When we first heard about the sub-prime mortgage scandal in the US, and how it might cause a complete recession, we wondered just how that would come about in the telecommunications and media worlds, but already the pinch has started to hit.
And even companies as secure in their financial progress as Apple and Google, are issuing results, either bang on target, or only slightly below, and being lumped in with the rest as failures ‘ by a US investment community that has embraced panic and unreasoning fear as a normal state of its existence.
One US financial analyst is predicting a collapse of the sales of AT&T’s U-Verse sales, on numbers that will be out later today (include in a separate piece and it turns out he was wrong), and on the back of a slowdown there is raising question marks over Alcatel, Ciena, Sonus Networks, ADC Telecommunications and Tellabs, saying they are all sensitive to AT&T order levels.
But there is actually a twist to this story, which is that AT&T has enjoyed such good weather that it has achieved all of the build out of U-Verse that it has planned for the existing financial year, and so will cut back to zero until the new financial year. Now this has the beginnings of some vast rumor-mongering scandal about it. Because now that AT&T has reported U-Verse numbers which are spot on investment Bears will see this as a ‘bad’ thing.
Alcatel numbers may, for instance, show no sign of U-Verse order weakness in its current numbers (out on July 29th) but issue its usual conservative assessment of future macro economic conditions, and this will be interpreted as future weakness, in just the same way that Apple’s results have been treated. This will then trigger a run on all those stocks that are sensitive to AT&T ordering. In fact all of their numbers might be up (not that U-Verse ordering would be enough on its own to bring up Alcatel’s numbers, but perhaps some of the others) and this could easily be interpreted as confirmation of the AT&T build out rumor (ahead of plan and therefore slowing now). So good news will be interpreted as bad news.
Only a panicked US investment community can manage to get so out of kilter over good news.
Google this week produced what any other company would have considered a good financial set of results. Net income was up 35% to $1.25 billion on revenues of $5.37 billion up some 39% over this time last year and the company has $12.7 billion in the bank. The market had predicted better, with net income around $1.5 billion on roughly the same revenue. What we find interesting is that in a market known to be courting recession, and given that advertising is the very first thing that goes in a recession, that some of this mild disappointment hadn’t already been in Google’s price. Instead the stock dropped almost 10% on the day in a market that behaved as if it was shocked.
What could have spooked the market regarding Google only came out yesterday and that’s details of a slide (rather than increase) in market share in search revenues confirmed by audience research firm comScore saying Google’s shares has fallen 0.3% to 61.5% during June, with Yahoo and Microsoft each picking up the slack. That might have made the difference on its own, but the share price moved on the results, not that data.
The company talked about ‘Strong international growth, sustained traffic increases, another strong quarter, despite a more challenging economic environment.”
The same thing went on at Apple ‘ which came out with another batch of incredible results. Apple shipped 41% more Macs, with more of them the more expensive laptops, compared to a 15% PC market growth; it sold 12% more iPods, and in the quarter reported some 717,000 iPhones even though since quarter end it has clearly sold an awful lot more, and will sell 10 million by the end of the financial year.
As a result Apple net income was $1 billion, ahead of Wall Street’s expectations, with revenue up 38% to $7.46 billion, again ahead of analyst expectation. Apple retail went even faster than these numbers, and naturally the stock fell around 10% entirely on a few parting remarks about the future economic uncertainty.
Yahoo which actually had an awful quarter, with profits down 18% in an internet advertising market that is growing like crazy, with net income down to $131 million (at least it’s still a profit) compared to $161 million a year ago, on revenue up just 6% to $1.8 billion roughly in line with expectations. But the management described the quarter as a ‘home run’ which of course meant it wasn’t an ‘own goal’ and said that the outlook for 2008 remains unchanged. The shares continue to float downwards as they have the past few weeks, but not half so badly as Google and Apple, and it must be remembered that these executives are fighting for their lives and face a shareholders meeting that still has the potential to replace the entire board on August 1st. This week activist investor Carl Icahn was granted three seats on the board in a move that was supposed to mean he stops calling publicly for the heads of the entire board of Yahoo, for failing to sell out to Microsoft.
The Board will put themselves up for re-election, and presumably Icahn is supposed to support them now, but given that he has lost a fortune on Yahoo stock and that the main reason for him asking for boardroom seats was to push through a Microsoft takeover, we can’t quite see why he might support the existing management team.
Both Vodafone and Ericsson share prices were treated in much the same way. Vodafone cut its revenue outlook, blaming a weak economy and consumers holding back from taking up new handsets (that’s not happening to iPhones). And as a result the company decided to buy back $2 billion worth of its own shares.
Ericsson produced a surprise 70% drop in profits due to costs associated with job cuts and absorbing its share of the Sony Ericsson handset profit fall. Revenues for Ericsson were just $8.1 billion in the quarter, a rise of just 2%.
Flash memory supplier SanDisk, often a good indicator of the shipments of handsets and MP3 players also reported a surprise loss way below analyst expectations.
In a market like this, confidence is exceptionally fragile and any hint of the future potential for bad news is being treated like a disaster, not because it is a disaster, but because if investors don’t move their money out of the firing line of reporting companies, most other investors will, making the collapse a self fulfilling prophecy. Anyone that has been around a major market correction of this kind in the past, knows that it sucks in the good and the bad, and the shock waves have already traveled a long way from the property and financial markets and are now reaching into our heartland in telecommunications, operators services and media.
On a good news note Broadcom shrugged off the entire sector malaise and brought home its second quarter at $1.2 billion, up almost 34% over this time last year with net income up to $135 million which is $100 million over the $34.3 million from a year ago, up 294%, with $71 million of that in freshly signed patent licenses, restated for the past two quarters
Naturally the share price has fallen 8% over the past few days in sympathy with what appears to be a major market correction, but the news is only hours old as we write it, and all that may be put back in the price. After all money has to find somewhere to run to.