It's that time of the quarter again, when thousands of companies use lengthy press releases to disclose just how their businesses fared over the prior three months and along the way share a few things (some companies more so than others) about what they expect conditions to look like in the coming months.
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For tech firms, this earnings season arrives on the heels of an 11-month rally during which the Nasdaq has gained over 30% and many high-flyers have tacked on 50% or more. The bar is often being set high for big-name tech companies due to report. But then again, the same could've been said in mid-July, when the Nasdaq was trading about 200 points lower.
Here are some things to keep an eye on as three marquee tech names -- specifically, Netflix Inc. (NFLX) - Get Netflix, Inc. (NFLX) Report, Apple Inc. (AAPL) - Get Apple Inc. (AAPL) Report and Alphabet Inc. (GOOGL) - Get Alphabet Inc. Class A Report-- report in the coming weeks.
Netflix, whose Q3 shareholder letter arrives on the afternoon of Oct. 16, is the first big tech name to report this month. The consensus is for revenue of $2.97 billion (up 30%) and GAAP EPS of $0.32. But Netflix's subscriber adds typically have a much bigger impact on how its stock reacts post-earnings. In July, the company guided for 750,000 Q3 U.S. streaming subscriber adds and 3.65 million international adds. What to watch:
- Asian momentum. Though now available in just about every big foreign market besides China, the company only launched its services in large Asian markets such as Japan, India and South Korea in late 2015 or early 2016. Growing penetration rates for these markets is crucial to maintaining Netflix's heady international subscriber growth, which to date has depended a lot on Europe and (to a lesser extent) Latin America. Netflix doesn't break out international subscriber adds by region, but does at times provide some color on how it's faring in various locales. The company has been stepping up its local content investments for Asian audiences, and said on its Q2 call it would invest more "on the ground" in Asia.
- U.S. subscriber guidance. On Oct. 5, Netflix disclosed it's respectively hiking prices for its U.S. Standard and Premium plans by $1 and $2 per month, to $11 and $14. In 2016, the company claimed price hikes for customers previously grandfathered in at lower prices hurt subscriber growth for a while. Will management guide for a repeat in Q4? For now, the consensus is for Netflix -- aided by seasonality and a strong late-2017 content slate -- to add 1.58 million U.S. subs and 4.39 million international subs in Q4.
- Disney commentary. Walt Disney Co. (DIS) - Get Walt Disney Company Report , as many readers likely know, has said it will pull its films off Netflix by decade's end and launch in a streaming service in 2019 that will become the exclusive home for Disney, Pixar, Marvel and Star Wars films. Look for analysts to press management on how Netflix, which plans to spend $7 billion on content next year and is believed to be paying Disney a small fortune for its material, on how it plans to offset the loss of Disney content.
- International margins. While Netflix's U.S. streaming segment has reported over $2 billion worth of "contribution profits" over the last four quarters, its international segment has lost a little over $100 million. However, international's loss did decline to $13 million in Q2 from $69 million a year earlier, and Netflix forecast it would see an international contribution profit for the whole of 2017, based on July's exchange rates. Did it keep the momentum going in Q3?
- Free cash flow (FCF). Though Netflix has been officially reporting profits, it's still burning quite a lot of cash due to its massive content investments that have left it with $15.7 billion in streaming content obligations. FCF was negative $2.2 billion during the 12 months ending in June. On average, analysts think FCF was at negative $556 million in Q3.
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Apple, set to report on the afternoon of Nov. 2, is expected on average by analysts polled by FactSet to post September quarter revenue of $50.8 billion (up 9% annually) and GAAP EPS of $1.87. What to watch:
- Guidance, guidance, guidance. With iPhone X pre-orders starting on Oct. 27 and deliveries on Nov. 3, markets might be quick to brush off a September quarter miss. There will be more concern, however, if Apple issues weak guidance for the seasonally big December quarter due to major iPhone X supply constraints. For now, the consensus is still for revenue to rise 10% to $86.6 billion. That said, given how loyal much of Apple's customer base is, markets might be willing to also forgive a light December quarter outlook if the shortfall isn't too bad and management signals that consumer demand for the X is very strong. Look for a lot of post-earnings volatility in such a scenario.
