INTC: Look Ahead to March 2021 Quarterly Results

This "look-ahead" post discusses how I came up with an estimate for Intel's earnings for fiscal 2021's first quarter, which will end on March 27, by predicting each element of its Income Statement, from top-line Revenue to bottom-line Earnings Per Share (EPS) and everything in between. 

Once the company’s official results become available in April, I will compare the real Income Statement to my prediction and point out any surprises, positive or negative. 

  

But, before we get into the details, let's take a step back and start with background information about Intel.

Intel makes semiconductor chips used in computers, servers, and many other devices. Once the clear leader of its industry, the rapid growth of mobile phones benefited competing firms that did a better job producing chips that consumed less electrical power, a key consideration.  Intel has also lost market share because of delays manufacturing new generations of chips.  For example, Apple replaced chips from Intel with faster, lower-power devices it designed itself.  When the price of Intel's shares dropped in 2020, Third Point, a hedge fund, got involved and advocated for changes.  They got their way, at least in part, when Intel announced in January 2021 that its Chief Executive Officer would be replaced by Pat Gelsinger, who was CEO of VMWare and had previously worked at Intel.  Even before external pressure to act, Intel had been selling or divesting businesses (e.g., smartphone modems, NAND devices) in which it no longer wanted to compete.

Intel recorded profits of $21 billion, $5.07 per share, on revenue of $78 billion during the last 12 months.  In the quarter that ended on December 26, 2020, Intel earned $1.42 per share on a GAAP basis, and it gained $1.52 per share after non-GAAP adjustments and exclusions.  See Intel's most recent quarterly report and my review of their results relative to expectations for additional information.

Shares of Intel now trade for about $61 each, giving the company a market value of $252 billion. These shares can be found in the Dow Jones Industrial Average, Standard and Poors 500, Standard and Poors 100, NASDAQ 100, and Russell 1000 stock indices.

Readers might be interested in my latest gauge analysis of Intel's financial statements, which looked at factors that affect investment suitability.

    

My starting point, if available, when estimating earnings is guidance provided by the company's management to financial analysts.  It's true that the company may downplay expectations somewhat to avoid disappointments, but the top managers ought to know better than anyone else how well their products and services are selling.  I also look for other information about the company in the news, and I take advantage of trends in the company's historical results.  While it makes my task a little more difficult, I also try to estimate earnings that conform to Generally Accepted Accounting Principles (GAAP).  Non-GAAP results, which most professionals focus on, are somewhat arbitrary and often exclude meaningful items.

Intel's management communicated their expectations, or "guidance" as it's known, for the March 2021 quarter last January. 

For Revenue in the March quarter, Intel estimated $18.6 billion, and I am using that figure.  

The estimated operating margin of 27 percent implies operating expenses will be (1 - 0.27) * $18.6 billion = $13.6 billion.  Operating expenses include the Cost of Goods Sold (CGS), Research and Development (R&D), Sales, General, and Administrative costs (SG&A), and other lesser costs.  Intel's Gross Margin was 56.8 percent of Revenue in the fourth quarter of 2020, and I'm expecting this will improve slightly to 57 percent in the current quarter.  This is equivalent to saying I'm looking for the CGS to equal (1- 0.57) * $18.6 billion = $8.0 billion.

R&D expenses were running at about $3.3 billion per quarter most of 2020, but surged to almost $3.7 billion in the fourth quarter as the company worked feverishly to resolve manufacturing issues with its newest chips.  I'm assuming R&D will remain at the elevated $3.7 billion level in the March quarter.

I'm expecting based on recent quarters that SG&A expenses to equal 8.5 percent of Revenue, or 0.085 * $18.6 billion = $1.6 billion.

Other, miscellaneous operating charges are usually minor, and I've penciled in $100 million for this line item.

With the assumptions above, operating expenses total $8.0 + 3.7 + 1.6 + 0.1 = $13.4 billion.  This is a little below the guidance estimate of $13.6 billion.  Operating income would equal $5.2 billion, down substantially from the March 2020 quarter. 

Non-operating items include gains (or losses) on equity investments, which is volatile figure, and interest, which doesn't change as much from quarter to quarter.  I'm guessing a $200 million gain for the former amount and a $100 million deduction for the latter.

Intel's guidance says we can assume an income tax rate of 14.5 percent for the quarter and that's exactly what I did.  

The bottom-line result is Net Income of $4.55 billion ($1.10 per share) in the first quarter of 2021, down from the year-earlier figure, but a little more profitable than the company's guidance suggests.

The following Income Statement summarizes the estimates made as discussed above. 

This post is not investment advice, and the accuracy of the information, tables, charts, and any commentary presented is not guaranteed.  Readers are encouraged to independently verify all data using information from original sources. The Income Statements discussed in these blog posts have not been audited and may differ in material respects from those published by the subject company.  These differences are intended to facilitate analysis and cross-company comparisons. Complete financial statements with notes can usually be found in the 10-Q and 10-K filings companies submit to the Securities and Exchange Commission (SEC).

#intel #intc #gcfr #gcfr2 #lookahead #nac_financialanalysis 

NVDA: Look Ahead to January Quarterly Results

This "look-ahead" post discusses how I came up with an estimate for NVIDIA's earnings for fiscal year 2021's fourth quarter, which ended on January 31, 2021, by predicting each element of its Income Statement, from top-line Revenue to bottom-line Earnings Per Share (EPS) and everything in between.

Once the company’s official results become available later this month, I will compare the published Income Statement to the prediction and identify any surprises, positive or negative.  Examining these differences can identify what factors (e.g., profit margins, non-GAAP expenses, tax rates, share buybacks) are driving changes to a company's financial performance.

But, before getting into the details, let's take a step back and start with background information about NVIDIA.

NVIDIA develops high-speed integrated circuits and cards for demanding data-processing applications, such as gaming, data centers, visualization, artificial intelligence, and even cryptocurrency mining.  NVIDIA announced in September 2020 that it plans to acquire UK-based Arm Limited, a company that has been very successful at licensing designs for integrated circuits, from Softbank for $40 billion in cash and new NVIDIA shares. But, it's uncertain whether regulators will approve this deal and allow it to proceed.  NVIDIA was able to acquire Mellanox Technologies, a maker of high-performance computer networking products for data centers, for $7 billion in April 2020. 

Shares of NVIDIA now trade for about $566 each, giving the company a market value of $356 billion. These shares can be found in the Standard and Poors 500, Standard and Poors 100, NASDAQ 100, and Russell 1000 stock indices.

NVIDIA recorded profits of $4 billion on revenue of $15 billion during the last year. In the quarter that ended on October 25, 2020, NVIDIA earned $2.91 per share (excluding certain items), which significantly beat the $2.58 Wall Street consensus forecast. See NVIDIA's most recent quarterly report.

