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Q2 Earnings 2018

By the FAST team

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Three FAAMG companies and Twitter reported earnings this week – it was a mixed bag of results.

Details and Implications:

Q2 revenue failed to meet expectations, posting $52.9bn vs an expected $53.41bn. But, net income rose to $2.5bn for the quarter vs $197m in the same quarter last year. This was driven by several factors, not least Amazon’s cloud business AWS which exceeded expectations with revenue of $6.1bn in Q2 (vs expected $6bn). ‘Other revenue’, which includes Amazon’s advertising services business, saw revenue of $2.2bn vs $945m in the same quarter last year and up $160m over the previous quarter ($2.03bn Q1 2018). Revenue growth was strongest in the US, up 44% on Q1 at $32.1bn, whilst international sales grew 27% to $14.6bn in the same period.

A combination of missed revenue targets, decreasing daily user numbers and an unusually cautious forward outlook contributed to a tough Q2 earnings for Facebook with shares seeing a 20% drop and up to $120bn wiped off the value of the company in one fell swoop. The overly cautious guidance has been ascribed to several possible factors: Facebook trying to reset expectations and downplay a perception of the company profiting whilst it deals with some big social issues; possible engagement issues around the switch from News Feed format towards more ‘Stories’ based ads in the core Facebook offering and/or the re-balancing of revenue between Facebook and Instagram, with the latter not being able to provide the same growth. Whatever the reason, this week was a big reality check for Facebook. However, the consensus from analysts and investors is that Facebook has pivoted successfully in the past (just look at the switch from desktop to mobile revenues) and will do so again. Revenue came in at $13.23bn vs estimated $13.36bn and Global Daily Active Users (DAU) was 1.47bn (vs expected 1.49bn). North American DAUs were 185m (vs expected 185.4m) and European DAUs were 279m (vs expected 279.4m).

Few companies can account for a $5bn fine in their quarterly accounts and still see their stock soar, but Alphabet can. The Google parent company reported overall Q2 revenues of $32.7bn up 23% in constant currency vs Q2 2017 ($26bn) and beating the expected $32.17bn. Net income would have been $8.3bn but taking account of the EC fine for its activities around Android, this was reduced to $3.2bn. Earnings per share similarly would have been $11.75, but were reduced to $4.54 due to the fine. The Q2 results made interesting comparison to the same period in 2017 when Alphabet was also dealing with a fine, that time a $2.74bn hit for promoting its own shopping services ahead of competitors in its search results. Advertising revenues once again showed how they power the Alphabet mothership, hitting $28bn, up 23.9% YoY. Traffic acquisition costs also rose, hitting $6.4bn in Q2, 23% of revenues, vs $5.1bn or 22% of revenues in the same quarter last year. Other bets, which includes Google’s cloud services, saw revenues of $4.4bn, up 36.5% YoY. Alphabet’s stock rose to record highs following the release of its earnings.

Twitter stock also took a big hit (down 18% at time of writing) as its Q2 reported results as Monthly Active Users (MAUs) were down on expectations. Twitter reported 335m MAUs in the quarter, down from 336 in Q1 and against a market expectation of 338.5m. Despite the drop in MAUs, Twitter reported an 11% rise in Daily Active Users, but didn’t break out the exact number. Twitter also beat revenue expectations, posting $711m against expectations of $696.2m and advertising revenue was $601m – an increase of 23% YoY. Another reason for the share price drop was that Twitter, like Facebook, also marked investors cards by issuing downgraded guidance on full year numbers.

Further Reading:

Alphabet Q2 Earnings Release / Facebook Q2 Earnings Release / Amazon Q2 Earnings Release / Twitter Q2 Earnings Release