Wall Street Beat: Mobile is key to tech earnings

Tech earnings this week highlighted the importance of mobile communications to IT, as companies including Apple, Samsung, Facebook, AT&T and Texas Instruments reported mixed results for the quarter ending in June.

Apple and Samsung earnings underscored competition in the mobile market. Reporting Tuesday, Apple said revenue was up 1 percent year over year to US$35.3 billion, while profit declined 22 percent to $6.9 billion.

The lack of a new hit product, competition from Android-based devices and sagging sales overseas, particularly in China, hampered earnings for the quarter. Apple sales in China declined 4 percent year over year. The overseas results indicated a problem other IT companies face.

"The continued recession in Europe and slowing growth in China will offset improvements in the US, Japan, and some emerging markets," according to Forrester analyst Andrew Bartels, in a recent forecast for IT sales this year.

While Apple had a soft quarter, however, a refresh of its mobile product lines should bolster growth, analysts said. "We maintain our belief that Apple has a strong product pipeline, including a refreshed iPhone 5S, mid-tier iPhone, and iPad lineup that should result in solid earnings growth," wrote Canaccord Genuity analyst T. Michael Walkley in a research note. The launch of a lower-cost iPhone should also help Apple in emerging markets, Walkley noted.

Meanwhile, Samsung Electronics, reporting Friday, said that even though revenue and net earnings rose significantly year over year, tough competition in the mobile phone market and the need to boost marketing costs cut into results.

The company generated a profit of 7.77 trillion won (US$6.89 billion), up a whopping 50 percent year over year, as sales rose 21 percent to 57.5 trillion won. However, marketing costs associated with, among other things, launching its Galaxy S4 during the quarter brought operating profit down for the mobile unit by 3 percent even though sales increased.

Samsung has been edging out Apple in the hard-fought mobile phone market. A report from Strategy Analytics on Friday said that Apple's share of the smartphone market declined in the second quarter to its lowest level in three years, slipping to 13.6 percent in the quarter from 16.6 percent year over year. During the same period Samsung's market share rose to 33 percent from 31 percent.

However, Apple and Samsung face a similar problem: Their success in high-end smartphones means that mature markets are saturated. They face the tough task of getting users in developed markets to upgrade while coming up with devices tailored to emerging markets, some of which face slowing growth over the next few quarters.

The shift to mobile computing has implications for a wide variety of IT and Internet companies. Facebook on Wednesday said mobile ad sales helped fuel revenue, which skyrocketed 53 percent year over year to $1.81 billion, while profit totaled $333 million compared to a net loss of $157 million.

A year ago, the social networking giant had essentially no mobile revenue, but during the past quarter sales of mobile ads came out to 41 percent of total advertising revenue for the quarter.

Mobile communications also played an important part in AT&T's quarter. The company reported a rise in revenue as strength in its mobile business made up for flat-lining wireline sales.

The company Tuesday said it gained 632,000 wireless subscribers in the quarter, while mobile data sales increased almost 20 percent year over year. Total revenue increased 1.6 percent year over year to $32.1 billion. Excluding AT&T's former Advertising Solutions division, which was sold off, sales were up 2.6 percent. However, as operating expenses rose, profit declined to $3.82 billion, down from $3.9 billion.

Other tech companies reporting earnings this week included:

-- Texas Instruments. The chipmaker, noting weakness in the PC market, said revenue declined by 9 percent year over year to $3.1 billion. Net income, however, rose by 48 percent to $660 million as cost-cutting measures took effect.

-- Amazon, which reported that sales for the quarter rose 22 percent year over year to 15.7 billion. Operating income, however, declined 26 percent to $79 million. The good news was that its business in the U.S., which is expected to expand faster than overseas markets, increased and earnings in the region were up.

Stark Earnings for Intel Reflect Its Changing Market

For years, Intel executives scoffed at potential threats to its computer chip business from makers of less expensive chips for video games and mobile phones. The largest maker of chips, Intel continued to focus on putting those chips in personal computers, where they could be sold at a high profit margin.

 
That strategy appears to have run its course. The quality of mobile and gaming chips made by other companies has improved to a point where they run most of the world’s mobile phones and tablets. And partly because more people are turning to those mobile devices, PC sales are waning.