My starting point, if available, when estimating earnings is guidance provided by the company's management to financial analysts.  It's true that the company may downplay expectations somewhat to avoid disappointments, but the top managers ought to know better than anyone else how well their products and services are selling.  I also look for other information about the company in the news, and I take advantage of trends in the company's historical results.  While it makes my task a little more difficult, I also try to estimate earnings that conform to Generally Accepted Accounting Principles (GAAP).  Non-GAAP results, which most professionals focus on, are somewhat arbitrary and often exclude meaningful items.

NVIDIA's management communicated their expectations for the January quarter when they last reported results in November 2020.  Note that this period is 14 weeks long.

NVIDIA’s outlook for the fourth quarter of fiscal 2021 is as follows:

•Revenue is expected to be $4.80 billion, plus or minus 2 percent.

•GAAP and non-GAAP gross margins are expected to be 62.8 percent and 65.5 percent, respectively, plus or minus 50 basis points.

•GAAP and non-GAAP operating expenses are expected to be approximately $1.64 billion and $1.18 billion, respectively.

•GAAP and non-GAAP other income and expense are both expected to be an expense of approximately $55 million.

•GAAP and non-GAAP tax rates are both expected to be 8 percent, plus or minus 1 percent, excluding any discrete items. GAAP discrete items include excess tax benefits or deficiencies related to stock-based compensation, which are expected to generate variability on a quarter-by-quarter basis.

NVIDIA expects its Revenue in the fourth quarter will be $4.7 billion and $4.9 billion.  I'm assuming the figure will be in the middle of this range.

I'm also using the 62.8 percent of Revenue midpoint for the GAAP Gross Margin.  The Cost of Goods Sold in, therefore, estimated to be be $4.8 billion * (1 - 0.628) = $1.79 billion.

Operating expenses include Research and Development and Sales, General, and Administrative costs.  Based on historical data, I'm assuming R&D will be about 2/3 of the $1.64 billion GAAP guidance figure and the other 1/3 will be SG&A.

The numbers above combine to produces an estimate for Operating Income of $1.37 billion, which is 39 percent higher than the equivalent quantity in the year-earlier quarter.

For non-operating gains and losses, I used the $55 million net expense from the guidance and the 8 percent (!) effective income tax rate.   

With these figures, the estimate for Net Income (GAAP) in the quarter is $1.2 billion ($1.92 per share).  

The following Income Statement summarizes the estimates made as discussed above. 

This post is not investment advice, and the accuracy of the information, tables, charts, and any commentary presented is not guaranteed.  Readers are encouraged to independently verify all data using information from original sources. The Income Statements discussed in these blog posts have not been audited and may differ in material respects from those published by the subject company.  These differences are intended to facilitate analysis and cross-company comparisons. Complete financial statements with notes can usually be found in the 10-Q and 10-K filings companies submit to the Securities and Exchange Commission (SEC).

#nvidia  #nvda  #gauges #gcfr  #gcfr2 #lookahead #nac_financialanalysis

HD: Look Ahead to January Quarterly Results

This "look-ahead" post discusses how I came up with an estimate for Home Depot's earnings for fiscal year 2020's fourth quarter, which ended on January 31, 2021, by predicting each element of its Income Statement, from top-line Revenue to bottom-line Earnings Per Share (EPS) and everything in between.

Once the company’s official results become available later this month, I will compare the published Income Statement to the prediction and identify any surprises, positive or negative.  Examining these differences can identify what factors (e.g., profit margins, non-GAAP expenses, tax rates, share buybacks) are driving changes to a company's financial performance.

But, before getting into the details, let's take a step back and start with background information about Home Depot.

Home Depot operates about 2300 big-box home improvement stores in the U.S., Canada, and Mexico that cater both to professionals and do-it-yourself homeowners.  The COVID-19 pandemic, in some ways, benefited Home Depot as house-bound consumers started more renovation projects. However, the pandemic also led to increased labor and cleaning costs and supply chain challenges.  In December 2020, Home Depot acquired HD Supply Holdings, a former subsidiary, for $8 billion.  HD Supply distributes maintenance, repair and operations (MRO) products for use in multi-family and hospitality buildings.

Shares of Home Depot now trade for about $277 each, giving the company a market value of $299 billion. These shares can be found in the Dow Jones Industrial Average, Standard and Poors 500, Standard and Poors 100, New York Stock Exchange Composite, and Russell 1000 stock indices.

Home Depot recorded profits of $12 billion on revenue of $126 billion during the last year. In the quarter that ended on November 1, 2020, Home Depot earned $3.18 per share, which  beat the $3.05 Wall Street consensus forecast. 

Revenue in the November 2020 quarter totaled $33.5 billion, 23 percent more than last year.  The Building Materials business was responsible for 38 percent of overall revenue, and this unit's revenue grew by 22.3 percent compared to the year-earlier result.  The Décor business contributed 33 percent of revenue, and this unit's revenue increased by 19.5 percent.  The Hardlines unit supplied 29 percent of revenue, and this business's revenue rose by 29.0 percent.

My starting point, if available, when estimating earnings is guidance provided by the company's management to financial analysts.  It's true that the company may downplay expectations somewhat to avoid disappointments, but the top managers ought to know better than anyone else how well their products and services are selling.  I also look for other information about the company in the news, and I take advantage of trends in the company's historical results.  While it makes my task a little more difficult, I also try to estimate earnings that conform to Generally Accepted Accounting Principles (GAAP).  Non-GAAP results, which most professionals focus on, are somewhat arbitrary and often exclude meaningful items.

Home Depot did not provide any guidance about the fourth quarter when the company reported results last November.  I have had to rely on historical trends and national economic data to estimate the company's earnings.

The Census Bureau publishes data on U.S. Retail Sales, include data specific to Retail Sales: Building Materials, Garden Equipment and Supplies Dealers , which correlate fairly well to Home Depot's reported Revenue.  In November 2020, the index was up 16 percent when compared to the same month in 2019.  The final figures aren't yet available for December, but the advance number for the month was a stellar 22 percent than the year-earlier figure.  If Home Depot's Revenue were to increase at 19 percent (i.e., halfway between 16 and 22 percent) in the fourth quarter, the figure would be 1.19*$25.8 billion =  $30.7 billion.  For my Revenue estimate, I'm bumping this figure up to $31.0 billion to account for one month of HD Supply's sales.

Home Depot's Gross Margin is normally very close to 34 percent of Revenue, and will probably be so again in the fourth quarter.  This would translate into a Cost of Good Sold of (1-0.34)*$31.0 billion =$20.5 billion.

The Depreciation expense was $528 million in the third quarter, and I'm expecting a similar amount the fourth quarter.

