Global equities scorecard: Arch disruptors shine

Arista Networks, Mobileye and New Relic report strong results, while we update our recommendation on Sierra Wireless.

Mobileye (NASDAQ: MBLY)

Mobileye, the leading developer of automated driver assistance technologies, beat earnings and revenue estimates and increased guidance for Q3 and 2H 2015. An excellent report all around. Mobileye continues to deliver.

Mobileye reported Q2 earnings per share (EPS) of $US0.10, beating consensus of $US0.08. Revenue of $US52.8 million was ahead of consensus of $US47.8m, a 10.5 per cent beat. OE (original equipment) revenue came in at $US43.6m vs $US40.6m. Aftermarket revenue of $US9.2m was also ahead of $US8.6m estimated by the street. Q2 gross margin was 74.3 per cent. Free cash flow came in at $US22.8m easily exceeding street estimates of $US15.2m.

Mobileye raised 2015 guidance well above consensus estimates. Revenue is now expected to be $US235-239m vs prior guidance of $US217-218m and is a result of higher demand coming from increased penetration rates and new launches. Non-GAAP net income is now guided up to $US105-107m and EPS guidance was raised to $US0.44-0.45 (street $US0.39).

Mobileye noted that its win rate remained at 100 per cent of RFQs (request for quotation) that the company was asked to participate in. Management also noted seeing an acceleration of customer plans around automated driving for both front-facing and 360 degree camera configurations.

This as an important long term positive as the ASPs (average selling prices) for highly automated vehicles can be multiple times that of ADAS (advanced driver assistance technology). Management also confirmed that it is supplying the Chevrolet Malibu camera-only ADAS features.

Additionally management noted that one of its Q2 EyeQ3 launches is the General Motors K2XX program, a very sizable truck program with some 1.2 million annual production units. Management also confirmed the recent nomination of Volkswagen into FAST. Toyota and Volkswagen represent significant future opportunities for the company.

Arista Networks (NYSE: ANET)

Arista Networks, a provider of networking solutions and switches for the large data centre environment, beat on both earnings and revenues. Guidance was positive as the company continues to gain market share over legacy rivals Cisco and Hewlett Packard as per our thesis.

Arista generated revenues of $US196m vs consensus of $US190m. Revenue growth came in at 41.8 per cent year over year. EPS of $US0.54 handily exceeded the consensus of $US0.46. Non-GAAP net income of $US0.54 per share is a 54 per cent increase year over year.

Guidance was solidly above consensus (midpoint $US210m vs $US206m). Arista believes 2015 revenue from large customer MSFT (15 per cent of sales) will be flat to slightly up, vs flat to slightly down. It does not expect the impending Trident to Tomahawk chipset migration to slow revenue.

Management also shaded its margin targets a touch higher. Gross margins will remain in the 63-65 per cent range for now and the operating margin should remain at the high end of the prior 23-25 per cent range. This is unlikely to change consensus as Arista has routinely exceeded its operating margin targets.

Arista cited balanced strength in its top four verticals – cloud titans, Tier 2 service providers, financials and technology – though cloud titans like MSFT appear the strongest.

Tata Motors (NYSE: TTM)

Tata Motors reported 1Q FY16 results with EBITDA beating consensus driven by solid growth in its home market that offset the weakness in the Jaguar Land Rover (JLR) business in China.

China was clearly the weak spot. JLR China sales declined 33 per cent over the quarter due to a slower than expected ramp up of the JV produced Evoque model. Lack of inventory of the Freelander and restricted supply on the Discovery Sports model were also to blame. Additionally, Jaguar XF and XJ models experienced shortage ahead of their model changeovers.

That said, on the conference call the company expects demand to normalise for the luxury car industry in China.

The bright spot was clearly the domestic (or standalone) market performance. In Q1 FY16, domestic business recovered as volumes in the MHCV (medium and heavy commercial vehicle) business improved and new launches in the PV (auto) segment supported growth.

Tata’s MHCV segment grew by 20.7 per cent in Q1 on fleet replacement demand for the higher tonnage trucks. With a new government, expectations of various economic reforms and a pickup in infrastructural activities, the MHCV division is well placed.

There was also a good recovery in the PV segment. In Q1 FY15, PV sales grew by 27 per cent – a solid recovery. The Zest sedan and recently launched Bolt are doing well and there are more upcoming launches coming in the ensuing quarters.

