Q1 2016 Earnings Season Preview

We’re about to embark on the earnings reporting season for Q1 2016 and I thought I’d do a quick preview of some of the big things to look out for as the major technology companies report earnings. I’m going to focus on just a handful of the biggest companies rather than try to be exhaustive.

Alphabet – April 21st

Alphabet has been all over the news for the past few weeks but, arguably, for many of the wrong reasons. There have been reports that Nest is underperforming relative to its targets, that Verily is seeing an exodus of talent, and the company itself has announced it’s looking to offload its robotics division. In some ways though, all of this is a sign of increased financial discipline at Alphabet under CFO Ruth Porat. As I predicted earlier, breaking out financial reporting for the Other Bets has brought greater scrutiny. It appears the company is starting to respond to that scrutiny by engaging in some belt-tightening. Some of the Other Bets are no doubt chafing at this clampdown, but I’d expect management both to argue it’s a good thing and the issues recently reported are less serious than suggested.

Amazon – April 28th

Amazon has been on something of a tear financially in recent quarters, with its AWS division growing like a weed and increasingly profitable to boot, while the core e-commerce business in North America also performs very strongly. As a result, it’s been able to elevate its operating profits above its usual anemic levels and demonstrate increasing dominance in the markets where it does well. However, I continue to question whether Amazon can achieve the same results in more than a handful of markets, so it’s worth looking for signs of success or failure in secondary markets during earnings. China and India are particularly interesting to watch, since Amazon’s usual playbook doesn’t really apply in those markets and it needs to think differently about how to be successful there.

Apple – April 25th

With Apple, the single biggest question is just how it will perform relative to the unusually pessimistic guidance it issued last quarter. This was forecast to be the first down quarter for iPhone sales, but the company didn’t issue specific guidance for exactly what those sales would be. Were they as bad as the company feared, or was the guidance overly negative? The second most interesting question is what guidance for the June quarter looks like. Recent reports suggest iPhone sales continue to be somewhat sluggish this quarter. The other thing worth watching for is guidance relating to the iPhone SE launch. There are two specific things I’m very curious about: one is any guidance around what the launch will do to goose iPhone sales, but the other is the impact on average selling prices for iPhones and margins, both of which could take a hit following the SE launch if it sells in any decent numbers.

Microsoft – April 21st

Microsoft outlined much of its vision for the year at its recent Build developer conference but there’s nothing there that will really move the needle financially. Meanwhile, Windows 10 continues to grow at a steady but not stellar pace and the latest estimates from many analyst firms suggest the PC market isn’t recovering despite repeated promises. This remains one of the single biggest questions about Microsoft’s future and I’d expect management to be asked about it on the earnings call. The other big question is Microsoft’s cloud business, which is not as clearly and explicitly broken out as Amazon’s AWS. Will Microsoft finally start providing more visibility over not just the revenue run rate but also the profitability of its cloud efforts? That’s something a number of shareholders – including Steve Ballmer – have been calling for and I think it’s something Microsoft will have to provide sooner rather than later.

Samsung – date not yet set

We’ve already had Samsung’s preliminary financial estimate for Q1 2016 but that was a very high-level report as always. The most interesting thing is the detailed breakdown of how the different units fared in Q1 and, especially, the two most important: mobile and semiconductors. The former has, of course, struggled over the last several years as the pincer movement between Apple at the high end and a variety of low-cost Android competitors at the low end have squeezed its business. However, last quarter there were signs the semi business was struggling too – was that a blip, or are there more reasons for concern in this segment this quarter? Early reports have suggested it did better, but the detailed numbers will be important here too. Also important will be the company’s commentary with regards to average selling prices and profit margins because it’s had to trade off those two variables against bolstering shipments recently. It’s likely it will continue to have to do so.

As usual, this should be a fascinating earnings season and I’ll be sharing my views on the actual results here and elsewhere as the next few weeks go by.