This week in earnings: Will elephants dance?


Three giants of earlier eras of computing report earnings this week, and investors and customers will be looking for evidence that their modern-day makeovers are nearing completion. IBM will report after the closing bell today, Microsoft at the end of training tomorrow and SAP AG before the opening bell on Wednesday.

All three companies are moving the core of their businesses into the cloud, although at different speeds. Transitioning from big license fees and hardware sales to subscriptions is a wrenching process, even though the result is a more stable and predictable business. Customers understand this, but Wall Street is less patient. This week’s earnings will be seen as a report card on the progress of the entire enterprise IT industry in making this transition.

“IBM, SAP and Microsoft’s financial results are important measures of the rate of change taking place in the software and technology industry as customer demand moves from on-premise solutions to cloud-based services,” said Jeffrey Kaplan (@THINKStrategies), managing director of THINKstrategies Inc. “The key for these companies is whether they can grow revenue and profits from their cloud businesses quickly enough to compensate for the decline in their traditional on-premise offerings.”

Here’s what to look for:

IBM (July 18)

Big Blue would like to avoid reporting its 17th consecutive quarter of earnings decline, but don’t bet on it. Consensus estimates are that revenues will drop about $1 billion from the $20.5 billion the company reported in the second quarter of last year. But that isn’t really the point. IBM has been aggressively downsizing in order to maintain profit margins, and it’s achieved some success. Barclays Capital Inc. recently revised its IBM operating margin estimates upward even as it slightly downgraded revenue forecasts. IBM’s stock is up 20 percent this year on optimism about its Watson analytics technology and hybrid cloud strategy.

International Data Corp. last week named IBM the number two infrastructure-as-a-service (IaaS) provider behind Amazon Web Services (AWS). Among the factors the researcher cited are Big Blue’s steadily growing set of analytics, cognitive computing, Internet of Things, mobile, networking and storage products, as well as its global data center reach and the success of its Bluemix platform-as-a-service offering, which the company claims is adding 20,000 new developers each week.

IBM has achieved some eye-opening successes in areas where it has not traditionally been thought of as a leader. Gartner recently placed it at the top of its Magic Quadrant for mobile application development platforms, and IBM just signed a global contract with one of the world’s largest property management firms to outfit 25,000 of its buildings with sensors connected to a Watson-based Internet of Things cognitive platform.

“IBM is changing the way people interact and putting Watson under all of that,” said SiliconANGLE founder John Furrier (@Furrier).

Microsoft (July 19)

Investors chose to focus on the bad news in Microsoft’s second-quarter earnings – lowered guidance for the rest of the year – but that’s Wall Street for you. For customers, the news was mostly good. Office 365 revenue grew 63 percent as the subscriber base swelled to 22.2 million. New sign-ups for Microsoft’s Dynamics Customer Relationship Management (CRM) online service more than doubled year-over-year. All of this feeds Microsoft’s position as the number two public cloud infrastructure player and the top software-as-a-service vendor overall.

But Microsoft needs to find growth in other markets. Keep an eye on Dynamics, because many people believe it will be the company’s next big strategic thrust. Microsoft has long been a bit player in CRM, focusing mainly on small to midsize businesses with a product that wasn’t considered remarkable. The pending acquisition of LinkedIn Corp. could change all of that. Offering access to the world’s largest database of professional profiles would make for an appealing pitch to enterprise sales and marketing chiefs, provided that Microsoft doesn’t breach the trust that exists between LinkedIn and its members. Turning the network into a vast prospecting database would be the quickest way to flush a $26.2 billion investment.

There’s no question Microsoft is serious about enterprise financials and CRM. Earlier this month it revealed plans to combine its sales automation and resources planning services into an integrated suite called Dynamics 365. It continues to work on tightening integration with the Office 365 office suite as well. Having failed in its efforts to buy Inc. outright, Microsoft will have to get creative about better using the assets it already has.

One of those assets is its partner network, an area in which Microsoft has long been strong. Making it easy for managed service providers to resell Microsoft cloud products can turbo-charge its growth. “Cloud service providers have become the people to please rather than the major enterprises,” said Dan Kusnetzky (@dkusnetzky), founder of Kusnetzky Group LLC. “Not all suppliers have been able to successfully change their mindset.”

Redmond has been attending to its legacy business, too. It shut off the free Windows 10 upgrades spigot earlier this month, overhauled its enterprise licensing schedule and announced plans to ship Windows Server 2016 in the fall for those customers that haven’t yet moved to the cloud. It also disappointed some customers by delaying its Azure Stack private cloud platform and changing the distribution strategy, but that won’t affect the earnings report.

Analysts are lukewarm on the outlook for this quarter, with consensus estimates of revenues in the $22.1 billion range, roughly flat with last year, and earnings of 58 cents per share, up slightly from a year ago.

SAP (July 20)

With the account control dividend of being a leader in enterprise resource planning, SAP has understandably taken its time moving to the cloud. While the company’s SaaS business is growing nicely, it’s not the star of the show.

That role would fall to HANA, SAP’s hybrid online transaction processing/online analytical processing (OLTP/OLAP) in-memory database. SAP bound HANA closely into the latest release of its flagship enterprise resource planning (ERP) system and is positioning it as a cloud platform for big data analytics. It claims to have more than 3,200 HANA customers. HANA underlies SAP’s new initiatives in IoT and spatial processing and is the foundation of new partnerships with Intel and Siemens AG, among others. One analyst suggested that HANA could dominate this week’s earnings announcement.

What’s more likely to frame the discussion, though, is Brexit. The European Union accounts for about 40 percent of SAP’s revenue, which makes the company more exposed that its U.S.-based counterparts to any turmoil resulting from the British divorce. Analysts don’t expect Brexit to have much impact on the most recent quarter, but they’ll be asking questions on the earnings call about what to expect going forward.

Given SAP’s excellent track record at managing expenses and its history of outperforming the technology sector, don’t expect any surprises on Wednesday. In reiterating its “overweight” rating on SAP earlier this month, Barclays noted that “management is cost-conscious, which should help to offset any license miss.”

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