Category: Technology Stocks

Tech stocks refer to any stock involved in the technology sector, from semiconductor producers to software providers. Tech stocks are often a leading indicator for the economy and the stock market. Technology stocks generally follow the pattern of more innovation in the market & new development of product.

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Technology Stocks

Box Is Successfully Targeting a Niche in the Enterprise Content Management Space

Business Strategy and Outlook

Box has sought to differentiate its offerings using a two-step strategy. First, the company has pivoted away from cloud storage, an area where price competition can be fierce, especially for smaller players such as Box. Instead, the firm has focused on redesigning its platform as a collaboration ecosystem. With features such as Box Sign, Relay, and Governance, the firm is creating an open garden where users can interact with native Box features, along with more than 1,500 integrations from various software vendors, to manage their daily workflows. 

First, some other key competitors in the enterprise collaboration space include the likes of Microsoft and Google. These players have access to significantly more capital than Box, creating a tough competitive environment. Second, the legacy solutions that businesses often use for collaboration or document sharing are well entrenched, leading to high switching costs for businesses adopting Box’s solution.

Financial Strength

Box’s financial health to be in good shape. Although the company remains unprofitable in GAAP terms, we are encouraged by the firm’s positive free cash flow, or FCF, which we expect to trend upward as the firm is able to trim operating costs while maintaining solid top-line growth. The firm’s balance sheet is also in good shape, with cash and equivalents well above $500 million at the end of fiscal 2022. While Box has long-term debt, we do not foresee the firm encountering any difficulties in paying its obligations via its strong cash reserves and forecast FCF generation. With a strong net cash balance and cash flow generation profile, it is expected that management to pursue further M&A coupled with continued share repurchases. Management has been active on both of these fronts recently with tuck-in acquisitions of SignRequest and Cloud FastPath and significant share repurchase programs.

Fourth-quarter revenue of $233 million, buoyed by product stickiness and larger deal wins, was up 17% year over year. Much like other software-as-a-service companies, Box can grow its revenue in two ways: increasing average revenue per user, or ARPU, and/or increasing its number of paid users. Box has increased its ARPU by upselling its product to existing clients and increasing large deal sizes, with $100,000-plus deals growing 25% year over year. Management provided revenue guidance between $233 million and $235 million for the first quarter in fiscal year 2023, with adjusted EPS between negative $0.05 and negative $0.04. Full-year guidance was $990 million to $996 million for revenue with adjusted EPS landing between negative $0.07 and negative $0.03.

Bulls Say’s

  • Box’s revenue is buoyed by secular tailwinds as enterprise workflow collaboration tools remain in hot demand. 
  • With the firm’s focus on the enterprise space, clients are typically sticky, leading to more certainty around revenue. 
  • Box’s large install base and go-to-market motion will allow the firm to drive top-line growth while also enacting operating efficiencies leading to better free cash flow generation.

Company Profile 

Box is a cloud-based content services platform that provides cloud-based storage and workflow collaboration services for enterprise customers. The firm was founded in 2005 as a file sync and sharing provider. More recently, however, the company has focused on bolstering its product portfolio by adding tools such as governance and e-signature that enhance workflow management and collaboration.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Technology Stocks

Veeva’s CRM Application Propelled It to Become Leading Solution Of It’s Niche Market

Business Strategy and Outlook

Veeva is the leading provider of cloud-based software solutions tailored to the life sciences industry, providing an ecosystem of products to address the operating challenges and regulatory requirements that these companies face. Its highly specialized offerings for the life science industry allow companies to improve operational efficiency to get products to market faster while ensuring regulatory compliance and ultimately sell more effectively. Its effective technology and dominant position enable Veeva to generate excess returns commensurate with a wide-moat company. Its strong retention, continued development of new applications, increasing penetration with existing customers, addition of new customers, and expansion into industries outside of life sciences should allow the company to extend its market leadership, in Analysts view. 

The company operates in two categories. Commercial solutions entail vertically integrated customer relationship management services and end-market data and analytics solutions. R&D solutions is a horizontally integrated content and data manager. Veeva’s CRM application supports real-time collaboration and regulatory oversight and enables incremental add-on solutions. The incremental functionality is critical to improving marketing programs while remaining in compliance with mandated antikickback laws and statutes. This service has been well received by the life sciences industry and has propelled Veeva to become the leading solution with the lion’s share (approximately 80%) of this niche market. As a follow-on to the initial introduction of CRM, management introduced R&D solutions to broaden the portfolio that addresses the largely unmet needs of the life sciences industry outside of CRM. Each module offers features and functionality targeting four key areas in life sciences: clinical (trial management), regulatory (compliance), quality of manufacturing, and safety.

