The top earnings reports from last week were Facebook’s (FB - Free Report) , Alphabet’s (GOOGL - Free Report) , Amazon’s (AMZN - Free Report) and Intel’s (INTC - Free Report) .
Facebook: Facebook reported strong second quarter results, beating our estimates on both top and bottom lines. Total revenue grew 47%, of which mobile, which is now 87% of revenue grew 53%. Facebook has around 5 million advertisers, 70 million SMBs (potential advertisers) have Facebook pages and the platform connects 2.01 billion monthly active users. The price per ad jumped 24% in the last quarter while the number of ads jumped 19%. Still, revenue growth is decelerating because of declining desktop usage that allows it to serve more ads and newsfeed ad stuffing is reaching its limits.
Facebook is looking to video and also beyond the core platform to maintain growth at a blistering pace and Instagram followed by Messenger look ready to rise to the occasion. So data center investments are growing rapidly to support video sharing and machine learning, sending capex up 45%. Headcount is also growing rapidly (up 43% in Q2).
Google: Alphabet also topped our estimates for revenue and earnings. But investors were disappointed with the $2.74 billion EU fine that the company chose to charge this quarter even while it’s considering appealing the decision. Also, the cost per click (CPCs, or the price advertisers are willing to pay per click) remains in continued decline, attributed to strength in programmatic ads, as well as mobile and YouTube, which carry lower prices.
But offsetting the 23% decline in CPCs was a whopping 52% increase in paid clicks, so the resultant 21% revenue increase seems to indicate that the tradeoff was worthwhile. The non-advertising segment within Google (Play, Hardware, Cloud) was up 42% to nearly 12% of revenue, with the company investing heavily to scale the cloud business, where it’s seeing strength.
Both Hardware and Play businesses are seasonal and will therefore see higher marketing costs this quarter. The contribution from Other Bets remains insignificant, but revenues are increasing and losses declining, which is a nice thing.
Amazon: Given its huge revenues, first-mover advantage and the way it systematically boots out the competition, it’s really hard to imagine Amazon as a growth stock. After all, growth stocks are supposed to be young with strong revenue increases coming off a small base and little profit to show for their efforts.
But Amazon is in a league of its own, with $38 billion in quarterly revenue and a mere $197 million in profit (just 0.5% of sales). But that’s because Amazon IS a growth stock, ploughing back what it makes into content acquisition, AWS and India expansion. Analysts should also have factored in a spike in fulfillment costs in preparation for Q4 because this isn’t the first time Amazon has made such preparations. At any rate, the bottom line is, its earnings missed the Zacks Consensus Estimate despite the usual fillip from AWS.
Intel: Intel beat the Zacks Consensus Estimate on both the top and bottom lines. is diversifying away from the PC business, but its 56% revenue share in the last quarter indicates that the company’s fortunes are still tied to a considerable extent to a market where it sees a shrinking TAM.
Intel is doing well to generate 12% growth here on the strength of new products that are boosting prices on the notebook platform. Data center, at 30% of revenue, is not a cake walk any longer with NVIDIA taking the lead in machine learning and AMD coming up with some compelling products of its own. Intel is optimistic about its ability to increase the TAM (currently at 40% of the total opportunity) when it “builds out the adjacencies like Ethernet, Silicon Photonics and 3D XPoint memory and pulls them all together with rack scale design.”
While cloud and commercial service providers are driving this business, some of the strength in cloud is coming at the expense of enterprise because of corporate workload shifts. That leaves the non-volatile memory group at 6%, Internet of Things group at 5%, which are growing strong double-digits and the recently acquired Altera (programmable solutions group, which is chugging along.
Intel needs to get a few things right including artificial intelligence and IoT. And it absolutely can’t afford to lose share in the data center. Its positive earnings surprises, encouraging guidance, restructuring actions, spate of acquisitions and capital investments indicate that it may be able to outsmart the rising competition.
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Apple Could Start U.S. Manufacturing: Apple (AAPL - Free Report) has always maintained that it does support job creation in the country through its suppliers as well as app developers for its eco system. It recently added to those efforts by creating an Advanced Manufacturing Fund with a billion dollar corpus, with the goal of supporting manufacturing jobs in the country.
