Global stocks: Amazon astounds

We update our calls for Amazon, Facebook, Xilinx, Intuitive Surgical, Google, Dow and Infosys in response to their latest results.


Amazon beat both earnings and revenue estimates and provided better than expected guidance for the second quarter of 2015.

Total revenues of $US22.7bn topped consensus (despite foreign exchange headwinds) and grew 15 per cent year-on-year and 22 per cent on a constant currency basis.

The gross margin of 32 per cent continued to increase (3.4 percentage points up year-on-year), and gross profits increased by 29 per cent (an acceleration from 28 per cent in the fourth quarter of 2014) due to the increasing mix of higher gross margin Amazon Web Services. Reported operating income of $US255m also beat consensus.

In North America electronics and general merchandise (EGM) was a standout, increasing 31 per cent, while “other” was up 21 per cent, and media gained 5 per cent. International was more subdued, decreasing a currency-affected 2 per cent.

As promised, Amazon broke out the important metrics in its web services business (the cloud computing platform service that offers businesses large computing and storage capacity at a low cost) for the first quarter of 2015 and 2014. Amazon Web Services (AWS) revenue increased 49.1 per cent year-on-year to $US1.6bn in the quarter and generated $US5.16bn in the past 12 months. Operating income for the quarter was $US265m.

The size and scale of Amazon’s AWS business are well-ahead of competitors in the cloud space (Microsoft and Google). This will give Amazon flexibility in pricing going forward. The segment is operating at double-digit margins (14 per cent in 2014 and 22 per cent in 2013), well above the company average.

Many analysts were “blindsided” by how big and profitable AWS is. The stock jumped 14 per cent the next day.

Our take: Amazon continues to execute well in its core business and AWS is set to grow at a 40 per cent plus rate as it continues to capture a significant portion of the total addressable market (TAM) of some $US50bn by 2018. Like Facebook this is a core long term holding.

Now that we have some clarity as to Amazon Web Services we are raising our $US410 price target to $US490. By the end of 2015 this will be a $US8.0bn business growing at 40 per cent plus.

Putting a 15 times enterprise value to earnings before interest, tax, depreciation and amortisation (EV/EBITDA) multiple (or a 6 times 2015 revenues) on that gets us the other $US50bn of value $US80 on our earlier target price.


Facebook Inc. reported big gains in first-quarter revenue, but heavy spending on data centres and long-term initiatives kept a lid on profit. Revenue rose 46 per cent to US$3.54 billion from US$2.5bn a year ago. Analysts had expected US$3.56bn. Revenue was weighed down by the rising dollar. Facebook generates more than half its revenue overseas.

Net income for the three months ended March 31 totalled US$512 million, or 18 cents a share, down from US$642m, or 25 cents per share, a year earlier.

Excluding certain expenses, Facebook earned 42 cents a share, up 20 per cent the year before. Analysts, on average, expected earnings of 40 cents per share, so it was a nice beat.

More importantly, monthly active users (MAUs) rose 4 per cent quarter-on-quarter and 13 per cent year-on-year to 1.44bn. Mobile MAUs rose 5 per cent quarter-on-quarter and 24 per cent year-on-year to 1.25bn. Mobile-only MAUs (581m) are now 40 per cent of total MAUs and I expect this trend to increase to Facebook’s benefit.

Advertising revenue (Facebook’s “bread and butter”) rose 55 per cent adjusted for currency. It was similar to the 53 per cent growth in the fourth quarter of 2014. Mobile ad revenue of $US2.42bn was up 80 per cent year-on-year and mobile is now some 73 per cent of total ad revenues.

And of course Facebook continues to spend aggressively with cash expenses of US$1.7Bn up 57 per cent Y/Y and still ahead of revenue growth. Still free cash flow was up 30 per cent to US$1.2 Bn and the company ended the quarter with US$12.4Bn in cash.

The company had over 4bn video views in the first quarter of 2015, up from 3bn the previous quarter. 75 per cent of video views are currently done on mobile. Video ads, by the way, command as much as 10 to 20 times the price of display ads.

