Late October gains on Wall Street bolstered by strong tech earnings

By Steve Brachmann
October 28, 2015

American tech companies have been doing a good deal of business in the past few months and it’s helped to chart a positive path forward for Wall Street, where the Dow Jones Industrial, NASDAQ and the S&P 500 all made late October gains after a flurry of positive earnings reports from the tech sector. Although some tech companies publishing earnings reports had rockier third quarters than others, performance was very good almost across the board, making now a very good time to be in the consumer or high tech industries.

Many of these tech developers are regularly featured as part of our Companies We Follow series here on IPWatchdog. We’ve also recently reported on a global brand value survey conducted by Interbrand which shows how these tech companies are becoming some of the most highly valued brands in the world. With so many in the tech sector reporting earnings in late October, we thought that we would take some time to look at a round-up of tech sector earnings reports to see the directions in which the industry is trending.

 

Scooters in Sydney

Google’s office in Sydney, Australia. Image by Google.

Alphabet Posts High Revenues, EPS on Strong Mobile Performance

The third quarter of 2015 is the first one for which Google reported its earnings under the name of its new parent holding company, Alphabet Inc. (NASDAQ:GOOG), still headquartered in Mountain View, CA. As we reported back in August after the announcement of the corporate restructuring, these changes are designed to enable Google founders Larry Page and Sergey Brin to continue making long-shot investments on robotics, health and autonomous car tech while keeping Google’s profitable Internet search and advertising businesses intact with streamlined operations.

The early returns are showing that the new structure is a profitable one for Alphabet, which beat analyst estimates for earnings per share (EPS) by almost 15 cents per share. The corporation posted quarterly revenues of $18.7 billion, a 13 percent year-over-year increase over Google’s revenues earned in the third quarter of 2014. Strong performance in Google’s mobile search division, including both YouTube and Google’s programmatic advertising operations, helped Alphabet improve its fortunes in the recent quarter. The earnings report also included the incredible news that each of the six products covered in the core Google division (YouTube, Android, Chrome, Google Maps, Google Play and the Google search engine) have one billion users all over the world. That’s an incredibly dominant position in the world of Internet services.

Higher revenues leaves both Alphabet and Google in a good place to invest more thoroughly in research and development and the latest earnings report indicates that they’ve done exactly that. Third quarter 2015 R&D expenses were increased by $575 million over the company’s R&D expenses in the same quarter last year. Through three-quarters of 2015, Alphabet/Google’s research and development expenditures are $1.2 billion greater than they were through the first nine months of 2014.

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IBM reaches 10-year, $700 million technology services agreement with Etihad Airways. Image by IBM.

IBM’s Corporate Revenue Woes Extend Into Their 14th Quarter

It was a much different story for IBM (NYSE:IBM) of Armonk, NY, when its earnings report missed on the low side of analyst expectations, marking the 14th straight quarter for which the enterprise tech developer has reported falling revenues. Although IBM’s EPS was four cents per share higher than Wall Street analyst consensus, low revenues caused the company’s stock to fall by 5.75 percent within a day of the earnings report release.

Official remarks from IBM executives acknowledge that the company fell short on revenue but pointed out that its cloud division increased its revenues by 65 percent through the first three quarters of 2015; other gains were felt in mobile, social, analytics and security sectors. Growth in these areas of strategic imperative, to paraphrase remarks made by IBM CEO Ginni Rometty, helped to defray some of the concerns over double digit percentage point losses in quarterly net income, some of which is the result of the effects of the strong American dollar in foreign markets.

It’s a little discouraging, although not surprising, to see IBM’s recent corporate turbulence eating into the R&D reserves of the world’s most prolific innovator, when relying on the metric of how many patents a company earns from the U.S. Patent and Trademark Office to compare. Third quarter R&D expenditures for IBM, which the company reports as “research, development & engineering” (RD&E), were $1.29 billion, a drop from the $1.35 billion invested into the company’s R&D goals during the third quarter of 2014. Year to date, IBM has invested $230 million less into research and development than it did during the first nine months of 2014.

 

aAmazon Wows Analysts With Profits From the Cloud

Online retailer Amazon.com, Inc. (NASDAQ:AMZN) of Seattle, WA, had positive news of its own to contribute with its third quarter earnings report, one which encouraged a bevy of buy ratings to be issued by a number of investment banks. Quarterly net revenues of $25.4 billion were nearly 25 percent greater than net revenues enjoyed by the company in the third quarter of 2014. A quarterly earnings press release issued by Amazon reported that the company enjoyed a 72 percent increase in operating cash flow over the previous 12 months.

This was the first quarter that Amazon listed its cloud business, branded as Amazon Web Services (AWS), as its own reportable segment and the positive performance of Amazon’s cloud division was widely heralded in the business world. Year-over-year, net sales for AWS increased by $906 million to just under $2.1 billion in net sales for Amazon’s third quarter. Over the first nine months of 2015, AWS earned an additional $2.2 billion more than the company took home from AWS sales through the first three quarters of 2014. Amazon saw positive returns on net sales all around but especially in its North America division, where quarterly net sales eclipsed $15 billion compared to $11.7 billion during the same period last year. Amazon’s late October acquisition of Platform-as-a-Service (PaaS) provider Elemental Technologies is evidence that the cloud is a continued area of focus for the company.

