Earnings season always seemed to produce massive detail on individual trees, but remarkably little on the forest overall. So I’m starting to review bellwether company transcripts to highlight trends/comments that pertain to macro, their sector, or other sectors.
I might hazard a comment or two on the companies themselves, but in general this is about trying to turn the earnings microscope around see what shows up in the telescopic view. Plus snarky comments where they seem appropriate (grin). All quotes are from Seeking Alpha’s (excellent) transcripts.
A bit rushed today (busy researching tankless hot water heaters for the new house – fascinating actually). Will get to Verizon and others over the weekend (hopefully).
IBM: China seems like a one-off problem, but emerging markets are squishy. Developed markets seem decent, Japan strong, and the shutdown a non-event.
- China weakness at least partially procedural? Pent up demand for tech & capital goods for 2014? “China was down 22%. We experienced a slowdown in demand across the board, but most significantly in hardware, which was down about 40% and which makes up about 40% of our business in China…. While we had some execution problems during the third quarter, we were impacted by the process surrounding China’s development of a broad-based economic reform plan, which will be available mid November. In the mean time, demand from state-owned enterprises and the public sector has slowed significantly as decision-making and procurement cycles lengthened. We believe the changes will take time to implement and do not expect demand in China to pick up until after the first quarter of next year.” [later on in the call] “China broadly in a year accounts for about 5% of IBM and about 40% of that business is hardware… it was down substantially. We were talking 40%, 50%, enormous reductions on a year-to-year basis in a geography we were intended to see growth rates… And you got to look at that and say, what significantly accounts for that. And I would say, quite honestly, if you look at the elements in China and we have worked with the team in China that simply has been a substantial impact as the process surrounding China’s development of broad-based economic reform plan takes shape. And that is going to be announced and available, we think in November and probably it will take some time to implement. So I think we are looking at a couple of quarters, but once that economic plan is announced, adds clarity to market, we should see I think and fairly within our team, a recovery in the demand pattern for state-owned enterprise public sector.”
- Japan’s economic rebound shows through, but Yen drop hurts – watch for love at other companies with large Japan exposure (Cisco and Juniper for example). Also Tech Gross Margins in Japan tend to be high, so it could help profits across the board. “Japan’s revenue was up 5% with good performance across hardware, software, and services. This was the fourth consecutive quarter of revenue growth ” YEN = “[reported profit was] significantly impacted by the depreciation of the Yen.”
- Emerging Markets Squishy, But Not Quite as Bad as Headlines Suggested: “if you look at the performance that we saw this quarter in growth markets, revenue at constant currency down 5% compared to the IT growth rate and growth markets are plus 5%. We’ve had about 10 point gap there. So we did very kind of simple back of the envelope analysis on that to distinguish what was macro and what was execution. If we snap [China] out, the growth markets would have been flat. And so to us that sounds like about 5 of that 10 point gap to the industry are coming from a macro environment issue. The other five we think it’s pure execution… the macro environment impact… accounted for about half that differential to the industry [with the rest being IBM’s] leadership differential and… execution.”
- Shutdown looks like a non-event for 4Q. “U.S. Federal business is a little less than 3% of our total revenue mix. So as you look at the risk within that 3%, it turns out that really the bulk of our Federal business is either or not exposed or even if isn’t a category that is exposed has been deemed essential. So as we look at it, it’s kind of a time dimension. So if we close on that issue in October, there really shouldn’t be much of an impact for IBM….”
- Getting more aggressive with Chromebooks? I think its meaningful that Larry Page led off with talking about the ChromeOS and Chromebooks after a quick pointed reference to how “everyone” though that Android was a bad idea in the early days too. Plus a later mention of ChromeBook/Nexus store-within-a-stores at Best Buy. I’m waiting to see the touch-screen version of Chrome OS which has to be coming. If those things are still in the $200’s-$300’s it could well be my next laptop.
- Capex remain huge and an under-appreciated source of demand for tech gear. Many don’t appreciate just how large Google looms in terms of tech spending. They’s spent $5.1b in capex this year so far and will probably get to over $6b. That is much larger than CenturyTel/Qwest’s total capex. More importantly, roughly half (or more) of a Telco’s reported capex does not actually go to capital equipment. A lot of it is capitalized labor and the like. So VZ’s reported @$16b capex is only about $8b of actually equipment spending – which ain’t a whole lot bigger than Google’s $6+b. Moreover, Verizon buys a pretty wide range of gear while Google’s is much more concentrated in compute (unbranded servers) and networking gear (although it does include a lot of real estate that I can’t separate out). “the majority of the CapEx this quarter was spent on production equipment, so like machines, data center construction looking ahead and building the capacity ahead of our needs to get the flexibility and real estate purchases, so we had a number of kind of really good opportunistic purchases in the portfolio we were targeting and they kind of came online this quarter, so pretty pleased with that. “
Vampire Squid: Regarding Goldman Sachs’ mysterious (and huge) revenue drop.
- A lot of it seems to be out of the currency trading operation.
- About the same time the Swiss authorities are digging into what seems to be another LIBOR-esque “lets manipulate the benchmark for fun and profit” trading scandal involving exchange rate-setting manipulation.
- Any chance those might just possibly be connected in any way? Of course we’ll never know. Unless Goldman’s luck in dancing betwixt the landmines has finally run out.
- But watch that exchange rate scandal regardless. I feel like it hasn’t quite caught the popular imagination yet but somebody is going to get burned pretty bad in the end.