Our take: Facebook remains as one of the best placed companies in the internet/social media space and this earnings report underscores the sustainable growth potential of mobile and video platforms. Our thesis and “buy” recommendation remain intact.


Like Facebook, Google’s first-quarter revenues were hurt by the surging dollar, but up 12 per cent year-on-year. In constant currency they were up 17 per cent.

Still, Google reported a good first-quarter result overall with better margins somewhat offset by higher capital expenditures. Advertising – now including the software licensing server revenue activity from Doubleclick in current and year-ago periods – was up by 11 per cent, while other revenue growth was up 23 per cent.

In the call, management provided more clarity in the closely watched “paid clicks” metric, stating that the solid “sites” growth (a major revenue driver) came from higher margin TrueView ads on YouTube. Clearly Google’s ad mix is changing and migrating to mobile and YouTube’s one billion plus viewing audience – that’s a good thing.

Margins actually rose from 49.6 per cent in the first quarter of the previous year to 50.5 per cent in this quarter. This was its first year over year gain during a first quarter since 2009 and the second year over year improvement in the past three quarters, so it was a good result. Evidence of some cost discipline is a positive in my opinion. Operating expenses advanced at a subdued 21 per cent year-on-year rate compared with 35 per cent a year ago.

Our take: A decent report overall and the company is progressing well in developing other avenues for growth in the face of a slowing desktop search environment via app monetisation, mobile search, and YouTube.  At 16 times 2016 EPS it’s certainly not overvalued. Our “buy” recommendation and target price is maintained.


The fourth quarter of 2015 marked another disappointing period for Xilinx with reported revenues of $US566.9m, missing consensus by $US2.63m. Further, the company issued guidance for first-quarter of 2016 that was below consensus for $US594.8m.

The company beat earnings estimates by US$0.08, however, on the back of a better than expected gross margin of 69.9 per cent, up 2.3 percentage points year-on-year.

So what pressured fourth quarter sales? Telecom/data centre chip revenue, which makes up 39 per cent of total revenue, fell 7 per cent quarter-on-quarter and 26 per cent year-on-year. Another industry player, Texas Instruments, just cited telecom infrastructure weakness, particularly for mobile gear, as a reason for its first-quarter sales miss and soft second-quarter guidance.

Industrial, aerospace, and defence revenue (42 per cent of total) fell 7 per cent quarter-on-quarter mainly due to seasonality but rose 13 per cent year-on-year. Broadcast, consumer and automotive (17 per cent of total) rose 12 per cent quarter-on-quarter and 6 per cent year-on-year. This segment continues to do well.

Another bright spot is the 28nm business. It generated sales above $US160m in the quarter and the company is seeing strength in industrial and automotive applications.

On the earnings call, management acknowledged a “pause” in China LTE (4G) build outs and thinks the issue is more timing related with a pick up later in the year. The company affirmed its FY2016 growth model of flat to slightly up.

Our take: While this earnings report is disappointing, it’s not a disaster, so I’m maintaining my “buy” recommendation.

A few data points suggesting an acceleration of China 4G build out would certainly give the stock a boost. Given the proliferation of internet connected smartphones purchased by the Chinese (Apple’s China iPhone 6 sales were up 71 per cent to $US16.8bn) suggests it’s only a matter of time.

Meanwhile, the company is executing well in terms of maintaining profitability and I believe Xilinx is still good way to play the global network expansion of 4G and it remains the dominant player in a duopoly business. Investors are just going to have to be patient with this one.

Intuitive Surgical

Intuitive Surgical  reported mixed first-quarter results, with revenues and EPS both coming in slightly below expectations, primarily due to weak OUS system sales (the OUS weakness was primarily due to customers in Japan delaying purchases ahead of Xi approval) as well as disappointing gross margins, which were impacted particularly by mix and foreign exchange.

Still, revenues were up 14.5 per cent to $US532.1m and reported EPS of $US2.57 gained 127 per cent year-on-year – a nice earnings recovery after a difficult late 2013-14.

