- Q3 reporting got underway last night with both bellwethers IBM and Intel reporting Q3 results.
- Both sets of results were disappointing and both fell after hours.
- This was compounded by a failure to beat guidance by cloud computing vendor Fortinet which cost the stock a mere 18%.
- This sets the scene for a very poor earnings season where it looks like there is no absolutely confidence in Windows 8’s ability to drive a pick-up in PC and tablet sales.
- Furthermore, with IBM, the signs of slowing in the enterprise IT spend are now stronger and more plain for all to see meaning that the safe haven of software is not so safe anymore.
- So it looks very much as if Apple is going to make all the running in Q4 with new products being launched Tuesday next week.
- No one, not even the bulls of Microsoft, seem to believe that Windows 8 is going to have much effect on the PC / Tablet market in Q4, meaning that if consumers do like it there is likely to be a big bounce in both estimates and stock prices.
- I had been hoping the supply chain would have started to see some serious ramp up in volumes in anticipation of Windows 8, but frankly sentiment is so bad that no one is taking the risk.
- This basically puts off any real recovery in the PC makers, suppliers, semiconductor vendors and outsource partners until January.
- Some numbers:
- Intel reported Q3 revenues and EPS of $13.46bn / $0.58 compared to consensus at $13.20bn / $0.49. No surprise there Intel had already warned.
- Guidance was the problem with Q4 revenues / gross margins expected at $13.1bn – $14.1bn ($13.6bn) / 57% +/- a couple of points. This compares unfavourably to consensus at $13.7bn / 61.4%.
- People were already pessimistic on Windows 8 for Q4 and now they are going to be even more so. Gross margins have missed due to underloading of fabs and product transitions.
- Furthermore datacenters, which have been making up for weak PCs all year, also suddenly slowed underlining the weak numbers from IBM.
- IBM Q3 revenues / EPS were $24.7bn / $3.62 compared to estimates of $25.4bn / $3.61.
- Guidance was unchanged with EPS of at least $15.10 expected for the year. EPS is not the problem here. It is revenues.
- IBM bemoaned the macro environment as North America has slowed meaningfully in the last three months underlining the sudden softness Intel saw in datacenters.
- Software deals are being pushed back and this marks a significant weakening of the outlook for software and IT services.
- Until now it has all been about business still being there but being more difficult to get hold of, highlighting the need for great execution.
- However, now it looks like great execution is no longer enough and that the business itself is being delayed or cancelled.
- IBM is an expensive stock compared to both its peers and the tech sector overall and these numbers will challenge both its status as a safe haven against macro weakness and its premium valuation.
- Not even cloud computing has escaped the ravages of macro which appears to have taken the edge off Fortinet’s ability to beat and raise quarter after quarter.
- Cloud computing stocks trade in the stratosphere and I expect that the Q3 reporting season is going to bring them back to lower and more reasonable altitudes.
- Take Home Message
- Nothing looks safe and secure anymore in technology and the sector, ex-Apple,seems set to labour in Q4.
- I own Apple for a pop to $700 and nothing else at the moment having toyed with, and rejected, the idea of owning Intel into numbers for a Windows 8 related bounce. (Phew!).
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