Microsoft (MSFT) , Qualcomm (QCOM) and PayPal (PYPL) all reported after the close on Wednesday (along with Facebook), and Alibaba (BABA) reported on Thursday morning. Alibaba fell sharply, as did PayPal, which has been stung by news that eBay (EBAY) will stop using PayPal as its “primary” payments processor in 2020. Microsoft and Qualcomm have seen smaller declines.
Here’s a look at the companies’ earnings reports and guidance. Microsoft, Alibaba and PayPal, it should be noted, all went into earnings trading near all-time highs and thus faced high expectations.
The software giant reported December quarter (fiscal second quarter) revenue of $28.9 billion (up 12% annually) and adjusted EPS of $0.96, topping consensus analyst estimates of $28.4 billion and $0.87. And on its earnings call, it guided for its three reporting segments to collectively post March quarter revenue of $25.25 billion to $25.95 billion, in-line with a $25.51 billion consensus. It’s worth noting here that Microsoft has a history of guiding conservatively and then beating its tempered guidance.
- Office 365 and Azure momentum remains quite strong. For the second quarter in a row, Microsoft’s Office commercial and consumer revenue respectively grew 10% and 12% annually, as Office 365 adoption continues growing the company’s addressable market. Office 365 commercial seats grew by 30% annually, and 365 consumer subs rose by 1.2 million sequentially and 4.3 million annually to 29.2 million. Notably, CFO Amy Hood added on the earnings call that Office 365’s ARPU growth improved last quarter.
Azure, meanwhile, saw revenue growth accelerate to 98% from the September quarter’s 90%. That’s well above the 42% growth recorded by Amazon Web Services (AWS) in Q3, and says a lot about Azure’s popularity within Microsoft’s server software base and more generally for hybrid cloud deployments. But Microsoft — perhaps worried about giving Amazon, whose cloud infrastructure business remains much larger, a talking point — still declines to break out Azure’s revenue.
Office 365 and Azure momentum also helped Microsoft’s commercial unearned revenue balance rise 18% to $20.2 billion. And there’s still room for margin improvement: At 55%, Microsoft’s commercial cloud gross margin was up from last year’s 48%, but remained well below on-premise software gross margins. The gap will probably never be fully eliminated, but even getting halfway there could do wonders.
Office 365 continues seeing strong growth.
- Older Windows and server franchises are holding down the fort. Amid ongoing PC sales pressures, Microsoft’s Windows OEM revenue managed to grow 4% for the second straight quarter; relatively healthy business PC shipments helped. Windows commercial sales swung from 7% growth to a 4% decline, but Microsoft notes a large year-ago deal hurt growth.
Likewise, in spite of headwinds caused by public cloud adoption, sales of on-premise server software rose 4%, a little better than the September quarter’s 2%. A good reception for the SQL Server 2017 database, which adds Linux support and a slew of machine learning features, helped out.
- Surface and gaming could have done better. Though Microsoft began shipping a new/anticipated Surface Pro 2-in-1 on December 1 and a refreshed Surface Book laptop a couple weeks before that, its Surface revenue rose only 1% annually. The company did forecast that Surface revenue — benefiting from a full quarter of sales for the new hardware — will grow in the March quarter, but it looks as if the arrival of more competitive 2-in-1 devices from Windows OEMs (and perhaps also iPad Pro adoption?) is affecting demand.
Gaming revenue rose 8%. But that feels a little disappointing given that Microsoft launched its 4K-capable Xbox One X (Scorpio) during the quarter. The One X helped gaming hardware sales rise 14%, but Xbox software/services growth slowed to 4% from the September quarter’s 21%.
Recently, Polygon reported that Microsoft, which will soon get a giant influx of offshore cash, is thinking of making a big gaming acquisition to strengthen its Xbox ecosystem. Electronic Arts and game developer/distribution platform Valve are among the names to have reportedly been thrown around.
As Broadcom (AVGO) continues pursuing its hostile bid for Qualcomm, the mobile chip/patent giant reported December quarter (fiscal first quarter) revenue of $6.04 billion (up 1%) and adjusted EPS of $0.98, topping consensus estimates of $5.97 billion and $0.91. On the other hand, it guided for March quarter revenue of $4.8 billion to $5.6 billion and adjusted EPS of $0.65 to $0.75, almost entirely below a consensus of $5.58 billion and $0.86.