Financial Strength

It is held Veeva enjoys a position of financial strength arising from its strong balance sheet (no debt) and leading position in a growing market. As of fiscal 2022, Veeva had over $2.4 billion in cash and short-term investments and no debt. It is likely the company will continue to use the cash it generates from operations to fund future growth opportunities. From Analysts perspective, management has been disciplined about M&A and taking on debt. The 2019 acquisition of Crossix was the firm’s largest to date, at approximately $430 million. It is anticipated the company will continue make small tuck-in acquisitions and fund them through available cash and cash flow from operations. Even in this scenario, increasing liquidity is foreseen, as the firm’s reserve of cash should continue to increase.

Bulls Say’s

  • Veeva’s best-of-breed vertical addressing unmet needs provides opportunities to further penetrate a highly fragmented market. 
  • The rapid adoption of the company’s new modules continues to entrench Veeva in mission-critical operations of customers, making it increasingly challenging for competitors to gain a foothold. 
  • Veeva’s institutional knowledge and codevelopment partnerships with customers enable the company to develop robust offerings addressing market needs.

Company Profile 

Veeva is a leading supplier of software solutions for the life sciences industry. The company’s best-of-breed offering addresses operating and regulatory requirements for customers ranging from small, emerging biotechnology companies to departments of global pharmaceutical manufacturers. The company leverages its domain expertise and cloud-based platform to improve the efficiency and compliance of the underserved life sciences industry, displacing large, highly customized and dated enterprise resource planning systems that have limited flexibility. As the vertical leader, Veeva innovates, increases wallet share at existing customers, and expands into other industries with similar regulations, protocols, and procedures, such as consumer goods, chemicals, and cosmetics. 

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Expert Insights Technology Stocks

More Than 90% Of Fortune 100 Firms Could Be Using Splunk’s Offerings As A Vote Of Confidence In Its Enterprise Product Lineup

Business Strategy and Outlook

Splunk is a leader in ingesting, indexing, and analyzing machine generated data, and it alleged the company will maintain its leadership status for the foreseeable future. It is held machine data to become more pervasive, impacting every part of an enterprise’s operations. With more data to ingest, index, and analyze, it is foreseeen narrow-moat Splunk has a long runway for growth as it seeks to continue to dominate the enterprise market. Splunk’s offerings primarily target two broad use cases: security and full-stack monitoring & analysis (FSMA). On the security front, Splunk’s SIEM, or security information and event management, operates as a well-refined alert system, putting out alerts if any nefarious activity appears on a client’s network. Splunk’s security orchestration, automation, and response, or SOAR, software is geared toward triaging these issues automatically. SIEM and SOAR software, working in tandem, allow an enterprise’s IT team a reprieve by using artificial intelligence to triage security issues, thereby leading to a substantially lower number of alerts that need to be manually dealt with. 

The FSMA space is nascent, springing into existence as a method of unifying and coalescing disparate parts of an enterprise’s monitoring framework. Splunk’s FSMA offering seeks to give enterprises a one-stop shop to monitor their entire IT stack, ranging from application performance to logs to end user experience. Splunk’s offering allows enterprise customers to remove these data silos and monitor the entire IT stack from one consolidated platform. 

It is held Splunk warrants a narrow economic moat thanks to high customer switching costs. It is foreseen more than 90% of Fortune 100 firms using Splunk’s offerings as a vote of confidence in its enterprise product lineup. Further, it is impressing, Splunk’s strong cloud dollar-based net retention (DBNR) that has consistently remained above 120%. With the ability to land big customers and consistently upsell them, analysts remain confident in Splunk’s long-term growth prospects.

Financial Strength

It is anticipated Splunk’s financial position is healthy. Splunk ended fiscal 2022 with $1.43 billion in cash and current investments. This is juxtaposed with the company’s convertible senior notes of $3.14 billion at the end of fiscal 2022. While debt exceeds cash-in-hand currently, it is likely Splunk’s cash and cash generation over the next five years will far outstrip its commitments over the same time period. As the company undergoes the cloud transition, its effect on free cash flow has been evident. The company’s FCFE (free cash flow to equity) margins from 2014 to 2019 were comfortably in the double-digits. However, with the cloud transition dampening revenue and increasing operating spend, free cash flow margins have been significantly lower than before. However, it is alleged these transitory costs to allay and project that Splunk will achieve consistent double-digit FCFE margins starting fiscal 2025. It isn’t likely for any major shifts in Splunk’s capital structure. It is foreseen the company raising capital in the future by issuing more equity or taking advantage of low interest rates and issuing debt.

