Evolution AB, Novartis, Alphabet - Q2'23 Earnings review
Evolution AB, Novartis, Alphabet - Q2'23 Earnings review
1. Evolution AB Q2’23 Earnings
Results
Source: Koyfin (affiliate link with a 15% discount for StockOpine readers) | We personally use Koyfin on a daily basis to screen for stocks, extract financial data and ratios, read earnings transcripts and run peer comparisons.
Revenues of €441.1M, increased by 28.2% (33.5% for Live Casino and -4% for RNG).
Live Casino accounts for 84% of total sales
RNG increased 5.8% on reported figures but declined 4% on pro-forma figures (Nolimit City was acquired in 2022)
EBITDA of €311.7M, increased by 30.8% - EBITDA margin of 70.7% Vs 69.3% in Q2’22.
Operating Profit of €281.5M, increased by 31.2% - Operating margin of 63.8% Vs 62.4% in Q2’22.
Profit for the period of €264.1M, increased by 31.5% - Profit margin of 59.9% Vs 58.4% in Q2’22.
Source: Evolution, Q2’23 presentation
Balance sheet
Cashflow from operating activities of €233.8M (Vs €185.5M) – Margin of 53% (53.9%).
Free cash flow of €223.2M (Vs €170.7M) – Margin of 50.6% (49.6%).
Strong balance sheet with Cash and Cash equivalents of €541.7M (€293.9M Q2’22) compared to lease liabilities of €79.9M (nil debt).
Outlook
RNG was supposed to grow by double-digits on a long-term basis, yet Martin Carlesund, CEO indicated that this will take more time than initially anticipated. RNG is accretive to margins.
Roadmap of +100 games is intact (more than half in H2) with few interesting games announced.
“And as I said earlier in this presentation, we're already working on the road map for 2024 and creating the most advanced and large game show ever seen in the history of iGaming. Exciting times ahead.” Martin Carlesund, CEO
Other highlights
New live casino studios in LatAm such as Argentina (launched) and Columbia (planned).
Launch of Funky time (mid-May) – Looking at players reported by iGaming Tracker it appears that the launch is successful.
Source: iGaming Tracker Limited, Live Casino Player Numbers - Hourly Chart (igamingtracker.com)
Largest market is Europe ~40% of total sales which grew by 15%, followed by Asia ~37% which grew by 48%. The fastest growing region is Latin America which grew by 61% (~7% of sales).
Game rounds index – shows the development of game rounds played weighted by revenue contribution (measure of activity in its network) → Grew by 56% y/y (higher than revenue) → Why?
“The high growth in game rounds versus revenue partly reflects the volume of new players from new regions coming in with low bet sets.” Martin Carlesund, CEO
Source: Evolution, Q2’23 presentation
Final thoughts
Pros:
Growth and margins remain healthy: a) above the assumptions implied in our valuation and b) EBITDA margin is in the higher end of the 68%-71% guidance.
LatAm and Asia growth show that EVO is capitalizing on the opportunity.
Cons:
North America’s revenue declined sequentially but y/y growth is still at 20%. A key catalyst will be the legalization in a new state (such as Illinois or Indiana) yet expansion of portfolio to existing states (already executing) is also important.
Reported undersupply in Europe in tables (demand exceeds capacity) but management is aware and is focused to resolve it.
Overall, a solid quarter!
If you are interested to learn more about Evolution, here is our in-depth write-up (Dec 2022): Evolution AB – A ‘sin’ stock with healthy returns
2. Novartis AG Q2’23 Earnings
Results
Source: Koyfin (affiliate link with a 15% discount for StockOpine readers)
Revenues of $13.6B, increased by 7% (+14% volume, -2% price, -3% generic impact = 9% in constant currency)
Innovative Medicines (IM) Revenues of $11.2B, up by 7% (+15% volume, -2% price, -4% generic impact = 9% in constant currency).
Key contributors:
Entresto sales of $1.52B, up by 37% or $391M
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Kesimpta sales of $489M, up by 105% or $250M
Pluvicto sales of $240M, up by $230M
Kisqali sales of $493M, up by 66% or $185M.
Of the 8 multi-billion brands mentioned in our write-up, namely, Cosentyx (Immunology), Entresto, Leqvio (Cardiovascular), Zolgensma, Kesimpta (Neuroscience), Kisqali, Pluvicto (Solid Tumor) and Scemblix (Hematology), all are doing great except Cosentyx which was flat at $1.27B and Zolgensma which declined by 18% to $311M.
Source: Novartis Q2’23 Presentation
Core Operating Income of $4.7B, increased by 9% - Core Operating margin of 34.3% Vs 33.4% in Q2’22.
