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Keith's Macro Notebook 2/6: USD | UST 10YR | China

Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.


P: Walking the Plank (4Q14)

Takeaway: P gave itself some breathing room, but likely not enough. More importantly, the much bigger risks are approaching.

KEY POINTS

  1. 4Q14 WORSE THAN IT LOOKED: P missed 4Q14 revenue estimates by 3% on a shortfall in advertising revenue from three industry groups with seasonally stronger 4Q ad spend; the question is why?  Also, P saw accelerating user growth in 4Q, but it was coming off a deflated 4Q13 comp; a quarter that we believe P experienced heightened attrition.
  2. BOUGHT SOME BREATHING ROOM, BUT: Management took the smarter route and rebased expectations, guiding to 2015 revenues of $1.16B at midpoint (vs. $1.20B for consensus).  However, management appears to be hinging part of its outlook on its expectation for mid-teens listener hour growth in 2015, a setup we believe is highly unlikely.
  3. THE BIGGER RISKS REMAIN: We continue to expect users to decline on a y/y basis in 2015 since P’s remaining TAM isn’t large enough to supports its heightened attrition issues.  Meanwhile, Webcaster IV will remain an overhang on the stock.  As a reminder, anything short of a best-case scenario for P on Webcaster IV could derail its entire business model.  Click the note links below for more detail.

 

4Q14 WORSE THAN IT LOOKED

P missed 4Q14 revenue estimates by 3% on a shortfall in advertising revenue; specifically from Retail, Telecom, and Consumer Electronic advertisers.  However advertising spend across these three groups is seasonally higher in the 4Q, so the question is why was P seeing pressure here? We're not sure if this is a sign of wavering demand, or a one-off instance, but a concern nonetheless. 

 

The bright spot from the quarter was its accelerating user growth.  However, the acceleration is coming off what we believe to be a deflated comp in 4Q13, which is when we suspect P experienced heightened level of attrition.  Back in August 2013, P altered its ad feed from 1 ad/15 minutes to 2 ads/20 minutes, and increased its max ad load at the same time.  In turn, P saw its sharpest y/y deceleration in active user growth in its reported history in 4Q13; likely a result of ad load pushing the user away.  So we wouldn't read into the 4Q14 acceleration

 

P: Walking the Plank (4Q14) - P   Active User Deceleration 4Q14

 

BOUGHT SOME BREATHING ROOM, BUT

Management took the smarter route and rebased expectations, guiding to 2015 revenues $1.16B at midpoint (vs. $1.20B for consensus).  However, management commentary during the call suggests that the company appears to be hinging part of its outlook on its expectation for mid-teens listener hour growth in 2015, a setup we believe is highly unlikely.

 

As we detail in the note below, we're expecting users to decline in 2015.  P has long history of heightened attrition, and our TAM analysis suggests P's remaining TAM will not be able to compensate for much longer.  

 

P: New Best Idea (Short)

12/22/14 03:56 PM EST

[click here]

 

Our scenario analysis below suggests that P would require a sharp acceleration in Ad RPMs to hit revenue guidance if it can't produce double-digit listener hour growth as management expects.  However, accelerating Ad RPMs would likely mean increasing sell-through on idle inventory (i.e. increasing ad load), which we believe would exasperate its retention issues further.  In short, P's core growth drivers are working again each other.

 

P: Walking the Plank (4Q14) - P   Ad Business Model 

P: Walking the Plank (4Q14) - P   2015 Scenario Analysis Guidance

 

THE BIGGER RISKS REMAIN

As we mentioned above, we continue to expect users to decline on a y/y basis during 2015 since P’s remaining TAM isn’t large enough to supports its heightened attrition issues.  We suspect that would crush investor sentiment whenever that occurs. 

 

Meanwhile, Webcaster IV will remain an overhang on the stock.  As a reminder, anything short of a best-case scenario for P on Webcaster IV could derail its entire business model.  Click the note links below for more detail.

 

P: Webcaster IV = Powder Keg

01/13/15 02:49 PM EST

[click here]

 

 

Let us know if you have any questions or would like to discuss in more detail.

