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This Week in Earnings – Q4’23

The Sector Beat: Technology

15 min. read

In today’s thought leadership, we cover:

Key Events

Labor

  • In the week ending Feb. 3rd, seasonally adjusted initial jobless claims decreased 9,000 to 218,000 while the 4-week moving average increased 3,750 to 212,250, pointing to underlying labor market strength despite highly publicized layoffs in the technology sector (Source: Labor Department)

Services

  • The Institute for Supply Management’s services-activity index rose to 53.4 in January, up from 50.5 in December. Economists had expected the index to increase less steeply to 52.0, though any reading above 50 indicates expansion. (Source: WSJ)

Interest Rates

  • In a rare interview with CBS 60 Minutes Federal Reserve chair Jerome Powell reiterated a March rate cut is unlikely as officials look for more economic data to confirm inflation is headed down to 2%. (Source: Forbes)

Red Sea

  • Claire Lombardelli, chief economist at the OECD said on Monday that a sustained increase in inflation as a result of the latest crisis is a risk, but not the group’s base case. “It’s something we’re watching closely… we have seen an increase in shipping prices. If that were to continue for an extended period, then that would feed through into consumer price inflation. But at the moment, we don’t anticipate that to be the case.” (Source: CNBC)

China

  • In January, China’s consumer price index dropped 0.8% compared to the previous year, which was higher than economists’ anticipated decline of 0.5%. This marks the most rapid decrease since the global financial crisis, indicating ongoing deflationary pressure. Consequently, there’s increased pressure on the government to enhance support for the struggling economic recovery. (Source: Bloomberg)

Earnings Snap

66% of the S&P 500 has reported earnings to date

Q4'23 Revenue Performance

  • 64% have reported a positive revenue surprise, below the 1-year average (67%) and the 5-year average (68%)
  • Blended revenue growth (combines actual reported results for companies and estimated results for companies yet to report) is 3.4%
  • Companies are reporting revenue 1.2% above consensus estimates, below the 1-year average (+1.6%) and the 5-year average (+2.0%)
Chart: S&P 500 Q4'23 Blended (Reported & Estimated) Revenue Growth YoY
Source: Corbin Advisors

Q4’23 EPS Performance

  • 81% have reported a positive EPS surprise, above the 1-year average (77%) and the 5-year average (77%)
  • Blended earnings growth (combines actual reported results for companies and estimated results for companies yet to report) is 9.0%
  • Companies are reporting earnings 6.8% above consensus estimates, above the 1-year average (+5.7%) but below the 5-year average (+8.5%)
Chart: S&P 500 Q4'23 Blended (Reported & Estimated) Earnings Growth YoY
Source: Corbin Advisors

The Sector Beat: Technology

Chart: Indexed Performance of S&P 500 Technology, 1-Yr
Source: FactSet

Guidance Trends

We analyzed annual revenue and EPS guidance provided by calendar-year U.S. Technology companies with market caps greater than $1B that have reported to date.1 

For comparison purposes, we provide an “All Company Benchmark”, which tracks in real-time2 a basket of companies larger than $1B in market cap across all sectors that have reported to date.

Chart: Table - Industry chart
Source: Corbin Advisors

Full Year 2024 Guidance Trends

Revenue

  • More companies Narrowed the range, 43%, relative to last year
  • 85% of midpoints are above 2023 actuals
Chart: Full Year 2024 Revenue Guidance vs 2023
Source: Corbin Advisors

EPS

  • More companies Widened the range, 36%, relative to last year
  • Nearly all midpoints, 94%, are above 2023 actuals
Chart: Full Year 2024 EPS Guidance vs 2023
Source: Corbin Advisors

Earnings Call Analysis

We analyzed the earnings calls for this group and the broader Technology sector universe to identify key themes.

Visual Representation of Earnings Commentary

Visual Representation of Earnings Commentary

Technology continues to dominate headlines and for good reason: the sector is experiencing somewhat of a renaissance. Developments in AI are hitting the market at an unprecedented cadence, with those companies most able to benefit from the AI revolution in the near term seeing actual and expected earnings rise along with stock multiples. Meanwhile, companies across sectors are seeking and promoting “tech enablement” — defined as the strategic integration and utilization of technology to enhance business processes, increase efficiency, and foster innovation. In fact, second only to Government Policy, industrial investors and analysts highlighted Robotics and Automation as the most compelling Industrial theme according to our latest Inside The Buy-Side® Industrial Sentiment Survey® published on January 18.

While tangible improvements are not obvious among the entire sector, the tech-heavy NASDAQ composite has gained 33% over the past year versus +21% and +14% for the S&P 500 and Dow 30, respectively, with relative outperformance carrying through year-to-date.3  Not to mention, the Apple Vision Pro™ release last week sent imaginations soaring.

