Palo Alto Networks 3Q16 Earnings Call Notes

Mark McLaughlin

Prevention oriented approach is critical to security

“Customers agree that having the right foundational approach to security is critical. From inception we have been focused on a prevention oriented approach, which we believe is the only way to combat the imbalance between a highly automated adversary and increasingly manually dependent responses.”

Certainly expect stock based comp to come down in the future

“So from a SBC perspective as you noted, we’re here in the heart of Silicon Valley in a very, very competitive talent environment and we’re very fast growing company. So the combination of those two things has meant that to support the growth we’re hiring a lot of people and we do that where you’re granting them equity to put make them part of the team and that’s ownership skin in the game as well along with the shareholders and that is driven stock-based compensation as you can see and I know it’s high by the way and high along with some of our very fast growing peers along those lines. As we think about that into the future, the SBC will come down. I certainly expect that to be the case and I would expect that to start next year as a matter of fact.”

We did see some macro volatility that is causing our customers to act more slowly

“On the macro side, we did mention that we’ve seen from the beginning of the year, the calendar year a lot of macro volatility and what I mean by that is there is same covering around out there whether there is a price of oil or what’s going to happen with interest rates, China, the stock market being up and day down and I think from a sentiment perspective of our customers it has them more cautious then they had been in the past and they’re doing more inspection on deals, it’s taking longer from a deals sales cycle as they look at — as they look at different things, different number of times. And also in some cases trying to did you with less today that they can in the future.”

Customers are double checking that they want to spend their money

“the one metric you can look at there with DSOs being higher, you can see we had a more backend loaded quarter in April than before and the reason for that we believe we believe is we’re very engaged with the customers is them taking longer to get approvals for deals. I think I might use this term volatility before as a lot of things that play out there, but it ultimately boils down to sentiment right about how the customers feel about things and I think that sentiment in that environment has been cautious from January and it continues to be that case. And they’re putting more attention and focus on what they’re going to spend and how they prioritize that. I think in a very good way as you can see from a lot of other companies reporting in the IT sector and what they’ve reported and how they felt about the future security I think obviously remains at the top it’s a priority spend item. How do we see customers taking longer to get the deals approved as are getting checked two or three times in a row just to make sure that they want to spend their money.”

Splunk FY 1Q17 Earnings Call Notes

Doug Merritt

Partnership with Accenture

“On the partner front, I’m pleased with our strategic alliance with Accenture. They are expanding their bench of trained Splunk Practitioners and we are collaborating on value creation and program delivery to bring new solutions to market. Accenture is leveraging Splunk as a platform to deliver applications to enhance service delivery offerings, including their intelligent automation platform for application service delivery and their new cyber defense platform.”

Nothing unusual in terms of customer activity

“What we saw in Q1 was consistent with what I’ve seen in the quarters that I’ve been here in the field and there is a lot of chatter that we’re all hearing around the world and a lot of nervousness that is coming through the news channels but from our customer engagements, there was a pretty typical quarter.”

Growth rates are important to us

“as we’ve talked about for my two years here and I’m sure well before with Godfrey, the growth rates are important to us to maintain at Splunk and that means a lot of scale that we got to drive and in my first week and a half of interacting with Susan while she’s doing the job the constant framing that she has driven with all of her conversation is how do we take the goodness that we have as we really have built a phenomenal sales machine here, not fumble the handoff in anyway which is my number one priority in my first few calls with you guys is honor what we have gone and make sure we don’t miss a beat on the customer revenue front but continue to think thoughtfully and strategically about how do we prep this company for the same continued growth that we have experienced, so we can really execute on the market opportunity that’s in front of us.”

Dilution rate from stock based comp should be 3-5%

“The way we think about it ultimately is around what’s our dilution rate. So four years ago, 2012, when we went public, our dilution rate was over 10%, and last year it was down to 6%. And when we look forward we think that a normalized level regardless of how many heads we’re adding to the business should be somewhere in that 3% to 5%. I think again that’s how we measure the effectiveness of our stock plans in terms of the absolute dollars that are hitting the stock-based compensation expense. ”

Dave Conte

We have to be able to deliver in the cloud

” the other element that’s adjacent of course is how do we deliver our products and solutions that equates to cloud. So that’s a really important investment for us because well people want to talk a lot about the cloud momentum which we all recognize is critically important, customers workloads are it’s a binary environment, they have a lot of their data behind a firewall, they have a lot of their data and workload that listen in cloud and it‘s absolutely critical for us in terms of how we satisfy customers that we offer them cloud solution and ultimately something we’re very proud of that we think is of course unique to us and that’s hybrid search across their data locations. So regardless of where your data lives, you can leverage your Splunk Instance to do searches in correlations.”

