TMT: 1Q 2015 Earnings Rundown

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Two main themes surprised us during 1Q15. First, advertisers are showing caution at a particularly eventful moment in the evolution of mobile commerce, and second, the enterprise transition to the cloud is playing out even faster and more profitably than we had anticipated. The first trend contributed to serious stumbles at TWTR, LNKD, YELP and YHOO, and did no favors for GOOG and FB, both of which have traded sideways after FX affected revenue misses. The second trend pleased AMZN and MSFT investors, both of which delivered big upside in cloud sales and margins. The data center IT players threatened by the shift to the cloud – IBM, EMC and others – largely disappointed as we thought, but have not been punished by the market. Finally, we jumped the gun on QCOM, which acknowledged that a rebound is still a few quarters away.  Most of the rest of 1Q, including AAPL and NFLX’s blowouts, played according to our expectations.

FX headwinds affected nearly everyone in 1Q 2015. The effect of the strong dollar was likely much stronger than what was embedded in estimates, delivering a 640bp hit to sales on average. Investors largely shrugged this off, and the hit will likely be less painful next Q.

Advertisers are more cautious on mobile than expected. Most ad driven internet names missed sales, caused in part by those FX headwinds, but also by a noticeable drag in mobile ad spending. FB and GOOG largely shrugged it off, but TWTR took it on the chin, noting that ad buyers were skittish on new formats and that a new buyer friendly pricing scheme hit 1Q sales. We remain extremely bullish on the long term future of mobile ads, but note that we may have been ahead of ourselves this Q.

Webscale data center operations make big $. Shockingly, fast growing AWS is AMZN’s most profitable business, even after huge price cuts in 2014. MSFT also saw huge growth from its cloud software efforts, while GOOG’s well hidden IaaS business is likely riding the same wave. Traditional IT names IBM and EMC disappointed against modest expectations, implying a sharper than expected transition to the cloud and good news for SaaS application players, most of whom have yet to report.

Smartphone growth shows interesting contrasts. Investors yawned at AAPL’s blowout, already nervous over the impossible compares coming for FY16. However, AAPL suppliers ARMH and SWKS got some love. QCOM got a beat down after lowering guidance – the benefits of a China resolution and the new Kryo processor architecture won’t help until next FY.

Wireless rivalry continues. With a price war in full effect, TMUS took 1M postpaid phone adds at the expense of T and VZ, which will continue to see margin pressure. Despite T/VZ seeing strong non-phone device adds, they are starting to lose postpaid phone subs. Expect this to continue.

E-commerce is a tale of two cities. While AMZN saw strong growth in a weak FX environment, EBAY’s beat came as a surprise driven by PayPal. With the core EBAY business struggling and PayPal under threat from a host of mobile payments solutions, our outlook is negative.

Please see our published research page for the full note.

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