IBM: Earnings Report for the Quarter Ending December 31, 2020

IBM reported after the market closed on January 21, 2021, it earned $1.51 per diluted share in the quarter that ended on December 31, 2020, down 63 percent from earnings of $4.11 in the same 3 months of the previous year. These figures are the earnings determined in accordance with U.S. Generally Accepted Accounting Principles (GAAP). 

Operating Earnings from Continuing Operations, a non-GAAP figure, fell 56 percent to $2.07 per share from $4.71 one year earlier, a decline not quite as steep as change than seen in the GAAP figures. The principal exclusions contributing to the $0.56 per share difference in the latest quarter between the GAAP and Non-GAAP earnings were: Acquisition-Related Adjustments [$0.40 per share], Retirement-Related Adjustments [$0.22 per share], and Other [$0.04 per share].  Non-GAAP earnings, by excluding unusual and non-cash items that could obscure the results of a business's principal, ongoing operations, are intended to be cleaner measures of corporate profits.

This post compares the quarterly Income Statement published by IBM to the estimates I made in a previous “Look Ahead” post.  My estimates were based on publicly available guidance provided by IBM's management to financial analysts, news reports, and trends in the company's historical results.  Unless otherwise mentioned, all reported values mentioned below are GAAP figures.

First, a little background about the company:  IBM was the first giant computer company, and it was once one of the largest companies in the world.  When hardware became a commodity product, IBM increased its focus on more-profitable information technology services for businesses.  Always a research powerhouse, the company subsequently developed cloud-computing and artificial intelligence services (e.g., "Deep Blue"), but IBM's annual revenue has been slowly declining for years. IBM started to recreate itself in a more radical way in 2019 by acquiring Red Hat, a leading open-source software firm, for $34 billion.  The next step came when IBM announced in October 2020 it would spin off its managed infrastructure services unit, into a separate company.  This business is currently part of the Global Technology Services division, and it brings in revenue of about $19 billion per year.  

Revenue in the December 2020 quarter totaled $20.4 billion, 6 percent less than last year's $21.8 billion. The Global Technology Services business was responsible for 32 percent of overall revenue, and this unit's revenue percent fell by 5.5 percent compared to the year-earlier result. The Cloud & Cognitive Software business contributed 34 percent of revenue, and this unit's revenue decreased by 4.5 percent. The Global Business Services unit supplied 20 percent of revenue, and this business's revenue fell by 2.7 percent.

I was expecting IBM to report revenue of $20.2 billion for the December 2020 quarter.  The actual amount surpassed my estimate by $167.0 million (0.8 percent).

The Cost of Revenue (also known as Cost of Goods Sold) was $9.8 billion in the latest quarter, which translates into a Gross Margin of 51.7 percent of revenue. Since it was higher than the 51.0 percent Gross Margin achieved in the year-earlier quarter, it signifies that IBM sold its products and services at more profitable prices relative to production costs. I was expecting the Gross Margin to be 48.5 percent in the December 2020 quarter, and IBM exceeded that prediction by 3.2 percent.

IBM spent $1.61 billion on Research and Development in the latest quarter, up from $1.60 billion one year ago. I had estimated that R&D expenses would be $1.62 billion.  R&D was 7.9 percent of Revenue.

Sales, General, and Administrative expenses totaled $7.2 billion in the December 2020 quarter, up from $5.4 billion one year ago.  SG&A expenses increased from 24.9 percent to 35.5 percent of quarterly revenue, and the big increase is due to a ~$2.0 billion charge for restructuring.  

The last operating expense line on the Income Statement is for all other operating income and expenses.  This line amounted to a $173.0 million gain in the latest quarter.  I had assumed the restructuring charge, originally expected to be $2.3 billion, would be listed here and not as part of SG&A.

Operating Income was $1.9 billion in the quarter, down 56.2 percent from the year-earlier period.  Operating Income exceeded my $0.4 billion estimate by $1.4 billion. The better-than-expected Gross Margin and the less-than-expected restructuring charge accounted for much of the difference between the actual result and my prediction.

