Weekend Update #129
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.
In observance of the Memorial Day holiday, markets were closed on Monday. The shortened trading week was gripped by developments on Capitol Hill, where the White House and Congress deliberated over a possible deal that would raise the US debt ceiling. The House passed a US debt ceiling bill on Wednesday with broad bipartisan support. Later in the week the Senate passed a bill that will suspend the debt ceiling and impose restraints on government spending through the 2024 election. The deal will help the US avert default, which helped spur financial markets, with all three major indices surging on Friday.
On the economics front, we saw employment data that suggests the Fed still has work to do in terms of monetary tightening. JOLTS data showed a rise in job openings to 10.1 million from 9.8 million in March, representing the highest level since January. While the unemployment rate rose from 3.4% to 3.7% due to new workforce entrants, the change in nonfarm payrolls proved to be robust, with the actual number of 339,000 exceeding economist estimates of 195,000. ADP employment change showed a similar increase: 278,000 payrolls added versus 170,000 expected.
Among companies reporting financial results, Lululemon (LULU) reported earnings that surpassed Q1 expectations and revealed a raise in full year guidance. Dollar General (DG) and Advance Auto Parts (AAP), however, both disappointed, suggesting that the lower-income consumer is struggling. DG missed earnings estimates due to customers slowing spending resulting from recession fears while AAP missed on all fronts, cutting its earnings and sales guidance for the full year and reducing its quarterly dividend by 83%, all due in part to the company experiencing shrinking market share.
Despite the strong economic data, we heard Fed Speak that suggested the Fed may pause in June and hike again in July. This apparent “pause” was also well-received by markets. Of course, we will see what happens when the Fed makes their next decision on June 14.
Weekly Performance
S&P 500 4,282.37 +1.88%
Dow Jones 33,762.76 +2.17%
Nasdaq 13,240.77 +1.76%
Key Economic Readings Next Week
Monday, June 5 — Durable Goods, ISM Services Prices Paid, New Orders, Employment
Wednesday, June 7 — Consumer Credit; Trade Balance
Thursday, June 8 — Initial and Continuing Jobless Claims
Friday, June 9 — Wholesale Trader Sales and Inventories; Household Change in Net Worth
Wednesday, June 14 — FOMC Rate Decision
Thank you Blue Room Team Leader OMAR GUZMAN
Matt Goldberg — Chief Executive Officer
Thanks Angela. And thanks to all of you for joining us this morning. Since I first joined these quarterly calls last July, I have been focused on aligning our teams around a shared vision, reinvigorating our culture of execution, organizing ourselves to break down silos, building out a world class leadership team, leveraging data to deepen our consumer engagement focus, accelerating our product development and investing to extend our market leadership and experiences. We are pleased with the progress we're making while delivering on our expectations for our financial performance.
Our Q1 results were achieved as our new leadership team rallied the organization around our group vision to be the world's most trusted source for travel and experiences*. We launched our strategy for Tripadvisor and engaged our employees on how we translate our priorities into an operating plan with tangible proof points while delivering on our revenue and margin plan. And we continued to deliver meaningful growth as the market leader in experiences at Viator and strengthened our European dining position at TheFork. We delivered year-over-year revenue growth of 42%, or $371 million and adjusted EBITDA of $33 million, or 9% of revenue, in line with our expectations for the quarter and reaffirming our confidence in our plan for the full year. In a moment, I'll provide some tangible examples of our disciplined execution and the progress we're making against our segment strategies.
But first, let me frame these results in the context of our strategy and illustrate how our focus is driving performance. We operate unique segments with their own strategies, each in different stages of growth, with different competitive dynamics, market opportunities and customer value propositions. In Tripadvisor Core, we're focused on delivering sustainable revenue and profit growth, by driving deeper traveler engagement that benefits our partners and fuels our diverse monetization paths.
