5 Notable Earnings Results from Q3 2021 (Part 1)
In this article, I summarise earnings results from five US companies: Palantir Technologies, GoodRx, Upwork, Bumble, and ResMed.
Earnings season is always a busy time of the year where we get updates from companies on their financial and operational performance over the past quarter. After reading through the Q3 earnings reports and conference calls from 20+ companies either in my personal investment portfolio or on my watchlist, here were five notable results that stood out.
Palantir Technologies (NYSE:PLTR) - Demonstrating Significant Traction in Commercial Markets
Palantir is an American Software as a Service (SaaS) business that help organisations integrate and make decisions from data. Their product offering includes: (1) their Gotham platform which is targeted towards governments and (2) their Foundry platform which is targeted towards commercial enterprises. Palantir has attracted somewhat of a cult following amongst retail investors due to their secretive nature and because one of their co-founders (Peter Thiel) is a famous venture capitalist, renowned for being part of the ‘PayPal Mafia’ and the first outside investor in Facebook (now Meta).
Here were some of the highlights from Palantir’s Q3 results:
Revenue increased to $392m (+4% Q/Q; +36% Y/Y), which beat their internal guidance of $385m.
Commercial revenue increased to $174m (+21% Q/Q; +37% Y/Y), which was the fourth straight quarter of accelerating growth.
US commercial revenue increased 103% Y/Y over Q3 2020.
Commercial customer count increased 46% Q/Q over Q2 2021, indicating their growing traction amongst startups and SMEs.
Total remaining deal value increased to $3.6b (+6% Q/Q; +50% Y/Y), of which commercial remaining deal value increased to $2.2b (+101% Y/Y).
Non-adjusted gross margin of 78% (up Q/Q from 76% in Q2 2021).
Operating cash flow of $101m, up from ($52m) in Q3 2020.
2021 adjusted free cash flow guidance increased from $300m+ to $400m+.
Stock-based compensation decreased to $184.8m (down from $232.7m in Q2 2021 and $847.0m in Q3 2020).
One of the main reasons Palantir sold off after earnings was that their government revenue decreased 6% Q/Q from $232m to $218m (this still equates to +34% Y/Y growth). However, Palantir signed a number of new government contracts with the US Air Force and NIH throughout the quarter which should boost government revenues over the next few quarters. I find it amusing the changing narratives investors have on a stock. In previous quarters, investors criticised Palantir for being too reliant on government revenues (along with excessive stock-based compensation) and questioned whether their software would land with commercial clients. Well, in Q3, Palantir showed continued accelerating growth in commercial revenues and reduced stock-based compensation, but the stock sold off around 9% after earnings due to weaker than expected government revenues.
Palantir is not a cheap stock, trading at around 22x NTM estimated revenues, but this multiple has compressed around 50% from the highs in February 2021. It seems a fair price for a market leader with recurring high-margin revenue, an impressive founder-led management team, enormous room for growth with commercial clients, and long-term revenue guidance of 30%+ CAGR through to 2025.
GoodRx (NASDAQ:GDRX) - Becoming a Digital Health Powerhouse
GoodRx is an American digital health platform with a mission to make healthcare more affordable. Their lead generation mechanism is a popular free website and mobile app which tracks prescription drug prices throughout the US and offers a number of educational support resources (GoodRx Health). Their product offering includes: (1) a prescription medication savings program where GoodRx receives a referral fee from pharmaceutical benefit managers (PBMs) in return for attracting customers via discount coupons; (2) a telehealth offering and marketplace; and (3) a subscription membership program (GoodRx Gold) where customers receive greater discounts on prescription medications, telehealth consultations, and mail orders. GoodRx has fantastic product reviews and boasts net promoter scores of 90+ among both consumers and healthcare professionals.
Here were some of the highlights from GoodRx’s Q3 results:
Revenue increased to $195.1m (+10% Q/Q; +39% Y/Y), which was in line with their internal guidance of $193-197m.
Monthly active customers increased to 6.4m (+7% Q/Q; +31% Y/Y).
Subscription plans increased to 1.13m (+7% Q/Q; +68% Y/Y).
Subscription revenue increased to $16.2m (+13% Q/Q; +111% Y/Y).
Other revenue (includes telehealth revenue) increased to $23.2m (+33% Q/Q; +177% Y/Y).
Gross margin of 94.2% (up from 93.7% in Q2 2021; down from 94.6% in Q3 2020).
Adjusted EBITDA (which excludes lots of one-off stock-based compensation and income tax expenses) increased to $61.8m (+13% Q/Q; +16% Y/Y), representing a 31.7% margin.
Q4 forecasted revenue of $212-222m, representing an acceleration to 9-14% Q/Q growth and 38-45% Y/Y growth.
GoodRx is fast becoming the go-to digital health platform for consumers with increasing diversification across product lines. It trades at around 16x NTM estimated revenues, which represents around 45% multiple compression from the peak in late 2020. Analysts are forecasting 30%+ revenue CAGR through to 2024.
Upwork (NASDAQ:UPWK) - Turnaround Complete with New CEO at the Helm
Upwork is the world’s largest online marketplace for freelancers with dominant market share in the US. However, the share price has taken an interesting route since their IPO in October 2018. After going public at around $20 per share, poor execution from management, decelerating revenue growth rates, and COVID-19 disruptions sent the stock to around $5 per share in March 2020. However, a few months prior in January 2020, Upwork welcomed a new CEO, Hayden Brown, who has been the driving force behind a major turnaround for Upwork. On the back of accelerating growth rates and expanding margins over the past few quarters, Upwork’s share price rose to a high of almost $65 in July 2021. I’ve been a patient long-term holder of Upwork since November 2018, earning a respectable IRR of 57%.
