The Deipnosophist

Where the science of investing becomes an art of living

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Location: Summerlin, Nevada, United States

A private investor for 20+ years, I manage private portfolios and write about investing. You can read my market musings on three different sites: 1) The Deipnosophist, dedicated to teaching the market's processes and mechanics; 2) Investment Poetry, a subscription site dedicated to real time investment recommendations; and 3) Seeking Alpha, a combination of the other two sites with a mix of reprints from this site and all-original content. See you here, there, or the other site!

19 October 2007

Earnings reports - Q3 2007

Many of my favorite opportunities reported their earnings yesterday; I will focus on two, Google/GOOG and Intuitive Surgical/ISRG...

1) Google/GOOG:
(Thank you, Seeking Alpha, for collating and providing the following comments.)
In its report after the bell Thursday, Google announced a 46% increase in quarterly earnings and 2,130 new employees. The company earned $1.07 billion ($3.38/share) compared to $733.4 million ($2.36/share) last year. Excluding certain items, Google earned $3.91/share, beating analysts' estimates of $3.78/share. Revenues jumped to $4.23 billion, 57% more than last year, and 9% more than last quarter. Net revenue (minus payments to partner sites) came in at $3.01 billion, also surpassing analysts' projections of $2.94 billion. The top and bottom line numbers beat the Street's lofty expectations, but it is yet to be seen if it will prove enough to support the stock's positive momentum.

In a pre-earnings note, Cantor Fitzgerald analyst Derek Brown addressed Google's seemingly unstoppable growth: "We fully recognize that the party at Google has to end some time. Yet, we see no obvious signs that: (i) Google's business has hit the proverbial wall, or ii) that consumers and advertisers are shifting their behavior away from Google and toward its competitors."

CEO Eric Schmidt said in the release: "Our efforts to offer more products and services in international markets as well as effectively grow our technology infrastructure and add to our deep talent base during the quarter helped to deliver growth by enabling Google to reach more users around the world." Last quarter the company came under scrutiny for its aggressive hiring, but the company continued to expand another 15% in the third quarter. There are now nearly 16,000 employees at Google.

Buy side analysis (Thank you to for the following comments)
AmTech raises their target on GOOG to $815 from $685. They say regions outside the U.S. and U.K. grew 80% - and they think +70% may be sustainable for 3-4 qtrs. The firm remains very bullish on GOOG stock in the near-term. They were surprised by headcount growth, but believe this surge was in place before management began to focus on hiring discipline. They see GOOG as strategically positioned so far ahead of competitors they can comfortably slow expansion and still outpace others. They say end-mkts remain very strong and under-penetrated, especially internationally.
BofA believes that the elimination of the European best practices funding program could add an incremental $35-$90 mln and $250-$660 mln in in incremental '08 and '09 rev, respectively.
Jefferies notes that revenues (net of TAC - traffic acquisition costs) were up 62% YoY and 10% sequentially to $3.01 bln, exceeding their and consensus est of $2.9 bln. Considering that the "top ad promotion formula change," one of the most important tweaks to the Google algorithm after some time took place only on August 21, they expect monetization improvements to continue into Q4. That, combined with strong Q4 seasonality, should help GOOG keep its growth momentum, says the firm.
Nollenberger says paid search remains extremely healthy, with search rev on up 68% Y/Y. The only negative in their view was the unabated growth of new hires—over 2,100 engineers and salespeople were added in the qutr, up from 1,500 last qutr. Still, they say operating expense growth moderated slightly from last qtr.

Conference Call Summary...
Says this is seasonally one of their weakest quarters but seasonal weakness intraffic was milder than expected... says may see pressure on TAC (traffic acquisition costs) rates going forward... Says pleased with MySpace partnership... AdSense TAC went downslightly; Google TAC went up; primarily driven by partner mix... co says do not feel need to spend cash right now; if they saw something of interest that would add value they would look into it... Asked about mobile side and if they feel comfortable with current position: says currently happy with mobile applications; says it is a strong story for the co; co does not feel required to create infrastructure, says there are opportunities for them in this area; more of an opportunity to the co then it is a cost (Note: Co does not give anyhint into a possible gPhone)... re DoubleClick- says they are following steps for approval; says they are optimistic but unable to guess on timing... Says pleased with MySpace partnership... Says they are paying a lot of attention tothe headcount... co says growth rates are 'quite significant' in India and China since co is starting from relatively scratch; notes they are competing with someone in China who has a majority share (BIDU); says they believe that they have majority share in India... With regards to regulations believes that their size is not harmful to consumers; says working closely with governments; says they are a consumer co and the consumers are free to choose; say they promote privacy. NB: Analyst Day next week.

2) Intuitive Surgical/ISRG:
Q3 (Sep) earnings of $0.95 per share, excluding non-recurring items, $0.16 better than the Reuters Estimates consensus of $0.79; revenues rose 63.8% year/year to $156.9 million vs the $143.6 million consensus. Q3 instruments & accessories rev increased 70% to $49.5 million; da Vinci Surgical Systems rev increased 63% to $85.5 million; service & training revenue increased 52% to $21.9 mln.

HSBC raises their ISRG target to $325 from $198 following "beat and raise" 3Q07 driven by strong systems growth. They note that stronger 3Q07 da Vinci robotic system sales were driven by growth in international markets. The firm raises their sales and EPS forecasts for 2007 through 2009.

Wachovia notes that ISRG reported Q3 2007 revenue of $156.9 mln (64% growth),$13.4 mln ahead of consensus of $143.5 mln. They note that ISRG had EPS of $1.04 (or $0.95 excluding $0.09 from one-time gains on the sale of investments including HNSN shares and foreign exchange gains) vs. the Street est. of $0.79. ISRG placed 46 systems in the U.S. (24% growth yr/yr) and 17 systems outside the U.S. (89% growth yr/yr). Firm says that this is the third consecutive quarter of acceleration in outside U.S. system growth and supports their thesis that ISRG begins to see the benefit of internationa linvestments. They expect system placement to remain robust. They believe that ISRG's revenue growth will make it challenging to prevent further margin expansion. They model 390 bps of operating margin expansion in 2007.

CIBC notes that ISRG's Q3 was solid on the surface, with sales and EPS handily exceeding ests. However, firm says Q3 was balanced by:
1) slowing U.S. unitgrowth again, up only 24%;
2) light procedure volumes/guidance for procedure growth was unchanged for the first time in years;
3) declining q/q utilization in the U.S.; and
4) dVP penetration now nearing a noteworthy 50% level.

At a time when valuation is at record levels relative to past years, firm thinks this becomes a point of great concern.

(end quotes; reenter dmg...)

No surprise, then, that each stock is up, and dramatically so, in pre-opening trades. (Especially no surprise amid the many, many increased share price targets.)

Contra to these two (and others) is J Crew/JCG, which is perilously close to breaching its crucial support, although I might grant it a few days extra grace to determine whether yesterday's low is not, in fact, a bear trap. (Please understand that a breach of $40 merely changes the pattern I had expected, not my bullishness.) I hope to provide more comments this weekend re this opportunity.

Full Disclosure: Long the shares of all companies mentioned in this post.
-- David M Gordon / The Deipnosophist


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