We’re about to head into earnings season once again, with Netflix reporting this Wednesday and most of the big tech companies reporting next week and the week after. With that in mind, here’s a preview of what I’m expecting and what I think we should be looking for as each of the big companies report.
With Alphabet, I’m looking for two big things: further signs of improving the financial performance in the Other Bets segment following the streamlining that’s been going on there, and any indicators of how Google’s new hardware has performed. Operating losses were down year on year in the Other Bets segment for the first time in Q3 2016 so we may see another quarter of narrowing losses. From a hardware perspective, any revenues will be reported under Google’s “Other” segment, which houses all non-advertising revenue from the Google business, including Google Play app and content sales, enterprise services sales, and various other revenue streams. That’s already a fairly big chunk of revenue in total – $2.4 billion in Q3 – but even a million or so Pixel sales would generate around $600-700m in new revenue for this segment so the growth here should be noticeable. Beyond these two items, I’m also curious to see whether all the growth in ad revenues at Google continues to come from its own sites rather than third party sites – that trend has been evident for a while now.
Based on a couple of press releases of holiday sales Amazon put out earlier this month, it looks like it had a very healthy fourth quarter. I would guess e-commerce sales were up 20-30% while AWS likely also continued to grow revenue and profits strongly. Amazon is starting to look unstoppable on the e-commerce side, capturing almost all the growth in e-commerce while expanding into new verticals and even opening more physical retail stores. The hardest thing with Amazon is simply not knowing in which quarters it will choose to reinvest profits versus passing them on to shareholders – just as it had investors trained to expect higher margins following many years of breaking even, it produced lower profits again last quarter and its guidance for Q4 was ridiculously broad. But, on a long-term basis, Amazon looks to continue its stellar run.
Apple promised modest year on year growth this quarter in its guidance but it has an extra week of sales this quarter compared with the same quarter last year. It has made some analysts assume the growth is based on that extra week rather than underlying trends. Apple tried to push back against that idea on its earnings call and has all but said it expects the underlying business to grow in the coming months, so that’s the biggest single thing to look for, not just this quarter but for the coming year. iPhone sales are obviously by far the single biggest factor – if there was year on year growth in shipments, that should help drive overall growth. But if there wasn’t, that reinforces the narrative that has emerged over the past year that Apple will struggle to grow going forward as it has in the past. Recovering Mac sales, driven by the new MacBook Pro, as well as strong holiday sales of the various versions of the Apple Watch should help too, as will the record App Store revenue Apple touted in a press release earlier this month.
Facebook is another of those companies, like Amazon, which seems to have been on a tear lately with no end in sight. But it’s also been providing stronger indications on its recent earnings calls that ad load is near saturation and will cease to be a major factor in driving revenue growth going forward. I’ve done some analysis on this point and concluded that, although this will lead to slower growth going forward, it will still probably see healthy growth relative to most of these other companies. It will shortly launch video ads in its Stories feature in Instagram, which offers a new venue for advertising and will help with overall ad load even as ad load is becoming maxed out elsewhere. But in addition, the growing user base, rising prices per ad, and other factors should still help drive high growth. I’m guessing management will also be asked about WhatsApp monetization on the call – Facebook suggested that was coming at its F8 conference last year (and there have been various hints of how this might happen) but we haven’t seen many details yet. In theory, this could be a useful additional source of ad revenue growth — but WhatsApp’s management has eschewed advertising as a business model.
Microsoft finally seems to be coming out of a long period of declining revenues and returning to growth, with essentially flat revenues year on year last quarter. It helps that the phone business is now so small that even big year on year percentage declines don’t put too big a dent in dollar revenues. It’s also passed the one-year anniversary of the Windows 10 launch, which introduced deferred revenue and artificially depressed reported revenue. However, Surface revenue is likely to have been flat or down slightly in the quarter, with no big portable launch and only the relatively niche Surface Studio launching in the quarter, compared with previous year-end launches. The other major growth drivers should remain healthy, however. Microsoft’s various cloud business have been growing strongly, though the exact components can be hard to pick apart in Microsoft’s complex reporting structure. Negative PC market growth continues to be one of the biggest headwinds and, although there was slightly slower decline in the overall market in Q4, it was still down year on year, which will have a knock-on effect on Microsoft.
Netflix is a business that has to be seen in two parts with very different dynamics. The domestic business is massive and highly profitable but has recently seen significantly slowing growth, driven in part by increased saturation and in part by the recent price increases. Netflix forecasted a pretty healthy quarter of growth for the US business, so we’ll have to see how accurate that forecast is – it has struggled recently to get these numbers right. The international business, on the other hand, is catching up to the domestic side in terms of its total size thanks to its rapid growth (on the basis of the current run-rate, it’ll likely become the larger of the two later this year), but has been unprofitable. The loss per subscriber has been narrowing even as the total number of subscribers grows, so there’s a path to profitability here, and a number of individual markets are already profitable. But with massive investments in original content – $6 billion in 2017 – Netflix has to ensure its growth continues to keep revenues ahead of costs and start to turn a profit in its international business.
Samsung has already released a surprisingly upbeat preliminary set of quarterly results but we’ll have to wait a few weeks to see the details. Revenue looks very healthy overall, apparently driven by strong performance in smartphones and semiconductors. The former is a surprise, given the Note7 recall and its impact, at least some of which fell into Q4, and which has had at least some effect on people’s perceptions of the Samsung brand, but a strong quarter here will help reassure investors the damage is limited. If semiconductors did contribute to the strong overall results, that will also be a positive sign because that segment has performed unpredictably over recent quarters after being an important growth driver for several years prior. Semiconductors has the highest margin of any Samsung division, so its performance is particularly important to overall performance.
Twitter badly needs to show its recent efforts to improve user growth are working. Judging by the number of nagging emails from Twitter I received at my various accounts in late December, I’m guessing it’s doing everything possible to goose monthly active user numbers (which are based on the last month in the quarter) but, of course, it’s this kind of thing that makes MAU such a poor measure of true user patterns. Twitter continues to refuse to provide daily active user numbers which suggest these would reflect poorly on the service. I’m expecting some modest growth in MAUs to be reported but those should be taken with a pinch of salt for the reasons I’ve just outlined. The other big problem Twitter has faced recently is its average revenue per US user hasn’t been growing nearly as well as in the past, so this is worth watching this quarter too. Engagement numbers have also been all over the place and Twitter needs to start showing more consistent trends here as well. I would expect the various live video efforts to be a big focus on the earnings call – the big question here is whether any of this is generating either better user growth or meaningful new ad revenue.