Here were some of the highlights from Upwork’s Q3 results:
Gross services volume (GSV) increased to $904m (+3% Q/Q; +38% Y/Y).
Revenue increased to $128.1m (+3% Q/Q; +32% Y/Y), beating their internal guidance of $125-127m.
Total active clients increased to 752,000 (+4% Q/Q; +25% Y/Y).
GSV per active client of $4,400 (+4% Q/Q; +12% Y/Y), which has accelerated from 2% Y/Y growth in Q1 2021 and 8% Y/Y growth in Q2 2021.
Number of customers with annual spend of $1m or more in the past 12 months increased 11% Q/Q from Q2 2021.
Take rate decreased to 14.2% (flat Q/Q; down from 14.8% in Q3 2020), due to increased recurring revenue from larger clients which is priced at the lower end of their tiered service fee structure.
Gross margin stable at 73% (flat Q/Q; flat Y/Y).
Adjusted EBITDA of $8.2m (+13% Q/Q; +23% Y/Y), beating their internal guidance of $4-5m.
2021 revenue guidance upgraded to $496-498m (+33% Y/Y growth at the midpoint) from $490-494m in Q2 2021.
Upwork is a solid business operating in an enormous market and executing well under new leadership. It is not the bargain it once was during COVID-19 lows at around 2x NTM estimated revenues, but I still think the current price represents a reasonable price for a business with 70%+ gross margins (and expanding) targeting $1b in 2025 revenue (equates to 19% revenue CAGR from this point).
Bumble (NASDAQ:BMBL) - Valuation Looking Attractive After a Brutal Sell-Off
Bumble is an online social network which operates the 2nd (Bumble) and 4th (Badoo) most popular dating apps worldwide. Bumble was founded in 2014 by Whitney Wolfe, who was also part of the founding team for Tinder (the most popular dating app worldwide). Following Bumble’s IPO in February 2021, Wolfe became the youngest self-made billionaire at the age of 31. Bumble is a business I have been casually following for the past two quarters, but the 19% sell-off after their Q3 earnings report has forced me to take a deeper and more serious look at the business.
Here were some of the highlights from Bumble’s Q3 results:
Revenue increased to $200.5m (+8% Q/Q; +24% Y/Y), which beat their internal guidance of $195-198m.
Bumble app revenue increased to $142.5m (+12% Q/Q; +39% Y/Y).
Badoo app and other revenue decreased to $58.0m (-2% Q/Q; -3% Y/Y).
Bumble app paying users increased to 1.53m (+4% Q/Q;+20% Y/Y).
Total average revenue per paying user (ARPPU) increased to $22.97 (+10% Q/Q; +19% Y/Y).
Gross margin decreased slightly to 72% (down from 73% in Q2 2021).
Adjusted EBITDA increased to $54.5m (+5% Q/Q; +1% Y/Y), beating internal guidance of $48-50m and representing a 27.2% margin.
2021 revenue guidance upgraded again to $765-768m from $752-762m (Q2 2021) and $724-734m (Q1 2021).
2021 adjusted EBITDA guidance upgraded again to $205-207m from $195-200m (Q2 2021) and $177-182m (Q1 2021).
This was another solid quarter for Bumble, with some obvious weakness with the Badoo app. It is clear that Bumble’s future growth depends more on the Bumble app (and other acquisitions and product developments) than the Badoo app. Management have also highlighted international expansion as an area for future growth. The sharp drop in valuation to around 6x NTM estimated revenues in spite of back-to-back upgrades in 2021 revenue and adjusted EBITDA guidance has me interested. I plan to take a deeper look at Bumble over the next few weeks and will consider taking a starter position if there are no major red flags and I can get comfortable with the TAM.
ResMed (NYSE:RMD; ASX:RMD) - Another Solid Quarter from a Proven Executor
ResMed was founded in 1989 and makes cloud-connected medical devices for the treatment of obstructive sleep apnea (OSA), chronic obstructive pulmonary disease (COPD), and other respiratory conditions. It is a proven performer with a long track record of increasing revenues, profits, and dividends. Since I invested in October 2016, ResMed has achieved an impressive IRR of 64%, smashing the broader market.
Here were some of the highlights from ResMed’s most recent results:
Revenue increased to $904.0m (+3% Q/Q; +19% Y/Y on a constant currency basis).
Revenue increased 25% Y/Y (29% Y/Y in Europe, Asia, and other markets), excluding the impact of one-off respiratory care revenue associated with COVID-19 generated in Q3 2020.
Gross margin of 56% (flat Q/Q; down from 58.3% in Q3 2020), attributed to supply chain disruptions and higher freight costs, both of which should be temporary.
Operating income increased to $261.9m (+8% Q/Q; +21% Y/Y).
Net income increased to $203.6m (+4% Q/Q; +14% Y/Y).
ResMed has benefited from consistent multiple expansion (see below) since I invested in October 2016, providing a powerful tailwind for long-term investors. It currently trades on a trailing P/E of around 46x, which is at the higher end of its historical valuation range, but is not outrageous for a dominant market leader with significant pricing power that continues to grow revenues and profits at double digit rates. ResMed has historically demonstrated more operating leverage than in this quarter, but COVID-19 and supply chain issues have impacted their margins. My thesis on ResMed is unchanged after this quarter; I plan to hold for the foreseeable future and continue to benefit from the power of compounding.
I plan to release part 2 in the coming weeks so keep a look out for that email. I will likely be covering DermTech, Asana, Desktop Metal, Coupang, and Axon Enterprise, which are all companies I own or plan to own in the next few weeks.
Cheers,
Jordan