This is the second in my series of posts previewing the week’s tech earnings (the first, for last week, is here). I have at least one more week of these to go and both weeks will be very busy, with lots of tech company earnings announcements due. To avoid clutter, instead of embedding charts in this post, I’m going to link to charts where relevant for those who are interested. These should pop up in a new tab/window when clicked.
I wanted to start with a very quick review of last week’s piece in relation to what was actually reported:
- Netflix – I suggested watching for whether growth in the US would bounce back (and intimated it probably wouldn’t), and the company came out and said growth would indeed be slower going forward. I also said we should watch for commitments to more original programming and the company announced a big increase in spend year on year. Overall, I think Netflix is actually doing very well.
- IBM – I suggested they’d likely have another bad quarter and they did – almost every major metric was moving in the wrong direction, especially growth across all divisions. But I also said Tech.pinions readers would want to listen for any references to the Apple partnership, and there were seven on the earnings call, five of them in the prepared remarks and two in the Q&A. Sadly, there was very little meat on those bones.
- eBay – I said there were increasing questions about the viability and sustainability of the core eBay business and it turned out to be something of a miserable quarter for that division, with very slow growth year on year and the announcement of significant layoffs. Paypal, meanwhile, had a much better quarter, further reinforcing the rationale behind the company split.
- Verizon – We already knew a little about Verizon’s quarter ahead of earnings because of some guidance issued earlier, but the details reinforced key trends — it was a massive quarter for device sales and upgrades (Verizon’s biggest ever) and this dragged down profits. The company remains very focused on profitable growth, however, and explicitly stated it would resist the urge to compete on price and would see churn rise as a result. I also said we should look out for tablet net adds, and that had its highest ever quarter, likely soundly beating the other three big carriers in this department.
Microsoft – Monday, January 26th, after market close
Earnings call: 2:30pm PT. Link
A few things to look for this time around:
- Surface sales and profitability – last quarter, Microsoft announced healthy revenues (though likely similar shipments to a year earlier, at higher ASPs), and positive gross margins (I calculated rough numbers for these last quarter too – chart). It’ll be interesting to see whether sales grew or shrank (I suspect modest growth) and what the margins look like. They have a long way to go for operating profitability still.
- Lumia – this is the first full quarter under Microsoft and, of course, Q4 is traditionally big for devices of all kinds. Following some patchy growth in 2014 (chart), it would be good to see a big Q4 for Lumia and potentially maintaining or even increasing market share globally. Sales were likely almost all at the low end, however, so share of revenue continues to fall.
- Cloud services – one of the real bright spots in Microsoft’s earnings in the last few quarters and it should continue to grow rapidly, even as Amazon’s AWS unit seems to sputter a little. It was over $1 billion in a quarter for the first time last quarter and should eclipse its “Enterprise Services” category this time around (chart).
- Office 365 – Consumer Office 365 continues to grow slowly and I don’t expect any big change here. It’s still tiny as a revenue stream compared with traditional Office sales (chart). It’ll be interesting to see if Microsoft provides any commentary on the impact of making more Office functions free.
AT&T – Tuesday, January 27th, after market close
Earnings call: 1:30pm PT. Link
The second of the major US wireless carriers to report, AT&T has the most total reported subscribers and by far the most ‘connected devices’ subs (think Kindles, connected cars and the like – see chart). It’s likely to continue to extend that lead this quarter with strong additions driven by connected car, Digital Life (home security and automation) and other connected devices sales. AT&T also recently overtook Verizon as the carrier with the lowest churn, and I’d expect this trend to continue as Verizon’s churn has begun to rise as it has avoided competing aggressively on price. It’ll be particularly interesting to see whether AT&T shared Verizon’s huge quarter for smart phone sales and upgrades.
Apple – Tuesday, January 27th, after market close
Earnings call: 2pm PT. Link
To my mind, the two most interesting questions for Apple this quarter are iPad and iPhone sales. As everyone knows by now, iPad sales have been slowing for some time, while iPhone sales have continued to grow steadily (chart) and should see a huge boost this quarter from the new phones. The questions are whether iPad sales recover (as I suspect they will in time, though perhaps not this quarter) and just how big the iPhone quarter will be. Based on all the available indicators, it seems like it will be massive growth, far bigger than any previous single quarter for the iPhone. Perhaps less predictable is what will happen to average selling prices for both iPads and iPhones. iPhone ASPs have held up very well over rate years and may even grow significantly this quarter as the base iPhone 6 Plus price pulls averages up. But the iPad ASP keeps falling as Apple keeps older devices in market at lower and lower prices (chart) and I suspect this trend will continue. The big surprise last quarter, of course, was how well Mac sales held up and, in fact, grew. I expect we’ll continue to see this trend in the past quarter’s results.
