Marriott's (MAR +0.56%) numbers are trending in the right direction, and its loyalty program membership is out of this world. Cerence (CRNC 1.49%) posts strong numbers in the second quarter and raises guidance for the full year. In this episode of MarketFoolery, Motley Fool analyst Jason Moser analyzes those stories and The Trade Desk's (TTD +3.43%) 10-for-1 stock split.
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This video was recorded on May 10, 2021.
Chris Hill: It's Monday, May 10th, welcome to MarketFoolery. I'm Chris Hill. With me today, Jason Moser. Good to see you.
Jason Moser: Good to see you.
Hill: We have automotive tech, we have got big honking stock split to get to, but we're going to start with the business of travel. It was a mixed first quarter from Marriott, profits were higher than expected, but overall revenue, not quite where it needs to be. Demand is on the rise for Marriott though, especially when it comes to the leisure side of the equation.
Moser: Yeah. I'm glad you said that because it is definitely coming back online and to that point, they did note on the call Mainland China occupancy is near pre-pandemic levels. They say that occupancy reached 66% in Mainland China in March, which was nearly the same as March from 2019. Strong demand on both leisure and business there. We're seeing some recovery here in the U.S. and Canada. Clearly, the data coming out of the U.S. is just getting better by the day and you can see just a boots on the ground. People are out, people are doing stuff, and travel and leisure is becoming a little bit more of an option. Occupancy started the year at 33% in January in the U.S. and Canada, reached 49% by March, so the trends are all headed in the right direction. For a company like Marriott, more than 7,600 properties around the world, I mean, yes, we may be living in the age of Airbnb, Chris, and we used an Airbnb just several weeks back. It was a wonderful experience. Marriott still matters. They have a massive footprint and a tremendous opportunity, so it's nice to see these numbers trending back in the right direction for really what is, I think a very important company in the travel space.
Hill: Yeah. I'll just add anecdotally, a couple of weeks back, was up in the Boston area, staying at a Marriott property. Once we got all checked in and that sort of thing, I was talking to the manager behind the desk and just saying, [laughs] without wanting to just completely bombard her with questions, I did ask a couple of questions about like, how's occupancy? That sort of thing. [laughs] It was interesting, and we're not talking about downtown Boston here. This was out in one of the suburbs. They were at 90% in terms of occupancy, and one of the things she said, she didn't really put it in terms of their challenge, but it is something that a lot of businesses are struggling with at the moment, had to do with just hiring, was just staffing up in such a way. Because when demand was incredibly low, you could run a hotel with far fewer people. Once occupancy gets up to 90%, you got to get people back doing everything you need to do to run a hotel. I don't know that that's a huge problem for Marriott in the way that we're seeing it for some of the national restaurant chains, some of the stories in terms of hiring. But if you're a Marriott shareholder, I think you have to be pretty happy with the way they've responded. Yeah, the stock is down about 3% today, but it's still up 10%, 15% year-to-date and not too far from its all-time higher actually.
Moser: No. I think with a company like Marriott, it's an interesting discussion, the hiring one, the employment situation because it is different market to market. But the discussion being had is, is it more lucrative to stay home or actually go get a job? I think it's fair to at least ask the question, are we getting better? Is there just no chance things turn for the worse again? Did something not sneak up and bite us one more time here? It's understandable the trepidation that may exist on the hiring side for both parties, whether you're hiring or whether you're looking for a job. You may not necessarily feel the confidence that that job is necessarily going to be as stable as it was pre-pandemic. Hopefully it is.
I think when you look at Marriott, one of the things that's astounding, we talked about this last quarter; I feel like it's worth you've mentioned every quarter because it's just such an impressive number. Their Bonvoy loyalty membership, the loyalty club, the app, everything that they do, the credit card partnerships, they have over 150 million members [laughs] of this Bonvoy membership. Now, in the age of the loyalty club, Chris, you've got Starbucks and Chipotle, and all of these retailers building their loyalty memberships. Here's Marriott, just sneaking under the radar with 150 million Bonvoy members, and they can push out spending incentives and whatnot to try to help stock that traffic. In line with that, first-quarter global credit card spending for Marriott and their partners was down just 5% versus the first quarter of 2019. That's yet another metric that shows you, not only is traffic coming back, but so is spending, and all this while, they are building up this little home and villas by Marriott International Business, which it's not all that substantial right now. It's not that meaningful to the company's financials, but they have 30,000 listings, so it's a bit more of an Airbnb competitor. It shows that they're thinking about that part of the market as well. Again, just go back to this, this is I think one of the more important businesses out there in the travel industry. It certainly seems like the metrics are starting to paint the picture of recovery. I would imagine that we'll see some better days for Marriott here in the coming years.
