Weekend Update #195
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Stocks saw their worst week since March 2023 and bonds whipsawed as another disappointing US jobs report revived concerns the economy is cooling and the Federal Reserve is moving too slow to rescue it.
With a slew of labor data this week, the JOLTS report showed July’s job openings fell to 7.673 million from June’s 7.910 million, compared to the consensus estimate of 8.100 million. Overall openings are now at their lowest level since January 2021. ADP reported 99,000 jobs were added in August vs. the consensus expectation for 145,000 additions while the prior July number was revised downward to 111,000 from 122,000. Additionally, the monthly change in nonfarm payrolls for August was 142,000, below consensus estimates of 165,000 and representing a slight increase from July’s 89,000. The prior July report was also revised down to 89,000 from the initial 114,000, a continuation of revisions implying a weaker-than-expected picture. With the revision, July's payrolls are now the lowest since December 2020.
Traders are pricing in at least a 25 basis point cut for the FOMC meeting on Sept. 17-18, though many economists are urging for a larger 50 basis point move.
Other corporate highlights:
Volvo scaled back its outlook as rising tariffs hurt some of its models made in China, a day after it abandoned its target of being fully electric by 2030.
Tesla plans to launch its ‘FSD’ advanced driver assistance system in China and Europe in Q1 2025, pending regulatory approval.
Salesforce announced it will acquire the data protection and data management startup Own, previously known as OwnBackup, for $1.9 billion in cash.
Intel Corp. is reportedly considering options for its stake in its struggling automated driving systems provider Mobileye Global Inc. as part of a major strategy overhaul.
Verizon agreed to buy rival telecommunications operator Frontier Communications Parent Inc. for about $9.59 billion to expand its high-speed internet business.
Vice President Kamala Harris joined President Joe Biden in declaring that United States Steel Corp. should remain domestically owned and operated, the latest headwind to the proposed sale of the company to Japan-based Nippon Steel Corp.
Friday’s Close
(Weekly Performance)
S&P 500 5,408.42 -4.25%
Nasdaq 16.690.83 -5.77%
Dow Jones 40,345.41 -2.93%
Thank you Blue Room Analyst NICK PEART
Executive Summary
Despite a 78 bps expansion in operating profit and revenue coming in line with consensus estimates, Synopsys’ EDA segment (70% of total revenue) slowed to 6% year on year growth after comping at +11.0% and +12.0% in the first and second quarters. Additionally, unadjusted revenue points to a +5% annual increase for the full year. This means that investors will have to weigh slower growth against a more profitable business, which is reflected in the trading of Synopsys’ equity shares in the day after earnings.
Revenue of $1.526 billion came in about 38 bps above consensus expectations of $1.520 billion, and was a lower upside than what some reporting analysts say they had hoped for:
Total revenue (excluding Software Integrity) grew 13.0% year over year
Core EDA Segment grew 5.8% year over year
Design IP Segment grew 32.2% year over year
GAAP Diluted EPS grew 20% year over year
On an unadjusted basis, revenues are slated to grow ~4.7% (adjustments to reported comps exclude the discontinued Software Integrity business)
Gross profit margins increased 160 bps and operating profit margin increased 78 bps, with operating deleverage coming primarily from higher general and administrative expenses.
Management noted Synopsys is broadening its demand base and is predicated on the race to optimize power and performance alongside the proliferation of AI. As with the other design automation and IP companies, revenue is more closely tied to R&D spend at their customers than it is to end-market dynamics. As such, Synopsys believes that the industry is in a multi-year investment cycle based on mounting compute complexity.
In EDA, Synsopsys claims to be gaining share in key end applications like debugging, verification, and analog design. In Design IP, Synopsys is growing revenue strongly (+32% this quarter) due to strength in interface and foundation IP. The company noted IP agreements with Intel Foundry, TSMC, Samsung and Global Foundry, across the mobile, PC, and automotive markets.
Pete Christiansen — Citigroup
Good afternoon. Thanks for joining. My name is Pete Christiansen. I'm on Citi's equity research team covering a bunch of areas, including fintech and crypto. Thanks for joining us today. I'm thrilled to have Alesia Haas, Chief Financial Officer of Coinbase here to discuss what's going on with the company recently.
Alesia Haas — Chief Financial Officer
Thank you. Yes.
