#WCOE in the Digital Economy, Q3 2020
Splunk Needs to Earn the Trust Back
Splunk's quarterly result this week was a disappointment no matter how you look at it. The company missed almost all the key metrics: revenue growth, ARR, Cloud ARR, and RPO growth. The management uncharacteristically suggested a large number of deals failed to close on the quarter's final days. A more significant issue is the management's credibility was taking a massive hit. The company reassured its quarterly outlook and long-term plan in late October but pulled all the targets after only six weeks.
"you guys had an Analyst day not too long ago, and you reiterated longer-term targets... it's a bit surprising to hear you withdraw FY '23 targets altogether." -- Keith Bachman, Analyst of BMO
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Salesforce's Acquisition of Slack
Expanding Slack's enterprise footprint will be Salesforce's key focus to turn the firm's most expensive acquisition into real success. Execution is everything. The good thing is history (Tableau, Mulesoft, etc.) is on Marc Benioff's side.
"That's the game-changer. This is bigger than I've ever thought it could be. And when I looked at the companies from around the world, we're implementing Slack from the fastest growing start-ups to Fortune 500 companies and Starbucks and Target and HP and what they're doing, and then when we integrate that with the single source of truth, it's a supercharger. So, we already know more than 90% of Slack's enterprise customers are also Salesforce customers, but we also see how much further they can go." -- Marc Benioff, Chairman & CEO of Salesforce
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Snowflake: All About Driving Higher Consumption
The hottest software IPO didn't let investors down in the first quarter out of the gate. The quarterly results demonstrated an impressive growth at scale: product revenue growth of 115% YoY, RPO growth of 240%, and an improving net revenue retention rate of 162%. The conservative revenue guidance only turned off the market for less than 24 hours. $SNOW's jaw-dropping valuation is at 103x EV/Sales now ($ZM: 35x; $COUP, 36x; $PLTR, 29x).
Snowflake has also expanded its product features during the quarter. The announced Snowpark allows users to code, implement workloads on the Snowflake platform directly. It will support unstructured data sets soon. The data-sharing feature has been gaining traction among users (23% of penetration rate). As the management reiterated and emphasized many times during the call: $SNOW is a consumption-based company. All they do is to drive higher consumption.
"Our entire business model, as we've said over and over, is based on consumption. So anything that drives consumption of our query engine and our platform accrues to our business model. So our whole strategy is driven to move the dial on consumption."-- Frank Slootman, CEO of Snowflake
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Intel Seeking Help From the Government, but That May Be the Wrong One to Ask
Intel CEO Bob Swan wrote an open letter to President-elect Joe Biden this week. Intel is the last leading-edge semiconductor manufacturer in the U.S. soil but is gradually losing its mojo given the hiccups in recent years. In the letter, Bob Swan called for increasing investments by the U.S. government into the domestic semiconductor industry, citing foreign government subsidies as a significant disadvantage.
"According to the Semiconductor Industry Association, the U.S. accounts for just 12% of global semiconductor production capacity, with more than 80% taking place in Asia. Rising costs and foreign government subsidies to national champions are a significant disadvantage for U.S. semiconductor companies that make substantial capital investments domestically. A national manufacturing strategy, including investment by the U.S. government in the domestic semiconductor industry, is critical to ensure American companies compete on a level playing field and lead the next generation of innovative technology."
However, Intel's recent struggle has nothing to do with a lack of money or investment. The company has been pouring money into capital spending and share buyback. The root of the problem is more the execution, and that's not a problem that can be solved by a subsidy by the U.S. government.
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Workday: Is Management Too Conservative?
The leading enterprise SaaS company ($WDAY) delivered a solid quarter on almost all metrics but gave a very conservative subscription revenue backlog (a leading indicator of revenue) guidance for the final quarter of the year. The market didn't take it well since whether the company can sustain its growth rate above 20%+ matters the most for investors at the moment. The second wave of COVID-19 seems taking a toll, but the slow adoption of financial management products could be the real trouble down the road.