 

Hesham Shaaban, CFA

@HedgeyeInternet 


CCL: SOURCE MARKETS

Takeaway: Carnival may not be sourcing as much from North America as previously thought

Chart Of The Day: Analysis of Carnival's revenue by source market in 2014


  • Digging into CCL's 10K, we found that sourcing from Europe actually accounted for a greater proportion of CCL's revenues in 2014 vs 2013 - 36.7% of revenues came from the European source markets in 2014, up 1.6 points from 2013.
  • Better European pricing vs poor Caribbean pricing in 2014 had some impact but this was still a surprise as it suggests sourcing inflexibility in Europe. 
  • CCL had a strong performance in Europe thanks to Costa in 2014. CCL's European capacity on an ALBD basis decreased 2% points YoY in 2014.
  • Out of the 3 major cruise lines, Carnival Corp maintains the highest exposure to the European consumer given its large fleet of ships. The chart below suggests that Carnival Corp is even more reliant on the European consumer and if demand trends deteriorate there in 2015, it could have an outsized effect.  

  

CCL: SOURCE MARKETS - ccc


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LEISURE LETTER (02/06/2015)

TICKERS: SGMS, RCL

 

EVENTS

  • Feb 10: 
    • IGT extraordinary shareholder meeting vote
    • HOT 4Q CC 10:30am
      • (1866) ; pw: 67514695
  • Feb 12: 
    • MPEL 4Q CC 8:30am
      • (1866) ; pw: MPEL
    • PNK 4Q CC 10:00am
      • ; pw: 68847867
    • BYD 4Q CC 5:00pm
      • ; pw: 5378350
  • Feb 17: MGM 4Q CC 11:00am
    • ; pw: 8870181
  • Feb 18: 
    • HYATT 4Q CC 11:30am
      • ; PW: 62845475
    • MAR 4Q release 5pm
  • Feb 19:
    • HST 4Q CC 9:00am
  • Feb 25: Prestige analyst day (9:00am-12pm)

HEADLINE STORY 

China  Hua Jingfeng, a deputy bureau chief at the Ministry of Public Security, said illegal gambling remained a problem even though the government was "forcefully keeping it in check". "Some foreign countries see our nation as an enormous market, and we have investigated a series of cases," Hua told reporters.

 

"A fair number of neighboring countries have casinos, and they have set up offices in China to attract and drum up interest from Chinese citizens to go abroad and gamble. This will also be an area that we will crack down on."

 

Casinos are not allowed to legally advertise in mainland China, but operators have skirted around the issue by promoting the resorts where the casinos are located.  Hua said the government was also seeking to crack down on a "small number" of police and government officials who are guilty of collusion in covering up gambling and providing an umbrella of protection for it.

Article HERE

Takeaway:  Manila, South Korea, Cambodia, etc. might not get the big boost expected from incoming Chinese gamblers 

COMPANY NEWS

Novomatic- The gaming equipment supplier says that according to preliminary data, revenue for 2014 generated by its three holding companies totaled EUR3.8 billion (US$4.4 billion), +8% YoY.  

 

The firm said in a statement: “During the financial year 2014, the group‘s continued growth was based on the intensification of activities in the European core markets such as the U.K., Spain, Italy and also Holland, where through acquisitions the company has achieved a position as market leader.

Article HERE

 

SGMS - As part of its association with global gambling operator bwin.party, Scientific Games has initiated the distribution of a selected group of its online slots to the residents of New Jersey. From February 2015, the registered players of Borgata Casino and the New Jersey arm of PartyPoker will have access to SG video slots.

Article HERE

 

RCL - arranged financing for its fourth Oasis-class ship at STX France, which cut steel for the newbuild this week. The unsecured term loan is for an amount up to the US dollar equivalent of approximately €931m. The financing is fully guaranteed by France's export credit agency, Compagnie Française D’Assurance pour le Commerce Extérieur. The 12-year loan, to be assigned to Royal Caribbean once the ship is delivered in the second quarter of 2018, will amortize semi-annually. At the company's election, interest will accrue at a fixed rate of 3.72% or at a floating rate equal to LIBOR plus 1.1%. 

Article HERE

 

 

INDUSTRY NEWs

 

Japan – Japan’s government has tapped Innovation Group to aid in the study as part of a team of industry advisors led by Deloitte Touche Tohmatsu.

The research will include advice for implementing gaming regulations, practices from similar jurisdictions, background on problem gaming programs, anti-money laundering approaches and the financial impacts from competing jurisdictions.

