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1:05 pm Looking Ahead - May 5, 2016

Thursday may be Cinco de Mayo, yet the market's fixation is apt to be more on China than Mexico thanks to the release of the Caixin Services PMI report Wednesday night. 

Caixin Services PMI for April for China (Wednesday, May 4, at 9:45 p.m. ET)

  • Why it's important
    • With ongoing weakness in China's manufacturing sector, the push is on to redirect participants' attention to the services side of the economy, which is still running in expansion mode  
    • This report, and the reaction to it, will help dictate the performance of other equity markets around the globe on Thursday
    • The Services PMI number will drive expectations with respect to potential policy stimulus actions in China

  • A closer look
    • The Caixin Services PMI reading for March was 52.2, up from 51.2 in February but down from 52.4 in January
    • The April 2015 Services PMI reading was 52.9

 

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  • What's in play?

    •  China ETFs
      • iShares China Large-Cap (FXI)
      • ProShares UltraShort FTSE China 50 (FXP)
      • Deutsche X-trackers Harvest CSI 300 (ASHR)

    • ETFs for regional markets
      • iShares MSCI Japan (EWJ)
      • iShares MSCI Australia (EWA)
      • iShares MSCI Hong Kong (EWH)
      • iShares MSCI South Korea Capped (EWY)
      • iShares MSCI Singapore (EWS)
      • iShares MSCI Taiwan (EWT)
      • iShares MSCI Malaysia (EWM)
      • iShares MSCI Emerging Markets (EEM)

    • Index ETFs
      • SPDR S&P 500 ETF (SPY)
      • PowerShares QQQ Trust (QQQ)
      • iShares Russell 2000 (IWM)

    • Currencies
      • USD/CNY
      • USD/JPY
      • EUR/USD

    • S&P futures

    • Commodities

    • Treasuries

12:35 pm Shopify loses ground in spite of Q1 beat as net loss expansion weighs on results

Online-business merchant Shopify (SHOP 29.56, -1.18) trades about 3.8% lower on the session in spite of reporting better than expected Q1 earnings and revenues in addition to guiding the coming quarter and fiscal year's revenues ahead of Street views.

Specifically, SHOP reported better than expected earnings per share (EPS) in ($0.06) on revenues which grew 94.7% versus last year and also came in ahead of expectations at $72.7 million. Adjusted net loss was $5.1 million for Q1, a steeper loss than a year ago ($2.5 million net loss).

Management noted strength derived from progress on the mobile front as mobile orders from SHOP merchants surpassed those of desktops in February for the first time ever.

The good news continues, as more merchants are utilizing the company's platform leading to gross merchandise volume growth of 102% in the quarter; GMV was $2.7 billion in Q1.

Looking ahead, SHOP sees better than expected Q2 revenues in the range of $79-81 million. Additionally, for Q2 SHOP sees adjusted operating loss in the range of $6-7 million. For the FY16 period, SHOP raised its revenue expectation to $337-347 million from $320-330 million on an adjusted net loss expectation of $16-22 million.

Shares are lower in spite of the beat and raise as net losses continue to grow; recall that SHOP went public almost a year ago, and also note that newer companies often run at a net loss as they acquire new assets and expand. It appears that investors were expecting expense progression to slow, a notion SHOP squashed posting strong mobile orders, and renewing its commitment to expand to messaging by acquiring Kit CRM. 

11:31 am Criteo (CRTO)

Before the open today, online and mobile advertising company Criteo (CRTO) issued its 1Q16 results, which were strong and better-than-expected. After some very choppy performance over the past several quarters -- especially relative to EPS expectations -- CRTO has now put together two straight top-and-bottom line beats. The stock has reacted accordingly, gaining 66% from February 9, when it reported Q4 results, to yesterday's closing price. Compared to other stocks in this space, such as Rocket Fuel (FUEL), Tremor Video (TRMR), and MaxPoint Interactive (MXPT), Criteo has clearly emerged as the winner of the group.

