Quarterly Earnings Q4 2016

Norm Johnston, Chief Strategy and Digital Officer

Background
The first major earnings reports of the year are out, covering the major players and their Q4 results.

Apple: Desperately seeking diversification

Apple needed a big quarter after several previous earnings reports left analysts disappointed. It delivered in Q4. Quarterly revenues were $78.4bn, up from $77.4bn a year ago, helped by strong sales of the iPhone 7. Remember the term “phablet”? The new iPhone7 Plus, with its much larger screen, appears to have given people the nudge they needed to finally upgrade. Interestingly iPad sales were down by 19%. Apple had strong growth across the board with sales increasing with everything from desktops to the Apple Watch. Apple Pay users tripled and transaction volumes rose by 500%. Investors are also keeping a close eye on Apple’s Services (Music, Apps, etc.) given Cook’s very public prioritization of that side of the business, particularly with a growing challenge from Amazon. All eyes are now on Apple’s highly anticipated next wave of product and services, particularly the next iPhone, which will fall on the products 10^th anniversary.

Alphabet: It’s all about the CPC

Alphabet’s quarterly fortunes seem to increasingly rest on one key variable: how much it makes per click (cost-per-click, or CPC). So despite an increase in revenue from both YouTube and its core search product, Alphabet’s stock price took a tumble primarily based on that one single variable. CPC decreased by 16% year-over-year, surpassing analyst expectations of an 11% drop. It has been the great migration to mobile that has been the underlying cause of the decline. Frustratingly for Google the last quarter results indicated that the volume in mobile searches and the corresponding revenue was making up for the CPC drop. Now it appears, at least in the short term, Google is still exposed to fluctuations in that volume/value equation as well as nuances between brand and generic search CPC and trends. That explains the flurry of new ad monetization products, particularly for YouTube, where there is still plenty of room for growth through better ID-based targeting using historical behavioral data, such as your search activities. Alphabet’s “Other Bets” showed growth ($262m in Q4 vs $150m a year ago), but from a small base in contrast to the overall business ($26bn). 

Facebook: Teflon

Facebook delivered another strong quarter despite industry-wide criticism on some embarrassing miscalculations on key metrics such as video view durations. The lingering impact of that flawed data may yet come back to bite Facebook even as it races to correct historical data and introduce greater third-party verification. In the meantime it’s mainly positive news. Revenue was up by 53% to $8.8bn, spurred on by more monthly users (+17% yoy) and more monetization and advertising opportunities, particularly on Instagram. So far there has been little sign of last quarters’ expectation setting over future growth in light of potential ad loading issues. On the negative side Facebook took a financial hit on the Oculus lawsuit to the tune of $500m. On the one-to-watch side is Zuckerberg’s comment that Facebook may be exploring original and licensed short-form content (with ads), perhaps to challenge the about-to-be-very-enrichened-via-IPO SNAP.

SNAP: Here we go again

SNAP officially and finally filed for its long-mooted IPO. SNAP is now reporting 158m daily users (as opposed to the usual monthly metric), healthy but slow growth compared to rivals like Facebook that experienced a much stronger “hockey stick” addition of users in the early days. This comparatively anemic growth has raised concerns that perhaps Snapchat has peaked, or is losing momentum to Facebook which has layered comparable and competitive features into apps like Instagram. A platform built on youth is always at risk when they grow up and move on, and the next generation decides there is something cooler out there. Nevertheless, SNAP has done much to build a strong advertising and content platform with plenty of opportunities for brands to play. Revenue reached $400m in 2016, a healthy start to monetization, even if the company still lost $500m due to investments and costs. It’s doubtful any of this will make a difference to the IPO, which seems certain to whip the markets into another Facebook-like frenzy of buying. Whether SNAP faces a similar marketing beating and correction to its share price in the early days is probably somewhat dependent on whether analysts view it as the next Facebook or Twitter.