported their first quarter earnings results. The earnings report follows the Company’s fourth annual Vaccines Day, which took place on April 11, during which the Company unveiled new clinical programs within its vaccines arm and also provided financial framework for the short- to medium-term with respect to its respiratory vaccine candidates – vaccines for COVID-19, RSV, and Flu. The earnings call thus summarized key highlights from the investor event, but also heavily emphasized data surrounding the Company’s Individualized Neoantigen Therapy (previously referred to as “Personalized Cancer Vaccines”). While much of the earnings call focused on reiterating key learnings from this past quarter, management was able to shed light on aspects of the portfolio and strategy that was either more detailed, or new information entirely to investors.
Chief Executive Officer Stephane Bancel opened the call highlighting key financial metrics for the past quarter. The Company brought in $1.9 billion in revenue, significantly beating analyst expectations. What’s more, the Company posted a net income of $79 million and a diluted earnings per share of $0.19. All of these figures beat expectations, but there is a key caveat to this earnings beat. In previous earnings calls, Moderna signaled they had signed $5 billion in advanced purchase agreements for 2023; $2 billion of which would be posted in the first half of the year. By bringing in $1.9 billion in the first quarter, the Company will write only $0.2 - $0.3 billion in the second quarter of 2023. So while Moderna technically beat on earnings, it would be misguided to say this has any impact whatsoever on annual earnings; any potential upside to Moderna’s earnings lies in further sales related to its COVID-19 vaccine, which would not be recognized until the third and fourth quarters of this year.
Further diving into the Company’s 2023 revenue outlook, Moderna continued to reiterate it expects new sales for deliveries in the second half of this year from its largest markets: the United States (both commercial and governmental), Japan, the European Union, in addition to a hodgepodge of countries in Asia & Latin America. Moderna’s commercial arm is currently in negotiations with customers throughout the United States, including national and regional [harmacies, government health providers, employers and physicians. It should also be noted that there is room for further upside with respect to the European Union. Pfizer has recently had issues finalizing their contracts with the European Union for this upcoming year. Moderna’s Chief Commercial Officer, Arpa Garay, commented that the company is “encouraged by the news that the EU is in renegotiations with Pfizer. For us, the signals that the EU likely does not want to rely on one sole supplier. And we also are encouraged that the EU does recognize the value of the effectiveness and safety of our COVID-19 vaccine.”
Yelp grew revenues 13% year-over-year in the first quarter with a total of $312.4 million and maintained very healthy gross profit margins of 91.7% as compared to 91.5% in the prior year period despite inflation and macroeconomic headwinds.
The company continues to focus on product innovation, with the latest iteration being Yelp Guaranteed, a new satisfaction guarantee program that provides consumers with greater confidence when hiring eligible advertisers through Request-a-Quote. The program allows consumers to get up to $2,500 back in the event something goes wrong with their projects. In addition to providing consumers with peace of mind when connecting with Services advertisers on Yelp, they believe this new offering has the potential to drive more consumer projects through the Request-a-Quote flow which will help improve lead quality and drive more connections to advertisers by leveraging the trusted Yelp brand.
Despite the beat on revenue and EPS in the quarter, SDGR shares traded down following Q1 2023 earnings on the back of a 65% year-to-date surge prior to the release. Such positive sentiment in trading set the bar high for Schrödinger, and while the financial results showed strength to star the year, lumpy revenues that will be weighted heavily toward the fourth quarter places the utmost importance on a solid H2 to achieve the revenue guidance — for which investors may be pricing in some uncertainty given the dynamic macroeconomic environment.
As highlighted from the slide deck below, taking a smoothed-out picture of revenue shows consistent and strong growth from both the software and drug discovery sides of the business, and in the earnings call, CFO Geoff Porges discusses the possibility of changing their method of revenue recognition to make it easier for investors to see the growth momentum.
On Schrödinger’s internal drug discovery pipeline, the company has now dosed the first patients in its first-ever wholly-owned clinical trial with SGR-1505 (MALT1). The company’s second program, SGR-2921 (CDC7), is also progressing quickly toward clinical trials with an IND scheduled for this year. A third IND with SGR-3515 (Wee1) is planned for 2024.
Q1 2023 results place the company solidly in line with guidance to hit mid-double-digit growth in the software business as well as a potential 100% year-over-year growth in the drug discovery portion of the business, hitting an important inflection point into profitability. Similarly, the cash distribution from Takeda’s acquisition of the Nimbus TYK2 inhibitor gives Schrödinger management even more room to invest and capitalize on the many growth opportunities ahead.
EYLEA lost share to Vabysmo this quarter, down from ~75% of branded share to ~70% of branded share, which is concerning. The company is hoping to recapture that market with high dose EYLEA. They also highlighted being short of potential EYLEA sales this quarter by USD 70 million due to lower inventory levels.
Weakness in EYLEA was offset by strength in collaboration revenue with Sanofi. Dupixent sales grew 37% globally and brought in more revenue than EYLEA for the quarter. Libtayo also contributed with 46% growth year over year, to USD 183 million.
EBIT margins have thinned relative to last year as increased R&D spend is mixed with lower sales, due to the exclusion of COVID-19 antibody sales. The addition of acquired R&D expenses during the quarter created a headwind as well.
With the buyout of Sanofi for full commercialization rights to Libtayo come with additional go-to-market expenses. (Higher headcount and headcount-related costs, and higher contributions to an independent not-for-profit patient assistance organization.) These increases were partly offset by a decrease in commercialization-related expenses for EYLEA.
Expense guidance for FY23 has generally increased, but CAPEX and taxes are forecast to be lower.
