Samsung warns sales and profits are going down the toilet

Korean giant Samsung has become the latest major tech company to warn about significant under-performance towards the end of 2018.

In its earnings guidance for Q4 18 Samsung Electronics advised that it expects sales of around 59 trillion Korean won and 10.8 trillion Korean won. In the same quarter a year ago it racked up sales of 66 trillion and profits of 15 trillion, so that’s a pretty major drop-off, especially for profit, with margin dropping from 23% to 18%.

Analysts expected a bit of a drop in profit, according to Bloomberg, but only as low at 13.8 trillion. The same story points the finger at the trade aggro between the US and China as a major reason for the drop off, citing reduced demand for memory chips which are a big thing for Samsung.

Among the companies presumably buying less chips is Apple, which also issued a sales warning last week, thanks largely to smartphone demand dropping off a cliff in China. Samsung has blamed its woes on ‘mounting macro uncertainties’ affecting chip sales and good old ‘intensifying competition’ in the smartphone market.

The latter claim seems somewhat implausible in the light of Apple’s recent admission. What seems more likely is that the downward trend in smartphone demand has accelerated, compounded by the fact that neither of Apple or Samsung’s latest flagship models offered much to entice people to upgrade. Two-year-old smartphones still do a decent job so upgrade cycles are extending, which means lower sales for the foreseeable future.

Apple points finger at China for financial woes

It seems the anti-China sentiment is pretty infectious as Apple pins the blame for the company’s shrinking bank account on the misery consumers hiding behind the Great Wall.

For years it seemed Apple was able to defy industry trends. Despite the fact global smartphone shipments were slowing, irrelevant to the fact there was little innovation emerging from the handset segment and in spite of charging a small fortune for the devices, Apple was still able to bleed the iCultists dry. However, now tt appears Apple’s immunity to the plague of normality is starting to wane.

Apple has revised its guidance for the first quarter of 2019, and there’s quite a bit missing. CEO Tim Cook explained the iLeader would only be bringing in roughly $84 billion across the three months which ended December 29, compared to the previous estimated range of $89-93 billion.

And China was of course to blame.

“While we anticipated some challenges in key emerging markets, we did not foresee the magnitude of the economic deceleration, particularly in Greater China,” said Cook. “In fact, most of our revenue shortfall to our guidance, and over 100 percent of our year-over-year worldwide revenue decline, occurred in Greater China across iPhone, Mac and iPad.”

This was not the only reason of course. The launch of the iPhone was too late, putting too much pressure on the channels in the lead up to Christmas. The US dollar was subject to FX swings. Supply could not meet demand. And finally, more people were holding onto their older devices instead of upgrading to new ones. All of these factors combined, plus weak performance in the emerging markets, resulted in a $5-8 billion hole.

It might be easy to blame the external factors here, and they would have almost certainly played a notable role, but perhaps Cook and co should look a bit more inwards to explain the current conundrum; when was the last time Apple did something genuinely innovative?

If you consider what devices are being brought to the market today, there are simply features and gimmicks which are better than what users had before. The age of innovation for the smartphone has temporarily ceased. This has been the case at Apple for some time, though now it appears the brand credit-line has run out. There are still iLifers out there who will upgrade when Cook snaps his fingers, but not as many as there used to be, and it does appear the idea of Apple as a status-symbol in China has died.

Apple has been the master of brand advertising, driving loyalty and asset-bleeding over the years, but this quarter might suggest the power of the Apple brand is beginning to fade due to a lack of innovation and extortionately expensive products. In every segment, Apple of course charges a premium, but it doesn’t necessarily mean the product is actually better. Is the iPhone XS better than the Huawei Mate 20 Pro? Or do the Airpods perform better than Bose? Is the Homepod the best smart speaker out there? Does the product justify the cost? Has the age of holding iLifers to ransom come to an end?

Unfortunately for Apple, at a time when innovation is at a premium a supply-chain expert is in charge of the business. The company might be the smoothest running machine around, but innovation has certainly lacked without Steve Jobs at the top, though the big question is whether the great mind of Jobs could squeeze out any new ideas in these meagre times.

After Cook announced the firm would stop detailing shipment numbers in the financial reports we should have all seen this coming, but what we have learned here is that not even Apple is immune to global trends. It can’t charge more an offer no added values in exchange. Its customers are just as cash conscious as others. New products require innovation to work.

The cloud is booming but no-one seems to have told Oracle

Revenues in the cloud computing world are growing fast with no end in sight just yet, but Oracle can’t seem to cash in on the bonanza.