Apple-Vision-Pro-app-experiences-multitasking
Apple-Vision-Pro-app-experiences-Numerics
Apple-WWCD23-Vision-Pro-FaceTime-230605
Apple-WWCD23-Vision-Pro-spatial-video-230605
Apple-WWCD23-Vision-Pro-with-battery-230605

Source: Apple; Apple and Apple Vision Pro™ are trademarks of Apple Inc., registered in the U.S. and other countries and regions.

Notably, we see a bifurcation within Technology between hardware and software providers. Hardware companies, particularly those in the Semiconductor industry, are weathering the effects of inventory destocking and normalization post the supply chain-induced pandemic spending spree, further compounded by headwinds in certain sub-sectors, such as automotive. For this group, conditions are expected to soften over the next quarter with relative improvement anticipated in the second half of 2024 and into 2025. On the other hand, many software and service providers continue to experience burgeoning interest from companies, Technology and otherwise, seeking efficiency improvements, AI integration, security enhancements, and digital solutions.

As such, executives across much of the sector are doubling down on the AI arms race and shifting resources and focus on R&D and productivity investments, including increasing automation within their own workforces. Tech companies large and small are reprioritizing efforts toward this megatrend and, as a result, we have seen a bevy of layoff announcements coming from this space as they “rightsize” some of the fervid workforce expansion undertaken during the pandemic. With only one full month of 2024 under our belts, nearly 34,000 employees have been laid off across 140+ companies4. As Mark Zuckerberg, CEO of Meta explicitly said last week, shifts in organizational scale were made “so we can invest in these long-term, ambitious visions around AI.”

The Big So What™ logo

Despite near-term headwinds, the Technology sector continues to be among the most favored of all, reigning as the top bullish bet for four consecutive quarters according to our Q4’23 Inside The Buy-Side® Earnings Primer® published on January 11. And, while much has already been said about the hype behind AI and its influence on the sector, Q4 earnings was clearly a positive litmus test for the continuation of this theme, and guidance midpoints reflect overall growth in 2024.

"I was worried about you all not asking an AI question until well into the call. Just checking you're all okay out there."

Mike Cannon-Brookes
Co-Founder and Co-CEO, Atlassian
($56.6B, Software - Application)
Chart: Inside The Buy-Side® Investor Sentiment: Technology Sector
Source: Corbin Advisors

Key Earnings Call Themes

Industry Dynamics Split the Technology Sector in Two; Hardware Companies Expect an Inventory Digestion Hangover Through at Least the First Half of 2024, while Software is Anticipated to Pick Up Steam

  • ON Semiconductor ($2B, Semiconductors): “In the near-term, based on our current outlook and early LTSA signals, we expect continued softness across all end markets through a period of inventory digestion and slowing end demand. The bottom line is that we will weather 2024 with substantially better financial performance than in prior downturns.”
  • Viavi Solutions ($2.0B, Communication Equipment):“Looking ahead to calendar 2024, we expect telecom service provider spend to continue to be soft, with the notable exception of the North American cable operators. That said, our strategy in the past six years to diversify outside the service providers into lab and production and aerospace and defense makes it easier to ride out the telecom cycle downturn.”
  • Littelfuse ($5.9B, Electronic Components): “We continue to see inventory destocking across our electronics and commercial vehicle distribution channels in Q4. We are also seeing a subset of OEM customers continue to work down inventory levels. We expect inventory destocking well into the new year, but as inventory levels stabilize, we expect to return to normalized order rates during 2024.”
  • DXC Technology ($0B, Information Technology Services):“Some of the near-term project work will slow down a little because of global economic uncertainty. However, we’re very well positioned in this next wave.”
  • Fortinet ($52.9B, Software – Infrastructure): “The YoY product revenue comparisons in the first half of 2024 will be the most challenged. While we expect service revenues to grow sequentially in the LSDs in Q1 and to grow sequentially at LSD to MSD for the remainder of 2024, we expect product revenue growth will continue to be impacted by project and product digestion in 2024, and we believe the selling environment should improve in the second half of 2024 and into 2025.”
  • CDW ($32.3B, Information Technology Services): “The uncertain market conditions we operated under 2023 have persisted into early 2024, and customer sentiment remains cautious and prudent. And while indicators suggest a compelling need to address workload in data growth, rising security threats and eventual client device obsolescence, our current expectations for a slow start to the year for IT spending and full year growth in the LSD range.”
  • Microsoft ($1T, Software – Infrastructure): “We have moved from talking about AI to applying AI at scale. By infusing AI across every layer of our tech stack, we are winning new customers and helping drive new benefits and productivity gains. Growth will be driven by our Azure consumption business, with continued strong contribution from AI. [However], Windows OEM revenue growth should be relatively flat as PC market unit volumes continue at pre-pandemic levels. Hardware revenue will decline YoY.”
  • Palantir ($51.7B, Software – Infrastructure): “On the strength of our work on the ground and our software that actually works, we expect reacceleration of our US government business in 2024. Conventional wisdom is that government acquisitions are slow and then you need to invest in the programs that the government is buying in a 2- to 3-year acquisition cycle. As the US confronts conflict in three theaters and as all services seek rapid capabilities to meet those moments, we see substantial opportunity across our departments.”
  • Commvault Systems ($4.1B, Software – Infrastructure): “Our improved fiscal year 2024 total revenue outlook reflects the seasonally-stronger subscription software trends that we usually experience in the second half of the fiscal year combined with the ongoing momentum of our SaaS offerings.”

