Global stocks: Earnings shine

Facebook

Facebook reported stellar 3Q15 numbers that topped forecasts on almost every metric. 3QEPS came in at $US0.57 (consensus $US0.52). Total revenues were $US4.5 billion, up 51 per cent Y/Y (consensus $US4.3bn).

User growth and engagement continue to grow exponentially while increased ad demand is driving monetisation. Video is the key incremental driver. Instagram ad load growth should provide a larger contribution in 4Q.

User metrics are quite astounding. Daily active users are now in excess of one billion a day! Or as one commentator put it, one seventh of the world's population is on Facebook daily! Also on average, some 500 million people are watching more than 8 billion videos a day, according to the company on the earnings call.

Facebook is continuing to grow both daily and monthly active users (DAUs and MAUs) steadily across all geographies, with total global users now at 1.55bn. Mobile users were up 23 per cent Y/Y to 1.38bn.

Advertising results were way ahead, driven by strong demand. 3Q ad revenue grew 45 per cent Y/Y, or 57 per cent Y/Y in constant currency terms. There are now more than 2.5m advertisers on Facebook. Mobile ad revenue of $US3.35bn came in 73 per cent YoY and was $US158m above consensus estimates. Total ad revenue of $US4.3bn was also ahead of forecasts.

More importantly price-per-ad increased 61 per cent YoY in 3Q. Stronger ad demand, along with solid user growth and engagement trends contributed to the upside.

Facebook's “other” properties are also doing well. Instagram reached 400m monthly active users in the quarter; the platform introduced new ad formats and opened up self-serve capabilities. I expect a significant revenue ramp for Instagram in 4Q, given Instagram's ad API remained in beta (test mode) until the end of September.

As I believe the positive trends displayed in Facebook's past few quarters will continue unabated, I am raising my price target to $US125 which is 35X 2017 EPS.

Cerner

Similar to the first two quarters, Cerner reported Q3 EPS in line with expectations but revenue fell slightly short even as bookings growth continued to exceed expectations. The company also issued initial 2016 EPS guidance below Street estimates ($US2.30-2.40 vs consensus of $US2.52), pointing to higher D&A and professional service contributions as the most likely reasons for the gap. Analysts believe that the slower recognition of revenues in the backlog probably reflects some milestones being included in some new contracts, but strong bookings still bode well for future revenue growth and that's why I'm sticking with Cerner for now.

Adjusted EPS came in at $US0.54 which was exactly inline with guidance and consensus. However, revenues came in below lowered expectations at $US1.13bn vs $US1.18bn consensus. The top line miss was concentrated primarily in System Sales and, to a lesser extent, Reimbursed Travel, while Support & Maintenance revenues were in line.

Bookings however, exceeded the high end of guidance by 10 per cent and were up 44 per cent Y/Y to a new record of $US1.59bn. Some software licence revenue that would normally be recognised upfront is being pushed out for some new contracts until reaching go-live and other project-related milestones. Management sees the growing backlog as improving visibility into 2016 with over 75 per cent of revenues next year expected to come from backlog.

As well, bookings momentum is strong across several metrics including a record 45 new contracts over $US5m in 3Q against a prior record of 38. New clients also represented 39 per cent of bookings in the quarter, well above 2014's 28 per cent, indicating that Cerner continues to improve its competitive positioning and capitalise on a growing replacement market. Recent high profile contracts are also increasingly including core EMR, population health, and RCM, implying that Cerner is able to up-sell and cross-sell to its client base.

In spite of the “noise” around Cerner's recent quarterly results (not uncommon in contract based IT companies), Cerner's competitive position, large and growing addressable market, and bookings visibility into 2016/2017, keep me in the stock.

I would be an aggressive buyer of CERN here in the low $US60s.