 
The move to mobile devices started to hurt Intel’s results in recent quarters, but the quarterly earnings that the company reported on Wednesday were particularly stark. Net income was $2 billion, or 39 cents a share, a drop of 29 percent from a year earlier. Revenue was $12.8 billion, down 5 percent.
Intel’s results were slightly below expectations. Analysts had predicted 40 cents a share and revenue of $12.9 billion, according to a survey of analysts by Thomson Reuters. Intel cut projections for annual revenue, gross margin and research and development.

 
“At the end of the day, the market will go where the market goes,” Brian M. Krzanich, Intel’s chief executive, said in a call to analysts after the earnings were released. “We’ve not always lived up to the standards we’ve set for ourselves.”

 
Mr. Krzanich, who took over in May, has previously said that Intel was slow to see the threat from tablets and smartphones. On Wednesday, he said that organizational changes, along with a renewed commitment to looking for “the next big thing,” would bring Intel back.

 
In the near term, this means going after the lower end of the PC and tablet market. A new chip will be out in time for the Christmas season, he said, in notebook-type computers that will be sold for as little as $300 and tablets costing $150. Intel also has plans to soon put new chips in higher-end touch-screen devices.
“He’s got to manage in a very tough environment,” said Douglas Freedman, analyst with RBC Capital Markets, referring to Mr. Krzanich. “Intel has done a good job showing they can make chips for mobile devices and tablets, but in the next three or four quarters he has to show he can bring that home.”
While chips for PCs still make up almost three-quarters of Intel’s revenue, few analysts expect the PC market to recover to its old highs. Last week, International Data Corporation said that PC sales fell 11.4 percent in the second quarter of the year. Most of the developed world is now saturated with the machines, and people are buying replacement computers at a slower rate.

 
Mr. Krzanich said Intel would “leave no computing opportunity untapped” to make up for the loss. In particular, he said, Intel’s “highest priority” would be small mobile devices.

 
Mr. Krzanich has also focused on cost-cutting and streamlining at the company, giving Mr. Freedman and others some hope that Intel’s profit will rebound.

 
In Wednesday’s call, the company noted that Microsoft’s Surface Pro tablet, which carries a high-margin Intel chip, was not counted in the PC sales numbers by I.D.C. and others. The analysis firm has said, 

however, that in the first quarter of this year Microsoft’s tablets, including tablets not carrying Intel chips, had just 4.4 percent of the tablet market, compared with 39 percent for Apple’s iPad. There is little to suggest significant improvement from there, an I.D.C. analyst said. 

Surface RT tanks Microsoft's earnings

Microsoft fell way short of analyst estimates for its fourth fiscal quarter, with revenues nearly a billion dollars short of what analysts had expected.

The culprit? Microsoft’s Surface RT tablets. A lack of sales forced Microsoft to take a $900 million charge, in addition to a previously deferred $782 million charge related to Microsoft Office.

Sources close to Microsoft said that the charge reflects the recent pricing changes for Surface RT.

Surface RT Microsoft reported net income of $4.97 billion (59 cents) on revenue of $19.90 billion, nevertheless, which showed strong improvements from a year ago. The company reported a 10.1 percent increase in revenue from a year ago, when Microsoft reported a loss of $492 million. For the fiscal year, Microsoft reported net income of $26.86 billion on revenue of $77.85 billion.

Analysts polled by Yahoo Finance expected Microsoft to report an EPS of 75 cents per share, on revenue of $20.73 billion.

Microsoft has struggled to convince consumers to support its newly released Windows 8 operating system, but the company recently released a preview of Windows 8.1 as a “do-over” to win back customers. Win 8.1 has customer-friendly features that include the ability to boot directly to the desktop, as well as a “start button” that takes them back to a reorganized Windows Start Page.

Steve Ballmer, Microsoft’s chief executive, took a forward-looking approach Thursday, pointing to the company’s recent reorganization as a recipe for success.

“We are working hard to deliver compelling new devices and high value experiences from Microsoft and our partners in the coming months, including new Windows 8.1 tablets and PCs,” Ballmer said in a statement. “Our new products and the strategic realignment we announced last week position us well for long-term success, as we focus our energy and resources on creating a family of devices and services for individuals and businesses that empower people around the globe at home, at work and on the go, for the activities they value the most.”

Steve Ballmer

In a study conducted by online advertising network Chitika, the share of North American web traffic from Windows 8 operating systems has grown to 4.8 percent, the company said Wednesday.

