Tech earnings preview for week of January 19th

I’m kicking off a new series of posts for Insiders every Monday for the next several weeks, offering a preview of major tech companies’ earnings for that week. I’ve always done extensive analysis of financial reporting from these companies on my personal blog but I wanted to offer Tech.pinions Insiders something different – highlighting some of the key things to look out for before these earnings come out. This first week is relatively quiet and I’ll be focusing on just four companies: Netflix, IBM, eBay, and Verizon. AMD is also reporting results on Tuesday, but I don’t focus on the chipmakers as closely so I won’t offer a preview of their results.

Netflix – January 20th, after market close

Earnings call: 2pm PT. Link

Netflix continues to be a business in three parts: the domestic US streaming business is by far the largest and generates good margins; the international streaming business is second largest but consistently unprofitable, since the company ramps up investment in new countries every time it gets close to break even; and the domestic DVD business is the smallest (and shrinking fast) but generates fantastic margins:Although the company has traditionally been very good at forecasting future growth, it stumbled last quarter when it failed to meet its subscriber targets and the stock got hammered as a result. So, one big question this quarter is whether it can meet its targets as it has in the past. The company laid the blame for its shortfall on its price increases which haven’t gone away. So this is a good test of whether growth will be permanently slower or whether it can recover. International growth in particular was slower than forecast last quarter, but this is going to be an increasingly important source of growth going forward, so that’s worth watching too. DVD subscribers continue to churn at a fairly predictable rate, so I wouldn’t expect any surprises there.

It’s also worth watching for any comments abut the increasing shift to over-the-top video services from traditional broadcast and cable networks such as CBS and HBO and the recent announcement by DISH of Sling TV. HBO’s announcement came just before last quarter’s earnings, but it still hasn’t launched. However, any launch is likely to come in the second quarter of 2015, so Netflix’s management may provide some better guidance now that they’ve had time to gauge the potential impact from this and other moves. One other big thing to watch for is any statements about future investments in original content – this has been a big theme from both Amazon and Netflix over the past couple of years, and it’s also become one of the most significant cost drivers for both companies.

IBM – January 20th, after market close

Earnings call: 2:30pm PT. Link

IBM is another company which had a bum quarter last time around although, arguably, its quarter was significantly worse than Netflix’s. It missed revenue and profit targets and also had to abandon long-standing targets for its turnaround. It simply hasn’t been responding fast or effectively enough to the cloud transition that affects so many parts of its business, even though both its cloud and mobile revenues have been growing rapidly. It’s worth watching for signs that these problems continue.

For Tech.pinions readers, I think the most interesting thing to watch for will be any guidance on the impact of the Apple deal. A month ago, the two companies announced the first wave of apps to come out of the partnership and they were impressive. But of course, the other side of the deal is IBM selling Apple’s hardware into the enterprise, and we haven’t had much of an update on that since the deal was announced. So it’s worth listening for any tidbits about this side as well as progress in deploying the apps announced in December. I’ve written before about how I see the IBM deal for Apple: as one of a number of initiatives aimed at incrementally increasing the addressable market for the iPhone and iPad. Both IBM and Apple are likely to be asked about this on their respective earnings calls.

eBay – January 21, after market close

Earnings call: 2pm PT. Link

eBay is perhaps not a company most Tech.pinions readers spend a lot of time thinking about. It’s largely stuck to its two core businesses of payments and e-commerce and hasn’t expanded into devices, digital media or other areas that compete more directly with other big tech companies we cover here. But the company split may create more interest, especially around Paypal. As mobile payments take off, brands such as Venmo will become more important and Paypal has invested considerably in the various facets of mobile payments across both retail and m-commerce. One of my biggest questions has been what potential Apple has to extend Apple Pay into other realms, like P2P payments and other things Paypal currently does. If it did decide to, it might start to present a significant threat to Paypal and others in this space. The rapid takeup of Apple Pay so far certainly suggests it could come to be very disruptive in time.

At the same time, Paypal has been the faster growing of the two parts of eBay’s business, and has slowly outgrown eBay itself — this is a big part of the rationale for the split that’s coming in the second half of 2015. As well as the emerging questions about Paypal in the mobile sphere, there are increasing questions about eBay itself, in the face of increasing competition from Amazon’s third party seller business and overseas businesses, notably Alibaba. eBay’s scale is increasingly being eclipsed by Alibaba as well as Amazon; in fact, Alibaba’s gross merchandise volume for mobile transactions alone now exceeds eBay’s total gross merchandise volume:

Verizon – January 22nd, before market open

Earnings call: 5:30am PT. Link

I follow the carriers closely as part of my regular coverage and focus on all the carrier metrics like ARPU, churn, gross adds and so on. I’ll be doing a preview for each of the four major carriers as their reporting dates come up. Here’s a quick primer on the state of the market following last quarter’s results by way of context:

There are a couple of specific things to watch out for this quarter with regard to Verizon specifically. Verizon has already published some preliminary results for the quarter to warn investors that margins fell due to higher customer upgrades and higher churn as a result of fierce competition in the US wireless market. Sprint and T-Mobile have become particularly aggressive and Verizon is starting to feel the heat. This is notable because Verizon has remained more immune than the other carriers to the competitive threat until now, partly because its customer base tends to be the most loyal among the big US carriers, and also the most conservative. Verizon’s response has been to focus its retention efforts on individual high value customers rather than to issue across-the-board price discounts as the other carriers have done. This quarter’s earnings should paint this picture in more detail and give some sense of whether the company will be able to dial things up in Q1.

The other thing to watch for with Verizon is tablet sales. Verizon has led tablet sales among the US carriers for quite some time, despite the others’ best efforts. One reason is that it has a low cost tablet it sells exclusively, which it tends to roll out from time to time in an attempt to boost its numbers. But I suspect its base is also more likely to buy connected tablets than some of the other firms’. T-Mobile has been getting more aggressive in selling tablets, with some free data promotions and the like, but it has a long way to go to catch up. Meanwhile, connected devices such as e-readers and in-car connectivity have been a much less significant driver of growth for Verizon than for AT&T, despite its early lead with OnStar. This past week it announced Verizon Vehicle, an after-market OnStar competitor, which is clearly an attempt to regain some share of this market. It will be interesting to see how Verizon responds to questions about the potential scale of this business, which won’t launch for several more months.