Interest and other non-operating items summed to a net expense of $564 million.  My estimate was $525.0 million.

The effective income tax rate fell by 6.2 percent to 1.9 percent, which had a positive effect on net income.  I expected the tax rate to be 10.2 percent.

Net income in the quarter was $1.4 billion, $1.51 per share.  The figures for the year-earlier quarter were $3.7 billion, $4.11/share. My EPS estimate was ($0.10).

In summary, IBM greatly exceeded my prediction by increasing its gross margin, incurring a lower-than-expected restructuring expense, and (somehow) having an income tax rate close to zero.

The Cash Flow Statement for the quarter shows that IBM's operating activities generated $5.9 billion in cash during the last quarter, up 69.8 percent from $3.5 billion in the year-earlier period. The cash flow delta was, therefore, much better than the change in earnings. Notable uses for cash included $1.5 billion to pay dividends to shareholders, $299 million for corporate acquisitions, and $1.1 billion to acquire property, plant and capital equipment. 

Free cash flow over the last 12 months totaled $15.2 billion, or $16.86 per share using the latest share count. At the current market price per share of $118.60, this translates into a very attractive Free Cash Flow Yield of 14.2 percent.

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).

 #ibm  #gauges  #gcfr  #gcfr2 #QtrlyRpt   #nac_financialanalysis

INTC: Earnings Report for the December 2020 Quarter

Intel Corporation reported after the market closed on January 21, 2021 it earned $1.42 per diluted share in the quarter that ended on December 26, 2020, down 10 percent from earnings of $1.58 in the equivalent 13 weeks of the previous year. These figures are the earnings determined in accordance with U.S. Generally Accepted Accounting Principles (GAAP). 

Non-GAAP earnings were unchanged from one year earlier at $1.52 per share. Non-GAAP earnings, by excluding unusual and non-cash items that could obscure the results of a business's principal, ongoing operations, are intended to be cleaner measures of corporate profits. However, caution is warranted when analyzing these figures because management has considerable leeway in choosing which GAAP-required items to exclude.

This post compares the quarterly Income Statement published by Intel to the predictions I made in the “Look Ahead” post I shared earlier.  

First a little background about the company:  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 required less electrical power, a key consideration.  Intel has also lost market share because of delays manufacturing new generations of chips.  Apple started using its own proprietary chips in its devices, replacing those from Intel.  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 this CEO change, Intel had taken some significant strategic actions; e.g., divesting most of its  smartphone modem business and making a deal to sell its NAND memory and storage business to SK hynix for $9 billion.

Revenue in the December 2020 quarter totaled $20.0 billion, 1 percent less than last year's $20.2 billion.  Intel's guidance for the quarter, issued last October, was that revenue would be about $17.4 billion.  I used this latter figure in my prediction.  Sales were obviously much better than anticipated.

The Client Computing Group business was responsible for 55 percent of overall revenue, and this unit's revenue grew by 9.3 percent compared to the year-earlier result. The Data Center Group business contributed 30 percent of revenue, and this unit's revenue decreased by 15.6 percent. The Non-Volatile Memory Solutions Group unit supplied 6 percent of revenue, and this business's revenue fell by 0.7 percent.

The Gross Margin weakened from 58.8 percent of revenue to 56.8 percent, a sign that Intel sold its output and services at less profitable prices relative to production costs.  Although weaker, profitability was better than I had anticipated, as I thought the Gross Margin would be 54 percent of revenue.

Research and Development expenses rose to $3.7 billion from $3.4 billion.  I was expecting $3.3 billion.

Sales, General, and Administrative expenses increased from $1.54 to $1.76 billion, or from 7.6 percent to 8.8 percent of quarterly revenue.  I expected SG&A to be slightly higher, 9.0 percent of revenue.  The company spent more per dollar of sales on other operational costs, such as marketing. 

The last operating expense line on the Income Statement is for restructuring and other"special operating items.  This line was only $52 million in the last quarter, quite a bit less than the $260 million I had been expecting because of all the changes underway at Intel.  