Unfortunately, though, CRTO has hit a bit of a speed bump due to its soft Q2 guidance and its FY16 guidance that indicates a sharp decline in revenue growth this year. Specifically, for Q2 it guided for revenue of $158-$162 million, shy of the $163.8 million consensus. This, combined with the stock's rise over the past few months, created an ideal profit-taking scenario, sending shares lower by as much as 9% today.

While it did come up short of the consensus, it's worth pointing out that at the mid-point of the Q2 revenue guidance, CRTO's revenue would grow by 45%. That represents an up-tick from Q1's growth of 37%, and is in the ballpark of Q4 and Q3's growth of 51% and 55%.

But, perhaps the more pressing concern is the steep drop off in expected revenue growth for this year. For the year, CRTO is expecting revenue ex-TAC growth of 30-34% at constant currency. We already noted that CRTO's revenue was up 37% this quarter and it expects revenue growth of 45% next quarter. Therefore, we must conclude that the company is expecting a drop-off in growth in 2H16. Furthermore, that 30-34% growth would represent a deceleration from FY15 when revenue jumped by 50% at constant currency.

It's not all bad news, though. CRTO also said it is striving for some improvement on Adjusted EBITDA margin, projecting an improvement of 60-100 basis points. So, at the expense of some revenue growth, the company is looking to drive profitability higher. And that's not such a bad thing.

9:45 am Match Group (MTCH)

Match Group (MTCH), which made its IPO debut in November 2015, is trading up 15% today after it reported strong Q1 results last night. In terms of quick background, Match Group is a major provider of online dating products. It operates a portfolio of over 45 brands, including Match, OkCupid, Tinder, PlentyOfFish, Meetic, Twoo, OurTime and FriendScout24, each designed to increase our users' likelihood of finding a romantic connection. Each brand is tailored to meet the varying preferences of its users. It currently offers its dating products in 38 languages across more than 190 countries. The company is majority-owned by IAC/InterActiveCorp (IAC).

Its target market includes all adults in North America, Western Europe and other select countries around the world who are not in a committed relationship and who have access to the internet. The market for dating products is fragmented, and no single product has been able to effectively serve the dating category as a whole. Match Group currently operates four of the top five revenue grossing dating apps in North America, and three of the top five worldwide. In addition, its Tinder product is the most downloaded mobile dating app in North America.

MTCH acquired dating site PlentyOfFish for $575 mln in July 2015 to expand in the lucrative mobile-based dating business. Key competitors not owned by Match Group include eHarmony, Zoosk and Spark Networks (LOV), which owns Jdate, ChristianMingle and BlackSingles.com.

Substantially all of MTCH's dating revenue is derived directly from users. The significant majority of that revenue comes from recurring membership fees, which typically provide unlimited access to a bundle of features. Each of its brands offers a combination of free and paid features targeted to its unique community. In addition to direct revenue, MTCH also generates online advertising revenue. In addition to its dating business, MTCH also operates a non-dating business in the education industry through its ownership of The Princeton Review, which provides a variety of test preparation, academic tutoring and college counseling services.

Turning to the Q1 results, non-GAAP EPS declined to $0.11 from $0.13 in the prior year period. However, the $0.11 was better than market expectations. Revenue rose 21.4% year/year to $285.3 mln, which also was better than expected. Dating revenue grew 24% to $260 mln, better than the $253.6-258 mln prior guidance. Dating EBITDA margin was 26% vs. mid-20% guidance.

In sum, clearly investors seem pleased with the Q1 results. There are some positive things going on with MTCH. Online dating has really gained in popularity in recent years. And it has particularly picked up steam since mobile has become ubiquitous. More than 70% of new users sign up via mobile channels. Match Group also has huge scale as it owns several of the top dating/apps, including Match.com, Tinder, OkCupid and it recently acquired PlentyofFish, which boosts its mobile exposure. Online dating really has lost the negative stigma it had several years ago. IAC is up 8% today on the strong MTCH results.

9:36 am Avis Budget Spikes After Upbeat Guidance Overshadows Earnings Miss

Avis Budget (CAR 25.30, +1.76) reported below-consensus earnings for the first-quarter, but the stock has rallied 7.5%, which is likely a response to better than expected full-year guidance.

The Dow Jones Transportation Average component reported a loss of $0.28 per share and the company noted that the first quarter traditionally exhibits some seasonal weakness. Revenue increased 1.7% to $1.88 billion, which matched market expectations.

The increase in revenue was fueled by an 8.0% increase in rental days. Excluding the acquisition of Maggiore, rental days increased 5.0%.

Looking at the geographic breakdown, Americas revenue fell 1.0% to $1.36 billion due to a 5.0% decline in pricing. The impact of lower pricing was partially offset by a 3.0% increase in volume. Per-unit fleet costs rose 6.0% to $312 per month.

International revenue jumped 9.0% to $517 million even though currency movements reduced revenue by 5.0%. Pricing declined 5.0% in constant currency while rental days increased 21.0%. When excluding the acquisition of Maggiore, rental days increased 12.0% and revenue per day declined 3.0% in constant currency. Per-unit fleet costs fell 9.0% to $221 per month. In constant currency, per-unit fleet costs declined 5.0%.

Going forward, Avis Budget expects full-year earnings between $2.70 and $3.30 per share on revenue between $8.75 billion and $8.90 billion. The company's earnings guidance falls in line with market expectations while the revenue outlook is ahead of analysts' average estimates.

8:48 am Priceline Slides After Disappointing Guidance

Priceline (PCLN 1250.00, -104.64) reported better than expected results for the first quarter, but the report has been overshadowed by cautious guidance for the second quarter.

The travel booking site delivered earnings of $10.54 per share on a 17.6% increase in revenue to $2.15 billion.

Priceline's gross travel bookings, net of cancellations, increased 21.0% year-over-year to $16.70 billion. Similarly, gross profit also increased 21.0%, climbing to $2.00 billion. International operations totaled $1.70 billion, which made up the bulk of the total gross profit.

Non-GAAP net income totaled $532 million in the first quarter, which was a 24.0% increase year-over-year. On a GAAP basis, net income increased 12.3% to $374 million.

Priceline's management was upbeat about the first quarter, but the guidance that was issued for the second quarter was well below market expectations. The company sees second-quarter earnings between $11.60 and $12.50 per share. Revenue growth is expected to be between 7.0% and 14.0% with room nights booked increasing between 15.0% and 22.0%.

The cautious guidance has led to pre-market selling that has sent the stock lower by 7.7% to levels not seen since late February.

8:24 am Devon Energy Shares Trade Higher Following Earnings/Guidance

Devon Energy (DVN 32.75) reported a first quarter loss of $0.53 per share, which came in ahead of expectations. On the top line, revenues fell 34.9% year/year to $2.13 billion, which easily fell short of expectations.

DVN's reported oil production averaged 285,000 barrels per day in the first quarter. Of this amount, 255,000 barrels per day were from the company's core assets, where investment will be focused going forward. The company has several cost-reduction initiatives underway that positively impacted first-quarter results.

The most significant operating cost savings came from lease operating expenses (:LOE), which is DVN's largest field-level cost. LOE declined 21% compared to the first quarter of 2015 to $7.13 per Boe, and LOE was $6 million below the bottom-end of guidance.

The decrease in LOE was primarily driven by improved power and water-handling infrastructure, declining labor expense and lower supply chain costs. DVN's midstream business generated $202 million of operating profit in the first quarter, driven entirely by DVN's strategic investment in EnLink Midstream.

The company has a 64% ownership in the general partner and a 25% interest in the limited partnership. To further enhance its financial strength, the company is targeting total divestiture proceeds of $2-$3 billion. In April, DVN took an important step toward that divestiture goal by announcing the sale of its non-core Mississippian assets in northern Oklahoma for $200 mln, which is expected to close in the second quarter.

"In spite of the challenging industry conditions, Devon achieved another high-quality operating performance in the first quarter as we continued to take the appropriate steps to deliver significant cost reductions and accelerate efficiency gains across our portfolio," said Dave Hager, president and CEO.

"These successful efforts resulted in production exceeding the midpoint of guidance for all products and operating costs declining by more than 20% year over year. Additionally, G&A costs savings remain on track to reduce overhead by up to $500 million on an annual basis."

Looking ahead, the company's top priority is to maintain a strong balance sheet.

