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Cartoon of the Day: Good As Gold

Takeaway: Unless an ideological change occurs at the Fed, the predictable monetary policy response to growth slowing data points will continue.

Cartoon of the Day: Good As Gold - Gold cartoon 07.23.2014


WYN Q2 2014 - EARNINGS PREP

Consensus estimates, management guidance and commentary, and questions for management in preparation for the earnings release/call tomorrow

 

 

Q2 2014 CONSENSUS ESTIMATES

  •  Total revenues:  $1,338 million
    • Vacation Ownership:  $667 million
    • Vacation Exchange & Rentals $402 million
    • Lodging $280 million
  • EBITDA $320 million
  • EPS $1.14/share

 

MANAGEMENT GUIDANCE

 

Q2 2014:

  • Adjusted EPS:  $1.11 to $1.13
  • No share repurchases factored into guidance
  • During the period April 1, 2014 through April 23, 2014, WYN repurchased an additional 0.6 million shares at an average price of $71.98 for a cost of $42 million.

Full Year 2014:


As of March 31, 2014

  • Revenues:  $5.25 - $5.35 billion
  • EBITDA:  $1.215 - $1.24 billion, organic growth 6% - 8%
  • EPS:  $4.28 - $4.38

 

QUESTIONS FOR MANAGEMENT

  1. How much capital does WYN have "stuck" in Venezuela due to the Porlamar, New Sparta?  How does the company plan to deal with this "at risk" capital?
  2. Discuss peak season summer vacation bookings (trends - occupancy and rate) and cancellation rates.
  3. Discuss how the recent national umbrella television advertising campaign has increased consumer awareness and how that awareness translated into room reservations. How will the company change the targeting of the advertisement between now and Sept 21?
  4. Discuss current M&A pipeline and pricing vs. return expectations
  5. View on increasing dividend as compared to growth in free cash flow
  6. With the WYN stock trading near $73/share, what is managements view on stock valuation?
  7. Discuss recent credit trends within Vacation Ownership segment - receivables write-downs, reserves, and impairments?
  8. How has the vacation ownership podium presentation format impacted sales trends?
  9. Plans for an additional time-share receivables securitization during 2014?

 

FORWARD LOOKING COMMENTARY

Lodging Segment

  • The general economic environment in Europe is improving and the operating enhancements that Wyndham put in place (namely technology) will enhance yield management capabilities and streamline cost structures.
  • Anticipate margin improvement in our hotel group.
  • Hotel Group will see first ever umbrella marketing program with a national advertising campaign in spring 2014.

Vacation Exchange & Rentals

  • As of early April, peak summer bookings for Wyndham's European vacation rental businesses were comfortably ahead of last year - more volume than it was pricing - up high single-digits.
  • (Guests) are booking earlier.
  • A decline in exchange revenue per member, primarily resulting from the decline in Latin America due largely to the ongoing economic and political environment impacting Venezuela customer base, where access to foreign currency is limiting travel.
  • Summer is looking good. Visibility into that (booking trends) is difficult due to a shorter booking window.
  • Largest European rental market is Holland, and the Dutch consumer's feeling much more confident than he and she were two years ago, and even more than last year.
  • Seeing some positive trending in consumer confidence in Europe and see this in the advance bookings.
  • (Goldman Conference) Advance bookings have been up, strong single-digit, low double-digit growth in different pockets of the market so call it 10% booking improvement. As the yield management systems kick in, expect ability to push price closer to the time of travel.

Vacation Ownership

  • Targeting just over 30,000 new customers this year versus about 27,000-28,000 last year
  • Conditions in the ABS market are terrific
  • The amount of loans written off were $63 million in the quarter compared to $77 million in the first quarter of last year.

Corporate

  • In the first quarter, repurchased 2.1 million shares totaling $150 million. Absent M&A opportunities, it's safe to assume that Wyndham will spend approximately $600 million this year on share repurchase.
  • Repurchase authorization of $476 million remains
  • Increased EPS guidance by $0.05 for the full year and diluted share count goes to 130 million shares reflecting the benefit of repurchases.
  • VAT impact in Q1 was $3 million or $4 million.
  • Foreign exchange negatively impacted quarterly results by $6 million due to the official exchange rate of Venezuela.

RCL Q2 2014 EARNINGS PREP

Consensus estimates, management guidance and commentary, and questions for management in preparation for the earnings release/call tomorrow.

 

 

Q2 2014 CONSENSUS ESTIMATES

  • Total revenues:  $1.987 billion
  • EPS $0.52

 

MANAGEMENT GUIDANCE

 

RCL Q2 2014 EARNINGS PREP - rcl 

 

QUESTIONS FOR MANAGEMENT

  1. What is the industry capacity increase in Europe for 2015? And RCL's European capacity in 2015?

  2. Is the European strength mostly coming from US sourced and Asian sourced customers -- or some other part of the World?