Operating Profit of $2.9B, increased by 31% - Operating margin of 21.4% Vs 17.4% in Q2’22.
Profit for the period of $2.3B, increased by 37% - Profit margin of 17% Vs 13.3% in Q2’22.
Balance sheet
Cashflow from operating activities of $3.6B (Vs $3.8B) – Margin of 26.3% (29.4%).
Free cash flow of $3.3B (Vs $3.5B in Q2’22) – Margin of 24% (27.4%).
Net Debt (incl. leases) increased to $17.3B as of 30 June 2023 compared to $9.2B as of 31 December 2022 mainly due to the annual dividend payment of $7.3B in Q1 and buybacks of $5.8B. Net debt to EBITDA is at a healthy 0.8x.
Credit ratings remained at A1 with Moody’s and AA- with S&P.
Outlook
Guidance* was revised upwards for a second consecutive quarter. Group sales (incl. Sandoz) are expected to grow in the high-single digits (from mid-single digits) and Group Core operating income is expected to grow in the low-double digits (from high-single).
*assumes that no Entresto (~13.5% of IM sales in Q2’23 of which ~50% are in US) generics launch in US or Sandostatin (~2.9% of IM sales in Q2’23) ones enter the US.
Source: Novartis Q2’23 Presentation
Other highlights
Announced a new $15B buyback program (~7% of market cap).
Novartis received a negative decision from the U.S. District court of Delaware to uphold validity of Entresto combination patent (8,101,659) which expires on July 15, 2025 and will appeal the decision. Currently, no generics have tentative or final approval in the US. Considering the importance of Entresto on its growth strategy, developments on this front should be closely monitored.
“As we stated, we continue to not expect generics to launch at risk given the risk of trouble damages in such a brand of this size as well as the strength of we believe our case on appeal. That said, we feel confident that in the midterm, we'll continue to hit our 4% sales and 40% margin guidance for the company ex Sandoz, as Harry outlined. And that wouldn't require us to take any additional cost out because we had already assumed Entresto would go in mid-2025 as our forecasting assumption.” Vasant Narasimhan, CEO
Key 2023 readouts are on track, while Kisqali (+$3B potential) met the primary endpoint at interim analysis.
Source: Novartis Q2’23 Presentation
Acquisition of Chinook announcement for $3.5B, a clinical-stage biopharmaceutical company with two high-value, late stage assets in development for IgA nephropathy (rare and severe kidney disease).
Novartis builds on neuroscience pipeline and xRNA platform capabilities with acquisition of DTx Pharma for $500M (+$500M conditional) which is in line with its strategy of prioritizing 5 technology platforms, one of them being xRNA.
Agreement to divest ‘front of eye’ ophthalmology assets to Bausch + Lomb for $1.75B (+750M milestone payments) in line with focus on 5 therapeutic areas.
Board endorsed the Sandoz spin-off. It was also noted that the dividend will not be rebased post the transaction.
Final thoughts
Pros:
Guidance was revised upwards.
Core operating income of IM was 39% (vs 37.2% in Q2’22) while Novartis ex-Sandoz margin reached 37.7% (Vs 34.7% in Q2’22). Novartis steadily moves towards the +40% Core Operating Margin (incl. corporate costs) mid-term target.
Management actions show that it executes on its transition to a ‘pure-play’ innovative medicine company.
Cons:
Entresto patent negative decision – In general impact from generics can be huge. For instance, Gilenya was down by 57% in H1 2023 after generics entered the US in Oct 2022.
Stabilization of Cosentyx revenue (the second largest drug, ~9% of sales) – growth across all regions of 18% in constant currency, offset by a decline in US by 12%.
A decent quarter. Over the short-term our key concern is the final outcome for Entresto, yet we acknowledge that management will fight to protect its interests. Moreover, Novartis has a large pipeline of drugs and few important readouts in 2023 to offset such impact over the long-term.
If you are interested to learn more about Novartis, here is our in-depth write-up (Nov 2022): Novartis AG – Write up
3. Alphabet Inc. Q2’23 Earnings
Results
Source: Koyfin (affiliate link with a 15% discount for StockOpine readers)
Revenues of $74.6B, increased by 7% (9% on constant currency basis).
Source: StockOpine analysis, Alphabet Earnings Release Q2’FY23
Google search and other revenue growth accelerated to 4.8%, compared to 1.9% in Q1’23, driven by increased demand in Retail sector.
YouTube Ads returned to growth, up 4% (previously down 3% in Q1’23). Considering the negative impact from strong growth in YouTube subscription (ad-free tier) as well as the increasing watch time of YouTube Shorts which is less monetized than other content, we believe that the growth achieved is sufficient.