We are very attentive that we have the right disclosures for GAAP v non-GAAP

As it relates to the SEC, we are very attentive to ensuring that we have the right disclosures and the right compliance around any adjustments we make between GAAP and non-GAAP. And I think we take it very seriously and we take great pride in ensuring consistency in our non-GAAP results. I really think if the SEC is doing the right thing to say look when companies are out there exercising the reporting differences between GAAP and non-GAAP, what level of consistency are they applying to those adjustments and what should be considered recurring versus a non-recurring item that you would exclude or cash versus a non-cash item like stock-based comp that you would exclude. So we pay a lot of attention to the consistency of our disclosures around non-GAAP.”

3G Capital Founder Jorge Paolo Lemann Interview

Jorge Paolo Lemann, Founder of 3G Capital, which is responsible for the takeover and ownership of Budweiser, Burger King, Kraft, Tim Hortons, Heinz, explained his strength is assembling teams

“I’m no financial genius.  What I do best, which is sort of a surprise to me, is put teams of people together, finding great people, incentivizing them, working together with them, giving them a chance to shine, enabling them.  That’s the most important thing that I did.  That’s what I’ve found I do well.  And that’s not a skill that I knew I had.  You have to attract the best possible team.”

Jorge Paolo Lemann, Founder of 3G Capital, on attracting talent

“The people factor is something that you really have to work hard at.  Most people think of business as selling a product and you have a very good product to sell or you have a special strategy and after I found out that attracting good people to work with me, I found out that it was more powerful than what you were doing or what the product was.  As a team, you will find something interesting to do.”

 

 

Source: Jorge Paolo Lemann Interview, April 27, 2016

 

Darden (DRI) CEO Gene Lee Interview

Darden (DRI) CEO Gene Lee on trying to change culture

“There’s nothing like changing your whole board to have a mandate for change within an organization.  Culturally as an operator, culture is hard to change.  When our entire board was turned over, everyone within the organization was now willing to accept change and trying to figure out how we regain the momentum.”

 

Source: https://www.youtube.com/watch?v=oxeSCgi-g1A&index=99&list=PLwJK8JzK8C_fr-qVhEg7dt14JNOwxFe3L

Milliken Institute: May 2, 2016

Patterson (PDCO) Q4 2016 Earnings

Patterson (PDCO) CEO Scott Anderson said the dental equipment market is stabilizing

“Looking at our markets, conditions were roughly unchanged compared to the last quarter, but there was some subtle changes in the complexion in our end markets during the fourth quarter that are worth noting. In Dental, we continued to see relative stable to steadily improving conditions.”

Seeing fragility in the livestock market

“Performance in Production Animal continues to reflect the softness in the livestock industry, especially in dairy and beef cattle markets. We’re beginning to see some signs of end-market improvement, especially in the swine market. This is part of the cyclicality of the livestock markets and we anticipate gradual improvement as we head into fiscal 2017.”

Dental equipment sales didn’t meet expectations during the quarter

“Our sales performance was mixed even in spite of the tough comparable, and fell short of our internal expectations. Sales of consumables were generally in line with market, and with the exception of our fiscal 2016 third quarter consistent with sales performance trends over the past several quarters. Sales performance and equipment, digital equipment more specifically is where we were more challenged and also were faced with the toughest comparable. Overall equipment sales fell 6.9% in constant currency, driven by lower digital x-ray equipment sales.”

Much like other industries, the dentist office is getting transformed by the digital revolution

“As I stated last quarter, the importance of properly supporting these technology investments is critical today, and will only deepen as we move forward and dental offices become even more digitized, providing support which help makes technology investments worry-free for the practitioner so they can focus on patient care, which will be an increasingly important differentiator for Patterson in the future. Dental offices that are embracing digital dentistry are looking for partners they can make, integrating these technologies into their practice environment, and supporting them seamless.”

