Tech Earnings Need a Reality Check

by James Brumley | April 23, 2013 9:15 am

Though first-quarter earnings just began in earnest a couple weeks ago, we’ve already heard earnings results from seventeen of the S&P 500’s technology names, including Yahoo (NASDAQ:YHOO[1]), International Business Machines (NYSE:IBM[2]) and Google (NASDAQ:GOOG[3]).

While as a whole the results have seemed “good enough,” there are actually a couple of alarming red flags waving.

The Good

To date, twelve of the seventeen technology companies in the S&P 500 that have posted Q1 results have topped estimates, one just met analysts’ earnings forecasts and four actually fell short of estimates. All in all, that’s close to the norm, even if it’s a small sample size. On average, actual earnings have exceeded earnings forecasts by 3.1%.

Compared to last year’s bottom lines, income from technology companies is so far 5.3% better. Sales are up 3.8% for all the companies that have reported first quarter numbers to-date.

The numbers themselves may not feel big, but by corporate growth standards, they’re not bad. And considering the S&P 500 Technology Index is projected to post a 4% dip in year-over-year income for Q1-2013, the growth we’ve seen so far is actually quite impressive.

But that’s not the full story.

The Bad

First off, kudos to eBay (NASDAQ:EBAY[4]), Google, and Yahoo. All three topped estimates and last year’s per-share income. Plus, while Yahoo’s revenue slipped a modest 6.6%, both Google and eBay pumped up the top line at a double-digit clip.

You know a stock’s in trouble, though, when the market manages to ignore a mountain of good news in search of the bad-news molehill.

For Yahoo, that worry was dwindling ad revenue[5]. Display ad sales slumped 11% in the first quarter — even worse then the anticipated 9% contraction. It matters because display ad revenue accounts for nearly half of Yahoo’s business.

And it’s not like Google didn’t give investors something to worry about either. In the same vein, the search engine’s costs per click fell 6% on a year-over-year basis. Between the two companies, the market’s understandably starting to worry that the mass migration to mobile isn’t lending itself to either company’s bread-and-butter business.

The Ugly

So if relatively good news is treated as bad, is actual bad news going to be seen as plain awful?

International Business Machines didn’t leave us in suspense. Old Big Blue missed estimates for the first time in eight years when it posted per-share income of $3.00. Analysts were looking for $3.05.

Still, it was the revenue miss that really spooked the market. The company drove $24.7 billion in sales a year earlier, but only generated revenue of $23.4 billion for the first quarter of 2013. That 1.3% earnings shortfall on top of the 5.2% dip in revenue was enough to send the stock nearly 8% lower. Fittingly, it was the biggest daily loss shares have seen in the past eight years.

IBM’s CFO Mark Loughridge explained in the conference call that the company’s software and mainframe business struggled last quarter, which is worrisome considering IBM is … you know … predominantly a software and mainframe company.

Had Loughridge’s explanation not eerily mirrored what we heard from Oracle (NASDAQ:ORCL[6]) when it unveiled its earnings shortfall[7], it might be dismissible to hear it from International Business Machines. When the two top names in the database and big-computing industry hit the same wall though, it’s not a stretch to say economic weakness has finally started to crimp corporate IT spending. Those big trends don’t start and stop on a whim.

Intel (NASDAQ:INTC[8]) fared poorly too, posting earnings of 40 cents per share versus expectations of 41 cents. That was also well under Q1-2012’s income of 53 cents, underscoring the waning PC business and the company’s struggle to break into the tablet and smartphone game.

Advanced Micro Devices (NYSE:AMD[9]) is experiencing the same problem of a shrinking PC market and greater competition within the mobile market. Its income was a bust last quarter too, falling to an adjusted 13-cents-per-share loss versus an 12-cent profit a year earlier.

AMD knows why it’s struggling. It’s even got a plan to pull itself up by its bootstraps. Advanced Micro Devices’ CEO Rory Read notes:

“We will continue to diversify our portfolio and attack high-growth markets like dense server, ultra low-power client, embedded and semi-custom solutions…”

Translation: AMD is aiming for the corporate market as well as the mobile market — anything but PCs and laptops. If IBM and Oracle can’t get the job done on the corporate site though, and as long as Taiwan Semiconductor (NYSE:TSM[10]) and Nvidia (NASDAQ:NVDA[11]) continue to dominate the mobile processor market, AMD’s going to remain in an uphill battle on all sides.

The Bottom Line

All that being said, there’s one detail worth bearing in mind at least through Tuesday: As shaky as the technology sector’s Q1 earnings may look right now, Apple (NASDAQ:AAPL[12]) is the sector’s biggest drag this time around.

If Apple earns the expected $10.08 per share when it posts Q1’s numbers on Tuesday, the tech sector as a whole will be on pace for a 4% dip in year-over-year income. Without Apple’s impact, the sector should see a 0.2% increase in earnings. That’s not great, but it at least suggests some of these companies are weathering the storm.

In the end, investors need to choose carefully … and shouldn’t necessarily listen to the media. For example, heading into earnings season the media as well as the market were merciless towards Microsoft (NASDAQ:MSFT[13]) and it’s been one of the technology sector’s biggest first quarter success stories. Its 18% improvement in revenue and 19% increase in earnings is tops in the industry.

All in all, it’s been one weird earnings season for tech so far … and that’s not apt to change mid-stream.

As of this writing, James Brumley does not own any of the aforementioned securities. 

  1. YHOO:
  2. IBM:
  3. GOOG:
  4. EBAY:
  5. dwindling ad revenue:
  6. ORCL:
  7. unveiled its earnings shortfall:
  8. INTC:
  9. AMD:
  10. TSM:
  11. NVDA:
  12. AAPL:
  13. MSFT:

Source URL:
Short URL: