2022Q4 Earnings Review Part X: Consumer Cyclical, Financials, Healthcare, Semiconductors & Tech Software
- Royal Bank of Canada beat on earnings and revenue as management increased its loan loss provision as they forecast a turbulent 2023.
- Veeva Systems reported a blowout quarter along with a strong outlook as investors cheered on the strong report.
- Broadcom reported a strong quarter to start its FY2023 on a strong note as they look to grow its software segment with the VMWare acquisition.
- Casey’s General Stores Inc. beat on revenue and earnings and management updated its FY2023 outlook.
- Adobe beat on the top and bottom line as they started their FY2023 on a strong note.
Royal Bank of Canada (RY): The Canadian money center bank beat on earnings and revenue as they benefitted from interest rate increases from the Bank of Canada. Royal Bank of Canada reported earnings of CAD$3.05/share (beat WallStreet estimates by $0.12) on revenue of CAD$15.1 billion (beat WallStreet estimates by $1.5 billion). The bank reported a total net income of $3.2 billion for the quarter down $881 million as they reported a return of equity of 12.6%. Personal & Commercial Banking reported a net income of $2.13 billion which was propelled by double-digit growth in business lending and credit cards. The business unit reported 9% loan volume growth.
The Wealth Management segment reported a net income of $848 million up 3% as higher interest margins offset the lower fees. The Capital Markets business reported a net income of $1.22 billion which was up 9% as they got higher revenue from Global Markets and higher fixed-income revenue from higher interest rates. The overall net income number was affected by a higher loan loss provision of $532 million up from $425 million. The stock sold off on the news as the report did not show strong net interest income margins and management will need to control its expenses. If the stock sells off significantly we will add to our position if the stock enormously sells off.
Veeva Systems Inc. (VEEV): Cloud software provider for the healthcare sector, Veeva Systems reported a strong quarter as they beat on earnings and revenue. The company reported earnings per share of $1.15 (beat WallStreet estimates by $0.11) on revenue of $563.4 million (beat WallStreet estimates by $10.88 million). In comparison to our fund estimates, earnings exceeded our expectations but revenue came in a tad bit light of our expectations. We estimated Veeva Systems would earn $1.08/share on revenue of $565 million. The company reported revenue growth of 16% mainly supported by its subscription revenue which was coincidentally up 16%.
Expenses were high during the quarter as operating margins contracted significantly from 43.1% to 19.3% as the company spends for its growth. The company’s net income ended the quarter at $188.5 million up from $97.1 million. The company gave a solid outlook for its FY2024 Q1 quarter as they expect revenue between $514–516 million. For the fiscal year, management is expecting the company to generate total revenue between $2.35 and $2.36 billion. Management expects to generate an operating income of approximately $800 million on that revenue base. Management is going to need to work on free cash flow this coming fiscal year as the company had a cash burn of $217.3 million up from $127.4 million. Veeva Systems ended the quarter with $889.7 million with cash on the balance sheet.
The company is clearly in a spending growth mode and investors cheered on the earnings with the stock going up 6.2%. Investors are expecting that Veeva Systems is gaining market share as they go on the offense. The company does not come at a cheap valuation as it trades at 59x earnings but you are paying for growth with a growing total addressable market. We will continue to hold the stock and look to add to our stock position on market sell-offs.
Broadcom Inc. (AVGO): The diversified semiconductor company reported a top and bottom line beat with impressive margin expansion. Broadcom reported earnings per share of $10.33 (beat WallStreet estimates by $0.17) on revenue of $8.92 billion (beat WallStreet estimates by $20 million). In comparison with our fund estimates, Broadcom beat on earnings but slightly missed on revenue as we expected the company to earn $10.25/share on revenue of $8.98 billion. The company reported revenue growth of 15.7% from the quarter with 80% of the revenue still coming from the Semiconductor Solutions Segment which reported revenue of $7.1 billion (up 21%).