Patterson (PDCO) CFO Ann Gugino expects their end markets to grow low single digits

“As we head into fiscal 2017, we currently expect the Dental market to continue growing at a pace of 2% to 3%. In Companion Animal we have anticipate 4% to 5% market growth, and in Production Animal we are expecting underlying market growth of roughly 2%.”

Patterson (PDCO) CEO Scott Anderson says he feels they are growing faster than the underlying market

“I would see the underlying markets are probably growing about 200 basis points when we look at our sales, market share with our major suppliers, the 3M, Dentsply, Cablecure, Danaher’s we feel confident that we’re taking share and growing faster than the underlying market. I think it’s definitely an era of stability of right now in the Dental market and I would say if there is any bias over the next five years, it would be bias towards an increase in market growth driven by particularly how strong the underlying demographics are in the North American market but currently you’ve got a underlying consumable market that we think is growing about 200 basis points.”

Hewlett Packard Enterprise (HPE) CEO Meg Whitman Interview

Hewlett Packard Enterprise (HPE) CEO Meg Whitman sees consolidation accelerating in the information technology outsourcing business

“This transaction unlocks value for both companies.  The new post-merger enterprise company will be a pure play industry leader which is important because I think the industry is going to consolidate and it’s important to get on the front of consolidation rather than the back end of consolidation.”

Hewlett Packard Enterprise (HPE) CEO Meg Whitman thinks her stock is undervalued

“There’s incredible value in our stock price.  As you know, Hewlett Packard Enterprise trades at a lower multiple than our competitors.  We are beating the competition now which was not true 4 years ago.  If you look at this most recent quarter, our networking business grew 18% while Cisco’s shrunk 3%.  We have gained share in external disk storage for 2 straight years while IBM, Dell, & EMC have all lost share.  We’ve gained market share in servers overall especially in density optimized and rack.  I feel very good about our core business.  We use a returns based capital allocation strategy so we look at all different ways to deploy our capital and right now we think our shares are a good buy and that we ought to continue to buy shares.”

 

Source: http://video.cnbc.com/gallery/?video=3000520536

May 25, 2016

Company Notes Digest 5.27.16

Each week we read dozens of transcripts from earnings calls and presentations as part of our investment process. Below is a weekly post which contains some of the most important quotes about the economy and industry trends from those transcripts. Click here to receive these posts weekly via email.

This Week’s Post: The Sky Isn’t Falling

Earnings season slowed down a lot this week, but conference presentations took the place of earnings. Presentations at conferences are a nice change of pace because they tend to focus more on strategy and long term plans. There was some macro commentary though, which was positive in that conditions haven’t changed much in May.

In addition to the transcripts we read online this week, we also attended the B Riley Conference in Los Angeles. At B Riley we got the opportunity to meet one on one with a number of management teams and ask our own questions. Notes (usually paraphrases) from our meetings are included in this week’s piece. Thanks to the team at B Riley and especially Ken Tang for hosting us.

The Macro Outlook:

Visa and Mastercard both agree that there hasn’t been any dramatic change in the consumer in May

“what we are seeing…it’s very much more of the same…We don’t see that weakening environment, but in the same respect we also don’t see a strengthening of commerce and obviously that’s something that we’d like to see. But I would say in every developed market around the world volumes continue to perform at levels like we saw last quarter.” —Visa CEO Charles Scharf (Payments)

“I don’t think we see anything different really than what we said back when we had our last earnings call in our first quarter earnings call in April, right, I guess. So from a U.S. perspective…We don’t see that the consumer had a step-down in spend.” —Mastercard CFO Martina Hund-Mejean (Payments)

Costco is encouraged that discretionary categories performed relatively well

“Okay. Well, in terms of the customer, so far so good. We don’t see any dramatic change…Interestingly, when you look at nondiscretionary items…versus discretionary items…including big-ticket items like furniture, electronics and the like, we’ve actually had, relatively speaking, a little more strength in some of those nonfood categories. So that I think allays some of any concerns that some people have had. But generally speaking, I’d have to say our customers are still pretty healthy” —Costco CFO Richard Galanti (General Merchandise)