  3. Is Spain/UK still leading the way in European performance? 

  4. What about the impact from Israel/Gaza and Ukraine conflicts? Changes in Scandinavia/Russia deployments for 2015? Has the booking curve been more closer in for these itineraries?

  5. How are Celebrity's new onboard promotions doing?

  6. Is the Caribbean's heavy promotional state more of a demand or supply issue? 

  7. Which categories are driving onboard revenue growth e.g. casino, bar?

  8. Discuss early interest and booking activity for the new Australia based itineraries?

 

FORWARD LOOKING COMMENTARY

 

Asia

  • Continue to see strong yield growth on sailings in Asia even with the significant capacity increase in the region.

Onboard yields

  • Onboard yields... continued to see the benefits of fleet upgrades and onboard revenue management initiatives.

Booking volumes

  • Booking volumes have been accelerating. The past eight weeks have been much stronger, with bookings up more than 20% year-over-year. While the strong demand trends have been partially driven by promotions available for Caribbean sailing, RCL is also seeing elevated levels of quality demand for itineraries not being discounted. So as a result, book load factors and APDs for the year are higher than same time last year.
  • Demand from North America has been particularly strong at increasing prices and RCL already have more than 80% of their forecasted United States and Canadian revenue on the books.  This is considerably more than same time last year.

Caribbean

  • While RCL is seeing strong bookings for the Caribbean with recent booking volumes trending well above last year's levels, the environment remains very promotional.  The pressure on pricing has mostly been limited to seven night and shorter Caribbean itineraries as they are seeing continued yield growth on long Caribbean sailing.
  • Expect to see higher Caribbean load factors than last year during the summer. So, as Caribbean capacity for the industry is up more in Q2 than in all other quarters, it is subsequently where RCL expects to see their largest yield decline for the Caribbean.
  • Still expect Caribbean itineraries to be down slightly YoY.  RCL guidance expects continuation of our promotionally oriented Caribbean market environment for the remainder of 2014.

Europe

  • European sailings have exceeded expectations and are booked at significantly higher load factors and prices than the same time last year. Demand and pricing have been broadly strong for these itineraries with all key source markets trending ahead.
  • Finally starting to see a recovery in pricing from Southern Europe.  RCL expects European itineraries, which account for 22% of their capacity in 2014 to generate double-digit improvement versus 2013 and higher yields than 2008.
  • The percentage of guests booked on European sailings who have purchased their air through us has doubled year-over-year. An added benefit of our ChoiceAir program is that it increases the retention of the booking. Both our Mediterranean and Northern European products are at a higher book position than prior year and are driving elevated per diems with Mediterranean sailings doing particularly well.
  • One of the markets that RCL has been particularly pleased with is the Spanish market that seems to have picked up quite nicely. And seeing strength out of the U.K. and Irish market as it relates to pricing.

Asia-Pacific

  • Continue to exceed both pricing and volume expectations. China sailings which represent about 1/3 of this capacity are expected to generate double-digit yield improvement.  This is in spite of a 30% year-over-year capacity increase in the market.
  • 2014 summer China season is booked far ahead of the same time last year at higher rates.

Quantum of the Seas

  • Currently in a very encouraging booked position in terms of both load factor and pricing

Alaska

  • Alaska yields to increase in the low to middle single digit range and to be similar to yields in record 2011 season.

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PENN Q2 2014 EARNINGS PREP

Consensus estimates, management guidance and commentary, and questions for management in preparation for the earnings release/call tomorrow.

 

 

Q2 2014 CONSENSUS ESTIMATES

  • Total revenues:  $649 million
  • EBITDA: $77 million
  • EPS $0.07

 

MANAGEMENT GUIDANCE

 

Q2 2014

  • Revenues:  $640.5m
  • EPS:  $0.06
  • EBITDA:  $75.9m

FY 2014

  • Revenues: $2.5138 bn
  • EPS:  $0.12
  • EBITDA:  $256.2m

 

QUESTIONS FOR MANAGEMENT

  1. What's the latest on Sioux City? Shouldn't it be classified as discontinued operations?

  2. July trends?

  3. IL VGT competition is pressuring the brick-and-mortar casinos but should it ease as less and less new machines will be added later this year and in 2015?