MACRO 

Hedgeye Macro Team remains negative Europe, their bottom-up, qualitative analysis (Growth/Inflation/Policy framework) indicates that the Eurozone is setting up to enter the ugly Quad4 in Q4 (equating to growth decelerates and inflation decelerates) = Europe Slowing.

Takeaway:  European pricing has been a tailwind for CCL and RCL but a negative pivot here looks increasingly likely in 2015.


TWTR: Perfectly Played (4Q14)

Takeaway: We played this release wrong, and management played it perfectly. Our short may be long in the tooth, but TWTR isn't out of the woods yet.

KEY POINTS

  1. 4Q14 LOOKED MUCH BETTER: Outside of the sputtering MAU growth metrics, we saw some marginal improvement across the metrics that were concerning us the most.  TWTR is not out of the woods by any stretch, but it doesn’t appear to be getting worse.
  2. AND MANAGEMENT PLAYED IT PERFECTLY: Management explained away the MAU weakness, while pointing to a positive inflection 1Q15.  Management also managed consensus expectations by explicitly quantifying its non-recurring 2014 tailwinds (e.g. World Cup). 
  3. SHORT MAY BE PLAYED OUT, BUT TREAD CAREFULLY: We still do not believe TWTR can hit 2015 estimates without M&A support, and the additional $1.8B raise suggests that may be the plan.  But without a hard catalyst in site, it may be time to walk away from this one.  We'll be monitoring consensus estimates, and reassessing our position from here.

 

4Q14 LOOKED MUCH BETTER

The biggest blemish from the quarter was the lack of US user growth.  Outside of that we did see some marginal improvement in some of the key metrics that we concerning us the most. 

 

We also saw a widening spread between ad engagements and timeline views, which suggests improved targeting ability or increased ad load (management suggests both).  We also saw both ad engagements and pricing both accelerate on a sequential basis (at the same time) for the first time in TWTR’s reported history; suggesting that TWTR may not be as dependent on surging ad load to drive its model (at least this quarter).

 

TWTR: Perfectly Played (4Q14) - TWTR   Ad vs. user engagement 4Q14

TWTR: Perfectly Played (4Q14) - TWTR   Ad Engagement vs. Pricing 4Q14

 

AND MANAGEMENT PLAYED IT PERFECTLY

The MAU weakness was explained away by pointing to the iOS 8 integration that essentially cut third-party MAU metrics by 4M, while at the same time, pointing to a positive inflection in MAU metrics in 2Q15 to-date.  Further, management approached 2015 guidance by quantifying the non-recurring tailwinds in 2014 (e.g. the World Cup essentially doubled its sequential revenue growth rate in 2Q14).  

 

TWTR: Perfectly Played (4Q14) - TWTR   Ad Rev Ex

 

SHORT MAY BE PLAYED OUT, BUT TREAD CAREFULLY

Management essentially guided inline, with revenues at the midpoint of $2.33B vs. consensus of 2.30B.  We were expecting $2.17B, and really haven't seen much to dissuade us form our estimates.  

 

Despite the marginal improvement we highlighted above, TWTR still really hasn't shown us much to suggest that it's found an answer to comping past the 2Q13 Supply Shock; especially since we now realize how much of its 1H14 ad revenues were juiced by one-time events

 

TWTR: Perfectly Played (4Q14) - TWTR   Growth Drivers 4Q14

 

However, the big variable is M&A.  TWTR essentially doubled its cash balance after raising an additional $1.8B last quarter.  With $3.6B in cash, mgmt attempt to fill the void inorganically.  We're not sure the street will be willing to pay up for that (e.g. its 3Q14 release).

 

But without a hard catalyst in site, it may be time to walk away from this one.  We'll be monitoring consensus estimates, and reassessing our position from here.

 

 

Let us know if you have any questions, or would like to discuss in more detail.

 

Hesham Shaaban, CFA

@HedgeyeInternet


February 6, 2015

February 6, 2015 - Slide1

 

BULLISH TRENDS

February 6, 2015 - Slide2

February 6, 2015 - Slide13

February 6, 2015 - Slide3

February 6, 2015 - Slide4

February 6, 2015 - Slide5

 

BEARISH TRENDS

February 6, 2015 - Slide7

February 6, 2015 - Slide8

February 6, 2015 - Slide9

February 6, 2015 - Slide10

February 6, 2015 - Slide11
February 6, 2015 - Slide12


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