In Viator, we continue to accelerate our leadership position in experiences by investing in awareness, enhanced products and repeat bookings to capture more market share in this underpenetrated and high-growth travel category.
In TheFork, we're driving healthy growth with significant margin improvement this year by delivering value to both diners and restaurants in the European dining market.
Takeaways:
In the very near term, Intel is indicating that they are not seeing the CPU attrition to GPU computing in the data center business that some investors may be concerned about after the Nvidia 1Q results. They guided to $12.0 billion in the quarter, and the CFO Zinser believes the company is on track for $12.0 to $12.5, meeting the upper range of guidance.
In the back half of the year the company states that the shipping of Sapphire Rapids and the manufacturing of Emerald Rapids puts them in a good position to rebound on the CPU inventory correction. Intel is forecasting a million S.R. units shipped by mid-year. Like AMD, Intel is about three quarters behind in terms of the rollout of their GPU accelerator to compete against Nvidia’s H100 solution, but the timeline to shipment is targeting the back end of this year, which the company has seen a 2.5x step up in demand from 90 days prior. So, we’re seeing broad adoption of GPUs in the data center.
Intel’s gross margin profile is in recovery mode which will be driven by higher revenue, better sell-in, and efficiencies in the operations. The company is looking to report the product business and the foundry business separately by next year. The efficiency comes from refocusing each division to their core competencies, which include running fabs at full capacity and skipping out on “hot lots” for in-house manufacturing. The combination of the two initiatives should lead to a more consistent level of output, fewer delays, higher time to revenue recognition, and thus better gross margins on product costs.
Intel Foundry in general is working on the Five Nodes in Four Years initiative and has remained on time for that target. This was an area that many were skeptical of, due to lack of necessary toolage and a poor track record of delivering on in-house nodes under previous management. The “culture” has shifted, with more KPI being implemented and enforced by segment, which they believe is driving the transformation of Intel’s manufacturing business.
2022 10-K Transcript
Our Company
We are a global energy technology company originally founded in March 2006 under the name PVI Solutions, Inc. in the State of Delaware and subsequently changed our name to Enphase Energy, Inc. in July 2007. We deliver smart, easy-to-use solutions that manage solar
generation, storage and communication on one platform.
Today, our intelligent microinverters work with virtually every solar panel made, and when paired with our award-winning smart battery technology, results in one of the industry's best-performing clean energy systems. For the first time in the evolution of our centuries-old grid, people can get paid for the clean energy they produce and share with their communities, helping to build a new energy future that harnesses the sun. This clean, free, abundant source of energy can power our lives and ultimately help replace fossil fuels altogether. We have shipped
approximately 58 million microinverters, and over 3.0 million Enphase residential and commercial systems have been deployed in more than 145 countries.
We design, develop, manufacture and sell home energy solutions that manage energy generation, energy storage and control and communications on one intelligent platform. We have revolutionized the solar industry by bringing a systems approach to solar technology and by pioneering a semiconductor-based microinverter that converts energy at the individual solar module level and, combined with our proprietary networking and software technologies, provides advanced energy monitoring and control. This is vastly different than a string inverter system using string modules, whether with or without an optimizer, which only converts the energy of the entire array of solar modules from a single high voltage electrical unit and lacks intelligence about the energy producing capacity of the solar array.
BLUE ROOM Analysis
Precision BioSciences’ May 2023 CAR T update showed a vastly improved safety profile for both azer-cel and PBCAR19B Stealth Cell due to improved product attributes coming from the improved manufacturing process of the CARs. As a result of the manufacturing of more potent cells, Precision was able to decrease the lymphodepletion dose, that in past cohorts led to fludarabine-associated neurotoxicity issues, to a new FluCy750 dose with success in the initial 5 patients treated in that cohort. Thanks to these data, Precision’s management team believes they have a strong enough dataset spanning all cohorts treated to approach the FDA about moving azer-cel into a pivotal Phase 2 trial. The meeting will occur this June, and Precision will update investors a few weeks following that conversation.
