Weekend Update #77
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.
The House Price Index registered yet another increase for the month of March, albeit smaller than expected, growing 1.5% month-over-month against the expected 2.0%. We can see in the above chart the slope of the index steepen beginning in June after the Federal Reserve implemented a near zero interest rate policy and asset purchasing program which included the purchases of agency mortgage-backed securities.
See more below from Team Leader Omar Guzman.
Jefferies Software Conference
June 2, 2022
Luv Sodha
Good evening, everyone. Thank you for joining us again. My name is Luv Sodha, I'm part of the Jefferies Software Equity Research team. We're lucky to have the Zuora team here. Thank you, Todd for being here. Todd is the CFO at Zuora. For those of you who might not know Zuora, Zuora is a leading player within the cash to quote process. They do everything from billings, revenue recognition, and have an extensive and impressive business. So Todd, thank you for joining us. He has an extensive background coming from SAP. Maybe, you know talk a little bit about Zuora, its place in the market today? And what brought you over from SAP to join Zuora?
Todd McElhatton, Chief Finance Officer
So, thanks, Luv. It's great to be here today. So, Zuora in really simplistic terms, we are helping companies manage their quote to cash to revenue recognition to collection process, and we're doing that for companies that have a radical revenue. And a lot of people are like, well, how hard can that actually be? And what's so different about radical or subscription revenue versus a standard product one and done. And what companies are finding what Zuora knows is because that's where we -- that's our DNA, we started in tech and now we've gone into manufacturing, media, other emerging verticals such as financial services, healthcare, retail that once you start going into an ongoing annuity revenue stream, the accounting rules change, the complexity changes, and it's not a one and done.
And what you see is after the company makes or after the customer makes an initial purchase, the journey just begins. And during that journey there's lots of things that happen, customers maybe want to upgrade, maybe they want to pause, maybe they want to add to their subscription. And every time that you do that, you end up probably affecting at least a dozen downstream systems.
And what's happened traditionally is people either built something themselves or maybe they've clued something together with their ERP or CRM systems, but those are all hardwired together. And so, what ends up happening is the marketing group comes up and says, I've got a great idea for some new pricing and packaging that I want to release. And this was maybe case in point with Zoom during the pandemic and a company like Zuora we were able to help them move out all those new pricing and packaging and really grow their business in days.
But companies that have these traditional, do it yourself, or they clued something together with their CRM or ERP systems are sitting there saying, okay this is an IT project will come back and we'll have your new pricing and packaging done in one or two quarters. And anybody knows it's got product groups behind them they're like that's totally unacceptable and it really puts you at a disadvantage in the marketplace. And that's where Zuora comes in and we really help our customers.
And so, I think in short that's what our value proposition is. That's what we've done. We've been in this for 14 years. We've got a great list of 1,000 plus customers. We started in tech, but what we're seeing is more and more companies have seen the resilience of a subscription business model and want to have a greater share of their business there. And that's been a great opportunity for Zuora.
To your last point is I've been now at Zuora almost 2 years. Most recently, I came from SAP and I was a CFO for all their cloud businesses. I'd also been at VMware and Oracle and a couple things really excited me about the opportunity. First of all, I felt that Zuora had been a little bit under appreciated in that we had a huge runway in front of us. If I take a look at how much of the market is going to these radical business models and it's just not in one industry.
Matter of fact, I was even more pleasantly surprised when I join Zuora about manufacturing, how big of a vertical it was for us. And today Zuora powers 12 of the 15 largest car manufacturers. A lot of those autonomous car business models are going to be running on the Zuora platform. But I saw this there was this huge opportunity. We absolutely are the market leader in the product. If you took a look at any of the external surveys, whether it be a Forrester and MGI were right at the top there. And I certainly understood from the other enterprise software companies that I work for what their products look like and I understood what their weaknesses were.
And I think any time you have a product that is in an area where it is growing and it is the future and you are a market leader, that's a fantastic opportunity. And the second thing is never bet against business transformation. And that is absolutely what we are doing is we are helping businesses transform. So between having a great product and a market that's super growing and being part of this business transformation, I felt like it was a fantastic opportunity. And over the last couple years, we have really re-engineered an acceleration of the growth. We developed the multi product strategy, and I've been really pleased with the results that we've been able to put up on the board and from our perspective this is just the beginning.
BLUE ROOM Analysis
The company negatively surprised our analysis with a non-profitable first quarter to start the fiscal year of 2023. Both topline and gross profit dollars were inline with what we expected and with what was guided to in Ambarella’s FY22 and 4Q22 earnings conference call. We were surprised by the level of continued investment into operational components, with both R&D expense and SG&A expense coming in higher than expected, as a percentage of total sales. Our primary thesis for lower R&D expense, was an apparent three-and-a-half to four year R&D investment cycle. From 2013, to now there have been two such cycles, in which R&D peaks roughly 2.5 years ahead of the launch of a new product family. The first cycle began with consumer video processors, which evolved into computer vision products, and we are now moving towards AI and robotics in security and automotive. We are not concerned about the quarter’s earnings unprofitability given that the company still grew its cash balance and sits in a comfortable negative net debt position on its balance sheet [-$189.91 million]. The longer term sales thesis remains, judgment day won’t arrive until after CY2025, when the company expects its higher ASP CV3 products to launch.
Ambarella, like many other semiconductor companies, is burdened by the lack of integration in the global supply chain. Customers continue to stall orders from Ambarella while they wait for other components to become less congested in the supply chain in order to construct full kits. It appears that the demand for Ambarella’s products remains, but it is uncertain how long it will be before the company can recognize those sales.
Along the lines of supply chain and production capacity, the Company management provided an update about the 14nm wafers being produced by Samsung in Texas. The timeline for 2H22 improvement is still on track, but may be inconsequential now that the Company expects CV5, 5nm wafer to go into mass production in 2H22 as well. The Company affirmed its forecast; CV making up 45% of sales this year. CV3 will also be shipped for demos in 2H22.
Ambarella also made sure to note that its working capital/ operating cycle was beginning to improve. Days of Inventory shrank to 117 days from 128, while days receivable shrank to 28 days from 45 days.
As far as the Company’s outlook for 2Q23:
Revenue of $78 to $82 million disappoints our model, which expected $87.5 million. This also came short of Bloomberg consensus expectations of 91.4 million. Persistent supply chain issues are likely to continue lowering market expectations for sales growth.
Non-GAAP gross margin of 63.5% at the midpoint is inline with the most recent quarter. Non-GAAP operating expense of $43.5 implies a non-GAAP operating margin of 9.13%. Tax rate should be modeled between 4 and 6 percent.
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