Visa Second Quarter Earnings

Visa released Q214 earnings pre-market on Thursday, July 24^th. Net income for the quarter rose 11 percent to $1.36 billion, or $2.17 a share, from $1.23 billion or $1.88 a year earlier. Revenue increased 5% to $3.16 billion.  Due to a series of nagging economic issues, the company trimmed its projections for annual revenue growth. The report also shows cross-border volume growth on a constant dollar basis was 7% for the quarter. On the end of Friday, Visa dropped 3.58% or $7.97 to $214.77.

Earlier on Thursday, Visa announced Visa Digital Solutions, an initiative geared toward secure payments using mobile phones and other devices.

After the U.S. imposed sanctions against Russia in March, President Vladimir Putin tried to create their own payments system. However, due to the lack of experience and technical support, the program failed. Instead, the Russia government agreed to pay millions of dollars to Visa and Mastercard to keep them in action in Russia. Although Visa only generated 2% of revenue from Russia, the stock has been very sensitive to the Ukraine-Russian standoff. 

 Visa is heavily reliant on transaction growth, but after a long battle between retailers and payment technology companies, the company determined transaction fees of 21 cents. In addition, there are more substitute companies that have been established such as mobile wallet, which can highly affect Visa’s future growth. The investment thesis is intact, but it may be affected by the above reason in the future.

I have reiterated my price target of $246, representing 15% upside from Fridays closing price.  

Solarwinds Inc. 2Q14 Earnings: Record Beat, Outlook Raised, Reiterate BUY

Solarwinds Inc. reported 2Q14 earnings Thursday market close and held a corresponding conference call at 5pm EST. Revenues came in $101.5MM up 31% yoy besting our $96.6MM estimate. Non GAAP EPS was up $0.41 vs our $0.38 estimate up 11% yoy. All eyes on license revenue which came in at $37.6MM up 21% yoy due to strength in core and systems management products. It should be noted that this was the first time in company history where total revenue exceeded $100MM, a fine feather in the cap of an underdog.

On a year-over-year basis, new business sales grew by 25%. Did we not have faith incremental investment in the back half of last year would pay off? While the NA installed base contributed to sales to existing customers up 138%, more consistent momentum is gaining with EMEA and APAC, whose teams were started just a year ago. Over the next 3 quarters, management believes they have the “strongest schedule of product releases we’ve ever had as a company,” words taken with strides as the stock was up ~7% in after hours peaking ~12% today.

Solarwinds has expanded the depth and breadth of their leadership team over the last several quarters akin to their international build out. Also, last week, they announced that Paul Cormier, President of product and technology at Red Hat has joined the Board of Directors. On June 18, 2014, 13 days before the end of 2Q they acquired Pingdom, a leading provider of website monitoring and performance management solutions, which are all offered as a service from the cloud.

Enough positives. Total non-GAAP expenses grew by $23.4 million or 66%. Also, the company took a charge of $6.8 million related to the abandonment of their former headquarters in Austin. Solarwinds leased new space, which they moved into this past April to provide sufficient room for planned future growth.

Solarwinds generated record operating cash flow of $51 million as a result of strong collections. In August, they expect to repay $40M outstanding on their revolving credit facility. Lastly, approximately 70,000 shares were repurchased during Q2 for ~$2.7M under the stock buyback plan announced last year. There is approximately $12M still available under that buyback program, which is scheduled to conclude on July 31, 1 week from now. What is downside?

Outlook for FY Non-GAAP operating margin increased 100 bps to 42% based primarily on the margin outperformance in Q2 despite the dilutive impact of the Pingdom acquisition. Revenue outlook for the second half was raised $4.5M or $8.5M for FY14. On a stand-alone basis, Pingdom is approximately $2-2.5M of the sum. The rest due to increased confidence in the business based on demand generation, strengthened team, product roadmap and market opportunity.

After our double down in late June our average share price increased to $35.59. Currently up around ~20% we see another 20% of appreciation down the road. Over the last 3 years the stock has sold for 29x current year earnings. We are maintaining our $52.00 PT representing a 31x multiple to our FY14 EPS of $1.71. Indeed a slight premium warranted due to consistency of results, robust growth rates, and product pipeline coupled with profitability.

Google 2Q 2014 Earnings Call

Google Corporation posted revenues of $15.9 BB and non-GAAP EPS of 6.08 dollars per share. Consensus was at 6.24 for EPS and 15.6 according to Thompson Reuters. The stock appreciated in after-hours trading and the gains stuck as the Class A shares rose and stayed above 600 the following week. Analysts were impressed by the strong revenue growth of 22% YoY and the company beat estimates on another number as well. This number, traffic acquisition costs (TAC), came in at $3.29 BB. This represents 23% of revenues and Google's revenue minus TAC came in around $500 MM above consensus estimates. 

Paid clicks were up 25% YoY and cost per click was down 6% YoY and flat QoQ. To see this metric flat QoQ was another great indicator. 

Google sites revenues were up 23% YoY and came in at $10.94 BB. Network revenues were up 7% YoY coming in at $3.42 BB. Other Revenues came in at 1.6 BB, up 53% YoY. 

