Microsoft, Intel Sales Saved by the Cloud Amid Economic Concerns

CFOs may cut spending as they prepare for a possible recession, but a reduction in companies' cloud usage is unlikely.

Bloomberg

January 23, 2019

4 Min Read
Peter DeSantis, AWS VP of global infrastructure, speaking at AWS re:Invent 2018 in Las Vegas
Peter DeSantis, AWS VP of global infrastructure, speaking at AWS re:Invent 2018 in Las VegasAmazon Web Services

Nico Grant, Ian King and Dina Bass (Bloomberg) -- The fortunes of Intel Corp., Microsoft Corp. and other big sellers of technology for business were buoyed by the cloud last quarter.

Industry earnings begin Tuesday when IBM releases results after the bell and multiple analysts expect corporate spending on information technology to rise slower in 2019 than in the past several years. Software companies and those tied to the global cloud-computing push are poised to grab the biggest slice of that spending.

Results from Intel, Microsoft and Texas Instruments Inc. will follow International Business Machines Corp. over the next two weeks, providing a window into corporate America’s sentiments amid slower economic expansion, U.S.-China trade tensions and a partial shutdown of the U.S. government that’s depriving investors of some of the usual economic indicators and damping business activity.

Cloud demand “should prove durable even in a slowing macro environment, supporting growth for well-positioned software vendors,’’ Morgan Stanley analyst Keith Weiss wrote in a note.

Gartner Inc. estimates that global IT spending will increase 3.2 percent in 2019, with an 8.3 percent gain for business software. Investors are pinning their hopes on the continuing investment by companies such as Microsoft and Amazon.com Inc. in giant data centers built to provide growing demand for online mobile services and from companies looking to outsource their computing needs.

Related:Cloud Giants Continue Pouring Billions Into Data Centers

Intel, which supplies the companies with server chip microprocessors, generated almost $17 billion in revenue in the first nine months of 2018 at its data-center unit. Sales increased 26 percent in the third quarter from a year earlier. When Intel reports earnings Thursday, analysts estimate the chipmaker’s quarterly revenue will increase 12 percent from a year earlier.

Microsoft, the second-leading public-cloud provider behind Amazon, is estimated to see a revenue jump of 12 percent year over year when it releases results Jan. 30.

Hardware makers whose products furnish traditional corporate data centers and those relying on personal computers and smartphones will have a tougher slog. Morgan Stanley downgraded hardware companies ahead of earnings season, casting a pall on reports from companies such as Hewlett Packard Enterprise Co. and NetApp Inc., which sell servers and storage hardware.

“Hardware spending plans down-ticked more than any other technology category and across U.S. and European’’ among chief information officers, Katy Huberty, an analyst at Morgan Stanley, wrote in a note. “Growth expectations are back to recent lows’’ as companies continue the move away from their own data servers to public-cloud centers.

IBM is expected to post falling revenue in the quarter ended in December compared with a year earlier. While it has more business tied to the cloud, which may improve the company’s potential for growth, its legacy hardware continues to hamper overall prospects, Arvind Ramnani, an analyst at Keybanc Capital Markets, wrote in a note.

Texas Instruments is scheduled to report Wednesday and arguably has the broadest reach because it supplies customers that span makers of space hardware to home electronics. The company has said it’s experiencing a slowing of orders across all of its end markets.

“TI will give us an excellent window into the dynamics of the auto and industrial space,’’ said Daniel Morgan, a fund manager at Synovus Trust Company. “Demand for chips used in the cloud area will do better than those drowned in the muck of the PC and smartphone space.’’

After Apple Inc. told investors on Jan. 2 that sales in the holiday quarter would fall short of earlier targets on weaker demand for the iPhone in China, the outlook for the already sluggish smartphone market worsened. In the fourth quarter, the PC market also resumed a slide that began in 2011 as shipments dropped about 4 percent.

The economic outlook is raising concerns about a recession among chief financial officers, who may look to pare spending, said John-David Lovelock, a Gartner analyst. Still, those trims would likely come in discretionary areas that already are declining, such as printers, PCs, tablets and phones, he said.

In that circumstance, spending on cloud services and computing wouldn’t be reduced much, Lovelock said. It’s growing rapidly -- set to pass spending on storage and servers in the U.S. this year -- and it’s much harder to shut off. Cloud isn’t like a piece of software or a server that companies own and can use for as long as they like. If they stop paying for cloud, the service gets shut off, and increasingly these products power critical parts of customers’ businesses.

“Information technology has changed,” Lovelock said. “IT has gone from supporting the business to being the business.”

The shutdown also may lead to more cautious outlooks for those that do a lot of work with the public sector, such as Microsoft, VMware Inc., Symantec Corp. and Citrix Systems Inc.

“We believe management teams will err on the side of caution and factor in most government deals will slip from 1Q into 2Q/3Q given the shutdown in the Beltway,’’ Daniel Ives, an analyst at Wedbush, wrote in a note.

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