Tech earnings got underway from last week, taking up the headlines, so here are a few highlights from the Microsoft (MSFT - Free Report) , International Business Machines (IBM - Free Report) and Netflix (NFLX - Free Report) earnings reports. There were also rumors about Intel (INTC - Free Report) quitting its wearables business.
Microsoft: Microsoft topped estimates, helped by a 23-cent tax benefit as it set off losses related to the handset business it sold off, without which it would have beat by about 4 cents. The results were anchored by its growing cloud business, the scope of which is being gradually expanded under the cloud-first model.
So it’s encouraging that the infrastructure business (Azure) jumped 97% during the quarter and Office 365, the SaaS version of its Word, Excel and other productivity software, grew 43% to more than the transactional business for the first time. Microsoft expects to generate an annualized commercial cloud revenue run rate of $20 billion by 2018, and in the last month of the June 2017 quarter it exceeded $18.9 billion, indicating that it is well on track to reach the goal.
Segment-wise, the Productivity business grew 21%, Intelligent Cloud grew 11% with More Personal Computing declining 2%. The company remains in investment mode as it grows its cloud business so look for more collaborations and increasing capex.
International Business Machines: IBM saw broad-based declines across all segments due to secular issues in its legacy business. However, strategic imperatives, including cloud and analytics accounted for $8.8 billion, which is about 45.6% of the $19.3 billion it generated in the quarter, so the crossover point seems near.
Cloud and analytics within strategic imperatives grew a respective 17% and 6% from the year-ago quarter, as the company was able to leverage the products and relationships in its legacy business. Overall, the company reported earnings that beat expectations on revenue that missed and reiterated 2017 guidance.
Netflix: Netflix reported revenues that blew past our estimates while missing bottom line expectations by a penny. Since the company only offers ads-free streaming at a fixed rate, the number that most investors are looking for is subscriber additions. Accordingly, subscriber growth of 5.2 million instead of the estimated 3.2 million was particularly encouraging. Moreover, there were 4.4 million net new additions from international markets, so investments in regional content are clearly paying off.
Is Intel Quitting Wearables?
A person familiar with the matter told CNBC that Intel has done away with the division working on health wearables including fitness trackers after de-emphasizing it for some time. Intel made a number of acquisitions in the space including Basis and Rekon, but none of these apparently went off exactly as envisioned.
As a result, it decided to absorb most of the Basis staff in other parts of the business, while letting the rest go. Media reports indicate that the company remains focused on augmented reality, but it now looks like it may focus on chips rather than devices to generate continued growth in the IOTG business.
Price Change Last Week
Price Change Last 6 Months
Apple Target Price Hike: Morgan Stanley analyst Katy Huberty said that although the new iPhone would ship late this year (October instead of September), this only meant stronger March and December quarters (DigiTimes’s Steve Shen, citing a report by the Economic Daily News says the phone is 1-2 months delayed and won’t come to market until November or December.).
Huberty is projecting an in-line June quarter and weaker-than-consensus September quarter. Deutsche Bank analyst Sherri Scribner said however that there was reason for caution on Apple shares because of fundamental challenges like saturation due to elongated refresh cycles, declining share, increased Chinese competition and a growing secondary market. Both analysts raised their target prices although Huberty’s $182 was notably higher than Scribner’s $132.
First Apple China MD: Isabel Ge Mahe, who was born in the northeastern city Shenyang of Liaoning province, is going back to China as Apple’s (AAPL - Free Report) Vice President and Managing Director of the greater China region. Mahe has been with Apple for nine years, during which time she has led Apple’s wireless technology teams, worked on the HomeKit team and on Apple Pay, which recently launched in China. She also played a role in developing China-specific features for the iPhone and iPad. Her fluency in mandarin is also seen as a big positive. Apple has been struggling in China, so Mahe’s job is cut out.
Facebook Expanding Mexico Data Center: Facebook’s (FB - Free Report) New Mexico data center is nearly doubling capacity with a 460,000 square-foot state-of-the-art extension. The first building, to be powered by Affordable Solar’s three new solar farms currently under construction, will start operation in 2018. The second one, which will also be powered with renewable energy, will be launched in 2020. Facebook will get property tax exemption for 30 years in exchange for annual payments of $50,000 to $500,000, with the state also providing billions of dollars in industrial revenue bonds and other economic development funding.