Bulls Say’s

  • Splunk has secular tailwinds behind its back as the security and FSMA markets are expected to grow rapidly. 
  • Splunk’s products are incredibly sticky, offering the company an opportunity to increase cross-selling velocity as customers increase their usage of Splunk’s platform. 
  • Many of Splunk’s enterprise customers are undergoing digital transformations. This shift should bode well for Splunk as these efforts typically include leveraging technology such as Splunk’s for efficiency gains.

Company Profile 

Splunk is a cloud-first software company that focuses on analyzing machine data. The company is a major player in two markets: security and full-stack monitoring & analysis. Splunk is currently undergoing a cloud transition as the company weans its on-premises customers over to its cloud products that are delivered as software-as-a-service. The firm’s top line consists of the sale of software licenses, cloud subscriptions, and maintenance and support. 

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Technology Stocks

Sonic Healthcare up to $500m on market buyback supportive at current share price levels

Investment Thesis

  • As the Covid pandemic subsides, near-term earnings may underwhelm but longer term, we don’t doubt the quality of SHL’s assets, which is geographically diversified, and high quality management team.
  • Ageing population requires more diagnostic tests, especially as Medicine focuses on preventative medicine.
  • Market leading positions in pathology (number one in Australia, Germany, Switzerland, and UK number three in the US). Second leading player in Imaging in Australia.
  • High barriers to entry in establishing global channels.
  • Ongoing bolt-on acquisitions to supplement organic growth and potentially improve margin from cost synergies.
  • Leveraged to a falling dollar. 
  • Globally diversified.

Key Risks

  • Disruptive technology leading to reduced diagnostics costs.
  • Competitive threats leading market share loss.
  • Deregulation resulting in new pathology collection centres.
  • Adverse regulatory changes (fee cuts).
  • Disappointing growth.
  • Adverse currency movements (AUD, EUR, USD).

Bulls Say’s

  • Revenue of $4,757m, up +7%. 
  • EBITDA of $1,540m, up +18%.
  • Net Profit of $828m, up +22%.
  • Cash generated from operations of $1,041m, up +28%, reflecting EBITDA growth and lower interest payments. SHL achieved 85% conversion of EBITDA to gross operating cash flow.
  • Earnings per share of 170.8cps, up +21%.
  • SHL retained a strong balance sheet position, with gearing at record low level of 12.9% (vs 12.5% in the pcp) and below covenant at <55%, interest cover of 44.9x (vs 33.8x in the pcp and above covenant limit of >3.25x) and debt cover of 0.3x (vs 0.4x in the pcp and covenant limit of <3.5x), and with ~$1.4bn of available liquidity.
  • SHL maintained its progressive dividend policy, with the Board declaring an increase of 4 cents (or up +11%) to 40 cents (100% franked) for the FY2022 Interim Dividend.

Company Profile 

Sonic Healthcare (SHL) is a medical diagnostics company with operations in Australia, New Zealand, and Europe. The company provides a comprehensive range of pathology and diagnostic imaging services to medical practitioners, hospitals and their patients along with providing administrative services and facilities to medical practitioners. SHL has three main segments: (1) Pathology/clinical laboratory services based in Australia, NZ, UK, US, Germany, Switzerland, Belgium and Ireland. (2) Diagnostic imaging services in Australia; and (3) Other which includes medical centre operations (IPN), occupational health services (Sonic HealthPlus) and laboratory automation development (GLP Systems).

(Source: BanyanTree)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Technology Stocks

PayPal Holdings Inc. : FY21 Revenue of $25.37bn Largely in Line With Consensus Forecast of $25.35bn

Investment Thesis:

  • Leveraged to the structural growth story of electronics payments and e-commerce globally.
  • Strong market position (largest payments platforms in North America) and increasing global market share.
  • Sophisticated technology platforms which have been incrementally improved via R&D and acquisitions. PYPL’s technology stack are difficult to replicate and impose high barriers to entry to new competitors.
  • Value-accretive acquisitions.
  • Incoming strategic partnerships to further unlock payment efficiency and access to wider markets (e.g. Instagram, Uber, Paymentus).
  • Strong free cash flow generation gives way to capital management initiatives.