But a recent report from the WSJ suggests that Apple intends to do much more than that. The Journal quoted President Trump: “I spoke to [Tim Cook], he’s promised me three big plants — big, big, big.” He added “I said, ‘You know, Tim, unless you start building your plants in this country, I won’t consider my administration an economic success. He called me, and he said they are going forward.” Apple hasn’t confirmed this report.
Meanwhile, Apple supplier Foxconn has announced that it will open a $10 billion LCD plant in Wisconsin in exchange for cash incentives of $3 billion over 15 years and waiver of several environmental reviews. It will set up a 20 million-square-foot plant in 2020 at a 1,000-acre site that will initially employ 3,000 people and ultimately, up to 13,000.
Credit Suisse Positive on Apple Services: Credit Suisse expects Apple to double revenue from services (including the App Store, Apple Music, Apple Pay, Apple Care, and iTunes) to $52 billion by 2020, "driven by a high quality, affluent, digitally transacting user base of 1.1bn devices and around 650mn users." App Annie estimates that the iOS App Store will generate over $60 billion in gross consumer spending by 2021, so it should be a major driver of service revenues.
Facebook Cafeteria Workers Want More Pay: More than 500 cafeteria workers of Facebook’s San Jose contractor Flagship Facility Services have decided to join the UNITE HERE Local 19 trade union to negotiate for higher pay. Facebook requires its contractors to pay a minimum wage of $15 an hour and 15 paid leaves plus 15 days parental leave for new parents.
UNITE HERE says that its survey of the contractor’s workers showed an average pay of $18.81 per hour with the median wage being $17.95 per hour. Given the rising cost of real estate and food, workers are finding it difficult to make ends meet, so they want the union to negotiate on their behalf. Facebook hasn’t said it will raise the minimum wage requirement, but offered a non-committal statement indicating that it may be open to negotiations.
Google CEO Pichai Joins Alphabet Board: Google CEO Sundar Pichai has been appointed as the 13th board member of its holding company Alphabet, in recognition of his good work as CEO. Pichai joined Google in 2004 and moved up the ranks to the top position in August 2015. He joins other Google executives including co-founders Larry Page and Sergey Brin, chairperson Eric Schmidt and head of Google’s cloud unit Diane Greene. In the words of Larry Page, “Sundar has been doing a great job as Google’s CEO, driving strong growth, partnerships, and tremendous product innovation. I really enjoy working with him and I’m excited that he is joining the Alphabet board."
Amazon Exploring Healthcare Opportunities: Media reports indicate that Amazon is exploring healthcare opportunities through a Seattle-based secret lab it’s calling 1492. The division is different from the one that recently started selling medical supplies and equipment in the U.S. and will more likely focus on businesses like electronic medical records, telemedicine and genomics research that will allow it to leverage artificial intelligence and AWS.
Chinese Internet Giants Invest in China Unicom: In an attempt to help state-owned enterprises with operations and technology and also bring in additional funding, the government is opening up some of its organizations to private investment. China United Network Communications is one such organization that has seen interest from Alibaba (BABA - Free Report) , Tencent, Baidu and JD.com.
This could also be an attempt to curry favor with the government in lieu of its decision to police the Internet even more than it did before. But Jeffries analyst Edison Lee feels that not all these investors would be welcomed; first, because that may not help it operationally and second, because it could cause conflict orf interest, since the interested parties are competitors.
Meg Whitman Exits HP Board: HP CEO and Chairman Meg Whitman, is exiting the board position for unspecified reasons. Among the rumors circulating on her departure was one that she could be under consideration for the position of Uber CEO, which will find a replacement for Travis Kalanick by September. Whitman has the experience and wherewithal to hold the position but has tweeted that she wouldn’t be accepting the position. She will be replaced by Chip Bergh, current CEO of Levi Strauss who has been a board member since 2015. Whitman also quit the Survey Monkey board in May, so it’s her second board departure this year.