Operating Income was $5.9 billion in the quarter, down 13 percent from the year-earlier period, but much better than I had predicted.

As for non-operating items, Intel benefitted handsomely from the stock market's surge as it recorded a large $1.7 billion gain on equity investments.  Interest income was lower. 

The effective income tax rate was surprisingly high at 21.8 percent.  

Net income of $5.9 billion was 15 percent lower than in the December 2019 quarter.  Earnings per share of $1.42 were only down 10 percent, as buybacks reduced the number of shares outstanding.  The guidance for the quarter was for an EPS of $1.02 per share.  Nevertheless, because of much higher revenue, better profitability and the large gain on equity investments, Intel's earnings were dramatically better than forecast.  

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.

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

KMI: Earnings Report for the Quarter Ending December 31, 2020

Kinder Morgan, Inc., reported after the market closed on January 20, 2021 it earned $0.27 per diluted share in the quarter that ended on December 31, 2020, no change from earnings of $0.27 in the same 3 months of the previous year. These figures are the earnings determined in accordance with U.S. Generally Accepted Accounting Principles (GAAP). 

Adjusted Earnings, a non-GAAP figure, did a little better, rising 4 percent to $0.27 per share from $0.26 one year earlier. 

This post compares the quarterly Income Statement published by KMI to the predictions I made in the “Look Ahead” post I shared earlier. 

First a little background about the company: Kinder Morgan owns and operates a sprawling network of pipelines and associated terminals for transporting oil, gas, carbon-dioxide, and other products.  Already a large owner of pipelines, Kinder Morgan became gigantic when it acquired El Paso, Corp., in 2012.  Shortly thereafter, Kinder Morgan executed a series of transactions, totalling $76 billion, that converted general and limited partnership interests of various Kinder Morgan and El Paso entities into one publicly traded company. About 40 percent of the natural gas consumed in the U.S. is now carried by Kinder Morgan pipelines.  More recently, Kinder Morgan (and most other other energy firms) experienced declining profits and cash flows when actions taken worldwide to combat the COVID-19 pandemic reduced overall demand for energy products.  Upstream producers that depend on high prices were hurt the most, but midstream firms such as Kinder Morgan also suffered.  The company incurred impairment charges totaling $1.6 billion in 2020 when it recognized formally that lower energy prices had lowered the value of its assets.

Revenue in the December 2020 quarter totaled $3.1 billion, 7 percent less than last year's $3.4 billion.  I had predicted Revenue of $3.2 billion, and the actual figure missed this by 3.2 percent.

The Gross Margin weakened from 56.6 percent of revenue to 55.3 percent, a sign that Kinder Morgan sold its output and services at less profitable prices relative to production costs. I had assumed the Gross Margin would be 57.0 percent, and the actual margin was less profitable.

Sales, General, and Administrative expenses rose from $236 million in the year-earlier quarter to $270 million.  These expenses increased from 7.0 percent to 8.7 percent of quarterly revenue, which shows the company spent more per dollar of sales on other operational costs, such as marketing.  I had expected SG&A to be 7.4 percent of revenue, a lower figure than the actual percentage.

Operating Income sank from $1.9 billion (boosted by a big gain on a divestiture) to $980 million.  My estimate of $937 million was in the right ballpark.

Interest and other non-operating items totaled a net expense of $180 million, much better that last year’s $850 million expense because of higher earnings on equity investments.  I had predicted a $230 million non-operating expense.

The effective income tax rate fell sharply from 42 percent to 22 percent, which had a positive, but expected, effect on Net Income.

Net Income attributable to KMI, at $607 million, was almost the same as in the year-earlier quarter.  It beat my estimate of $537 million by 13 percent.   EPS, as mentioned above, was steady at $0.27, and exceeded by estimate by $0.03.

In summary, Kinder Morgan’s revenue and operating margins decreased in the latest quarter, when compared to the year-ear period.  But, non-operating income increased sharply and the income tax rate was down.   Somehow, everything balanced out and the company’s earning per share was exactly the same as last year, and 13 percent more than I expected.

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.