Toll Brothers still loves the luxury housing market

“We don’t agree that there’s weakness at the high end. I think our results and our commentary confirms and supports that…I would not accept the thesis that the high end has a bid ask issue. We don’t have buyers coming in that are looking to negotiate. We are very comfortable with the business. There are plenty of buyers and we love the luxury end.” —Toll Brothers CEO Douglas Yearley (Homebuilder)

There continue to be companies that see some weakness though

Demand for farm equipment is pressured

“Low commodity prices, stagnant farm incomes, and elevated used equipment levels in U.S. and Canada are continuing to pressure demand for farm equipment” —Deere Investor Relations Joshua Jepsen (Ag Equipment)

Jewelry sales are soft

“We attribute the overall lower sales to softness in domestic customer spending in many U.S. markets as well as lower spending by foreign tourists of many nationalities in New York and other high tourism markets.” —Tiffany (Jewelry)

And IT spend is muted

“And by geography and by segment and by technology, our view is, all of that feels muted right now…muted is not necessarily a bad thing, it’s just the reality that we don’t see the strong growth that has existed in the IT spending environment” —Tech Data CEO Bob Dutkowsky (Technology Distributor)

But overall the sky isn’t falling (except for Brazil)

“I travel around the world a lot with our customers and I have seen nothing personally or heard of on my team that makes me think the sky is falling again anywhere but Brazil.” —Linkedin Head of Sales Mike Gamson (Social Network)

Financials:

Some financial engineering tricks may be reaching their limits

Companies can’t borrow and buyback forever

“We are very committed to shareholders returns, cash returns in fact in the last year we have returned 250% of free cash flow so we can’t stay at that level.” —Applied Materials CEO Gary Dickerson (Semiconductor Equipment)

And GAAP profits are important

“Yes, listen, we’re very focused on GAAP profits, and I think all companies in our space who use both stock and cash are focused on it. And I think we’ve got a very clear commitment with our compensation committee about the goals that we’re moving towards and I think so far so good on tracking towards them.” —Linkedin Head of Global Sales Mike Gamson (Social Network)

If the financial engineering doesn’t end, regulators could flex their muscles

“The power has shifted towards regulators in this country. And I think that’s a risk for the economy. I don’t think that’s a coincidence that we’re seeing sub-par economic growth, I think it’s a burden. Doesn’t matter if you talk to healthcare executives or bankers.” —Chevron CEO John Watson (Oil and Gas)

Blockchain is something financial companies are spending a lot of time thinking about

“blockchain is it something I think that from our standpoint we certainly spend a lot of time thinking about and we have our own investments in companies where we’re developing prototypes…I think if you just ask me what the impact will be I think the short-term on payments not tremendously significant” —Visa CEO Charles Scharf (Payments)

An increasing number of people are filing tax returns via mobile phone

“the number of completed returns through the mobile app and through mobile browsers doubled.” —Intuit CEO Brad Smith (Personal Finance Software)

Consumer:

Flat is the new up for many old-line retailers

“In our domestic business, we delivered better-than expected, essentially flat comparable sales, versus our guidance of 1% to 2% decline.” —Best Buy CEO Hubert Joly (Consumer Electronics)

Retailers are having to defend expansion plans

“So we still believe in new stores, I mean I think they create an incredible place for our customer to touch and feel the product, they make our digital platform more competitive and ultimately they create brand awareness. I think we have opportunities to leverage them perhaps differently than we do today to create different and unique experiences” —DSW CEO Roger Rawlins (Retail)

Meanwhile Amazon is making an even bigger push into fashion

Amazon definitely wants to be seen as a place where a customer can get fashion —Steve Madden Director of Finance Derek Browe (Shoes)

But the returns can kill you in online apparel 

In the online channel, it’s the return and refund costs that kill you because of the high cost of shipping versus the ultimate price of the order. About 20% of overall apparel orders on e-commerce are returned —Destination XL CEO David Levin (Big and Tall Apparel)

It’s a great time to be a content creator

“there are so many different buyers out there for content. It’s a great time to be a content creator.” —Comcast EVP Mike Cavanagh (Media)

Millenials want to own homes

“As millennials mature, studies indicate that their appetite for home ownership is consistent with past generations, which is of course encouraging for our industry.” —Toll Brothers Chairman Bob Toll (Homebuilder)

Technology:

