Freescale Semiconductor (FSL) is jumping more than 20% today on a very strong Q4 earnings report, driven by an unexpected jump in gross margin. In case you're not familiar, Freescale is a supplier of embedded processors (microcontrollers and digital networking processors) for the automotive, networking, industrial and consumer products industries. Embedded processors are the backbone of electronic systems, providing essential control and intelligence, while enhancing performance and power efficiency. FSL combines its embedded processors with analog, sensor and radio frequency (RF) devices to streamline customer development efforts.
A number of trends are driving growth in Freescale's end markets, including 1) semiconductor content per vehicle increasing, 2) the expansion of cloud computing, 3) the build out of next generation communications infrastructure, and 4) the Internet of Things (smart devices that can talk to each other). FSL has established leadership positions in many of its core markets as 80% of sales are from products where FSL holds the #1 or #2 market positions.
Nearly half of its revenue comes from the automobile industry. Growth in semiconductor content per vehicle is being driven by applications for electrification, automation, powertrain, driver safety, engine management and driver information and convenience systems. Due to the high degree of regulatory scrutiny and safety requirements, the automotive semiconductor market is characterized by stringent qualification processes, zero defect quality processes etc. resulting in significant barriers to entry and better sales forecasts.
Semiconductor content per vehicle continues to increase due to government regulation of safety and emissions, standardization of higher-end options across a greater number of vehicle classes, consumer demand for greater fuel efficiency and new comfort and multimedia applications. Automotive safety features are evolving from passive safety systems to active safety systems with advanced driver assistance systems such as radar and vision systems. Regulatory actions are helping to drive the increase in applications such as tire pressure monitoring, electronic stability control, occupant detection and advanced driver assistance systems.
Turning to the Q4 results, non-GAAP EPS more than doubled YoY to $0.42, which was well above expectations. Revenue rose a modest 2% YoY which was basically as expected. Whenever you have a big beat on the bottom line and in-line results on the top line, the first thing to look at to explain the discrepancy is margins. And FSL did great on that measure. Gross margin improved to 47.2% from 44.0% a year ago and 46.3% in Q3.
The company cites operating efficiencies and procurement savings, offset by the impact of lower sales volume and a modest decline in utilization. Analysts had actually been expecting a sequential decline in Q4 so to see a 90 basis point improvement was impressive especially considering that sales declined 9% sequentially. In fact, gross margins have improved sequentially for eight consecutive quarters. Gross margin is now at an all-time high for the company. In terms of adjusted EBITDA margin, it improved to 24.8% from 21.8% in the year ago period. However, it was down slightly from 25.1% in Q3.
Just as important as the Q4 gross margin was, investors are particularly pleased with management's new long term gross margin target provided on the call last night: in the low- to mid-50s range so there is still a lot of upside. The next milestone will be 50% gross margins which will be achieved by driving operating efficiencies across the business. Those operating efficiencies include additional raw material conversions such as gold to copper, which alone represents significant savings in the tens of millions of dollars. Transitioning from 50% to the longer term target of low- to mid-50s, will be driven by FSL's pipeline of new products which should generate nice tailwinds in the years ahead.
In sum, this was a really good quarter for FSL, particularly the margin expansion and management's stated goal of low-to-mid 50% gross margin over time. FSL has done a good job getting costs under control. Also, with nearly half of revenue from automotive, FSL is a play on the expanded use of technology in cars (Internet-connected cars, semi-autonomous driving etc.) This is where the automotive market is headed.
Arctic Cat Reports Mixed Q3 Results; Issued FY15 Guidance, Noting N. Am. Inventory Levels
Arctic Cat (ACAT 30.20, +0.49) is trading up by about 1.7% this afternoon after initially trading down sharply in reaction to the company's earnings. ACAT reported Q3 (Dec) EPS which was better than expected at $0.68 per share, and revenues which were worse than expected, at $193.7 million. In addition, the company issued downside guidance for FY15 EPS, stating that it has challenges in regards to North American dealer inventory levels.
