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Market Snapshot
briefing.com
| Dow | 34904.09 | +51.55 | (0.15%) | | Nasdaq | 14032.08 | +87.95 | (0.63%) | | SP 500 | 4519.19 | +21.56 | (0.48%) | | 10-yr Note | 0/32 | 4.12 |
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| | NYSE | Adv 1681 | Dec 1116 | Vol 688 mln | | Nasdaq | Adv 2307 | Dec 1990 | Vol 4.3 bln |
Industry Watch
| Strong: Information Technology, Energy, Industrials, Consumer Discretionary, Health Care |
| | Weak: Utilities, Health Care |
Moving the Market
-- Carryover momentum after three day winning streak
-- Drop in market rates after this morning's data acted as a buying catalyst
-- Digesting this morning's economic releases
-- S&P 500 climbing past 4,500
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Closing Summary
30-Aug-23 16:25 ET
Dow +37.57 at 34890.24, Nasdaq +75.55 at 14019.31, S&P +17.24 at 4514.87
[BRIEFING.COM] The stock market logged its fourth consecutive winning session in another lightly traded affair. Upside moves, however, were more subdued compared to recent sessions. The S&P 500, which closed above the 4,500 level, and the Nasdaq Composite finished near their highs of the day thanks to support from the mega cap space.
An initial drop in market rates following this morning's weaker than expected economic data provided added support early on. Treasury yields climbed off their intraday lows, though, as the session progressed.
The ADP Employment Change Report for August showed an estimated 177,000 jobs were added to private-sector payrolls (Brieifng.com consensus 195,000) following an upwardly revised 371,000 (from 324,000) in July. The second estimate for Q2 GDP, meanwhile, was revised down to 2.1% (Briefing.com consensus 2.4%) and the GDP Price Deflator was revised down to 2.0% (Briefing.com consensus 2.2%) from 2.2%.
The 2-yr note yield, at 4.90% just before the GDP report, pulled back to 4.82% before settling the session at 4.88%. The 10-yr note yield, at 4.15% just before the data, fell to 4.09% before settling at 4.12%.
Relative strength from the mega cap space was the biggest driver of index gains. The Vanguard Mega Cap Growth ETF (MGK) rose 0.7% while the Invesco S&P 500 Equal Weight ETF (RSP) rose 0.3%. The market-cap weighted S&P 500 closed up 0.4%.
Nine of the 11 S&P 500 sectors logged a gain, led by information technology (+0.8%) and energy (+0.5%). The utilities (-0.4%) and health care (-0.03%) sectors, meanwhile, fell to the bottom of the pack.
There were some individual stocks making outsized today. Ambarella (AMBA 60.34, -15.44, -20.4%) plunged after reporting better than expected earnings, but issuing Q3 revenue guidance that was well below consensus. HP Inc. (HPQ 29.29, -2.08, -6.6%) was another notable loser after reporting EPS that was in line with expectations, but moderated its expectations for Q4 (Oct), largely driven by a continued aggressive pricing environment in PCs, sluggish demand in China, and enterprise demand softening.
Meanwhile, Hewlett Packard Enterprise (HPE 17.36, +0.52, +3.1%) garnered a positive reaction after beating earnings estimates.
- Nasdaq Composite: +33.9% YTD
- S&P 500: +17.6% YTD
- Russell 2000: +8.8% YTD
- S&P Midcap 400: +8.1% YTD
- Dow Jones Industrial Average: +5.3% YTD
Reviewing today's economic data:
- Weekly MBA Mortgage Applications 2.3%; Prior was -4.2%
- August ADP Employment Change 177K vs Briefing.com consensus of 195K; Prior was revised to 371K from 324K
- July Adv. Intl. Trade in Goods -$91.2 bln; Prior was revised to -$88.8 bln from -$87.8 bln
- July Adv. Retail Inventories 0.3%; Prior was revised to 0.5% from 0.7%
- July Adv. Wholesale Inventories -0.1%; Prior was revised to -0.7% from -0.3%
- Q2 GDP - Second Estimate 2.1% vs Briefing.com consensus of 2,4%; Prior was 2.4%
- Q2 GDP Deflator - Second Estimate 2.0% vs Briefing.com consensus of 2.2%; Prior was 2.2%
- The key takeaway from the report is that it fits the soft landing scenario; also, there were downward revisions to the inflation readings, which is something that will continue to drive the market's belief that the Fed can refrain from another rate hike.
- July Pending Home Sales 0.9% vs Briefing.com consensus of -1.3%; Prior was revised to 0.4% from 0.3%
Looking ahead to Thursday, market participants will receive the following economic data:
- 8:30 ET: Weekly Initial Claims (Briefing.com consensus 235,000; prior 230,000), Continuing Claims (prior 1.702 mln), July Personal Income (Briefing.com consensus 0.3%; prior 0.3%), Personal Spending (Briefing.com consensus 0.7%; prior 0.5%), PCE Prices (Briefing.com consensus 0.2%; prior 0.2%), and Core PCE Prices (Briefing.com consensus 0.2%; prior 0.2%)
- 9:45 ET: August Chicago PMI (Briefing.com consensus 45.0; prior 42.8)
- 10:30 ET: Weekly natural gas inventories (prior +18 bcf)
Little changed ahead of the close
30-Aug-23 15:35 ET
Dow +39.87 at 34892.41, Nasdaq +75.85 at 14019.98, S&P +17.96 at 4515.59
[BRIEFING.COM] The major indices are holding steady ahead of the close.
The 2-yr note yield fell three basis points to 4.88% and the 10-yr note yield settled unchanged at 4.12%.
Looking ahead to Thursday, market participants will receive the following economic data:
- 8:30 ET: Weekly Initial Claims (Briefing.com consensus 235,000; prior 230,000), Continuing Claims (prior 1.702 mln), July Personal Income (Briefing.com consensus 0.3%; prior 0.3%), Personal Spending (Briefing.com consensus 0.7%; prior 0.5%), PCE Prices (Briefing.com consensus 0.2%; prior 0.2%), and Core PCE Prices (Briefing.com consensus 0.2%; prior 0.2%)
- 9:45 ET: August Chicago PMI (Briefing.com consensus 45.0; prior 42.8)
- 10:30 ET: Weekly natural gas inventories (prior +18 bcf)
Mega caps lead
30-Aug-23 15:05 ET
Dow +51.55 at 34904.09, Nasdaq +87.95 at 14032.08, S&P +21.56 at 4519.19
[BRIEFING.COM] The major indices moved mostly sideways over the last half hour.
Mega caps continue to outperform. The Vanguard Mega Cap Growth ETF (MGK) is up 0.7%.
Salesforce (CRM) and Chewy (CHWY) are among the names reporting earnings after the close.
Insulet, Charles River gain after insider purchases; Brown-Forman slips on earnings miss
30-Aug-23 14:30 ET
Dow +5.14 at 34857.81, Nasdaq +51.29 at 13995.05, S&P +12.57 at 4510.20
[BRIEFING.COM] The S&P 500 (+0.28%) is firmly in second place on Wednesday afternoon, moving modestly sideways over the prior half hour.
S&P 500 constituents Insulet (PODD 204.59, +15.11, +7.97%), Charles River (CRL 210.15, +6.26, +3.07%), and Seagate Tech (STX 68.09, +1.69, +2.55%) dot the top of the list. PODD gains after CEO last night disclosed purchase of 5,550 shares worth approx. $1.0 mln, CRL Director bought 1,000 shares worth approx. $200K, while storage stock STX (as well as peer WDC) has strung together a couple of good sessions as August comes to a close.
Meanwhile, Brown-Forman (BF.B 66.24, -2.79, -4.04%) is one of today's worst performers following this morning's Q1 miss.
Gold hits three-week highs
30-Aug-23 14:00 ET
Dow +11.01 at 34863.68, Nasdaq +59.08 at 14002.84, S&P +13.12 at 4510.75
[BRIEFING.COM] With about two hours to go on Wednesday the tech-heavy Nasdaq Composite (+0.42%) is still today's top performer, having shaved a bit off over the prior half hour, though.
Gold futures settled $7.90 higher (+0.4%) to $1,973.00/oz to a three-week high following today's economic data; the yellow metal also impacted by modest losses in both treasury yields and the greenback.
Meanwhile, the U.S. Dollar Index is down about -0.4% to $103.11.
Page One
Last Updated: 30-Aug-23 09:00 ET | Archive
Market expects Fed to sit tight after econ data
Three sessions ago the S&P 500 closed at 4,376. Yesterday, it hit 4,500 and closed a whisker shy of that intraday high. To say the least, the stock market has had a good, little run the past three sessions, paced by mega-cap leadership and gains across all 11 S&P 500 sectors.
Trading volume has been remarkably light during this run; nonetheless, the prevailing bias has been unmistakable and aided by a drop in market rates.
Tuesday's session had a big tailwind behind it as the weaker-than-expected JOLTS - Job Openings Report for July and the Consumer Confidence Index for August sent Treasury yields sharply lower. The 2-yr note yield dropped 15 basis points to 4.91% and the 10-yr note yield fell nine basis points to 4.12%.
Briefly, the market took solace in the thought that the soft data, particularly the jobs data, would be regarded by the Fed as a basis not to raise the target range for the fed funds rate again. That view was corroborated by the fed funds futures market, which showed a sub-50% probability of another 25 basis points rate hike at the September, November, and December FOMC meetings.
Prior to the JOLTS and Consumer Confidence reports, the probability of a 25 basis points rate hike at the November meeting was 62.3%. Today it sits at 41.2% with another round of economic data helping to lower the rate-hike temperature.
The ADP Employment Change Report for August showed an estimated 177,000 jobs were added to private-sector payrolls (Briefing.com consensus 195,000), which is a sharp deceleration from the upwardly revised 371,000 jobs (from 324,000) reported for July.
The key takeaway from this report, however, was the softening in pay growth for job stayers to 5.9% year-over-year -- the slowest since October 2021. The report noted that pay growth slowed for the first time in all 50 states and Washington, D.C.
The second estimate for Q2 GDP growth, meanwhile, was marked down to 2.1% (Briefing.com consensus 2.4%) from the advance estimate of 2.4%. The GDP Price Deflator also got marked down to 2.0% (Briefing.com consensus 2.2%) from the advance estimate of 2.2%. The PCE Price Index got revised lower to 2.5% from 2.6%, as did the core-PCE Price Index, which checked in at 3.7% versus the advance estimate of 3.8%.
The key takeaway from the report is that it fits the soft landing scenario; also, there were downward revisions to the inflation readings, which is something that will continue to drive the market's belief that the Fed can refrain from another rate hike.
The 2-yr note yield, at 4.90% just before the GDP release, is at 4.85%, and the 10-yr note yield, at 4.15% just before the GDP release, is at 4.11%.
The equity futures market saw some uplift following the data, seemingly riding the theme that less good economic news is good news if it keeps the Fed on hold. Still, there wasn't a flood of buying interest, as traders remain cognizant that the S&P 500 has gained nearly 3.0%, and that the Nasdaq Composite has gained 3.6%, in the last three sessions alone. We suspect traders might be showing some hesitation, thinking that this heady action can't persist or, at least, opting to wait and see if it does.
Currently, the S&P 500 futures are up two points and are trading fractionally above fair value, the Nasdaq 100 futures are up four points and are trading 0.1% above fair value, and the Dow Jones Industrial Average futures are up 37 points and are trading 0.1% above fair value.
-- Patrick J. O'Hare, Briefing.com
Patterson Companies not receiving a pat on the back as in-line Q1 results spark profit-taking (PDCO)
By registering Q1 (Jul) results consistent with analyst expectations, Patterson Companies (PDCO -6%), a dental and animal health product distributor, is amid a sell-the-news reaction today. Although worth pointing out, shares of PDCO were down as much as -14% today before bouncing off their 200-day moving average (28.20), filling the gap after strong Q4 (Apr) results in late June and possibly establishing support.
Why are investors selling PDCO's in-line Q1 results? Following PDCO's double-digit earnings beat and upbeat FY24 (Apr) EPS guidance, PDCO's Q1 performance appears weak. The market may have priced in continued outperformance in subsequent quarters, and to see results merely meet expectations is proving to be a bit of a letdown. Also, PDCO is beginning to ramp internal investments over the immediate term, which management is confident will provide a longer-term tailwind but could weigh on margins. As a result, PDCO reiterated its FY24 adjusted EPS outlook of $2.45-2.55.