"The question is, are we already at pre-COVID levels. We are not, ..., obviously, there is the second wave as well in front of us that is creating more near-term uncertainty, for which we do not know yet what is going to be the impact or how long it's going to take, basically, for all of us to get on the other side, right?" -- Chano Fernandez, Co-CEO of Workday
"But I do believe there are some bigger (financial management) projects that are being held off until post-pandemic. And so the idea of starting a big project at a Fortune 500 company, we're getting those, but probably not as much as I think we'll get post-pandemic." -- Aneel Bhusri, Co-CEO of Workday
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Agora: Strong Customer Addition Shadowed by Margin Weakness
"Our number of registered applications reached more than 240,000 at end of September, adding nearly 10,000 per month in Q3. Our number of active users reached more than 1,800, up 95% year-over-year. Outside of China, we continue to see strong demand for our real-time audio and video products in both mature use cases such as entertainment and gaming and emerging businesses such as education." -- Tony Zhao, CEO of Agora
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Bilibili: An Emerging Player in Online Ads/Gaming With Golden Cohort
"There are about half of the young generation in China has been active on Bilibili, which is the golden cohort for brand advertisers, …, and at the same time, we continue to improve our advertising efficiencies, launching innovative ad product, …, and as our brand perception and brand power continue to increase, Bilibili has now become a must-invest platform across many advertisers. …, so as of 2020, we believe our advertising value has been widely recognized by our advertisers. As we look into 2021, we're quite confident to continue to carry out this positive growth momentum." -- Juliet Yang, Senior Director of IR of Bilibili
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On the gaming side, $BILI is the main Android distributor in China for Genshin Impact, which generated the most mobile gaming revenue globally in October 2020.
"Our solid reputation, strong game operation capabilities, and high destiny gamers demographic have made Bilibili the gogo-to platform for 20 operating partners."
"In September, as the main Android partner in China, we began jointly operating the highly anticipated Genshin impact. The massive success of Genshin and our operation is another feather in our cap." -- Sam Fan, CFO of Bilibili
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JD: The Pie is Big Enough in the Online Supermarket & Fresh Market
"In China, the traditional retailers in fresh food categories, the top 10 players, top 10 supermarket brands only take about 5% of the overall Chinese market." -- Lei Xu, CMO & CEO of JD Retail
"...(supermarket and fresh) this is a huge market, and we have seen a structural opportunity for this category, ..., we understand that there are many companies entering into the market. But we believe, by the end of the day, there will be quite a few players, and we don't have to compete head-to-head at this stage."-- Sandy Xu, CFO of JD
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Nvidia: RTX 30 Series Pushing Gaming Revenue Over $2 Billion for the First Time
"Starting with Gaming. Revenue was a record $2.27 billion, up 37% year-on-year, up 37% sequentially, and ahead of our high expectations. Driving strong growth was our new NVIDIA Ampere architecture-based GeForce RTX 30 Series of gaming GPUs.
..., First announced on September 1st and ranging in price from $499 to $1,499, these GPUs have generated amazing reviews and overwhelming demand. PC World called them 'staggeringly powerful' while Newegg cited 'more traffic than Black Friday.' Many of our retail and E-tail partners sold out instantly.
The RTX 30 series drove our biggest ever launch. While we had anticipated strong demand, it exceeded even our bullish expectations. Given industry-wide capacity constraints and long cycle times, it may take a few more months for product availability to catch up with demand." - Colette M. Kress, CFO of Nvidia
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AMD's Record-Setting Quarter
AMD delivered a blow-out quarterly result and outlook. The management is seeing a very healthy datacenter environment without any slowdown. The Xilinx acquisition makes sense. It's not about technology synergy between the two, but more about TAM expansion and complementary product portfolio + customers. We will judge the deal in three years by how successful they are in cross-selling and revenue synergy, especially in Xilinx's strong markets like communication and A&D.
If things work out, by the end of FY2021, AMD could be a company with 15B revenue, growing at 20%, with an FCF margin ~20%. 3B FCF generation and keeps growing, with net cash over 3B. By that time, they could be bigger than Intel in terms of market cap and start acquiring other datacenter related semi companies.AMD delivered a blow-out quarterly result and outlook.
