What Is GDPR, Which Companies Are Talking About It, and Why?

You’ve probably been hearing a lot about the GDPR, or General Data Protection Regulation, over the past few months. If you haven’t, it’s very likely you have at least been receiving a few emails about privacy policy updates from the software products that you use. If you’ve been researching GDPR, you may have even noticed that the official GDPR site has been so overloaded with visits that it has slowed and sometimes even become unreachable.

So what’s all the fuss about? In this post, we’ll explain why.

What Is GDPR?

GDPR is the European Union’s new data privacy law that was written to further ensure the transparency of companies’ data collection and privacy. It has specifications for businesses around how they handle personal data such as user email addresses and phone numbers. GDPR is only really supposed to apply to the EU and EU residents, but because so many companies do business in Europe, American companies must also show that they are also GDPR compliant — all by today, when the law is officially implemented.

American companies have been updating their privacy policies and explaining, at the very  least, how they:

  • Capture, use, store, and secure user / customer data
  • Capture and use cookie data
  • Capture and use location/mobile data
  • Share user data with company employees, partners and third parties, if applicable
  • Obtain user consent to receive marketing communications

We decided to deep dive into how companies are talking about GDPR and the necessary compliance preparations. We used Sentieo’s DocSearch to search for mentions of GDPR across SEC filings, call transcripts, press releases, presentations, and global filings. We can see below that mentions have definitely escalated over the last two years, especially as we got closer and closer to the date of implementation: May 25, 2018.

 

Sentieo

We also see that there was an initial spike shortly after European Parliament adopted the regulation on April 14th, 2016. GDPR has been in progress for the past 6 years, as the timeline below shows:

  • January 25th, 2012: GDPR proposal released.
  • October 21, 2013: The European Parliament Committee on Civil Liberties, Justice and Home Affairs (LIBE) has orientation vote.
  • December 15, 2015: Negotiations between the European Parliament, Council and Commission (Formal Trilogue meeting) result in  joint proposal.
  • December 17, 2015: European Parliament’s LIBE Committee voted for negotiations between the three parties.
  • April 8, 2016: Adoption by Council of the European Union
  • April 14, 2016: Adoption by the European Parliament.
  • May 24, 2016: Regulation entered into force, 20 days after its publication in the Official Journal of the European Union.
  • May 25, 2018: Its provisions are directly applicable in all member states.

(source: Wikipedia)

We took a closer look at the companies with the most mentions of GDPR. The top five companies included Varonis and Talend, which are both companies that offer data-centric services. Varonis (VRNS) is a leader in data security and analytics, focused on protecting enterprise data. Thus, the GDPR mentions in its documents often refer to the products it provides to prepare its customers for GDPR.

Talend (TLND), a software integration vendor, also heavily referenced GDPR during its May 10th earnings call. Michael Tuchen, Talend’s CEO & Director even mentioned that Talend would even be “assisting Virgin Money UK with meeting regulatory requirements, including the EU’s GDPR.”

IBM had the third-most mentions of GDPR in its documents, and has even conducted a study on the subject: Majority of Businesses View GDPR As Opportunity to Improve Data Privacy and Security. Here is part of their press release about the study that came up in our search:

Last year, IBM itself also began to offer solutions to help their customers become more compliant with data regulations. Here is part of a June 2017 press release detailing those solutions:

 

 

GDPR is definitely inspiring organizations to more closely examine their data policies, especially in light of Facebook’s data breach and consumers’ increased understanding of privacy. We anticipate that most businesses will view data transparency as an essential part of their future strategies. This goal of transparency has allowed for some businesses like Varonis, Talend, and IBM to offer up specific compliance solutions for this use case, since compliance can be a complex process for most organizations without the right support. On the other hand, B2B companies in the software and targeted advertising businesses that derive a significant proportion of their revenues from the EU may face challenges from the GDPR.

