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Bill Maurer
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I am a market enthusiast and part-time trader. I started writing for Seeking Alpha in 2011, and it has been a tremendous opportunity and learning experience. I have been interested in the markets since elementary school, and hope to pursue a career in the investment management industry. I have... More
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  • Google Controls Costs But Status Quo Remains

    Last week, technology giant Google (NASDAQ:GOOG) (NASDAQ:GOOGL) reported its second quarter results. The company missed on the top line for the fourth straight quarter, but eliminated its six quarter EPS miss streak with a sizable beat. The company finally decided to reign in its out of control spending. As a result, shares rocketed to a new high, with the Class A premium continuing to increase thanks to no meaningful capital return news.

    Prior to Google's earnings report, the Wall Street Journal reported that the company was becoming more cost disciplined under new CFO Ruth Porat. In Q1 of this year, GAAP operating expenses (not counting the cost of revenues) rose nearly 900 basis points faster than revenue growth. In Q2, that narrowed to about 200 basis points, allowing the nearly 30 cent EPS beat. On the conference call, Porat provided the following statement:

    "These strong top-line results were complemented by ongoing operating expense discipline in the quarter as reflected in 31% year-over-year growth in GAAP operating income and 16% year-over-year growth in non-GAAP operating income.

    The company has finally decided to reign in its spending, one reason why I previously have argued against an acquisition of Twitter (NYSE:TWTR). While Google has continued to grow its revenues by double digits, operating expense growth could not continue to significantly outpace revenue growth. While analysts have kept their 2015 revenue estimates flat since Google's Q2 report, the average EPS figure is up by 59 cents since, reflecting this cost control.

    Google reported free cash flow of nearly $4.5 billion in Q2, and the company's cash balance is likely over $70 billion today. While management did not rule out capital returns on the conference call, no plans were formally announced. In fact, I'm now a little less convinced Google will detail any plans for returning capital to shareholders in 2015 based on the conference call commentary.

    During Q2, the number of Class A shares outstanding rose by 0.57% sequentially to almost 290 million. However, the number of Class C shares outstanding rose at a slightly faster pace, 0.66%, and now totals nearly 344 million. The extra 54 million plus Class C shares, combined with no voting rights, has allowed the premium between these classes to continue rising. A capital return plan announcement could have changed this, but with no such news, investors continue to favor shares with voting rights. The chart below details the Class A premium since early April, the share split anniversary.

    (Note: Last data point on chart is for 7/22 close)

    The Class A premium has rocketed to new highs post-earnings, now around $33. Since the share split anniversary, Class A shares have risen by 28.41%, compared to a 23.63% rise for Class C. That's outperformance of 478 basis points in just 76 trading days, less than 1/3 of a market year. Despite a higher share price, Class A shares have also averaged about 50,000 more shares traded daily over the past three months.

    In the end, Google shares were rewarded for the company's cost discipline, a key factor in EPS growth going forward. Under new CFO Ruth Porat, this is a new era for Google, and it was nice to see the EPS miss streak snapped. There was no capital return news announced, however, which continues the status quo. The Class A premium has soared to another new high, and I don't see a reason for the situation to change in the near term.

    Jul 22 5:37 PM | Link | Comment!
  • Intel Now In Wait And See Mode

    Last week, we received quarterly results from chip giant Intel (NASDAQ:INTC). The company reported better than expected revenues, while EPS beat thanks to a one-time tax rate plunge. While the company did lower its full year revenue guidance, the decline was not as bad as feared. At this point, the stock is basically stuck, waiting to see how the PC market fares with the Windows 10 launch, and as Intel tries to complete its Altera (NASDAQ:ALTR) purchase.

    For Q2, the company came in just under its $13.2 billion revenue midpoint. That ended up being a sizable beat, because as I detailed in my earnings preview article, analysts were lowering their forecasts into this report. The street's consensus figure ended up at $13.04 billion. While gross margins were ahead of guidance, the company spent more on the operating line and more than double its guidance for restructuring expenses. The company ended up beating by a nickel on the bottom line, thanks to a one-time tax refund claim and some indefinite reinvestment of non-US earnings. In the end, the Q2 numbers were a mixture of good and bad.

    For Q3, the company guided to a $14.3 billion revenue midpoint, about $200 million ahead of expectations. Management did reduce its full year revenue forecast from "approximately flat" revenues to "down approximately one percent". As mentioned above, analysts had become a bit negative, expecting a 2% full year decline, so we've seen a recent snapback in estimates, seen below.

    The company did boost its yearly gross margin forecast by 50 basis points. However, management increased its operating expense and tax rate guidance for the back half of the year, and restructuring expenses seem to be running a bit high. Analysts have increased their full year EPS average by 6 cents since Intel's report, although you have to remember that Q2 beat by a nickel. The Q3 average is up by 3 cents, while the Q4 average is down by 2 cents.

