Though 2017 was already looking like a pretty good business year for large-cap tech companies going into October, the third-quarter earnings reports delivered by many of them took things to another level. To recap:
- Apple Inc. (AAPL - Get Report) beat estimates on the back of 12% annual sales growth, and reported 24% growth for its various non-iPhone businesses. The company also guided for 7% to 11% December quarter sales growth in spite of major iPhone X supply constraints.
- Alphabet Inc./Google (GOOGL - Get Report) topped estimates while reporting 22% sales growth. Paid ad clicks and impressions grew 47% annually, with 55% growth recorded for Google's own sites and apps. And the "Google other" reporting segment, which covers hardware sales, Google Play transactions and cloud apps and services, saw revenue rise 40% to $3.4 billion.
- Amazon.com Inc. (AMZN - Get Report) easily beat estimates, reporting 29% sales growth after backing out the Whole Foods deal and (including Whole Foods) guided for 28% to 38% growth for seasonally huge Q4. North American segment revenue grew 28% excluding Whole Foods, international segment revenue grew 29% and Amazon Web Services (AWS) grew 42%.
- Facebook Inc. (FB - Get Report) continued a multi-year streak of quarterly beats. Revenue grew 47%, with ad revenue growing 49% thanks to a 35% increase in ad prices and a 10% increase in impressions.
- Microsoft Corp. (MSFT - Get Report) soundly beat estimates with the help of a 17% sales increase for the reporting segment covering its server software and Azure cloud platform. The company also saw its Office commercial and consumer revenue respectively rise by 10% and 12%, and delivered a modest amount of Windows growth.
- Samsung Electronics delivered 30% Q3 sales growth, a major improvement from Q2's 20% growth. A 51% increase in chip sales (driven by a memory boom cycle) helped, as did a 23% increase in mobile product sales (driven by the Galaxy S8 and Note 8).
- Netflix Inc. (NFLX - Get Report) beat estimates and (more importantly) topped its quarterly subscriber guidance by a healthy margin. Revenue rose 30%, the U.S. streaming sub base grew by 850,000 to 52.8 million and the international base grew by 4.45 million to 56.5 million. And the company's Q4 subscriber guidance was better than feared, given recent price hikes.
Even IBM Corp. got in on the fun a little. Though its long-pressured sales were only flat annually, Big Blue beat estimates thanks to better-than-expected software and mainframe numbers, and reported a 15% increase in total services signings.
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Though each company's story is naturally different, a few broader trends are lifting the fortunes of multiple companies within the group, not to mention other tech firms. Specifically:
1. Consumers are more willing than ever to pay top dollar for high-end smartphones.
Analytics firm Flurry reports the average U.S. consumer spends about 5 hours per day on his or her smartphone. The smartphone is now hands-down the primary computing and communications device for hundreds of millions of consumers, and -- together with the spread of monthly installment plans from carriers and others -- makes a lot of them quite willing to splurge on new high-end models. It also doesn't hurt that these devices are often viewed as status symbols.
While the iPhone X's $999 starting price gets a ton of attention, it's really part of a broader trend. Google, Samsung, LG and other Android OEMs are also charging more for their 2017 flagship phones than they did for their predecessors in 2016. And in spite of the X's arrival, the iPhone 8 and 8-Plus carry higher starting prices than the iPhone 7 and 7-Plus did last year. Fears that the end of traditional smartphone subsidies would do a number on the high-end phone market now seem quaint.
2. Consumers are steadily upping their digital content and app budgets.
Netflix's Q3 subscriber growth and Q4 guidance might provide the clearest sign of this within recent earnings reports, but there's plenty of other evidence. Excluding an accounting event, Apple's Services revenue grew 24% to $8.5 billion -- large increases in App Store transactions, Apple Music subscriptions and iCloud storage subscriptions all played roles.
Meanwhile, Google is seeing strong Google Play transaction growth and Microsoft's Office 365 consumer subscriptions rose by 1 million sequentially and 4 million annually to 28 million. As the amount of time consumers collectively spend in front of PCs, mobile devices, streaming devices and consoles keeps rising, so is the amount they're willing to spend on apps and content accessed through those devices.
3. Online ads keep taking share from offline ad channels like clockwork.
In recent years, much of the talk regarding this trend has focused on the movement of video ad dollars to online platforms. But that's just one piece of the puzzle. The quality of the user data and targeting/measurement tools possessed by top online ad platforms, e-commerce and online travel's ongoing share gains against offline alternatives and steady growth in the amount of time spent online (especially on mobile devices) are all giving big advertisers incentives to up their online ad spend.
And within this space, Google and Facebook remain forces of nature, taking share from many smaller players with the help of unmatched scale, mountains of data and quality mobile ad products. That said, Amazon is also making its presence felt: The company's "Other" revenue, which to a large extent consists of e-commerce ads, grew 58% in constant currency to $1.1 billion.
4. Superior scale is proving a big competitive advantage for many Internet giants.
This holds not only for Google and Facebook's ad businesses, but also for Amazon's e-commerce operations. The massive fulfillment and logistics infrastructure built up by Jeff Bezos' firm, together with a giant seller marketplace and a very popular shipping/digital content service (Prime) that's practically impossible to replicate, have been driving quarter after quarter of U.S. e-commerce share gains. And in Q3, it looks as if they drove international share gains as well.
Likewise, Netflix's unmatched streaming video subscriber base has allowed the company to set a $6 billion 2017 content budget and a $7 billion to $8 billion 2018 content budget. All that spending, in turn, is allowing it to keep posting strong subscriber growth even as it gradually hikes prices. In online video as in e-commerce and ads, there's no substitute for scale.
5. Corporate adoption of public cloud infrastructures isn't slowing down.
With each passing quarter, enterprises get sold more and more on the benefits of running app workloads on cloud infrastructures -- faster deployment times for new apps and services, the value of devoting fewer resources and man-hours to managing on-premise infrastructures and immediate access to cutting-edge tools and services are among the big ones. It also, of course, doesn't hurt that prices for cloud infrastructure (IaaS) service continue falling at a brisk pace.
AWS, whose Q3 sales grew 42% to $4.6 billion, remains the colossus here. But Microsoft (90% Azure growth) and Google's public cloud platforms are also faring well. All three appear to be taking share from smaller IaaS providers that have less scale and fewer services to offer.
6. One way or another, businesses are spending more on software.
It's become clear in 2017, if it wasn't earlier, that the replacement of traditional software license sales with cloud subscriptions isn't a zero-sum game for many companies. That over the long run, companies are often willing to spend more on subscriptions to large and constantly-updated cloud app suites than they were on traditional licenses. The numbers posted by the likes of Microsoft and Adobe make this clear.
At the same time, as IBM would gladly state, certain parts of the on-premise software market, such as security, analytics and enterprise mobility management (EMM) software, are still faring well. Gartner sees total enterprise IT spending, whether cloud or on-premise, rising 8.5% this year to $354 billion and 9.4% next year to $387 billion.
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