It was a big earnings week for the technology sector last week with earnings reports from Intel (INTC Quick QuoteINTC - Free Report) , Microsoft (MSFT Quick QuoteMSFT - Free Report) , Alphabet (GOOGL Quick QuoteGOOGL - Free Report) , Amazon (AMZN Quick QuoteAMZN - Free Report) , Twitter , Expedia (EXPE Quick QuoteEXPE - Free Report) , PayPal (PYPL Quick QuotePYPL - Free Report) and so many more. In fact, around 48.4% of tech companies have reported thus far according to the latest earnings trends report, of which 73.3% beat on revenue and 80.0% beat on earnings. Moreover, while sector revenues grew just 6.2%, earnings growth was much stronger at 17.7%. 

So let’s jump straight to the biggest stories-

Earnings

Intel: Intel almost reached the revenue estimate with earnings beating by a penny. The biggest disappointment for investors was the data center business, which grew 6% (Intel earlier lowered estimated growth for this business from 15% to the high single-digit range). The two largest segments are client computing and data center, together comprising 73% of revenue so the 6% growth here basically sets the tone for the whole earnings report.

Management attributed the data center softness to seasonality, pointing to the stronger average selling prices (ASPs) and better-than-expected PC demand in the legacy business and strong growth in memory where it just started shipping Optane for things like AI and automated driving (the memory business was up 55% off a very small base).

The other tiny segments, IoT and programmable solutions (Altera), also grew strongly. Management is reasonably optimistic about the full-year targets and thinks that new products will continue to have a positive impact on ASPs and therefore profitability.

Microsoft: The leading software company reported fiscal third-quarter revenue that was more or less in line with the Zacks Consensus Estimate and earnings that were well ahead. Microsoft also benefited from the relatively strong PC sales (IDC estimates shipments increased 1% in 1Q17 after five years).

Microsoft’s strength at business customers and Win 10 upgrades helped its Windows licensing revenue grow 5%, although partly cannibalizing on its lower-margin Surface hardware sales. While Microsoft doesn’t separate Azure from the rest of its commercial cloud business, it did say that Azure sales rose 93%, while commercial Office 365 (the cloud-based version of Word, Excel and other productivity software) grew 45%.

The company seems on track to achieve its $18 billion in commercial cloud revenue target next year. While cloud growth rates are coming down, this should be expected given that the business is now growing off a larger base. Consequently it makes sense for investors to hail the cloud growth while absorbing the temporary softness in Surface sales (down more than 25%) as the company prepares to launch the next generation of its premium tablets.

Alphabet:  Alphabet reported solid first-quarter results, wherein earnings of $7.73 blew past the Zacks Consensus Estimate of $7.24 while ex-TAC revenue of 20.12 billion also topped the Zacks Consensus Estimate of $19.65 billion. Revenue and earnings continued to grow strong double digits from the year-ago quarter.

Since advertising remains its primary business (86% of gross total revenue), the strong report was largely a factor of prices (CPCs were down 19% because of strength in lower-margin mobile and Trueview ads), and paid clicks (that increased 44%). Encouragingly, Other revenue (including Google Play, hardware and Cloud) jumped 49.4% while Other bets (currently Nest, Verily and Fiber) revenues grew 47.9%. Management said that the much-talked-about ad pulling from YouTube didn’t have an impact on results.

Amazon: Amazon’s revenue and earnings were both ahead of the Zacks Consensus Estimates. AWS at around 9% of revenue, contributed over 88% of net profits, international continued to generate losses, while North America profits increased marginally from a year ago. Profit moderation in the retail business is not unexpected in the first quarter, as there is a huge drop in revenue from the seasonally stronger fourth quarter.

But this is what makes AWS so important for Amazon: it allows the company to continue investment in fulfillment centers, international expansion, Echo and artificial intelligence, while remaining very aggressive on pricing and continuing to push its Prime subscriptions. All of these are extremely important to drive continued growth year upon year.