The other major update on the 19B Stealth Cell showed that the scientific proof-of-concept has been achieved with a delayed immune response from T cells and NK cells in response to CAR T therapy proving that cloaking edits improved the stealth capability. Although patients at the 540 million cell dose do not have enough follow up time to assess the 6-month complete response rate, Precision showed that 3 out of 5 evaluable patients have MRD- responses — which could be a strong leading indicator of durable complete responses for patients. By year-end, Precision should have collected enough follow-up on these first 7 patients to evaluate signs of durability in the 19B Stealth Cell program as well.
Outside of an investor update on the azer-cel pivotal trial conversation with the FDA, Precision BioSciences will also host an in vivo R&D day in July to discuss new preclinical data throughout the in vivo portfolio and provide updates on some of the most unique and exciting programs the company is working on.
Michael Amoroso — President & Chief Executive Officer
Precision BioSciences is out of Durham, North Carolina
A little over 100 employees
The foundation is gene editing, created by Jeff Smith and Derek Jantz
ARCUS is the proprietary gene editing platform with substantial advantages over other technologies on the market
The ex vivo program is in the clinic with azer-cel and 19B stealth cell
The first inflection point will be tomorrow, that hasn’t happened yet
There will be a few this year
Going to in vivo, the foundation of the house, it’s been a busy year already
They just showed DMD data at ASGCT a couple weeks ago
Next is EISEL where they will share non-human primate data in hepatitis
The second half of the data will be the in vivo R&D day
It is highlighted by Lilly DMD data and Novartis sickle cell anemia data
In the second half of this year, iECURE might have the first in vivo gene editing IND accepted
They will submit a CTA next year for hepatitis B
Takeaways:
Revenue of $2.00 billion grew (+24.0% y/y) and beat consensus expectations of $1.93 billion. Beat BLUE ROOM expectations of $1.919 billion.
Gross margin was stronger than expected due to steeper declines in air freight costs.
Gross profit was higher due to stronger than expected sales, and lower product costs as a function of lower air freight.
Net income of $290 million beat consensus expectations of $252 million and BLUE ROOM expectations of $253 million, primarily on gross profit leverage slightly offset by higher SG&A expenses, namely brand awareness campaigns internationally.
GAAP EPS beats: 2.28a vs 1.96e (consensus), 1.98e (BLUE ROOM)
The is currently meeting its necessary annual growth rates to hit the Power of Three x2 Growth plan.
John McDonald — Bernstein
I'll kick it off talking about your big weekend, last weekend. You had the big conversion of Union Bank onto U.S. Bank's platform?
Andy Cecere — Chief Executive Officer
We did. Thank you and good morning, everyone. John, as you said, Memorial Day weekend we successfully converted and integrated Union Bank into the U.S. Bank system. That included about 1.2 million consumer and small business customers, about 3,000 commercial customers. And Importantly to date, we've already enrolled in our digital capabilities about 300,000 of those customers, and as you might expect with any large conversion we prepared for and we're ready for any unknowns, which always happen in the conversion. And we had a couple of technical slowdowns related to customer behaviors and activities and trends, but I couldn't be more proud of the way the banking group, our bank branch employees, our 24-hour banking, our call centers, and particularly our technology group resolved the issues very rapidly to make sure there was minimal customer disruption. So, we're in a good spot. We're not completely done. We still have trust and investment this weekend and then card at the end of the month and then we'll be completely integrated on all systems across the board.
John McDonald — Bernstein
Great. Terry, maybe from the financial angle, how does that set you up in terms of near-term merger integration expenses and then later in the year merger saves, just to remind us of that timeline?
Terry Dolan — Chief Financial Officer
Yeah. So maybe from a merger-related cost perspective, the second quarter and third quarter will be probably the highest simply because you're going through the severance costs and all sorts of things that are part of it. But then that starts to wane as we get into the end of the year. And certainly by 2024, the vast majority of merger-related costs are done, which is good.