"Windows’ hold on the continental desktop OS marketplace remains as strong as ever,” Chitika said in a statement. “While this is certainly good news for Microsoft, it is tempered by the continued growth of mobile web browsing, where the company is not as strong, along with the more gradual slope of Windows 8 growth rate within North America."

"However, Microsoft’s decision to make some changes to the recent Windows 8.1 update may spur more users to adopt the new OS, as the company has attempted to address some of the user concerns surrounding the initial version of the software.”

Microsoft’s Windows Division revenue grew 6 percent for the fourth quarter and 5 percent for the full year. Excluding the $540 million impact of its Windows Upgrade Offer revenue deferral, however, the Windows Division revenue would have decreased 6 percent for the fourth quarter and 1 percent for the full year.
Microsoft was also affected by the continued slide in the PC market, which has seen consumer buy tablets and phones rather than PCs. Amy Hood, Microsoft’s chief financial officer, said that Microsoft is instead investing in cloud services.

“While our fourth quarter results were impacted by the decline in the PC market, we continue to see strong demand for our enterprise and cloud offerings, resulting in a record unearned revenue balance this quarter. We also saw increasing consumer demand for services like Office 365, Outlook.com, Skype, and Xbox LIVE,” Hood said. “While we have work ahead of us, we are making the focused investments needed to deliver on long-term growth opportunities like cloud services.”

Microsoft’s traditional pillars of strength continued to buoy the company.

Microsoft’s Business Division reported the highest profits and revenue, at $4.87 billion ($4.1 billion a year ago) and $7.2 billion respectively ($6.3 billion a year ago).Server and Tools reported $2.3 billion in profits (versus $2.04 billion a year ago) on $5.5 billion in revenue ($5.1 billion a year ago).Microsoft’s Entertainment and Devices Division also saw its losses shrink from $252 million to $110 million, as revenues grew from $1.78 billion to $1.92 billion.Microsoft’s online business continued its money-losing ways, with a loss of $372 million on increased revenue of $804 million.Bing organic U.S. search market share was 17.9 percent for the month of June 2013, up 230 basis points from the prior year period, Microsoft said.

  “We continue to see strong demand for our enterprise products and services, with more and more customers making long-term commitments to the Microsoft platform,” said Kevin Turner, chief operating officer at Microsoft, in a statement. “The growing adoption of our cloud services, including Office 365, Windows Azure and Dynamics CRM, continues to demonstrate our leadership position in the cloud.”
Microsoft did not release a revenue outlook. 

Samsung predicts big earnings jump in Q2, still disappoints

Samsung Electronics predicted a big jump in profit for the second quarter compared to a year earlier, but the company's explosive growth is slowing amid signs its top end Galaxy smartphones are less popular than expected.

Samsung said Friday that its operating profit for the April-June quarter will probably be between $8.1 billion and $8.3 billion. This is at least a 44 percent gain from what it generated during the same stretch in 2012, and Samsung said sales are also likely up around 20 percent.

Those are strong gains, but analysts and investors had expected better. Bloomberg said a survey of 34 financial analysts predicted an average of $8.7 billion in earnings. A number of investment banks have cut their ratings on the Korean company in recent weeks, and its stock has fallen.

The results correspond to the launch of Samsung's flagship Galaxy S4, released in April. The phone was a highly anticipated follow-up to Samsung's successful S3, and the company held a major launch event at New York City's Radio City Music Hall, with a live broadcast to people watching in nearby Times Square.

Samsung is now the world's largest smartphone maker as well as a dominant manufacturer of semiconductors and displays, but phones make up the bulk of its profits.

The company said it shipped 10 million of the handset in May, less than a month after the global launch, but has been silent since then about results. Many reviewers said the phone was more an upgrade from the S3 and complained about the large amount of Samsung proprietary software on the device. In Japan, the country's largest carrier NTT DoCoMo ran a summer campaign with big discounts for both the S4 and a Sony handset, and the carrier recently said that the slightly less expensive Sony phone is selling far better.

Since the launch of the original S4, Samsung has released several variations. These include a stock Android version, the Galaxy Zoom S4 with a better camera and screen, a "mini" version, and the Galaxy S4 Active, a more rugged, waterproof design.

Samsung typically announces a target range for its earnings a few weeks before its actual earnings announcement.