Key Risks:

  • Global macro-economic conditions deteriorate, impacting consumer spending and business activity.
  • Pricing pressures from emerging competitors and alternatives to PayPal. Leading banks or tech giants such as Amazon may develop their own payment platforms to cannibalize sales from Paypal (e.g. Apple Pay).
  • U.S.-China geopolitical tensions impeding cross-border e-commerce transactions.
  • Adverse currency movements and regulatory changes (data privacy / protection, governments’ intervention/protection policies).
  • Security and technology risks (including cyber-attacks).
  • Value destructive acquisition(s).

Key highlights:

PYPL FY21 revenue of $25.37bn was largely in line with consensus forecast of $25.35bn, however, GAAP EPS of $3.52 missed forecast of $3.60. The Company added 49 million NAAs (net active accounts) bringing total active accounts to 426 million, up +13%, leading to TPV growing +33% to $1.25 trillion with management forecasting TPV to reach $1.5 trillion in FY22. Management announced a pivot in strategy to shift emphasis more towards engagement and driving higher value NNAs, leading to scrapping of the 750 million accounts target by 2025. However, management remains confident of new strategy driving higher ROI

  • Pivot in strategy – Management has pivoted their strategy and is shifting emphasis more towards engagement and driving higher value NNAs (consumers who are more engaged, drive incremental sales for merchants which drive growth at much higher margins and ROI) rather than just focusing on generating account creation (over time the Company still expect to grow net new actives, but more in line with pre-pandemic levels), leading to management scraping their target of growing active accounts to 750 million by 2025.
  • eBay headwinds in the rearview – last revenue pressure in 2Q22. eBay’s migration of payments away from PYPL led to 1100bps headwind on top-line in FY21, however, the Company remains at final stage of transition with no pressure past 2Q22 and a final ~400bps revenue headwind in FY22 (concentrated in 1H22).
  • Capital management. Given strong cash flow generation (cashflow from operations up +8% over pcp to $6.3bn and FCF up +9% over pcp to $5.4bn) and strong balance sheet with ample liquidity of $16.3bn in cash, equivalents and investments, management continued shareholder return initiatives, returning $3.4bn in the year via repurchase of ~15.4m shares of common stock.
  • Growing proportion of private label sales. Own brand sales percentage increased across all segments, with Bapcor Trade delivering 29.6% (up +50bps over 2H21), Retail delivering 33.9% (up +120bps over 2H21), Speciality Wholesale delivering 54.6% (up +130bps over 2H21) and New Zealand delivering 30.3% (up +40bps over 2H21), with the Company remaining on track to reach its 5-year targets to supplement market leading brands with BAP’s own brand products, which should be a positive for margins.
  • Revenue growth of ~15-17% Revenue growth of ~15-17% on a spot and FXN basis (excluding eBay to grow ~19-21%) vs prior guidance of high-teens, as spending remains impacted by omicron, inflationary pressures, and lack of stimulus.

Company Description:

PayPal Holdings Inc (NASDAQ: PYPL) is an American company in the global payments industry that acts as a payment gateway between merchants and customers, enabling electronic forms of payment instead of cash and cheques. The Company also provides an online payment system that allows individual persons to send and receive money between PayPal accounts. As of 2021, PayPal has 426 million active users and facilitates transactions across more than 200 countries and 25 currencies.

(Source: Banyantree)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Technology Stocks

Fineos Shares Remain Disconnected to Fair Value

Two businesswomen working late in office look at documents

Business Strategy and Outlook

Fineos is a core software vendor to the global life, accident, and health, or LA&H, insurance industry. The firm generates revenue mainly from subscriptions and product implementation services. Fineos help insurers streamline workflow, save costs, and win new business. Fineos is currently migrating customers to a cloud-based offering (from on-premise products). This makes it easier to rollout new features and support at lower marginal costs, while also providing more recurring subscription revenue. 

The firm executes a classic land and expand strategy. Building on its leadership in claims and absence products, Fineos aims to cross-sell its broader product set including payments, billing, data and more. It intends to expand the use of the Fineos platform across multiple jurisdictions with existing multinational clients. Higher customer expectations cost pressures, regulatory requirements, or increasing competition are prompting insurers to switch from clunky internal systems to external software like that from Fineos. 

