Wall Street’s Q3 earnings season so far
November 25 2021 - Team Stockal
Q3 earnings season has been remarkably impressive even as investors anticipated that corporates won’t be able to handle supply-chain slowdowns and thus impact margins. The S&P 500 index is up by 8% during this earnings season – its best performance in several years and up by 26% YTD 2021. Despite inflationary issues and supply chain concerns the Big Techs and other large organisations continue to surpass growth expectations during the quarter and show their resilience in an uncertain environment that has largely been impacted post the pandemic. Here are the earnings highlights of some of the large corporations in the recent quarter.
Netflix Inc. (NFLX)
After a lighter-than-normal content slate of the company in Q1 and Q2 – largely due to Covid-related production delays in 2020, Netflix is now seeing a stronger content slate in the second half of the year. Revenue growth during the quarter was largely driven by a 9% increase in average paid streaming memberships and a 7% growth in Average Revenue Per Membership (ARM).
- In Q3, revenues saw a growth of $7.5 billion – a 16% year-on-year growth.
- Operating income grew by 33% to $1.8 billion.
- The company added 4.4 million paid net adds (vs. 2.2 million in Q3 2020) to end the quarter with 214 million paid memberships.
- The APAC region was the largest contributor to membership growth with 2.2 million paid net adds (half of the total paid net adds) as the company continues to improve services in this region.
- EPS of $3.19 vs. $1.74 a year ago included a $136 million non-cash unrealised gain from forex on the company’s Euro-denominated debt.
Microsoft Corporation (MSFT)
Microsoft has reported one of its best quarterly results surpassing analysts’ expectations. The company’s cloud strength drove its results during Q1. The shares of the company rose higher post the results making it the most valuable company in the world today with a market capitalisation of $2.54 trillion. The stock has rallied over 50% in the past year.
- Revenues during the quarter were $45.3 billion – an increase of 22% year-on-year. Segment breakdown of revenues saw a growth in all three revenue segments.
- Revenues in Productivity and Business Processes reported an increase of 22% year-on-year to $15.0 billion during the quarter, largely driven by office commercial products’ revenue growth, 42% increase in LinkedIn revenue growth, and Dynamics products’ growth which increased by 31% year-on-year.
- Revenues from the Intelligent Cloud segment saw an increase of 31% year-on-year to $17 billion, largely driven by Azure and other cloud services revenue growth of 50%.
- Revenues from the Personal Computing segment increased by 12% year-on-year to $13.3 billion, largely attributed to growth in Windows OEM revenues, and search and news advertising revenues, which increased by 40%.
- Operating income increased by 27% during the quarter to $20.2 billion.
- GAAP-adjusted net income increased by 48% to $20.5 billion.
- Diluted EPS was $2.71 (GAAP-adjusted) – an increase of 49% year-on-year.
- The company also returned $10.9 billion to shareholders in the form of share repurchases and dividends during the quarter, which was an increase of 14% compared to a year-ago quarter.
“Digital technology is a deflationary force in an inflationary economy. Businesses-small and large- can improve productivity and the affordability of their products and services by building tech intensity.”
Satya Nadella, Chairman and CEO, Microsoft
Alphabet Inc. (GOOGL)
The company reported profits and revenues which exceeded analysts’ expectations. Revenues grew by 41%, largely driven by growth in the company’s advertising revenues. The management expressed the company’s ad market remains strong and unlike most of its peers, it has not been negatively impacted by Apple’s iOS privacy changes or supply chain issues. Analysts’ have revised the targets upward for most of the tech giants post the results, and expressed that Google remains a well-positioned company in the longer term in the digital advertising space. Investors are bullish on Google’s growth prospects and the stock is up over 80% this past year.
- Revenues grew by 41% year on year to $65.12 billion. Google’s advertising revenues grew by 43% to $53.13 billion during the quarter up from $37.1 billion from the previous year.
- YouTube ads rose to $7.21 billion against $5.04 billion a year ago.
- Cloud revenues reported $4.99 billion as against $3.44 billion a year ago.
- Operating income grew to $21.03 billion which was a 32% increase on a year-on-year basis.
- Traffic Acquisition Costs (TAC) was also higher at $11.50 billion as against $8.16 billion seen a year ago.
- The company also had share repurchases of 4.6 million shares during the quarter to an extent of $12.6 billion.
- Google also warned that the growth rates won’t be as rosy as they have been in the past few quarters and is likely to diminish in the next quarter.
- Analysts expect a slowdown in revenue growth in the first half of 2022 as a result of lower fees in the Google Play store along with regulatory challenges the company faces.
Apple Inc. (AAPL)
Apple reported higher revenues and earnings during the quarter. However, the numbers fell short of analysts’ expectations during the quarter – which the company attributed to larger-than-expected supply constraints on iPhones, iPads and iMacs. The supply constraints were largely driven by industry-wide chip shortages and covid-related manufacturing disruptions in Southeast Asia. Nonetheless, the company’s overall revenues were still up by 29%, and each of the product categories reported growth on an annual basis.
- The company reported a record revenue of $83.4 billion –higher by 29% from a year ago.
- iPhone revenues grew by 47% from a year-ago quarter to $38.87 billion.
- Services revenues grew by over 25% to $18.28 billion and other products revenue grew by 11.5% to $8.79 billion
- iPad revenues also grew higher by 21.4% during the quarter to $8.25 billion.
- The management announced that it expects a solid year-on-year revenue growth (which will be higher than the $6 billion hit on revenues faced in the current quarter) in the next quarter despite the fact that they will face some of the worst supply constraints.
