Tech Earnings Season: 5 Things That Lived Today

While earnings season isn’t over yet, enough tech companies have reported to give some sense for how sales are trending in many parts of the sector.

Here are some of the things that stood out as reported by tech companies big and small over the past few weeks:

1. Chip Demand Declines in Some Markets, While Remaining Strong in Others

Companies like Micron Technology (MU) and Taiwan Semiconductor (TSM) have made it pretty clear — in case all the other evidence wasn’t enough — that consumer demand for PCs, smartphones and other tech/electronics products have softened, both due to macro pressures and shifts in consumer spending from goods to services (all of which have been particularly weighted by demand for low-end products). More recently, Seagate’s ( STX ) weak results/guidance and Corsair Gaming’s ( CRSR ) warning signaled a slowdown in demand for chips and components that go into consumer tech hardware.

And in some non-consumer markets, OEMs have started to adjust chip/component inventories — often after building them up over the past two years amid shortages — even though they’re still relatively healthy. also the end-demand. Seagate indicated on Thursday that many clients are prepared to reduce their hard-drive inventories (especially Chinese customers). And on Friday, Morgan Stanley’s Joseph Moore reported (while downgrading Micron to an “Underweight” rating) that Micron’s customers are “taking a more aggressive approach to inventory management” after Micron said on its earnings call on June 30 that its own inventories will grow in the near-term.

On the other hand, both Micron and Taiwan Semi indicated that they are still seeing good end-demand from the data center and automotive end-markets. And while Micron and Seagate issued weak quarterly sales guidance, Taiwan Semi issued above-consensus quarterly guidance and raised its full-year outlook.

In a chip demand environment like this, I think there is value in remaining selective about which chip suppliers to invest in. In sum, companies whose sales are skewed toward the auto, industrial and/or cloud data center end-markets — and which don’t sell commodity products are prone to seeing significant price drops when shortages begin demand over supply — the position appears to be relatively stable.

2. Demand for Chip Equipment Still Doesn’t Look Bad in General

Chip equipment stocks fell following Micron’s June 30 earnings report, after the memory giant said (amid weakening PC/smartphone memory demand) that it would cut its capex plans for fiscal 2023 ( ending in August 2023). But since then, the news flow for the group has gotten healthier.

During its Q2 earnings call, Taiwan Semi said it now expects its full-year capex to be near the low end of a guidance range of $40 billion to $44 billion (still up from 2021 capex of around $30 billion ), but added that this was due to equipment supply constraints and indicated that it would also invest heavily in capex next year. Also, lithography equipment giant ASML ( ASML ) cut its full-year sales guidance due to revenue recognition delays caused by supply constraints, but also reported strong backlog growth and indicated that its capacity is largely booked through 2023. And several smaller chip equipment makers, Camtek (CAMT) and Axcelis Technologies (ACLS), respectively, now expect their Q2 sales to be in the high that end and above their previous guide sets.

True, BE Semiconductor ( BESIY ), a supplier of chip assembly equipment, gave soft Q3 guidance. And it’s no surprise to see other memory makers, such as Samsung and SK Hynix, also signal that they plan to reduce their memory capex.

However, demand for wafer fabrication equipment (WFE) among non-memory chip manufacturers still appears robust, thanks to factors such as greater capital-intensity for leading manufacturing processes, catch-up spending for mature processes and efforts (aided by subsidies ) to localize more chip production. And with many chip equipment makers now sporting high-single-digit or low-double-digit forward P/Es, their shares now likely have a low bar to clear.

3. Software Spending Is Softening Somewhat

IBM’s (IBM) software division missed consensus Q2 earnings, and (after accounting for the increased forex hit the company expects this year) Big Blue dropped the full year, on a dollar basis, that income guide. Meanwhile, SAP ( SAP ) also did well by keeping its full-year, euro-based, revenue guidance unchanged, and said on its call that its sales of traditional software licenses were hurting as macro uncertainty accelerates the long-term shift towards the cost of cloud software.

It may be pointed out here that IBM has long been a shared donor in software (among other areas), and SAP’s commentary does not bode well for cloud software/SaaS pure-plays. But cloud customer survey software provider Qualtrics (XM) also lowered its full-year guidance, noting in its call that it sees some extended deal cycles, and Bill McDermott, CEO of the cloud IT service, also suggested management software giant ServiceNow (NOW) , Macro fears are affecting deal activity. other data which points to reduced software deal activity.

Software still takes the lion’s share of IT spending, and SaaS businesses’ reliance on recurring revenue streams protects them to some extent during the downturn (not to mention appeal to potential acquirers). But with deal activity seemingly slowing — perhaps more so outside of high-priority areas like security — more guidance/estimate cuts for the sector are likely to come. And while some software companies are arguably now pricing in some bad news, some still carry high values.

4. Online Ad Spending Is Struggling – Especially for More Types of Ad Buys

Snap’s ( SNAP ) Q2 shareholder letter — in which the company declined to provide Q3 guidance and said its Q3 revenue was flat year-to-date — more than confirmed fears that digital ad budgets are shrinking as various businesses tighten their belts. Twitter’s (TWTR) Q2 report, in which the company posted a $140 million revenue miss and (citing its pending/debated deal to acquire Elon Musk) declined to provide Q3 guidance, was not also did little to calm investor nerves.

It’s worth noting that both Snap and Twitter have strong exposure to brand ads and app-install ads. The former has long been an early casualty when businesses are nervous about macro conditions, and the latter seems to be hurt by a mix of macro pressures, changes in Apple’s ( AAPL ) user tracking policy and tougher conditions in finance for many public and private technology companies.

Demand trends may not quite a bit bad for some bigger online ad players. Last week, online ad agency Tinuiti shared reasonably good Q2 data for Google’s ( GOOGL ) search spend for its clients, though it reported a significant decline in the annual growth rate for their YouTube ad cost. However, at a time when many companies are eager to cut costs and due to a tight job market, they are often reluctant to make large layoffs, it is easy to see many of them ending their ad/marketing spend, even just a moment.

5. A Strong Dollar Is a Big Trouble for US Multinationals

This should come as no shock to anyone who tracks the dollar’s performance against currencies such as the euro and yen. But still, some of the forex hits being revealed this earnings season are noteworthy.

Forex was a 7-percentage-point headwind to IBM’s Q2 sales growth, and a 4-point headwind to Netflix ( NFLX ) Q2 growth. In addition, the companies respectively forecast 8-point and 7-point forex headwinds for Q3.

Look for several other US tech companies with significant international sales to report seeing similar pressures on the top line due to a strong dollar.

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