Despite “Near-term Headwinds”, Executives Tout Long-term Secular Growth Tied to Tech Enablement

  • Microchip Technology ($45.5B, Semiconductors): “Our products and technologies are enabling innovation in many new fields… the innovation machine is strong. And the inventory correction will pass and go and ultimately, the long-term growth of the business, will come from how this innovation plays out and how the overall role and content that semiconductors will play in that innovation being delivered on end products.”
  • Roper Technologies ($58.6B, Software – Application): “Procare Solutions is a fantastic addition to the Roper portfolio. Procare meets all our longstanding acquisition criteria: leader in a smaller market, delivers mission-critical verticalized software solutions, competes based on customer intimacy, operates an asset-light business model, and is led by a skilled, passionate leadership team. The market itself is quite attractive, and in the midst of a long-term secular tailwind of young, dual-income families seeking higher levels of early childhood education versus daycare. In addition, like most industries, this one is undergoing long-term tech enablement.”
  • Littelfuse ($5.9B, Electronic Components): “Demand continued to be soft in consumer products, personal devices, and appliances in the quarter. Despite these near-term headwinds, we continue to be a leading technology enabler in the broad Electronics market and have the track record to deliver strong execution and meaningful long-term growth. Structural Electronics end market drivers such as AI, automation and more stringent safety requirements remain a key opportunity, as our customers continue to rely on us for technology expertise and… innovation.”
  • KLA ($81.4B, Semiconductors & Semiconductor Equipment): ”The past few years have strengthened our confidence in the increasing importance of process control and enabling technology advancements and optimizing yield at a high design mix/volume production environment. This bodes well for KLA’s long-term growth outlook despite still challenging near-term demand trends. In the meantime, KLA business continues to stabilize and the long-term secular trends driving semiconductor industry demand and investments in WFE remain very compelling.”
  • Taiwan Semiconductor Manufacturing ($687.2B, Semiconductors): “Despite the near-term challenges, our technology leadership enabled TSMC to outperform the foundry industry in 2023, while we are positioning us to capture the future AI in high performance computing-related growth opportunities. Our business has bottomed out on a YoY basis and we expect 2024 to be a healthy growth year for TSMC, supported by continuous strong ramp of our industry-leading 3-nanometer technologies, strong demand for the 5-nanometer technologies, and robust AI-related demand.”

Companies Increase Investments in AI, Digital Transformation, and Productivity Tools while Shifting Resources Away from Other Categories… Including Headcount

  • International Business Machines ($5B, Information Technology Services): “While there has been a lot of talk about reduced software [and] technology budgets overall, we are not seeing that. We are seeing that people are a bit more discriminating in what they are spending on, they’re spending more on AI, more on digital transformation, and it might mean that they are focusing less on some other areas.”
  • CTS ($3B, Electronic Components): ”We had some temporary cost reduction measures [but] R&D costs will be higher in 2024 as we continue funding our growth programs.”
  • Avnet ($1B, Electronics & Computer Distribution): ”We’re always reducing expenses while we need to make investments and some investments might be in productivity tools, RPAs, things along those lines [and] now artificial intelligence/machine learning. We’re putting more and more investment behind the digital side of the equation.”
  • Microchip Technology ($5B, Semiconductors): “We’re taking steps to reduce our expenses. In addition to the variable comp programs, which provide automatic reductions during a down cycle, and normal containment of discretionary expenses, we will be implementing broad-based pay reductions. Our team members, who are not a part of the factory shutdowns, will take a 10% pay cut. And consistent with our normal practice, the executive team will take the largest reduction with a 20% pay cut… avoiding layoffs and, in the process, protecting manufacturing capability, as well as high priority projects, which are important for our customers and us to thrive in the long term.”