So, from a year-over-year perspective, that'll be nice. From a cost synergy standpoint, we modeled included in our estimates about $900 million with cost synergies. Once we are now through the system conversion, we can start to implement that about two-thirds of it is personnel-related type of cost, a third of it is contracts and operational sort of aspects. Our expectation is that we'll be kind of at the full run rate of the cost synergies by the end of the year. So as we get into 2024, we'll be in good shape.
Takeaways:
Networked charging systems grew from 225,000 in 4Q last year to 243,000 this year, and DCFC chargers grew to 21,000, up from 19,000 last quarter.
Gross margin is improving as the supply chain costs ease, which helps build up inventory for demand and keep up with the backlog. It also helps with customer satisfaction, in that more inventory means more backup parts, which can now be shipped the next day. That keeps customers satisfied and prevents market share attrition.
Gross margin is also expected to expand on higher sales, which feeds into the target of Adjusted EBITDA positive by 4Q of this year. In addition, it will help get to cash flow positive in the same time span. This is led by management’s assumption that they can cut adjusted EBITDA loss by 2/3rds over the course of the year.
The assumption for now is that the back half of this year will be substantially higher in terms of revenue than the first two quarters, led by fleet buys and strength in Europe.
Despite the second quarter coming in below investor expectations, it should still be a record quarter for the company.
The company continues to be vehicle limited in fleet, despite it being strong, and will be an “uncoiled spring” once the OEMs are able to pick up on deliveries.
In Commercial the headwind is the slower-than-expected recovery in work from home.
In Residential, the headwind is the macroeconomic environment as well as interest rate digestion. Financed EVs will be more expensive in the near term, which may pressure consumer purchases of EVs in the same time frame.
NEVI will be gradually accounted for in the P&L and there will be now sudden uptick, due to the way the program is required to allocate.
The Tesla and Ford collaboration is not seen as a headwind due to the fact that DCFC will still be under supplying demand and that ChargePoint will absorb some of that excess demand.
Chad Dillard — Bernstein
So first I want to talk about the cycle, then I want to talk a little bit more about just labor productivity and how Caterpillar impacts that. Spend some time on the energy transition and how Caterpillar influences that theme. And then finish up on just services and just get an update on how you guys are thinking about reaching your $28 billion target. But first off, I guess you've been CEO for, I guess, almost seven years now? So the first question is just about how Caterpillar has changed under your leadership, then versus now?
Jim Umpleby — Chairman & Chief Executive Officer
Well, it's great to be here, Chad. And we've been asked to speak up, so I'm going to try to do that for all of you. So, we rolled out a new strategy in 2017, and we started by telling our investors that we were going to achieve higher operating margins and higher, more consistent free cash flows at different levels of revenue. And we laid out a new strategy to accomplish that.
That strategy was based on three key elements. One is operational excellence, which is safety, quality, lean, and a competitive and flexible cost structure. And that competitive and flexible cost structure is something we've worked very hard on the last few years. Really worked on removing structural costs, really worked hard in ensuring that we receive a return on every dollar of capital that we invest in. And I believe our results have demonstrated that has paid off.
Another major area of focus was services. And I can talk a lot about that, but we've invested heavily in services. It's something — and services represent everything we do for our customers after that initial sale. And done right, it's good for the customer, it increases their productivity and efficiency, it's good for our Caterpillar dealers, and it's good for us.
Another area was expanded offerings, investing in different products to ensure that we have the right products to meet customer price points, different kinds of customers. The most productive piece of equipment was typically sold by Caterpillar, but oftentimes we'd have to discount that product to capture what we will call lifecycle value customers, customers that couldn't afford or didn't need the most productive piece of equipment. So now we're designing products, not only those most productive pieces of equipment but also products that allow us to capture those lifecycle value customers.
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