Today's bearish reaction paints a slightly misleading picture, as PDCO still delivered plenty of positives worth highlighting in Q1.
- Top-line growth of 3.5% yr/yr to $1.58 bln was driven by strength across both PDCO's core Dental and Animal Health segments.
- In Dental, sales increased 2% yr/yr to $567 mln, fueled by healthy demand for consumables and value-added services, such as PDCO's software offerings. Equipment sales remained the laggard, dropping 6% yr/yr. However, the equipment category tends to experience variability quarter-to-quarter. On average over the past eight quarters, sales have grown 4%.
- PDCO commented that the dental market remains stable, boasting solid underlying fundamentals, such as an aging population, practice modernization, and increasing emphasis on overall patient health, helping serve as long-term tailwinds.
- In Animal Health, sales climbed 4% to $1.01 bln, with PDCO's companion animal and production animal divisions enjoying decent growth.
- PDCO continues to target mid-single-digit revenue growth in companion animal over the long term. Meanwhile, PDCO's focus on expanding its software and value-added services remains the priority in its production animal business.
- A key factor underneath PDCO's consolidated results is its commitment to private labels within Dental and Animal Health. The company has continued to invest in its private label portfolio, looking to add more products to its assortment within Animal Health in 2024 than ever before. This has enabled decent adjusted operating margin improvement in Q1, expanding 60 bps yr/yr.
Bottom line, Q1 contained several bright spots. Unfortunately for PDCO, they did not translate to meaningful top and bottom-line outperformance, a disappointment to investors following such solid results last quarter. There are still encouraging developments for PDCO, including a fortified private label portfolio and strategic investments in fulfillment centers to alleviate capacity constraints, which can contribute to sustainable long-term growth.
Box's soft guidance rounds out to a sharp selloff in the stock as customers rein in spending (BOX)
Data storage and sharing company Box (BOX) is the latest tech company to report that it's experiencing heightened budget scrutiny among its customers, resulting in the company lowering its FY24 revenue and operating margin outlook, while also issuing downside EPS and revenue guidance for Q3. Pricing improvements driven by ongoing customer conversions to the Enterprise Plus product and tight cost controls helped BOX to edge past Q2 EPS expectations -- a feat it has accomplished in every quarter except for one in the past five years. However, the focal point for market participants is the softening demand environment and accompanying deceleration in BOX's growth.
- Billings, a key metric for BOX that's viewed as a good gauge for cash flow generation, decreased by 1% yr/yr to $232.5 mln, adding to investors' concerns. BOX stated that billings were impacted by a high volume of early renewals in Q1. For context, billings grew by 11% in Q1, preceded by growth of 6% in Q4. Cash flow from operations was up by 15% to $33 mln, compared to growth of 16% in Q1 and 87% in Q4.
- Due to macroeconomic factors that are causing customers to tighten their budgets, BOX's net retention rate came in slightly below its expectations at 103%. Seat expansion within the company's existing customer base has slowed, although its churn rate of 3% is solid, indicating that enterprises are still prioritizing investments in secure data management and collaboration tools.
- The midpoint of BOX's Q3 revenue guidance of $261-$263 mln equates to yr/yr growth of just 4.8%, which would represent its lowest top-line growth rate in over five years. BOX also slightly cut its FY24 revenue guidance to $1.04-$1.044 bln from its prior forecast of $1.045-$1.055 bln, creating a domino effect that led to it reducing its operating margin outlook to approximately 4.5% from 5.0%. Lower sales translate into reduced sales leverage, impacting margins and profitability.
- The good news is that BOX is mitigating the bottom-line impact by keeping a tight lid on costs. In Q2, General and Administrative expenses were virtually flat yr/yr at $32.6 mln. Combined with a 70 bps yr/yr bump in non-GAAP gross margin to 76.9%, the cost containment efforts helped BOX generate EPS growth of 28.5%.
- Another positive is that BOX announced a $100 mln expansion to its stock repurchase program, providing it with another lever to pull to create EPS growth.
The bottom line, though, is that BOX's already tepid revenue growth rates are poised to slip even lower as enterprises are once again becoming more conservative with their spending. Once economic conditions improve, BOX is confident that its growth will reaccelerate -- especially as its Box AI platform gains traction -- but in the near term, the stock seems to be missing a meaningful catalyst.
Ambarella slammed lower as weakening IoT market in China cuts deeply into its outlook (AMBA)
Ambarella (AMBA), a manufacturer of computer vision chips for advanced driver-assistance systems (ADAS), security cameras, and IoT applications, is plunging lower after issuing weak Q3 revenue guidance that badly missed expectations. The company did beat Q2 EPS estimates, mainly due to its solid cost containment efforts, but the better-than-expected earnings performance is being clouded by a gloomier outlook that's characterized by increasing inventory reduction actions at its customers.
- For the fourth consecutive quarter, revenue declined on a yr/yr basis, falling by about 23% to $62.1 mln in Q2. During the earnings call, CEO Fermi Wang specifically called out weakness in its consumer IoT business, which has a significant presence in China -- a market that he described as weaker than other markets. Furthermore, Mr. Wang added that AMBA experienced a further push out of demand from a large customer, adding to the alarm.
- These pockets of weakness are making AMBA's customers' efforts to reduce their inventory more difficult. Consequently, the company doesn't expect to see a recovery in 2023, leading it to issue downside Q3 guidance of $50 mln +/- 4%. At $50 mln, AMBA's revenue would be down by nearly 40% in Q3, marking its worst yr/yr decline in more than five years.
- AMBA is anticipating a return to growth in 2024 as inventory levels normalize and as demand within the automotive end market remains strong. An expanding list of design wins with major auto OEMs -- such as those with Continental and Bosch -- should drive stronger top-line growth next year.
- The company's lineup of SoCs in the AI inference market is also poised to become a more substantial contributor to revenue in the coming years. On that note, AMBA began to port Meta Platforms' (META) Llama 2 code generation model for AI with its CV3 chips this quarter. Importantly, CV3 chips carry significantly higher ASPs than the typical video processing chip with SoCs ranging from $50 to more than $400 per SoC.
- During this downturn in demand, keeping a tight lid on expenses will be critical. In Q2, AMBA did a good job on this front with non-GAAP operating expenses coming in at $46 mln, below its prior guidance of $48-$50 mln.
