Looking Ahead - August 29, 2016
Economic growth in the first half of the year was disappointing, yet economists are expecting better things for the second half of the year. The Personal Income and Spending Report for July, which will be released Monday, will provide some early clues as to whether they are right.
|Mon, Aug. 29||Time of Release||Briefing.com||Consensus||Prior|
|Personal Income||8:30 ET||0.4%||0.4%||0.2%|
|Personal Spending||8:30 ET||0.2%||0.3%||0.4%|
|PCE Prices - Core||8:30 ET||0.1%||0.1%||0.1%|
Rackspace [RAX] to be taken private by Apollo Global Management [APO] for $32/share
In a deal worth about $4.3 billion, private equity investment firm Apollo Global Management (APO 18.51, +0.05 +0.27%) bought Rackspace (RAX 31.41, +1.22 +4.04%) this morning for $32.00 per share in cash. Upon closing of the deal, RAX will become a privately held company.
For those who may not be familiar, RAX is a cloud computing company that engineers and develops cloud solutions for companies like Google (GOOG 774.79, +5.38 +0.70%), Microsoft (MSFT 58.49, +0.33 +0.56%), VMware (VMW 74.78, +0.25 +0.34%) and Amazon (AMZN 768.18, +8.96 +1.18%) Web Services. APO is essentially an investment manager; the company manages funds on behalf of pension, endowment and sovereign wealth funds and has made deals in tech recently with the likes of home security firm ADT and Redbox operator Outerwall.
As today's deal goes, APO paid an approximate 38% premium for RAX as measured from August 3, which APO holds was the last day prior to news reports circulating about a potential RAX takeout. To that end, a Reuters report on August 5 detailed a potential deal with APO, suggesting at the time a $3.5 billion price tag. Earlier than that though, the Wall Street Journal detailed on August 4 that a potential deal was near for the company.
Terms of today's deal dictate that affiliates of certain funds managed by APO would pay $32.00 per share in cash for RAX. Additionally, funds managed by Searchlight Capital Partners LP will make a strategic equity investment in the acquired company.
The deal is expected to close in the fourth quarter of this year. Cloud computing (SKYY 33.92, +0.30 +0.90%) peers BCOV +3.1%, TDC +2.0%, HPQ +1.8%, AKAM +1.7% and AMZN +1.2% all trade in the green today as the broader market pares gains, yet also stays positive following remarks from Fed Chair Janet Yellen at the Jackson Hole meeting.
Splunk [SPLK] trades lower on JulQ earnings/guidance; license revenue growth a bit soft
Splunk (SPLK) is trading lower today after reporting Q2 (Jul) results last night. Many investors have probably heard the Splunk name but they do not really understand what they do. Basically, Splunk provides software that allows its customers to collect, index, search, monitor and analyze data regardless of format or source. Its software helps make sense of large and diverse data sets commonly referred to as big data and it's specifically tailored for machine data.
Machine data is produced by nearly every software application and electronic device at a company. Each thing that happens contains a time-stamped record of various activities, such as transactions, customer activities, and security threats. Beyond a company's traditional IT and security infrastructure, every processor-based system generates machine data.
Examples include HVAC controllers, manufacturing systems, smart electrical meters, GPS devices and radio-frequency identification tags, and many consumer-oriented systems, such as electronic wearables, mobile devices, automobiles and medical devices that contain embedded processor chips. These things are continuously generating machine data. Splunk's software helps make sense of all these data points in real-time so management and IT staff can make the correct operational decisions.
Its flagship product is Splunk Enterprise, a machine data platform, comprised of collection, indexing, search, reporting, analysis, alerting, monitoring and data management capabilities. Splunk Enterprise can collect and index hundreds of terabytes of machine data daily, irrespective of format or source. Its platform uses Splunk's patented data processing architecture that performs dynamic schema creation on the fly, enabling users to run queries on data without having to define or understand the structure of the data prior to collection and indexing. This is in contrast to traditional IT systems that require users to establish the format of their data prior to collection in order to answer a pre-set list of questions.