It seems like investors are becoming comfortable with Google's long term strategies and investments as the stock has been strong even with an earnings miss. All the drama surrounding the Nest recall has also appeared to have had minimal impacts on Google's results. Google may be leading the way towards technological advances worldwide and can easily be considered undervalued at these levels where revenue growth is consistently around 20% each quarter. Google has been swallowing various other companies with relatively minimal effects on the financial results. Of course expenses have been trending up but the company has proven that it can afford to invest for the future today. With growing ad revenues and the various other avenues for growth becoming available, we recommend a hold on the company with a price target around 700.

Regions Financial Q2 Earnings

Before the market opened on July 2^nd, Regions Financial posted strong second quarter earnings. 

They posted a profit of $292 million, up 12% from a year earlier, and met earnings estimates at 21 cents a share.   Revenue increased by 2% to $1.28 billion over prior quarter.  Net interest margin was 3.24% down two basis points from last quarter, but net interest income grew $6 million to $837 million year over year.  Net interest income was benefited from loan growth, but net interest margin declined because of lower asset yield, and loan spread retraction resulting from a persistently low rate environment and competitive pricing pressures. 

                The bank’s loan portfolio grew 1.1%, boding well for revenue growth.  The boost in consumer and business portfolios has increased to $77 billion. 

                Their Tier 1 capital ratio is 12.5%, up .09% year over year.  Their Basel 3 ratio was 11%.  Their liquidity also remained solid with a loan to deposit ratio of 82%. 

Last month Regions settled allegations that it improperly accounted for loans that soured during the crisis.  They agreed to pay $51 million.  Also, there is an ongoing investigation by the U.S Department of Housing and Urban Development related to mortgage practices. 

 The CEO commented that these results demonstrates an effective execution of their strategy, by focusing on customer needs, they have grown loans, deposits, and checking accounts.  They achieved a positive operating leverage and increased their efficiency ratio to 64.2%.  Net charge offs declined to .35% of loans, a decrease of 18% over last quarter. 

Although the strong earnings, the stock fell $.09, or .98% to $10.10.

Halliburton Co. (NYSE: HAL) Q2 Earnings

Halliburton Co. (NYSE: HAL) reported Q2 earnings per share (EPS) of $0.91 on Monday with the stock closing for the day at $71.00 representing a 40% appreciation in value since the start of 2014. EPS was below our estimate of $0.95 but matched analyst expectations of $0.91 with overall results for the quarter meeting expectations. Total revenue grew to a record $8.1 billion with revenue from North America rising 11 percent in Q2 from Q1. Overall demand for oil field services grew significantly during Q2 in North America with the expectation of improved margins for the remainder of 2014. The average number of active rigs on land in the U.S. grew to 1,781 further supporting HAL’s growth. HAL’s limited exposure to current U.S. sanctions on Russia, are expected to have a limited impact on earnings going forward according to Chief Operating Officer Jeff Miller on the call.

 

There were some issues involving revenue timing for Latin America in Q2, which lowered earnings but is expected to normalize over the second half of the year. International earnings were modest with little unexpected results. HAL had acquired Neftex Petroleum Consultants in Q2, which is expected to improve subsurface modeling and improve multiple facets of HAL’s core competencies.

 

It was also announced that the company would be increasing its stock buyback authorization to $6 billion from $5 billion and that it would be promoting Jeff Miller from chief operating officer to president at the start of next month.  Overall HAL has exceeded our expectations and is positioned well in its industry to continue to grow. While the HAL model has yet to be updated with earnings we are expecting to increase our price target citing a strong outlook in the oilfield services industry.

Private Bancorp Q2 2014 Earnings

Private Bancorp, ticker symbol PVTB, reported net income of $40.8 million, equating to $.52 per diluted share for the Q2 2014.  This compares to $28.9 million, or $.37 per diluted share, for Q2 2013.  For the first six months of 2014, the company reported net income of $75.3 million, of $.96 per diluted share, compared to that of $56.2 million, or $.72 per diluted share for the first six months of 2013.

According to the CEO, Larry Richman, "Our second quarter results reflect the benefit of our consistent focus on developing client relationships as higher net interest income and strong fee income led to net income of $40.8 million, a 41% increase over last year.  Total loans increased 10% year-over-year, with about $365 million in funding to new clients in the second quarter.  Operating profits are up 21% from a year ago on higher revenue drive by loan growth and lower credit costs."

The statement by Private Bancorp's CEO, as well as the strong performance in Q2 2014, demonstrate the growth of the company within the past year.  Our initial investment thesis, which was centered upon increasing net interest income, solid fee income, as well as expansion into the middle market, continues to hold true as the company has improved in each of these areas.  We feel confident in our position and will continue to monitor the company moving forward throughout the summer.

SanDisk Corporation pulls back drastically after an amazing four month rally

       SanDisk Corporation’s share price plummeted after rallying over 10% since the beginning of June after Q2 numbers were released on Wednesday. It is very painful to see the stock hand back over a month of gains but the stock apparently had gotten more than ahead of itself and a sell-off pursued throughout after-hours trading on Wednesday. The stock was down 13.5% off of Wednesday’s close by market close on Thursday. We thankfully got about 1.5% of this back on Friday but still lost quite a bit of gains. To be fair the stock did partake in a rather extensive rally leading up to earnings, probably due to high expectations from traders.