The magnitude of AMBA's Q3 revenue guidance miss caught market participants off guard. While the longer-term outlook remains bright, thanks to the company's exposure to the auto and AI markets, the weakening IoT business and mounting macroeconomic pressures in China are potent headwinds that will weigh on AMBA's results in the near/intermediate term.
Hewlett Packard Enterprise's solid Q3 performance not met with outsized praise today (HPE)
Hewlett Packard Enterprise (HPE), the servers, storage, and networking software provider, cleared analyst earnings expectations in Q3 (Jul), raised its FY23 (Oct) EPS outlook, and left its FY23 revenue growth forecast unchanged at +4-6% in constant currency. Nevertheless, its shares are not budging.
Today's lukewarm reception is likely due to management's static forward-looking views on the macro economy. During its conference call, HPE repeated that the broader IT market remains pressured. Cycle times are still elongated, and digestion of prior orders continues to have some near-term impact, particularly in HPE's compute and storage businesses, which endured revenue declines of 13% and 5% yr/yr, respectively, capping overall revenue growth. HPE's comments echo those made by some of its peers lately, such as NetApp (NTAP), which remarked last week that the spending environment was no different from the previous quarter in JulQ, and Juniper Networks (JNPR), which expressed similar sentiments last month, stating that the macro environment remained challenging.
Meanwhile, FX headwinds continue to clip total revenue growth, with HPE projecting a 300 bp impact in FY23, hitting the high end of its prior 250-300 bp prediction. Additionally, with AI being the central focus of HPE, it was not very reassuring to see that AI only had a mildly positive impact on overall revenue.
- There were still several highlights worth mentioning. Even though the macroeconomic climate remains unfavorable, HPE delivered revenue growth of 0.7% yr/yr to $7.0 bln, matching the midpoint of its previous guidance. The company's Intelligent Edge segment was the star, expanding sales by 50% yr/yr to $1.4 bln, translating to a 20% chunk of overall revenue and comprising the largest slice of total operating profit at 49%. HPE's GreenLake hybrid cloud platform was the primary fuel, delivering an annualized revenue run rate (ARR) of $1.3 bln in the quarter, a 48% jump yr/yr, underscoring healthy progress shifting toward edge hybrid cloud and AI.
- Speaking of AI, growth in HPE's High Performance Computing & Artificial Intelligence (HPC & AI) segment was a tad underwhelming, inching just a percent higher yr/yr to $836 mln on negative 0.8% operating margins. Interim CFO Jeremy Cox mentioned that since AI is in its early stages, tightness in critical components and long lead times are present, which will likely keep margins volatile over the near term. Still, HPE exited the quarter with the most substantial order book ever, reflecting accelerating AI demand.
- HPE's pivot to a high-growth, high-margin operation is bearing fruit, leading to a decent 120 bp improvement in non-GAAP gross margins yr/yr and assisting its $0.49 EPS in Q3, exceeding the high-end of its prior guidance by a penny. As a result, HPE raised its FY23 EPS outlook again, predicting $2.11-2.15, up from $2.06-2.14.
HPE's Q3 results were decent. However, too much near-term uncertainty remains, preventing shares from seeing a more upbeat response today. AI offers compelling upside over the long term, but in the meantime, the volatile margins and relatively light revenue growth associated with HPE's AI business is keeping the stock from partaking more meaningfully in the AI-related boom.
HP Inc. heads sharply lower on earnings as hopes for an improved 2H performance fade (HPQ)
HP Inc. (HPQ -8.5%) is heading sharply lower following its Q3 (Jul) earnings report last night. After reporting a large EPS beat last quarter, HPQ was just in-line this time. Plus, revenue fell 9.9% yr/yr to $13.2 bln, which was below analyst expectations. HPQ has now missed on revs for three consecutive quarters. It also did not help that the mid-point of Q4 (Oct) EPS guidance was below expectations. HPQ has been saying for two quarters that 2H would be better than 1H, but it does not seem to be materializing.
- HPQ says it's seeing enterprise spending remain cautious, with the rising cost of capital being a notable factor. The SMB segment is showing resilience, but Consumer continues to see softness in discretionary spending. Geographically, most markets are experiencing some weakness, although at different levels. Notably, HPQ saw a downturn in the China market, where demand is not even yet tracking the lower GDP recovery.
- On the Personal Systems (PS) side, revenue fell 11% yr/yr (or -8% constant currency) to $8.9 bln with 6.6% operating margin. PS revenue rose 9% sequentially, reflecting back-to-school demand as well as higher unit volume resulting in share gain. Consumer PS revenue was down 12% yr/yr while Commercial PS revenue was down 11%. HPQ saw continued Commercial enterprise softness driven by cautious spending and delayed purchase decisions. Commercial makes up 70% of segment revs. Channel inventory levels are normalizing, however, industry-wide channel inventory continues to remain elevated. As a result, ASP pressures are offsetting volume growth.
- On the Print side, revenue fell 7% yr/yr (-5% CC) to $4.3 bln with 18.6% operating margin. Consumer Printing revenue was down 28% while Commercial Printing revenue was down 6%. Supplies revenue was down 2% (flat CC). HPQ continues to see soft demand, particularly in China, as well as aggressive pricing in the Consumer Print market and delayed enterprise spending in the industrial space.
Overall, this was a rough quarter for HPQ. The company had set expectations for a better 2H relative to 1H and it's not materializing. Probably the big takeaway was a more subdued outlook as the macro situation has not improved as quickly as anticipated. As such, HPQ is moderating its expectations for Q4 (Oct), largely driven by continued aggressive pricing environment in PCs, sluggish demand in China, and enterprise demand softening. This report makes us more cautious on Dell's (DELL) earnings report tomorrow after the close.
Patterson Companies not receiving a pat on the back as in-line Q1 results spark profit-taking (PDCO)
By registering Q1 (Jul) results consistent with analyst expectations, Patterson Companies (PDCO -6%), a dental and animal health product distributor, is amid a sell-the-news reaction today. Although worth pointing out, shares of PDCO were down as much as -14% today before bouncing off their 200-day moving average (28.20), filling the gap after strong Q4 (Apr) results in late June and possibly establishing support.
