Business Updates

AMD

There may have been fewer major consumer AI announcements since the launch of GPT-4 in March but 5 months later, the hype train continues to trundle along behind the scenes! That was the message from AMD’s second quarter, as they beat EPS and revenue expectations:

Customer interest in our Instinct MI300A and MI300X GPUs is very high. Engagements with top-tier cloud providers, large enterprises and numerous leading AI companies significantly expanded in the quarter. We are providing early system access and sampling both products with our lead AI, HPC and cloud customers now and remain on track to launch and ramp production in the fourth quarter. - Lisa Su, Q2 2023, Prepared Remarks

There was another update on AMD’s ROCm progress (their software for high performance computing (HPC) and AI applications - equivalent to Nvidia’s CUDA):

To make it easier for developers to tap into the full performance and features of our AI hardware, we delivered a significant performance and feature update in our latest ROCm software and expanded support for AMD silicon across the leading frameworks, including PyTorch, TensorFlow, Onyx and technologies like OpenAI Triton. - Su, Q2 Prepared Remarks

The company reported revenue of $5.4 billion, down 18% year-over-year and flat sequentially, and diluted earnings per share of $0.58, down from $1.05 a year ago, mainly due to lower client segment revenue which was partially offset by strong embedded segment performance.

[AMD Segment Revenue Q2 23.png] As communicated by management, Client revenues seem to have hit a bottom in Q1 and is set to rebound along with Data Center growth in the second half.

As ever though, markets are forward-looking and focus in the analyst Q&A narrowed down on the sequential data centre revenue growth from Q3 to Q4 implied in AMD’s guidance. The last quarter of 2023 looks set to be a big one:

As we go into the fourth quarter, there is an implied, a significant ramp in revenue [50% sequentially]. I think there are multiple components to that. So there is – the server CPU side will continue to ramp as we see Zen 4 ramp. There is a sort of large, call it, lumpy supercomputer wins, so our El Capitan win will be in the fourth quarter, primarily with a little bit in the first quarter.

And then we will have contribution from both MI300X going to large AI customers as they start their initial ramps as well as MI250s with a number of customers, who now view that as a very good option for some of the workloads that are not necessarily the largest language models or the largest parameters, but let’s call it more sort of the other AI workloads. So those are the components of the fourth quarter sort of implied growth, lots of pieces to it. But clearly, a big piece of it is the MI300 ramp. - Su, Q2 Q&A

Amazon

The story of Amazon’s Q2 was two-fold:

  1. AWS returned to sequential growth after the first quarterly decline in its history in Q1:

while customers have continued to optimize during the second quarter, we’ve started seeing more customers shift their focus toward driving innovation and bringing new workloads to the cloud. As a result, we’ve seen AWS’ revenue growth rate stabilize during Q2 - Andy Jassy, Q2 2023, Prepared Remarks

[Amazon Revenue by Quarter.png] To illustrate AWS’s scale and continuing growth, it now brings in as much as 3 quarters the revenue of Amazon’s ‘International’ segment, at a 25% operating margin (versus… a negative margin) and the gap continues to narrow.

  1. Jassy expects North American retail margins to expand beyond pre-covid levels:

I do believe that we’ll get back to margins like what we had pre COVID. And I don’t think that’s the end of what’s possible for us there. - Jassy, Q2 Q&A

With Q3 YoY sales set to grow 9-13% according to guidance, along with similar operating margins to Q2, Amazon’s slowing of expenditure growth over the past year (along with the rest of big tech) appears to be bearing fruit. Even following the 50% year-to-date gain in share price, with retail margin expansion on the horizon, and AWS continuing to make up a larger share of overall revenue, this is a position I’m considering adding to. More of the same please, Amazon!

Datadog

Lowering full year guidance is never a popular move with SaaS investors due to the extent to which these businesses are set up for rapid growth in their early years. Any negative changes in future expectations can lead to significant re-ratings. And so it proved this quarter for Datadog, with revenue guidance lowered from a range of $2.08 - $2.10B to $2.05B - $2.06B for FY23. Stock initially dropped 18% but has recovered a few percentage points since. As expected, net revenue retention dropped below 130% for the first time in DDOG’s public company history.

As usual, what was true for Amazon, is also true for Datadog, with ‘signs that cloud optimisation may start to subside.’