In recent years, Sales, General, and Administrative (SG&A) expenses have been right around 18.7 percent of Revenue in the fourth quarter.  The SG&A estimate is 0.187*$31.0 billion =$5.8 billion.

The numbers above combine to produces an estimate for Operating Income of $4.2 billion, which is 24 percent higher than the equivalent quantity in the year-earlier quarter.

For non-operating gains and losses, I've selected figures similar to those reported in the first three quarters of the fiscal year.   

I assumed 24.3 percent for the effective income tax rate, which is similar to the rate in previous quarters for Home Depot.

With these figures, the estimate for Net Income (GAAP) in the quarter is $2.94 billion ($2.72 per share).  

I did not make any explicit provisions for acquisition transaction or financing costs.  I don't expect them to be significant.

The following Income Statement summarizes the estimates made as discussed above. 

This post is not investment advice, and the accuracy of the information, tables, charts, and any commentary presented is not guaranteed.  Readers are encouraged to independently verify all data using information from original sources. The Income Statements discussed in these blog posts have not been audited and may differ in material respects from those published by the subject company.  These differences are intended to facilitate analysis and cross-company comparisons. Complete financial statements with notes can usually be found in the 10-Q and 10-K filings companies submit to the Securities and Exchange Commission (SEC).

#homedepot  #hd  #gauges #gcfr  #gcfr2 #lookahead #nac_financialanalysis

EIX: Look Ahead to December Quarterly Results

 This "look-ahead" post discusses how I came up with an estimate for Edison International's earnings for fiscal year 2020's fourth quarter, which ended on December 31, 2020, by predicting each element of its Income Statement, from top-line Revenue to bottom-line Earnings Per Share (EPS) and everything in between.

Once the company’s official results become available later this month, I will compare the published Income Statement to the prediction and identify any surprises, positive or negative.  Examining these differences can identify what factors (e.g., profit margins, non-GAAP expenses, tax rates, share buybacks) are driving changes to a company's financial performance.

But, before getting into the details, let's take a step back and start with background information about Edison International.

Edison International is the parent of Southern California Edison, which provides electric power to more than 15 million people.  Per government mandates, a growing percentage of this power has been derived from renewable sources. Electric utilities in California have been blamed for, and are spending considerable sums to prevent, wildfires caused by their equipment.

Shares of Edison now trade for about $58 each, giving the company a market value of $22 billion. These shares can be found in the Dow Jones Utilities Average, Standard and Poors 500, New York Stock Exchange Composite, and Russell 1000 stock indices.

Edison recorded profits of $356 million on revenue of $13 billion during the last year. In the quarter that ended on September 30, 2020, Edison earned $1.67 per share (excluding certain items), which matched the $1.67 Wall Street consensus forecast. See https://tinyurl.com/y4jdllsu for Edison's most recent quarterly report.

Revenue in the September 2020 quarter totaled $4.6 billion, 24 percent more than last year.

My starting point, if available, when estimating earnings is guidance provided by the company's management to financial analysts.  It's true that the company may downplay expectations somewhat to avoid disappointments, but the top managers ought to know better than anyone else how well their products and services are selling.  I also look for other information about the company in the news, and I take advantage of trends in the company's historical results.  While it makes my task a little more difficult, I also try to estimate earnings that conform to Generally Accepted Accounting Principles (GAAP).  Non-GAAP results, which most professionals focus on, are somewhat arbitrary and often exclude meaningful items.

Edison International updated its guidance for the entire fiscal year when it reported third-quarter results in last October. 

The columns above with guidance from last September can be ignored because the October guidance superseded any estimates issued earlier.  "Non-core Items" are  the difference between Basic (i.e., GAAP) and Core (i.e., Non-GAAP) earnings.  The $2.74 per share estimate for Non-core Items is almost the same as the actual Non-core amount during the first three quarters of 2020.  This suggests that Non-core amount in the fourth quarter will be minimal; in other words, the difference between Basic and Core EPS should be fairly small.

During the first three quarters of 2020, Edison's Core EPS was $0.57.  The company's Basic EPS guidance for the fourth quarter is, therefore, $1.73 minus $0.57 = $1.16 to $1.88 minus $0.57 = $1.31.

To estimate Revenue for the December quarter, I looked into Edison's historical financial data and found that roughly 24 percent of the company's annual Revenue gets recorded in the fourth quarter of a typical year.  The percentage can vary from year, sometimes significantly, but I consider it a reasonable basis for an estimate.  Since Revenue was $10.42 billion during the first three quarters of 2020, my estimate for the fourth quarter is $3.3 billion.

In the December quarters of 2016, 2017, 2018, and 2019, the Gross Margin averaged 37.2 percent of Revenue.  I'm assuming the figure will be similar in the fiscal year 2020.  The estimated Cost of Goods Sold is (1-0.372)* $3.3 billion = $2.1 billion 

Edison's depreciation expense was between $480 and $490 per quarter during the first nine months of 2020.  I assumed $485 million for the fourth quarter.

Miscellaneous operating expenses were over $1.3 billion in the third quarter because this period included non-core charges related to previous wildfire and mudslide events.  Since the guidance implied that non-core charges would be minimal in the fourth quarter (see above), I used only the token figure of $50 million for this line on the Income Statement.

The numbers above combine to produce an estimate for Operating Income in December quarter of about $690 million, which is more than double the equivalent quantity in the year-earlier quarter.

For the two non-operating items, I used figures from the September quarter..

Edison's effective income tax rate has been both absurdly high and absurdly low during recent quarters. In the first three quarters of the year, the company reported a tax credit of $355 million on pre-tax loss of $36 million.  I simply assumed a 10 percent tax rate, which (strangely enough) seems conservative.

After a $45 million deduction for preferred stock dividend payments, my estimate for Edison International's Net Income in the December 2020 quarter works out to be $454 million ($1.20 per share).

The following Income Statement summarizes the estimates made as discussed above. 

This post is not investment advice, and the accuracy of the information, tables, charts, and any commentary presented is not guaranteed.  Readers are encouraged to independently verify all data using information from original sources. The Income Statements discussed in these blog posts have not been audited and may differ in material respects from those published by the subject company.  These differences are intended to facilitate analysis and cross-company comparisons. Complete financial statements with notes can usually be found in the 10-Q and 10-K filings companies submit to the Securities and Exchange Commission (SEC).

#edison  #eix  #gauges #gcfr  #gcfr2 #lookahead #nac_financialanalysis

WMT: Look Ahead to January 2021 Quarterly Results

This "look-ahead" post discusses how I came up with an estimate for Walmart's earnings for fiscal year 2021's fourth quarter, which ended on January 31, 2021, by predicting each element of its Income Statement, from top-line Revenue to bottom-line Earnings Per Share (EPS) and everything in between.