Why are investors selling PDCO's in-line Q1 results? Following PDCO's double-digit earnings beat and upbeat FY24 (Apr) EPS guidance, PDCO's Q1 performance appears weak. The market may have priced in continued outperformance in subsequent quarters, and to see results merely meet expectations is proving to be a bit of a letdown. Also, PDCO is beginning to ramp internal investments over the immediate term, which management is confident will provide a longer-term tailwind but could weigh on margins. As a result, PDCO reiterated its FY24 adjusted EPS outlook of $2.45-2.55.
Today's bearish reaction paints a slightly misleading picture, as PDCO still delivered plenty of positives worth highlighting in Q1.
- Top-line growth of 3.5% yr/yr to $1.58 bln was driven by strength across both PDCO's core Dental and Animal Health segments.
- In Dental, sales increased 2% yr/yr to $567 mln, fueled by healthy demand for consumables and value-added services, such as PDCO's software offerings. Equipment sales remained the laggard, dropping 6% yr/yr. However, the equipment category tends to experience variability quarter-to-quarter. On average over the past eight quarters, sales have grown 4%.
- PDCO commented that the dental market remains stable, boasting solid underlying fundamentals, such as an aging population, practice modernization, and increasing emphasis on overall patient health, helping serve as long-term tailwinds.
- In Animal Health, sales climbed 4% to $1.01 bln, with PDCO's companion animal and production animal divisions enjoying decent growth.
- PDCO continues to target mid-single-digit revenue growth in companion animal over the long term. Meanwhile, PDCO's focus on expanding its software and value-added services remains the priority in its production animal business.
- A key factor underneath PDCO's consolidated results is its commitment to private labels within Dental and Animal Health. The company has continued to invest in its private label portfolio, looking to add more products to its assortment within Animal Health in 2024 than ever before. This has enabled decent adjusted operating margin improvement in Q1, expanding 60 bps yr/yr.
Bottom line, Q1 contained several bright spots. Unfortunately for PDCO, they did not translate to meaningful top and bottom-line outperformance, a disappointment to investors following such solid results last quarter. There are still encouraging developments for PDCO, including a fortified private label portfolio and strategic investments in fulfillment centers to alleviate capacity constraints, which can contribute to sustainable long-term growth.
Box's soft guidance rounds out to a sharp selloff in the stock as customers rein in spending (BOX)
Data storage and sharing company Box (BOX) is the latest tech company to report that it's experiencing heightened budget scrutiny among its customers, resulting in the company lowering its FY24 revenue and operating margin outlook, while also issuing downside EPS and revenue guidance for Q3. Pricing improvements driven by ongoing customer conversions to the Enterprise Plus product and tight cost controls helped BOX to edge past Q2 EPS expectations -- a feat it has accomplished in every quarter except for one in the past five years. However, the focal point for market participants is the softening demand environment and accompanying deceleration in BOX's growth.
- Billings, a key metric for BOX that's viewed as a good gauge for cash flow generation, decreased by 1% yr/yr to $232.5 mln, adding to investors' concerns. BOX stated that billings were impacted by a high volume of early renewals in Q1. For context, billings grew by 11% in Q1, preceded by growth of 6% in Q4. Cash flow from operations was up by 15% to $33 mln, compared to growth of 16% in Q1 and 87% in Q4.
- Due to macroeconomic factors that are causing customers to tighten their budgets, BOX's net retention rate came in slightly below its expectations at 103%. Seat expansion within the company's existing customer base has slowed, although its churn rate of 3% is solid, indicating that enterprises are still prioritizing investments in secure data management and collaboration tools.
- The midpoint of BOX's Q3 revenue guidance of $261-$263 mln equates to yr/yr growth of just 4.8%, which would represent its lowest top-line growth rate in over five years. BOX also slightly cut its FY24 revenue guidance to $1.04-$1.044 bln from its prior forecast of $1.045-$1.055 bln, creating a domino effect that led to it reducing its operating margin outlook to approximately 4.5% from 5.0%. Lower sales translate into reduced sales leverage, impacting margins and profitability.
- The good news is that BOX is mitigating the bottom-line impact by keeping a tight lid on costs. In Q2, General and Administrative expenses were virtually flat yr/yr at $32.6 mln. Combined with a 70 bps yr/yr bump in non-GAAP gross margin to 76.9%, the cost containment efforts helped BOX generate EPS growth of 28.5%.
- Another positive is that BOX announced a $100 mln expansion to its stock repurchase program, providing it with another lever to pull to create EPS growth.
The bottom line, though, is that BOX's already tepid revenue growth rates are poised to slip even lower as enterprises are once again becoming more conservative with their spending. Once economic conditions improve, BOX is confident that its growth will reaccelerate -- especially as its Box AI platform gains traction -- but in the near term, the stock seems to be missing a meaningful catalyst.
Ambarella slammed lower as weakening IoT market in China cuts deeply into its outlook (AMBA)
Ambarella (AMBA), a manufacturer of computer vision chips for advanced driver-assistance systems (ADAS), security cameras, and IoT applications, is plunging lower after issuing weak Q3 revenue guidance that badly missed expectations. The company did beat Q2 EPS estimates, mainly due to its solid cost containment efforts, but the better-than-expected earnings performance is being clouded by a gloomier outlook that's characterized by increasing inventory reduction actions at its customers.
- For the fourth consecutive quarter, revenue declined on a yr/yr basis, falling by about 23% to $62.1 mln in Q2. During the earnings call, CEO Fermi Wang specifically called out weakness in its consumer IoT business, which has a significant presence in China -- a market that he described as weaker than other markets. Furthermore, Mr. Wang added that AMBA experienced a further push out of demand from a large customer, adding to the alarm.
- These pockets of weakness are making AMBA's customers' efforts to reduce their inventory more difficult. Consequently, the company doesn't expect to see a recovery in 2023, leading it to issue downside Q3 guidance of $50 mln +/- 4%. At $50 mln, AMBA's revenue would be down by nearly 40% in Q3, marking its worst yr/yr decline in more than five years.
- AMBA is anticipating a return to growth in 2024 as inventory levels normalize and as demand within the automotive end market remains strong. An expanding list of design wins with major auto OEMs -- such as those with Continental and Bosch -- should drive stronger top-line growth next year.
- The company's lineup of SoCs in the AI inference market is also poised to become a more substantial contributor to revenue in the coming years. On that note, AMBA began to port Meta Platforms' (META) Llama 2 code generation model for AI with its CV3 chips this quarter. Importantly, CV3 chips carry significantly higher ASPs than the typical video processing chip with SoCs ranging from $50 to more than $400 per SoC.