Lastly, it’ll be very interesting to look at the various metrics that help us derive a number for App Store sales. Based on the numbers Apple recently provided, it appeared 2014 was significantly higher than 2013 but during 2014 proper growth slowed significantly (chart). But the numbers Apple provides in these press releases are rounded and therefore provide an incomplete and occasional picture of performance. The actual financial results should hopefully help to pin down exactly what’s happened here and whether this slowing is really occurring. If it is, the question becomes why.
One more thing — this is the first quarter for Apple’s new reporting segments, which will increase opacity in some key areas and provide homes for some newer initiatives such as Apple Pay, Apple Watch (when that arrives) and so on. So there will be some extra work to do to make sense of the new financials. Sadly, we’ll lose some visibility over elements of Apple’s business as this happens, potentially including the retail business, just as things start to get interesting with the introduction of the Apple Watch to retail and the potential channel implications.
Yahoo – Tuesday, January 27th, after market close
Earnings call: 2pm PT. Link
Yahoo is a company in two parts: there’s the core Yahoo business itself and the Alibaba investment which actually drives the vast majority of the valuation for the company. Following the IPO, Yahoo has some serious cash with which to make acquisitions, something it’s already shown a considerable willingness to do. It’ll be interesting to watch for any commentary on how that money might be used. I suspect we’ll see continued attempts to buy and build video properties and to augment Yahoo’s search capabilities (and increasingly untangle itself from its Microsoft search relationship). I believe Marissa Mayer is, to a great extent, trying to recreate Yahoo in Google’s image, and since video and search are huge parts of Google’s success, those will be key investment targets. Alibaba itself continues to do phenomenally well as an investment (see below), but the Yahoo core business isn’t turning around just yet (chart). Another thing to watch for is commentary on the switch from Google to Yahoo as the default search engine in Firefox, which some statistics are already showing had a substantial impact on Yahoo’s share in the US. I especially hope financial analysts ask about whether this will stick, since it’s a relatively simple matter for Firefox users to switch back again.
Facebook – Wednesday, January 28th, after market close
Earnings call: 2pm PT. Link
Facebook has been on a great run financially, putting up big growth numbers and increasing profitability, almost all of it driven by the rapid growth in mobile advertising revenue (chart). The big question everyone keeps asking is to what extent this is driven by app-install ads, and to what extent that’s sustainable. I expect financial analysts to ask Facebook executives about this on the call and I expect them to cave to this increasing pressure, if not this quarter, then in the next couple of quarters. Regardless of whether they increase transparency, I expect them to continue to downplay the importance of app-install ads and play up the percentage of that spend that comes from big brands such as McDonalds rather than simply from game makers. In looking at Facebook’s business, it’s always worth remembering the three major drivers of growth: user growth, engagement, and monetization. User growth on the core Facebook platform continues to slow, so the really important things are engagement and monetization on the Facebook platform and user growth in the newer properties – Instagram and WhatsApp. But of course those properties are only poorly monetized today, so look for some guidance on how that’s progressing too.
Qualcomm – Wednesday, January 28th, after market close
Earnings call: 1:45pm PT. Link
I don’t follow the chipmakers closely, so I’ll keep this brief. I think one of the key things to look for in Qualcomm’s earnings and on their call is not so much direct financial reporting as their guidance on two major issues that could affect their results. Firstly, the ongoing situation in China. On the one hand, Qualcomm claims it’s losing out on significant revenue it’s owed by local players. On the other, the government is pursuing an antitrust investigation. Both are already hurting Qualcomm and could continue to do so. It’ll be good to get an update on those. Secondly, persistent rumors of problems with Qualcomm’s newest Snapdragon 810 chip which Qualcomm itself has largely denied so far. I have no doubt financial analysts will ask some pointed questions about this on the call and that they’ll call on Qualcomm to provide guidance about any delays related to it.