More than 11,000 customers in over 110 countries in a wide variety of industries use Splunk software and cloud services. For example, in JulQ, Dubai Airport selected Splunk Enterprise to create a real-time airport dashboard to visualize the complex operational processes at one of the world's busiest airports. They're using Splunk to gain insights into every passenger touch point to drive an excellent experience and to effectively deploy resources. Dubai joins other airports, such as San Francisco International, Denver International, Sydney International and London's Gatwick Airport, among others who are using Splunk to run their operations.
Turning to the Q2 (Jul) results, Splunk reported non-GAAP EPS of $0.05, which was better than market expectations and it was above the $0.03 earned in the prior year period. Revenue rose 43.5% year/year to $212.8 mln, well above prior guidance of $198-200 mln. License revenue rose 32% YoY to $115.7 mln. In terms of guidance, Splunk expects Q3 (Oct) revenue to come in around $228-230 mln, roughly in-line with market expectations while full year revenue guidance was bumped up to $910-914 mln vs prior guidance of $892-896 mln.
On the call, SPLK talked about the outstanding performance of its Splunk Cloud business as the company once again nearly doubled the amount of orders from a year ago. Some notable cloud wins this quarter include Uber which tripled its Splunk Cloud usage to more than 1 terabyte in less than a year. Uber selected Splunk because it met their security needs and was able to scale to support their tremendous growth.
Also, Australia's Queensland Department of Education and Training expanded its Splunk Cloud presence. They're going to use Splunk for cybersecurity protection. They also have an analytics use case where they're keeping students and staff safe by proactively alerting schools of incidents of cyber bullying and threatening online behavior. And Hulu.com expanded its use of Splunk and Enterprise Security in the cloud to keep their streaming services running smoothly.
So why is the stock trading lower despite the numbers being pretty good? It seems to us that the problem is with the license revenue growth. It grew +32% YoY in JulQ, but that was down from +41% in AprQ and +44% in JanQ. Ironically, part of the problem is that Splunk's Cloud business is doing so well. Cloud revenue is included on the Maintenance & Services line and not License revenue, so as customer move to the cloud that hurts SPLK's license revenue, which is much higher margin.
GameStop [GME] Sinks 8% On Weaker Sales; Nothing Terribly Surprising Though
GameStop (GME 29.61 -2.55) shares are trading lower by 8% after the company reported disappointing sales and lowered full year comps guidance.
GME actually reported in-line earnings, with EPS of $0.27 per share, excluding non-recurring items. However, revenues fell 7.4% year/year to $1.63 billion, missing analyst estimates, while consolidated comparable store sales declined 10.6%, which came in worse than the guidance for -4% to -7%.
Sales were negatively impacted by declines in its three largest traditional gaming segments:
On the other hand, non-gaming segments performed better, with technology Brands revenues increased 54.6% to $175.9 mln.
Looking ahead, GME issued in-line guidance for Q3 as it expects EPS of $0.53-0.58, excluding non-recurring items. It expects comparable store sales to range from -2.0% to 1.0%.
GME also reaffirmed its full year guidance for EPS of $3.90-4.05, which was in-line with analyst expectations. However, it reduced its outlook for comparable store sales, which are now expected to range from -4.5% to -1.5%, down from the prior expectation for -3.0% to 0.0%.
Bottom line: Nothing terribly surprising
GameStop's quarter highlights well-known issues with its traditional physical gaming business. These issues are part of the reason the stock trades at such single digit P/E multiple of roughly 7.8x the next twelve months' earnings. GME has also been a popular short, as 37% of the float is sold short. That heavy short-interest could also help support the stock if some of those shorts cover their positions as the stock trades lower.
So while the results weren't anything to get excited about, they also shouldn't be terribly surprising and may be baked into the stock to some extent.
In addition, GME has a dividend yield of around 5% based on an expected annual dividend rate of $1.48 per share.
Big Lots [BIG +2.0%] Set to Climb After Earnings Beat
Shares of Big Lots (BIG 54.00, +1.06) have added 2.0% in pre-market, responding to better than expected earnings.
The retailer reported above-consensus second-quarter earnings of $0.52 per share on revenue of $1.20 billion, which declined 0.5% year-over-year, missing analysts' estimates by a slim margin.
