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US Tech Earnings: Ad Slowdown, Inflation, and Supply Woes Hit

Rene Anthony

Wednesday, July 27, 2022

Wednesday, July 27, 2022

Recap how mega-tech performed during the most recent quarter.

Recap how mega-tech performed during the most recent quarter.

Not only the biggest names on the US stock market, but also the most crucial for investor sentiment, this week has seen the latest earnings from the mega-tech sector deliver mixed results. The story behind the results points to emerging storm clouds, but there are also some silver linings in play.

Here is your round-up of the latest big tech earnings.

Alphabet Cloud and Advertising Slowdown

Google parent company delivered earnings per share that fell short of expectations, at US$1.21 per share versus US$1.28 per share. The main contributor to the miss' was slowing revenue growth, up just 13% versus 62% in the prior corresponding period when consumer spending was still in the midst of a boom thanks to government stimulus support. 

Advertising revenue gained just 12%, with businesses holding off on spending as inflation bites. YouTube was the biggest laggard, with sales up just 5% to US$7.34 billion compared with 84% growth in the same quarter last year. The social media platform is facing stiff competition from the likes of TikTok, which has resonated with much of the company audience.

There were some headwinds at play as the US dollar strengthened throughout the quarter, wiping nearly 4% off revenue growth, and with the impact set to be felt again in the coming quarter.

Sticking with Alphabet (NASDAQ: GOOGL) outlook, the company CFO, Ruth Porat, cited the uncertainty surrounding the global economic environment.

Another area that fell short of expectations was the company Cloud division, with revenue coming in at US$6.28 billion versus consensus forecasts of US$6.41 billion. In fact, the division, which is going toe-to-toe with Microsoft Azure and Amazon Web Services, slumped to a loss of US$858 million.

Elsewhere, there were promising signs in terms of revenue from search activities, with the boost in travel activity a tailwind for the company, and traffic acquisition costs were kept in check. Still, the uncertain economic outlook has dampened the company appetite for further hiring and investment leading into the end of the year, with both areas set to face a pull-back in expenditure.

Microsoft Core Operations Offer Reassurance

While software giant Microsoft (NASDAQ: MSFT) may have fallen short of expectations for its June-quarter results, the company outlook provided some cause for optimism among shareholders. 

At both the top and bottom line the company missed consensus forecasts for the first time in over five years, with EPS of US$2.23 per share just shy of a forecast of US$2.29 per share, and revenue at US$51.9 billion also behind the median analyst tip of US$52.4 billion. Group revenue increased by 12% year-over-year, the slowest rate since the early days of the pandemic.

In a similar fashion to Alphabet, a stronger greenback had a pronounced effect on the international conglomerate, weighing on the EPS result by as much as US 4 cents per share.

Although revenue growth in the September quarter may moderate further to 10%, at least based on the mid-point of the company guidance for around US$50 billion in revenue, it is tipping a higher margin, while the full-year forecast for FY23 is unchanged despite the deteriorating economic environment.

The company Azure cloud division continues to represent the key growth driver, with revenue from this segment leaping 40% year-over-year, slightly down on the 46% in the preceding quarter. This result was impacted by changes in services consumption across clients. However, the company long-term profile is improving, with a record number of US$100 million-plus and US$1 billion-plus deals struck during the most recent quarter.

A moderation in new deal volume in the SME segment weighed on growth in the company Productivity and Business Processes segment, which includes Office software, LinkedIn, and the like, although premium tier accounts are growing as a portion of all Office 365 subscriptions.

Like Alphabet search subsidiary Google, Microsoft encountered weaker advertising spending during the quarter, slashing revenue potential by up to US$100 million, although the business still benefitted from stronger search volumes.

Another area working against the company of late has been a decrease in quarterly PC shipments, with lockdowns in China, and lower demand towards the end of the quarter impacting the sale of Windows licences to device makers.

US Tech Earnings: Advertising Slowdown, Inflation, and Supply Issues Take Hold

Meta First Sales Slump

Headwinds continue to persist for Facebook parent Meta Platforms (NASDAQ: META), which issued its first decline in year-on-year sales - a quarter after its first-ever decline in users - with revenue, earnings, and its forecast all falling short of expectations.

Alongside the ongoing impact of Apple iOS privacy update, which has constrained Meta ability to track users, the company has also taken a hit due to big corporates cutting their advertising budgets amid weak economic conditions.

The company has been forced into cutting its staff numbers after revenue fell 1% in the second quarter, and given the expected outlook for advertising demand to remain weak. Meta expects revenue to decline between 2% to 11% in the third quarter, representing a total of US$26 billion to US$28.5 billion.

One of the challenges identified by the business is optimising the monetisation of its Facebook Reels' product, which is growing strongly, but struggling to bring in revenue in an efficient manner like its Instagram money-spinners. 

Meanwhile, the company pivot to the metaverse, including virtual reality and augmented reality technologies, is seeing losses compound, even as sales and marketing expenditure jumps sharply higher.

Amazon Core Ops Stutter as Web Services Gain Focus

After its last earnings outing disappointed shareholders, the world largest ecommerce player has seemingly pointed to a better picture ahead, with Amazon (NASDAQ: AMZN) reporting better-than-expected second-quarter revenue and offering an upbeat outlook.

Although revenue grew just 7% during the period, that was still ahead of expectations, resulting in total revenue of US$121.2 billion. Looking to the September quarter, management has guided for revenue growth of about 13% to 17%, indicating a pick-up in activity for the shopping giant.

The biggest headwind for the company continues to be its investment in electric vehicle manufacturer Rivian (NASDAQ: RIVN), where it booked a near US$4 billion loss after shares in the aspirational auto-maker plummeted during the period. That, as well as inflationary costs across fuel, energy, and transport led the company to an earnings per share loss of US 20 cents, despite cutting nearly 100,000 staff.

On the plus side, Amazon ad division and Web Services segment continue to outperform. Unlike its peers, Amazon recorded 18% growth in ad sales, and revenue for its Web Services division leapt by one-third to a total of US$19.7 billion, offsetting a 4% decline in online store sales revenue, and representing the entirety of the company operating income.

US Tech Earnings: Advertising Slowdown, Inflation, and Supply Issues Take Hold

Apple Growth Slows Amid Supply Chain Constraints

While its growth may be starting to show signs of slowing, Apple (NASDAQ: AAPL) results were still ahead of forecasts for both revenue and earnings. The company overall revenue grew just 2% during the quarter, whereas a year ago it posted 36% growth. In the preceding quarter, the company saw its revenue grow 8%.

In any case, management expects things to pick up in the September quarter, even with a number of headwinds in play thanks to the macro environment and the effects of inflation. The company has been stung by slowing demand for consumer electronics as inflation accelerates and the economy teeters towards a recession.

Apple flagship iPhone sales were buoyed by Android customer conversions, including double-digit growth among new customers for its smartphone.

Nonetheless, the growth story continues to come from Apple Services segment, with the highest growth of any division at 12% thanks to subscriptions, app store sales, and licensing fees.

Parts shortages have hampered some areas of the company operations, with iPad sales down 2%, and Mac sales down 10% versus the prior corresponding quarter. Customers are facing lengthy wait times to order certain Mac models, and the company took a near US$4 billion revenue hit as a result. There was also negative growth for other wearables like AirPods and Apple Watches.

Despite lockdowns in China stifling demand, sales across the Greater China region held up relatively well, down just 1% to US$14.6 billion, and in a positive sign for shareholders, the company was able to restore margin growth across the group.

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