Q3 2017 Earnings Preview

We’re about to kick of earnings season for Q3 2017, and so I’m doing my usual quarterly preview. My focus here isn’t so much predicting what we’ll see as suggesting the things to look for when these companies report. As usual, I’ll tackle the main companies I track in alphabetical order.

Alphabet

Alphabet’s last set of earnings was pretty impressive, with strong performance pretty much across the board and no obvious areas of weakness. Key trends continued, with ad revenue from  Google’s own sites continuing to grow much faster than ad revenue from third party sites, though growth in the latter has accelerated recently. In some ways, the most interesting revenue line to look at is the “Other” bucket within the Google segment, because that’s where a lot of Google’s new focus areas sit, including its first party hardware push and enterprise cloud services. Both have been major focus areas for Google in the past year, but Q3 should have pretty low hardware revenue given it will have been the lull before new hardware was launched earlier this month, so if there’s strong growth here, that’ll be a good sign cloud services are finally starting to grow commensurate with the investment Google is now making in this area. As I noted last week, one other thing to look out for is traffic acquisition costs in the Google sites business, and how these are tracking relative to revenue.

 

Amazon

Amazon demonstrated conclusively last quarter that it’s in the midst of another period of higher investment and therefore lower margins – its revenues grew strongly, but its profits were way down. Investments in AWS capacity, fulfillment infrastructure and employees, and even heavier hiring in higher-paid headquarters roles like software engineers and sales people for AWS and advertising all drove up costs and drove margins down to levels we haven’t seen in a couple of years. It’s likely we’ll see some of those same trends this quarter for the same reasons, with Amazon likely hiring significantly ahead of the holiday season. One of the biggest things to watch for this quarter is how Amazon will report the financials of the Whole Foods business – my guess it that it will simply be an additional reporting line along the lines of AWS, but we’ll have to wait and see. It has historically been more profitable than Amazon’s core business, so it should provide something of a boost to overall margins, again like AWS.

Apple

To my mind, by far the most interesting thing to look at in Apple’s earnings will again be its guidance. Its overall revenues and profits for this past quarter should be fairly predictable and in line with the outlook it provided a quarter ago, but there’s a small possibility it will be at the low end of its guidance if iPhone 8 sales in the first few days on sale were less than expected. However, the December quarter is entirely unpredictable at this point, with the iPhone X going on pre-sale right before the earnings call and on retail sale right after. Apple will certainly know what kind of supply it’s likely to have in the remainder of the quarter for that device, and that in turn will to a large extent determine how Apple’s overall December quarter goes. Weak supply could depress overall iPhone sales as many would-be buyers wait out the supply constraints, while strong supply would give Apple a massive quarter off the back of both strong sales and much higher ASPs (I wrote about all this in detail in an earlier piece). Early indications of Watch Series 3 sales and an ongoing reduction in the rate of revenue decline from China are also worth watching for.

Facebook

Coverage of Facebook in the news recently has been dominated by things that have nothing to do with its financials, at least from a direct perspective, and I’d expect its earnings call to feature a few questions about Russian influence and whether the measures Facebook is taking to mitigate that will have any longer-term impact on its ad business. But ad load saturation and its predicted effect on ad revenue growth is the thing many investors will be watching for, and I’d also expect lots of questions about Facebook’s big video push and the effect that will have on margins as the company invests heavily in content and projects lower margins due to revenue sharing. We got some hints about that on last quarter’s call but I’d expect more detail this quarter as Facebook moves this project along. It’ll also be interesting to see how many new hires it had in Q3, given that it promised faster hiring in the second half of the year.

Microsoft

Microsoft continues its transition from a product-driven to a services-driven company, but the headline on all of its earnings releases for the last two years has been all about the cloud. Microsoft’s growth rate in cloud services ticked up significantly last quarter, and one of my big questions then was whether that was a blip or a sign of a change in trajectory – my guess is the former. Meanwhile, the phone business is finally far enough in the rearview mirror that it should no longer be a drag on the business, while Surface revenue growth following recent product launches should turn positive again this quarter after some declines driven by shifting release cycles. The PC business overall, which of course is a major driver of Windows revenue, continues to be somewhat unpredictable animal from quarter to quarter, and foreign currency has been an ongoing drag on Microsoft’s results overall too.