 #kindermorgan  #kmi  #gauges #gcfr  #gcfr2 #lookahead #nac_financialanalysis

P&G: Earnings Report for the Quarter Ending December 31, 2020

Procter and Gamble (P&G) reported before the market opened on January 20, 2021, it earned $1.47 per diluted share in the quarter that ended on December 31, 2020, up 4 percent from earnings of $1.41 in the same 3 months of the previous year. These figures are the earnings determined in accordance with U.S. Generally Accepted Accounting Principles (GAAP). 

Core earnings, a non-GAAP figure, rose 15 percent to $1.64 per share from $1.42 one year earlier, a much better change than seen in the GAAP figures. Core earnings, by excluding unusual and non-cash items that could obscure the results of a business's principal, ongoing operations, are intended to be cleaner measures of corporate profits. However, caution is warranted when analyzing these figures because management has considerable leeway in choosing which GAAP-required items to exclude.

This post compares the quarterly GAAP Income Statement published by P&G to the predictions I made in the “Look Ahead” post I shared earlier.   

First a little background about the company:  P&G, which owns brands familiar to shoppers around the world, is a long-time giant of the consumer products industry. COVID-19 increased consumer and business demand for cleaning products and this has boosted P&G's sales, as did the greater amount of time people are spending at home.  Note that P&G acquired in November 2018 the over-the-counter (OTC) consumer healthcare business of Germany's Merck for $3.7 billion in cash.

Revenue in the December 2020 quarter totaled $19.7 billion, 8 percent more than last year's $18.2 billion.   I had predicted Revenue of $18.8 billion, and the actual figure beat this by 5.1 percent.

The Fabric and Home Care business was responsible for 33 percent of overall revenue, and this unit's revenue grew by 12.0 percent compared to the year-earlier result. The Baby, Feminine and Family Care business contributed 25 percent of revenue, and this unit's revenue increased by 6.0 percent. The Beauty unit supplied 19 percent of revenue, and this business's revenue rose by 6.0 percent.

The Gross Margin strengthened from 51.4 percent of revenue to 53.1 percent, a sign that P&G sold its output and services at more profitable prices relative to production costs.  I had assumed the Gross Margin would be 51.0 percent, and the actual margin was much more profitable.

Sales, General, and Administrative expenses rose from $4.9 billion in the year-earlier quarter to $5.1 billion, but SG&A decreased from 26.8 percent to 25.9 percent of quarterly revenue.  This shows the company spent less per dollar of sales on other operational costs, such as marketing. I had expected SG&A to be 28 percent of revenue, a higher figure than the actual percentage.

Interest and other non-operating items totaled a net expense of $500 million.  I had predicted $425 million.  The non-operating  figure was pushed up by a one-time charge for early repayment of long-term debt, which was expected.  I had predicted $425 million.  

The effective income tax rate rose by 2.9 percent to 20.3 percent, which had a negative effect on net income.  The rate was higher than the 18.5 percent I had expected.  

Net Income attributable to P&G increased 3.7 percent to $3.85 billion, and it beat my estimate by 22 percent.  EPS, as mentioned above, grew 4.3 percent to $1.47 per share, handily beating my $1.20 estimate.

In summary, P&G’s revenue and operating margins increased by healthy amounts in the latest quarter, when compared to the year-ear period.  Negative factors included the one-time debt extinguishment charge and a higher tax rate.  All in all, though, it was a good quarter for P&G, and much better than I had predicted.

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.

#p&g  #pg  #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

FB: Look Ahead to December 2020 Quarterly Results

This "look-ahead" post discusses how I came up with an estimate for Facebook'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 January 27, 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 Facebook.

Facebook operates its eponymous and widely used social network, plus Instagram, WhatsApp, and Messenger. Advertising is responsible for the bulk of the company's revenue.  COVID-19 accelerated a shift from offline to online commerce, and this has increased demand for online advertising.  Facebook has been under fire for some time about how it protects (or doesn't) the privacy of its users, how it manages (or doesn't) inappropriate content, and whether it has abused its dominant position in the market.  In December 2020, the Federal Trade Commission sued Facebook, claiming the company's anticompetitive conduct helped it maintain a monopoly. 