  4. Penn National (PA) had an awful quarter on gaming revenues. Is the PA market coming to maturity?

  5. Any new initiatives on the Charlestown property ahead of Horseshoe Baltimore opening?

  6. If slots at racetracks are approved by voters this fall in Nebraska, would PENN look to enter the Council Bluffs market?
  7. Any more cost cutting left?
  8. Thoughts on MA referendum and hurdles to getting Plainville open? 

 

FORWARD LOOKING COMMENTARY

 

Business conditions

  • Consumer environment remains very challenged and fragile, similar to what PENN experienced the second half of 2013. Most notably, at the lower end work segments of the database below $100 where they continue to lose visitation and trips.
  • Are actually seeing some nice trends at the $400-plus segment (VIP segment)
  • Visits are down. Spend is largely either flat or, in many cases, up as you work up the database.  Newer markets are holding up fine, but some of the more mature markets are soft.
  • About 50% of the lowered guidance is two properties in particular - Lawrenceburg and Charles Town.

New Developments

  • Openings this fall of PENN's VLT racing operations in Dayton and Mahoning Valley, both in Ohio. They are right on schedule and on budget for early fall openings.
  • Started construction on Plainville in March and expect to open this facility in 2Q 2015.
  • Started construction with the Jamul Indian Village of PENN's development that is expected to open in the early part of 2016.

Corp expense

  • The 20% reduction year-over-year is sustainable for the remainder of the year.

Margins

  • Margins will hold at existing levels throughout the year

Maintenance capex guidance

  • $80 million for FY 2014

IL VLT

  • As recent as March of 2014, those video gaming terminals represented 27% of overall gaming revenue in the state and to the tune of $53 million in the month of March. So these are certainly acting as parasites on the bricks and mortar business in the state of Illinois and you will continue to see supply reduction consideration in markets like those and others where visitation trends continue to be a bit of a concern.

Tunica competition

  • A lot of that Memphis business previously visited the Tunica market 8 years ago. 
  • Arkansas clearly has taken a big bite out of the Tunica market

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P: Shot Across the Bow

Takeaway: We expect a 2Q14 beat & raise, but we caution not to confuse this for the long-term story, which has a shorter runway than many believe.

SUMMARY

This is the summary version of our current thoughts on P.  In short, we have a cautious view of P's long-term runway.  We believe listener hours for its core ad-supported product will see pressure as the runway for new user growth isn't long enough to compensate for its churning members.  We understand there are additional opportunities from both car & local advertising, but we're not sure it will be enough to produce the 30% growth that consensus is expecting for both 2015 & 2016.  We are NOT short yet, given upside we see to 2Q14 revenues and 2014 guidance, but we will be looking for an entry point on the short side as we move closer to 2015. Until then, we'll continue to round out our analysis, and provide updates along the way.  

 

NEAR-TERM OUTLOOK (2014)

  1. 2Q14 REVENUES LOOKING STRONG: P’s monthly disclosures are showing a significant increase in listener hours (despite a user growth slowdown) as the company comps the mobile listening cap that ran from 3/13 to 8/13.  Factor in a considerable increase in ad load (see below), and a 50% increase in sell-through rates on its audio ad inventory, and we can see 10% upside to 2Q14 metrics. 

  2. 3Q14/2014 GUIDANCE UPSIDE?: We're expecting P's prospects to fade as we move through 2014 as it comps out of both its mobile listener cap and increased ad load in August.  We're expecting a 2014 guidance raise, largely because of a 2Q14 beat.  And even though we see some upside to 3Q14 currently, management may play it safe on the 3Q guidance release.  In short, if P raises guidance, it may be uninspiring.  

  

LONG-TERM OUTLOOK (2015 - )

  1. ACTIVE USERS TO DECLINE?: The question is when, but we expect low single-digit user growth to pressure investor sentiment before that occurs.  P has glaring retention issues.  Over the last +3 years (1Q11-1Q14), P has added at least 160M registered accounts, yet only gained 46M active accounts.  In turn, P’s churn (114M) has outpaced retention during this period.  But the bigger issue is its shrinking runway; with +250M registered accounts, and +160M added since 1Q11, the headroom for new account growth may not be large enough to offset its churning members for much longer.

  2. TUG OF WAR: P will need to continue increasing ad load to drive the 30% growth the street is expecting for both 2015 & 2016.  But rising ad load could exacerbate its retention issues.  P’s audio and video ads are intrusive; more ads could limit existing listener hours per user and/or incite even greater churn, especially in the wake of growing competitive threats.  If listener hours decline, one of two events occurs: P’s ad inventory declines alongside declining listener hours, or that increased inventory gets pushed on to its more active users, which will test their loyalty as well.  

