Another earnings season is upon us: the public tech companies will begin reporting second calendar quarter results later this week, starting with Netflix on Monday and moving on to others like Qualcomm, T-Mobile, and Microsoft later in the week, with others to follow over the next couple of weeks. Here’s what I’m going to be looking for – and what I suggest you look for – as some of the big companies report.
Alphabet
With Alphabet, I’m most curious about their commentary on YouTube and on programmatic advertising. These have both been big drivers of their ad revenue growth in recent quarters, and yet both were potentially hit by the boycott and more broadly the rethink by brands about the lack of control over where their ads appear. The boycott started late in Q1 and Alphabet management said it had little effect then, but there’s been some recent evidence of a pullback in programmatic spending. I’ll also be looking to see if recent stronger revenue growth in ad revenue from non-Google sites continues or falls back to earlier levels – even if it continues at current levels, it’s still growing way more slowly than ad revenue from Google’s own sites. Lastly, I’ll be listening for commentary on the earnings call about the cloud business – there have been signs recently that Google is willing to push harder to grow this business, which remains much smaller than major competitors Amazon and Microsoft’s equivalent businesses, and is barely discernible in Alphabet’s overall results.
Amazon
At Amazon, there have been recent signs of both a slowing in growth and margins in the AWS cloud business, so I’ll be looking to see whether those trends continue or whether things return to the previous steeper trajectory. In its larger e-commerce business there have also been recent signs of a slowdown, albeit to what are still very healthy levels of growth, while Amazon’s management hasn’t satisfactorily addressed either the causes or the prognosis on its calls. After a period of easing up on investment and driving more meaningful profits, it’s also seemed lately as if Amazon is priming for a bigger investment push and therefore thinner margins. Though many investors don’t seem to care much about short-term profits, the stock has responded positively to the growth and may pull back a little if signs of shrinking margins persist. The international business continues to be a drag on the overall business, and the only reporting segment that’s not profitable, and the last three quarters have seen deepening losses there alongside inconsistent profits in the domestic business, so that’s worth watching too.
Apple
Apple has now posted two consecutive quarters of revenue growth after nearly a year of declines, its first in many years, so all eyes will be on whether it continues that growth, and especially what happens with the iPhone, since that continues to be the biggest determinant of overall growth. Its guidance was for at least a billion dollars of year on year revenue growth, implying underlying iPhone revenue growth, with the higher end of guidance suggesting more material growth of over $3 billion. Beyond the iPhone, several of Apple’s other reporting segments have turned around recently, with the Mac line returning to growth over the last couple of quarters and the iPad revenue line (if not shipments) looking a little healthier, while Other Products (including both the Apple Watch and AirPods) has been a decent contributor. And of course Services continues to be a major driver of growth for the company and a significant contributor to overall revenues, and I would expect all those trends to continue. One of the things I’m most interested in is Apple’s guidance for the September quarter, because there’s arguably more uncertainty about this quarter than any other recent quarter based on the new iPhones Apple will announce a few weeks before quarter’s end. Given that the first ten days or so of sales of new iPhones normally fall in the September quarter, severely constrained supply on one or more new models, or a delayed launch, both of which have been reported, would materially affect its performance during that brief period. At the same time, Apple’s September quarter has been its most consistent recently, operating within a $4 billion band for the last three years, so that’s the baseline against which to measure any guidance.
One thing we already know about Facebook’s results is that it has passed 2 billion monthly active users, and that total will be very close to its final total for the June quarter, putting it just above the prior trajectory for user growth from recent quarters. However, far more interesting will be what’s happening on the revenue side, since Facebook has been warning since late last year that ad revenue growth would slow materially due to saturating ad load in the News Feed, and yet there’s been little sign of that yet. We’re now getting into the portion of the year where that slowdown was to have begun, so I’ll be watching both the numbers and the commentary on the earnings call for signs of where that stands. Facebook has certainly been pushing ads to many new places both in the core Facebook app and others such as Messenger and Instagram lately, suggesting that it’s doing its best to keep the growth trajectory going. The other thing to look for is signs of Facebook’s big recent ramp up in spending on original video content, which began in earnest during Q2 and was predicted a little in the Q1 earnings call. With many recent reports about how much Facebook is spending and offering to spend, I’d expect this to be a big theme on the call.
Microsoft
Microsoft has returned to revenue growth over the last three quarters, through a combination of underlying organic growth, the lessening effects of new accounting introduced over a year ago around Windows 10, and the fact that the former Nokia phone business has shrunk so much that it’s no longer leaving such a big hole in the finances. However, while the Office and related productivity and business processes segment has been growing strongly, and the cloud business following close behind, the combination of hardware and Windows Microsoft lumps together in its More Personal Computing segment has been in decline. The effective death of the phone business and the boost to the Surface line in recent months should help start to turn this revenue line around a little, though there are still some big headwinds in the form of the changes to the Windows licensing model. Microsoft’s recent layoffs also suggest ongoing transitions from legacy to cloud based products and business models, which will continue to work their way through Microsoft’s finances for several more years. It’s also worth looking at capital expenditures, which have come down pretty meaningfully both in dollar terms and as a percentage of revenues over the last year or so, to see whether that trend may begin to turn around as Microsoft continues to invest in Azure and related cloud infrastructure.
Samsung
Samsung has already reported preliminary results for the quarter, and both revenues and profits will set all-time records, and there won’t be nearly as many surprises as with the other companies discussed here. But what we don’t know yet is the composition of those results by segment, because Samsung saves that reporting for its final results. Based on past trends, it seems likely that the semiconductor division drove the vast majority of the growth in both revenues and profits, while there might have been some modest growth in the mobile division off the back of a strong Galaxy S 8 launch. The mobile division’s profits have been fairly flat lately even as the semiconductor division has taken off, and I would expect those trends to continue too.
Twitter is in the middle of yet another reset, retiring a number of ad products and investing in others in a way which the company has said will dampen revenue growth in the near term while setting it up for longer-term growth and profitability, at least in theory. As such, I’d expect this to be something of a down quarter for Twitter, and the question is really just how bad the financial picture is both for this quarter and the outlook going forward. User growth is a more interesting point this quarter than it has been for a while, because Twitter launched its Lite product for emerging markets in Q2 and Keith Coleman, who runs product at Twitter, recently said it had driven significant growth in users in India, so we could get faster growth than we’ve seen in a long time, albeit in a very low ARPU market. This will be the last earnings call with Anthony Noto as CFO before he hands over to the new full-time CFO Twitter recently announced and Noto focuses on his other job as COO. I’d expect that move to prompt some questions on the earnings call about the stability of management and about Jack Dorsey’s two CEO jobs. But I’d also expect some real probing on the call about the longer-term trajectory and prospects investors can expect at Twitter.
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