    One of the key takeaways of this report was that Intel slashed its capex forecast by another billion dollars for 2015 to $7.7 billion. This follows the $1.3 billion capex guidance cut at the Q1 report, meaning a 23% cut from the original forecast. It does make sense to reduce capex with the PC market being weak. There are also some that believe Intel cut its 2015 forecast due to the push-out of the 10nm platform to the second half of 2017. By cutting capex this year, Intel can boost its free cash flow, which hopefully will reduce the amount of debt needed to finance the Altera deal.

    It's now all about Windows 10 for Intel after the Client Computing Group showed a $1.8 billion revenue decline in the first half of 2015 as compared to the first half of last year. Analysts have become a little worried about the new operating system's potential, because Microsoft (NASDAQ:MSFT) has offered free upgrades to older system users. Additionally, the strength of the US dollar has pushed up PC prices around the globe. Finally, a major iPad refresh from Apple (NASDAQ:AAPL) this October, including the expected launch of a large screen tablet, could negatively impact PC sales.

    I'm most curious to see if Intel can improve its operating expense structure moving forward. The company has guided to about $528 million of restructuring expenses for the first 9 months of this year, substantially above the $238 million for last year's first 3 quarters. Intel's operating expenses are running at about a $20 billion yearly pace, which is almost as much as its cost of goods sold. A more streamlined set of operations going forward could really drive profitability improvement in future years. Analysts are expecting 7.4% EPS growth in 2016, and a large chunk of those gains could come from reduced restructuring expenses and better operating expense management.

    Intel shares closed Friday at $29.47, less than a dollar from their 52-week low. The weakness in the PC market during the first half of the year has really hurt revenues and the stock. At the moment, I see Intel trading mostly sideways until we get a clearer view of the PC space, but the 3.26% annual dividend yield is more than the 30-Year US Treasury bond currently. Investors may actually get more than that if we get a dividend raise for early 2016. As stated in prior articles, I think the stock's valuation is fair at the moment, but Intel needs to further reduce its PC reliance and operating expenses for long term upside in its shares.

    Tags: MSFT, INTC, earnings
    Jul 20 12:06 PM | Link | 1 Comment
  • AMD: The Vultures Are Circling

    Earlier this month, I wondered if a big warning from Advanced Micro Devices (NASDAQ:AMD) could be good news in the long term for shareholders. My premise was that another bad quarter could force massive changes, whether it be a breakup, buyout, or some other significant event. Unfortunately for investors, the company's earnings report was a little worse than most expected, which has sent shares to a new multi-year low.

    For Q2, AMD reported revenues of $942 million, more than an 8.5% sequential drop. The company's lowered guidance was for an 8% sequential hit, which would have implied about $948 million. The company matched analyst estimates for a non-GAAP loss of $0.17 per share. During the quarter, the company's cash position declined by $77 million to $829 million, while debt remained flat at $2.27 billion.

    The Q2 numbers weren't the only bad news. For the third quarter, the company guided to a sequential revenue increase of 6%, plus or minus 3%. That implies a midpoint of about $998.5 million, well below the $1.05 billion analysts were looking for. Management also provided this disappointing commentary on the conference call:

    Due to the recent change in the PC market outlook, our goal of second half profitability has been pushed out. However, we will continue to work towards improving our second half financial performance. We are assessing actions to be taken to reduce our current cost structure with a view to lower operating expenses to better align with our near-term revenue profile.

    After the Q2 warning, analysts weren't very hopeful about the second half, but management's statement basically confirms the bad news. The company also expects to get a bit closer to the lower end of its $600 million minimum cash target. If the company were to need cash, and it were to go the equity route, the recent plunge in shares really hurts. Any equity raise will be substantially more dilutive than it would have been just a few months ago.

    The one item that really worries me is that the company continues to cut its R&D expenses. When a technology company tries to turn around revenues, cutting investments in your future may hamper those efforts. BlackBerry (NASDAQ:BBRY) is a great example of this in recent quarters. Through the first six months of 2015, AMD spent $477 million on R&D, compared to $556 million in the prior year period. While the company does need to cut expenses in order to get profitable, it has to balance a fine line if it wants to get its growth story back on track.

    With the fall in shares, AMD will be trading for about 0.35 times this year's expected sales once analysts revise their forecasts for the newest set of guidance. That's an extremely depressed valuation as competitors trade for 2-4 times sales. After another quarterly disappointment, investors have clearly shown they are not very hopeful about AMD's short-term future. Maybe this will get management to shake things up tremendously, because the vultures are certainly circling.

    Tags: AMD, earnings
    Jul 17 12:51 PM | Link | Comment!
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  • $AMD guidance not impressive.and Q2 revs lower than reduced analyst estimates. Expect analysts to bring out the hacksaws again.
    Jul 16, 2015
  • The problem with $AAPL in the Dow. It rolls over and takes the entire market with it.
    Jul 9, 2015
  • I'll write up my thoughts on $TSLA this weekend. Should have an article out Monday if all goes well.
    Jul 2, 2015
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