Vimeo now has approximately 1.5 million Self-Serve & Add-Ons Subscribers, and 2,500 Vimeo Enterprise Subscribers
Total Bookings fell 5% year-over-year
Revenue decreased 4% year-over-year to $103.6 million, and Gross Profit decreased 2% year-over-year to $79.9 million
Operating loss was $2.8 million, a $23.5 million improvement from Q1’22.
Net loss was $0.7 million in the quarter, a $25.9 million improvement from the first quarter of 2022
Adjusted EBITDA was $3.2 million, a $13.6 million improvement from the first quarter of 2022, and the third consecutive quarter of positive adjusted EBITDA
Cash used by operations was $1.2 million, and Vimeo generated positive free cash flow of $4.9 million, or 5% of revenue
Vimeo Enterprise added new customers including the BBC, UCLA, Warner Brothers, Johnson & Johnson, Karl Lagerfeld, and the National Gallery among other customers.
Looking to maintain a run rate on quarterly expenses in the $77-79 million range (ex-SBC)
Achieved breakeven on GAAP EPS, best quarter since the company has been public
Likely a result of some one-time items, so not expecting this to continue in the near term
Shopify’s Q1 2023 earnings release signaled a major turnaround ahead for the company with two major announcements: a 20% reduction in headcount and a sale of its investment-heavy logistics business to Flexport. As excess workforce built during the heat of COVID-19 lockdowns and the eCommerce boom weighed on operating expenses, Shopify’s desire to fully scale an internal logistics and fulfillment business was a major headwind to profitability for the company throughout 2022. Making the strategic decision to prioritize Shopify’s core competency, eCommerce software, as well as to expand partnerships with Flexport and potentially Amazon was an exciting proposition for investors, leading to a 24% daily gain following Q1 earnings.
There are some significant hurdles to realizing this new vision of the company. First, Shopify will need to overcome the regulatory hurdle of a sale of the logistics business, a large part of which comes from the company’s $2.1 billion acquisition of Deliverr less than a year ago in July 2022. Second, it will be a challenge for management to keep employee productivity up internally following such a large round of layoffs and shift in strategy. Third, the overhang of declining consumer spending due to the economy will have to be overcome by subscriber growth and increased adoption throughout Shopify’s suite of eCommerce tools.
Despite these hurdles, Shopify demonstrated the power of its high growth in subscribers and adoption to offset macroeconomic impacts on spending, especially among larger brands in the first quarter.
“We expect our June quarter year-over-year revenue performance to be similar to the March quarter (-2.5% year-over-year), assuming that the macroeconomic outlook does not worsen from what we are projecting today for the current quarter. Foreign exchange will continue to be a headwind and we expect a negative year-over-year impact of nearly four percentage points.
For Services, we expect revenue to grow year-over-year. While continuing to face macroeconomic headwinds in areas such as digital advertising and mobile gaming
[In the prior earnings call, the company provided directional guidance for iPhone, Mac and iPad, but did not do so on this call]
Gross Margin: 44% - 44.5%
OpEx: $13.6 and 13.8 billion
OI&E: $(250) million, excluding any potential impact from the mark-to-market of minority investments
Tax Rate: ~16.0%
Uber Technologies’ stock (ticker UBER) closed up +11.5% after beating topline estimates by $124 million and paring GAAP EPS estimates of $(0.08). Delivery volume overtook the rideshare segment in the first quarter, showing stronger demand against the expectation that consumers would be less inclined to order delivery in the inflationary environment.
Overall Gross Bookings grew 2% sequentially and 19% year-on-year, leading to record performances from the Mobility and Delivery segments, the second quarter in a row. Mobility grew 1% sequentially and 40% year-over-year, while Delivery grew 5% sequentially and 8% year-over-year.
Mix continues to be fairly split from a gross bookings standpoint, but the mobility segment has a better contribution margin (revenue/gross bookings) at 29%. In order to push more revenue to the bottom line, the company may have to increase the take rate in delivery to match that of mobility. Uber is currently exploring the ad business to bolster profits in this segment.
On the call, Uber management suggested the growth tech era was coming to an end, and these companies will now start seeking profitability via cost cuts and focused investment.
We remain optimistic that the company can return to its longer-run average gross profit profile based on its budding advertising business and its pricing leverage in rideshare relative to its competitors.
Cystic Fibrosis (CF) Marketed Products
Vertex received approval from the U.S. Food and Drug Administration (FDA) for the use of TRIKAFTA in children 2 to 5 years of age with at least one F508del mutation in the cystic fibrosis transmembrane conductance regulator (CFTR) gene or a mutation in the CFTR gene that is responsive to TRIKAFTA. With this approval, approximately 900 children are newly eligible for TRIKAFTA.
Vertex has also completed regulatory submissions with the European Medicines Agency (EMA), the Medicines and Healthcare products Regulatory Agency (MHRA) in the United Kingdom, Health Canada, and the Therapeutic Goods Administration (TGA) in Australia for the use of KAFTRIO/TRIKAFTA in children 2 to 5 years of age.
Vertex received a positive opinion from the EMA Committee for Medicinal Products for Human Use (CHMP) for the use of ORKAMBI in children 1 to <2 years of age with two copies of the F508del mutation in the CFTR gene. If this label extension is approved by the European Commission, nearly 300 children with CF will be eligible for the first time for a medicine to treat the underlying cause of their disease.
Vertex has also submitted an sNDA to the FDA and Marketing Authorization Applications (MAAs) to the EMA, MHRA, and Health Canada for the use of KALYDECO in children from 1 month to <4 months of age. The FDA granted Priority Review designation and assigned a PDUFA date of May 3, 2023.
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