In a big week for tech earnings here are highlights from three-
First Up, Amazon
The largest ecommerce company that is still giving traditional retailers, online retailers, infrastructure providers, not to mention Alphabet GOOGL-owned Google headaches, missed estimates this quarter! And yes, that’s reportedly, the first time in two years!
So it didn’t matter that it was mainly because of investments in free one-day shipping for Prime members that the company had even warned of before. Investors weren’t in a forgiving mood.
And it wasn’t the only pain point. Amazon AMZN expects increases in headcount (it added 100,000 people in the quarter!), fulfillment and shipping cost (up a whopping 46% from last year, on top of a 36% jump in the second quarter), all related to bringing one-day delivery online, to continue in the current quarter.
Additionally, revenue was just slightly ahead of the Zacks Consensus Estimate. This is difficult to understand because the Diwali season in India was split between the third and fourth quarters this year, unlike last year when it was mostly in the fourth quarter, which should have made for easier comparisons. Of course, it does kind of explain the disappointing fourth quarter revenue guidance. That and the Japanese consumption tax that was raised from 8% to 10% on Oct 1.
One also wonders if Amazon is seeing increasing competition in AWS. The 35% revenue growth rate is nothing to scoff at, even if it’s decelerating, considering the business brought in nearly $9 billion in the quarter. But it’s interesting that the margin is also declining here.
Here are some numbers-
Revenue $69.698 billion (up 25% excluding currency impact), 1.9% above the Zacks Consensus Estimate.
Earnings $4.23 (down 26%), 5.16% below expectations
Q4 Guidance: Sales growth of 11-20% (very wide range) to $80-$86.5 billion; operating income of $1.2-2.9 billion (it was $3.8 billion in 4Q18).
Next in Line, Microsoft
Microsoft MSFT represents a solid growth story, which is all the more commendable because of the size of this company.
The three buckets into which this highly diversified business is more or less equally divided are productivity, cloud and personal computing.
As has become routine for Microsoft now, the cloud business saw the strongest growth this past quarter, driven by Azure and server products. Productivity also grew double-digits, as the company’s Office tools continued to excel (particularly in the commercial segment), Dynamics and LinkedIn. Personal computing was driven by acceleration in Windows 10 upgrades as end of support for Windows 7 draws near.
Microsoft’s strength in recent times has come on the back of some solid strategies.
The first of these is the bundling of its Windows software with its productivity tools that supported the Windows business in the face of increasing competition from Apple AAPL on the one side and Google on the other. Fattening the Office bundle also helped. Microsoft was the incumbent supplier, but there was a time when this leadership looked under threat, particularly as enterprises could move to competing platforms while shifting to the cloud.
This brings us to its second strategy of building out the cloud business as rapidly as it could through strategic partnerships, collaborations and building of internal capabilities, also harnessing the power of artificial intelligence (AI) and focusing on a hybrid cloud strategy. Today, Microsoft is extremely well positioned to transition its traditional user base to the cloud, capture new share, including at the government, and take share from Amazon’s AWS. The transition to the cloud is in its relatively early stages, so this business is set to grow for years.
The third strategy is with respect to its growing family of proprietary hardware under the Surface brand. It is used both to showcase its software, and to round out its technological capabilities. Gaming and search advertising are also lumped into this more consumer-focused business.
Github has added to this.
Microsoft isn’t a business that has major stories every quarter. It is the steady execution of these strategies quarter upon quarter that’s taking Microsoft places.
Here are some numbers-
Revenue $33.06 billion (up 15% excluding currency impact), topped the Zacks Consensus Estimate by 2.6%
Earnings $1.38, (up 21%), beating expectations by 10.4%.
Q2 Guidance: Productivity and Business Processes revenue of $11.3-11.5 billion, Intelligent Cloud revenue of $11.25-11.45 billion and More Personal Computing revenue of $12.6-13 million. COGS is expected to be $12.45-12.65 billion, operating expenses of $10.8-10.9 billion, other income and expense of $50 million and an effective tax rate of slightly above 17%.
Last But Not Least, Intel
Intel’s INTC results allayed fears that the U.S.-China trade deal is having a dire impact on semiconductor companies. If anything, it was slightly positive for Intel’s quarter, as Chinese customers stockpiled server chips worth around $200 million before the tariff goes into effect. Bob Swan said, “we expect to generate more than $3.5 billion in AI-driven data-centric revenue in 2019, up more than 20% year-over-year”.
The company continues to see stronger-then-expected demand for its PC chips and remains impacted by shortages. Management expects to have sufficient capacity to meet this extra demand next year. There is additional competition in this market from Advanced Micro Devices AMD, although management says that its PC business remains stronger than the broader market.
Chips built on 7nm process are expected to ship in the fourth quarter of 2021 and there onward, management expects to be back into the two to two-and-a-half-year cadence.
Here are some numbers-
Revenue of $19.19 billion beat by 6.4%
Earnings of $1.42 beat by 14.5%
Q4 Guidance: revenue of $19.2 billion (Data-centric up 6-8%, PC-centric flat to slightly down), operating margin of approximately 33.5% and a tax rate of 13.5%. EPS is expected to be $1.24.
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