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Tech Daily: Apple, Facebook, Microsoft, AMD Earnings

Sejuti Banerjea

Apple AAPL, Facebook FB, Microsoft MSFT and Advanced Micro Devices AMD were among the biggest earnings announcements. Here are a few details.

Apple

Apple’s reported earnings of $4.99 thrashed the Zacks Consensus Estimate of $4.54. What’s more, revenue of $9.82 billion also blew past our estimate of $88.02 billion. The significant beats from such large bases goes to show Apple’s leadership position, consumer mind share, brand value, strategy and execution.

Not surprisingly, analysts poured praise on the company, with around 15 of them raising price targets. They summed up the key takeaways-

Wedbush analyst Daniel Ives, said, “We would characterize these results and guidance as a ‘blow out’ print that will put more high-octane fuel in the bull thesis looking ahead.” He was also excited about the March guidance that he attributed to “pent-up demand within the installed base which is now over 1.5 billion devices worldwide.” He maintained his Outperform rating and recently-raised price target of $400.

Morgan Stanley’s Katy Huberty said that the iPhone’s return to strength along with double digit-growth in services and wearables signified that Apple had once again returned to its “three pillars of growth.”
D.A. Davidson’s Tom Forte pointed to “a potential multi-year cycle of positive smartphone unit growth due to the rollout of the next-generation wireless network, 5G.” "We see Apple's December 2019 quarter as a microcosm for its calendar 2020 performance, with the iPhone, once again, returning to the front and center," he said. He maintained his Buy rating while raising his price target from $375 to $385.

Jefferies analyst Kyle McNealy sees strong iPhone sales as a sign of increased subsidies and promotions from carriers, something he expects will become a more robust trend as carriers try to recover investments in 5G buildouts. He expects Apple’s 5G phones to be more differentiated than its current models from rival offerings.
 
Oppenheimer analyst Rick Schafer is also positive on the iPhone-driven quarter, the upcoming 5G iPhone and continued growth in the services business, which brought in $12.7 billion in the just-reported quarter.

Cowen and Co analyst Krish Sankar talked about how the services business had achieved the targeted $50 billion revenue run rate ahead of schedule and how the recurring revenue model was a powerful driver of earnings in the long term.

Credit Suisse analyst Matthew Cabral praised the strong quarter but cautioned investors on the valuation, pointing to the 30% appreciation in shares prices in the preceding 90 days.

UBS analyst Timothy Arcuri said Apple was expensive with respect to its own history but not with respect to large cap tech stocks.

BofA’s Wamsi Mohan attributed below-consensus services revenue to the Hong Kong unrest that impacted demand in China, but didn’t mention the trade war impact that may have increased patriotism in Chinese to prefer home-grown brands over foreign brands.

Wells Fargo analyst Aaron Rakers said despite lower-than-expected services revenue, the subscriber base expansion was encouraging. He now expects 600 million+ paid subscriptions by the end of 2020, up from previous expectations of 500 million.

Facebook

Facebook’s revenue and earnings of $21.08 billion and $2.56 beat the respective Zacks Consensus Estimates of $20.89 billion and $2.52.

While the results were hardly a disappointment, management comments about increasingly difficult user growth and related revenue pressures, increasing costs (including from regulatory scrutiny) to serve the existing users and increasing controversies resulting from a more defiant attitude from Zuckerberg about defending what he called Facebook’s “principles” impacted share prices.

Also, Mark Zuckerberg, while congratulating himself on the quarter, said "We remain focused on building services that help people stay connected to those they care about" but he provided no granularity on alternative growth avenues like AI and shopping on Instagram or even monetization ideas for WhatsApp.

The 2.5 billion monthly active users were up 8% year over year and 1.66 billion daily active users were up 9%, which were kind of okay.  But the more saturated North America region added just 1 million new users sequentially and 6 million from last year to reach 248 million.

So, Facebook is expecting first quarter revenue deceleration due to "increasing impact from global privacy regulations and ad targeting related headwinds" and while it has “experienced some modest impact from these headwinds to date, the majority of the impact lies in front of us."

Microsoft

Microsoft reported earnings of $1.51 (better than the Zacks Consensus Estimate of $1.32) on revenue of $36.91 billion (also better than the Zacks Consensus of $35.71 billion). The main driver of the stellar results was its cloud business with Windows also remaining strong.

The sustained strength in its cloud business was driven by first of all, its hybrid approach and position as the legacy provider, which in combination helps transfer corporate workloads to its cloud. Right from the time that Nadella took the helm, Microsoft has also adopted a collaborative approach to the cloud, partnering even with rivals when required to provide the greatest flexibility and choice to customers.

The fact that today it’s like a one stop shop for all cloud computing requirements including IaaS, PaaS and SaaS makes its offering compelling. As Amy Hood said on the call, “The Azure growth number is all about usage… We had good signings of agreements in the quarter and that contributed to bookings, and we had a good underlying consumption quarter.” That’s probably why Azure growth accelerated in the last quarter to 62% from 59% in the preceding quarter, driving commercial cloud revenue growth of 39% and a 5-point expansion in commercial cloud gross margin to 67%.

Intelligent Cloud sales, made up of Azure and server software, came in at $11.9 billion, Productivity unit sales, mainly Office software, rose to $11.8 billion, More Personal Computing, including Windows, Surface and gaming revenue, was $13.2 billion. The Windows business benefited from Windows 7 end of life buying.

Management said that the spread of the coronavirus in China could have a negative impact on the PC assemblers and component suppliers, many of which are based in Southeast Asia. This could negatively impact its More Personal Computing results in the current quarter. With expansion in cloud profitability and reduction in operating expenses, management expects a 2-point improvement in operating margins for the year ending in June. Capex will increase to build out cloud data centers.

Advanced Micro Devices

AMD reported revenue and earnings of $2.13 billion and $0.27, better than the Zacks Consensus Estimates of $2.10 billion and $0.26. But it didn’t blow our minds, especially considering how Intel solidly beat estimates and how AMD has been talked up by analysts and experts alike.

But it turns out that we needn’t fear that much because we don’t know that much about how the different segments of the company actually did because the non-PC business includes both server chips (where both unit shipments and average selling prices grew strong double-digits) and the semi-custom business (that declined more than the company’s expectations of around 30%).

The strength in the server business was attributed to its second-gen Epyc processors. The weakness in semi-custom was attributed to slower game console sales ahead of the launch of next gen devices from Microsoft and Sony.

Jefferies analyst Mark Lipacis reiterated his Buy rating and raised the target price from $56 to $58. He expects the Mar 5 analyst day to be a catalyst. “We expect server share gains to accelerate as cloud customers become more familiar with Epyc,” he said.

Cowen analyst Matthew Ramsay thinks nothing has changed fundamentally. While 1Q20 came in light due entirely to console seasonality, 2020 guidance should allow investors to feel comfortable with upside to consensus… Importantly, we believe the guidance sets the table for upward revisions throughout the year with notebook & console the largest potential upside drivers, while server growth will be of the highest magnitude.”

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