Earnings season is here again. Netflix reported its results on Monday afternoon and seemed to provide a pleasant surprise for investors, who sent the stock up 20% after hours. We’ll see all the other big names reporting results in the next two or three weeks as well, so I’m providing my usual roundup of what to expect from some of the most important consumer technology companies.
Following stories which suggest a certain amount of belt-tightening at Alphabet, it’ll be interesting to see if there’s evidence of that in its financial results this quarter. There has been some sign of this already in things like Alphabet’s capital expenditures and the performance of the Other Bets segment but I suspect there should be more evidence in this quarter. There will also be increasing pressure on the Google segment to start quantifying its cloud revenue, given its recent heavy emphasis on this business and the continued lack of financial transparency here relative to Amazon and Microsoft. There will also no doubt be questions on the call about pre-sales for Google’s new hardware products – Home and Pixel – though of course these started selling and shipping after the quarter was over.
Speaking of Amazon, it will likely continue to show strong progress both in its core e-commerce business and in its AWS cloud services. Another interesting milestone to watch for is the percentage of paid units which come from third party sellers, which is due to cross the 50% mark this quarter. That’s symbolically quite important for Amazon, whose own sales have always been a majority of total sales on the site. But it’s also important financially, because Amazon’s gross margin on these third party sales is higher than on its own sales. We might well see AWS cross 10% of total revenues in Q3, though it’ll quickly drop well below that again in Q4, as e-commerce sales rise dramatically in the fourth quarter each year. Also worth watching is whether Amazon can achieve four straight quarters of profitability in its International business, which has historically struggled to drive a profit. Capital expenditures and the associated depreciation and amortization have also been falling lately as a percentage of revenue, which has helped drive the improving margins we’ve seen lately. Is that a sign Amazon has run out of ideas for things to invest money in?
With its car efforts in the news again this week, it’s inevitable Apple will be asked about Project Titan on its earnings call and at least as inevitable executives will refuse to answer questions about it. Near term, however, all the attention will be on pre-sales of the new iPhones and for indications these may provide a potential rebound in iPhone sales and, therefore, Apple’s overall revenues. I think Apple’s revenues will rebound either at the tail end of this year or early next year and we’ll have official guidance for calendar Q4 2016 from this quarter’s earnings. That guidance number will be particularly interesting as it will be issued two days before a rumored event to announce new Macs. Macs don’t have an outsized impact on overall revenues, especially in a December quarter typically dominated by iPhone sales, but I’d expect analysts to try to tease out the effects of pent-up demand for Macs given how long in the tooth the current product line is. It’s also well worth watching the iPad revenue line, which was positive in growth terms last quarter for the first time in years off the back of much higher ASPs driven by the 9.7″ iPad Pro. Will that happen again this quarter?
Facebook continues to be one of the few companies that consistently provides impressive results quarter after quarter with little let-up. Even at its current scale, it achieved 60% year on year revenue growth last quarter and that’s even before any of its recent acquisitions make any significant contribution. Ads continue to provide over 95% of that revenue so one of the big questions this quarter has to be whether there’s any sign of that changing. Though there may be little evidence of it so far in the actual results, I’d expect analysts to ask how new initiatives like Workplace, Marketplace, and others will contribute over time to the non-ad revenue at Facebook. I’d also expect to see ongoing requests for more transparency in how Instagram performs, given many of Facebook’s ARPU metrics somewhat misleadingly include revenue but not user numbers for Instagram. I would also expect ongoing scrutiny on the question of ad load and whether Facebook is approaching peak loads yet, especially in its most mature markets.
Interestingly, Microsoft has already announced it will provide a couple of additional financial metrics this quarter, including both gaming revenue and gross margin for its “commercial cloud services”. The former will include revenue from hardware, software, and services, which is a business line that’s a little under $10 billion a year at present. The latter will be useful for gauging the profitability of the cloud business at Microsoft on an ongoing basis. This is another useful step toward more transparency from Microsoft in this area but, given how many things Microsoft throws onto the “cloud” pile, it’s hardly a like-for-like comparison versus Amazon’s AWS segment. Because Microsoft doesn’t break this cloud business out separately, it doesn’t currently have a reporting segment that does better than single digit growth on an annual basis and it badly needs to tell a better story of where future growth will come from, especially in the consumer market.
Samsung has already – twice – provided preliminary numbers for Q3 and they’re obviously heavily impacted by the Note 7 issues, which will be a major area of focus when the full and final numbers are reported. The Note 7 will have a significant impact on revenues and on profits, both from forgone sales and the cost of the recall and the devices involved. But it’s worth looking beyond that too – Samsung has been growing and increasingly profitable again in recent quarters and, although it will certainly take a hit here this quarter, it’s worth looking for longer-term signs these trends will continue (or evidence to the contrary). The semiconductor business, in particular, has been unpredictable lately, and it would be good to see some more stability there going forward.