Once the company’s official results become available on February 18, 2021, I will compare the published Income Statement to the prediction and identify any surprises, positive or negative.  Examining these differences can identify what factors (e.g., profit margins, non-GAAP expenses, tax rates, share buybacks) are driving changes to a company's financial performance.

But, before getting into the details, let's take a step back and start with background information about Walmart.

Walmart is large retailer known for keeping its costs and prices low.  In addition to its many eponymous storers, Walmart also owns Sam's Club warehouses.  To fight off competition from Amazon and other online retailers, Walmart has invested significant sums to improve Walmart.com.  This strategy is starting to pay off, and the company's online sales are growing rapidly.  The person that led Walmart's ecommerce efforts, Marc Lore, left the company on January 31, 2021, so that might be a concern.  Walmart's reputation for low prices, especially for groceries, cleaning products, and other consumer staples, paid off in the early days of the pandemic when home-bound consumers were stocking up on supplies.  Walmart is now taking steps to reduce its overseas operations.  It announced an agreement to sell its UK subsidiary and business in Argentina.  Walmart also made a deal to sell a majority interest in its subsidiary in Japan.

Shares of Walmart now trade for about $144 each, giving the company a market value of $411 billion. These shares can be found in the Dow Jones Industrial Average, Standard and Poors 500, Standard and Poors 100, Standard and Poors Dividend Aristocrats, New York Stock Exchange Composite, and Russell 1000 stock indices.

Walmart recorded profits of $20 billion on revenue of $549 billion during the last year. In the quarter that ended on October 31, 2020, Walmart earned $1.34 per share (excluding certain items), which significantly beat the $1.18 Wall Street consensus forecast. 

Revenue in the October 2020 quarter totaled $134.7 billion, 5 percent more than last year.  The Walmart U.S. business was responsible for 66 percent of overall revenue, and this unit's revenue grew by 6.2 percent compared to the year-earlier result.  The Walmart International business contributed 22 percent of revenue, and this unit's revenue increased by 1.3 percent.  The Sam's Club unit supplied 12 percent of revenue, and this business's revenue rose by 8.3 percent.

My starting point, if available, when estimating earnings is guidance provided by the company's management to financial analysts.  It's true that the company may downplay expectations somewhat to avoid disappointments, but the top managers ought to know better than anyone else how well their products and services are selling.  I also look for other information about the company in the news, and I take advantage of trends in the company's historical results.  While it makes my task a little more difficult, I also try to estimate earnings that conform to Generally Accepted Accounting Principles (GAAP).  Non-GAAP results, which most professionals focus on, are somewhat arbitrary and often exclude meaningful items.

Walmart did not provide any guidance about the fourth quarter when the company reported results last November.  I have had to rely on historical trends and national economic data to estimate Walmart earnings.

In particular, data on U.S. Retail and Food Service Sales are published by the Census Bureau and are readily available.  These reports indicated, for example, that sales were up 3.7 percent in November 2020, compared to November 2019.  Walmart is so large that its Revenue correlates fairly well with the national data, and I use this relationship to estimate the company's Revenue.  Although there's no national data yet for January 2021, my preliminary fourth-quarter estimate for Walmart's revenue, using the data that is available, is $145 billion.

In the first three quarters of fiscal year 2021, Walmart's Gross Margin rose from 23.9 percent to 25.4 percent of Revenue.  Counterintuitively, the Gross Margin in the January quarter is usually a little less than in the preceding October quarter.  This history led me to select 25.0 percent as my estimate for the January 2021 quarter.  The corresponding Cost of Goods Sold is (1-0.25) * $145 billion = $108.75 billion.

Sales, General, and Administrative (SG&A) expenses should be a little more than 20 percent of Revenue if history is a valid guide.  To be specific, I used 20.25 percent of Revenue to come up with a $29.4 billion SG&A estimate.

The numbers above combine to produces an estimate for Operating Income of just under $6.9 billion, which is a hefty 29 percent higher than the equivalent quantity in the year-earlier quarter.

I'm aware of two large items items that may be listed as non-operating gains and losses on Walmart's Income Statement for the fourth quarter.  I've estimated using publicly available data that the equity investment in JD.com earned about $1.0 billion, if the size of the Walmart's  stake in the Chinese firm did not change.  On the other side of the ledger, Walmart previously announced it would recognize a non-cash loss of approximately $2.0 billion, after tax, in the fourth quarter of fiscal 2021 on the sale of a majority stake in Seiyu, a retailer in Japan.  On pre-tax basis, this loss could be $2.4 billion.

I used $525 million for the estimate of net interest paid and 26 percent for the effective income tax rate.  With these figures, the estimate for Net Income (GAAP) in the quarter is $3.57 billion (1.25 per share).  

The following Income Statement summarizes the estimates made as discussed above. 

This post is not investment advice, and the accuracy of the information, tables, charts, and any commentary presented is not guaranteed.  Readers are encouraged to independently verify all data using information from original sources. The Income Statements discussed in these blog posts have not been audited and may differ in material respects from those published by the subject company.  These differences are intended to facilitate analysis and cross-company comparisons. Complete financial statements with notes can usually be found in the 10-Q and 10-K filings companies submit to the Securities and Exchange Commission (SEC).

#walmart  #wmt  #gauges #gcfr  #gcfr2 #lookahead #nac_financialanalysis

PEP: Look Ahead to December 2020 Quarterly Results

This "look-ahead" post discusses how I came up with an estimate for PepsiCo's earnings for fiscal 2020's 16-week fourth quarter, which ended on December 26, 2020, by predicting each element of its Income Statement, from top-line Revenue to bottom-line Earnings Per Share (EPS) and everything in between.

Once the company’s official results become available on February 11, I will compare the published Income Statement to the prediction and identify any surprises, positive or negative.  Examining these differences can identify what factors (e.g., profit margins, non-GAAP expenses, tax rates, share buybacks) are driving changes to a company's financial performance.

But, before getting into the details, let's take a step back and start with background information about PepsiCo. 

PepsiCo is a global food and beverage company. In addition to the eponymous soft drinks, PepsiCo also owns the Frito-Lay snack food business. In April 2020, PepsiCo acquired energy drink maker Rockstar for $3.85 billion. PepsiCo bought SodaStream in 2018 for $3.2 billion.

Shares of PepsiCo now trade for about $140 each, giving the company a market value of $195 billion. These shares can be found in the Standard and Poors 500, Standard and Poors 100, Standard and Poors Dividend Aristocrats, NASDAQ 100, and Russell 1000 stock indices. 

PepsiCo recorded profits of $7 billion on revenue of $69 billion during the last year. In the quarter that ended on September 5, 2020, PepsiCo earned $1.66 per share (excluding certain items), which significantly beat the $1.49 Wall Street consensus forecast. 