"Our business accelerated in the third quarter, resulting in record quarterly revenue, with net income and EPS more than doubling year-over-year"
"We set a record for quarterly client processor revenue and believe we gained client CPU share for the 12th straight quarter"
"In mobile, we set records for both quarterly notebook processor unit shipments and revenue as OEM sell-through doubled year-over-year. We have the strongest notebook processor portfolio in our history"
"We set a record for quarterly server processor revenue as sales grew a double-digit percentage sequentially and more than doubled year-over-year
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Twilio's Re-accelerating DBNER Highlights its Strengthening Value Proposition
Some takeaways from the earnings call:
"Our success is a testament to the value proposition that Twilio's platform offers businesses: digital engagement, software agility, and cloud scale." "The combination of Segment and Twilio means that we will be able to help any business make their customer engagement across every channel more personalized, timely, and impactful. This is an important step towards our vision of building the world's leading customer engagement platform." --- Jeffrey Lawson, CEO of Twilio
"We just saw a great performance kind of all around in terms of a number of our customers, segments, geography, products, …, two of the things that we have pointed out both at our Investor Day as well as today, we are continuing to see a reacceleration, if you will, in our Messaging business, and we feel great about the additional growth that we've been able to drive there." --- Khozema Shipchandler, CFO of Twilio
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NXP Returning to Growth as Automotive Quickly Rebound
"The past quarter has been more than a little surprising. Our automotive business came back much more quickly than we thought it would do, and we've seen real strength in the industrial and mobile end markets"
"Our third-quarter revenue performance was significantly better than planned. Relative to our guidance, we experienced material improvement across all of our end markets. We are pleased that the third quarter was also a return to improved year-on-year revenue performance providing a solid position to build from going into 2021" --- Peter Kelly, CFO of NXP
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ServiceNow's Growth Is Bound to Re-Accelerate
The increasing importance of enterprise workflow automation helps the company grow the top-line, with a broader portfolio of products.
"Before I move to guidance, I want to give a brief update on the trends we are seeing in our business. Overall, we see strong momentum heading into the last quarter of the year. The highly affected industries we outlined earlier in the year, which represented about 20% of our business and include areas such as transportation, hospitality, retail, and energy, continue to see macro headwinds but remain steady customers of ServiceNow. We closed 6 new deals over $1 million in these affected industries. And while we do expect some headwinds in severely impacted industries like airlines, renewals of existing customers have remained very strong.”
"We've also seen very healthy payment terms and DSOs. Collections have been strong, …, and we expect that trend to continue into Q4."
"Our pipeline generation has remained robust, and our pipeline coverage ratio for the remainder of the year gives us confidence in our ability to deliver a strong finish to 2020." --- Gina Mastantuono, CFO of ServiceNow
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Amazon's Hiring Spree
"We're able to meet the heightened demand in Q3 because we opened up more network capacity, particularly in our transportation network. First, we hired a lot more people to support the strong customer demand. We welcomed 250,000 permanent full-time and part-time employees just in Q3 and have already added about 100,000 more in the first month of Q4." --- Brian Olsavsky, CFO of Amazon
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Amazon's Still Underappreciated Third-Party Seller Services
Amazon's "third-party sellers services," mostly fulfillment by Amazon (FBA), is now a $20.4 billion business growing at 55% YoY. What's more impressive is that its growth has been accelerating since FQ1'19 from 20% YoY. Amazon has spent heavily on building out warehouses: "assets acquired under operating leases" increased 175% YoY to $6.1B in Q3.
The company expected to grow fulfillment and logistics network square footage by approximately 50% this year, including significant additions to the fulfillment centers and transportation facilities. "The majority of these buildings opened in late Q3 and into Q4. About half of this square footage growth will be on the transportation side to the opening of more sorting centers and delivery stations."
The third-party sellers' services' scale has surpassed all other logistics giants globally, whether it's the 1st party or 3rd party business model.
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Delayed iPhone 12 Launch Weighs on Revenue
"Greater China is the region that was most heavily impacted by the absence of the new iPhones during the September quarter." --- Tim Cook, CEO of Apple
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Online Advertising Recovering, Google Trailing Facebook
Judging by the YoY incremental growth of the advertising business at Google and Facebook.