 

NEAR-TERM CHART SERIES & ANALYSIS

 

Comping the Mobile Listener Cap in 2Q14 

P initiated a mobile listening cap for its free ad-supported service from 3/13-8/13. During this period, we estimate that ad-supported listener hour growth decelerated sharply, while per-user hours declined.  P's 2Q14 monthly disclosures suggest that trend appears to be reversing; total hours are accelerating despite slowing active user growth, as per-user hours are comping against the first full quarter of the mobile-listening cap.  

 

P: Shot Across the Bow - P   Ad supported hours 3

 

Ad RPMs Growth to Decelerate, But Increasing Ad Load Should Help

There is an inverse relationship between growth in RPMs (revenue per thousand minutes) and listener hours, suggesting a 2Q14 surge in listening hours may come with declining RPMs.  However, P increased its max ad load/hr in August 2013 (4 to 6), but more importantly, altered its ad feed (from 1 ad/15 min to 2 consecutive ads/20 min).  In short, some users are seeing considerable increases in ad loads, in some cases 100% higher. Management also stated that the sell-through rates on audio ads are up 50% y/y, so even though we expect a sharp deceleration in Ad RPMs, we still expect an increase y/y from the increased ad load.

 

P: Shot Across the Bow - P   RPM vs. Hours

P: Shot Across the Bow - P   Ad Load distribution

 

 

Upside in 2Q14 Will Wane Therafter

Surging growth in listener hours, and a likely y/y increase in RPMs, suggest meaningful upside to 2Q14.  We're expecting advertising revenue will accelerate in 2Q14, leading to total revenues of $235M (up 49% y/y) vs. consensus of $219 (up 38% y/y).  But after 2Q14, P will lose the y/y comp benefit of both its increased ad feed (August) and the listener cap (September).  Further, subscription revenue growth could see incremental pressure since P is no longer providing annual contracts (March 2014), which has created a mild uproar among existing subscribers (696 comments link).  Note its subscription price increase currently only applies to new members.

 

 P: Shot Across the Bow - P   HRM vs.

 

LONG-TERM CHART SERIES & ANALYSIS

 

Churn Appears to be a Recurring Theme

We can’t calculate P’s churn rate explicitly because the company stopped providing metrics for actual registered users in 2Q11.  Before that period, the math was pretty clear; following that period, we have to take a cumulative view of what has happened over the past +3 years, which we detail in the chart below.  P’s churn (114M) has outpaced its retention (46M) during this period.  Some users have multiple accounts, which could be partly to blame, but likely not enough to explain such high levels of churn (unless each of those active users averaged ~3.5 individual accounts).  Churn has gone under the wire since new account growth (registrations) has outpaced its churn, but that cannot continue indefinitely.  

 

P: Shot Across the Bow - P   Attrition 

 

Less Room for New Account Growth = Churn To Become More Evident

P has over 250M registered accounts, but there is definitely some double-counting of users (multiple accounts) in its account metrics since there are only 245M people in the US ages 10-69, which is likely its target market.  But remember that over 160M of its +250M accounts registered in 1Q11-1Q14.  So the better question is how many duplicate accounts were created during this period? The impetus to having multiple accounts is likely tied to P's listener caps, which only existed for 15 of the 39 months in this period., So while multiple accounts are definitely a driver, we question if its a material percentage; particularly in the more recent periods. But we still have work to do here, since answering this question is the key to breaking down P's realistic headroom, and whether the runway for new account growth can continue to compensate for churn.  Stay tuned.  

 

 

Rising Ad Load Will Exasperate Retention/Listener Issues

We estimate that ad-supported hours per/user declined marginally y/y on relatively clean comps in 4Q13 and 1Q14 (despite the easier comp from 1Q13 from one-month of the cap). We suspect P's adjusted ad feed (2 consecutive ads every 20 min from 1 ad every 15 min prior) may be partly responsible.  For example, we estimate the average ad-supported user listens ~40 minutes daily.  If turn, P has actually doubled the ad load for those users (4 ads in 40 minutes today vs. 2 ads prior).  This isn't as much of an issue now, but casts doubts as to whether P can stick to its stated strategy of gradually increasing ad load...without pressuring listener hours at the same time, which appears to be the case over the last 2 quarters.  Its important to remember that P's ads are intrusive, and the Pandora user as isn't captive as it once was given growing competition for listener hours from emerging threats.  

 

P: Shot Across the Bow - P   Ad hours decline 

 

CONCLUSION

Once again, this is the summary version of our current thoughts on P.  As always, we will be publishing additional notes with incremental data and analysis in the coming weeks & months.  In the interim, let us know if you have questions, or would like to discuss in more detail.

 

 

Hesham Shaaban, CFA

@HedgeyeInternet


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