- Microsoft’s 4Q shows the power of Office, Mister Softy’s biggest asset in establishing Windows 8 and Windows Phone as viable 3rd platform vs. Apple and Android.
- Google is powering through the recession as online ads take share from traditional media, on stabilizing click pricing. On-going big Capex expected, as infrastructure is its most important asset.
- Servers for the cloud are driving Intel growth despite the dying PC platform, but appear vulnerable long term to price pressure from ARM-based alternatives.
- Qualcomm missed due to supply constraints, but revealed the light at the end of the tunnel, with optimism that the supply catch up before year end.
Ah, earning season, when a young analyst’s fancy turns lightly to thoughts of interminable conference calls, and deliberately opaque financial disclosures. Speaking of which, several tech bellwethers reported this week – Google, Microsoft, Intel and Qualcomm – and were generally greeted with relief, if not actual applause. Relative to the published consensus, the results were a mixed bag, but as usual, the story was more important.
Reviewing the four, last in, first out, Google reported a strong earnings beat on a slight revenue miss last night. Not including the Motorola boat anchor, core Google revenues were up 21% YoY, which continues the deceleration of the previous quarter, which was up 25% vs. the 33% growth in 4Q11. However, the primary culprit in that deceleration, falling average prices for ad clicks, may have found some traction, up 1% QoQ, although down 16% YoY. Undoubtedly, the fast growth in lower priced mobile search is the prime factor in all of this, and Google addressed it on the call, likening the state of mobile to the early days of desktop and suggesting that there was considerable potential for mobile ads to become more effective, generate more ROI and deliver higher prices. Ultimately, the shift to mobile platforms is a very good thing for Google, with its control of the Android platform providing a vast array of opportunities to co-opt value from advertising, subscriptions, and transactions away from the rest of the Internet, and indeed, the rest of the economy. Google also continues to invest away, boosting Capex 28% Q/Q to $774M spending largely on infrastructure. While Google currently owns more servers than any other company on the planet by a factor of 2 or 3, management is keeping its data center bread buttered to sustain or even extend its substantial performance advantage on cloud-based applications.
Steve Ballmer has spent more time on stage in the last month than a Vegas lounge act, announcing the oddly-named Surface tablet at a glitzy Hollywood event and the tablet-friendly Office 2013 in a more tech traditional venue in San Francisco last week. The results for Microsoft’s 4Q were saddled with the huge write down of its 2007 purchase of online ad firm aQuantive, but the rest was either expected or encouraging. The server and tools business was the biggest organic grower at 13% YoY, reflecting the later stages of enterprise data center virtualization investment. While there is risk that private data center investment will wane, Microsoft is well positioned on the other side to offer cloud services and should be a relative winner in the transition. Office, Xbox and Bing were called out as growth drivers for their respective divisions, each of which posted YoY growth in line with the full company results. We see the profoundly dominant Office franchise as Microsoft’s biggest asset in pushing its Windows 8/Windows Phone/Metro platform to enterprises and on to consumers. To that end, the Windows division was down 13% YoY, with hopes that the decline of the traditional PC platform will be mitigated by the rise of the tablet/ultrabook friendly Windows 8 when it launches in October. Looking forward, Microsoft’s monopoly over device operating system software is coming to an end, with the gravy train of a growing desktop population and regular upgrades likely to be a long term declining annuity for the company. On the flip side, I think Microsoft’s Windows/Metro platform that extends Windows 8 architecture all the way down to the smartphone will give Apple’s iOS and Android a run for their money as it comes at them from the enterprise side. While it will never grab the 90%+ market share and obscene profitability of its Windows predecessors, it will position Microsoft to play the same land grab game against the rest of the Internet that Apple and Google are playing.
Intel’s numbers can be difficult to parse, revealing revenues but not shipments in very aggregated product categories. PC division grew sales 4% YoY, likely reflecting some share gain vs. hapless AMD, and a possible mix shift to somewhat higher end processors. With Garner making its 8th consecutive downward revision in its long term PC forecasts to a 0.6% CAGR through 2016, I think we are at the inflection point to inevitable and irreversible decline of the PC as we know it. The good news was 15% growth in the data center division, which benefits from the massive investment in large scale distributed data centers being built by the likes of Google, Facebook, Amazon, and Microsoft. Note that these investments do not show up in system sales as reported or forecast by industry analysts because these companies buy chips directly from Intel and have the server boards built to their specifications by contract manufacturers. While this trend is a real threat to companies like HP or Dell, thus far it has been good business for Intel.
However, down the road, Intel faces a threat from new more efficient processor architectures based on ARM technology. The big cloud data center operators obsess on their “Power Usage Effectiveness” (PUE), which measures how much additional power is needed for cooling and distribution relative to the power used for computation. A PUE of 1.0 is ideal, with Google closest to the benchmark at 1.13 overall, and Amazon (1.45) and Facebook (1.5) in pursuit. ARM recently demonstrated that 32 processor cores could be powered by a bicyclist. Not as impressive is a team of skydivers parachuting into the Moscone Center, but still makes a point that the future is about energy efficient chips with low heat emissions that can be incorporated into the data center. Intel’s Trigate process technology sidesteps the power efficiency problem of the CISC architecture underlying its processors, but as the rest of the world inevitably catches up, the cloud guys will have no compunction about shifting to inherently more power efficient and probably cheaper RISC chips offered by ARM’s licensees.
Finally Qualcomm, an ARM licensee, gave a double whammy of missing EPS and revenue only to pop in after hours and the day after earnings, as investors took time to listen to the story. The miss was attributable to supply constraints at foundries in Asia such as Taiwan Semi, which couldn’t retool fast enough to meet demand for Qualcomm’s latest 28nm Snapdragon processors. On the call, Qualcomm management sounded optimism that the pent up demand would be satisfied before year end and that the full year targets were unchanged despite the 2Q miss. Considering the potential for ARM-based processors as portable device architectures lay waste to the PC, Qualcomm’s unrivaled excellence in all things wireless, and the awesomeness that is its IPR licensing juggernaut, few companies are as well positioned to reap the benefits of the tectonic shifts affecting the TMT landscape. Nice to see that the market gives them at least some credit for that.
For our full research notes, please visit our published research site.