Netflix

Netflix will kick off earnings season on Monday afternoon, and its guidance was for just under 4.5 million new subscribers, the vast majority overseas. Netflix’s guidance, though, has been somewhat poor lately, missing on both the high and low side, and it’s always possible that it could see significantly fewer or more net adds. My guess is that it might overshoot its guidance slightly in both geographies, but there’s no reason to expect a significant departure. The bigger question is what its guidance for Q4 looks like, given that it’s just announced price increases which will come into effect in the quarter. I wrote about those price increases here last week, and overall I’d expect them to take a hit to net adds in the US (the only region where the price increases are happening) in the quarter, but still to generate positive net adds there given that it’s usually a healthy quarter for growth. However, the impact this time around will likely come all in the fourth quarter, unlike Netflix’s last increase, so it’s possible that we’ll see a bigger and more concentrated impact this time around. I’d also expect management to be asked about the mix of customers between Netflix’s three service tiers – SD, HD, and 4K – given that the price increases affect these three bands differently.

Samsung

Samsung has already pre-announced very strong earnings, as well as the impending departure of its CEO. But as usual we’ll have to wait for the full results before we know how the different business units fared. Based on recent results and overall market trends, it’s very likely that both strong demand for and increasingly high prices for memory were major drivers, with the smartphone business likely also having a good quarter off the back of the Galaxy S 8 launch earlier this year. I’d expect there to be some questions about how Samsung will replace its CEO, who suggested in his resignation letter to employees that he felt it was time for some younger blood at the helm.

Snap

Snap has been struggling ever since it went public to generate rapid user growth, while some market observers have recently reduced their forecast for its ad revenue growth rate as well. There’s been nothing to suggest any of the underlying trends will have changed much in Q3, with no new obvious revenue generating or growth-inducing features released in the quarter. Ongoing rollout of Snapchat’s self-service and automated tools for ad buying should continue to help drive revenue per user, and I would hope that the company will also be more transparent about some of its engagement metrics, which it hasn’t updated consistently as a public company. CEO Evan Spiegel has recently acknowledged that he needs to be more communicative now that Snap is public, and I hope we’ll see evidence of this during earnings – Snap’s earnings releases so far have been utterly spartan affairs, and management has been cagey and standoffish during the calls.

Twitter

Twitter continues to be more or less stuck in the same difficult spot as last quarter, with user growth likely not much better, and revenue per user likely continuing to be fairly stagnant. The company says it’s in the midst of yet another strategy shift and revamp of its ad tools, but has shown little concrete evidence that the shift will generate better results going forward. Meanwhile, it’s tinkered at the edges of its product, making changes which aren’t likely to change engagement or user growth meaningfully while leaving larger issues such as abuse and the complexity of on-boarding as a new customer unfixed. Live video has been a big focus, and Twitter will likely update the metrics it has shared previously on this topic, including the number of unique viewers. But we still need to see more information from Twitter about how much time those viewers spend watching video, and whether those views are generating meaningful revenue. I also live in eternal hope that Twitter might at some point finally provide daily active user numbers!

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Jan Dawson

Jan Dawson is Founder and Chief Analyst at Jackdaw Research, a technology research and consulting firm focused on consumer technology. During his sixteen years as a technology analyst, Jan has covered everything from DSL to LTE, and from policy and regulation to smartphones and tablets. As such, he brings a unique perspective to the consumer technology space, pulling together insights on communications and content services, device hardware and software, and online services to provide big-picture market analysis and strategic advice to his clients. Jan has worked with many of the world’s largest operators, device and infrastructure vendors, online service providers and others to shape their strategies and help them understand the market. Prior to founding Jackdaw, Jan worked at Ovum for a number of years, most recently as Chief Telecoms Analyst, responsible for Ovum’s telecoms research agenda globally.

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