There is ample room for Fineos to deploy new modules to existing customers and grow penetration over time. This further increases switching costs..Fineos has built multiple reference accounts from doing business with large insurers, who help with additional business wins. Risks include competition from larger competitors, and customer concentration, which may limit price hikes. These may be offset by Fineos’ high switching costs and the risk aversion of insurer clients in changing core systems. Fineos’ product switching costs are contingent on the group continuing to invest (such as in product development) to add value to customers.

Fineos Shares Remain Disconnected to Fair Value

Fineos had good top line growth in first-half fiscal 2022. Revenue grew 24% from the previous corresponding period, or pcp, to EUR 65 million. Morningstar analysts have lowered its fair value estimate to AUD 4.80 from AUD 5.10. But Fineos shares remain at a discount to Morningstar analysts estimate of intrinsic value. Morningstar analysts think the market is underpricing: 1) the inherent switching cost in Fineos’ products, stemming from the risk aversion of its customers to switching providers; and 2) the trend of insurers migrating their business administration processes to the cloud, providing opportunity for Fineos to take share. These drivers underscore Morningstar analysts expectation that Fineos will keep growing market share, noting around 55% of insurers still use legacy systems that have limited functionality and higher operating costs

Financial Strength

Fineos’ balance sheet is appropriately sound. As of Dec. 31, 2021, Fineos has cash and equivalents of EUR 48.6 million and no debt. But current earnings quality is weak. Cash flows have historically been maintained by equity raises, rather than from the ordinary course of business. Cash conversion (operating cash flows to EBITDA) has been irregular. Investing cash flows frequently outstrip operating cash flows due to constant reinvestments, such as for product development or acquisitions. Net cash should grow as the business scales. Morningstar analysts estimate Fineos can generate sustainable positive free cash flows by fiscal 2026-27. Until Fineos reaches scale, however, prospective business acquisitions over the next five years will likely require equity raises. Alternatively, FINEOS can drawdown debt for acquisitions, but this could result in gearing levels and debt coverage deteriorating quickly. Longer-term, we expect Fineos to realise operating leverage via a combination of revenue growth and the scaling of fixed costs. This should help maintain growth in earnings and help the firm become more cash generative. 

Bulls Say

  •  Fineos has low penetration in a sleepy industry that’s ripe for disruption. Operating metrics are solid and trending positively. 
  • Switching costs are high. A competitor who creates a better product only wins half the race. The other half is to build credible reference accounts and convince insurers to switch, which can be lengthy ordeals. 
  • Morningstar analysts believe Fineos will remain the leader in its niche space, as it continues to reinvest in its products or pursue acquisitions, bolstering its capabilities, increase the switching costs of its product suite and expand the modules on offer.

Company Profile

Fineos Corp Holdings PLC is an Irish company engaged in providing software solutions that include management and administration of policies and claims to the life, accident, and health insurance industry. The company’s platform, Fineos AdminSuite, comprises Fineos Absence, Fineos Billing, Fineos Claims, Fineos Payments, and Fineos Provider, among other solutions.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Technology Stocks

WiseTech Global Ltd reported strong 1H22 results driven by strong top line revenue growth

Investment Thesis

  • Market leading position (significantly ahead of the nearest competitor).
  • Growing global trade and increasingly globalization of products sold.
  • High degree of revenue visibility and low customer annual attrition rates. 
  • R&D spend will ensure product/services are enhancing WTC products. WTC’s vision is to be the operating system for global logistics. Having completed 39 acquisitions since its IPO in 2016, WTC has assembled significant resources and development capabilities to fuel its CargoWise technology pipeline.
  • Scalability of the business model.  
  • Geopolitical tensions considered by management as “tailwinds” due to higher consolidation of the logistics software industry.

Key Risks

  • Company announces another earnings downgrade.
  • Organic growth could moderate further, which may no longer warrant such a lofty valuation. However, organic growth has improved over FY19.
  • Management noting that revenues from recent acquisitions actually declined and offered little margin. This means the return from these acquisitions could take longer than management’s expectations. 
  • Competitive threat (new product/technological advancements).
  • Disruption to technology (data breach).
  • Adverse currency movements.

