Competition among service and content providers remains intense.
Another earnings season continues to roll along. One unique aspect of the first earnings period of a year is that it unfolds relatively slowly. The overwhelming majority of companies are reporting yearly and quarterly earnings, requiring a 10-K rather than a 10-Q. This means more work and time and better spacing among earnings reports.
Google (GOOG), Intel (INTC), and Microsoft (MSFT) reported almost two weeks ago. Verizon (VZ), AT&T (T), Apple (AAPL), Netflix (NFLX), and Yahoo (YHOO) reported last week. This week we get Qualcomm (QCOM) and Viacom (VIA). Almost a week will go by before we hear from Disney (DIS) and Time Warner (TWX). Comcast (CMCSA) reports February 15, almost three weeks after Time Warner Cable (TWC).
I like this a lot better than the usual condensed quarterly calendar. There is more time for analysis. Stocks have a chance to find their level beyond the initial reaction before competitors and peers provide incremental new information. Now if we could only do something about those immediate responses to headlines of reports.
Stocks often make big moves before almost anyone has had a chance to complete any real analysis. I believe this leads to a situation where the reaction to headlines colors the analysis of the results. Apple halts trading in its shares for 20 minutes after its report hits the wires. It sure would be nice if others would do the same.
Since the last "Dow of Steve" update on the earnings season, we have heard from several more important media and communications companies including Netflix, Time Warner Cable, AT&T, Amazon (AMZN), and Broadcom (BRCM). The overall messages remain the same. Wireline and wireless broadband are driving industry growth. Smartphones and tablets are driving mobile broadband. Competition among service and content providers remains intense.
The most exciting action has been in Netflix. The stock soared on its earnings report amid signs that streaming subscriber growth is back on track, providing a growth profile that could lead to a return to substantial profitability in a few years.
Time Warner Cable provided some relief to cable investors with better than expected financial and subscriber results. The company also reloaded its share buyback. The results indicate that cable can manage a transition to broadband and commercial services as growth drivers, even as competition and over-the-top video erodes subscriber counts in the core video business. This comes as welcome relief following several poor quarters for the cable industry and concern that share buybacks face limits as debt levels rise.
AT&T affirmed the boom in smartphone sales already reported by Verizon and Apple, but the report reminded investors that for now the real winners are the handset makers. Apple in particular is sucking most of the profit margin from new smartphone sales due to the subsidies provided to smartphone customers of the service providers.
Effectively, the service providers are taking a loss of about $400 on every iPhone when they pay Apple $600 and charge their customer $200. This situation is unlikely to change for the service providers while smartphone penetration is still rising and phone upgrade cycles are accelerating. This scenario will not appear in 2012. Keep an eye on AT&T for a signal that profitability is improving, as it has much higher smartphone penetration than other service providers due to its long period of exclusivity with the iPhone.
Amazon reported Tuesday night. Amazon missed on reported revenues and revenue guidance, throwing a wrench in the investment thesis for the shares. The thesis has revolved around driving top line growth at the expense of margins so that investors would buy future profits and ignore the lack of current profits. This issue is not one of great concern to media and communication investors.
What might matter, though, is that Amazon was a bit vague on Kindle Fire sales. Could this be a sign that the tablet did not sell as well as expected? Amazon's media sales were also light. The company suggested this was due to packaged video games. Instead, maybe Fire owners are buying less digital media than expected? If the Fire proves a disappointment, it would be a positive for Apple. It could also be a negative for Android, which is trailing badly in tablets. Google would be at a small risk if that is the case, as it risks loss of search revenue on a dominant Apple tablet.
Broadcom reported slightly better than expected results and guidance a little ahead of the street. The key takeaway for media and communications investors is that the company is confirming the bottom in the semiconductor cycle with future growth led by communication chips. Broadcom's specialty is connectivity chips. The company benefits from the trend toward mobile broadband. The semiconductor downturn was more a function of inventories and mismanagement of the supply chain industrywide. Nevertheless, hearing Broadcom management speak and guide confidently when the company's fortunes are driven by the mobile broadband and digital media trends is comforting.
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