“So overall, we're pleased at the degree to which advertisers really have reactivated their budgets in the third quarter. And they're reacting in part to, I think, evidence that consumers are showing strong demand across nearly all verticals. It's everything from home and garden to computer to work from home.” - Ruth Porat, CFO of Alphabet
The acceleration in advertising revenue growth from Q2 to Q3 was largely driven by strong advertiser demand resulting from the accelerated shift from off-line to online commerce that we saw in connection with the pandemic. We are seeing particular strength among small- and medium-sized businesses." --- Dave Wehner, CFO of Facebook
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5G Transition Starts to Drive Smartphone Semiconductor Growth Acceleration
Qualcomm, Skyworks, and Qorvo all reported their earnings last week, delivering a consistent message: smartphone semiconductor growth is accelerating, thanks to 5G.
"We're seeing a different set of drivers for revenue growth than units. It's driven by 4G to 5G transition, driving more RF front-end content." -- Akash Palkhiwala, CFO of Qualcomm
"In Mobile Products, the transition of 5G is fueling a shift from discrete products to higher-value content, including integrated modules in flagship and mass-market 5G smartphones." -- Robert A. Bruggeworth, CEO of Qorvo
"We have very strong content increase and content gain as 5G being introduced in the phones, it's adding a lot more complexity. It's adding new bands, which are being layered on top of the existing 2G, 3G, 4G technology and that adds a lot of complexity." -- Kris Sennesael, CFO of Skyworks
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Qualcomm Becoming One of the Largest RF Suppliers in the World
"In fiscal '20, we delivered $2.4 billion of RF front-end revenue, up 60% year-over-year. Qualcomm is now one of the largest RF suppliers with design wins across all our premium-tier smartphone customers and with a long-term road map to continue to grow our RF leadership as 5G is adopted in other industries." -- Steven Mollenkopf, CEO of Qualcomm
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AliCloud Near Breakeven With Huge Growth Potential
"AliCloud’s revenue grew 60% primarily driven by growth in the Internet, finance and retail industry customers' contribution, and the penetration rate of AliCloud among China -- Chinese-listed companies continued to increase, and ARPU growth accelerated, too." -- Maggie Wu, CFO of Alibaba
"Alibaba Cloud is expected to turn profitable by the end of this fiscal year. We believe cloud computing is a fundamental infrastructure in the digital area, but it is still in the early stage of growth. We are committed to further increasing our investments in cloud computing." -- Daniel Zhang, CEO of Alibaba
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T-Mobile: Blockbuster Subscriber Net Adds
T-Mobile also delivered a strong quarter even after retiring the Sprint brand, during which It added 2.04 million new customers (vs. estimate of 839K). Here are some key takeaways from Mike Sievert, CEO of T-Mobile, in the earnings call.
"We delivered the biggest subscriber growth in our history, with over two million total net additions. This is our 23rd consecutive quarter leading the industry, and this quarter, we delivered more than AT&T and Verizon combined. We've now surpassed 100 million total customers, and we're pulling further ahead of AT&T as the nation's number two wireless provider."
"Churn went down with the best year-over-year churn performance in our industry for postpaid phones.”
"We expect to realize over $1.2 billion of synergies in 2020, way ahead of our plans, and we're only a few months."
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U.S. 5G Deployment Update
Carriers all beat expectations amid pandemic, and they expect 5G to help them expand the total addressable market going forward.
1. Verizon: "Ultra Wideband" and "MEC." According to Hans Vestberg, CEO of Verizon:
“We continue our expansion on the Ultra Wideband, and we took a leapfrog with 19 more cities, and we are now 55 cities for mobility with 43 stadiums and 7 airports.”
“We now have 5 Mobile Edge Compute centers together with Amazon. We also announced that Microsoft is now joining also on the mobile edge compute as well, with a focus on the private side of the 5G Mobile edge compute.”