Google Network experienced a decline of 5%, an improvement from the previous quarter's decrease of 8.3%. While the negative growth is a concern, the trend is heading in the right direction. Management did not elaborate further on the declining revenues.
Total Google advertising (the first 3 categories in the above table combined) revenue saw an increase of 5.5%. Growth falls short of Meta’s ad revenue growth of 11.9% which has seen Reels monetization growing to a run rate of +$10B (Vs $3B in last fall).
Google Other revenue achieved an impressive growth of 24%:
This growth was led by strong performance in YouTube subscription revenues. Management reported 80 million subscribers in Q4’22, and the momentum continued in both Q1’23 and Q2’23.
Google Play also returned to growth due to an increase in the number of buyers.
The launch of Pixel 7a positively impacted hardware sales, further reinforcing revenue growth in this segment.
Google Cloud continues its momentum with a remarkable revenue growth of 28%. Google Cloud Platform (GCP) experienced even stronger growth, surpassing the overall growth of Google Cloud. This suggests that GCP is gaining market share, competing favorably with Microsoft’s Azure and other cloud services, which grew at 26%.
Operating Income of $21.8B, increased by 12.3% - Operating margin of 29.3% Vs 27.9% in Q2’22. However, the quarter included $966 million depreciation benefit (~1.3% of revenues) from the revision of the estimated useful life of server and network equipment and $69 million of severance and employee charges announced in January.
EBITDA margin of 33.8% Vs 33.5% in Q2’22.
Profit for the period of $18.4B, increased by 15% - Profit margin of 24.6% Vs 23% in Q2’22.
Segment profitability:
Google Services* (the first 4 categories in the above table combined) operating income of $23.5B, up 8%, and operating margin of 35.4% Vs 34.4% in Q2’22
Google Cloud continued growing profitability with $395 million in operating income, margin of 4.9% Vs -9% in Q2’22
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Balance sheet
Strong balance sheet with Cash and Cash equivalents and Marketable securities of $118B compared to long-term debt and lease liabilities of $27B.
Operating cash flow increased to $28.7B (Vs $19.4B) - Margin of 38.4% (27.8%). This significant increase compared to the prior year is mainly due to the deferral of certain tax payments to Q4’23.
Free cash flow of $21.8B (Vs $12.6B) – Margin of 29.2% (18.1%).
Other highlights
For GCP, management continues to see moderation in the rate of consumption growth as consumers optimize their spend.
Google Workspace growth continues to be driven by increase in seats and revenue per seat.
An important statistic shared by Sundar Pichai is that 70% of Generation AI unicorns are Google Cloud customers.
Users engaging with YouTube Shorts continue to increase, with over 2 billion logged-in users every month, up from 1.5 billion 1 year ago. YouTube reaches more than 150 million people on connected TV screens in the U.S., while it is gaining momentum internationally.
For YouTube Ads, management observed ongoing signs of stabilization in advertiser spending, while subscription growth remains strong.
CFO Ruth Porat highlighted, "We are prioritizing product focus on increasing quality consumption of video content with both Shorts and in the living room, which is translating into improved monetization. Second, within other revenues. In our YouTube subscription products, the sustained, strong growth in revenues reflects significant subscriber growth. Last week, we increased subscription prices for YouTube Music and Premium, which underscores the value of the products."
In other revenue, there was a timing benefit due to the launch of Pixel 7a in Q2’23 compared to the launch of Pixel 6a, which occurred in the third quarter of 2022. This will act as a headwind in the next quarter.
CFO, Ruth Purat is stepping down and she will assume the newly created role of President and Chief Investment Officer while she will continue to lead the Company until the Company finds her replacement. Ruth has been serving as CFO of the Company since 2015.
Brain* team of Google Research has been combined with DeepMind, therefore costs associated with the Brain team, which were previously included in Google Services, are now reported as part of unallocated corporate costs.
Investments in infrastructure to support AI is driving CAPEX higher.
“We expect elevated levels of investment in our technical infrastructure increasing through the back half of 2023 and continuing to grow in 2024. The primary driver is to support the opportunities we see in AI across Alphabet, including investments in GPUs and proprietary TPUs as well as data center capacity.” Ruth Porat, CFO
Final thoughts
A solid quarter for Alphabet, presenting a quarter of promising prospects. Key highlights include the acceleration of Google Search revenue, Google Cloud's increasing profitability and market share gains, robust growth in YouTube subscriptions, the return of YouTube Ads to growth, and the recovery of Google Play.
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