TMT: 2Q 2015 Earnings Preview

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SEE LAST PAGE OF THIS REPORT Paul Sagawa / Artur Pylak

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July 15, 2015

TMT: 2Q 2015 Earnings Preview

1Q15 shook things up with unexpectedly weak digital ad spending and an unexpectedly strong shift to the enterprise cloud. This quarter, we expect digital ads to get back on track in the US against somewhat muted expectations, with the cloud shift continuing to pick up steam. Companies with international exposure, particularly to Europe and/or China, could see hits to both top and bottom lines. As a result, smartphone sales could be a tad light, as could traditional IT. We believe 2Q could be a real turning point for wireless competition, with TMUS taking share from the VZ/T duopoly.

  • Digital ads to pick up from a weak 1Q15. Analysts are expecting just over 11% sales growth from GOOG – it should be able to beat that despite FX headwinds, with good news on CPC. FB will take a big hit on FX, but consensus sales estimates for 37% growth seem to expect it – OPEX is the wild card which could make or break the quarter. TWTR has the benefit of weak expectations – look for them to beat the 54% sales growth bogey easily – and can talk up strategic moves on the call.
  • Streaming to stay on a roll. We expect NFLX to continue the 1Q15 mojo with strong sub #s and sales growth. Meanwhile, weak ratings, a weak scatter market and an apparent new willingness to negotiate streaming deals suggest possible disappointments from traditional ad driven TV.
  • Smartphone sales soften. AAPL is still surfing the success of the iPhone 6 and expectations are still not high enough. Still a 4th consecutive blowout will not help the stock much, as the coming 6S faces a killer compare for FY16. The Android ecosystem is still licking its wounds – all the growth is from emerging market brands. QCOM is still a Q or 2 from regaining its mojo. Chip winners from 1Q15, ARMH and SWKS, may not get a repeat.
  • Enterprise cloud shift is accelerating. AMZN and MSFT will make the most hay this Q, but GOOG is making strides. SaaS leaders will show strong – CRM, WDAY, DATA, ADBE, etc. Meanwhile, most traditional IT vendors – e.g. IBM, EMC, etc. – are at risk, exacerbated by international exposure.
  • TMUS takes subs from VZ/T. TMUS already revealed 2.1 net adds for 2Q15, doubling its growth in 1Q. This could show in slightly higher churn for the other 3 carriers, who could see ARPU hits and unexpected CAPEX as well. Wireless competition should be good for tower stocks.
  • AMZN to lead a strong e-commerce Q. AMZN’s excellent 1Q15 in the face of a strong dollar portends more of the same, with resurgent sales growth and, perhaps, even an uptick in margins. EBAY seemed distracted by the pending PYPL spin during 1Q, but could have left a little in the tank to show a bit of strength ahead of Monday’s distribution.

It’s That Time Again

2Q15 TMT earning season kicks off in earnest this afternoon with NFLX’s results. Last quarter’s subscriber blow out sparked a 50% run in its shares, and with shares up 7.5% just in the last week, it is unlikely that NFLX is sneaking up on anyone again this quarter. Nonetheless, we expect a solid beat against consensus projections of 23% YoY topline growth to $1.65B and EPS of $0.31. However, this time the beat is unlikely to drive such a wild run, despite the 7 for 1 split executed this morning. Still, we believe that NFLX has a lot of growth ahead of it, with plenty of leverage to the bottom line.

The other stock reporting today is IBM. Given that consensus projects a 14% YoY decline in both sales and earnings, it is fair to say that expectations are muted. However, given IBM’s substantial exposure to FX and the impact of the cloud paradigm shift on its core businesses, it is not at all assured that the company won’t miss anyway. Even with a beat against an easy target, we don’t see much reason for optimism going forward.

Thursday will bring GOOG and EBAY. GOOG is often a head-scratcher, with an Amazonian tendency to disappoint on surprisingly high costs or mysterious one-time sales shortfalls. This time, the FX hit is embedded in expectations for just 11% top-line growth, a makeable target in what should be a strong quarter for on-line ad spending. GOOG has spiked in recent sessions back to where it was after announcing last quarter’s results. Assuming management can explain its performance on Wall Street’s preferred metrics of Cost Per Click and Paid Clicks, reaction to the quarter could take shares higher.

EBAY will be reporting its last earnings before spinning PYPL out to shareholders next Monday. In 1Q15, strength in PYPL overshadowed weakness in forward going EBAY business. Given the action of the “when issued” shadow stocks, it would seem investors are expecting a repeat performance here. While EBAY carries a lot of international exposure, overall growth in e-commerce may be enough to push it past the pessimistic consensus. Meanwhile, there is no reason to expect any hiccups on the PYPL side ahead of the distribution.

