Synopsys SNPS reported a good third-quarter result and consequently raised its full-year outlook. The improved outlook even comes despite some impact from the U.S.-China trade spat. The result illustrates a global design market that continues to flourish, and which is being driven by trends associated with artificial intelligence, 5G, Internet of Things, and cloud computing. Synopsys mentioned it was seeing competitive displacements within its electronic design automation, or EDA, business with Fusion Compiler spearheading the competitive wins at some large semiconductor companies. On the intellectual property, or IP, side, the third quarter was a record one for the firm and the company signed its single largest IP order ever during the period. In addition, AI accelerators and hyperscale data centers drove substantial growth for IP. With a leading position in many IP markets, we see the IP business as being a healthy growth pillar for the firm. While we account for Synopsys' improved outlook, it has little bearing on our valuation, and we maintain our $107 fair value for this narrow-moat company. We believe Synopsys currently trades at premium and would seek a wider margin of safety before investing new capital in the name. For the quarter, revenue grew 9.4% year over year to $853 million. Semiconductor & system design was bolstered by good demand from clients and the timing of customer IP product deals. For the entire note, click here.
Andrew Lange
Splunk SPLK reported a busy quarter with the $1.05 billion acquisition of SignalFx, an increase in revenue guidance, improved pricing transparency (which we applaud), but headwinds to cash flow for fiscal 2020, all in the first full quarter for new CFO Jason Childs. Shares traded up nearly 10% in early afterhours trading after the company increased guidance but gave back all of the gains when management disclosed a $550 million reduction in guidance for operating cash flow for the year due to changes in the firm's upfront cash collection policies. We believe that the changes are largely positive, particularly with regard to pricing, and positions Splunk as the go-to partner for enterprises looking to make use of their increasingly important machine data . We are maintaining our fair value estimate of $154 for narrow-moat Splunk and believe there is upside with shares trading near $130, especially as we view the cash flow headwinds as only a near-term issue. Splunk announced the acquisition of application performance monitoring company SignalFx. SignalFx, was founded in 2013 and provides real-time monitoring for cloud infrastructure and applications. We believe it is a good fit alongside Splunk's current offerings and will allow companies to monitor their cloud/application performance in an effort to help optimize resources. In the quarter, Splunk reported $516.6 million in revenue, an increase of 33% year over year. For the entire note, click here.
John Barrett
Zayo ZAYO concluded fiscal 2019 with revenue and profits in line with our expectations, but our fair value estimate continues to be exclusively based on our expectation that the firm will complete its transaction to be taken private in the first half of 2020 for $35 per share. We expect to increase our $33 fair value estimate by $1, as we continue to adjust for the time value of money. With the firm trading around $34, we see no opportunities for investors in Zayo. Our stand-alone fair value estimate would be $31, but we are pricing in a 100% probability that the transaction closes. The $650 million in revenue in the quarter met our expectation and was down 1%, year over year, matching the average decline for the first three quarters of 2019. The adjust ed EBITDA margin of 49.4% was virtually flat year over year and sequentially, but EPS was up over 40% year over year because of a substantial tax benefit. Zayo did not hold an earnings call and reduced the granularity of disclosure into its business segments, but zColo, its data center business, outpaced our revenue forecast while the networks segments declined slightly more than we projected. Still the networks segments drive 100% of the firm's net income. Though we were never particularly optimistic about Zayo's prospects, we found this year's performance, especially in the networks segments, disappointing. For the entire note, click here.
Matthew Dolgin, CFA
Narrow-moat L Brands LB delivered another mixed quarter, with Victoria's Secret posting a weak same-store sales decline of 9%. Some of this softness was to clear non-go-forward inventory, as new management merchandise will surface in the channel in August. Supporting this thesis was the magnitude of merchandise margin declines that led to an operating margin of 1% at the segment, a low water mark this decade. While Bath and Body comps also decelerated from its high-single-digit cadence over the last four quarters to 4% at stores, we believe this metric is strong enough to signal brand equity relative to the generally weak mall performance from the department stores this past quarter. Bath and Body operating margin also declined (down 50 basis points to 17%), but we remain unconcerned about the full-year opportunity, given that the fourth-quarter operating profit has surpassed the first three quarters combined and newness in product could moderate the level of discounting. We don't plan any material changes to our $42 fair value estimate, as L Brands' full-year outlook calling for low-single-digit comps, $2.30-$2.60 in earnings per share, and $750 million in free cash flow were in line with our estimates of 1%, $2.50, and $760 million, respectively. Our long-term outlook includes Victoria's Secret operating margins normalizing around 7% and flat comps, assuming a slow turnaround in the brand ensues. For the entire note, click here.
Jaime M. Katz, CFA
Narrow-moat Nordstrom JWN joined other North American department stores in reporting weak sales in 2019's second quarter. Nordstrom's 6.5% sales decline in its full-price segment in the quarter missed our forecast of a 4.0% decline despite July's annual Anniversary Sale. Nordstrom's sales were impacted by sell-outs of some popular items and slow sales of others. We think many retailers resorted to significant markdowns to move slow-selling inventory (especially women's apparel) in the second quarter. Nordstrom's off-price business reported a 1.9% sales decline in the second quarter. While this result matched our forecast, it is nonetheless disappointing considering the segment's history of growth. Nordstrom scaled back on flash sales in the quarter, a key driver of traffic for the off-price business, but intends to increase their frequency in the second half of the year. Despite the full-price sales miss, Nordstrom's EPS of $0.90 in the quarter beat our estimate of $0.77 on good expense control. Nordstrom reported selling, general, and administrative expenses as a percentage of sales of 31.2%, 70 basis points better than our forecast. Nordstrom reported improved economics from its Anniversary Sale despite the soft sales. We think the firm's inventory, down 6.4% year-over-year, is in good shape heading into 2019's second half but are cautious on customer traffic trends. For the entire note, click here.
David Swartz
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