1H22 Results: Relative to the pcp:

  • 1H22 Total Revenue of $281.0m, up +18% (+22% ex FX) on 1H21. 
  • CargoWise revenue was up +29% (+33% ex FX) to $193.0m, driven by Large Global Freight Forwarder rollouts, new customer wins, price and increased existing customer usage. 
  •  Acquisition (non-CargoWise) revenue of $87.9m, down -1% (up +2% ex FX). 
  •  Market penetration momentum continuing – two new global rollouts secured in 1H22 – FedEx and Access World – and Brink’s Global Services (Brink’s) signed post 31 December 2021. 
  •  Ongoing product development delivered 589 CargoWise new product features and enhancements and continued expansion of the CargoWise ecosystem. 
  •  Organization-wide efficiency and acquisition synergy program well-progressed – $20.2m of gross cost reductions in 1H22 (net benefit $19.7m). 
  •  EBITDA of $137.7m up +54% driven by revenue growth and cost reductions. Margin of 49%, up 12bps. CargoWise’s 1H22 EBITDA margin of 58% represents an increase of 4pp on 1H21. 
  •  Underlying NPAT of $77.3m, up +77%. 
  •  WTC generated strong free cash flow of $90.3m, up +85%. 
  •  WTC retained a strong balance sheet, with cash as at 31 December 2021 of $380.3m and no outstanding debt excluding lease liabilities. WTC has an undrawn, unsecured, four-year, $225m, bi-lateral debt facility, to fund future growth. 
  •  WTC’s Board declared a fully franked interim ordinary dividend of 4.75cps, which equates to payout ratio of 20% of Underlying NPAT.

Company Profile

WiseTech Global (WTC), founded in October 1994, is a leading provider of software to the logistics services industry globally. WTC develops, sells and implement software solutions that enable logistics service providers to facilitate the movement and storage of goods, domestically and internationally. WTC’s software assists their customers to better address and adapt to the complexities of the logistics industry while increasing their productivity, reducing costs and mitigating risks. WTC services over 6,000 customers across more than 115 countries with offices in Australia, New Zealand, China, Singapore, South Africa, United Kingdom and the United States. 

(Source: Banyantree)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Technology Stocks

VMware’s VSphere and ESXi Hypervisor Being Virtualization Gold Standards

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Business Strategy and Outlook

VMware, a pioneer of virtual machines, dominates the maturing data center server virtualization market. With organizations prioritizing cloud over on-premises computing infrastructure, it is seen VMware’s robust cloud provider partnerships, including the hyperscalers, should help the firm handle the changing market landscape. It is anticipated VMware’s growth to come from being the glue between computing infrastructures, networking locations, and burgeoning security and developer offerings being bolstered from its strong end user compute portfolio. 

Analysts’ view of cloud networking, akin to VMware’s assessment, is that most enterprises will utilize hybrid cloud solutions. Public clouds can precipitously augment network growth but enterprises face integration complexities among on-premises networks and private and public clouds. Beyond hyperscale cloud provider partnerships, VMware’s Cloud Provider Program offers thousands of cloud partners collaborating with VMware software. In Analysts’ view, this allows VMware to remain ingrained in networks while becoming the commonality between private and public clouds. It is held the November 2021 spin-off from Dell Technologies put an end to an uncertain future around VMware, and that growth can accelerate through VMware’s integration with cloud vendors and cadence of product releases outside of Dell’s umbrella. With solid free cash flow and growth opportunities, it is foreseen its $11.5 billion special dividend, to all shareholders, as part of the spin-off was worth the price of becoming a stand-alone entity. 

VMware’s vSphere and ESXi hypervisor are virtualization gold standards, and its hybrid cloud platform creates a consolidated view across multicloud environments. It is projected the company’s strong franchises within end user compute, security, and virtualized networking and storage can be overlooked, and support growth ventures such as VMware’s integration of Kubernetes-based container management within vSphere. It is likely, software cohesion across on-premises and clouds along with nascent networking products should give VMware sustainable growth.