Hill: That's a ridiculous number.
Moser: It's a lot.
Hill: In terms of loyalty programs, that is a ridiculous number.
Moser: I'm sure there are probably plenty of members out there and they don't even realize they're members. But again, all it takes really is a credit card partnership. It can all start with something like that. You can build up a network very quickly and you start throwing in some incentives. There are ways to create and build that relationship. It gives you a lot of data, they have a good app. It really plays into travelers' hands.
Hill: Let's move onto Cerence, which provides in-car voice assistant technology. Cerence not only had second-quarter results better than Wall Street was expecting, they also raised guidance for both profit and revenue for the full fiscal year. Despite all that, share is down 2%, which is not a big drop, but Jason, this is a stock that's down about 35% from its high for the year. Why is insurance getting just a little bit more love? This was about as good as you could hope for in terms of both the results and guidance.
Moser: Well, Chris, I don't mean to contradict you because you were right for the most part of the day thus far, it's worth noting right now it's about 11:45, Cerence is officially in the green. The stock is up just a couple of tenths of 1%. [laughs] But hey, listen, you're right. I think for as good of a quarter as it was, you feel maybe there would have been more positive reaction from investors. Part of that I think has to do with the fact that stock has just done really well here over the past several quarters. I think for good reasons, you know that they continue to exceed the goals that they set for themselves. They continue to raise guidance. It's really amazing when you think about the opportunity, automobile is turning into a nice pool frontier of opportunity of the tech side.
The neat thing about Cerence is, they're not just the automobile. I mean, it really is about all forms of mobility. They are focused on automobiles, of course, but talk about your micro-mobility, whether that's cars or motorcycles or whatever it may be, they talked about two-wheel forms of transportation. I mean, they're just really focused on all forms of transportation that are giving smarter up. Clearly, the automobile is still its big opportunity and when you look at the opportunity there, some of these numbers are astounding when you look at how connected cars are today. This is just data from the US International Trade Commission from about a year-and-a-half ago, conventional vehicle contains on average $330 worth of semiconductor content. But if you look at our hybrid electric vehicle, that can contain up to $1,000 worth of semiconductor content in anywhere close to 3,500 semiconductors. That just goes to show you how much of a computer really automobiles are today, which is what's playing into.
In regard to the numbers, revenue, just under $100 million in the quarter, that was up 14% from a year ago. Non-GAAP gross margin was up almost 700 basis points. Licensed product revenue was up 22% year over year, and then connected services revenue grew 18%. But even more encouraging within that connected services revenue, the new connected services revenue is growing even faster. That just goes to show that really, they've got to play on that legacy automobile base out there. But really, all of the new cars that are coming out more and more are coming out embedded with Cerence technology. Just to speak to that, the percent of worldwide auto production with Cerence technology today it's 52% and that's with an average contract duration of six and a half years. This is stuff it's getting in these cars and then that relationship is lasting for a while. It's still a very young business. Remember the spinoff from Nuance, which incidentally was just acquired by Microsoft. Now you're really starting to see the value being realized I think in that split. But again, encouraging key performance indicators from the company, I think that the enthusiasm in the automobile market today as far as what tech has to offer is really starting to become more apparent. I think that Cerence is going to be one of the companies it's going to be leading the way here for the next several years.
Hill: This is a company that has a market cap just north of $3 billion. It is much smaller than Nuance was when Microsoft got out their checkbook and bought them. Do you think three years from now, Cerence is still a stand-alone public company or there's someone come along and say, this is too good, we've got to buy these guys.
Moser: I sure hope that it's on it's own. I really do love to see little companies like these. I like to see them be able to forge their own path and grow. That can be the most rewarding for shareholders that are willing to be patient. The other side of the coin there as a bird in the hand. I mean, a nice acquisition premium there and no one ever really is going to complain about it, but when you look at the business today, at the size that it is, that they are now calling for anywhere from $380 million-$390 million in revenue for the full fiscal year, that number is just going to continue to grow, particularly when you consider how big the market opportunity is. I fully understand if there's a suitor out there who is interested. I imagine that they would have to pay a pretty penny though because this seems like a management team. When you listen to their calls and you listen to their presentations, they seem like a management team that not only really knows what they're doing, but it seems like they have a lot of fun doing it, and that can be a really awesome combination for investors.
