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October 29, 2021

Earnings season kicked off in our portfolio this week and will accelerate into November. Here are brief updates on what we’ve heard, and what I think.

Weekly Earnings Recap: DT, UPWK, TVTX, AVTR
Earnings season kicked off in our portfolio this week and will accelerate into November. Here are brief updates on what we’ve heard, and what I think.

Dynatrace (DT) reported quarterly revenue of $226.4 million (+33% in constant currency) which was above consensus. Subscription revenue of $212.6 million (+33% constant currency) drove the upside performance. The market’s reaction wasn’t great, despite the strong performance, possibly because of lower operating margins vs. the previous quarter (due to higher sales & marketing and R&D spending) and lower annualized recurring revenue (ARR) when factoring in foreign exchange conversions.

These are pretty nit-picky IMO and are tangential to the real story here, which is that Dynatrace is an emerging leader in enterprise application performance monitoring and security. DT looked better yesterday (it looked awful on Wednesday). Full-year guidance of $916 million (+30%) is modestly above consensus. Should DT return to the 70 area (where it closed the day after reporting) and have trouble lifting off that price I would likely get more concerned. But for now, with the stock up nicely for the second day in a row, I think the Wednesday retreat has opened up a little buying opportunity. BUY

Upwork (UPWK) reported results modestly above expectations as the company continues to benefit from the shift to remote and freelance work, a transition that accelerated due to the pandemic. Forward guidance was increased.

Q3 revenue was up 32% to $128.1 million. Adjusted EPS was flat at $0.04. Revenue was driven by higher gross service volume (GSV) as Upwork monetizes a larger user base that expanded during the pandemic. GSV per active client was up 12% to $4,375. Clients acquired during the pandemic are maturing into higher-spending clients. There is some noise in the numbers as take rates (what Upwork gets from a transaction) can vary depending on freelancer mix, and that, combined with Upwork’s lower EBITDA guidance (because it is spending 2X more in Q4 than Q3 on marketing, which is a good thing) may explain why shares of the company traded lower yesterday (UPWK closed down 11%). Take rate was flat at 13.2%.

Big picture, I think UPWK can work (albeit with some volatility) as the ongoing shift to more remote and freelance work is not transitory. In my view this has been a long time coming and, now that the ball is rolling downhill, workers and employers will continue to jump on board. Granted, too much volatility in UPWK could kick us out, but if we think three, five, ten years down the road I’m confident UPWK will be trading many times higher than it is now (assuming management doesn’t blow it). HOLD

Travere Therapeutics (TVTX) reported yesterday, and the biggest takeaway was added clarity on the plan for regulatory filings in both the U.S. and the E.U. To summarize, management said recent pre-NDA interactions with the FDA for sparsentan in IgAN support an application for accelerated approval, which should be done in Q1 2022. Additionally, the FDA has indicated an advisory committee is most likely not necessary. This filing will be followed by one for sparsentan in FSGS in mid-2022. Overseas, management is planning a combined filing in the E.U for IgAN and FSGS. Finally, as announced in September Travere has a deal with Vifor Pharma for commercialization of sparsentan in Europe, Australia and New Zealand. Taken together, these developments have analysts increasing their probabilities of success for the sparsentan franchise and should help shares of TVTX continue their upward march. Regarding sales of currently marketed products, product revenue was up modestly from $51.1 million in Q3 2020 to $54.2 million in Q3 2021. Full-year revenue is now likely to be around $223 million versus expectations for closer to $205 million prior to this report. BUY

Avantor (AVTR) released preliminary Q3 results a few weeks ago, but the official release came yesterday afternoon. As expected, revenue grew 13.4% to $1.83 billion. Adjusted EPS was $0.35, up 46% and beating by $0.03. Digging in, COVID added 1.7% ($80 million in revenue) which was below expectations, but the base business grew by 8.5%, which was ahead of expectations. In the grand scheme of things this could be good since investors may be less concerned with fluctuations in COVID cases/vaccine/boosters/etc. if the base business is ticking along nicely. Full-year growth guidance goes up to 10% to 11% (versus 9% to 11% previously). I kept at buy following the preliminary report and will maintain at buy, for now. BUY