“This year we launched our most powerful products ever, from M1-powered Macs to an iPhone 13 lineup that is setting a new standard for performance and empowering our customers to create and connect in new ways. We are infusing our values into everything we make – moving closer to our 2030 goal of being carbon neutral up and down our supply chain and across the lifestyle of our products, and ever-advancing our mission to build a more equitable future.”
Tim Cook, CEO, Apple’
Airbnb Inc. (ABNB)
The company reported one of its best quarters with the highest revenues and net income. The travel rebound that began earlier this year accelerated in Q3, resulting in Airbnb’s strongest quarter ever. Revenues and net income reported during the quarter were their highest ever.
- Q3 revenues came in at $2.24 billion which was the highest ever, up nearly 70% year-on-year from $1.3 billion seen in Q3 2020.
- The company had the most profitable quarter with a net income of $834 million and up by 280% from Q3 2020and nearly 4x higher than a year ago.
- Adjusted EBITDA exceeded $1 billion which was also the highest ever reported during the quarter.
- Earnings Per Share (EPS): was reported at $1.22.
- The company also reached a major milestone of 1 billion cumulative guest arrivals as more people got vaccinated along with relaxation on travel restrictions.
- Host earnings reached a record mark of $12.8 billion during the quarter and active listings continued to grow.
- Nights and experiences booked during the quarter were slightly lower from the previous quarter at 79.7 million, however, it was still higher by 29% year-on-year.
- The company expects progress in vaccination and improved international travel in the coming weeks to lead the overall growth in the fourth quarter and during the new year.
- Revenues for the next quarter is likely to be between $1.39 billion – $1.48 billion.
Nvidia Corporation (NVDA)
The company continues to post remarkable year-on-year growth in revenues and earnings and upside as against Wall Street estimates. The stock had a big run over the year with shares up over 120% YTD, 122% in 2020 and 76% in 2019. Demand for Nvidia is surging, driven by hyper-scale and cloud scale-out along with broadening adoption by more than 25,000 companies.
- Record revenue of $7.10 billion, up 50% year-on-year and higher by 9% from the previous quarter.
- The company reported record revenues from the Gaming, Data Center and Professional Visualization market platforms.
- Data Center revenues grew over 55% largely on increased demand for AI chips.
- Adjusted EPS was $1.17 which was up 60% from a year ago.
- The company paid cash dividends of $100 million during the quarter
Cisco Systems Inc. (CSCO)
The company ended FY21 with an exceptional Q4 performance that delivered strong results across revenue, non-GAAP net income, EPS and record operating cash flows. Cisco also reported a double-digit order growth across all customer markets and geographies, including the product order growth of 31%, which was the strongest year-on-year growth in over a decade. Continued momentum was seen in delivering more software and subscriptions during the quarter. The demand for Cisco technology was strong with its Q4 performance, marking the highest product order growth in over a decade.
- Revenues grew to $13.1 billion during the quarter which was up by 8% year-on-year and full-year revenues reported at $49.8 billion.
- Software revenues were reported at $4 billion in Q4 an increase of 6% and subscription revenues were higher by 9% year-on-year.
- For the full year, software revenues were reported at $15 billion which was higher by 7% from the previous year.
Next quarter Guidance
- Revenues: to see a 7.5% – 9.5% growth year-on-year.
- Adjusted Earnings Per Share (EPS): $0.79 – $0.81
Full-year FY2022 Guidance
- Revenues: 5% – 7% growth year-on-year.
- Adjusted Earnings Per Share: $3.38 – $3.45
“We continue to see great momentum in our business as customers are looking to modernise their organisations for agility and resiliency.”
Chuck Robbins, Chair and CEO, Cisco.
General Electric Company (GE)
The company decided to split its business into three divisions – aviation, healthcare and power. The move was the outcome of a year-long process of shrinking the company after selling its locomotive and home appliances business, spun off its oil & gas business along with selling its financial services arm. The shares of the company rose higher post the results.
- Total revenues reported during the quarter were $18.4 billion which was almost flat on a year-on-year basis.
- The company generated $1.7 billion in free cash flows from industrial operations in the current quarter as against $514 million a year ago. Profit margins have improved and are on track to generate more than $7 billion of free cash flows (FCFs) in 2023.
- The company expects adjusted profits to be in the range of $1.80-$2.10 per share as compared to the previous estimates of $1.20 – $2.00 per share.
- GE like other manufacturers is facing challenges in terms of labour and shortage of raw materials like semiconductor chips and resins which are likely to persist in 2022 thus impacting its profit margins.
Zoom Video Communications Inc (ZM)
The company reported better-than-expected quarterly earnings this week, however, there has been a slowdown in revenues.
- Revenues increased 35% from a year ago, slowing down from 54% growth seen in the prior period.
- Net income was higher at $340.3 million – up by 71% year-on-year.
- During the quarter, adjusted EPS was $1.06 – $1.07, a growth of about 19%.
- The company announced the launch of its own cloud contact centre software in early 2022.
- The company has $5.4 billion in cash and cash equivalent on its balance sheet.
Q3 earnings season wraps up with strong gains. The big techs drive the S&P 500 to its 66th record all-time high this year. Strong demand usually allows companies to pass on higher costs while inventories remain low. However, sticky supply bottlenecks would likely remain a threat – but margins typically expand when there is growth. The next six months could likely see S&P 500 rising above the 5,200 levels in an environment of reduced monetary stimulus and outperformance of cyclical stocks as per data from UBS Global Wealth Management. This would imply a rally of over 10% from the current levels for the S&P 500 index.