Pete Christiansen — Citigroup
All right. Thanks. I do want to start off with, I think understanding your role because I think your role is incredibly unique from that of other CFOs I think anywhere. And to be honest, it's difficult for us to think of a more dynamic CFO role than that required of Coinbase. Balancing and managing the business through inherent volatility of the crypto market and its cycles, capitalizing on unique opportunities and advocating for this technology with regulators and policymakers. Meeting transparency demands of shareholders and stakeholders alike, you have a lot of tasks and a lot of things that you need to juggle.
I think it would be really interesting for investors to maybe get a sense of from a day in a life perspective, can you walk us through where you're spending most of your time these days? And maybe if you can talk about how Coinbase goes about its financial planning process.
Alesia Haas — Chief Financial Officer
It's a lot, it's a lot of fun. It is dynamic. So it's funny. So Emilie, our President and COO and I talk often about how Coinbase requires the most context switching, the most, you start the morning thinking you're going to do one thing and then you learn five new things and you move in three different directions. You might talk about like, oh my goodness, how is Canada expansion going? And now how is derivatives going? Now how is the policy effort? How do we need to shape user experience? Like you can just jump all day. And so it's the most context switching that neither of us have had in any role that we've been at before. And that makes it incredibly fun because you can feel your brain stretching and growing, but also there's a lot there.
So I do spend the majority of my time helping either with my exec team or my leadership team within finance, just navigate through new information. And our collective role, my role, the exec team's role, Emilie and me working together is how do we take new, and sometimes brand new, like how is this crypto drive policy, brand new or how do we make something more efficient, just new information. How do we turn new information challenges into opportunities? How do we identify the key talent that we need to execute through something?
How do we make something more operationally efficient? How do we identify risk and then build in the mitigation so that we don't have any footfalls? How do we understand the financial impact, whether that's going to be a new cost that we need to absorb within our guardrails, whether that needs to be like framing the revenue opportunity, how do we build out new?
And so it's just translating information into opportunity. And that is what I spend the bulk of my time helping navigate. On a more granular basis, like my day job, I would say like every day there's time dedicated to looking at like what are our data, what are our metrics? We're an incredibly data-rich metric-driven company. And looking at anomalies and data and following up on that looks off, what are we learning here? But then one day a week, I'm doing deep dives with the exec team and going into various business issues. One day a week I'm going through roadmaps with my team, what projects are we working on? How do we get more operationally efficient? How do we do more with less? How do we become scrappy? Half a day a week, I'm working on global governance.
We have about 20 regulated subsidiaries around the world that require different boards, different approvals and just participating in global governance.
And then the rest of the time really depends on where we are in the quarter. Obviously, we're a public company, and so part of the quarter is going through earnings cycles. Part of the quarter is dealing and the opportunity to work with our regulators or our bank partners or other key constituents. And then the rest of it is balancing out product opportunities. How do we identify risks and financial opportunities within the various products that we have? And how do we dog through them in finance?
Because one of the things I tell my team and I think it's most important about sitting in the finance seat in a crypto company is we should be the users of everything we use, like our institutional platform, if it doesn't work for my needs, how is it going to work for any other client's needs? How do we make payments in USDC? How do I make FX in crypto work for our own business operations before we go to clients? And so we spend a lot of time using it within our own personal portfolios.
I was really proud we just came out of crypto onchain summer and we gave out awards to employees about who was the most onchain. Finance was almost 50% of the award winners. I was like, “go finance team!” So we spent a lot of time then understanding our products with our product leads and we're just staying that way.
Consumer sentiment confirmed its early-month reading; after drifting down for four months, sentiment inched up 1.5 index points above July to 67.8 and is currently 36% above the all-time historic low from June 2022.
Consumers’ short- and long-run economic outlook improved, with both figures reaching their most favorable levels since April 2024 and a particularly sizable 10% improvement for long-run expectations that was seen across age and income groups.
Sentiment this month reflects a slight rise in sentiment among Independents, as Democrats and Republicans offset each other almost perfectly. Democrats exhibited a large 10% increase in sentiment while Republicans posted an equally sized decline. These patterns resulted from a sea change in election expectations this month with Harris emerging as the Democratic candidate for president. In July, 51% of consumers expected Trump to win the election versus 37% for Biden. In August, election expectations flipped; 36% expected Trump to win compared with 54% for Harris. Economic and election expectations are both subject to change as election day approaches.
Executive Summary
Target Corp.'s second quarter revenue proved to be more resilient than Blue Room's initial forecasts, driven by a +3% increase in traffic. Traffic increased in all six of the company's core merchandising categories, including a multi-period rebound in its discretionary categories. Notably, comparable sales in the apparel segment grew 3%, driven by Target's performance wear (sportswear) owned brand categories. Despite ALTD quarterly data and share loss to Walmart in grocery in the prior quarter, demand for Target products showed strength in the June and July quarter, above management expectations. The 3% increase in traffic offset a 90 bps decrease in average transaction value (ASPs also decline as a result of promotional activity.