Revenue in the September 2020 quarter totaled $18.1 billion, 5 percent more than last year's $17.2 billion. The Beverages North America business was responsible for 33 percent of overall revenue, and this unit's revenue grew by 5.6 percent compared to the year-earlier result. The Frito-Lay North America business contributed 24 percent of revenue, and this unit's revenue increased by 7.2 percent. The Europe unit supplied 18 percent of revenue, and this business's revenue rose by 3.1 percent.

My starting point, if available, when estimating earnings is guidance provided by the company's management to financial analysts.  It's true that the company may downplay expectations somewhat to avoid disappointments, but the top managers ought to know better than anyone else how well their products and services are selling.  I also look for other information about the company in the news, and I take advantage of trends in the company's historical results.  While it makes my task a little more difficult, I also try to estimate earnings that conform to Generally Accepted Accounting Principles (GAAP).  Non-GAAP results, which most professionals focus on, are somewhat arbitrary and often exclude meaningful items.

PepsiCo updated its guidance for the fiscal year and, thus, the fourth quarter, after the company last reported quarterly results.  The key elements of the guidance are excerpted below:

The Company provides guidance on a non-GAAP basis as we cannot predict certain elements which are included in reported GAAP results, including commodity mark-to-market net impacts.

Based on our year-to-date results and what we can reasonably forecast for the balance of this year, we are providing an update to our full-year financial outlook today. The Company now expects:

•Full-year organic revenue growth to be approximately 4 percent;

•Full-year core earnings per share of $5.50 compared to 2019 core earnings per share of $5.53; and

•Approximately $10 billion in cash from operating activities and free cash flow of approximately $6 billion, which assumes net capital spending of approximately $4 billion.

In addition, the Company continues to expect:

•A core effective tax rate of approximately 21 percent; and

•Total cash returns to shareholders of approximately $7.5 billion, comprised of dividends of approximately $5.5 billion and share repurchases of approximately $2 billion.

Note that the guidance refers to non-GAAP earnings, which makes my task a little more difficult and amplifies the uncertainty of my estimates.

In the first three quarters (only 36 weeks at PepsiCo, but that's another story) of fiscal year 2020, organic Revenue growth was 3.6 percent and GAAP Revenue growth was 3.0 percent.  To get to 4 percent organic growth across the full fiscal year, as the guidance predicts, I've assumed the difference between GAAP and non-GAAP revenue growth will remain 0.6 percent.  This suggests that 3.4 percent (4.0 - 0.6) is a plausible estimate for GAAP revenue growth for the fiscal year.

In fiscal year 2019, PepsiCo's revenue was $67.2 billion.  Fiscal year 2020's revenue could, therefore, be 1.034* $67.2 billion = $69.5 billion.  Revenue during the first three quarters of the year was $47.9 billion, which leaves $69.5 billion - $47.9 billion = $21.6 billion for the fourth quarter of fiscal 2020.

During the first three quarters of the year, PepsiCo's Gross Margin averaged 55.4 percent.  The margin the fourth quarter is usually a little less, so I have assumed it will be 55 percent.  The Cost of Goods Sold estimate is, therefore, (1-0.55) * $21.6 billion = $9.7 billion.

Sales, General, and Administrative (SG&A) expenses have averaged 40.4 percent of Revenue during the first three quarters.  In the fourth quarter, this ratio is often 2 to 3 percent higher.  I don't think it will be quite that high this year, but it could see 42 percent as a possibility.

These estimates would lead to Operating Income of $2.8 billion, up from $2.7 billion one year earlier.

I assume net interest paid would drop to $400 million in this era of low rates.

For the income tax rate, I used the non-GAAP estimate of 21 percent.  The difference between the GAAP and non-GAAP rates is usually small.

With these assumptions, my estimate for Net Income is $1.93 billion ($1.39 per share), which compares favorably to $1.77 billion (1.26/share) in the year-earlier period.

The following Income Statement summarizes the estimates made as discussed above. 

This post is not investment advice, and the accuracy of the information, tables, charts, and any commentary presented is not guaranteed.  Readers are encouraged to independently verify all data using information from original sources. The Income Statements discussed in these blog posts have not been audited and may differ in material respects from those published by the subject company.  These differences are intended to facilitate analysis and cross-company comparisons. Complete financial statements with notes can usually be found in the 10-Q and 10-K filings companies submit to the Securities and Exchange Commission (SEC).

#pepsico  #pep  #gauges #gcfr  #gcfr2 #lookahead #nac_financialanalysis

CSCO: Look Ahead to January 2021 Quarterly Results

This "look-ahead" post discusses how I came up with an estimate for Cisco's earnings for fiscal year 2021's second quarter, which ended on January 23, 2021, by predicting each element of its Income Statement, from top-line Revenue to bottom-line Earnings Per Share (EPS) and everything in between.

Once the company’s official results become available on February 9, 2021, I will compare the published Income Statement to the prediction and identify any surprises, positive or negative.  Examining these differences can identify what factors (e.g., profit margins, non-GAAP expenses, tax rates, share buybacks) are driving changes to a company's financial performance.

But, before getting into the details, let's take a step back and start with background information about Cisco Systems.

Founded in 1984, Cisco is a leading seller of products, such as routers and switches, and related services, for connecting devices via the Internet.  The company makes products related to the following technologies: software-defined wide area networks, cloud computing, 5G and WiFi-6, optical networking, next generation silicon, and artificial intelligence.  A frequent acquirer of other companies, Cisco expects it will soon complete the $4.5 billion acquisition of Acacia Communications, Inc., a company that sells high-speed coherent optical interconnect products.

Shares of Cisco now trade for about $48 each, giving the company a market value of $200 billion. These shares can be found in the Dow Jones Industrial Average, Standard and Poors 500, Standard and Poors 100, NASDAQ 100, and Russell 1000 stock indices.

Cisco recorded profits of $10 billion on revenue of $48 billion during the last year. In the quarter that ended on October 24, 2020, Cisco earned $0.76 per share (excluding certain items), which beat the $0.70 Wall Street consensus forecast. 

Revenue in the October 2020 quarter totaled $11.9 billion, 9 percent less than last year.  The Infrastructure Platforms business was responsible for 53 percent of overall revenue, and this unit's revenue percent fell by 16.0 percent compared to the year-earlier result.  The Applications business contributed 12 percent of revenue, and this unit's revenue decreased by 8.0 percent.  The Services unit supplied 28 percent of revenue, and this business's revenue rose by 2.0 percent.

My starting point, if available, when estimating earnings is guidance provided by the company's management to financial analysts.  It's true that the company may downplay expectations somewhat to avoid disappointments, but the top managers ought to know better than anyone else how well their products and services are selling.  I also look for other information about the company in the news, and I take advantage of trends in the company's historical results.  While it makes my task a little more difficult, I also try to estimate earnings that conform to Generally Accepted Accounting Principles (GAAP).  Non-GAAP results, which most professionals focus on, are somewhat arbitrary and often exclude meaningful items.