This week brought joint-CEOs Safra Catz and Mark Hurd in front of analysts and investors to tell everyone nothing has really changed. Every cloud business seems to be hoovering up the fortunes brought with the digital era, demonstrating strong year-on-year growth, but Oracle only managed to bag a 2% increase, 1% for the cloud business units.

It doesn’t matter how you phrase it, what creative accounting processes you use, when you fix the currency exchange, Oracle is missing out on the cash grab.

Total Revenues were unchanged at $9.6 billion and up 2% in constant currency compared to the same three months of 2017, Cloud Services and License Support plus Cloud License and On-Premise License revenues were up 1% to $7.9 billion. Cloud Services and License Support revenues were $6.6 billion, while Cloud License and On-Premise License revenues were $1.2 billion. Cloud now accounts for nearly 70% of the total company revenues and most of it is recurring revenues.

Some might point to the evident growth. More money than last year is of course better, but you have to compare the fortunes of Oracle to those who are also trying to capture the cash.

First, let’s look at the cloud market on the whole. Microsoft commercial cloud services have an annual run rate of $21.2 billion, AWS stands at $20.4 billion, IBM $10.3 billion, Google cloud platform at $4 billion and Alibaba at $2.2 billion. Oracle’s annual run rate is larger than Google and Alibaba, those these two businesses are growing very quickly.

Using the Right Scale State of the Cloud report, enterprises running Google public cloud applications are now 19%, IBM’s applications are 15%, Microsoft at 58% and AWS at 68%. Alibaba is very low, though considering the scale potential it has in China, there is great opportunity for a catapult into the international markets. Oracle’s applications are only running in 10% of enterprise organizations who responded to the research.

Looking at the market share gains for last quarter, AWS is unsurprisingly sitting at the top of the pile collecting 34% over the last three months, Microsoft was in second with around 15%, while Google, IBM and Alibaba exceeded the rest of the market as well. Oracle sits in the group of ten providers which collectively accounted for 15% of cloud spending in the last quarter. These numbers shouldn’t be viewed as the most attractive.

Oracle is not a company which is going to disappear from the technology landscape, it is too important a service provider to numerous businesses around the world. However, a once dominant and influential brand is losing its position. Oracle didn’t react quick enough to the cloud euphoria and it’s looking like its being punished for it now.

Dell flies through Q3 with 15% revenue growth

Dell Technologies has reported its financials for the third quarter of 2018, with few complaining about15% revenue growth to $22.5 billion.

While the company still has a considerable bill to pay off following the $67 billion acquisition of EMC in 2016, the firm has boasted about paying off approximately $1.3 billion of core debt after three months of positive growth across the group.

“The digital transformation of our world is underway, and we are in the early stages of a massive, technology-led investment cycle,” said Michael Dell, CEO of Dell Technologies. “Dell Technologies was created to meet this opportunity head on for our customers and our investors. You can see the proof in our strong growth, in our powerful innovation and in the depth of our customer relationships.”

With total revenues standing at $22.482 billion, most of the numbers are heading in the right direction. The company is still loss-making, though this has narrowed to $356 million for the last three months and $522 million for 2018 so far, improvements of 13% and 78% respectively compared to the same periods of 2017.

Starting with the Infrastructure Solutions Group, revenue for the third quarter was $8.9 billion, a 19% increase, with the servers and networking delivering its sixth consecutive quarter of double-digit revenue growth. Storage products saw a 6% increase in revenues taking the total up to $3.9 billion.

The Client Solutions Group saw revenues increase by 11% to $10.9 billion, with Dell suggested strong growth in both the commercial and consumer units. Commercial revenue grew 12% to $7.6 billion, and Consumer revenue was up 8% to $3.3 billion, while the firm outperformed the PC industry for total worldwide units.

In the VMWare business unit, revenue for the third quarter was $2.2 billion, up 15%, with operating income of $768 million. This is one area where the Dell management team feel some of the biggest benefits of the EMC acquisition are being felt, with the dreaded ‘synergies’ tag emerging. However, it’s the external AWS partnership which seems to be claiming the majority of the plaudits.

“Overall, I think yesterday’s announcement at re:Invent just reinforced the momentum that we have in the partnership with Amazon,” said Patrick Gelsinger, CEO of VMWare. “And clearly, the VMware Cloud on AWS, we continue to see great customer uptake for that. We reinforce the expansion of that with the Relational Database Service, the RDS announcement that we did at VMworld and yesterday’s Outposts announcement just puts another pillar in that relationship. So now I’d say, we’re on Chapter 3 of the partnership. And overall, we just can see the continued momentum.”