- During this downturn in demand, keeping a tight lid on expenses will be critical. In Q2, AMBA did a good job on this front with non-GAAP operating expenses coming in at $46 mln, below its prior guidance of $48-$50 mln.
The magnitude of AMBA's Q3 revenue guidance miss caught market participants off guard. While the longer-term outlook remains bright, thanks to the company's exposure to the auto and AI markets, the weakening IoT business and mounting macroeconomic pressures in China are potent headwinds that will weigh on AMBA's results in the near/intermediate term.
Hewlett Packard Enterprise's solid Q3 performance not met with outsized praise today (HPE)
Hewlett Packard Enterprise (HPE), the servers, storage, and networking software provider, cleared analyst earnings expectations in Q3 (Jul), raised its FY23 (Oct) EPS outlook, and left its FY23 revenue growth forecast unchanged at +4-6% in constant currency. Nevertheless, its shares are not budging.
Today's lukewarm reception is likely due to management's static forward-looking views on the macro economy. During its conference call, HPE repeated that the broader IT market remains pressured. Cycle times are still elongated, and digestion of prior orders continues to have some near-term impact, particularly in HPE's compute and storage businesses, which endured revenue declines of 13% and 5% yr/yr, respectively, capping overall revenue growth. HPE's comments echo those made by some of its peers lately, such as NetApp (NTAP), which remarked last week that the spending environment was no different from the previous quarter in JulQ, and Juniper Networks (JNPR), which expressed similar sentiments last month, stating that the macro environment remained challenging.
Meanwhile, FX headwinds continue to clip total revenue growth, with HPE projecting a 300 bp impact in FY23, hitting the high end of its prior 250-300 bp prediction. Additionally, with AI being the central focus of HPE, it was not very reassuring to see that AI only had a mildly positive impact on overall revenue.
- There were still several highlights worth mentioning. Even though the macroeconomic climate remains unfavorable, HPE delivered revenue growth of 0.7% yr/yr to $7.0 bln, matching the midpoint of its previous guidance. The company's Intelligent Edge segment was the star, expanding sales by 50% yr/yr to $1.4 bln, translating to a 20% chunk of overall revenue and comprising the largest slice of total operating profit at 49%. HPE's GreenLake hybrid cloud platform was the primary fuel, delivering an annualized revenue run rate (ARR) of $1.3 bln in the quarter, a 48% jump yr/yr, underscoring healthy progress shifting toward edge hybrid cloud and AI.
- Speaking of AI, growth in HPE's High Performance Computing & Artificial Intelligence (HPC & AI) segment was a tad underwhelming, inching just a percent higher yr/yr to $836 mln on negative 0.8% operating margins. Interim CFO Jeremy Cox mentioned that since AI is in its early stages, tightness in critical components and long lead times are present, which will likely keep margins volatile over the near term. Still, HPE exited the quarter with the most substantial order book ever, reflecting accelerating AI demand.
- HPE's pivot to a high-growth, high-margin operation is bearing fruit, leading to a decent 120 bp improvement in non-GAAP gross margins yr/yr and assisting its $0.49 EPS in Q3, exceeding the high-end of its prior guidance by a penny. As a result, HPE raised its FY23 EPS outlook again, predicting $2.11-2.15, up from $2.06-2.14.
HPE's Q3 results were decent. However, too much near-term uncertainty remains, preventing shares from seeing a more upbeat response today. AI offers compelling upside over the long term, but in the meantime, the volatile margins and relatively light revenue growth associated with HPE's AI business is keeping the stock from partaking more meaningfully in the AI-related boom.
HP Inc. heads sharply lower on earnings as hopes for an improved 2H performance fade (HPQ)
HP Inc. (HPQ -8.5%) is heading sharply lower following its Q3 (Jul) earnings report last night. After reporting a large EPS beat last quarter, HPQ was just in-line this time. Plus, revenue fell 9.9% yr/yr to $13.2 bln, which was below analyst expectations. HPQ has now missed on revs for three consecutive quarters. It also did not help that the mid-point of Q4 (Oct) EPS guidance was below expectations. HPQ has been saying for two quarters that 2H would be better than 1H, but it does not seem to be materializing.
- HPQ says it's seeing enterprise spending remain cautious, with the rising cost of capital being a notable factor. The SMB segment is showing resilience, but Consumer continues to see softness in discretionary spending. Geographically, most markets are experiencing some weakness, although at different levels. Notably, HPQ saw a downturn in the China market, where demand is not even yet tracking the lower GDP recovery.
- On the Personal Systems (PS) side, revenue fell 11% yr/yr (or -8% constant currency) to $8.9 bln with 6.6% operating margin. PS revenue rose 9% sequentially, reflecting back-to-school demand as well as higher unit volume resulting in share gain. Consumer PS revenue was down 12% yr/yr while Commercial PS revenue was down 11%. HPQ saw continued Commercial enterprise softness driven by cautious spending and delayed purchase decisions. Commercial makes up 70% of segment revs. Channel inventory levels are normalizing, however, industry-wide channel inventory continues to remain elevated. As a result, ASP pressures are offsetting volume growth.
- On the Print side, revenue fell 7% yr/yr (-5% CC) to $4.3 bln with 18.6% operating margin. Consumer Printing revenue was down 28% while Commercial Printing revenue was down 6%. Supplies revenue was down 2% (flat CC). HPQ continues to see soft demand, particularly in China, as well as aggressive pricing in the Consumer Print market and delayed enterprise spending in the industrial space.
Overall, this was a rough quarter for HPQ. The company had set expectations for a better 2H relative to 1H and it's not materializing. Probably the big takeaway was a more subdued outlook as the macro situation has not improved as quickly as anticipated. As such, HPQ is moderating its expectations for Q4 (Oct), largely driven by continued aggressive pricing environment in PCs, sluggish demand in China, and enterprise demand softening. This report makes us more cautious on Dell's (DELL) earnings report tomorrow after the close.
Patterson Companies not receiving a pat on the back as in-line Q1 results spark profit-taking (PDCO)
By registering Q1 (Jul) results consistent with analyst expectations, Patterson Companies (PDCO -6%), a dental and animal health product distributor, is amid a sell-the-news reaction today. Although worth pointing out, shares of PDCO were down as much as -14% today before bouncing off their 200-day moving average (28.20), filling the gap after strong Q4 (Apr) results in late June and possibly establishing support.