If you're not familiar, ACAT is a manufacturer of outdoor equipment such as snowmobiles, ATVs, and generators. It also sells branded merchandise and clothing for its Arctic Cat outdoor vehicle line.
In terms of the numbers, ACAT reported EPS of $0.68. More specifically, the ATV segment saw sales of $83.9 million, up 7% compared to the prior year's sales of $78.2 million. Management noted than core ATV sales were down, but growth in Wildcat ROVs helped the segment.
In Snowmobiles, ACAT reported sales of $81.5 million vs. 118.1 million in the prior year's quarter. Management noted that this decline wasn't due directly to demand, but instead was primarily due to the timing of OEM shipments moving to Q1 and Q2 of 2015.
In the parts and accessories segment, ACAT reported sales of $28.3 million vs. $29.5 million in the prior year's quarter. The company noted that all areas in the segment performed well with the exception of snow-related parts, which were impacted in the quarter by the relative lack of snow.
In terms of the FY15 guidance, ACAT noted that it will take a $7 million charge in 4Q14 in relation to the company's ATV inventory reduction plan. ACAT also expects lower international sales in FY15, including sales in Russia, due to macro headwinds and unfavorable Canadian currency exchange (30% of ACAT's sales come from Canada).
The company also noted that it expects FY15 sales in the range of $705-$715 million, and earnings in the range of $1.24-$1.32 per share. While the company notes that the guidance excludes any impact from CFO transition costs that could be incurred in FY15, the initial look at the guidance looks worse than expected.
The company also noted that they are lowering the FY15 guidance as they work through existing challenges, and that one of the biggest challenges it faces is the rightsizing of its core North America ATV dealer inventory levels. Management noted that bold actions are necessary to return to growth.
Praxair Up Modestly Despite Weak Guidance
Praxair (PX 124.44 +1.23) is trading 1% higher following earnings results/downside guidance for the first quarter and the full year.
The company reported fourth quarter earnings results of $1.57/share this morning, excluding charges to net income related to Venezuela currency devaluation, a bond redemption and a pension settlement, which came in just above expectation.
On the top line, revenues fell 0.7% year/year to $2.99 billion, which fell just a bit short of expectations. Organic sales growth was driven by increased volumes, including volume growth from new plant start-ups, and higher price across the Americas and Asia.
Looking ahead, the company is expecting to see first quarter earnings of $1.39-1.47, which comes in below current expectations. This EPS guidance assumes a negative currency impact of approximately 7% year-over-year and 4% sequentially.
For the full fiscal year 2015, the company expects to see earnings of of $6.15-6.50, which comes in below expectations On the top line, the company expects to see revenue of $12.0-12.4 billion, which falls short of current expectations.
The company said, "we expect modest global growth in 2015. More than half of our sales are generated in North America and with our industry-leading presence we will continue to take advantage of the underlying economic strengths of the region."
Separately, the compay declared a 10% increase in its quarterly dividend to $0.71 per share, which is something positive to look at given the company's guidance. Despite today's gains, the stock remains below key moving averages, such as the 20, 50, 100 and 200-day moving averages (on a daily chart). The closest key moving average sis the 20-day, which is sitting at $126.26.
US Steel (X), a major producer of steel in the US and Europe, is up about 10% after reporting strong Q4 results last night. It's a difficult environment for X in light of the depressed oil prices but the company managed the quarter well, especially on the cost side.
In case you're not familiar, US Steel is an integrated steel producer of flat-rolled and tubular steel products with major production operations in North America and Europe. Unlike a mini-mill like Nucor (NUE) and Steel Dynamics (STLD) which makes new steel by melting scrap steel in an electric arc furnace (EAF), an integrated producer makes steel from raw materials (iron ore and coke) using what's called a blast furnace. US Steel has annual raw steel production capability of 27 mln tons (22 mln tons in North America and 5 mln tons in Europe).