Samsung – Thursday Korean time, Wednesday US time
Earnings call: 4:30pm PT on Wednesday. Link
Samsung has already previewed the headline figures and they’re ugly (chart). Profits and margins rebounded a little from last quarter, but things were still way down on the same quarter a year ago and I see no sign of an immediate turnaround. Part of Samsung’s problem is, while they’ve used channel stuffing and discounting to paper over short term performance issues in the past, both will come back to bite them as they seek to address long term issues. Of course, we’ll be looking for more details on the performance of the mobile business in particular – its decline has been, by far, the greatest factor in Samsung’s overall poor performance, while the semiconductor business has been performing much better. It’ll be interesting to see the interplay between these two, but more interesting will be to hear whether Samsung provides any more details about its plans for fixing this mess.
Google – Thursday, January 29th, after market close
Earnings call: 1:30pm PT. Link
Four key things to watch out for in Google’s earnings this week:
- The impact of Firefox’s switch to Yahoo as the default search engine in the US. I mentioned this above in the context of Yahoo, which will undoubtedly talk it up, but Google will no doubt be pressed about this on its earnings call as well. It’ll be interesting to see to what extent it affects overall numbers and how Google talks about its ability to win back those Firefox users. I suspect the impact on overall financials will be small as it’s US only, Firefox has relatively small market share, and it only took effect late in the quarter. But it’s certainly symbolically important and the numbers involved are still meaningful. As I’ve said before, Apple is the company who really has significant potential to put a big dent in Google’s numbers.
- Google’s increasing cost of gaining traffic for its own properties. This is closely related to the item above, but Google’s traffic acquisition costs (TAC) for its Sites business have been steadily rising as a percentage of revenues (chart) and it’s worth seeing whether this changes, and how Google talks about it. A portion of this revenue goes to Apple and that, in turn, is driven by the large proportion of Google’s revenue that comes from iOS devices in particular.
- “Other” revenues. Another big ongoing trend at Google is that its “Other” category of revenues are easily the fastest growing part of the business (chart). This includes Google Play revenue from apps and content, Nexus device sales, and various other smaller businesses, but we get very little insight into this in Google’s financial reporting. Expect analysts to continue to pressure Google to reveal more about the details behind this headline number, especially with the growth of Nest and other subsidiary businesses that report into this line.
- Growth in the core business. That “Other” growth is important, because Google’s core business has been showing some signs of slowing as users shift from desktop to mobile and Google fails to capture as much value in mobile as it does on the desktop. Both prices and traffic have struggled to grow recently as much as they have in the past and results from companies such as Yahoo, Microsoft and AOL suggest this is more than just a Google problem. As more and more companies successfully capture share of the mobile advertising market, Google will continue to struggle to capture the sort of share it’s accustomed to in the desktop world.
Alibaba – Thursday, January 29th, before US market open
Earnings call: 4:30am PT. Link
Alibaba is one of the poster children for the rising Chinese tech giants, and rightly so. Its core business looks like a combination of Amazon and eBay but, as I indicated last week, it already dwarfs both in terms of total transaction volumes. And in contrast to both Amazon and eBay, Alibaba is driving a great deal of growth through mobile, which is accelerating rapidly (chart). The importance and rapid growth of mobile is one of the key differences between the Chinese and US markets (though, as Ben Bajarin points out, it may simply be a question of timing rather than fundamental). What Alibaba has in common with Amazon is it is starting to sacrifice some of its margins in the pursuit of rapid growth, though not nearly to the same extent as Amazon. Alibaba remains a company with healthy profit margins overall. It’s worth watching for any headwinds or signals of slowing growth, but I suspect Alibaba will continue to grow rapidly and likely expand into more and more areas, including investing more outside of China.
LG – Thursday, January 29th
Earnings call: 5am PT on Thursday, earnings released a few hours earlier. Link
LG continues to be one of those quiet success stories in smart phones – a company that’s been making steady progress without capturing anything like the attention of some other businesses (and in stark contrast to its compatriot Samsung). Its smart phone shipments and, in tandem with them, its operating margins have been steadily growing (chart). Last quarter it looked as though LG’s smart phone margins might actually pass Samsung’s this quarter but we’ll have to see if that really happens. It’s remained the clear number 3 player in the US smart phone market behind Apple and Samsung, with 6.5-7% of the market, and its latest flagship phones have allowed it to capture share and drive growth in other markets around the world. Outside of smart phones, LG’s presence in smart devices remains limited, with nothing like the reach of Samsung, but I would expect that to change over time as it invests more in these categories.