Why are investors selling PDCO's in-line Q1 results? Following PDCO's double-digit earnings beat and upbeat FY24 (Apr) EPS guidance, PDCO's Q1 performance appears weak. The market may have priced in continued outperformance in subsequent quarters, and to see results merely meet expectations is proving to be a bit of a letdown. Also, PDCO is beginning to ramp internal investments over the immediate term, which management is confident will provide a longer-term tailwind but could weigh on margins. As a result, PDCO reiterated its FY24 adjusted EPS outlook of $2.45-2.55.
Today's bearish reaction paints a slightly misleading picture, as PDCO still delivered plenty of positives worth highlighting in Q1.
- Top-line growth of 3.5% yr/yr to $1.58 bln was driven by strength across both PDCO's core Dental and Animal Health segments.
- In Dental, sales increased 2% yr/yr to $567 mln, fueled by healthy demand for consumables and value-added services, such as PDCO's software offerings. Equipment sales remained the laggard, dropping 6% yr/yr. However, the equipment category tends to experience variability quarter-to-quarter. On average over the past eight quarters, sales have grown 4%.
- PDCO commented that the dental market remains stable, boasting solid underlying fundamentals, such as an aging population, practice modernization, and increasing emphasis on overall patient health, helping serve as long-term tailwinds.
- In Animal Health, sales climbed 4% to $1.01 bln, with PDCO's companion animal and production animal divisions enjoying decent growth.
- PDCO continues to target mid-single-digit revenue growth in companion animal over the long term. Meanwhile, PDCO's focus on expanding its software and value-added services remains the priority in its production animal business.
- A key factor underneath PDCO's consolidated results is its commitment to private labels within Dental and Animal Health. The company has continued to invest in its private label portfolio, looking to add more products to its assortment within Animal Health in 2024 than ever before. This has enabled decent adjusted operating margin improvement in Q1, expanding 60 bps yr/yr.
Bottom line, Q1 contained several bright spots. Unfortunately for PDCO, they did not translate to meaningful top and bottom-line outperformance, a disappointment to investors following such solid results last quarter. There are still encouraging developments for PDCO, including a fortified private label portfolio and strategic investments in fulfillment centers to alleviate capacity constraints, which can contribute to sustainable long-term growth.
Box's soft guidance rounds out to a sharp selloff in the stock as customers rein in spending (BOX)
Data storage and sharing company Box (BOX) is the latest tech company to report that it's experiencing heightened budget scrutiny among its customers, resulting in the company lowering its FY24 revenue and operating margin outlook, while also issuing downside EPS and revenue guidance for Q3. Pricing improvements driven by ongoing customer conversions to the Enterprise Plus product and tight cost controls helped BOX to edge past Q2 EPS expectations -- a feat it has accomplished in every quarter except for one in the past five years. However, the focal point for market participants is the softening demand environment and accompanying deceleration in BOX's growth.
- Billings, a key metric for BOX that's viewed as a good gauge for cash flow generation, decreased by 1% yr/yr to $232.5 mln, adding to investors' concerns. BOX stated that billings were impacted by a high volume of early renewals in Q1. For context, billings grew by 11% in Q1, preceded by growth of 6% in Q4. Cash flow from operations was up by 15% to $33 mln, compared to growth of 16% in Q1 and 87% in Q4.
- Due to macroeconomic factors that are causing customers to tighten their budgets, BOX's net retention rate came in slightly below its expectations at 103%. Seat expansion within the company's existing customer base has slowed, although its churn rate of 3% is solid, indicating that enterprises are still prioritizing investments in secure data management and collaboration tools.
- The midpoint of BOX's Q3 revenue guidance of $261-$263 mln equates to yr/yr growth of just 4.8%, which would represent its lowest top-line growth rate in over five years. BOX also slightly cut its FY24 revenue guidance to $1.04-$1.044 bln from its prior forecast of $1.045-$1.055 bln, creating a domino effect that led to it reducing its operating margin outlook to approximately 4.5% from 5.0%. Lower sales translate into reduced sales leverage, impacting margins and profitability.
- The good news is that BOX is mitigating the bottom-line impact by keeping a tight lid on costs. In Q2, General and Administrative expenses were virtually flat yr/yr at $32.6 mln. Combined with a 70 bps yr/yr bump in non-GAAP gross margin to 76.9%, the cost containment efforts helped BOX generate EPS growth of 28.5%.
- Another positive is that BOX announced a $100 mln expansion to its stock repurchase program, providing it with another lever to pull to create EPS growth.
The bottom line, though, is that BOX's already tepid revenue growth rates are poised to slip even lower as enterprises are once again becoming more conservative with their spending. Once economic conditions improve, BOX is confident that its growth will reaccelerate -- especially as its Box AI platform gains traction -- but in the near term, the stock seems to be missing a meaningful catalyst.
Ambarella slammed lower as weakening IoT market in China cuts deeply into its outlook (AMBA)
Ambarella (AMBA), a manufacturer of computer vision chips for advanced driver-assistance systems (ADAS), security cameras, and IoT applications, is plunging lower after issuing weak Q3 revenue guidance that badly missed expectations. The company did beat Q2 EPS estimates, mainly due to its solid cost containment efforts, but the better-than-expected earnings performance is being clouded by a gloomier outlook that's characterized by increasing inventory reduction actions at its customers.
- For the fourth consecutive quarter, revenue declined on a yr/yr basis, falling by about 23% to $62.1 mln in Q2. During the earnings call, CEO Fermi Wang specifically called out weakness in its consumer IoT business, which has a significant presence in China -- a market that he described as weaker than other markets. Furthermore, Mr. Wang added that AMBA experienced a further push out of demand from a large customer, adding to the alarm.
- These pockets of weakness are making AMBA's customers' efforts to reduce their inventory more difficult. Consequently, the company doesn't expect to see a recovery in 2023, leading it to issue downside Q3 guidance of $50 mln +/- 4%. At $50 mln, AMBA's revenue would be down by nearly 40% in Q3, marking its worst yr/yr decline in more than five years.
- AMBA is anticipating a return to growth in 2024 as inventory levels normalize and as demand within the automotive end market remains strong. An expanding list of design wins with major auto OEMs -- such as those with Continental and Bosch -- should drive stronger top-line growth next year.