On the positive side, procedure growth of 13 per cent came in above expectations, driven by general surgery (hernia and colorectal), as well as a continued stabilisation in prostate volumes, while annual procedure growth guidance was also increased to 8-11 per cent versus 7-10 per cent previously.

Importantly, the company shipped 99 da Vinci systems, including 75 latest generation Xi systems, which was a year-on-year increase from 87 systems in the first quarter of 2014.

Intuitive ended the quarter with $US2.7bn cash and no debt.

Our take: Procedure growth and shipments of the new Xi systems are nicely above expectations and should drive improvements in earnings and margins over the next few quarters. While the strong $US will still be a factor in repatriating foreign revenues, it’s unlike to make Intuitive less competitive in global markets simply because there is no competition. Our “buy” recommendation remains.

Dow Chemical

Dow’s results were excellent considering the many headwinds that many of its end markets are facing in a mixed global economic environment.

Earnings of $US0.84 per share beat analysts’ estimates by $US0.06, assisted by lower raw materials costs. Profit margins were the best in 10 years. Revenues of $US12.4bn were slightly below consensus mostly due to foreign exchange. Cash flow generation was strong, reaching a record high $US1.2bn in Q1, up 122 per cent year-on-year.

Profitability rose in all divisions except agriculture which was affected by seasonal pressures. Volumes in all the other major businesses increased with performance materials & chemicals and consumer solutions both up 5 per cent and performance plastics up 6 per cent.

Chief executive Andrew Liveris announced that after the sale of its chlorine business to Olin (announced March 27), it will have divested some $US11bn in non-core and lower margin, cyclical businesses. He also stated that the new plants in Saudi Arabia and the US would come online later this year, adding around $US3.1Bn to earnings before interest and tax (EBIT) in 2016.

Our take: Dow is doing all the right things here, selling low margin assets and reinvesting in higher growth businesses with some pricing power. There’s no change to our “buy” recommendation or target price. The stock has recovered nicely from an oil price induced sell off in late 2014.


Infosys results were below expectations for both earnings and revenues – a disappointing result all around.

The company’s fourth-quarter disappointed with the weakest growth among Tier 1 IT service providers (-0.4 per cent quarter-on-quarter in constant currency terms vs 1-3 per cent quarter-on-quarter from tier 1 IT peers such as Tata Consultancy and Wipro). The outlook on FY16 revenue growth was also below consensus at 6.2-8.2 per cent.

EBIT margins were in line with expectations, down 1 percentage point to 25.7 per cent. The company increased the dividend payout ratio up to 50 per cent from up to 40 per cent earlier. This also fell short of consensus expectations, given cash holdings of $US5.2bn and annual free-cash-flow generation of $US1.5bn.

The stock fell 9 per cent to US$31.80 on the result.

On the call, the company attributed the weakness in fourth-quarter revenue growth to project push-outs, delays in conversion and higher-than-expected pricing pressure. The period also saw ramp-downs in energy and telecom.

In terms of “verticals” the company sees insurance, telecom and energy to be challenged, while it expects good momentum in financial services, manufacturing and life sciences. While currently retail is a bit soft, management expects improvements going forward.

As for guidance, the company expects better growth in the second half of FY16 and hopes to improve win rates in traditional services using platforms like Panaya.

Management has retained its EBIT margin guidance of 24-26 per cent, although margins are likely to be volatile in the near term. In the first quarter there will be an impact of 2.5 percentage points from the salary hikes, promotions and visa costs.

Out take: Admittedly this is the first quarter that Infosys has reported since we recommended the stock on January 19 and, although I thought that the good results in the third quarter of FY2014 would continue into the next quarter, I am going to stick with the stock for now and give the new chief executive time to get things on track.

Infosys is a turnaround story and turnarounds don’t always happen on schedule. At 17 times FY2016 EPS it’s certainly not expensive. I’d be picking some up here in the low $US30s.

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