2. T-Mobile: "2.5 GHz." According to Mike Sievert, CEO of T-Mobile:
“We now have 2.5 GHz deployed in over 400 cities and towns, covering over 30 million Americans. And we're targeting more than 1,000 cities and towns, covering 100 million people with our mid-band high-capacity 5G coverage by year-end."
3. Accelerated Capex for 5G roll-out.
“And importantly, we also accelerated Capex spending, as Neville and team are running at full speed ahead on our synergy-driven network build." -- Mike Sievert, CEO of T-Mobile
"We expect our full-year Capex to be at the upper-end of our $17.5 billion to $18.5 billion guidance." -- Matthew Ellis, CFO of Verizon
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Square: Is Cash App Business Account the New Growth Engine?
"Cash App Business GPV, which is composed primarily of Cash for Business volumes as well as a small piece from peer-to-peer funded by credit card, Cash App business GPV was $2.9 billion, as you noted about 9% of Square's total reported GPV and we see transaction revenue here about $81 million, both of those metrics were up more than 300% year-over-year in the quarter. We monetize Cash of Business at 2.75% of volumes." -- Amrita Ahuja, CFO of Square
"What's different about Cash of Business, of course, it's all digital and allows those sellers to manage their business through peer-to-peer transactions through their cash tag and it also provides them higher weekly limits and relevant tax reporting forms." -- Jack Dorsey, CEO of Square
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PinDuoDuo: Online Agriculture Becomes the Next Growth Driver
$PDD delivered a better-than-expected quarterly result last week, lessening investors' concerns about the balance of growth and profitability. The management still prioritizes investment in growth areas, particularly in "DuoDuo Maicai," its online fresh grocery platform.
"Post-pandemic, we have noticed that consumer habit of grocery shopping in a wet market or supermarket are shifting. Many of our users have shifted to online channels for their daily staples. Pinduoduo has also become China's largest online platform for agricultural products by enabling direct selling from farms to the dining table." -- Chen Lei, CEO of PDD
"We see a bright future for agriculture in China. We generated RMB136 billion of GMV in this category in 2019 and expected it hit RMB250 billion this year. Consumers have come to identify PDD as the go-to-platform for agriculture goods." -- David Liu, VP of Strategy
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Tencent vs. Alibaba: Virtual Economy Surpassing Real Economy?
Tencent posted a blockbuster growth of gaming revenue in 2020, after two years (2018 to 2019) of sluggish performance due to stringent government regulation. The total gaming revenue grew 42% in the latest quarter, and the mobile gaming revenue topped 60% YoY growth for three consecutive quarters. The channel renegotiation boosted gaming profitability even further.
Tencent gaming is now three-quarters of the size of Alibaba's core eCommerce business (Taobao+Tmall) but growing twice as fast. So here is the question: as a society, are we closer to the inflection point where the virtual economy is larger than the real one?
"We have been in the process of negotiating the kind of revenue shares to what we think are more sustainable levels, and that has and will continue to flow through over time into our game margins." - James Mitchell, Chief Strategy Officer of Tencent
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Disney: Transforming Into a Streaming Business With Theme Parks
Some highlights from $DIS's recent quarterly result: DTC business continued to grow, suspending dividends to support streaming investments, and the intra-company content licensing reached a $6B annual run rate.
"We launched Disney+, and it has quickly exceeded our highest expectations. Disney+ had more than 73 million paid subscribers, far surpassing our expectations in just its first year." -- Bob Chapek, CEO of Disney
"As part of that commitment and given limited visibility due to COVID and our decision to prioritize investment in our DTC initiatives, the Board has decided to forego payment of a semi-annual dividend in January 2021." -- Christine McCarthy, CFO of Disney
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Datadog: Land and Expand, Rinse and Repeat
"Our powerful land-and-expand model continues to be driven by both usage growth of existing products as well as the cross-selling to our newer solutions. In the third quarter, we saw continued strength in our platform strategy, with over 70% of our customers using 2 or more products and about 20% of our customers now using 4 or more products, up from only 7% a year ago. Continued product traction is being driven by adoption in the initial land as well as strong cross-selling." -- David M. Obstler, CFO of Datadog
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