Dell Technologies is not a company which get a huge amount of press inches nowadays, though trends are certainly heading in the right direction here.

Qualcomm shares fall on concerns about its dispute with Apple

Mobile chip giant Qualcomm delivered fairly solid quarterly numbers but it lowered its outlook thanks mainly to Apple.

A slight year-on-year fall in revenue was still better than expected, as were its earnings per share. But guidance for the next quarter was reduced by around 20% for both chip shipments and licensing revenues. Apple seems to be to blame for both, with the gadget giant switching to Intel for its modems and the ongoing dispute over licensing terms resulting in a bunch of payments being withheld.

Qualcomm Q3 outlook

“We delivered a strong quarter, with Non-GAAP earnings per share above the high end of our prior expectations, on greater than expected chipset demand in QCT and lower operating expenses,” said Steve Mollenkopf, CEO of Qualcomm. “We are executing well on our strategic objectives, including driving the commercialization of 5G globally in 2019 and returning significant capital to our stockholders.”

Despite this Qualcomm’s share price was down 7% at time of writing. Speaking to Reuters, Qualcomm’s CFO George Davis speculated that the chip shipment downgrade might have been greater than many anticipated. On top of that the dispute with Apple is showing no sign of resolution, so investors may be increasingly inclined to price in a negative outcome for Qualcomm.

Softbank is now more of a VC than a telco group

Back in 2016 when Softbank CEO Masayoshi Son announced plans for the $100 billion Vision Fund it looks like a ludicrous plan, but with such incredible growth perhaps we should ask whether Son has been missing his calling for decades.

Looking at the financials for the first half of 2018, the most interesting story aspect is linked back to the Softbank Vision Fund (SVF) and Delta Fund (DF) investment bodies. Over the first six months, net sales for the Softbank Group came in at roughly $41 billion, with the team collecting an operating income of roughly $12.5 billion. The operating income attributable to the SVF and DF is $5.7 billion, roughly 45%.

45% might sound like a good number, but it becomes even more impressive when you consider how the funds are accelerating. In the first three months of 2018, the funds accounted for approximately 33% of operating income, but this ratio increases to 55% when you look at the second quarter alone. As you can see from the table below, the cash being generated by the funds is quickly racking up.

Q3 2017 Q4 2017 Q1 2018 Q2 2018
Gain on investments for SVF and DF $530 million $860 million 2.18 billion 3.55 billion
Realized gain on investments NA NA NA 1.29 billion
Unrealized gain on valuation of investments $490 million $830 million $2.24 billion $2.27 billion
Interest and dividend from investments $33 million $20 million $12 million $10 million

(Approximate values after currency conversion)

The fund itself, which has come under pressure recently due to involvement from Saudi Arabia, has consistently been consistently questioned by investors, though perhaps monstrous profit is a language which they will be more familiar with. Son has prioritised artificial intelligence in a portfolio which contains investments in Uber, Nvidia, Arm, GM Cruise, Doordash and Compass. The only one which doesn’t really fit into the family is WeWork, a shared office business which would be more comfortable inside a real-estate investment portfolio. That said, few will argue with the results.

Looking at the rest of the business, the story is pretty positive if less glamorous next to these monstrous profits. Total revenues and profits are up in the Softbank telco business, while the net gain on customer subscriptions is up approximately 1.2 million in comparison to the same period of 2017. Churn was also at a healthy 0.93% for the quarter and ARPU is flat. Not a bad return for the period. Sprint in another which is performing surprisingly well. Although subscription numbers are down sequentially, year-on-year Sprint managed to find 520,000 subscriptions from somewhere.

Son’s traditional stomping ground is looking very healthy, though with the acceleration of the VCs you really have to wonder whether the audacious businessman has been in the wrong industry all these years.

Apple shares fall 5% on weak forecast

With Apple pointing the finger at fluctuating currency, poor performance in emerging markets and supply issues, its busiest quarter might not be as busy as investors had hoped.

While CEO Tim Cook has defended the soundness of the supply chain, worries over whether the business can keep up with demand over the final quarter leading into Christmas seem to have spooked investors. Combined with warnings over performance in emerging markets as well as volatile currencies around the world, the team has stated it might miss guidance over the next three months, sending share price down 5% in afterhours trading.

“The emerging markets that we’re seeing pressure in are markets like Turkey, India, Brazil, Russia,” said Cook. “These are markets where currencies have weakened over the recent period. In some cases, that resulted in us raising prices and those markets are not growing the way we would like to see.”