- The company's lineup of SoCs in the AI inference market is also poised to become a more substantial contributor to revenue in the coming years. On that note, AMBA began to port Meta Platforms' (META) Llama 2 code generation model for AI with its CV3 chips this quarter. Importantly, CV3 chips carry significantly higher ASPs than the typical video processing chip with SoCs ranging from $50 to more than $400 per SoC.
- During this downturn in demand, keeping a tight lid on expenses will be critical. In Q2, AMBA did a good job on this front with non-GAAP operating expenses coming in at $46 mln, below its prior guidance of $48-$50 mln.
The magnitude of AMBA's Q3 revenue guidance miss caught market participants off guard. While the longer-term outlook remains bright, thanks to the company's exposure to the auto and AI markets, the weakening IoT business and mounting macroeconomic pressures in China are potent headwinds that will weigh on AMBA's results in the near/intermediate term.
Hewlett Packard Enterprise's solid Q3 performance not met with outsized praise today (HPE)
Hewlett Packard Enterprise (HPE), the servers, storage, and networking software provider, cleared analyst earnings expectations in Q3 (Jul), raised its FY23 (Oct) EPS outlook, and left its FY23 revenue growth forecast unchanged at +4-6% in constant currency. Nevertheless, its shares are not budging.
Today's lukewarm reception is likely due to management's static forward-looking views on the macro economy. During its conference call, HPE repeated that the broader IT market remains pressured. Cycle times are still elongated, and digestion of prior orders continues to have some near-term impact, particularly in HPE's compute and storage businesses, which endured revenue declines of 13% and 5% yr/yr, respectively, capping overall revenue growth. HPE's comments echo those made by some of its peers lately, such as NetApp (NTAP), which remarked last week that the spending environment was no different from the previous quarter in JulQ, and Juniper Networks (JNPR), which expressed similar sentiments last month, stating that the macro environment remained challenging.
Meanwhile, FX headwinds continue to clip total revenue growth, with HPE projecting a 300 bp impact in FY23, hitting the high end of its prior 250-300 bp prediction. Additionally, with AI being the central focus of HPE, it was not very reassuring to see that AI only had a mildly positive impact on overall revenue.
- There were still several highlights worth mentioning. Even though the macroeconomic climate remains unfavorable, HPE delivered revenue growth of 0.7% yr/yr to $7.0 bln, matching the midpoint of its previous guidance. The company's Intelligent Edge segment was the star, expanding sales by 50% yr/yr to $1.4 bln, translating to a 20% chunk of overall revenue and comprising the largest slice of total operating profit at 49%. HPE's GreenLake hybrid cloud platform was the primary fuel, delivering an annualized revenue run rate (ARR) of $1.3 bln in the quarter, a 48% jump yr/yr, underscoring healthy progress shifting toward edge hybrid cloud and AI.
- Speaking of AI, growth in HPE's High Performance Computing & Artificial Intelligence (HPC & AI) segment was a tad underwhelming, inching just a percent higher yr/yr to $836 mln on negative 0.8% operating margins. Interim CFO Jeremy Cox mentioned that since AI is in its early stages, tightness in critical components and long lead times are present, which will likely keep margins volatile over the near term. Still, HPE exited the quarter with the most substantial order book ever, reflecting accelerating AI demand.
- HPE's pivot to a high-growth, high-margin operation is bearing fruit, leading to a decent 120 bp improvement in non-GAAP gross margins yr/yr and assisting its $0.49 EPS in Q3, exceeding the high-end of its prior guidance by a penny. As a result, HPE raised its FY23 EPS outlook again, predicting $2.11-2.15, up from $2.06-2.14.
HPE's Q3 results were decent. However, too much near-term uncertainty remains, preventing shares from seeing a more upbeat response today. AI offers compelling upside over the long term, but in the meantime, the volatile margins and relatively light revenue growth associated with HPE's AI business is keeping the stock from partaking more meaningfully in the AI-related boom.
HP Inc. heads sharply lower on earnings as hopes for an improved 2H performance fade (HPQ)
HP Inc. (HPQ -8.5%) is heading sharply lower following its Q3 (Jul) earnings report last night. After reporting a large EPS beat last quarter, HPQ was just in-line this time. Plus, revenue fell 9.9% yr/yr to $13.2 bln, which was below analyst expectations. HPQ has now missed on revs for three consecutive quarters. It also did not help that the mid-point of Q4 (Oct) EPS guidance was below expectations. HPQ has been saying for two quarters that 2H would be better than 1H, but it does not seem to be materializing.
- HPQ says it's seeing enterprise spending remain cautious, with the rising cost of capital being a notable factor. The SMB segment is showing resilience, but Consumer continues to see softness in discretionary spending. Geographically, most markets are experiencing some weakness, although at different levels. Notably, HPQ saw a downturn in the China market, where demand is not even yet tracking the lower GDP recovery.
- On the Personal Systems (PS) side, revenue fell 11% yr/yr (or -8% constant currency) to $8.9 bln with 6.6% operating margin. PS revenue rose 9% sequentially, reflecting back-to-school demand as well as higher unit volume resulting in share gain. Consumer PS revenue was down 12% yr/yr while Commercial PS revenue was down 11%. HPQ saw continued Commercial enterprise softness driven by cautious spending and delayed purchase decisions. Commercial makes up 70% of segment revs. Channel inventory levels are normalizing, however, industry-wide channel inventory continues to remain elevated. As a result, ASP pressures are offsetting volume growth.
- On the Print side, revenue fell 7% yr/yr (-5% CC) to $4.3 bln with 18.6% operating margin. Consumer Printing revenue was down 28% while Commercial Printing revenue was down 6%. Supplies revenue was down 2% (flat CC). HPQ continues to see soft demand, particularly in China, as well as aggressive pricing in the Consumer Print market and delayed enterprise spending in the industrial space.
Overall, this was a rough quarter for HPQ. The company had set expectations for a better 2H relative to 1H and it's not materializing. Probably the big takeaway was a more subdued outlook as the macro situation has not improved as quickly as anticipated. As such, HPQ is moderating its expectations for Q4 (Oct), largely driven by continued aggressive pricing environment in PCs, sluggish demand in China, and enterprise demand softening. This report makes us more cautious on Dell's (DELL) earnings report tomorrow after the close.
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