UPDATED 00:02 EDT / OCTOBER 16 2017

INFRA

Tech earnings preview: The good times will keep rolling, at least for now

Tech earnings season kicks off this week with many of the giants set to report third-quarter results, and the tea-leaf readers mostly expect the rich to get richer.

IBM Corp. will lead off the enterprise and emerging tech earning parade on Tuesday, and investors and customers both are hoping it can break its more than five-year-long streak of quarterly revenue declines. Analysts aren’t betting on it, though. The consensus has IBM earnings staying flat at $3.38 per share with revenue falling 3 percent, to $18.67 billion.

IBM scrambles for traction

Although IBM’s cloud revenue has been growing, up 15 percent in the second quarter, the rates are nowhere near the almost triple-digit rate Microsoft Corp. reported in its previous quarter and the 40 percent growth Amazon Web Services Inc. has reported for the last couple of years. Cloud watchers say IBM’s bid to muscle its way into the ranks of the top public cloud vendors is largely a failure so far.

“I think we’re desperate for a smaller-than-expected decline that will show some sort of chance of actual revenue growth in 2018,” said Ralph Finos, an analyst at Wikibon, owned by the same company as SiliconANGLE. “A 1 percent decline would be a miracle.” IBM has placed big bets on its analytics business as well, but so far the results have been meager, Finos said. The analytics strategy is “the only way forward for them to become meaningful again,” he said.

In a report issued on Friday, Morgan Stanley forecast slightly lower revenues than Wall Street consensus estimates and said IBM has yet to show momentum in its “strategic imperatives,” which are security, artificial intelligence, cloud and digital transformation. “Additionally, investors question IBM’s ability to improve revenue growth without sacrificing profitability, making gross margin another key metric to watch” in the quarter, wrote equity analyst Katy Huberty.

Still, IBM could see a boost in hardware sales on the strength of the security-fortified z14 mainframes it introduced in July, said Charles King, president and principal analyst at Pund-IT Inc. “The quarters following next-gen mainframes typically spark buying sprees among the company’s mainframe base,” he said. “IBM also recently noted that sales of its Linux on Power systems were outperforming competing platforms, so that could add more good news.”

Clear sailing for SAP

Things look rosier for SAP SE, which reports before the market opens on Thursday. Analysts’ consensus estimates are earnings of $1.15 per share, up 13 percent, with revenue growth of about 8 percent, to $6.47 billion. In a study in contrasts for two enterprise giants, SAP shares are up more than 37 percent from their 52-week low while IBM stock is down nearly 20 percent from the high it hit in February.

SAP enjoyed 33 percent growth in cloud revenue and 70 percent growth in its S/4 Hana business suite last quarter. With little meaningful competition in its core market, SAP should see those segments continue to show strong results. The key metrics to watch are growth in cloud subscriptions, in light of SAP Chief Executive Bill McDermott’s comments last quarter that a “30 percent cloud growth rate is ever-intact,” and acceptance of its new Leonardo collection of artificial intelligence, machine learning and big data technologies underscored by the internet of things.

Wikibon’s Finos is expecting 28 percent cloud growth and about $6.7 billion in quarterly revenue. “SAP is doing very well; steady as she goes,” he said.

Pund-IT’s King agreed. “Hana has been a bright point for SAP, and I expect that success to continue,” he said. King called Leonardo “an intriguing approach to solutions that often require custom tailoring. SAP’s messaging on the subject could be better but I expect the company to smooth out the bumps in the months ahead,” he added.

Amazon, Google and Wintel, oh my!

Oct. 26 is earnings shock-and-awe day, as Google parent Alphabet Inc., Amazon.com Inc. and both partners in the Wintel consortium of Intel Corp. and Microsoft Corp. all report results. Finos expects Amazon Web Services’ revenue to come in at a little under $4.38 billion. That’s a 35 percent growth rate, the company’s lowest yet, but it’s on the back of some enormous numbers. “Maintaining 40 percent growth is getting hard,” Finos said. “If they can keep it at 40 percent, it would be a very strong story.”

Pund-IT’s King believes Amazon’s sheer dominance of public cloud makes its share price vulnerable. “Any signs of resistance or retreat tend to become overamplified,” he said. “Any negative surprises in the AWS business or substantial growth by Microsoft, Google or other major cloud players could rock Amazon’s boat substantially.” But we’ve heard that one before, to little effect.

No one is expecting any surprises out of Alphabet, whose stranglehold on the search marketing business seems to get stronger each quarter. Cloud-watchers will be particularly interested in whether Diane Greene’s two years at the helm of that business is paying off in accelerated growth. Google doesn’t break out cloud revenue, but in the last quarter, it reported 33 percent growth to $2.2 billion in the category of  “other revenues,” which includes cloud.

Alphabet stock has been rallying lately, and that trend is likely to continue for at least the immediate future thanks to Credit Suisse Group AG’s move this week to raise its target price to $1,350, nearly 35 percent above Alphabet’s Friday close.

Analysts expect Microsoft CEO Satya Nadella to be all smiles a week from Thursday. Microsoft stock has nearly doubled in the three-and-a-half years since Nadella took over as CEO after languishing for more than a decade. It’s up 25 percent this year. The big question is whether Microsoft can maintain the breathtaking growth of its cloud business. Azure revenues grew 97 percent in the previous quarter and Office 365 sales surged 44 percent. When sales of Azure and software-as-a-service products are combined, Microsoft is bigger in the cloud than Amazon.

Wikibon’s Finos expects Microsoft’s good times to continue rolling with revenue of $7.2 billion, a bit higher than the high-end guidance the company gave last quarter. Analyst consensus estimates are for a profit per share of 72 cents compared with 60 cents a year ago.

Finos also anticipates Azure will continue its 90 percent growth rate and commercial sales of Office products to grow about 40 percent. Microsoft’s Dynamics line of enterprise applications should grow 70 percent online and 7 percent overall, he predicts. “These guys appear to only have good or better news lately,” Finos said. The areas he tracks — productivity/business processes and Intelligent Cloud — “are both doing great.”

King said he’ll be interested to see what Microsoft has to say about its warm new embrace of open-source software. “I’m not sure they’re material to Microsoft’s bottom line, but they are emblematic of the positive changes the company is experiencing under Nadella,” he said.

Intel’s expected Oct. 26 earnings report will be the first since the announcement of its eighth-generation processor line, but those chips are oriented more toward desktop applications than the data center. The consensus profit per share is 80 cents, about the same as the previous quarter. King said the new generation of processor chips delivers impressive performance gains, so he’ll be interested to see how well initial sales to the high-end gaming and graphics markets are going.

“I also expect Intel will offer details on its holiday products and sales,” he said. “Those will be important for setting the tone and expectations for 2018.” He noted that the next generation of processors for the data center isn’t likely to be announced until early next year at the soonest.

Image: Pixabay

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