When Cisco reported its results for the October 2020 quarter, it also provided the following guidance the January 2021 period:

Guidance for Q2 FY 2021

Cisco expects to achieve the following results for the second quarter of fiscal 2021:

 

Q2 FY 2021
Revenue		0% - (2)% decline Y/Y
Non-GAAP gross margin rate		64% - 65%
Non-GAAP operating margin rate		32% - 33%
Non-GAAP tax provision rate		19%
Non-GAAP EPS		$0.74 - $0.76

Cisco estimates that GAAP EPS will be $0.55 to $0.60 in the second quarter of fiscal 2021.

Cisco reported Revenue of $12.0 billion in the quarter that ended January 25, 2020 (i.e., one year ago).  Assuming a minus-2 to 0 percent change, per the guidance, leads to a Revenue estimate for the January 2021 quarter between $11.75 billion and $12.0 billion.  I made $11.9 billion, just over the midpoint of this range, as my estimate.

For the Gross Margin, Cisco indicated that this ratio would be, on a GAAP basis, between 62 and 63 percent.  Using the 62.5 percent midpoint, the estimate for the Cost of Goods Sold = 37.5 percent of Revenue, or 0.375 * $11.9 billion = $4.5 billion

The Operating Margin listed in the guidance refers to operating income as a percentage of revenue.  A 25-percent GAAP margin with the $11.9 billion revenue estimate indicates that operating income should be about 0.25 * $11.9 billion = $3.0 billion and that operating costs would, therefore, total $11.9 billion - $3.0 billion = $8.9 billion.  This latter figure includes the Cost of Goods Sold, estimated at $4.5 billion, so there would be $8.9 billion - $4.5 billion = $4.4 billion to cover Research and Development (R&D), Sales, General, and Administrative (SG&A), and other operating expenses.  I've allocated this amount as $1.6 billion for R&D, $2.6 billion for SG&A, and $200 million for other.

For non-operating items, I've assumed a $20 million gain and $60 million net interest income.

The guidance indicates that an effective income tax rate of 19 percent is expected.

With these assumptions, my estimate for Net Income is $2.5 billion ($0.60 per share), which is at top end of the guidance range.

The following Income Statement summarizes the estimates made as discussed above. 

This post is not investment advice, and the accuracy of the information, tables, charts, and any commentary presented is not guaranteed.  Readers are encouraged to independently verify all data using information from original sources. The Income Statements discussed in these blog posts have not been audited and may differ in material respects from those published by the subject company.  These differences are intended to facilitate analysis and cross-company comparisons. Complete financial statements with notes can usually be found in the 10-Q and 10-K filings companies submit to the Securities and Exchange Commission (SEC).

#cisco  #csco  #gauges #gcfr  #gcfr2 #lookahead #nac_financialanalysis

QCOM: Look Ahead to December 2020 Quarterly Results

This "look-ahead" post discusses how I came up with an estimate for Qualcomm's earnings for fiscal 2021's first quarter, which ended on December 27, 2020, by predicting each element of its Income Statement, from top-line Revenue to bottom-line Earnings Per Share (EPS) and everything in between.

Once the company’s official results become available, I will compare the published Income Statement to the prediction and identify any surprises, positive or negative.  Examining these differences can identify what factors (e.g., profit margins, non-GAAP expenses, tax rates, share buybacks) are driving changes to a company's financial performance.

But, before getting into the details, let's take a step back and start with background information about Qualcomm.

Qualcomm makes chips and licenses mobile communications technologies that are used in many advanced wireless devices.  The transition to 5G mobile networks, which is just beginning, should benefit Qualcomm as the technology will motivate consumers to upgrade (again!) to newer, more capable phones.  Qualcomm's licensing business has been criticized on anti-trust grounds by government regulators in multiple countries and also by phone manufacturers.  This threat eased significantly when Qualcomm settled all litigation in April 2019 with Apple and Apple's contract manufacturers.  More progress was made in 2020 when Qualcomm and Huawei settled their disputes and reached a new long-term, global patent-license agreement.  Anti-trust concerns did end up scuttling the company's planned acquisition of NXP Semiconductors for $44 billion. 

Shares of Qualcomm now trade for about $162 each, giving the company a market value of $185 billion. These shares can be found in the Standard and Poors 500, Standard and Poors 100, NASDAQ 100, and Russell 1000 stock indices.

Qualcomm recorded profits of $5 billion on revenue of $24 billion during the last year. In the quarter that ended on September 27, 2020, Qualcomm earned $1.45 per share (excluding certain items), which significantly beat the $0.71 Wall Street consensus forecast.

Revenue in the September 2020 quarter totaled $8.3 billion, 73 percent more than last year.  The CDMA Technologies business was responsible for 60 percent of overall revenue, and this unit's revenue grew by 37.6 percent compared to the year-earlier result.  The Technology Licensing business contributed 18 percent of revenue, and this unit's revenue increased by 30.1 percent.

My starting point, if available, when estimating earnings is guidance provided by the company's management to financial analysts.  It's true that the company may downplay expectations somewhat to avoid disappointments, but the top managers ought to know better than anyone else how well their products and services are selling.  I also look for other information about the company in the news, and I take advantage of trends in the company's historical results.  While it makes my task a little more difficult, I also try to estimate earnings that conform to Generally Accepted Accounting Principles (GAAP).  Non-GAAP results, which most professionals focus on, are somewhat arbitrary and often exclude meaningful items.

Qualcomm provided guidance for the December 2020 quarter, which is the first quarter of fiscal year 2021, when the company last reported quarterly results. An excerpt is shown below.

Additional information was discussed during the conference call that took place after the quarterly results were published.

I'm using the midpoint of the Revenue guidance range, i.e., $8.2 billion, for my estimates.  This figure is an impressive 61.5 percent more than revenue in the December 2019 quarter, as Qualcomm benefits from the recent resolution of antitrust litigation.

While the Gross Margin was 58.4 percent in the year-earlier quarter, the additional revenue in the latest quarter will almost certainly have a significant positive effect on the Gross Margin.  I wouldn't be surprised to see the Gross Margin at, say, 65 percent, but I'm setting the target a little lower, at 63 percent.

Research and Development expenses were about $1.6 billion in September 2020 quarter.  I'm expecting the figure to increase to $1.7 billion as Qualcomm spends more to engineer a new generation of products.

The ratio of Sales, General, and Administrative costs to Revenue is more variable from quarter to quarter at Qualcomm than at other companies I analyze. It's averaged about 9 percent in the last year, but it should be lower now given the big increase in revenue.  7.5 percent of revenue seems like a reasonable estimate for SG&A in the December quarter.