Separately, the company is also raising 2016 production guidance:

  • Given the strong year-to-date production performance, Devon has raised the midpoint of its 2016 guidance by 15,000 Boe per day, or 3%. This incremental production is expected to be delivered without additional capital spending.

Pre-market, shares of DVN are trading 2.3% higher at $33.50/share.

8:08 am Generac Tops Q1 Estimates and Reiterates Full-Year Guidance

Generac (GNRC 37.43) is a manufacturer of power generation equipment, serving the residential, light commercial, industrial, oil & gas, and construction markets.  Its first quarter report revealed that business wasn't great, although it ended up being good enough to exceed analysts' first quarter revenue and earnings per share expectations.

For the three-month period ended March 31, Generac reported an 8.1% decline in net sales to $286.5 million.  The downturn stemmed from weak commercial & industrial product sales, which dropped 23% to $103 million due to a significant decline in shipments of mobile products into oil & gas and general rental markets.  Residential product sales were up 1.4% to $159.0 million, yet that was primarily due to contributions from recent acquisitions.

The company said shipments of residential products were modestly ahead of its expectations and helped offset the weaker sales of mobile products due to low energy prices.

Generac's adjusted gross profit margin for the period was 35.2% versus 32.9% in the same period a year ago.  Nonetheless, its adjusted net income slipped to $0.46 per share from $0.49 per share last year.  Again, though, that was better than what analysts were expecting.

The upside surprise didn't alter Generac's full-year outlook.  The company said it is maintaining its prior guidance, which calls for net sales growth between 10% and 12% and adjusted EBITDA margins of approximately 20%.  Total organic sales on a constant currency basis are still anticipated to decline 5% to 7%.

Generac has been feeling the pinch of the downturn in the oil & gas markets, as well as low instances of power outages.  Its 2016 guidance is predicated on no material changes in the current macroeconomic environment and no improvement in power outage severity for the remainder of the year relative to the very low levels seen in 2015.  

Accordingly, its guidance can be thought of as being quite conservative.  That could set up the company to deliver some positive surprises down the road in the event there is a pickup in macroeconomic conditions and there are increased instances of power outages that highlight the benefit of having backup power generation equipment on hand.

Shares of GNRC had a very tough 2015, declining 36.3%.  This year, however, they have been a winning standout, soaring 25.7% on the back of a sharp rebound in oil prices and the company's better than expected full-year revenue guidance that was provided in mid-February and which was reiterated today.

7:39 am Cray (CRAY)

Cray (CRAY) is indicated to open approximately -21% lower this morning after reporting better than expected Q1 results, but issuing downbeat guidance.

The company, which makes supercomputers for academic, government, and commercial use, reported that Q1 sales rose +33% to $105.6 million, while the company's EPS loss improved to ($0.13) in 1Q16 compared to the ($0.28) reported in the year-ago period. Both numbers were comfortably above expectations. CRAY also saw meaningful margin expansion, with gross margin rising to 38% in Q1 compared to 30% for 1Q15.

In the press release, management provided some color on the better than expected results: "We are off to a good start to our year. We completed several large installations during the first quarter including at the Department of Energy's National Energy Research Scientific Computing Center. Our momentum in the global weather forecasting market also continued as we completed acceptances at Australia's Bureau of Meteorology, and the U.K.'s Met Office; and Germany's National Meteorological Service recently chose to substantially upgrade its Cray systems..."

However, the company's outlook was decidedly on the cautious side. Q2 revenue guidance of $100 million fell well below investor expectations. And while CRAY reaffirmed their FY16 revenue guidance of $825 million, management said there "is an increased level of risk to achieving this target" driven by the company's "reliance on key third-party components, some of which have already been delayed, and the level and timing of new orders."

While it's well-known that CRAY's business can be very lumpy from quarter to quarter, and that their fiscal years are heavily back end-loaded (management said that Q4 is expected to account for 60% of total revenue for the year), judging from the magnitude of the selling investors were surprised by the downbeat language. However, one bright spot to the company's annual guidance was that management expects to improve its GAAP and non-GAAP operating profit margins for 2016 on a year-over-year basis.

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