       SanDisk beat on both the top and bottom lines but the source of the sell off was a result a drop in gross margin. The company posted revenues of 1.634 BB USD above consensus of 1.6 BB and an EPS value of 1.41 dollars per share above consensus of 1.39 dollars per share. Revenue growth was 10.7% YoY compared to EPS growth of 8% YoY. Gross margins were 48%, right in the middle of what the company had guided last quarter. There were no real surprises here, the company landed right around where they had guided and above consensus. The drop in margins from 51% to 48% non-GAAP is definitely worrisome but they had guided in the 47-49% range. This is being attributed by many analysts by Apple’s bargaining power. Apple contributed 20% of SanDisk’s revenue in 2013. SanDisk’s average selling price per gigabyte dropped 16% whereas cost per gigabyte fell by 12% QoQ, resulting in a 3% drop in gross margins. We believe that the stock is still a great longer term investment but a short term drop was inevitable after seeing the company up around 45% in four months. In an industry where oversupply has been an issue time and time again we have finally reached a point where demand is outpacing supply for NAND flash memory. This is going to throw more fuel onto SanDisk’s double digit revenue growth and should also help them retain pricing power going forward. Longer stays at each technology node will also increase the life of key intangible (patents) and tangible (manufacturing equipment) assets and provide time to prepare for technology ramps.

CEO Sanjay Mehrotra provided clarity on the results & outlook with the following points,

• Increasing attach rates for of SSDs to notebook computers, currently at 30% and expected to increase to 60% by 2017. This implies an annual growth rate of about 32% in PC SSDs if PC sales are flat. Strong results and guidance from Intel Corporation suggest PC growth may be in the cards.
• Slight embedded solutions growth and a higher mix of “custom embedded solution" sales. 
• Revenue ramp from X3 products for mid and entry level smartphones in China, the fastest growing areas of mobile, are expected in 3Q 2014.
• The 1Y technology node accounted for 60% of bit output and is expected to remain at this level for the remainder of 2014. 
• Enterprise SSD growth 30% sequentially and over 100% YoY. SSD solution mix came in at 29%.
• 15 nanometer production will ramp at the end of the year, 3D NAND pilot lines in 2H 2015.

This statement stuck out to me as the most alarming object from the release.

“We expect approximately 5% wafer capacity growth in 2014, and given OEM and enterprise demand for 19-nanometer supply, we expect our supply bit growth to be at the lower end of our previously stated range of 25% to 35%. Our estimate of industry supply bit growth remains at approximately 40%.”

Sanjay went on to discuss “supply constraints” arising from strong demand for sub 1Y, 19-nanometer technology.

This makes it sound like SanDisk is losing market-share and that demand for more advanced technology nodes is progressing slower than the company had forecasted. While Q3 will be weak due to these supply contraints, the tides will turn as technology ramps progress and capacity is added. The discipline to limit capacity growth is comforting as well because an oversupply situation would be drastic.

Comments from CFO, Judy Bruner

§  SSD solutions up 97% YoY 9% sequentially

§  Removable products up 7% YoY & sequentially, especially strong micro sd card growth in emerging markets.

§  Embedded revenue down 29% YoY and up 3% sequentially, reportedly due to in progress qualification for iNAND solutions with “several” customers.

§  Operating expenses of $311 MM were slighting below company forecasts.

   Conclusions & The Acquisition of Fusion-io

The industry outlook is still an extremely compelling reason to stay in the name but another main reason that we upped our price target was the acquisition of Fusion-io for $1.1 BB. This purchase is expected to be accretive by the second half of 2015. This acquisition will give SanDisk more access to the enterprise SSD market, its fastest growing business, along with access to more sales from some big customers including Cisco, Dell, HP, Facebook, IBM and Apple. They got the company for right about 2 times its book value, which seems like a steal when the company actually posts higher gross margins than SanDisk, coming in at over 51% GAAP in the last reported quarter. We believe that Sales & Marketing coupled with Research & Development synergies will allow this acquisition to generate income within a year. The company still trades at 19x TTM earnings and 16x 2015’s earnings before considering the acquisition. This company is making an amazing transformation into a tech heavyweight in storage and is increasingly more shareholder friendly with dividends and share repurchases. There is still a lot of room to run here despite this short term correction. SanDisk will not have to beat consensus next quarter by more than a couple cents in order to avoid another pullback. This pull-back surely has taken guidance for next quarter into account. Our estimates have the company beating consensus by a few cents next quarter and by above ten cents in the fourth quarter. We would be encouraged to sell in the face of further margin deterioration and revenue growth in the single digits beyond next quarter. While revenue growth is expected to be unimpressive next quarter, the bar is low and we expect the double digit YoY revenue growth to continue in 4Q and beyond. The company is cooling off a little bit and recharging and we think extending the position into 2015 will prove beneficial.