Apple Settles Patent Dispute: U.S. District Judge William Conley added $272 million to the $234 million a jury awarded the Wisconsin Alumni Research Foundation (WARF) back in October 2015 because Apple continued to infringe on the WARF patent even after the court ruling and before the patent expired in Dec 2016. Apple is reportedly appealing the decision.
The patent in question is called "predictor circuit," which improves processor performance by predicting what instructions a user will give the system. University of Wisconsin computer science professor Gurindar Sohi and three of his students were granted the patent in 1998. Apple claimed that the patent was invalid and asked the U.S. Patent and Trademark Office to review it, but the request was denied.
Microsoft Chip Development: Microsoft (MSFT - Free Report) just joined the likes of Apple and Google when it announced its own dedicated co-processor for the next version of its augmented reality device Hololens. The device has limited circulation today, but one of the things necessary for faster adoption is low latency when processing complex data. The coprocessor will take the load of AI processing off the main processor, thus eliminating the need to send data back to the cloud for AI-based decision making. It will therefore also help the device to operate in places with spotty connectivity.
Microsoft says the customization of the chip will make it more capable of handling required tasks. But it’s likely to make the device bulky another processor will mean increased power consumption and therefore, a larger battery.
Google Offers Vacation Rental Listings: Google is testing its new vacation rental listing on the search results page research firm Skift says it is a small group of about 7,000 listings). Google expects to add partners and listings if the test goes off well. The company has been losing parts of its primary search business to companies like Amazon, where a large percentage of people search for products. It has done a better job of protecting its turf in the travel market where it already offers flight information and some hotel listings. But it is getting deeper into accommodations with the latest change, as it adds new filters like places, accommodation type and so forth.
If the offering is expanded, Google’s scale can add competition for companies like Airbnb, TripAdvisor and HomeAway (now part of Expedia) and Priceline, which has its own vacation rental offering. But Google is more likely to become an advertising partner than a company directly selling travel services, so the big players may even benefit from the improved inventory distribution.
YT Red, Google Play Music Merging: at a panel session for the New Music Seminar conference in New York, Google Music head Lyor Cohen said that the company was streamlining its music offerings, specifically YouTube Red and Google Play Music in order to offer more to customers. There already was something of an overlap with the ad-free, subscription-only Red customers automatically gaining access to the ad-supported Google Play Music. Google also hinted that it was looking for a broad collaboration with music creators rather than a simple revenue sharing model. This is all very well because competition in the space is pretty hot right now with Spotify, Apple Music and Amazon all fighting for a share of the pie.
ZDNet reports that Spotify recently bought blockchain startup Mediachain with the goal of linking content to the identity of the creator while offering a channel for attribution, analytics and payment when unauthorized content distribution on web is getting out of control. In a statement to The Verge, Google said, “Music is very important to Google and we’re evaluating how to bring together our music offerings to deliver the best possible product for our users, music partners and artists. Nothing will change for users today and we’ll provide plenty of notice before any changes are made.”
M&A and Collaborations
Facebook Acquires Source3: Facebook has gotten more serious about its video efforts, both user-generated and professional. But despite its huge user base and consequent distribution power, it remains a place where users can share content without paying for it. Source3 has technology and expertise in intellectual property, trademarks and copyright to recognize, organize and analyze branded intellectual property in user-generated content and thereby prevent unauthorized sharing. This should help Facebook attract content creators. The company expects to integrate Source3 into its business with the team working out of its New York office.
Some More Earnings Reports: Texas Instruments, Advanced Micro Devices, Lam Research, PayPal, Expedia, Twitter, F5 Networks, Fortinet, Proofpoint, Juniper, Western Digital, Seagate, Corning, Electronic Arts.
This Week’s Earnings Reports: Apple, Zynga, Take Two, ActiVision, FireEye, Paycom, CA Technologies, NXP Semiconductors, Symantec, Cirrus Logic, Equinix, Yelp, Groupon, Shopify, Square, Microchip Technology, Arista Networks, Godaddy, TripAdvisor, Ametek
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