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Google And Microsoft Fall Short Of High Expectations, And AMD Gets Chinese Backing

This Seeking Alpha Eye on Tech newsletter looks at Google and Microsoft's calendar Q1 reports, as well as AMD's Q1 report and Chinese JV/licensing deal.

Also covered: SecureWorks' IPO pricing, Mellanox's post-earnings plunge, Uber's class-action settlement, and a Facebook news feed algorithm change.

Commentary and reports regarding online ad growth, SaaS software growth, the unicorn funding environment, and broadband data caps are highlighted.

Welcome to the April 22nd edition of Seeking Alpha's Eye on Tech newsletter.

Eye on Tech Coverage

  • Ericsson (NASDAQ:ERIC) missed Q1 estimates, thanks in large part to weak mobile carrier capex in Europe and emerging markets.

  • The numbers follow an earnings warning from Juniper (NYSE:JNPR), and a sales miss and soft guidance from Ciena (CEIN).

  • The results show the need for Ericsson to grow its exposure to cloud infrastructure deployments, as traditional carrier clients continue seeing intense revenue pressures.

  • An SSD developed by Intel (NASDAQ:INTC) and using Intel and Micron's (NASDAQ:MU) 3D XPoint next-gen memory easily beat a conventional SSD using NAND flash memory in a performance test.

  • 3D XPoint drives could replace traditional SSDs in many performance-intensive server/cloud applications, and also act as a DRAM alternative for in-memory databases.

  • The first 3D XPoint drives are expected this year, but sales aren't expected to ramp until 2017.

Noteworthy Tech News

Google sells off after Q1 miss; forex and TAC growth weigh - Alphabet/Google's (GOOG, GOOGL) Q1 results were just mildly disappointing relative to analyst estimates, rather than disastrous. But the stock went into earnings up nearly 40% from where it traded a year ago, and just 4% below its early-February highs (hit after the Q4 report). There wasn't much margin for error.

A larger-than-expected forex impact on sales growth - it led growth to be at 17% Y/Y vs. 23% - took a toll. For comparison, Microsoft (NASDAQ:MSFT) and IBM (NYSE:IBM) each saw just 300 bps forex hits in calendar Q1. Traffic acquisition cost ("TAC") growth also weighed - though TAC fell to 21% of ad revenue from 22% a year ago, that was only due to a mix shift in revenue towards Google sites (8% TAC) from network sites (70% TAC). On their own, both Google sites TAC and network sites TAC grew as a % of revenue.

When asked about TAC growth on the earnings call, CFO Ruth Porat said mobile ad growth is lifting Google sites TAC - the company is believed to make steep search-related TAC payments to Apple, and lesser payments to Android OEMs and carrier partners - and that adoption of programmatic (automated) ad-buying platforms is raising network sites TAC. Porat: "The obvious result is more revenue and gross margin dollars, but at a lower margin." If the EU's antitrust suit against Google prevents the company from requiring its apps/services be bundled with its version of Android, TAC could grow significantly.

Some Q1 positives: 1) Paid clicks rose 29% Y/Y, and clicks on Google sites 38%, with the help of strong YouTube and mobile search ad growth. This was partly offset by a 12% drop in ad prices (cost per click). 2) Free cash flow rose 37% to $5.2B, thanks partly to a 17% drop in capex to $2.4B. It probably won't be long before capex growth turns positive again, but there's clearly more spending discipline here under Porat.

Some interesting earnings call remarks from CEO Sundar Pichai: 1) He argued bringing Google's AI/machine learning APIs - the product of massive AI investments over the last several years - "is going to be a huge source of differentiation" for its cloud platform, which is now pulling out all the stops to gain ground against Amazon/Microsoft. 2) Though YouTube's content investments for the YouTube Red subscription service are currently focused on original content, Pichai says Google "will keep an open mind" about other material such as films and movies. Netflix (NASDAQ:NFLX) can't be happy to hear that.

Meanwhile, Porat says Google is looking to "rationalize" its investments in areas where it has "had multiple teams developing different approaches to a similar technology." That's being taken as a sign that Google will pare its spending in some parts of its...