As we’ve seen with the example of Facebook, non-compliance and cloudy communication can result not only in legal struggles, but also become a public relations nightmare with which no organization wants to be associated.

Sentieo Use Case: Is The MGM Lion Ready to Pounce As Supreme Court Allows States to Legalize Sports Betting?

On Monday, the Supreme Court overturned PASPA (the Professional and Amateur Sports Protection Act that effectively banned commercial sports betting in most states), opening the door to legalizing the estimated $150 billion in illegal wagers on professional and amateur sports that Americans make every year. (New York Times)

We immediately jumped into Sentieo to see how various companies were taking the news. We pulled up a search for “PASPA” and its synonyms.

Mentions of PASPA in documents have certainly spiked in the last 3 months as companies have been eagerly awaiting the announcement:

We looked at the companies mentioning PASPA the most in their documents and found a few companies that will likely see positive impacts. They include:

    1. William Hill – bookmaker based in London that is listed on the London Stock Exchange and is a constituent of the FTSE 250 Index
    2. Stars Group – Canadian gaming and online gambling company traded on Nasdaq and the Toronto Stock Exchange
    3. 888 Holdings – headquartered in Gibraltar, one of the world’s most popular online gaming operators & platform providers
    4. MGM Resorts International – American global hospitality and entertainment company
    5. Sportech PLC – online gambling and entertainment company headquartered in the United Kingdom,  traded on the London Stock Exchange under the symbol SPO

Here is the stock of Stars Group, with a large spike on May 14th:

All of these companies, except for MGM, had massive gains on Monday as the news hit the wire.

We dug a bit deeper into the MGM documents, and a May 10th Analyst day presentation caught our eye. Here’s a close-up:

On the call, MGM Chairman and CEO James Murren beat his chest on (correctly) predicting the outcome of the PASPA decision and tries to show that MGM Resorts’ primacy in the sports market and the overturning of PASPA would be a massive opportunity for the company. The accompanying slides from the presentation outlined the opportunity.

MGM was eagerly awaiting the PASPA announcement and is sure to already be pouncing on the opportunity to become even more of an “undisputed leader in sports.”

Unfortunately, for the company, the stock has not moved up accordingly since Friday. This is either a terrific investment opportunity, or a hope unrealized.

 

Dropbox vs. Box: The Story of Enterprise SaaS Multiples

The Dropbox IPO on March 23 was big news, as the market welcomed the newcomer with a 35% surge on its first day of trading. The stock has been hovering around $30 ever since then, almost double the initial IPO range of $16-18, making it one of the most valuable publicly-traded enterprise SaaS companies. With the company’s first earnings call coming this afternoon, we decided to take a closer look.

While the IPO was a success, there remains some skepticism about the valuation, especially when compared to Box, Dropbox’s closest peer. Both companies operate in the field of cloud storage and file hosting. It’s no coincidence that they even share similar names.

Let’s take a look first at valuation metrics. For enterprise SaaS companies that are still rapidly growing, traditional valuation ratios like PE and EV/EBITDA are not as relevant, so we looked at Enterprise Value to Sales multiples, along with key operating metrics across a broad range of enterprise SaaS companies, using Sentieo’s Comparable Analysis feature:

Sentieo

Dropbox’s EV/Sales multiple comes in at around 9.6x 2018 forecasted revenue. Box, meanwhile, operates at 5.8x revenue multiple, well below the 9.6x median for its peers. This valuation gap could be justified if Dropbox is growing faster or has a higher margin business. FY 2018 growth for Dropbox is forecasted at 20.5% vs. 27% for Box and Dropbox earns gross margins of 71.2% versus 73.3% for Box. However, Dropbox enjoys much higher operating margins with a 21.4% adjusted EBITDA margin compared to -3.2% for Box.

By digging deeper into the operating margins, we find that the difference between the two companies seems to come down to the approaches of their growth strategies. Dropbox has grown primarily through a highly efficient marketing function and self-serve model, while Box has grown through a traditional, and more expensive, enterprise sales model.