Turning to the Q4 results, adjusted EPS came in at $1.82, down from $2.16 in Q3 but well above the $0.27 earned in the year ago period. Revenue fell 4.6% year/year to $4.07 bln. Both revenue and EPS were well above market expectations. Total operating income in Q4 jumped to $420 mln from $146 mln in the year ago period. However, that was down from $479 mln in Q3 but a sequential decline was expected as Q4 is a seasonally slower quarter for X. Results have rebounded in the last two quarters (2H14). US Steel, and a number of other steel producers for that matter, were very much impacted by the harsh winter last year. But the second half of 2014 was much better.
From a bigger picture perspective, management thinks the global economy in 2015 will expand at a moderate rate, with US economic growth of approximately 3% and European economic growth of approximately 1%. Steel demand tracks directionally with GDP. Depressed oil prices will likely have a negative impact on the company's tubular segment in early 2015. Although this will also be a headwind for its flat-rolled segment, the company thinks that the potential for improved consumer spending could help overall flat-rolled demand.
In sum, X concedes that it enters 2015 with a volatile market: The company faces significant challenges from dramatically lower oil prices, lower steel prices, and the impact of the stronger US dollar (makes imports cheaper which is not good for X). However, on the call, they described how they also saw extreme headwinds in 1H14 but still were able to report a good year, that gives management confidence that it can handle headwinds in early 2015.
Dating back to early 2014, the IPO market has been churning out pharmaceutical and biotech deals at a torrid pace. While not every IPO has turned into a big winner, many have with some putting in huge triple digit gains (APSX, KITE, ALDR, RARE, to name a few). Additionally, the fact that many of these companies are only in clinical stages -- in some cases, early Phase I -- with no revenue hasn't deterred investors' enthusiasm. Which brings us to today's IPO: Ascendis Pharma (ASND), which priced its' up-sized 6.0 million share IPO at $18, at the high end of the $16-$18 expected price range.
ASND is a Denmark-based clinical stage biopharma company applying its TransCon technology to develop a pipeline of long-acting prodrug therapies. ASND's lead product candidate is TransCon hGH for the treatment of GHD (growth hormone deficiency).
The current standard of care for the treatment of GHD requires patients to receive daily injections over many years. This often results in poor patient compliance. TransCon hGH uses a once-weekly administration. Because TransCon hGH is a prodrug that releases unmodified growth hormone, TransCon hGH maintains the same mode of action as currently prescribed daily hGH therapies. If approved, TransCon hGH may reduce the burden of daily treatment by requiring significantly fewer injections, which may improve patient compliance and treatment outcomes.
Ascendis has successfully completed a Phase 2 study of TransCon hGH in adults with GHD and is currently conducting a six-month Phase 2 study in children with GHD. After completion of the pediatric study, the company plans to schedule an End of Phase 2 meeting with the FDA and the EMA, and then initiate a Phase 3 study in growth hormone deficient children in mid-2016.
In addition to TransCon hGH, ASND has developed a pipeline of long-acting prodrug product candidates such as TransCon Treprostinil, currently in Phase 1 trials for the treatment of pulmonary arterial hypertension, or PAH, TransCon Insulin, for the treatment of diabetes, partnered with Sanofi, and TransCon Ranibizumab, in the field of ophthalmology, partnered with Genentech.
Taking a quick look at the financials, the company posted a loss in the nine months ended Sep 30. They have reported profits in prior periods but it's not based on product sales. ASND's revenue has been primarily generated, not through product sales, but through collaboration agreements (up-front licensing fees, milestone payments etc.) For the nine months ended Sep 30, ASND reported revenue of EUR11.2 mln.
Boeing Over 3% Higher Following Earnings; Higher Deliveries Boost Operating Cash Flow
Boeing (BA 132.48), the world largest planemaker, is trading about 3% higher pre-market here, just below $137/share, following earnings results.