Jeff Bezos said that we’re entering a golden age of machine learning

“It has been a dream for so long, a kind of science fiction scenario, the things we’re solving with machine learning today are extraordinary. We really are at a tipping point where the progress is accelerating. I think we’re entering a golden age of machine learning. We’re still along ways away from being able to do things the way humans doing things. Human like intelligence is still pretty mysterious even to the most advanced AI research. If you think about the way humans learn, we are incredibly data efficient.” —Amazon CEO Jeff Bezos (E-Commerce)

This isn’t the first time that things like AI or IoT have been talked about though

I was around for the first AI wave…AI was a dirty word for a long time…grad students avoided the subject because you’d have your funding pulled right away —Digimarc CTO Tony Rodriguez (Digital Watermarks)

“So look we’ve been talking about IoT, I think we talked about this a little bit at dinner last night, back in the late 80s when I started to get involved in cellular we used to talk about IoT being a huge revenue driver. I finally think we’re on the cusp of that, but on the meantime the industry is exploded.” —Verizon CEO Lowell McAdam (Telecom)

IBM sees cognitive technologies as complementary to human workers

“we don’t see the application of cognitive technologies as replacing or automating anything away. What it really does is it provides a better basis by which people can make decisions” —IBM CFO Martin Schroeter (Enterprise Technology)

The cloud allows companies to update applications with more agility

“there’s certainly an economic element to this. But it’s really about agility…with our clients and the hybrid environment, we’re delivering new functions every day. And that’s why clients find that cloud that model so appealing.” —IBM CFO Martin Schroeter (Enterprise Technology)

Email can be a sticky product

There are still 700,000 subscribers to legacy Earthlink. There are a lot of people who in 1995 got an email like “scott@earthlink.com” who love their address and don’t want to give it up. —Earthlink Treasurer Trey Huffman (Internet Service Provider)

Healthcare:

More physicians are becoming employees of hospitals as hospitals consolidate

“over the last couple years a significant amount of consolidation in hospitals, and that will probably continue. We’ve also seen that the physician, more and more physicians are becoming employees of the hospital than they have been in the past.” —Johnson and Johnson EVP Sandra Peterson (Diversified Healthcare)

Materials, Energy:

Energy companies are running out of liquidity and will likely default despite higher oil prices

“further deterioration in the oil and gas producer portfolio occurred during the quarter…This trend was expected as leverage borrowers exhaust available sources of liquidity…The recent increase in oil prices, while encouraging, is not likely to have an immediate positive impact.” —Toronto Dominion CRO Mark Chauvin (Bank)

Miscellaneous Nuggets of Wisdom:

Bring your team together

“I’m always making sure it’s a special event and that people understand the importance of getting together. My point is that it’s important to me that people feel connected to something more than just their desk and computer. That they understand the purpose and have a sense of their role and how they contribute to things.” —Liberty Global CEO Mike Fries (Cable)

Be adaptive to change

The world is changing and you have to understand what’s around you, what you can and can’t control. If not you’re not long for this business or any business really —Perry Ellis CEO Oscar Feldenkreis (Apparel)

Know your purpose

“Life is what you make of it. You are dealt a pot of cards. Your DNA is fixed by your mother and your father. Your job is to make the best of the cards that have been handed out to you. What can you do well? What can you not do well? What are you worse at? If you ask me to make my living as an artist, I’ll starve; because I just can’t draw. But if you ask me to argue a point out, I’ll get by. Those are the cards I was handed out, and I make use of them. Don’t try and do something you are not favored by nature to do.” —Lee Kuan Yew, Former Prime Minister of Singapore

Full transcripts can be found at www.seekingalpha.com

B Riley 2016 Conference Notes

This week we attended the B Riley conference in Los Angeles. These notes are from one on one meetings with management teams.


Steve Madden (SHOO) Director of Finance Derek Browe at B Riley Investment Conference 5.25.2016

Steve Madden (SHOO) Director of Finance Derek Browe said consumer shopping habits are changing   

“We feel like consumers are focusing on comfort and that trend will likely continue.  Also, millenials are less brand conscious, they don’t want to wear branded goods with logos on them, they want to think for themselves.”

