UPDATED 20:01 EDT / JULY 16 2017

CLOUD

As earnings season kicks off, the cloud hovers over almost every tech giant

As second-quarter earnings reports start rolling in this week from technology bellwethers such as IBM Corp., Microsoft Corp. and SAP SE, all eyes will be looking upward once again to the cloud.

Cloud computing at once is providing a kicker for information technology companies while also continuing to eat away at traditional tech markets ranging from server companies to storage to networking gear. Even so, tech companies generally have good reason to be confident as they report quarterly earnings and look ahead to the second half of the year.

For one thing, growth prospects are good. Analyst firm Gartner Inc. said as much in its most recent Worldwide IT Spending Forecast published last week, forecasting a 2.4 percent increase in global IT spending in 2017 from a year ago, to $3.5 trillion, up from its forecast last quarter of 1.4 percent growth. Much of this increase is thanks to the growing adoption of cloud computing and infrastructure, but also of related market such as big data, flash storage, Internet of Things, wearable devices, networking and security.

That growth in turn makes market watchers optimistic that the technology sector will show a fourth successive quarter of earnings growth. A recent report from Zacks Investment Research forecast tech companies earnings will rise 10.1 percent year-over-year, on revenue growth of 6 percent. Those findings are backed by additional research from Goldman Sachs Group Inc., which expects earnings growth of 10 percent in the second quarter, though that’s down from 18 percent in the previous quarter.

As a result, tech stocks overall have had a stellar year so far, outperforming the S&P 500’s 8.3 percent gain with growth of 14.7 percent in the year to date. Indeed, many of the most recognizable tech companies’ shares have proven to be quite resilient in 2017.

Google Inc. parent company Alphabet Inc. has seen its stock price grow by more than 20 percent so far this year, while Microsoft is up nearly 15 percent, Apple Inc. 27 percent and cloud leader Amazon.com Inc. 32 percent. But in a sign that some traditional tech companies continue to struggle with the industry transition to the cloud, IBM and Intel Corp. both have seen their share prices fall, by 8 percent and 6 percent respectively, since the beginning of the year.

What to expect

The question on investor’s lips is which companies will grab the biggest slice of IT spending growth, and much will depend on who can show the most initiative in the accelerating cloud computing market, which experts say is the main driving force behind spending growth overall.

One company that’s striving to do so is IBM, which on Tuesday will be the first of the established tech giants to report its earnings. Few are expecting any fireworks, though, as IBM has seen its revenue decline for 20 successive quarters even as its cloud business has grown to account for 42 percent of its overall earnings. Indeed, Ralph Finos, an analyst with Wikibon, owned by the same company as SiliconANGLE, said he expects IBM to report revenue of $19.2 billion for its second quarter, down 2.2 percent from one year ago.

One of the key issues for IBM is that its cloud business relies on converting its largest and most complex enterprise customers from its on-premises equipment to its infrastructure as a service platforms, which will lead to less revenue for the company, Finos said. As a result, he doesn’t think the company will report positive revenue growth until 2018 at the earliest.

Microsoft will report its fiscal fourth-quarter on Thursday, and Finos said he’s expecting “only good news” from the company even though questions will be asked about its recent layoffs and sales reorganization. Finos’ forecast shows that Microsoft’s Azure infrastructure as a service business should grow by around 90 percent in the second quarter, while key cloud services such as Office 365 and Dynamics are expected to grow by at least 50 percent. Overall, analysts are expecting total revenue of between $22.6 billion on earnings per share of 69 cents.

German IT giant SAP is also due to report on the same day as Microsoft and analysts are expecting the company to build on its strong cloud performance last time out. In the first quarter, it saw cloud bookings for the quarter grow by 49 percent, while cloud subscriptions and support revenue grew 34 percent year-over-year, to $985 million, representing 17 percent of its total revenue. For the second quarter, analysts are expecting the company to reporting earnings per share of $1.03, up from 76 cents per share a year ago.

Besides looking at SAP’s cloud revenue, investors will also be looking at the performance of its newly released Internet of Things platform SAP Leonardo, said Holger Mueller, principal analyst and vice president at Constellation Research Inc. According to Mueller, there are questions over whether SAP can convince the markets of Leonardo’s revenue potential and generation. “They will need to explain more about the professional services approach of Leonardo vs the traditional software as a service business,” he said.

Beyond the cloud

Not every company reporting next week is focused on the cloud. For Qualcomm Inc. there are more pressing concerns, such as its ongoing legal battle with Apple Inc. which is having a serious impact on its bottom line. In April Qualcomm slashed almost $500 million from its second-quarter revenue forecast after it was reported that certain component manufacturers were withholding payments to the company at Apple’s behest. As a result, Qualcomm says it expects revenue of $4.8 billion to $5.6 billion.

The only good news for Qualcomm is that investors have already had time to brace themselves for this. But Mueller said they will be more interested in what the company has to say about its chances of actually prevailing against Apple. In addition, investors will be keeping an eye on the uptake of new processors and chips in new customer phones.

Looking ahead to the rest of the month, investors will be paying keen attention to the performance of cloud giants Google and Amazon Web Services Inc., which are set to report on July 24 and 27, respectively. Finos said he expects Google to log revenue of $24.9 billion, representing 16 percent growth year-over-year. He noted that Google still refuses to report its public cloud revenue, but said “it must be getting close to 7-8 percent of their business.”

Amazon does report its cloud revenue, however, and Finos is expecting more good news from the public cloud leader, which has continued to show healthy growth over the past five quarters. Finos said he expects AWS’s revenue to come in at $3.91 billion, representing 36 percent growth year-over-year.

Image: Pixabay

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