Newsletter: Published Wednesday, 08 August 2018.
📈 Earnings season
Earnings season is where almost all publicly traded companies report their results (profit, loss, revenue, customer churn etc) for the previous quarter.
It’s intense!
Everyone who works in the markets runs around trying to guess how well or badly a company did before they say it (expectations) and then is either shocked when they miss the mark or extremely pleased when they nail it (results).
Share prices jump around and headlines go a bit crazy.
Earnings seasons for companies in the United States fall in January, April, July and October.
Earnings seasons for Australian companies fall in February, May, August and November.
When you’re a long term investor, sometimes it’s difficult not to be pulled into all the action!
We discussed last week how Facebook lost 20% of its value because it changed its strategy and its growth rates fell short of expectations.
But ultimately, we think that the reorientation of the business is a long-term positive.
So when looking at the quarterly figures, it’s worth noting what they are but unless there is a material change in the way your companies operate, there’s no need to get swept up in the broader market sentiment.
Here’s a list of Twitter, Allergan (the Botox company!) and Essilor’s results and overarching strategies.
🐦 Twitter: the social cleanup continues.
Shares in Twitter took a beating in recent weeks.
They’ve slumped around 30%, mostly because monthly active users on the platform have fallen and investors took fright.
Twitter removed about 70 million accounts in May and June, but Twitter chief financial officer Ned Segal said most of those were not included in its reported metrics because they were not active on the platform for 30 days or more.
The company also recently purged fake accounts, but those changes happened after the close of the second quarter, so it didn't affect Monthly Active Users (MAUs) in this report. Twitter warned MAUs could go down even more next quarter.
"As a result of our health work, decisions not to renew or move to paid SMS carrier relationships in certain markets, and our decision to allocate resources towards GDPR and health, MAU could decline on a sequential basis in Q3," it said in its shareholder letter.
"Based on our current level of visibility, we expect the decline to be mid-single-digit millions of MAU.
Twitter revenue grew 24% year-over-year, with strong advertising gains.
Advertising revenue was at $601 million, an increase of 23% year-over-year. The company also grew its data licensing and other revenue business, which was up 29% year-over-year.
We’re not overly worried about the share price drop because shares were up almost 60% this year.
Taking that into consideration, it just looks like the market is re-rating and settling into this new period of social media platforms actually trying to clean up the fake trolls that lurk on their sites.
Allergan: a face smoothing business.
This company is great because it makes Botox.
And people are buying Botox a lot.
Allergan's overall revenue rose 2.9% to $US4.12 billion, bumping the shares higher.
Botox has more than 90% of the market for medical uses and 75% of the market for cosmetic uses.
It turns out, Botox is not just for perking up your face; it’s approved for nine different medical uses including chronic migraines, overactive bladders (?!), severe muscle spasms and is in trials for treating depression.
Because of Botox’s widely recognised in-market brand recognition, we think Allergan has a strong moat around it.
It also has a rather intimidating technology called the CoolSculpting system that helps people slim down by freezing fat away. The company says there is increasing demand for this arm of its medical aesthetics business. Great!
Allergan also announced it would begin a $US2 billion share buyback program.
Share buybacks are when a business decides to use its own cash to buy its own shares.
They generally do this when management thinks the market is undervaluing their own stock, they want to improve their metrics by creating scarcity in the public market or they just want to return cash to shareholders.
Essilor: a hidden gem.
It’s kind of amazing we aren’t just walking around bumping into each other.
An estimated 4.6 billion people on the planet need their vision corrected, and as it stands, only around 2 billion actually receive glasses.
Essilor is French company that controls 25% of the global market for producing prescription, reading and sunglass lenses.
Last March, Essilor's proposed merger with Italian firm Luxottica, the world’s largest eyeglass frame maker, was granted approval from regulators in the EU and US.
Luxottica Group is famous for several of its own brands of frames, including Ray-Ban and Oakley, with a global wholesale network covering more than 150 different countries. That’s a total of approximately 9,000 stores in North America, Latin America, Asia-Pacific, China, South Africa and Europe.
This quarter the Chinese authorities gave the merged entity conditional approval to sell their glasses in China.
This is a rather exceptional deal; because out of the 1.3 billion people in China, there are between 800-900 million myopic (short-sighted) people . That is an incredibly powerful, untapped market for an enormous global business which produces their glasses en masse and cheaply.
So far, China only represents 5% of sales for Essilor and 2% for Luxottica.
The reach of this new company is hard to underestimate: the merger has resulted in a vertically integrated eyewear business, extremely well positioned to capitalise on the growth of the global middle-class consumer.
It’s a good look for investors who take a long-term view on investments.