Hill: Our email address is [email protected]. We got a question from long-time listener Read McCullough, who writes, "I'm wondering if you can help me understand what is going on with The Trade Desk today. [laughs] I realize growth is volatile, but I'm having trouble following the scoop on this." The Trade Desk, for those unfamiliar, a digital ad platform. Their first-quarter revenue was up 37%. That was better than expected. Their profits were higher than expected. They announced a 10-for-1 stock split. Shares of The Trade Desk are down 20%. I am not a shareholder, Jason, but where is this hate coming from? [laughs] What's going on here?
Moser: Well, I am a shareholder, so folks our there who may be feeling a little pain, I'm feeling it right there with you, but really, as I often say, don't let the market's initial reaction to end earnings report, that's not the business. That's a separate thing entirely. I think there are a couple of different ways we can go with this. I mean, to your point, yes. It was a very good-looking quarter. I mean, revenue up 37%, non-GAAP earnings up 56%, they exceeded expectations. Customer retention still over 95%, and that's just consistently been that way over the past several years. Calling for revenue between $259 and $262 million for the current quarter, that too is better than what was expected. I think perhaps some of the criticism out there, maybe they weren't guiding high enough, maybe there was more expected as we see this ad market recover, we've seen plenty of positive reports that they're Google for one, I mean, you remember Alphabet's score, that thing was just off the charts.
Maybe that is one of the bigger question marks in regards to The Trade Desk here in the near term as at least in that unified ID 2.0, the industry-wide approach that ultimately it's seen as an upgrade, as an alternative to cookies. We've been talking a lot about that cookies debate here lately and how the ad space is changing in the name of protecting folks' privacy. Maybe there is some uncertainty, some question marks, and we're not getting as a clear picture for The Trade Desk in regard to what they expect for the rest of the year. It's worth noting that going into today before this sell-off, the stock was trading around 86 times free cash flow. Even though you've got a really good business that is blazing a trail in it's market, and it's profitable, and it just churns out a ton of cash, 86 free cash flow is still really expensive. I mean, we're in a market where everything looks really expensive. I'm sure that the guidance along with the valuation probably have short-timers heading for the exits today. I personally, as a shareholder, I have zero concerns after looking at this quarter.
I mean, I think again, the big question in regard to the UID 2 cookies and how Alphabet is going to help dictate this space and what ad-tech has the hold, I get that uncertainty. But to me, I mean, this is a business that just continues to do what they say they're going to do. A founder leading the way, smart CEO, the stock split, that matter. We always talk about stock splits, it's just the same size pizza, it's just more pieces. Perhaps this makes it more attractive for other investors though it's worth noting. I mean, the share price has gotten close to $1,000, I think you're at one point, that's pulled back since then. But I mean, anytime you have that $400, $500, $600 share price, when you split it down, you make it a little bit more accessible to folks. That could be something where it creates a little bit more interest. But overall, I think another encouraging quarter. As a shareholder, I'm happy and going to keep mine.
Hill: In terms of the stocks split, I think if I read it correctly, it's going to show up as a dividend.
Moser: Well, they do. It's done in the form of a dividend. Like you get the shares in the form of a dividend and that's essentially a tax benefit. You're not getting taxed on anything. Essentially, you're just getting the more shares classified in the form of a dividend. You're not going to deal with any tax implications until you've actually sell your shares. We see that quite often.
Hill: 10-for-1 though. [laughs]
Moser: 10-for-1, I know. That's an eye-catching number. I mean, normally, it's two or three, maybe four. I guess maybe they just wanted that nice round number, 10-for-1. That's going to make it a little bit more accessible to some people. Maybe that's a good thing, but at the end of the day, it's still the same size pizza. Speaking of which, now I'm getting hungry, Chris. It never fails when I use that analogy, feeling like a delivery might be coming hear for lunch here soon.
Hill: Let's get out of here. Jason Moser, thanks for being here.
Moser: Okay. Thank you.
Hill: As always, people on the program may have interest in the stocks they talked about and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of MarketFoolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.