Disney

Disney's results were ahead of expectations, as EPS of $US1.20, ( 35 per cent Y/Y) beat consensus estimates by $US0.06. Revenue grew 9.1 per cent to $US13.5bn in line with the street. Media networks were a positive highlight, as segment operating income was driven by strength at ESPN. The beat came despite the fact that much of the Star Wars-related consumer products revenue will not be realised until the movie is released in December. With Star Wars just six weeks away, management alluded to huge global demand for Star Wars-related merchandise. Disney also reaffirmed its three-year Cable Networks guidance.

DIS reported upside to cable networks revenue, which grew 12 per cent in F4Q15, driven by recurring growth of 9 per cent in ad sales and recurring affiliate fee growth of 8 per cent. Media Networks segment operating income growth of 27 per cent Y/Y may be comforting to those who are anxious about the traditional TV ecosystem (cable cutters). Cable Networks' three-year operating income guidance was unchanged.

Parks operating income came in slightly below consensus. Still US resort reservations are pacing up 5 per cent plus compared to prior year levels.

Studio operating income more than doubled in the 4Q, setting the stage for further growth. Driven mainly by cost improvements and lower content amortisation, the studio segment F4Q operating income was significantly higher than estimates due to a number of (positive) factors and beat consensus by 68 per cent driven by 1) increased TV/SVOD distribution, 2) lower film cost impairments, 3) improved theatrical results, and 4) higher revenue share in consumer products.

Disney has rallied back nicely ( 20 per cent) from its recent lows in late August, and is close to an all-time high. That said I would still be a buyer here as strong contributions from its studio pipeline and merchandise are not yet reflected in analysts' numbers.

Arista Networks

Arista Networks delivered a solid set of results. Q3 EPS of $US0.59 beat consensus by $US0.06 and revenues of $US217.55m ( 39.9 per cent Y/Y) beat by $US6.28m.

Demand from hyper scale customers or the “cloud titans” – Amazon, Microsoft, and Google – powered a strong 3Q. It also allowed Arista to offer strong 4Q guidance as well as intimating that 2016 would be above expectations.

There was good balance across key verticals. Strength from cloud titans, tier2 cloud suppliers, financials, and technology strongly impacted 3Q revenues.

Management commentary on the call suggests Arista is aggressively pushing into new markets (beyond the cloud titans), in part organically and in part via partnerships with VMware, HP, and Palo Alto Networks. The company cited media and entertainment, which it currently counts in its tech vertical, as one area. Analysts also see progress in health care and insurance.

Revenue outlook is healthy into 4Q and 2016 on this cloud strength. Arista indicated strong cloud demand in offering 4Q guidance of $US238m-242m, well above consensus of $US229m. Visibility with cloud customers has extended from one to two quarters to as much as three and that's a good thing for a high growth name like Arista.

In 2016 growth should be maintained by new products in data centre routing and possibly optical data centre. There could also possibly be an inflection point with other service providers. For example Apple is an indirect – and perhaps direct – customer and thus growth in Apple Music, iCloud and the App Store should aid Arista. MSFT sales are flattish this year but may recover as MSFT's public cloud sales are growing 70 per cent.

Legal concerns regarding the Cisco lawsuit seem manageable although negative news flow has pressured the stock in the past. Arista's sales growth suggests the Cisco suit is not pressuring sales and ANET revealed it is in process with a workaround for all patents.

Arista remains an arch disrupter in the infrastructure as a service (IaaS) space and my sense is it's still “early days” for this company. Plenty of upside left.

New Relic

Results for the June quarter saw revenue continue its torrid pace growing 68.7 per cent and handily beating estimates. The momentum is expected to continue. Guidance increases assumes this level of growth continues into 2016. In addition, the shift to quarterly/annual payments is helping drive deferred revenue and providing better contractual visibility.

New Relic reported 1Q16 revenue of $US38.1m and EPS of $US0.21 compared to consensus of $US35m. Management raised full year FY16 guidance to $US168-171m from $155-159m previously. That's significant.

Management noted that deferred revenue should outpace revenue growth in FY16. Assuming billings modestly outpace revenue growth for FY16, the company could be cash flow positive in the back half of FY16.