Financial Strength

It is held VMware a financially stable company that should continue generating strong free cash flow. The company’s main expenditures are in the forms of developing product innovations and marketing efforts. VMware’s R&D expenditures are in the low 20s as a percentage of revenue while sales and marketing expenditures are in the low 30s. In the past, VMware has bolted on firms to bolster its presence in focus growth areas, and it is projected organic developments to be supplemented with future acquisitions. As of the end of fiscal 2022, VMware had $3.6 billion in cash and equivalents, and it is anticipated the company will pay its debts on time.VMware completed its first special dividend of $11 billion in December 2018, which helped Dell Technologies facilitate an exchange of Dell Class V tracking stock (DVMT) for a new class of Dell Technologies Class C common stock or a cash buyout option for shareholders. As part of becoming an independent company and spinning off from Dell, VMware paid special dividends worth $11.5 billion and retained an investment-grade credit rating. Although VMware raised capital to help pay the special dividend, it is likely to quickly lower its obligations through cash on hand and its robust free cash flow generation.

Bulls Say’s

  • VMware’s hybrid cloud program could yield tremendous growth if VMware is cemented as the dominant software supplier between private and public clouds. Its presence in hyperscale public cloud networks could make it the de facto virtualization choice. 
  • Product leadership in application management, enduser computing, cybersecurity, and software-defined networking provides robust growth opportunities beyond core virtualization. 
  • VMware can more tightly integrate itself with Dell peers as a stand-alone company, while also benefiting from its Dell commercial contract and their salesforce.

Company Profile 

VMware is an industry leader in virtualizing IT infrastructure and became a stand-alone entity after spinning off from Dell Technologies in November 2021. The software provider operates in the three segments: licenses; subscriptions and software as a service; and services. VMware’s solutions are used across IT infrastructure, application development, and cybersecurity teams, and the company takes a neutral approach to being the cohesion between cloud environments. The Palo Alto, California, firm operates and sells on a global scale, with about half its revenue from the United States, through direct sales, distributors, and partnerships. 

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Technology Stocks

Megaport Ltd – Company achieved 2,455 customers across 768 Enabled Data Centres

Investment Thesis:

  • MP1 is a global Software Defined Network provider, focusing on cloud connectivity. As such, the Company is leveraged to the rapid growth of global cloud and data centres and is in a strong position to benefit from the rollout to new cloud and data centre regions. Key macro tailwinds behind MP1’s sector: (1) adoption of cloud by new enterprises; (2) increased level of investment and expenditure by existing customers; and (3) more and more enterprises looking to use multiple cloud products/providers, which works well with MP1’s business model.  
  • MP1 has a scale advantage over competitors. MP1 has over 600 locations around the globe. MP1 has significant scale advantage over competitors and whilst replicating this scale is not necessarily the difficult task, it will take several years to do so during which time MP1 will continue to add locations and customers using the scale advantage.
  • Strong R&D program ensuring MP1 remains ahead of competitors.
  • Strong cash balance of $104.6m. 
  • Strong relationship with data centres (DC). MP1 has equipment installed in 400 data centres, so MP1 is a customer of data centres. MP1 also drives DCs interconnection revenue. Whilst several data centres like NEXTDC, Equinix provide SDN (Software Defined Network) services, it is unlikely data centres will look to change their relationship with (or restrict) MP1 given they are designed to be neutral providers to network operators. Further, given MP1’s existing customer base and connections with cloud service providers, it would be very difficult for data centres (without significant disruption to customers/cloud service providers) to change the rules for MP1.

Key Risks:

  • High level of execution risk (especially with respect to development). 
  • Revenue, cost and product synergies fail to eventuate from the InnovoEdge acquisition. 
  • Heavy reliance on third party partners (especially data centre providers and cloud service providers). 
  • Data centres like NEXTDC, Equinix provide SDN services and decide to restrict MP1 in providing their services. 
  • Disappointing growth (in terms of expanding data centre footprint, customers, ports, Megaport Cloud Router).

Key highlights:

(1) Revenue increased +42% over pcp to $51.2m, driven by increased usage of services across all regions, with North America delivering strongest growth across all regions, increasing +55% over pcp, followed by Europe (+35% over pcp) and Asia Pacific (+28% over pcp). Monthly recurring revenue (MRR) increased +46% over pcp to $9.2m, driven by strong customer growth compounded with a 5% increase over pcp in services per customer. 

(2) Profit after direct costs improved +69.4% over pcp to $30.9m, driven by revenue growth and a controlled network cost. 

(3) Opex increased +42% over pcp with employee costs increasing +40% over pcp amid investment in headcount to support business growth (employee costs as a percentage of revenue declined -100bps over pcp to 55%), marketing (+126% over pcp) and travel (+1481% over pcp) costs increasing amid a gradual return of travel and conference activities following global easing of Covid-19 restrictions, and IT costs increasing +106% over pcp due to expensing of Software as a Service (SaaS) costs, previously capitalised, following a change in accounting policy. 