India should be seen as quite a worry for the iChief’s as while the country has been undergoing its own digital revolution over the last 18 months, Apple seem to be missing out on the biggest rewards. With India now being the second-largest smartphone market in the world, but with half the penetration of China, the opportunities are clear. Despite attention from Apple, it’s opening new production facilities and shops across the country, according to data from Canalys it is yet to break into the top-five smartphone brands.

Shipments in India across the most recent quarter dropped by 1%, though Xiaomi grew 31.5% year-on-year to claim the number on spot, at the expense of Samsung, where shipments dropped 1.6%. Vivo, Oppo and Micromax complete the top five, while the ‘others’ saw shipments decrease 34%. The Chinese brands seem to have found the right recipe to appeal to the Indian user, while Apple is still searching for the sweet spot.

“To give you a perspective in of some detail, our business in India in Q4 was flat,” said Cook. “Obviously, we would like to see that be a huge growth. Brazil was down somewhat compared to the previous year. And so I think, or at least the way that I see these, is each one of the emerging markets has a bit of a different story, and I don’t see it as some sort of issue that is common between those for the most part.”

One market where this isn’t the case is China, with the business growing 16% year-on-year. On the money side of things, it certainly is a different story. Total revenues across the business grew to $62 billion, an increase of 20% over the same period in 2017, though guidance is not as positive. Cook expects Apple to pocket between $89 billion and $93 billion over the next three months, though Wall Street has generally been hoping $93 billion would be the bottom end of the guidance.

Looking at the explanation, CFO Luca Maestri has pointed to four areas. Firstly, the team have launched products in reverse order compared to last year. Secondly, with many international currencies depreciating against the US dollar, Maestri anticipates a $2 billion headwind as a result. Thirdly, due to the number of products Apple has pumped into the market, the team is nervous about supply/demand. And finally, at the macroeconomic level in some emerging markets consumer confidence is not as high as it was 12 months ago.

Heading back to the positives, Apple is making more money now than it was a year ago. Despite there being no shipment growth in any of the major product lines (iPhone was flat year-on-year, iPad was down 6% and Mac was down 2%), Apple is still a money making machine. iPhone revenue increased 29% thanks to ridiculously high unit costs, while the services business was up 17%. This is an area which will be of significant interest to investors, as there is only so much Cook and co. can increase the price of iPhones to compensate for flat growth.

As part of the services division, the App Store has been trundling along positively, though with companies like Netflix and Fortnite stating they would be circumnavigating both the App Store and Google Play, all involved will hope this does not encourage others to do the same. Cook pointed out that the largest developer only account for 0.3% of revenues at the App Store, losing one or two won’t matter, but if the trend spreads too far the product might find troubling times ahead.

Overall, Apple is still in an incredibly dominant position, though the inability to capitalise on opportunities in the developing markets should be a slight worry.

Apple Financials

Apple Products

BT increases profit on declining revenues by getting rid of 2,000 people

Operator group BT saw its revenues decline in the six months to the end of September but still managed a 30% increase in net profit.

Profit is revenue minus overheads and reducing the latter is a time-honoured way for companies to keep themselves in the black. Among BT’s five strategic highlights for the fiscal half-year, which included finding a new CEO and demonstrating its 5G capability, was the ‘removal’ of around 2,000 roles over that time. The other two were a small NPS gain and some vague Openreach achievement.

“We continued to generate positive momentum in the second quarter resulting in encouraging results for the half year,” said Chief Exec Gaving Patterson, possibly for the last time. “We are successfully delivering against the core pillars of our strategy with improved customer experience metrics, accelerating ultrafast deployment and positive progress towards transforming our operating model.

“In consumer, we continue to see strong sales of our converged product, BT Plus, and have seen good mobile sales following new handset launches. Last month EE demonstrated 5G capability from a live site in Canary Wharf. We have maintained momentum in our enterprise businesses despite legacy product declines.”

BT had some fun with its slide deck this quarter, a highlight being the below attempt to illustrate its group strategy via the kind of rectangle-stacking larks usually associated with software architecture diagrams. It presumably took a while to do but apart from being an efficient way to display a number of generic corporate aspirations it’s not obvious what BT is trying to say.

BT Q3 2018 slide 1

There were also distinct slides summarising the performance of each business group. As you can see below revenue growth was hard to find, and it’s interesting to note which other metrics were cherry-picked to show the division in the best light. In terms of revenue BT remains very much a work in progress but making a decent profit is certainly a step in the right direction. You can read further analysis on this here.