Qualcomm also announced a new patent-licensing deal with Samsung (SSNLF) (as usual, terms are undisclosed). As part of the tie-up, Samsung will no longer oppose Qualcomm as it appeals an adverse Korean ruling over its licensing practices. The companies also plan to collaborate on 5G R&D, and in other mobile tech fields.
The Samsung deal, together with Broadcom M&A hopes, are likely keeping Qualcomm from seeing a larger post-earnings decline.
- Apple and China are weighing on both chip and licensing revenue. As expected, disputes with Apple (AAPL) and an unnamed Android licensee (a November Digitimes report indicated it was Huawei) continue taking a big toll on the very profitable Qualcomm Technology Licensing (QTL) division. QTL revenue, which is driven by royalties paid on 3G/4G device sales taking place in the preceding quarter, fell 28% last quarter to $1.3 billion, and is forecast to be down 40% to 49% in the March quarter to $1.15 billion to $1.35 billion.
In addition, both chip and licensing revenue are being stung by sluggish customer demand. Specifically, Qualcomm cites a “larger than typical sequential correction in orders from a [4G] thin modem customer and near-term smartphone trends in China.” The modem client is almost certainly Apple; a slew of reports about iPhone order cuts arrived in January, and the outlooks given by chipmakers such as Broadcom and Qorvo (QRVO) have also pointed to soft near-term sales to Apple.
- Momentum continues growing for non-mobile and RF chip sales. While Qualcomm’s MSM chip shipments — they consist of modems, app processors and system-on-chips (SoCs) containing both — rose 9% annually last quarter, total revenue for Qualcomm’s chip division (QCT) rose 13%. In addition, while QTL revenue is expected to tumble this quarter and Apple and China are due to weigh on mobile chip sales, total revenue is forecast to be down 4% to up 12%.
All of that suggests healthy growth for Qualcomm’s chip sales within non-mobile markets such as automotive, networking and IoT. Sales to such markets (MSM shipments included) grew over 25% in fiscal 2017 to $3 billion, and Qualcomm noted at CES its auto chip backlog is now above $3 billion.
- Qualcomm’s mobile RF chip business, which relies heavily on an RF filter JV with Japan’s TDK (it launched a year ago), also continues making headway. RF front-end module design wins with Samsung, Google, LG and others were announced at CES, and Qualcomm subsequently announced memorandums of understanding (MOUs) with several Chinese OEMs for the purchase of at least $2 billion worth of RF front-end modules in the coming years.
- Higher expenses are weighing on profits…for now. After falling in mid-to-late 2016 thanks to major layoffs, Qualcomm’s spending has been rising again. Heavy legal expenses led adjusted SG&A spend to rise 36% to $612 million, and 5G investments contributed to a 12% increase in adjusted R&D spend to $1.26 billion.
Qualcomm is, however, forecasting that its opex will drop by 1% to 3% sequentially this quarter. And the company is a couple weeks removed from unveiling a plan to cut its annual costs by $1 billion. Any resolution of the company’s legal battles with Apple and/or regulators would of course lower spending.
Qualcomm expects about 7% 3G/4G device shipment growth this year.
The Chinese e-commerce giant reported December quarter (fiscal third quarter) revenue of $12.76 billion (up 52% in dollars) and adjusted EPS of $1.63. Revenue topped a $12.36 billion consensus, while EPS missed a $1.67 consensus.
Alibaba also hiked its fiscal 2018 (ends in March) revenue growth guidance to a range of 55% to 56% from a prior range of 49% to 53%. Revenue is benefiting from a deal (announced in late September) to up Alibaba’s stake in its Cainiao logistics unit above 50%. Cainiao, which might not have been factored into some analyst estimates, contributed $600 million to Alibaba’s December quarter top line.
- Alibaba is dialing up its spending. Thanks to big investments in both data centers and retail initiatives — including offline initiatives such as the company’s Hema supermarkets — Alibaba’s adjusted cost of revenue equaled 40% of revenue, up from 35% a year ago. In addition, sales/marketing spend rose to 10% of revenue from 8%, thanks partly to heavy Singles Day promotional activity.
All of that naturally weighed on EPS. Like one or two U.S. tech giants, Alibaba is comfortable depressing short-term profits in the name of long-term growth, and investors have largely given it a green light to do so.