(4) The Company achieved 2,455 customers (up +7.4% over 2H21) across 768 Enabled Data Centres (420 located in North America, 208 in EMEA and 140 in Asia Pacific). 

(5) The Company ended the half with cash and equivalents position of $104.6m, down -23.2% over 2H21.

Company Description: 

Megaport Ltd (MP1) is a software-based elastic connectivity provider – that is, it is a global Network as a Service (NaaS) provider. MP1 develops an elastic connectivity platform providing customers interconnectivity and flexibility between other networks and cloud providers connected to the platform. 

(Source: Banyantree)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Financial Markets Sectors Technology Technology Stocks

Megaport Ltd – Company achieved 2,455 customers across 768 Enabled Data Centres

The concept of 5G network with magnifying glass on modern circuit board, high-speed mobile internet and new generation networks technology background

Investment Thesis:

  • MP1 is a global Software Defined Network provider, focusing on cloud connectivity. As such, the Company is leveraged to the rapid growth of global cloud and data centres and is in a strong position to benefit from the rollout to new cloud and data centre regions. Key macro tailwinds behind MP1’s sector: (1) adoption of cloud by new enterprises; (2) increased level of investment and expenditure by existing customers; and (3) more and more enterprises looking to use multiple cloud products/providers, which works well with MP1’s business model.  
  • MP1 has a scale advantage over competitors. MP1 has over 600 locations around the globe. MP1 has significant scale advantage over competitors and whilst replicating this scale is not necessarily the difficult task, it will take several years to do so during which time MP1 will continue to add locations and customers using the scale advantage.
  • Strong R&D program ensuring MP1 remains ahead of competitors.
  • Strong cash balance of $104.6m. 
  • Strong relationship with data centres (DC). MP1 has equipment installed in 400 data centres, so MP1 is a customer of data centres. MP1 also drives DCs interconnection revenue. Whilst several data centres like NEXTDC, Equinix provide SDN (Software Defined Network) services, it is unlikely data centres will look to change their relationship with (or restrict) MP1 given they are designed to be neutral providers to network operators. Further, given MP1’s existing customer base and connections with cloud service providers, it would be very difficult for data centres (without significant disruption to customers/cloud service providers) to change the rules for MP1.

Key Risks:

  • High level of execution risk (especially with respect to development). 
  • Revenue, cost and product synergies fail to eventuate from the InnovoEdge acquisition. 
  • Heavy reliance on third party partners (especially data centre providers and cloud service providers). 
  • Data centres like NEXTDC, Equinix provide SDN services and decide to restrict MP1 in providing their services. 
  • Disappointing growth (in terms of expanding data centre footprint, customers, ports, Megaport Cloud Router).

Key highlights:

(1) Revenue increased +42% over pcp to $51.2m, driven by increased usage of services across all regions, with North America delivering strongest growth across all regions, increasing +55% over pcp, followed by Europe (+35% over pcp) and Asia Pacific (+28% over pcp). Monthly recurring revenue (MRR) increased +46% over pcp to $9.2m, driven by strong customer growth compounded with a 5% increase over pcp in services per customer. 

(2) Profit after direct costs improved +69.4% over pcp to $30.9m, driven by revenue growth and a controlled network cost. 

(3) Opex increased +42% over pcp with employee costs increasing +40% over pcp amid investment in headcount to support business growth (employee costs as a percentage of revenue declined -100bps over pcp to 55%), marketing (+126% over pcp) and travel (+1481% over pcp) costs increasing amid a gradual return of travel and conference activities following global easing of Covid-19 restrictions, and IT costs increasing +106% over pcp due to expensing of Software as a Service (SaaS) costs, previously capitalised, following a change in accounting policy. 

(4) The Company achieved 2,455 customers (up +7.4% over 2H21) across 768 Enabled Data Centres (420 located in North America, 208 in EMEA and 140 in Asia Pacific). 

(5) The Company ended the half with cash and equivalents position of $104.6m, down -23.2% over 2H21.

Company Description: 

Megaport Ltd (MP1) is a software-based elastic connectivity provider – that is, it is a global Network as a Service (NaaS) provider. MP1 develops an elastic connectivity platform providing customers interconnectivity and flexibility between other networks and cloud providers connected to the platform. 

(Source: Banyantree)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.