Twitter: Twitter beat the Zacks Consensus Estimates on both top and bottom lines. Quarterly revenue declined again even as the quarterly loss dropped. Monthly active users increased 7% in the U.S. (fastest growth rate since 2Q15) and 6% internationally. Twitter is allocating resources to the more lucrative video format but this means upward spiraling content costs.

Can a loss-making company afford to spend loads on the most expensive thing in the world? But Dorsey has realized that nothing else will do. So it’s a bit of a do or die situation for Twitter. Another thing worth keeping an eye on is the declining cost per ad engagement, leading to declining average revenue per user despite rising engagement, which of course indicates weak pricing power.

Bottom line: Twitter finally has the strategy that can save it, but does it have the resources to follow up on it?

Some Other Tech Earnings From Last Week: Expedia, PayPal, Seagate, Western Digital, KLA-Tencor, Texas Instruments, Xilinx, Juniper, Fortinet, F5 Networks, Checkpoint, Corning, Nielsen

Other stories

Government Data Requests on Facebook Users: According to the latest global government requests report from Facebook, the number of requests for user data across the world was up 9% from the first half of 2016 to the second.  Requests for content restrictions were down 28%, although the trend may not have reversed because the first half of the year was inflated by a large number of requests related to one image from the 2015 terror attack in Paris.

Cisco Upgraded: Credit Suisse analyst Kulbinder Garcha upgraded Cisco stock from underperform to outperform on the basis of just-announced tax reforms from the White House. The analyst believes that significant tax cuts will allow Cisco to repatriate roughly $62 billion of cash that it has parked overseas, $30 billion of which can be used to return cash to investors over the next five years and the rest to make strategic acquisitions, both of which can significantly boost earnings power.

Google to Help Startups with Lawsuits: Last Tuesday, Google and Intertrust initiated a program called PatentShield, under which the companies will contribute some of their patents, so startups that join the program can use them as protection against patent litigation. In exchange, Google and Intertrust will take an equity stake in them, the size of which will depend on “the maturity of the company, its products and the litigation risk in their market.”

Apple Withholds Payments to Qualcomm: Apple, which uses Qualcomm technology through its manufacturing partners has stopped payments for the technology, precipitating a dispute on licensing fees between the two companies. Qualcomm says Apple doesn’t want to pay for its technology while Apple says that Qualcomm charges are unreasonable given that they are for standard essential technology.

“We’ve been trying to reach a licensing agreement with Qualcomm for more than five years but they have refused to negotiate fair terms,” Apple said in a statement. “Without an agreed-upon rate to determine how much is owed, we have suspended payments until the correct amount can be determined by the court.  As we’ve said before, Qualcomm’s demands are unreasonable and they have been charging higher rates based on our innovation, not their own.”

Apple Can't Replace Faulty iPads with Refurbished Ones: A Dutch judge has ruled that Apple must replace faulty iPads exchanged under its Apple Care warranty program with new and not refurbished devices. The terms of service of Apple Care programs allow Apple to provide refurbished products. The woman who bought a faulty iPad in this case refused to accept a refurbished device, which sent the matter to court.

Beijing Regulators Have Something to Tell Apple: Xinhua reports that The Beijing Cyberspace Administration, together with the Beijing Public Security Bureau and Beijing Cultural Market Administrative Law Enforcement Team met Apple representatives to see that Apple monitors the live streaming apps it sells through the app store more carefully.

Microsoft-Kaspersky Dispute: Last year, Kaspersky filed a complaint with Russia's Federal Antimonopoly Service (FAS) about Microsoft’s anti-competitive behavior. The court thereafter sued Microsoft for automatically removing incompatible software when users upgraded to Win 10 and not giving the companies enough time to work out the compatibility issue. Microsoft denied the allegations. Kaspersky has now withdrawn the case as the two companies have ironed things out.

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