Tata is proving to be a frustrating investment but I believe investors should stay the course. Our Indian domestic market thesis is playing out and other geographies like the UK, the US and Europe posted very strong performances for JLR in Q1, pushing down the Chinese contribution to just 14 per cent of volumes from 25 per cent qoq. This has reduced dependence on the Chinese market going forward.

JLR is on the cusp of a strong product cycle. New launches in FY16/17, the XE, Discovery Sport, new XF and new XJ should boost JLR sales over the next 12-18 months as will the launch of the Jaguar F-Pace (Jaguar Crossover).

Going forward, I believe that the recent 5-11 per cent price reduction of the Evoque will fuel volume growth in China over the next 12 months. However, meaningful growth can come back only when the JV with Chery comes on stream.

At 6.3 X 2016 EPS Tata Motors is one of the cheapest auto stocks in the world. Stick with it!

New Relic (NYSE: NEWR)

New Relic, a leader in software analytics for applications management, had a good start to the year as revenue for the first quarter was $US38.1m, up 69 per cent year over year and up 14 per cent sequentially. That beat consensus by $US2.61m. The company reported Q1 EPS of -$0.21 which beat by $0.04. More importantly, the company also guided up for next quarter and FY 2016.

New Relic ended the first quarter with 12,440 paid business accounts, up 27 per cent year over year. The annualised revenue per average paid business account continued to grow and is now more than $US12,500, up 31 per cent year-over-year and up 9 per cent sequentially.

Non-US revenue (a good source of future growth) grew to $US12.8m, up 74 per cent year-over-year, and non-US revenue accounted for 34 per cent of revenue in the quarter. Within Europe, the company is expanding in IT friendly Dublin and the UK. It is also expanding in Australia.

Gross margin for the quarter was 81 per cent compared to 83 per cent last year, and unchanged versus last quarter. New Relic predicts that while gross margin will moderate somewhat in the near term, they now expect it to be around 80 per cent for the year.

Guidance was also positive as the company expects revenue to range from $US40.2m to $US41.2m, a growth of 59 per cent to 62 per cent year-over-year; for fiscal year 2016, revenue will range from $US168m to $US171m, or a growth of 52 per cent to 55 per cent year-over-year. This is up from previous guidance of $US155m to $US159m for the full year.

An excellent report. I am of the view that after cyber security, the systems management space will be the next segment that investors will concentrate on.

Cheaper, faster, and more efficient analytical tools like those that New Relic provides via the cloud will continue to disrupt the large installed base of legacy products in the enterprise.

Sierra Wireless (NASDAQ: SWIR)

Sierra Wireless, a provider of wireless machine to machine devices, reported Q2 EPS of $US0.26, beating consensus by $US0.03. Revenue of $US158m ( 17.0 per cent Y/Y) beat by $US2.82m.

Though Sierra Wireless beat Q2 estimates, it guided for Q3 revenue of $US157-160m and EPS of $US0.23-0.27, well below a consensus of $US163.7m and $US0.30. Shares traded off 10 per cent after this revelation.

No real explanation was provided in the earnings release or the call for the outlook; Sierra notes the forecast doesn't assume any contribution from the recent MobiquiThings acquisition.

OEM Solutions revenue rose 18.5 per cent Y/Y in Q2 to $US138.2m; Enterprise Solutions revenue rose 7.6 per cent to $US19.8m. Gross margin fell 20 bps Q/Q and rose 20 bps Y/Y to 32.4 per cent. Operating expenses rose by a modest $US600K Y/Y to $US40.4m.

While I am a great believer in the “Internet of Things”, Sierra Wireless’ shares have not really performed for Eureka Report subscribers like many of our other “disrupters” such as Mobileye, Ambarella, Arista Networks, and FireEye. It is also down over 50 per cent year to date.

That said, the Internet of Things, or machine-to-machine (M2M) connectivity as it is often called, remains one of the most promising trends in technology. It is based on the idea that, in the future, all electronic devices will be connected to each other through the internet – everything from cars to mundane household appliances like toasters. IoT is seen as a necessary first step towards making electronics more intelligent, as it enables centralised control and facilitates the collection and analysis of machine data. However, I’m no longer sure that Sierra is necessarily the best way to play it.

As well, the most significant threat to Sierra is the potential for commoditisation within the IoT embedded modules market. A maturing IoT industry is likely to attract larger competitors with significant scale and accelerate the standardisation of IoT modules. That process is underway.

Nor are the Y/Y growth rates for earnings and revenues anything to get excited about. Downward guidance suggest these won’t improve anytime soon so I am changing my recommendation from buy to hold for now until I get a sense that the company’s growth is stabilising and poised to accelerate.

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