Interest expenses should run to about $125 million per the company's guidance.  Other non-operating gains and losses are tough to forecast.  I assumed a $100 million charge.

These assumptions would lead to income before taxes of a little over $2.6 billion.

While the company indicated it expects a non-GAAP income tax rate of 14 percent, I'm upping that to 16 percent because I estimate GAAP earnings.  With these assumption, my estimate for Net Income would be $2.2 billion ($1.92 per share).  While this EPS is a little above the company's GAAP guidance range, I was so conservative with my assumptions, I wouldn't be comfortable with a lower figure.

The following Income Statement summarizes the estimates made as discussed above. 

This post is not investment advice, and the accuracy of the information, tables, charts, and any commentary presented is not guaranteed.  Readers are encouraged to independently verify all data using information from original sources. The Income Statements discussed in these blog posts have not been audited and may differ in material respects from those published by the subject company.  These differences are intended to facilitate analysis and cross-company comparisons. Complete financial statements with notes can usually be found in the 10-Q and 10-K filings companies submit to the Securities and Exchange Commission (SEC).

#qualcomm  #qcom  #gauges #gcfr  #gcfr2 #lookahead #nac_financialanalysis

BR: Look Ahead to December 2020 Quarterly Results

This "look-ahead" post discusses how I came up with an estimate for Broadridge Financial Services' earnings for fiscal 2021's second quarter, which ended on December 31, 2020, by predicting each element of its Income Statement, from top-line Revenue to bottom-line Earnings Per Share (EPS) and everything in between.

Once the company’s official results become available in February, I will compare the published Income Statement to the prediction and identify any surprises, positive or negative.  Examining these differences can identify what factors (e.g., profit margins, non-GAAP expenses, tax rates, share buybacks) are driving changes to a company's financial performance.

But, before getting into the details, let's take a step back and start with background information about Broadridge. 

Broadridge provides investor communications, securities processing and other financial services. Broadridge performs proxy voting services for more than half of all public companies and mutual funds globally, and in an average day it processes $8 trillion in fixed income and equity trades.  Broadridge was spun off from Automatic Data Processing in 2007.  In 2019, Broadridge completed four acquisitions: Rockall, a provider of securities-based lending and collateral management solutions; RPM, a provider of enterprise wealth management software solutions and services; retirement plan custody and trust assets from TD Ameritrade; and, Shadow Financial Systems, which had cryptocurrency and Exchange Traded Derivatives capabilities.  On December 31, 2019, Broadridge and IBM agreed that IBM will operate, manage and support the Broadridge Private Cloud for the next 10 years.

Shares of Broadridge now trade for about $149 each, giving the company a market value of $17 billion. These shares can be found in the Standard and Poors 500, New York Stock Exchange Composite, and Russell 1000 stock indices.

Broadridge recorded profits of $473 million on revenue of $5 billion during the last year. In the quarter that ended on September 30, 2020, Broadridge earned $2.15 per share (excluding certain items), which significantly beat the $0.63 Wall Street consensus forecast. 

Revenue in the September 2020 quarter totaled $1.4 billion, 12 percent more than last year's $1.2 billion. The Investor Communications business was responsible for 55 percent of overall revenue, and this unit's revenue grew by 7.2 percent compared to the year-earlier result. The Global Technology and Operations business contributed 22 percent of revenue, and this unit's revenue increased by 8.1 percent.

My starting point, if available, when estimating earnings is guidance provided by the company's management to financial analysts.  It's true that the company may downplay expectations somewhat to avoid disappointments, but the top managers ought to know better than anyone else how well their products and services are selling.  I also look for other information about the company in the news, and I take advantage of trends in the company's historical results.  While it makes my task a little more difficult, I also try to estimate earnings that conform to Generally Accepted Accounting Principles (GAAP).  Non-GAAP results, which most professionals focus on, are somewhat arbitrary and often exclude meaningful items.

Broadridge updated its guidance for fiscal year 2021, which ends next June, after the company last reported quarterly results.  The update (see the excerpts below) indicate that the company now expects revenues and earnings to be higher than it did when the fiscal year began.

Unfortunately for my purposes, Broadridge didn't provide any specific written guidance for the December quarter.  However, during a conference call, the company's management did voice the following statement shedding some light on expectations for the quarter.

We do expect second quarter earnings to be lower than in the first quarter and more in line with historical averages of 12% to 14% of our full year earnings. Embedded in that view are our expectations for event-driven revenues of approximately $40 million, a more normalized tax rate and the impact of the increased investment spend, I noted.

Broadridge expects its GAAP EPS in fiscal year 2021 to be 5 to 12 percent greater than the $3.95 per share it earned in fiscal year 2020.  The prediction range is, therefore, $4.15 to $4.42 per share.  As the company noted, about 13 percent of this annual EPS can be expected in the second quarter, so a reasonable EPS range for the quarter is $0.54 to $0.58.  

To come up with a revenue estimate for the December quarter, I confirmed that Broadridge normally records ~22 percent of fiscal year revenue in the second quarter.  If I assume revenue for the fiscal year will be 2.5 percent higher (the midpoint of the guidance range) than the previous year's $4.53 billion, the estimate for the latest quarter becomes:  0.22 * 1.025 * $4.53 billion = $1.02 billion.  

The GAAP operating income margin in fiscal 2020 was about 13.8 percent.  The company expects that to increase by 180 basis points, but margins in the December quarter are usually much lower than the yearly average.  If I assume an operating margin of 10 percent in the quarter, it would imply that the cost of goods sold + sales, general, and administrative expense would equal $1.02 billion * (1- 0.1) = $920 million.  In a typical quarter, the cost of goods sold is about 83 percent of operating expenses, or 0.83* $920 million = $764 million.  Sales, general, and administrative expenses would be $920 million - $764 million = $156 million.

Non-operating expenses can be variable, but an interest expense of $15 million per quarter is fairly typical.  

An income tax rate of 21 percent would yield net income of $67 million ($0.57 per share), which is consistent with the company's guidance.

The following Income Statement summarizes the estimates made as discussed above. 

This post is not investment advice, and the accuracy of the information, tables, charts, and any commentary presented is not guaranteed.  Readers are encouraged to independently verify all data using information from original sources. The Income Statements discussed in these blog posts have not been audited and may differ in material respects from those published by the subject company.  These differences are intended to facilitate analysis and cross-company comparisons. Complete financial statements with notes can usually be found in the 10-Q and 10-K filings companies submit to the Securities and Exchange Commission (SEC).

#broadridge  #br  #gauges #gcfr  #gcfr2 #lookahead #nac_financialanalysis

GOOG/GOOGL: Look Ahead to December 2020 Quarterly Results

This "look-ahead" post discusses how I came up with an estimate for Alphabet's earnings for fiscal 2020's fourth quarter, which ended on December 31, 2020, by predicting each element of its Income Statement, from top-line Revenue to bottom-line Earnings Per Share (EPS) and everything in between.