Steve Madden (SHOO) Director of Finance Derek Browe talked about increased efficiency in the supply chain

“It now can take us about 6-8 weeks to bring a product to market whereas it used to take us about 3 months.  Also, about 65% of our products are shipped via boat.  However, when time is of the essence and we need to be on trend with our product, we can ship via airplane and get it here faster.”

Steve Madden (SHOO) Director of Finance Derek Browe talked about the profitability economics of different channels

“Amazon is currently the most profitable place to sell our goods because they’re taking care of all the logistics and sometimes we’re able to give them exclusive products.  Macy’s is our next most profitable channel but it is less profitable because they often push us on volume rebates and bulk pricing discounts.  Selling on our own website isn’t as profitable as the previous 2 channels because of the high shipping costs.”

Amazon is making a hard push into apparel

“Amazon definitely wants to be seen as a place where a customer can get fashion


Perry Ellis (PERY) CEO Oscar Feldenkreis at B Riley Investment Conference 5.25.2016

Perry Ellis (PERY) CEO Oscar Feldenkreis says no analysts are asking Amazon CEO Jeff Bezos the right questions

“E-commerce is not profitable, I don’t care what Bezos says.  Some of the biggest costs in the online channel are freight and credit card fraud protections.  No analysts are asking Jeff the right questions.  They need to be asking him what the liquidation value of his inventory is if he doesn’t sell it.”

Perry Ellis (PERY) CEO Oscar Feldenkreis says brand is important in retail

“Amazon doesn’t want to carry fashion product, in order for us to succeed I have to focus on brand differentiation and treating my product with respect.”

One must adapt to change

“The world is changing and you have to understand what’s around you, what you can and can’t control. If not you’re not long for this business or any business really”


Destination XL Group (DXLG) CEO David Levin at B Riley Investment Conference 5.25.2016

Destination XL Group (DXLG) CEO David Levin said the economics of e-commerce returns are atrocious

“In the online channel, it’s the return and refund costs that kill you because of the high cost of shipping versus the ultimate price of the order.  About 20% of overall apparel orders on e-commerce are returned whereas, because our customer segment is so unique, ours is around 8%.”


Digimarc (DMRC) CFO Charles Beck at B Riley Investment Conference

Digimarc (DMRC) CFO Charles Beck said a key ingredient is necessary in the innovation process

“Innovation only happens if trust is inherent in the organization.”

Digimarc CTO Tony Rodriguez noted that there has been interest in AI before that didn’t pan out

I was around for the first AI wave…AI became such a dirty word that grad students avoided the subject because you’d have your funding pulled right away


Camtek CFO Moshe Eisenberg

Camtek’s CFO said that the semiconductor industry has become less cyclical as it has matured

I think that as the industry has become more mature you see less cycles. The trend in the semi cycle is up.


Jetpay CFO Peter Davidson

Government regulations to protect low income borrows may have restricted their access to credit

“Government regulators have declared war on anything that serves underbanked consumers”


Earthlink Treasurer Trey Huffman

Legacy Earthlink still has 700,000 subscribers

“There are still 700,000 subscribers to legacy Earthlink. There are a lot of people who are tied to their email and don’t want to give it up.”


IMAX CFO Greg Foster at B Riley Investment Conference 5.25.2016

IMAX CFO Greg Foster highlighted Disney’s unique skill set in creating mega blockbusters which ultimately helps drive their business

“Family oriented movies, especially put out by the folks at Disney, are huge growth drivers for our business.”

Prefers to focus on the bigger movies

“I would rather have 6-7% of Finding Dory than 15% of a movie that doesn’t work.  For instance, we missed the movie Frozen, which did over a billion dollars in gross ticket sales, and that hurt us tremendously.”

Relies on the quality of the movie to drive ticket sales

“We’re still in the hit making movie business.  We live and die by the titles.  We think Finding Dory could be the biggest movie of the year.  We need tent pole movies like that to drive our business.”

Consumers care more about how good the movie is than the specifications of how the movie is shot

“People don’t go see movies because it’s shot in 4K versus 6K.  They go for the overall experience.  They want to know if the movie is good.  They want to know if the characters are compelling.”

Hoping to capitalize on the virtual reality trend

“IMAX virtual reality is an out of home, high end, highly differentiated unique experience.  It’s not just some place to watch trailers.  We want directors creating differentiated content for the platform.”