Microsoft and Apple were among a host of major corporations whose quarterly performances dragged on U.S. equity markets Wednesday.
Microsoft had to swallow an embarrassing $8.4 billion charge related to its less-than-successful smartphone ventures. The tech giant had previously announced it would write off about 80 percent of its Nokia phone business after failing to generate much buzz around its Windows Mobile smartphones.
Phone hardware revenue was down nearly 38 percent year over year in Microsoft’s most recent fiscal quarter, which ended June 30. The company ultimately posted $3.2 a billion net income loss, with total revenues down more than 5 percent year over year. Microsoft shares closed Wednesday down about 3.7 percent.
Apple, meanwhile, posted a largely positive quarter: The company’s net sales, net income, earnings per share and gross margins were all solidly above where they were last quarter.
And yet the company’s performance still managed to underwhelm investors enough to spark a sell-off, as analysts expected even greater gains. Apple stocks were down 5.2 percent in midday trading Wednesday and accounted for more than half of the Dow Jones industrial average’s 86-point drop in the middle of the day. Apple ended the day down 4.23 percent.
Earnings season is far from over, but a few major themes are starting to take shape that could make or break a company’s quarterly performance (and subsequent stock valuation). U.S. News breaks down the top three behind-the-scenes factors that are wreaking havoc on the most recent quarter’s earnings reports.
1. Strong Dollar
This is far from a new narrative, but the relative strength of the dollar and comparative weakness of international currencies has weighed heavily on the revenue streams of firms that do international business. This was abundantly clear in the first quarter when Pepsi, for example, saw its year-over-year revenue from its PepsiCo Europe segment drop 25 percent, thanks in large part to a euro that in March fell to a 12-year low against the dollar.
The dollar’s strength hasn’t abated very much, and has served as a headwind to firms conducting business abroad. Tupperware Brands on Wednesday reported second-quarter sales that were up 4 percent in local currencies but ultimately down 13 percent when converted to U.S. dollars. Emerging markets accounted for about two-thirds of Tupperware’s total sales, meaning the company’s dollar earnings were weighed down by South America (where sales were up 21 percent locally but down 25 percent when converted to dollars) and the Asia-Pacific region (where sales were up 1 percent locally but down 8 percent in dollars). Tupperware’s stocks were down about 8.3 percent when the markets closed Wednesday.
And Tupperware isn’t alone in its currency woes. United Technologies Corp. saw net sales drop 5 percent, net income plummet 7.7 percent and earnings per share shed about 6 percent in its most recent fiscal quarter, according to its earnings report released Tuesday. Currency valuations were considered to be a major factor.
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“Continued strength in the U.S. dollar has had a significant adverse impact on our results this year,” Gregory Hayes, president and chief executive officer of United Technologies, said in a statement.
Harley-Davidson, likewise, saw net income drop more than 15 percent, in large part due to what the company referred to as “currency-driven competitive pressures.”
“In the face of a tough competitive environment, driven mostly by currency and greater competitive activity, we are leveraging our many strengths and meeting the challenge head on,” Matt Levatich, president and chief executive officer of Harley-Davidson, said in a statement.
Pharmaceutical company Novartis, eBay and more than a dozen other firms also have struggled to perform against a relatively strong U.S. currency.
2. Rising Expenses
It’s said that one has to spend money to make money, but there’s inherently a limit to how much a company can spend and still turn a reasonable profit. Earnings season is far from over, but a handful of companies have already been plagued by rising expenses.
Microsoft’s whopping $8.4 billion write-off managed to smother any headline success the company would have produced in the last quarter. Excluding the massive payment, operating income would have risen to $6.4 billion, rather than clocking in at a loss of nearly $2.1 billion.
Goldman Sachs, likewise, saw its net income drop 49 percent to about $1.05 billion (from $2.04 billion in the second quarter of 2014) after incurring $1.45 billion in legal and regulatory expenses (compared with the $284 million in such fees it incurred only a year earlier).
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Noninterest expenses at Wells Fargo also weighed on the bank’s quarterly performance, although net income only ticked down to $5.72 billion, about $10 million shy of 2014’s second quarter. Such expenses were up 2.5 percent year over year, and the company’s efficiency ratio rose to 58.5 percent from 57.9 percent. That means it was costing Wells Fargo about $0.585 to earn a dollar in revenue.
On the other side of the fence, major banking and financial firms like JPMorgan Chase & Co., Citigroup and Bank of America saw positive second quarters thanks in part to their abilities to shave expenses (though the period ended before Citigroup will be refunding hundreds of millions of dollars to its customers for allegedly deceptive credit card practices).
3. Unrealistic Expectations
This was Apple’s major problem. Concerned investors cited weakening iPhone sales, even though the iPhone has never performed better during the months of April, May and June than it did in 2015.
“We had an amazing quarter, with iPhone revenue up 59 percent over last year, strong sales of Mac, all-time record revenue from services, driven by the App Store, and a great start for Apple Watch,” Tim Cook, Apple’s chief executive officer, said in a statement.
Revenue jumped 33 percent since last year, while net income climbed 38 percent. But you’d never know that by looking at Apple’s stock performance following its earnings announcement.
“This was an expectations problem, not a problem with the numbers themselves. The analysts got it wrong,” Chris Caso, a senior analyst at Susquehanna Financial Group, said on “Squawk Box” Wednesday. “You’re at the tail end of the iPhone 6 cycle, and I think since February when the stock peaked, the question has been, ‘Is this as good as it gets?'”
Apple isn’t expected to just beat market expectations – it’s expected to shatter them, which is a bit unfair considering analysts have relatively low expectations for most other companies reporting quarterly results.
Intel, Netflix, Halliburton and a host of other major companies reported quarterly results that weren’t nearly as positive as Apple’s, yet the iPhone maker’s stock dip was the most noticeable. Even Harley-Davidson and Microsoft, whose quarterly performances were largely forgettable, managed to surprise analysts who were expecting much worse.