BT Q3 2018 slide 2

BT Q3 2018 slide 3

BT Q3 2018 slide 4

BT Q3 2018 slide 5

BT Q3 2018 slide 6

 

Chip division continues to carry Samsung

Samsung has released its quarterly numbers, and while it is an improvement on the last quarter, the business is seemingly being propped up by a surging semiconductor unit.

Total revenues for the three months stood at roughly $57 billion, a 5.5% increase from the same period in 2017, while operating profit came in at roughly 15.5 billion, a year-on-year increase of 20.9%. The earnings were largely in line with the expectations the management team floated a few weeks back.

“In the third quarter, operating profit reached a new quarterly high for the company driven mainly by the continued strength of the Memory Business,” the team said in a statement. “Total revenue increased YoY and QoQ on the back of strong sales of memory products and OLED panels.

“The Korean won remained weak against the US dollar, resulting in a positive QoQ effect of approximately KRW 800 billion, experienced mainly in the components businesses. However the Korean won rose against major emerging currencies, which weighed slightly on the set businesses.”

Looking at the individual business units, the chip team rose to the top of the rankings once again. Revenues came in at roughly $22 billion for the quarter, with profit standing at $12 billion. Although demand is set to be weaker for the next quarter, the team anticipate slight increases over the next twelve months as demand for public cloud market, and mobile storage expands.

With fingers pointing to increased competition, revenues fell in the IT & Mobile Communications with over smartphone shipments remaining flat due to a decrease in sales of mid- to low-end products. High promotional costs and fluctuating currencies have been blamed for a dip in profitability, with the division only contributing $1.9 billion, despite it claiming pretty much the same revenues as the chip boys.

Another unit worth keeping an eye on will be the Networks unit. While revenues were down year-on-year, owing to decreased investments in 4G and the 5G euphoria yet to kick in, Samsung does seem to be benefiting from the increased scrutiny placed on Huawei in recent months. With many telcos snubbing Huawei, or at least decreasing dependence on the vendor, Samsung could certainly take advantage.

With Huawei and Xiaomi offering a more sustained threat in markets where Samsung traditionally dominates, this might not be the end of the woes for the start-studded division of Samsung.

Q3 validates O2 indifference towards convergence

Telefonica’s UK business O2 has continued a strong 2018 performance with a 7.9% increase in revenues in the third quarter, while it greedily captured an additional 120,000 subscribers.

The results perhaps justify the businesses decision not to enter into the convergence fight. Back in July, CEO Mark Evans confirmed the business would continue to focus on its mobile-only proposition, and wasn’t convinced entirely by the idea of bundled services. This statement is certainly contradictory to many telcos across the world, including its own cousin, Telefonica Germany, which plugged 5G FWA at Broadband World Forum. That said, the numbers speak for themselves.

Over the last three months, total revenues stood at £1.5 billion, up 7.9% year-on-year, while mobile service revenues grew by 3.4%, thanks to customers choosing larger bundles and MVNO growth. The O2 network now has 32.3 million customers, including MVNOs such as Lycamobile, making it the busiest network in the UK. Churn was also down to 1%, which O2 claims is the best in the UK.

“We continue to put the customer at the heart of our business, delivering leading propositions and unique customer experiences, as demonstrated by the launch of our revolutionary O2 Custom Plans, exclusively available in our direct channels,” said Evans. “O2 Custom Plan offers customers real choice, by giving them control, flexibility and transparency, and has once again driven the O2 point of difference in the market.

“Our on-going commitment to invest in our network includes enhancing 4G connectivity and preparing the ground for 5G. As champions of mobile we continue to build for the future, where mobile is one of the most powerful opportunities to strengthen the UK economy and enrich our society.”

This laser like focus on mobile is probably best for everyone involved. Despite O2 leading in the market share race, it has consistently been condemned for having the worst network in the UK. This has been confirmed quarter after quarter, by a variety of different sources. Some might come to the conclusion the consistency of poor performance simply suggests the management team does not care that much. However, efforts are being made to improve this record.

In the most recent spectrum auction, O2 claimed all the available 2.3 GHz spectrum to enhance its 4G offering. This spectrum has already been put to use, while most recently O2 suggested it was going to improve connectivity in 339 rural communities throughout the UK. The business is investing in its network, with the financial results indicating O2 spent £192 million on CAPEX over the quarter, which works out at roughly 12.5% of total revenues. This is not the highest around, but it is a healthy number.

O2 is the first of the UK MNOs to release its financial results for the third quarter, so there isn’t a fair comparison to make at the moment. However, 7.9% growth is going to be a very tough number to beat. Perhaps there is something in this ‘do what you know how to do’ mentality from O2.