Research and development costs are reported by Amazon in the technology and content section of its expense report and expenditures in this area have been rising. Amazon’s recent earnings report showed the company spent $774 million more in the technology and content sector than it did during the third quarter of 2014. Through three quarters of the year, Amazon’s R&D expenses are more than $2.3 billion greater than expenditures during the same period of last year.

 

MSFT_logo_rgb_C-GrayMicrosoft’s Revenues Drop But the Cloud Sees the Company Flying High

If there’s a recurring theme sounding during this latest round of tech company earnings reports, it’s that the cloud computing sector is quickly becoming one of the most profitable areas of the IT world. Almost $6 billion in quarterly cloud revenue supported a surprisingly positive earnings report issued from Redmond, WA-based computer hardware and software developer Microsoft Corporation (NASDAQ:MSFT). Overall, corporate revenue declined by 12 percent over reduced sales of smartphones and the company’s Windows operating system but the company still beat analyst estimates on EPS.

Microsoft’s recent earnings report, officially for the first quarter of the company’s 2016 fiscal year, shows 8 percent growth in the company’s Intelligent Cloud sector. Sector revenue from premium products and services saw double-digit growth and usage of Azure’s cloud computing resources more than doubled year-over-year. Elsewhere, although the recent release of Windows 10 was helping the company outperform the overall market for PCs, the entire More Personal Computing sector was declined 17 percent to $9.4 billion in the quarter.

Microsoft’s weak revenue results may have contributed to shrinking R&D expenditures for the company. Research and development expenditures were slashed by $1.7 billion compared to the amount of money spent on innovative pursuits in the same period last year. Still, Microsoft did manage to invest nearly $3 billion into its technological development and engineering activities.

 

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TI’s TPS2540 USB power and charging port controller. Image by Texas Instruments.

Texas Instruments Improves Its Cash Flow While Cutting R&D Expenses

Third quarter results showcased in the most recent earnings report from Texas Instruments Incorporated (NASDAQ:TXN) of Dallas, TX, were somewhat mixed, although analysts noted that the 76 cents earnings per share posted by the company beat EPS estimates by 8 cents per share. Despite weak revenues, some analysts are predicting solid growth in Texas Instruments’ earnings through 2016, mainly bolstered by cost reductions in producing miniaturized electronics.

Corporate revenues for Texas Instruments’ third quarter were down by 2 percent compared to the company’s returns in its third quarter of 2014, a reduction of about $80 million down to $3.42 billion. Operating profit and net income also dropped slightly but cash flow was up slightly over the past twelve months, up to $4.11 billion from the $3.82 billion seen in the twelve months leading up to the end of 2014’s third quarter. Additionally, Texas Instruments’ core business activities in its Analog and Embedded Processing sectors, which together contributed 85 percent of the company’s quarterly revenues, saw slight year-over-year increases in revenues and operating profit.

Despite signs of the strong business being done by Texas Instruments, the most recent quarter saw a reduction in research and development expenditures. The corporation spent $316 million on R&D during the third quarter of 2015, a reduction of $16 million from the $332 million invested by the company during the third quarter of 2014.

 

Other Tech Earnings

Elsewhere in tech, eBay Inc. (NASDAQ:EBAY) of San Jose, CA, posted better than expected quarterly earnings results, beating analyst EPS predictions by 3 cents per share. This was eBay’s first earnings report since spinning off online payment service provider PayPal Holdings Inc. (NASDAQ:PYPL), also headquartered in San Jose. eBay’s quarterly revenues of $2.1 billion were down slightly year-over-year but product development costs remained steady, dropping only $5 million to $241 million in the quarter.

Cloud and virtualization software developer VMware, Inc. (NYSE:VMW) of Palo Alto, CA, posted a beat on EPS and a 10 percent increase in quarterly revenues year-over-year although stocks took a tumble on investor concerns over fallout from the acquisition of VMware’s parent company EMC Corporation (NYSE:EMC) by privately-held Dell Inc. VMware’s earnings report also announced a new cloud services venture with EMC known as Virtustream; Virtustream’s financial earnings will be reported in the first quarter of 2016. VMware’s research and development costs increased slightly by $4 million year-over-year to $331 million in the quarter.

Flash memory storage provider SanDisk Corporation (NASDAQ:SNDK) of Milpitas, CA, beat EPS estimates by 29 cents per share, posting a $1.09 EPS for the quarter. SanDisk’s quarterly revenues were down year-over-year by $294 million to $1.45 billion. The company saw a 30 percent year-over-year increase in gigabytes sold during the third quarter although the average selling price per gigabyte declined 37 percent compared to the third quarter of 2014. R&D expenditures mirrored SanDisk’s weaker revenues, dropping nearly $12 million to $212 million in the quarter.

Packaged electronics developer Flextronics International Ltd. (NASDAQ:FLEX), headquartered in Singapore, saw its share prices rise after announcing its earnings for the second quarter of its 2016 fiscal year. The company’s adjusted EPS of 27 cents per share was slightly better than analyst consensus predictions for the quarter. Year-over-year, Flextronics’ revenues tumbled by $212 million down to $6.31 billion.

The Author

Steve Brachmann

Steve Brachmann is a freelance journalist located in Buffalo, New York. He has worked professionally as a freelancer for more than a decade. He writes about technology and innovation. His work has been published by The Buffalo News, The Hamburg Sun, USAToday.com, Chron.com, Motley Fool and OpenLettersMonthly.com. Steve also provides website copy and documents for various business clients and is available for research projects and freelance work.

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