This leads us to a key metric used in the SaaS industry: the magic number. The magic number is a ratio used to measure how efficiently a company grows its annualized recurring revenue relative to sales and marketing expenses. Here is the formula:

formulaSource: thesaascfo.com

We can quickly find the numbers we need to calculate Dropbox’s magic number using Sentieo’s Document Search, and then export the table to Excel.

 eexcel

Here is the result:

result

As a rule of thumb, a SaaS magic number above 1 is good, and a number below .75 is concerning. Using the same process as we did for Dropbox above, we found that Box had a magic number of 0.38 in the most recent quarter, and 0.31 is the prior two quarters. This clues us in to why Box has such an abysmally low multiple for a SaaS company. But it doesn’t explain why Dropbox is priced at a premium to SaaS peers despite lower than average growth and margins.

We believe the secret lies in the Atlassian story. We first wrote about Atlassian right after the IPO two years ago in: No “High” in $TEAM: Why Atlassian Will 10X Or Get Acquired. Since then, the stock has been on a tear, almost doubling with quarter after quarter of revenue beats. Atlassian’s success has earned it by far the highest revenue multiple in its peer group at 16.9x 2018 sales. We believe this is primarily due to its efficient, self-serve, marketing-driven growth model and ability to upsell existing customers a broad suite of offerings. Atlassian had a magic number of 1.68 in the most recent fiscal quarter.

Dropbox’s IPO marketing materials make it clear that they want to be seen as the Atlassian of cloud storage, with many discussions of the benefits of the self-serve model, 500 million users, and individual accounts being upsold into enterprises.

Why Dropbox Is Overvalued vs. Box

This story hides some major issues with Dropbox. Their strategy for years has been to go after the consumer cloud storage market, which never made sense, as that market is highly competitive and has limited revenue potential. Box decided long ago to pivot to the enterprise, while Dropbox went through numerous failed acquisitions and internal initiatives, attempting to build products in everything from email to payments. They built a strong consumer brand in the process but ultimately decided to double down on enterprise. We think it’s too late.

The cloud storage and file hosting industry, including all the related services, doesn’t seem to be protected by a particularly wide moat. All of the major technology names are active in this field as well, including Amazon, Google, Microsoft, and Apple. All of these companies have the added advantage of pre-existing customer relationships. The main advantage Dropbox would need is the ability to provide differentiated services to enterprises. However, we haven’t seen evidence of Dropbox’s ability to effectively build differentiated enterprise products. As they are forced to expand their market, we believe they will face stiff competition that will make it more difficult to grow. On the other hand, the 500 million users may be the key to unlocking growth within enterprises that enterprise sales teams couldn’t effectively crack.

Meanwhile, Box’s stock has been on a tear over the past few weeks, especially after famous tech investor Chamath Palihapitiya gave a bullish presentation on the company at the Sohn Investment conference and the company has raised guidance.

We’ll be watching the language closely as Dropbox reports earnings today. The street seems to be expecting the company to beat estimates and raise guidance, leading to an increase in the stock as insiders come up on their lockout period. We don’t necessarily expect the company to disappoint in its first earnings call, but we’re bearish on the long-term outlook for the company.

“Boring Questions Are Not Cool” — A Sentiment Analysis of the TSLA Q1 2018 Earnings Call

Tesla’s earnings call yesterday was anything but boring, as Elon Musk very roughly dismissed analyst questions. We jumped into Sentieo to quickly find the Tesla transcript and dig into the details.

 

A.M. Sacconaghi, Senior Analyst at Sanford C. Bernstein & Co., asked Musk about gross margin end of year targets with regard to the Tesla Model 3. Tesla CFO Ahuja cited the weakening of the dollar and increased labor costs as Elon began to dismiss the question altogether.

