Quick Thoughts: Apres le Deluge – Earnings

sagawa
Print Friendly, PDF & Email

SEE LAST PAGE OF THIS REPORT Paul Sagawa / Artur Pylak

FOR IMPORTANT DISCLOSURES 203.901.1633 /.1634

psagawa@ / apylak@ssrllc.com

twitter.jpg
@PaulSagawaSSR

January 24, 2016

Quick Thoughts: Apres le Deluge – Earnings

4Q15 earnings season kicks off in earnest this week. In general, we expect strong results from cloud-based leaders – AMZN, GOOGL, FB, MSFT, in particular. We believe device demand in 4Q15 was weaker than expected, with likelihood that 1Q16 guidance will also be disappointing. In particular, we do not expect a iPhone7 comeback from AAPL. Enterprise IT spending was likely soft, particularly in international markets – look to SaaS leaders and the big three IaaS names as exceptions. Media results may be a bit better than the last few quarters, but expectations for 2016 look too high. VZ already kicked of telecom earnings with mixed results – TMUS continues to take share and should have a margin rebound.

  • Strong cloud quarter – All signs point to an excellent AMZN quarter – 3M new Prime members in just one week and obvious momentum in both e-tail and IaaS. We believe the digital ad market remains strong – expect GOOGL, FB and TWTR to continue strong YoY sales growth and margin leverage against achievable estimates. MSFT has 200M Windows 10 users, up from 110M in Oct – this has strong implications for licensing revenues, but also Office 365. Azure grew at triple digits last quarter, we expect it to come close this time. Expectations and valuation are modest.
  • Another TWTR shakeup – Re/Code is reporting that TWTR will announce a new, high profile Chief Marketing Officer on Monday, hired from a major consumer company. Accompanying the hire, several current TWTR executives will be leaving, including the head of engineering, the head of product, the media head, and the head of Vine. While TWTR’s valuation is already severely depress, we expect the appearance of further executive disorder will further pressure the stock. Still, we see strong 4Q15 results and growing acquisition rumors as backstops for a stock that we believe has serious upside longer term.
  • Disappointing devices – No one expects a strong quarter out of AAPL, but we think many analysts are getting too optimistic, too early in the face of a mature smartphone market and already high replacement. VZ’s comments are ominous, and we see nothing in the iPhone 5SE and 7 rumors to suggest that either can recharge growth. Look for a soft quarter and soft guidance to keep pressure on the stock. The read across for competitors and suppliers is also negative. QCOM, AVGO, SKYW, and others could also disappoint. Disk drive motor maker Nidec has reported weak 4Q15 sales and 1Q16 guidance, citing poor consumer PC demand. This hammered STX and WDC shares ahead of their reports, pricing in a serious miss. Constructive 2016 comments from either could yield upside.
  • Enterprise IT spending slows – IBM already reported its 15th consecutive quarter of falling sales, tacking on 2016 earnings guidance well below consensus. There is not a lot of reason to expect other old line IT suppliers – e.g. HPE, CSCO, EMC, JNPR, ORCL, EQIX, and others – to offer more encouraging results, as the economy weighs on enterprise spending decisions. SaaS and IaaS are inherently deflationary – economic pressures could spur more activity for companies like CRM, WDAY, DATA, NOW, N, and the big three IaaS players (AMZN, MSFT, and GOOGL).
  • Media gets a respite – A stronger scatter market spurred by fantasy sports and early campaign spending seems to suggests a temporary easing of ad sales pressures for linear TV network owners, like CBS, FOXA, and DIS. We stress temporary, as we believe expectations for 2016 are far too optimistic and the shoe could drop with 1Q16 guidance. Cable MSOs – e.g. CMCSA, CHTR, TWC, etc. – will see benefit from jamming through broadband price increases. We will be looking to see if broadband subs continue to decline, as they did in 2015.
  • TMUS keeps rolling on – TMUS pre-released an upside surprise in 4Q15 subscribers right into the teeth of the market crisis. We expect the strong share gains to translate to top-line and bottom-line beats. After VZ reported solid, but unspectacular results, we are more pessimistic for T and S.
  • OTA and Security – In our recently published predictions for 2016 (LINK: http://www.ssrllc.com/publication/ten-investible-things-that-we-think-will-happen-in-2016/), we called out online travel agencies and security software companies as serious concerns for 2016. Economic and safety considerations may have weighed heavily on PCLN, EXPE, TRIP and SABR during 4Q15 and will certainly add caution to 1Q16 guidance, even before competitive pressures are added in. On the security side, FEYE got investors’ attention by announcing a deal for privately held iSight but missed on sales. This may be a harbinger for other highly valued security stocks, like FTNT, CHPT, PFPT and others.

Conclusions – 4Q15 earnings pick up this week. On Tues., AAPL and T could dampen the modest TMT recovery. We believe iPhone sales will disappoint this quarter and throughout 2016 (LINK: http://www.ssrllc.com/publication/smartphones-mobile-maturity/).). We also see T coming in light on subs and service revenues. On Wednesday, FB should bring relief, reflecting very strong digital ad demand. QCOM is likely to remain weak – we don’t expect royalties from China to have begun to flow YET. We also expect tepid results from JNPR, along with no comments on the ongoing FBI investigation of the discovery of an unauthorized back door to the company’s firewall software. On Thursday, expect AMZN to exceed even heightened expectations on accelerating share gains in e-commerce and leadership in IaaS. Cloud revenues will also drive MSFT to a beat, along with very strong Windows 10 adoption driving enterprise licensing and Office 365 conversions. The disk drive stocks – WDC and STX – have already been hit hard on Nidec’s preannouncement. We expect them to hold serve against greatly reduced expectations. Finally, FTNT also reports Thur. and investors should feel jittery after Feye’s sales miss.

Overall, we see more downside risk in TMT names than upside opportunity in the quarter. Devices, components, enterprise hardware and software, online travel and security software could see numerous disappointments against aggressive expectations and overly optimistic valuations. The saving grace will be the big internet names – the aforementioned AMZN, MSFT and FB, along with GOOGL – who are extending their dominance. We also see SaaS software as a pocket of strength, and favor TMUS to follow strong sub growth with upside financial results. We are braced for a negative reaction to TWTR’s management changes on Mon., but expect good results in the Feb 10 earnings release and see significant upside for investors, either from future growth or from a possible acquisition.

 

 

Exh 1: The SSR TMT Heat Map

Exh 2: TMT Earnings Cheat Sheet

Print Friendly, PDF & Email