- Margins and ASPs. With a $999 starting price, the iPhone X will clearly provide a boost to Apple's December quarter iPhone average selling price (ASP). As will the $699 and $799 starting prices for the iPhone 8 and 8-Plus. But between its edge-to-edge OLED display, 3D-sensing front-camera system and everything else, the X is also quite likely the costliest iPhone to manufacture to date. Meanwhile, memory prices remain high, and Apple has kept not only the iPhone 7/7-Plus but also the 6S/6S-Plus around at $100 discounts to their pre-iPhone 8 prices. And it cut $50 off the price of the 4-inch iPhone SE. All of this yields some interesting cross-currents for Apple's margins and ASPs. The company typically provides gross margin guidance in its earnings report; it doesn't give ASP guidance, but might comment on ASP trends on its earnings call.
- iPad momentum. iPad sales were surprisingly healthy in the June quarter, with revenue rising 2% annually and units 15% on the back of strong demand for the low-cost 9.7-inch tablet (it's just called the iPad, and starts at $329) that Apple launched in March. Apple's report will let us know how much the June launch of two new iPad Pro models, including a 10.5-inch model that has a form factor similar to its 9.7-inch predecessor, served to keep the iPad's momentum going. The consensus is for iPad revenue to be up 3% to $4.4 billion, with unit sales of about 10 million. Of note: For its latest iPad Pros, Apple has been heavily promoting iOS 11 multitasking features meant to make the tablets more effective notebook substitutes. And those features, like the rest of iOS 11, didn't roll out to users until mid-September.
The Google parent reports after the close on Oct. 26. After backing out ad revenue-sharing payments with partners (traffic acquisition costs, or TAC), the consensus is for revenue of $21.9 billion (up 20%) and GAAP EPS of $8.30. What to watch:
- Paid click growth. Mobile search and YouTube ad momentum led paid clicks -- defined as the number of ad clicks and impressions on which Google collects revenue -- to grow by a blistering 52% annually in Q2, with 61% growth recorded on Google sites and apps. That easily offset a 23% drop in average ad price, or cost per click. Can Google turn in another quarter of 50%-plus paid click growth? It's possible: Both search and YouTube remain on very solid footing. But it's worth keeping in mind that some of the recent paid click growth has come from upping YouTube's ad load and increasing the amount of screen real estate taken by search ads, trends that can't be expected to continue forever. And there could be some headwinds related to trends such as Amazon.com Inc.'s (AMZN) - Get Amazon.com, Inc. Report e-commerce share gains -- Amazon relies less on search ads than many of its rivals -- and YouTube's attempts to "demonetize" content deemed politically sensitive.
- TAC trends. Due to a revenue mix shift towards mobile ads, which often involve payments to partners such as OEMs and carriers, TAC equaled 11% of the ad revenue obtained from Google's sites and apps in Q2, up from 9% a year earlier. Google has suggested TAC will continue rising as a percentage of revenue, but the exact pace of the growth stands to have a big impact on Google's bottom line.
- "Google Other" revenue. This line in Alphabet's income statement covers all of Google proper's non-ad revenue streams, including hardware sales, Google Play transaction cuts, YouTube Red subscriptions and cloud app and service sales. Google Other revenue rose 42% to $3.09 billion in Q2, and the consensus is for it to grow 40% in Q3 (ahead of October's Pixel 2 launch) to $3.39 billion. Google unfortunately doesn't break out sales for any of its Google Other businesses by themselves. But it does occasionally provide earnings call commentary on the progress achieved by some of them.
- Other Bets' losses. The Other Bets segment, which covers businesses such as Nest (smart home hardware), Google Fiber and Alphabet's venture capital and growth equity investment arms, posted a Q2 operating loss of $772 million on revenue of just $248 million. This followed a 2016 in which Other Bets lost $2.96 billion on revenue of $809 million, in spite of some attempts by CFO Ruth Porat to reign in spending. Thanks partly to the timing of stock grants, the consensus is for Other Bets' operating loss to drop to $464 million in Q3. Investors have generally given Alphabet a pass for its Other Bets losses, given the long-term nature of many of the projects it's investing in. And that's understandable, given how Google proper has made some of its long-term projects pay off in a big way. But expect some eyebrows to be raised if Other Bets' losses aren't meaningfully narrowed in Q3.
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