See the specific dialogue below, which we highlighted and saved in Sentieo:

 

When Sacconaghi tries to dig deeper into Tesla’s plans to cut spending and where the company will be in terms of capital requirement, Musk brashly shuts him down:

 

(Note: Musk actually says, “Boring bonehead questions are not cool,” but our transcription service excluded the word “bonehead.”)

When responding to questions about the impact of news coverage on the recent Tesla crash fatality (during which the car was using “Autopilot”), Musk responds that these questions are “killing him,” calls press headlines “inflammatory,” and diverts back to an analyst from YouTube who only responds to him with clear, positive fanaticism.

 

We also decided to take a look at the transcript sentiment report for the call, with just another click within Sentieo. The chart below shows a huge uptick in analyst sentiment, but that’s really only because Musk chose to gift half of the call to this enthusiast from YouTube (Galileo Russell is a 2015 college grad who describes himself as “a finance geek whose two biggest current fascinations are Tesla and Bitcoin.”)

 

 

Lastly, we glanced at the comparison word clouds provided in the sentiment report for the call (below). We can see that analysts only wanted to talk Model 3, and management not at all. By contrast, in February, management spoke mostly about Model 3, but not at all in May. Clearly shown by this recent call, the focus has shifted to dodging the Model 3 discussion, whereas it was embraced previously.

Analyst vs. Management: Keyword Difference

This is another comparison cloud showing the major average difference between management and analyst keywords on the 2018-05-02 conference call.

 

Conference Calls Sequential Comparison Word Cloud

The following comparison word cloud shows the biggest changes in average keyword frequency between the 2018-05-02 conference call and the 2018-02-07 conference call for TSLA.*

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Musk certainly seems to be feeling the heat under analyst scrutiny. We will see what next quarter brings and if Tesla is able to meet the goals he suggests.

Earnings Guide Part 2 : Using Sentieo’s Alternative Data to Predict This Week’s Earnings Announcements

Note: The content of this post references an opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.

With earnings season continuing this week, the Sentieo team has been making their predictions about earnings using alternative data from Sentieo Mosaic. Last earnings season, the team accurately predicted the Netflix, Snapchat, Twitter, Skechers, Grubhub, Trupanion, and Hubspot beats.

Our Methodology: Why Does This Data Predict Earnings?

In the graphs below, we are presenting Quarterly YoY growth in Google Trends, Website Visits (Alexa Panel), and Twitter Mentions. In all cases, we have compared the data against quarterly revenue growth. Alternative datasets like these are offered in the Sentieo platform and can provide an edge in analyzing consumer-facing businesses, as they often have a high correlation with revenue growth and are available ahead of traditional financial metrics for the period. As consumer behavior shifts more and more towards digital, indicators like these have become more predictive of tech and consumer company results. Below each chart is a link to the interactive version of the graph.

Here’s what we’re thinking for Floor & Decor:

 

FND – Floor & Decor Holdings (Call on Thursday, May 3, 2018)

 

Floor & Decor Holdings is a leading specialty retailer in the hard surface flooring market, selling tile, wood, and other accessories at low prices. The company was founded in 2000 and is headquartered in Atlanta.

We used Sentieo Mosaic to analyze alternative data for the brand, plotting it in the chart below. The chart shows that Google Trends (green line) and Alexa Website Visits (red line) have historically correlated with FND’s revenue growth; both datasets caught major revenue growth inflections in early and late 2017. For Q1 2018, Google Trends decelerated, but has leveled off more recently, while Alexa data has moved sideways in the face of an expected revenue deceleration from analyst estimates.

View Interactive Chart: http://snt.io/VW5jpdqoc

 

The Google Trends data below shows that business is growing nicely for FND. The top blue line represents Google Trends data for 2018, and demonstrates that FND is hitting new heights this year.

 

FND is a high multiple stock and has moved up a lot since last earnings, suggesting that the bar is high. FND looks like a likely beat this quarter, but if the company misses estimates, expect the stock to go down.