Houston, Big Tech Has a Problem
A troubling sign has emerged among some of the biggest names in technology as a result of their most recent earnings announcements. Aggregate demand in the form of meaningful revenue growth appears to have vanished. Unfortunately, there's only so far you can cut expenses to drive new levels of profitability before investors start to recognize there's a potentially serious problem.
Anemia on the rise
Although IBM managed to satisfy investors by upping its full-year earnings guidance, Big Blue reported a year-over-year revenue decline of 3.3% to $24.9 billion, which translated to a net income decline of 16.9% in the second quarter. After adjusting for currency fluctuations, IBM's revenue would have only declined by 1%. As far as earnings guidance is concerned, the company raised its full-year outlook by $0.20 a share to $16.90, above the analyst consensus of $16.64 a share. According IBM CFO Mark Loughridge, the guidance bump can be attributed to a combination of cost-cutting, "solid" growth prospects, and potential tax settlements. To me, the boost is likely driven more on efficient maneuvering than it is on driving aggregate top-line revenue growth.
For its fiscal fourth quarter, Microsoft reported revenue growth of 3% to $19.1 billion, missing expectations by $820 million thanks to continued weakness in the PC market. Even after backing out the $900 million writedown the company took as a result of recent Surface RT price cuts, the company still missed earnings expectations by $0.09 cents a share.
Undoubtedly, Microsoft is in a tough spot with the state of the PC market in disarray. Even if Mr. Softy can gain market share in mobile computing, it may not be meaningful for shareholders. That's because Windows devices with screens smaller than 10.8 inches are believed to command a lower license fee from device markers than normal. Instead of the typical $120 a device maker would pay, they are only believed to paying $30 per device in this size segment. Coupled with the reality that consumers continue to trade down to mobile computing devices with smaller form factors, it doesn't likely equate to Microsoft driving meaningful top line growth in the future.
Last week, Intel announced that its revenue declined by 5.1% year over year in its second quarter, which translated to net income decline of 29%. But what got investors spooked was that Chipzilla lowered its full-year revenue outlook, which it now expects will remain flat compared to last year. As you can imagine, Intel is in a similar predicament as Microsoft, but instead of licenses, its processor business is expected to face revenue pressure as it enters the tablet and lower end computing segment with its upcoming Bay Trail processor. Consequently, Intel's profitability will be lower on a per unit and total dollar basis even with constant profit margins.
A different problem to have
While Google was the big tech outlier that reported 19% year-over-year revenue growth for its second quarter earnings results, investors still won't be calling it a home-run quarter. The reason being that the company's cost per click -- or CPC -- declined by 6% year over year and 2% from last quarter, inviting the possibility of a structural headwind lingering within its advertising business. Essentially, CPC is Google's version of average selling price, which if revenue growth were slow, it would probably become rather painful for investors. Luckily, that doesn't seem likely to happen anytime soon, considering Google's paid click volume grew by 23% year over year and 4% from the first quarter to help offset this headwind. In other words, Google has time to sort this out before investors really start getting concerned.
Too big to grow?
When companies reach that "megacap" status as these tech titans have, it's often difficult to drive revenue growth to the point where it translates to growing the bottom line in a meaningful way for investors. Over the long term, earnings growth can't be fueled by share buybacks and cost-cutting measures alone; it needs to be driven by a company's ability to enter new markets, to gain market share in existing markets, and to develop a competitive advantages.
That said, investors are only going to reward top line growth for so long. If you're an investor in a company that's struggling revenue growth, you should think long and hard about how it can create new revenue generating opportunities and whether it will big enough to matter.
Earnings pressure aside, nothing's going to stop big tech from fighting for a chance to shape our technological lives and commanding our attention. As you can imagine, there are a lot of players in the space, which is why it's imperative to understand who's who in this coming battle. To help investors like you make sense of it all, The Motley Fool has published a special free report, detailing how you can profit from this game-changing opportunity. If you want to be in know, click here to get started.
The article Houston, Big Tech Has a Problem originally appeared on Fool.com.Fool contributor Steve Heller owns shares of IBM, Google, and Intel. The Motley Fool recommends Google and Intel and owns shares of Google, Intel, IBM, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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