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Earnings season surprises markets with better-than-expected reports

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The markets continue to be focused on the earnings season. More than three-quarters of S&P 500 companies that reported Q1 earnings have beaten estimates. With 78% of the companies in the S&P 500 reporting actual results for the quarter, 76% have reported a positive EPS surprise and 60% have reported a positive revenue surprise.

For Q1 2019, the blended earnings decline for the S&P 500 is -0.8%, which will mark the first year-over-year decline in earnings for the index since Q2 2016.

Eight sectors recorded a decline in their bottom-up EPS estimate during the first month of the quarter, led by the Industrials (-6.2%) with Boeing being a significant contributor to the decrease in earnings. On the other side, three sectors recorded an increase in their bottom-up EPS estimate during the first month of the quarter, led by the Energy (+11.1%) sector.

For Q2 2019, 56 S&P 500 companies have issued negative EPS guidance and 14 S&P 500 companies have issued positive EPS guidance. Meanwhile, the forward 12-month P/E ratio for the S&P 500 is 16.8, which is above the 5-year average (16.4) and above the 10-year average (14.7).

During the last week, the key events in the corporate earnings season were Google’s parent Alphabet Inc, smartphone manufacturer Apple, General Electric, General Motors, as well as pharmaceutical giants Pfizer Inc and Merck & Co, as well as chipmaker Qualcomm.

Sales of iPhone pushed Apple’s revenue down by 5%

Revenue of Apple fell by 5% YoY to 58 billion USD, coming in toward the high end of management’s guidance range for fiscal second-quarter revenue of between 55 billion USD and 59 billion USD.

The revenue was weighed down by lower iPhone sales, which accounted for 54% of total revenue during the period. Furthermore, since iPhone contributes outsize gross profit to the tech giant’s overall results, lower revenue from the segment hurt Apple’s profitability. The company’s gross profit margin was 37.6% – in line with guidance but down 70 basis points from the year-ago quarter. Earnings per share fell 10% year over year to 2.47 USD.

Apple

The revenue from iPhone sales fell 17% year over year during the quarter. Services revenue rose by 16% to a record 11.5 billion USD, while Mac revenue was down by 5%. The revenues from iPad jumped 22% year over year, driven primarily by the company’s redesigned iPad Pro, which launched late last year. Finally, the wearables, home, and accessories segment saw revenue surge 30% higher, driven by nearly 50% year-over-year growth in its wearables products.

Google’s parent Alphabet Q1 revenue rose

Google’s parent Alphabet reported first quarter revenue of 36.34 billion USD, which represents a 17% increase from the same time last year, but lower than the 37.33 billion USD forecast by analysts. The earnings per share amounted to 11.90 USD per share, beating the market expectations for 10.61 USD.

Alphabet inc

Google is seeing decelerating growth after consistently expanding at 20% or more in prior periods. Revenue increased 17%, down from growth of 28% a year earlier, and ad sales rose 15%, down from 24% a year ago.

Paid clicks on Google properties grew only 39% from the year-ago quarter. That’s a sharp drop from the fourth quarter or 2018 (up 66%) and third quarter (up 62%). It means that Google properties are not growing traffic volumes as quickly to make up for declines in advertising prices.

However, the traffic acquisition costs for the quarter were 6.86 billion USD versus 7.26 billion USD expected by the analysts.

Revenues of Qualcomm fell, but net income doubles

Even though its revenue fell by 5% YoY to 5 billion USD, Qualcomm posted an encouraging second quarter with an earnings call that revealed a future 4.7 billion USD windfall after settling litigation with Apple.

In its second-quarter results, the California-based mobile technology giant Qualcomm saw operating costs rise of 135% year-on-year to 900 million USD, in large part as litigation costs stung the company.

The company’s net income amounted to 663 million USD, or 0.55 USD per share, more than doubling its year-ago profit of 330 million USD, or 0.22 USD per share. On an adjusted basis, it earned 0.77 USD per share, ahead of the 0.71 USD per share that analysts projected on average.