Sears Selling on Amazon: In furtherance of its goal of reducing real estate footprint and expanding distribution through online channels, Sears has inked a deal with Amazon (AMZN - Free Report) . The company will be selling its Kenmore brand of appliances through Amazon. While some are concerned that there will be additional shipping costs, these are likely to be lower than real estate costs. So it does seem to be a good deal. Additionally, the company will now be incorporating Alexa into its smart devices so they can be controlled by voice command (Amazon is developing the required Alexa “skill”).
Alibaba Foray into Indian Grocery Market: Alibaba is looking to invest $200 million into BigBasket, the largest Indian online grocer, to tap the strong growth prospects in that segment. The investment values the company at $900 million. Dubai’s Abraaj group led a funding round last year that raised $150 million. Morgan Stanley reportedly forecasted a 141% CAGR for the Indian food and grocery market that will see it touch $15 billion by 2020 and accounting for 12.5% of the overall retail sales in India.
Toshiba Chip Unit Sale Update: Toshiba shares jumped last week after David Einhorn’s Greenlight Capital announced that it had acquired a stake in the company and it was also able to avoid an injunction order. Toshiba was also able to prevent WDC workers from entering the JV premises by getting a temporary stay on the court’s order allowing WDC.
Toshiba, in preparation of selling its stake in the JV, had transferred its interest in it to a company it named Toshiba Memory that Western Digital objected to as a violation of its rights as a JV holder. If Toshiba sells to one or more semiconductor rivals of Western Digital, it will transfer important intellectual property and render its own investment in SanDisk, the other JV partner, pointless.
So Western Digital has a lot at stake. At the same time, Toshiba is dealing with big problems of its own as it deals with accounting irregularities that led to huge losses at its American nuclear unit. Toshiba could get delisted if it doesn’t meet key profitability criteria and for that reason it needs to sell the company as soon as possible.
Google Wins Equal Pay Fight: The Labor Department had sued Google in January, saying that the company hadn’t complied with orders to supply it documents to prove that it was in compliance with equal opportunity laws. Google protested the allegation and said it provided hundreds of thousands of documents about its pay structure upon 18 different requests.
The court found that the agency hadn’t established grounds to explain why it needed details like employee email addresses, dates of birth and salary history, especially considering the fact that it could expose people to data and identity theft, considering the increase in such incidences these days.
Microsoft 365: At its Inspire 2017 conference, Microsoft unveiled Microsoft 365, targeted at small and medium business owners with global operations, or at least with global aspirations. While large organizations can expand as required and maintain entire IT departments, smaller organizations may have financial constraints. As a result, Microsoft is combining its Office 365, Windows 10 and Enterprise Mobility and Security products into a single solution for easy deployment.
NBC News on Snapchat Show: A show called “Stay Tuned” from Comcast’s NBC will soon be coming to the Discovery tab on the Snapchat app. Hosted by reporters Savannah Sellers and Gadi Schwartz of NBC News and MSNBC and inspired by some success with earlier news snaps, the show is designed to tap the young audience that normally stays away from such things. The first daily news show on the platform will run at 7 a.m. and 4 p.m. Eastern time during the week and 1 p.m. on weekends. It will include ads, so there will be money from the get-go.
M&A and Collaborations
Google, GE Invest In Desktop Metal: The two conglomerates are part of a$115 million Series D funding in metal 3D printing company Desktop Metal, which has now raised $212 million. The company has designed a couple of printers, one for the office, and the other for industrial uses. The office version, which will ship this September, costs $50,000 plus furnace cost of around $60,000. The industrial version, to ship in 2018, has a starting cost of 360,000 plus the cost of one or more furnaces.
Amazon-VMware Deal: Amazon and VMware are reportedly extending their relationship (signed last October) to include software for corporate data centers. For Amazon, which has been modifying its public cloud strategy to incorporate more elements of the faster-growing hybrid cloud, it expands its scope and prospective customer base by allowing companies to migrate their on-premise apps to the cloud and also recover files from AWS in case of a disaster. For VMware, it’s an opportunity to retain customers that may have been lost to public or other hybrid cloud provider. So it’s a win-win.
This Week’s Earnings Reports: Intel, Google, Facebook, Texas Instruments, Advanced Micro Devices, Lam Research, PayPal, Expedia, Amazon, Grubhub, Twitter, Netgear, F5 Networks, Fortinet, ProofPoint, Netgear, Juniper, Seagate, Corning, Elextronic Arts.
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