It Is A Mistake To “Look Through” Q2 and 2020 Earnings
There is insight to be gleaned from recent earnings conference calls. We have highlighted a few from this past week (below). Many companies assume a deterioration in business from Q1 to Q2 and a potential recovery beginning in Q3. A majority of companies did not provide formal Q2 nor calendar 2020 guidance (access our list of 27 companies, 8-K filings and transcriptsHERE). Two key questions are: 1.) “How bad will Q2 results be?” and 2.) “Should the economy begin to recover in Q3, what will be the rate of recovery?” Two difficult questions to answer, especially the second. Different communities across the U.S. will re-open at different times and re-engage at different rates.
Management team commentary from earnings calls the week of April 20th. Tickers mentioned: AXP, IBKR, IBM, INFY, NDAQ, NFLX, SAP, T, VZ. (Related videos and poll at article’s end.)
American Express (tkr: AXP): “It’s important to note that the latest macroeconomic outlook today reflects an even more significant deterioration in U.S. GDP and unemployment than when we closed the books on the first quarter.”
AT&T (tkr: T): “It’s impossible to overstate the impact of COVID-19 on all of us. I expect it will have long-lasting implications for many things we used to take for granted like how we congregate, work, travel, and interact. The economic impact has been swift and there is no consensus on how long this downturn lasts. A lot hinges on when and how we open things back up, when do we have sufficient testing and protocols in place, so people feel comfortable returning to work or school or even going shopping. Bottom line, we have very little visibility into the broader economic situation, which makes it impractical to provide detailed financial guidance at this time.”
Interactive Brokers (tkr: IBKR): “This quarter’s high volatility led to more active trading strategies. Volatility as measured by the average VIX nearly doubled to 30.7 in the current quarter up from 16.7 in the first quarter last year. We are hiring again to keep up to the influx of new accounts and to strengthen client services and systems development.”
IBM (tkr: IBM): “However, in the last few weeks we faced a shift in client priorities, towards the preservation of capital. This impacted software disproportionately.”
Infosys (tkr: INFY): “We see near-term weakness across the board especially in the area of discretionary spending. Clients are focused on ensuring safety of their employees and maintaining business continuity while at the same time conserving cash. This is bound to impact near term performance as they re-prioritize and delay some projects.”
NASDAQ (tkr: NDAQ): “Our clients are dealing with the twin challenges of a surge in trading volumes and the logistical challenges of the health crisis with their staff working remotely. As a result we’re seeing clients take longer to make upgrades and new purchasing decisions. They are also extending implementation schedules and instituting temporary code freezes that will delay the timing of short-term change requests.”
Netflix (tkr: NFLX): “Some of the lockdown growth will turn out to be pull-forward from the multi-year organic growth trend, resulting in slower growth after the lockdown is lifted country-by-country. No one knows how long it will be until we can safely restart physical production in various countries, and, once we can, what international travel will be possible, and how negotiations for various resources (e.g., talent, stages, and post-production) will play out.”
SAP (tkr: SAP): “The revised outlook assumes the current COVID-19 induced challenging demand environment deteriorates through the second quarter before gradually improving in the third and fourth quarter as economies reopen and population lockdowns. As the spread of COVID-19 intensify, we saw a meaningful amount of new business postponed and purchase decisions put on hold for the time being, especially in our upfront licenses business.” (note: SAP co-CEO Jennifer Morgan will leave the company on April 30th 2020).
Verizon (tkr: VZ): “The company increased its bad debt reserve in first-quarter by $228 million based on the expected number of customers who will seek payment relief under the Keep Americans Connected pledge. As a result of COVID-19, Verizon closed nearly 70 percent of its company-operated retail locations and reduced in-store service hours to promote social distancing.”