Next week is a big week, with AAPL and MSFT both reporting Tuesday on top of VZ, T and YHOO. AAPL will very likely blow out its consensus numbers, with 10%+ potential upside to both sales and earnings. However, odds are, the widely expected beat won’t push the stock much higher. Doubts persist about the reception for the much hyped Apple Watch and about the potential demand drop off for the upcoming iPhone 6S vs. the blockbuster 6 and 6 Plus. Neither doubt will be addressed on this conference call.

MSFT will a lot of moving parts in its 4QFY15 numbers, a year after first consolidating the results of its purchase of Nokia’s phones business. Many Nokia product lines have been terminated, culminating in the recently announced decision to lay off 7,800 workers in that business. The soft PC market on the tail of last year’s Windows 8 upgrade cycle will take its toll, as will MSFT’s near 55% exposure to international markets. Still, digesting these factors is easier given the hall pass of soft expectations. Analysts are projecting sales down 5.6% with a slight uptick in EPS to $0.56. This looks easily doable, and CEO Nadella will likely have a good story to tell on continued big growth in his cloud offerings.

Given TMUS’s already announced 2.1M post-paid subscriber gain, VZ and T are almost certain to post collective declines in phone subscribers, perhaps covered by growth in non-phone device connections. As usual, T will likely take the worst of it, although we are not expecting VZ to skate away free. We also fear modest hits to ARPU and upside surprises to CAPEX given the increasingly competitive environment. TMUS won’t report its own numbers until July 30, but we expect strong revenue growth to drive a beat of the $0.20 expectations.

QCOM will report next Wednesday. We expect a further holding pattern, as management waits on negotiations for back payments from Chinese manufacturers to play out. Investors will also have to wait for the superior new Snapdragon wireless chipsets to begin shipping at year end. Meanwhile, expect QCOM to meet or slightly beat its now tepid expectations, with investors reacting with a yawn. We will get more excited in a quarter or two.

AMZN is on tap for Thursday, July 23. As per usual, management will offer scant detail and answer few questions, but some nuggets may escape. In particular, we expect AWS to build on its impressive 1Q15, maintaining a rapid growth trajectory and relatively attractive profitability. We also believe the e-commerce revenues will be stellar, with hope that management will once again offer a glimpse of better margins to keep up investor enthusiasm.

TWTR earnings are almost two weeks away after a tumultuous quarter, which saw the departure of CEO Dick Costolo and the reveal of Project Lightning, an event-driven remake of the TWTR app intended to answer its critics and energize both registered and unregistered users of its content. Neither of these things will affect sales or earnings THIS quarter, but expect interim CEO Jack Dorsey to talk futures in a big way on the call. Given that estimates for 2Q15 have sales growth cratering from 74% in the “disastrous” 1Q15 to just 54% this quarter, there would seem to be room for TWTR to stop the bleeding with a solid beat against greatly lowered expectations. We remain convinced of the potential of TWTR to be a dominant information distribution platform and are encouraged by the CEO replacement and by Project Lighting.

FB, which reports July 29th, is not expected to have nearly as much of a revenue growth fall off. Consensus points to 37% top line growth down just a tad from the 42% delivered in 1Q. Given the 10% YoY drag from FX reported last quarter, 37% still represents impressive growth and FB could beat it. On the bottom line, the $0.47/share consensus is just $0.05 higher than the year ago compare, reflecting Mark Zuckerberg’s OPEX spending binge, but clearly achievable. With the stock having just set new highs, even a substantial EPS beat may not be enough to take it a lot higher in the near term. Nonetheless, FB has plenty of room to deliver future growth from its unique platform, and will get much easier FX compares by year end.

Also reporting July 29th, DATA has crushed consensus revenue expectations in the two years since its IPO debut. There is no reason not to expect another beat with sales growth at 60%+ driving EPS solidly ahead of the $0.05 target. The other SaaS name in our portfolio, WDAY, won’t report until nearly a month later for its July quarter, the same as its larger rival CRM. Several traditional IT companies – CSCO, HP, and ORCL amongst them – will also report out of the traditional cycle. The TMT results over the next month should give us some useful perspective.

Exh: SSR TMT Earnings Cheat Sheet, CQ2 15

Note: Q1 in key metrics notes refers to the first calendar quarter of 2015
Source: Capital IQ, Company Releases, SSR Analysis

 

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