The company reported fourth quarter earnings of $2.31 per share, excluding non-recurring items, this morning, which easily topped expectations. On the top line, revenues rose 2.9% year/year to $24.47 billion, modestly beating expectations.
Looking ahead to 2015, the company's outlook is a little mixed. Boeing expects to see 2015 EPS of $8.20-8.40, excluding non-recurring items, which falls short of current expectations. Meanwhile, the company is expecting to see revenue of $94.5-96.5 billion for the year, which is above current expectations.
Back to the quarter, the company reported that operating cash flow increased to $5.0 billion on higher deliveries and timing of receipts and expenditures.
The company holds a strong cash generation and outlook. Remember in December that Boeing increased the share repurchase authorization to a total of $12 billion, replacing the authorization approved in 2013 of which approximately $4.8 billion was remaining, and raised the quarterly dividend 25%.
Cash and investments in marketable securities totaled $13.1 billion at quarter-end), up from $10.1 billion at the beginning of the quarter. Debt was $9.1 billion, up from $8.9 billion at the beginning of the quarter, primarily due to the issuance of new debt.
Total company backlog at quarter-end was a record $502 billion, up from $490 billion at the beginning of the quarter, and included net orders for the quarter of $37 billion. Backlog is up $61 billion from prior year-end, reflecting $152 billion of net orders in 2014.
Below is some additional color for its 2015 outlook:
Apple shares soar 6% as iPhone sales were a big plus to earnings
Apple (AAPL $116.00 +6.86) shares are trading higher by 5% after the company reported first quarter earnings of $3.06/share which was higher than expected, while revenues rose $74.6 billion which was higher than expected with gross margins of 39.9% which was also higher than expected.
The company issued guidance for the second quarter of $52.0-55.0 billion in revenues which was in line with estimates with gross margins of 38.5-39.5% which is line with estimates. The company typically issues conservative guidance.
The earnings beat was let by iPhones as the company sold 74.5 million iPhones in the quarter which topped the Street estimate of 66.8 million versus 51 mln last year. This was the first full complete quarter with the new iPhone 6 and iPhone 6 Plus.
For the last several quarters, iPads missed expectations. This quarter iPads came in at 21.4 million vs 21.8 mln estimates vs 26 million last year. Q1 Macs 5.5 million vs 5.5 million estimates vs 4.8 million last year. International sales accounted for 65% of the quarter's revenue.
On the conference call, Tim Cook says development of Apple Watch is on schedule; shipments set to begin in April. Mac and App Store revenues hit records. Results would have been stronger absent F/X headwinds. About 750 banks and credit unions have signed on to bring Apple Pay to their customers. Apple Pay accounts for 2/3 of all contact list payments.AAPL sold more iPhones in China than the United States (as expected).Co had 200K unit decline in iPhone channel inventory did during December quarter this year compared to increase of about 1 mln in the year ago period. Co was not able to reach supply demand balance until this month. This left AAPL target range of 5 to 7 weeks of channel inventory on look forward basis. Co saw an increase iPad channel inventory by 1.1 million units during the quarter compared to an increase of 2.1 million in the December quarter last year. AAPL planning an additional 40 more stores in China by end of 2016.
Q&A Session: Currency Headwinds: The biggest impact came from the Japanese yen the Russian ruble. Co said in Q2 the foreign exchange headwinds will be stronger versus Q1.Q2 revenue growth on a YoY basis in constant currency would be five points higher than what AAPL is guiding to if it wasn't for the FX movements; gross margin percentage after the offset that AAPL is getting from the hedging program will be impacted by over 100 basis points. Co said it would be guiding to a sequential increase in margins absent the F/X headwinds.Co said it doesn't report that exact mix between iPhone 6 and other models, but there is a geographic difference between iPhone 6 and iPhone 6 Plus.
AAPL shares are trading higher by 39% over the last 52 weeks. Look for resistance near the $119-120 level which will be an all time high for the stock.