Gross profit expanded 190 bps and offset SG&A deleverage from higher general expenses and employee benefits. Product margin leverage is primarily a function of better mix and lower inventory shrink, which the company expects to contribute to margin leverage in the third quarter, but to half the degree it did in the second quarter.
According to management, consumers remain budget conscious and inflation constrained, but will spend where they see value and "newness". This is something that we've heard echoed on competitors’ earnings calls as well. To that extent, Target will continue to offer lower pricing, introduce more owned-brand products and general merchandise newness to continue this trend.
Target also reinstated its share repurchase program in the quarter, buying back $155 million of its shares for an aggregate 1.1 million shares retired. The average price per share was $145.94. The Company has capacity for $9.5 billion in its repurchase program, and intends to continue repurchases throughout the remainder of F2024 and beyond.
Executive Summary
Zoom reported higher-than-expected earnings for Q2 FY2025 in both growth, non-GAAP operating income and diluted EPS. In Q2, total revenue came in at $1.163 billion, up 2% year-over-year. This result was approximately $13 million above the high end of the guidance.
Enterprise revenue grew 4% year-over-year and represented 59% of total revenue, up from 58% a year ago. Online average monthly churn came in at 2.9%, down from 3.2% in Q2 of FY '24, the lowest rate ever reported.
With the momentum, the company raised the top line and profitability outlook for the full year of FY '25. Total revenue is expected to grow 2.4% at the mid range and non-GAAP OPM expected to decrease 50 bps, to 38.7%.
Operating cash flow in the quarter grew 34% year over year to $449 million. Free cash flow grew 26% year over year to $365 million. With the strength and free cash flow in the first half of the year, free cash flow is raised to be in the range of $1.58 – $1.62 billion for the full year.
Zoom had a strong quarter marketed by burdening our Zoom Workplace offering, marching upmarket with Contact Center, and deepening the AI capabilities that underpin its entire platform. The company surpassed 1,100 Zoom Contact Center customers representing more than 100% year-over-year growth.
The company has introduced an AI Companion that is being integrated into various products, such as Zoom Meetings, Phone, Team Chat. It announced the launch of a new Zoom Webinar offering that can host up to 1 million attendees, and Zoom Docs early this month.
After almost seven years, CFO, Kelly Steckelberg has made the decision to leave Zoom. Kelly will be staying on through Q3 earnings.
Executive Summary
Ulta Beauty shares are poised to drift lower after posting worse-than-expected earnings for the quarter and substantially lowering their full-year guidance. Competition is the theme of Ulta’s earnings miss, with the company’s bricks-and-mortar stores seeing intense competition from the likes of Sephora, Walmart, Target, CVS etc. Competition was most intense in prestige while Ulta was able to maintain its market share in mass market. Despite strong promotions during the summer, Ulta management noted that they were unsuccessful at their physical retail locations though there were some positive responses online and in-app. As expected, the retailer lowered its revenue along with its margin guidance for full-year F2025 due to continued competition and the requisite increases in marketing spend and promotions in order to lure customers back to Ulta.
Executive Summary
Imugene’s azer-cel update carries important implications for Precision BioSciences, as DTIL is still eligible to receive up to $206 million in milestones for azer-cel from Imugene. The first milestone is a disclosed $8 million in cash upon the successful completion of phase 1b dosing in the LBCL population. Imugene has dosed a total of 11 patients to date and provided a data update on 10 of those patients. The company is targeting enrollment of 10-20 patients in its Cohort B, which has enrolled 5 patients to date with 4 patients included in this data update.
Precision’s milestone could be achieved in mid-2025 with Imugene targeting a registrational trial to begin in late 2025 or early 2026. With achievements in later stage trials, approaching commercialization, it is standard for a company’s milestone payments to get larger as well. Presuming this is the case, the 2026-28 period will be a key revenue revenue recognition period for Precision BioSciences as it relates to the Imugene collaboration.
Imugene acheived 44% overall response (OR) and 33% complete response (CR) rates in the 9 total patients dosed, with 50% OR and CR seen in the first 4 patients dosed in Cohort B with the addition of IL-2 to the regimen. This is an exciting signal for Imugene, along with durability seen in one patient in CR out to 120 days and one CR out to 90 days. 6-month durability will be a key measure, and full results will probably be released in mid-2025 to late-2025 based on management’s commentary in this call.