The cohort of customers who began optimizing about a year ago appeared to have stabilized their usage growth at the end of Q2, as indicated by their recent activity and their related commitments with us. And we saw usage growth in aggregate rebound in July to levels that are most similar to what we see in Q1. While it is too early to call an end to cloud optimization and a significant level of macro uncertainty remains, these new trends, along with the tenor of our customer interactions, are encouraging. - Oliver Pomel, Q2 2023, Prepared Remarks

A slight silver lining was the raising of full year non-GAAP net income guidance from a range of $1.13 - $1.20 per share to $1.30 - $1.34 per share. FCF margin came in at 28% for the quarter, but while this was marvelled at last year, in today’s market it feels a baseline expectation. Instead, the concern is that an already expensive valuation (despite the post-earnings drop, shares are still up 40% since April) remains difficult to justify. It’s hard to argue that Datadog (the company) are doing much wrong but the stock is a separate issue!

[DDOG Annual Revenue Growth.png] When optimisation hits, it hits hard…

Twilio

What’s this? Positive operating cash flow and free cash flow?! Stock-based compensation only 15% of revenue?! Raised non-GAAP operating income guidance for the full year?!

Twilio Vince The Twilio turnaround story is gathering steam!

The only real drawback on the quarter (aside from DBNER falling to 103%) was hearing about the ‘unique positioning’ of Twilio in relation to AI (they’re seemingly joined by every other public software company) but we’ll let that slide given the recent tough times at the company.

In all seriousness, this was exactly the quarter that Twilio needed to deliver:

We’ve made substantial strides on our path to GAAP profitability and have substantially increased the operating margin profile of our business. In Q2, we reduced GAAP loss from operations by over 50% year over year. We drove a continued reduction in stock-based compensation and delivered $72 million of free cash flow in the quarter. We are executing well against our commitments. - Jeff Lawson, Q2 2023, Prepared Remarks

[TWLO SBC Rev Q2 23.png]

Encouraging to hear this on the sales front too:

I’m excited that for the first time in over a year, the majority of our segment sales team has been in seat for at least nine months. We’ve seen early signs of traction with these efforts, including a strong increase in pipeline generation within Flex and significant improvement in segment pipeline conversion from Q1. - Elena Donio, President, Data & Applications, Q2 Prepared Remarks

And on the ongoing headwinds from crypto customers:

As we referenced during our Q1 earnings call, our Q2 growth rate was negatively impacted by headwinds from customers in the crypto industry. Total Q2 organic revenue growth, excluding crypto customers was 14% year over year. We anticipate a similar headwind in Q3, after which the impact will start to moderate. - Aidan Viggiano, CFO, Q2 Prepared Remarks

There was also mention that half of the $1B share repurchase program was completed by early July, with plans to proceed the remainder in future. Twilio is still trading at rock-bottom prices, but a few more quarters of cost and sales discipline has the potential to remind investors that there’s value to be had here.

Snowflake

Snowflake beat on revenue and earnings expectations with 37% YoY revenue growth and non-GAAP EPS of $0.22 but I’m becoming increasingly disillusioned with SNOW due to the continuing egregious levels of stock-based compensation. As a proportion of revenue, SBC was around 45% in Q2 and has been close to that level for the past 7 quarters. As a result, GAAP operating margins have shown little sign of improving and remain at -42%. This is beginning to feel like another Twilio situation, where the market is content to weather lack of profitability based on supposed high levels of future growth (no doubt Slootman and Scarpelli’s profiles help support this vision) despite increasing competition:

Why do I own this thing again - surely there are better options out there? Food for thought…

YTD return vs benchmarks

(Index source: Koyfin)

Portfolio Nasdaq S&P 500 FTSE 100
34.4% 36.6% 14.8% 4.7%

Portfolio

Holding Ticker(s) Weighting (%)
Cash - 18.9
iShares Core UK Gilts UCITS ETF GBP (Dist) IGLT.L 11.1
Alphawave IP Group plc AWE.L 11.0
Xtrackers NASDAQ 100 UCITS ETF XNAQ.L 9.0
iShares VII PLC - iShares MSCI EM Asia UCITS ETF USD (Acc) CEA1.L 5.3
Twilio Inc. TWLO 5.2
Invesco Bloomberg Commodity UCITS ETF CMOD.L 5.1
ASOS Plc ASC.L 4.3
Snowflake Inc. SNOW 4.2
iShares Core MSCI Europe UCITS ETF EUR (Acc) SMEA.L 3.9
Adyen N.V. ADYEN.AS 3.6
Howden Joinery Group Plc HWDN.L 3.6
Datadog, Inc. DDOG 3.6
Team17 Group plc TM17.L 3.0
Amazon.com, Inc. AMZN 2.9
CrowdStrike Holdings, Inc. CRWD 2.8
Advanced Micro Devices, Inc. AMD 2.6

Adjustments

There are a couple of new additions in there that I’m not ready to discuss yet - that’s next month’s post! No sells in August.

Closing Remarks

Next month:

  • Updates on Crowdstrike, Team17, Alphawave
  • Asos and Adyen’s portfolio additions