Comparable store sales increased 0.3% after the company guided for growth of up to 2.0%. This was the 10th consecutive quarter that saw growth in that category.
Merchandise inventory decreased by $12 million year-over-year to $809 million. Inventory per store was little changed when compared to the same quarter a year ago.
Going forward, Big Lots expects third-quarter earnings between -$0.04 and $0.01 per share, which is roughly in line with market expectations. Fourth-quarter earnings are expected between $2.18 and $2.23 per share, which is also close to analysts' estimates. Comparable sales are expected to increase up to 2.0% in each quarter.
Autodesk [ADSK +3.8%] Climbs After Beating Estimates
Autodesk (ADSK 66.12, +2.42) reported better than expected results for the second quarter, sending its shares higher by 3.8% in pre-market action.
The software company reported above-consensus earnings of $0.05 per share on revenue of $550.70 million, which declined 9.6% year-over-year, but still surpassed analysts' average estimates. The company noted that an ongoing transition to its business model made a negative contribution to revenue as more revenue is recognized ratably instead of being recorded up front. Deferred revenue jumped 23.0% to $1.50 billion.
Total subscriptions increased by 109,000 on a sequential basis to 2.82 million while new model subscriptions increased by 125,000 to 692,000.
Total annualized recurring revenue grew 10.0% year-over-year to $1.47 billion while new model annualized recurring revenue spiked 82.0% year-over-year to $371 million.
Looking at the segment breakdown, Architecture, Engineering, and Construction revenue increased 8.0% year-over-year to $253 million while Manufacturing business segment revenue grew 3.0% to $177 million. Platform Solutions and Emerging Business revenue fell 47.0% to $86 million and Media and Entertainment revenue declined 16.0% to $34 million.
The strong start to the fiscal year prompted the company to issue upbeat guidance, priming the market for a third-quarter loss per share between $0.22 and $0.27, which is ahead of current market expectations. Revenue is expected between $470 and $475 million, which is also ahead of analysts' estimates. For the full-year, Autodesk expects to record an above-consensus loss between $0.70 and $0.55 per share on revenue between $2.00 and $2.05 billion, which is ahead of market expectations.
Brocade [BRCD] Tops Third Quarter Expectations
Brocade (BRCD 10.46), which provides networking hardware and software for business and organizations worldwide, checked in last night with better-than-expected fiscal third quarter results. Still, bottom-line growth was lacking in the company's report due to acquisition-related purchase accounting adjustments, unfavorable revenue mix, and higher operating expenses.
The company's non-GAAP net income declined 20% to $92 million, or $0.21 per diluted share. The latter was ahead of analysts' average expectation, yet down 21% from the same period a year ago as the company's non-GAAP gross margin fell 210 basis points to 66.5% and its non-GAAP operating margin dropped 740 basis points to 19.5%.
Brocade said the third quarter results included approximately two months of financial results from Ruckus Wireless, which it acquired in May. That acquisition helped drive a 7.0% increase in revenue to $591 million, which was at the high end of its outlook range.
Storage Area Networking (SAN) product revenue declined 9% year-over-year to $282 million, which the company blamed primarily on lower Fibre Channel director sales. IP Networking product revenue surged 36% year-over-year to $209 million thanks to the aforementioned acquisition, which offset a 26% year-over-year decline in the U.S. federal revenue.
In its prior fiscal year, EMC Corporation (EMC), which is being acquired by Dell, was Brocade's biggest customer, accounting for 17% of total net revenues, followed by Hewlett-Packard Enterprise (HPE) and IBM (IBM), each of which comprised 12% of total net revenue, respectively. Strikingly, Brocade indicated that 23% of its fiscal third quarter revenue came from 10% or greater customer revenues versus 43% in the year-ago period for that same grouping.
In an 8-K filing, Brocade said it expects fiscal fourth quarter revenue to be between $630 million and $650 million and non-GAAP earnings per share to range from $0.21 to $0.23. Those guidance ranges are roughly in-line with analysts' average expectations.
Shares of BRCD are up 13.9% year-to-date and are little changed in pre-market action. In the wake of the third quarter report, Wunderlich raised its price target on the stock to $11 from $9.