Executive Summary
MongoDB shares are poised to trade higher after the company posted second quarter earnings that handily beat analyst expectations and reflected the resumption of sales growth demonstrating the slowdown seen in Q1 was more noise than signal. MongoDB added 2,000 customers in Q2 compared to 900 in Q1. Average revenue per customer increased 12% year-over-year compared to 14% in Q1. While MongoDB management called out that they are seeing the same muted consumption trends that they saw in Q1, they continue to be able to gain new customers and new workloads. MongoDB raised its full-year growth outlook across the income statement, now expecting at the midpoint $1.92 billion in revenue, $191 million in non-GAAP operating income, and $2.40 in non-GAAP EPS.
Executive Summary
Workday delivered another solid quarter, highlighted by 17% subscription revenue growth, 16% 12-month backlog growth and 25% non-GAAP operating margin.
Both subscription and professional revenue came in higher than guidance, resulting in total revenue was $15 million higher than guidance, up 16.7% to $2,085 million. U.S. revenue in Q2 totaled $1.56 billion, up 16%, and international revenue totaled $524 million, growing 18%.
Subscription revenue grew 17.2% in Q2 and expected growth for Q3 is 15.6% y/y. Due to strong demand in Q2, professional revenue outlook is raised to the range of $680 - $690 million for FY’25. Q3 total revenue is expected to grow 14.2% y/y and the company raised the high-end outlook to $8,415 million from $8,385 million, representing 15% - 16% growth.
The company updated expectations for FY '26 and FY '27 which offers annual subscription revenue growth of approximately 15% while expanding non-GAAP operating margin to 30% over the same period. This updated framework also increases the expected FY '27 cash flow.
Workday joined the Fortune 500 list for the first time, ranking it among the largest U.S. companies by revenue.The company now has more than 70 million users under contract and more than 2,000 Workday Financial Management customers.
Extend remains one of its fastest-growing SKUs. New ACV increased more than 75% in Q2, driven by Extend Pro, which taps into the power of Workday AI.
The Board of Directors approved a new share repurchase program to repurchase up to an additional $1.0 billion of shares of its Class A common stock.
Executive Summary
Appointed as Chief Financial Officer of Exact Sciences as of May 15, 2024, Aaron Bloomer speaks to investors in a Q&A session at the Wells Fargo Healthcare Conference. His confidence in the business is underlined by the past few months Mr. Bloomer has spent integrating with and understanding the business. In this conference, Aaron Bloomer highlights key pieces of the business for investors to be on the watch for:
1. Exact is “tracking way ahead” of long-term guidance for 20% EBITDA margins along with 15% revenue growth
2. The company is on a catalyst-rich data and product launch trajectory:
Initial colon blood test data to be shared in October, with a finalized algorithm
Final BLUE-C data on colon blood to be shared by year-end
MRD data in CRC by end of year 2024
MRD data in breast in 2025
Cologuard Plus price finalization, with management submitting for a 25% price increase ($600)
Cologuard Plus approval within months and launch in early 2025
Ongoing enrollment for 25,000 patient MCED trial (up to 50,000 total patients)
3. Colon blood data that Exact is “really, really excited to share” — the company would hope for a >13% advanced adenoma sensitivity and significantly reduced COGS profile compared to Guardant/Freenome
4. Bloomer stating confidence in the 20%+ YoY revenue rebound in H2 2024
5. Rescreen success that builds from 65% compliance in 1st rescreen, to 80% compliance at second, to 90% compliance at 3rd (in line with Guardant Shield compliance)
6. Care Gap programs translating to a $500 million per year new revenue opportunity alone, on top of the current $2.2 billion consensus estimated screening revenue for FY 2024
7. Incremental sales and marketing investment stated to be $10-15 million per every $100 million incremental revenue generated
Executive Summary
Zuora grew subscription revenue 9% year-over-year to $104 million, above consensus estimates of $101.5 million. The company also generated $25.6 million in adjusted operating income, ahead of consensus’ $18.7 million estimate, producing a 22% margin. Adjusted EPS was $0.19, exceeding estimates of $0.10. Despite continued macro-related headwinds, Zuora increased its full year guidance for subscription revenue and adjusted operating profit. With the Togai and Sub(x) acquisitions, Zuora is progressing on its mission to become a full monetization solution. With a robust pipeline for the second half of 2024, ZUO shares are poised for growth as the company reaches its near-term goal of “Rule of 30,” while targeting a “Rule of 40” over the long-term.
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