New Relic realised 10 per cent plus of this quarter's revenue from its non-APM products (Insights, Browser, Synthetics), further demonstrating the company's ability to cross-sell. The company had a 130 per cent dollar-based net expansion rate during the quarter which is an indicator that the company continues to be successful in expanding sales within its existing customer base.

Paid business accounts of 12,440 were slightly less than consensus estimates of 12,500 going into the quarter but annualised subscription revenue/paid business accounts came in at 12,265 ahead of consensus estimates of 11,217. This has been the trend since IPO with the annualised subscription revenue/paid business being the bigger lever of growth.

I continue to like the systems management space which by some accounts is the second fastest growing technology subset after cybersecurity. New Relic's novel approach to application monitoring and its delivery via the cloud continue to gain traction in a large addressable market that is being inundated by new applications and programming languages. Legacy vendors can't keep up. That's why I like New Relic.

Tata Motors

Tata Motors' numbers were mixed for the quarter, negatively impacted by declining sales in China and a one-time charge for 5800 vehicles destroyed in a factory explosion in Tianjin (which will eventually be mostly covered by insurance). The net loss was 4.3 billion rupees ($US65m). Excluding the one-time charge, Tata Motors posted a profit of 15.4 billion rupees ($US232.8m).

However, on a much more positive note, Jaguar Land Rover (JLR) sales were extremely strong as retail sales in Europe and North America rose 34 per cent and 23 per cent respectively on demand for new models such as the Discovery Sport. JLR's US sales of 8,187 units was a 76 per cent Y/Y increase driven mainly by Land Rover. Tata Motors is counting on introductions of refreshed Jaguar XF sedans, the XE, and the new F-Pace crossovers to spur demand.

Tata Motors' JLR unit is clearly benefiting from demand in the US where the auto industry registered its best two-month stretch of sales in 15 years.

The standalone (Indian domestic) business continues to outperform consensus expectations. The company's domestic medium and heavy commercial vehicles (MHCV) volumes reported growth of 32 per cent Y/Y driven by replacement demand from fleet operators and pre-buying ahead of ABS becoming mandatory before October 1, 2015. The company expects demand recovery in MHCVs to be sustained in FY16.

In the domestic passenger vehicle business, new launches such as the Bolt and Zest have helped increase Tata's market share by 20bps Y/Y to 5.8 per cent in 2QFY16. The company will launch at least two new models every year until 2020 to regain the market share lost in the last three to four years.

In China (now less than 20 per cent of sales) JLR's volumes have been impacted more than the industry due to: (i) slower sales ramp-up of the locally-produced Evoque; (ii) phase-out of Freelander models; and (iii) phase out of certain Jaguar models.

The company expects improved volumes performance in China in 2HFY16 on the back of new launches like Jaguar XE, Discovery Sport, new Jaguar XF and new Jaguar XJ. The company has recently launched Jaguar XE and Discovery Sport in China. The Discovery Sport has been competitively priced and is priced 20 per cent cheaper than the imported Discovery Sport. As well the Discovery Sport should fill the void of Freelander: The local production of the Discovery Sport has now started in the local JV with Chery.

JLR is also expanding its distribution reach to catch up with peers: JLR currently has some 180 dealer outlets, which is substantially lower than its peers (such as BMW which has 440 outlets). Management has indicated that it plans to expand its distribution network by opening 35-40 new outlets annually.

I expect a decent recovery in China volumes based on these initiatives beginning in early 2016. In fact we may be seeing the beginning of this recovery now. After several months of declining volume growth, JLR posted its first Y/Y gain (up 9 per cent Yo/) in China during the month of October 2015.

Our thesis for Tata remains intact. Strong growth from JLR globally (and a China stabilisation and then recovery) combined with a sustainable and profitable recovery in the Indian domestic business should continue to drive the shares higher. Tata has already rallied 36 per cent off its recent lows (late September). At 7.0 X 2016 EPS it's still a compelling bargain.