Shares of Facebook now trade for about $251 each, giving the company a market value of $727 billion. These shares can be found in the Standard and Poors 500, Standard and Poors 100, NASDAQ 100, and Russell 1000 stock indices.

Facebook recorded profits of $25 billion on revenue of $79 billion during the last year. In the quarter that ended on 30 September 2020, Facebook earned $2.71 per share, which significantly beat the $1.90 Wall Street consensus forecast. See https://tinyurl.com/yyzvclj2 for Facebook's most recent quarterly report.

Revenue in the September 2020 quarter totaled $21.5 billion, 22 percent more than last year's $17.7 billion. The Advertising business was responsible for 99 percent of overall revenue, and this unit's revenue grew by 22.1 percent compared to the year-earlier result. The Payments/Fees business contributed 1 percent of revenue, and this unit's revenue decreased by 7.4 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.

Facebook 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 comments:

In the fourth quarter of 2020, we expect this trend to continue and that the number of DAUs and MAUs in the US & Canada will be flat or slightly down compared to the third quarter of 2020.

We expect our fourth quarter 2020 year-over-year ad revenue growth rate to be higher than our reported third quarter 2020 rate, driven by continued strong advertiser demand during the holiday season. Additionally, Oculus Quest 2 orders have been strong which should benefit Other Revenue.

We expect 2020 total expenses to be in the range of $53-54 billion, narrowed from our prior range of $52-55 billion.

We expect 2020 capital expenditures to be approximately $16 billion, unchanged from our prior outlook.

We expect our fourth quarter 2020 effective tax rate to be in the mid-teens and our full-year 2021 tax rate to be in the high-teens.

With respect to revenue in the fourth quarter, the key statement above is "fourth quarter 2020 year-over-year ad revenue growth rate to be higher than our reported third quarter 2020 rate."  Facebook's revenue in the third quarter of 2020 was 21.6 percent higher than in the third quarter of 2019.  Given this, I'm going to assume, somewhat arbitrarily, revenue in the fourth quarter will grow by 24 percent.  Since Facebook's revenue was $21.1 billion in the fourth quarter of 2019, my estimate for the latest quarter becomes $26.1 billion.

The guidance indicates that Facebook's total expenses for the entirety of 2020 are expected to be between $53 and $54 billion.  The figure presumably covers cost of sales, research and development, and sales, general, and administrative costs.  During the first nine months of 2020, these expenses totaled $38 billion.  So, the guidance is really indicating that the expenses are expected to be $15 to $16 billion in the fourth quarter.  I used historical ratios to split the $16 billion expense figure across cost of sales, R&D, and SG&A.

The final critical figure is the income tax rate.  The company's guidance suggests "mid-teens," and I have used 16 percent.

The resulting estimate for Net Income is $8.67 billion ($3.00 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.

#facebook  #fb  #gauges #gcfr  #gcfr2 #lookahead #nac_financialanalysis

INTC: Will Exceed Prior Guidance

On January 13, 2021, Intel announced that it had chosen Pat Gelsinger to replace Bob Swan as Chief Executive Officer, effective February 15.

The press release (https://tinyurl.com/y55lnk8z) also stated that:

Intel expects its fourth-quarter 2020 revenue and EPS to exceed its prior guidance provided on October 22, 2020. In addition, the company has made strong progress on its 7nm process technology and plans on providing an update when it reports its full fourth-quarter and full-year 2020 results as previously scheduled on January 21, 2021.

The guidance provided by the company last October was for revenue of about $17.4 billion and EPS of $1.02 on a GAAP basis in the fourth quarter of 2020.  Both figures are now likely to be surpassed when Intel reports next week how well the company actually performed.  

See https://www.gcfr2.com/2020/12/intc-look-ahead-to-december-2020.html for my forecast for Intel's fourth-quarter Income Statement, which built on the figures in the initial guidance.  Since Intel gave no hint about the magnitude of the increased revenue and earnings, I am not updating the forecast.