The smaller segment, Software Infrastructure Solution had revenue contracting of 1.36%. The company is in the process of acquiring VMWare to help bolster this segment and reduce the reliance on the commoditized semiconductor sector. Hock Tan and his management team are executing at a high level as the company reported expanding margins across the board. Gross margins expanded by 98 basis points to 67.3% while operating margins grew by 1.38% to end the quarter at 46%. While net income margins expanded by over 5% to end the quarter at an impressive 42%. Broadcom generated $3.93 billion in free cash flow which was down from $4.46 billion and ended the quarter with $12.5 billion on the balance sheet (up from $12.42 billion).
Management declared a dividend of $4.60/share which was in line with the one declared in the previous period. Overall, Broadcom reported a solid quarter and will benefit from the secular growth demands in the semiconductor space but we like how the company is diversifying its revenue base with these lucrative software acquisitions. If the stock sells off on any market weakness we will be adding to our position.
Casey’s General Stores, Inc. (CASY): The owner of gasoline stations and convenience food stores beat on earnings and revenue on resounding FY23 third quarter. Casey’s reported earnings per share of $2.36 (beat WallStreet estimates by $0.36) on revenue of $3.33 billion (beat WallStreet estimates by $10 million). In comparison to our fund estimates, Casey’s beat on EPS but revenue came in below our expectations as we estimated the company would earn $2.06/share and revenue of $3.37 billion. The company earned $2.67 in EPS on a GAAP basis because of a one-time expense reduction of $0.31/share on the resolution of a legal matter. Total inside sales were up 8.2% primarily because of the increased pricing of food and beverages.
Total gasoline sales were up 3.7% from the prior year but same-store fuel gallons were down 0.5%. Total fuel gross profit came in at $262.4 million (up 10.4%) due to the elevated gas price averages. Inside same-store sales were up 5.6% (missed our fund estimate of 6.5%) as gross profit came in at $450.6 million (up 11.6%). Merchandising margins were up 200 basis points due to a better sales mix during the quarter. In terms of store growth, Casey’s had a 20-store net growth during the quarter as the company ended the quarter with 2,472 stores. The company has $876 million in liquidity and has the capacity to repurchase up to $400 million in share buybacks left over.
Management updated its FY2023 outlook for its same-store sales growth and coupled with the good earnings report the stock was up 2% on the news. The stock is flat year to date and we will be looking to add to our stock position.
Adobe Inc. (ADBE): Adobe reported an outstanding quarter which really caught investors by surprise as they beat on earnings and revenue. The technology software reported earnings per share of $3.80 (beat WallStreet estimates by $0.12) on revenue of $4.66 billion (beat WallStreet estimates by $40 million). The company headline numbers were impressive and in comparison to our fund estimates Adobe beat on earnings but revenue came in line with our expectations. We estimated Adobe would earn $3.74/share from a revenue base of $4.66 billion. The company reported 9% revenue growth which was primarily driven by the Digital Media segment up 9% at $3.4 billion.
The other segments Digital Experience and Document Cloud had higher revenue growth rates of 11% and 13% respectively but from smaller revenue bases. Those segments reported revenue of $1.81 billion for the quarter. Adobe had some margin contraction as operating margins went down from 37.1% to 34.1% while the higher spending on R&D (up 18%) contracted net margins to 26.8% from 27.2%. Adobe’s remaining performance obligations which basically represent the company’s backlog ended the quarter at $15.2 billion. Adobe generated $1.59 billion in free cash flow down from $1.67 billion as the company ended with $4.1 billion in cash down from $4.2 billion.
In terms of the company’s FY23 Q2 outlook, management forecasted revenue would come in between $4.75–4.78 billion (3% sequential revenue growth). The stock popped (up more than 5% in the after-hours) on the earnings news as investors cheered the good quarter. We would have added to the stock on the news but we think the DOJ is going to block the company’s acquisition of Figma. The prospect of an anti-trust lawsuit will be a headwind for the stock.
Disclosure: Cresco Investments is long Royal Bank of Canada (RBC), Veeva Systems (VEEV), Broadcom Inc. (AVGO), Casey’s General Stores Inc. (CASY), and Adobe Inc. (ADBE).
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This article is intended for information, engagement & entertainment purposes only, and is not to be construed as investment advice or direction. Investors are strongly encouraged to perform due diligence and/or consult with their financial advisor(s).
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