In a world where Apple Inc. blows the doors off its earnings each quarter, companies are finding that meeting or beating earnings-per-share expectations just isn't enough any more, particularly if revenues miss the mark.
Apple had what CEO Steve Jobs called a "phenomenal" quarter, as its third-quarter revenue of $15.7-billion (U.S.) topped the consensus estimate by $1-billion, and its $3.51 EPS exceeded the expected $3.11.
It may be unfair to compare any company to the most-ballyhooed performer in the tech space, but look at two other well-known names that reported this week - International Business Machines Corp. and Yahoo Inc.
While IBM reported EPS of $2.61 Monday, above the consensus $2.58, and increased its future guidance, its revenue of $23.7-billion was roughly $500-million below the expected $24.2-billion. IBM's reward? It lost 2.5 per cent Tuesday, and has shed 4 per cent of its value since last Thursday's close.
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Yahoo reported EPS of 15 cents Tuesday after the market closed, a penny better than consensus. Yet the company's revenue of $1.13-billion was below the expected $1.16-billion. The company has faced far greater punishment, losing 8.5 per cent in Wednesday's trading.
"Apparently, beating consensus earnings estimates but coming short on the top-line counts as a miss these days," Zacks Investment Research said in a note late Tuesday after Yahoo stock fell in after-market trading.
Indeed, Robert Kavcic, an economist at BMO Nesbitt Burns, says 83 per cent of S&P 500 companies have beaten estimates so far, but only 65 per cent have beaten revenue estimates.
"The market is not rewarding just EPS surprises any more," Mr. Kavcic said. "We're at a more mature part of the cycle - in the early part, the markets were grateful to see any upside surprises, whether it was cost- or revenue-driven. Now, I think expectations are much higher, and the market wants to see underlying strength in demand, not just margin expansion."
A closer look at IBM and Yahoo reveals this.
IBM increased EPS 12.5 per cent above 2009's second quarter as the company expanded both gross and pretax profit margins. But the company raised concern with a lacklustre performance in signing customers for service contracts.
Signings for new deals dropped 12 per cent from 2009's second quarter, to $12.3-billion. Signings in IBM's outsourcing business dropped a "surprising" 19 per cent year over year on a significant decline in contract extensions, noted analyst Robert Cihra of Caris & Co.
Brian Marshall of Gleacher & Co. said that "once again, IBM continues to grow its earnings stream (with minimal revenue growth) better than any other large-cap technology company of similar size. However, in our view, the investment community is searching for ideas that offer more 'juice' in the financial model, given the improving outlook for technology spending."
At Yahoo, the warning signs are more than just a few quibbles. Even positive analysts call the company a "work in progress," while others are worried that Yahoo is heading in the wrong direction.
The analysts at William Blair & Co. say they "are concerned that growth has stalled at Yahoo," noting that the site's number of page views have been decelerating, and now declining, since the second quarter of 2008.
The results released Tuesday showed that search-related revenue at sites owned and operated by Yahoo declined 8 per cent from 2009's second quarter. At the same time, Google's core paid search advertising revenue increased 24 per cent, said Martin Pyykkonen of Janco Partners.
"Yahoo is clearly continuing to lose market share in paid search ad monetization and revenue growth vs. Google," Mr. Pyykkonen said.
Analysts at Citigroup Global Markets, in downgrading Yahoo to "hold," admitted their buy recommendation in June, 2009, "was wrong" and one of their key assumptions - that its market share was relatively stable - is now untrue. "Yahoo's share of U.S. Internet usage minutes has declined materially over the last year and slid below 10 per cent for the first time in [the second quarter] in part due to the rise in the Google and Facebook platforms."
All of this is reflected in Yahoo's revenue, whether it meets expectations or not. Rick Aristotle Munarriz, in his weekly column at The Motley Fool, called "Throw This Stock Away," says "Over all, Yahoo's flat top-line performance, at a time when Internet usage is booming globally, is all one needs to know about the company's fading relevance in the dot-com space it once dominated."
Special to The Globe and Mail