- Chinese e-commerce momentum remains fairly healthy. Revenue for Alibaba’s China Commerce Retail segment, which covers its massive Taobao and Tmall marketplaces, rose 47% in local currency to $9.24 billion. That’s down from the 64% growth recorded in the September quarter (not surprising) and might not be quite as high as some bulls hoped following a big run-up, but is still better than the 42% growth recorded a year ago.
The segment’s “customer management” (ad) revenue rose 39% thanks to higher ad prices. Commission revenue rose 34%, and “Other” revenue, which includes offline businesses and is still less than 10% of the segment’s revenue, grew 525%. Taobao/Tmall annual active shoppers rose 16% annually to 515 million. A gross merchandise volume (GMV) figures wasn’t shared; Alibaba now only breaks that out at the end of each fiscal year.
- Cloud and video growth was strong, but profits remain elusive. Sales continue to boom for Alibaba’s AliCloud unit, the largest player in China’s burgeoning cloud infrastructure market. Cloud computing revenue rose 104% to $553 million, outpacing the September quarter’s 99% growth. Alibaba claims to have rolled out 396 new AliCloud products and features last quarter.
Digital Media & Entertainment revenue, driven by the Youku Tudou video platform and the UCWeb mobile browser, rose 33% for the second straight quarter and totaled $832 million. Alibaba notes Youku’s “daily average subscribers” more than doubled annually.
But with Alibaba continuing to make big data center and original content investments, both businesses continue producing red ink. The Cloud Computing and Digital Media & Entertainment segments respectively posted adjusted EBITDA of negative $28 million and negative $340 million.
The online payments giant reported Q4 revenue of $3.74 billion (up 24%) and adjusted EPS of $0.55, topping consensus estimates of $3.63 billion and $0.52. Q1 guidance is for revenue of $3.58 billion to $3.63 billion and adjusted EPS of $0.52 to $0.54 vs. a consensus of $3.55 billion and $0.54. And full-year guidance (possibly conservative) is for revenue of $15 billion to $15.25 billion (up 15% to 17%) and adjusted EPS of $2.24 to $2.30 vs. a consensus of $15.27 billion and $2.26.
But all of that is overshadowed by eBay’s plans. Some takeaways:
- The eBay news is bad, but maybe not as bad as feared. eBay plans to gradually make an internal payment-processing solution delivered with the help of white-label processor Ayden its “primary” payment option for transactions. This effort, referred to as “payments intermediation,” will start on a small scale in the second half of 2018 and ramp in 2019. eBay states “a majority” of Marketplace customers will be transitioned to it in 2021.
However, PayPal will remain an eBay payment option at least until 2023, per the terms of a revised deal. And on its earnings call, PayPal said it feels no need to adjusted its medium-term guidance due to eBay’s move. The company also noted eBay was just 13% of its Q4 payment volume, down from 16% a year ago and 19% two years ago.
PayPal’s growth in recent years has been fueled by share gains among online retailers and digital content providers not named eBay or Amazon, with deals inked with payment card giants and banks providing an assist. eBay’s actions don’t change that story. Moreover, it’s far from a given that eBay will eventually stop supporting PayPal altogether. Given PayPal’s popularity and steadily-expanding reach, eBay would be swimming against the tide if it did that.
- Core metrics are still healthy. Payment volume grew 29% in constant currency in Q4 to $131 billion, matching Q3’s growth. Transaction growth fell slightly to 24% from 26%, but transactions per active account (on a 12-month basis) were still up 8% to 33.6. 8.7 million active customer accounts were added in the quarter, raising the total to 227 million.
The Venmo platform remains a key volume growth driver. Venmo payment volume rose 86% to $10.4 billion, helping total P2P volume rise 50% to $27 billion. Mobile commerce is also providing a lift: Mobile payment volume rose 53% to $48 billion (37% of total volume).
- Spending discipline is boosting margins. PayPal’s adjusted operating margin rose to 22% from 21% a year ago. While the company’s payment-volume based expenses (affected by deals with card companies) rose to 43% of revenue from 42%, its non-transaction related expenses fell to 35% of revenue from 37%, and rose just 11% in dollars after adjusting for an accounting issue.
Spending controls helped adjusted EPS rise 30%, outpacing revenue growth of 24%. EPS growth is also expected to outpace revenue growth in 2018.