Once the company’s official results become available on February 2, I will compare the published Income Statement to the prediction and identify any surprises, positive or negative.  Examining these differences can identify what factors (e.g., profit margins, non-GAAP expenses, tax rates, share buybacks) are driving changes to a company's financial performance.

But, before getting into the details, let's take a step back and start with background information about Alphabet.

Alphabet was formed in 2015 as the holding company for Google and various smaller businesses known as "Other Bets."  Alphabet has three classes of common shares, with Class B shares, which are primarily owned by Google's founders, having much greater voting rights than the Class A (ticker GOOGL) shares.  Class C shares (ticker GOOG) have no voting rights.  

Google's products include Search, Maps, Gmail, Android, Chrome, Google Cloud, YouTube and (recent acquisition) Fitbit.  Even though Alphabet also controls businesses such as Calico, GV, Verily, Waymo, and X, Alphabet's revenues are almost entirely due Google's ability to deliver online advertising.  Google (and, therefore, Alphabet) has been benefitting as commerce moves on line, and the COVID pandemic has accelerated this trend.  But, Google's strength can also be a concern.  In October 2020, the U.S. filed a civil antitrust lawsuit claiming that Google has abused its market position in the search and search advertising markets.  This follows a decision by the European Union in June 2018 to fine Google 4.34 billion euro ($5 billion) for abusing the dominance of its Android mobile operating system. One year earlier, the EU fined Google €2.42 billion ($2.74 billion) for violating European competition law in the way shopping search results and ads were displayed.

Shares of Alphabet now trade for about $1728 each, giving the company a market value of $1.2 trillion. These shares can be found in the Standard and Poors 500, NASDAQ 100, and Russell 1000 stock indices.

Alphabet recorded profits of $36 billion on revenue of $172 billion during the last year. In the quarter that ended on 30 September 2020, Alphabet earned $16.40 per share, which matched the $16.40 Wall Street consensus forecast. See https://tinyurl.com/y5u7dq2l for Alphabet's most recent quarterly report.

Revenue in the September 2020 quarter totaled $46.2 billion, 14 percent more than last year's $40.5 billion. The Google Search business was responsible for 57 percent of overall revenue, and this unit's revenue grew by 6.5 percent compared to the year-earlier result. The YouTube Advertising business contributed 11 percent of revenue, and this unit's revenue increased by 32.4 percent. The Google Cloud unit supplied 7 percent of revenue, and the value rose by 44.8 percent.

My starting point, if available, when estimating earnings is guidance provided by the company's management to financial analysts.  It's true that the company may downplay expectations somewhat to avoid disappointments, but the top managers ought to know better than anyone else how well their products and services are selling.  I also look for other information about the company in the news, and I take advantage of trends in the company's historical results.  While it makes my task a little more difficult, I also try to estimate earnings that conform to Generally Accepted Accounting Principles (GAAP).  Non-GAAP results, which most professionals focus on, are somewhat arbitrary and often exclude meaningful items.

Alphabet described its expectations for the fourth quarter of 2020 in October after the company last reported quarterly results.  Here are some of the most salient statements:

Let me end with our outlook. Regarding revenues, in the third quarter, we benefited from a broad-based improvement in advertiser spend across all geographies and nearly all verticals. This is reflected in both Search results as well as the rebound in brand advertising spend on YouTube. While we’re pleased with our performance in the third quarter, there is obviously uncertainty in the external environment. In terms of Google Cloud, we’re pleased with the consistent strong revenue growth that you saw again this quarter, reflecting the extraordinary secular trend under way. And, with respect to Other Revenues, the primary driver of growth was Play, where revenue growth reflected elevated engagement during the pandemic on top of strong underlying growth. There are signs that user behavior is beginning to return to normalized levels. 

Moving on to profitability. We are pleased with the improvement in profitability versus the prior quarter, reflecting both the revenue performance versus Q2 as well as the tactical adjustments we made to slow down certain categories of spend in response to COVID. In particular, the deceleration in headcount growth this quarter reflects the actions we took at the outset of the pandemic to focus hiring on our highest priority areas like Google Cloud. Excluding the impact of closing the pending Fitbit acquisition, we expect a moderate further deceleration in the pace of headcount growth in the fourth quarter. 

We also saw the impact of steps we took to slow down some categories of marketing spend. In the third quarter, Sales and Marketing expenses declined year-on-year, primarily due to a planned slow down in ads & promo. We expect a more moderated year-on-year decline in Sales & Marketing in the fourth quarter as we increase spend sequentially to support product launches and the holiday season. 

Turning to Capex, once again this quarter, we had a year-on-year decline in investments primarily due to a reduced pace of real estate acquisitions which we implemented at the outset of the pandemic. Servers continued to be the largest driver of investment in the third quarter, followed by data centers. Our Capex outlook for the full year has not changed as we continue to expect a modest decrease in 2020 compared with last year.

(emphasis added)

My takeaways from this guidance are as follows:

• Maintaining the revenue growth rate for Advertising, which is the preponderance of sales, depends on how the economy holds up during the pandemic.  Cloud revenues will continue to grow, revenues from lesser sources may moderate
• Margins will improve, but by small amounts, due to less hiring
• Sales and marketing expenses will fall, but not by much.
• Capital expenditures will neither accelerate nor decelerate.

Revenues increased by 14 percent in the third quarter of 2020 relative to the year-earlier period.  Economic data for the fourth quarter isn't yet available, but data for October and November showed small declines in personal income and consumer spending.  I'm going to assume Alphabet's revenue growth slipped to 11 percent.

The gross margin was 54.3 percent in the third quarter of 2020 and 54.4 percent in the fourth quarter of 2019.  I decided to go with 54.5 percent for the latest quarter.

Research and development spending has been about $6.8 to $6.9 billion per quarter in 2020. The figure is normally somewhat higher in the fourth quarter, $7.4 billion seems like a reasonable estimate for the fourth quarter of 2020.

Sales, general, and administrative expenses have been about 17 percent of revenue, but often higher in the fourth quarter.  I've chosen 17.5 percent of revenue for my estimate.

Alphabet's income tax rate was about 16 percent the last two quarters, although it was quite variable in the preceding periods.

The resulting estimate for Net Income is $10.9 billion ($15.88 per share).

The following Income Statement summarizes the estimates made as discussed above. 

Please note that my organization of revenues, expenses, gains, and losses, which I use for all analyses, can and often does differ in material respects from company-used formats.  The standardization facilitates cross-company comparisons.

#alphabet  #google #googl #goog  #gauges #gcfr  #gcfr2 #lookahead #nac_financialanalysis