Layoffs

  • Plexus ($6B, Electronic Components): “We’re taking a look at areas where we can enable better scalability, create greater efficiencies, and align our cost structures to position us for future investments. That primarily involves rightsizing capacity and mostly across our operations, it hit manufacturing services and engineering. We are rightsizing in areas where we have excess capacity, which includes personnel reductions.”
  • Enphase Energy ($7B, Solar): “Throughout 2023, we have been reducing discretionary spend [through] hiring freezes [and] attrition. We don’t backfill. We only backfill critical [roles]. In December, we implemented a restructuring plan. We further reduced our worldwide headcount for the employee and contractors by 10%.”
  • Tenable Holdings ($6B, Software – Infrastructure): “The focus areas for the changes we made in go-to-market are first on sales overlays and second on removing layers of management. So overall, we think it creates more cohesive go-to-market motion. It resulted in a 5% reduction in force, about $20M of savings.”
  • Gartner ($6B, Information Technology Services): ”The larger companies as you’ve seen are still laying off tens of thousands of people, and so they haven’t finished restructuring. As we mentioned, overall new business was up in the tech sector MSD, and so we’re thinking that’s a leading indicator that retention will follow.”

Despite Static Recovery, Long-term Optimism Persists

  • Diodes ($3.1B, Semiconductors): “The unknown is really the actual demand, especially after the Chinese New Year. The China recovery is still extremely slower than anybody’s expectation. So overall, unfortunately, still weaker from the visibility point of view. We just need to continue to monitor it very closely.”
  • Lam Research ($5B, Semiconductor Equipment & Materials): “Most of our China revenue in the last two quarters was from domestic Chinese customers, and we expect spending from this region to be stable overall in 2024.”
  • Teradyne ($7B, Semiconductors Equipment & Materials): ”The news report is really nothing new. We’ve had a multiyear effort going on to increase the resilience of our supply chain. And that involved moving production locations for some of our products. We still have an extensive supply chain that is in China. We are competing for business and winning in China. And I think that it’s a good headline, but there’s nothing new in that story or in our commitment to that region, as a place where we expect to grow.”
  • Allegro MicroSystems ($5B, Semiconductors): ”China is incredibly important to us and actually, in the most recent quarter, we saw some really nice growth in China despite all… the macro noise that you hear, which just reinforces our belief, we have to be in China to win with the Chinese customers. And we’re really pleased with the progress we’re making.”
  • ON Semiconductor ($2B, Semiconductors):“Our position in China is very well positioned. Last quarter, we talked about having long-term service agreements with four of the top five China OEMs, both qualified and ramping revenue… we feel pretty good about our success and our exposure in China for EV. I would extend that to the industrial side of it.”
  • Dolby Laboratories ($7B, Specialty Business Services): ”Interestingly, about half of our OEM partnerships are with Chinese EV manufacturers, which are quickly becoming some of the most popular cars on the road in China and Europe.”
  • Amphenol ($6B, Electronic Components):”Relative to China, I’m very happy to see that the geopolitics of China and the U.S. seem to be… swinging towards a more moderate phase. The world is a better place when countries are talking rather than arguing, and that’s a good thing. In those areas of the electronics industries, where we support in China, places like the automotive industry, places like the industrial market, we continue to see great opportunities.”
  • Apple ($9T, Consumer Electronics): “We’ve been in China for 30 years, I remain very optimistic about China over the long term, and I feel good about hitting a new installed base number, a high watermark, and very good about the growth in upgraders YoY and during the quarter.”

From Digital Transformation to Cybersecurity, Product Enhancements to Analyst Workflow, Companies Embrace AI Technology with Open Arms and Expect Additional Demand Tailwinds as a Result

  • DXC Technology ($0B, Information Technology Services):”The bottom line is, we are nowhere near the full digital transformation as companies, as countries, or as nations, and AI is now fueling much more of that. If you step back and think about where AI in the near term is going to have the most impact, it’s with organizations with large data sets. So, the demand backdrop is there. The reality on the modern workplace and the ITO front, it’s clearly a shrinking macro environment.”
  • TD Synnex ($7B, Electronics & Computer Distribution):“Right now, there are products in market that are AI-enabled. It’s more of an early ramp with the expectation that there will be more robust demand as we move through time. I believe the reality is that this isn’t just an incremental on-top-of-whatever IT spending might have been planned prior to AI. This won’t be just a new market segment, but rather there will be some reprioritization that happens relative to how customers spend their IT dollars moving forward. So, I think it will have a positive effect on IT growth.”
  • Microsoft ($1T, Software – Infrastructure): ”It’s been a real pivot of our entire investment infrastructure to be working on this work. And that’s important because it means we’re shifting to an AI-first position, not just in the language we use, but in what people are working on day-to-day. When you take improvements at the gross margin level, plus this consistency of re-pivoting a workforce toward the AI-first work we’re doing without adding material number of people to the workforce, you end up with that type of leverage, and we still need to be investing.”
  • Atlassian ($6B, Software – Application): “I’d just point out, we’re in a super dynamic space right now, particularly with AI, and there’s a lot of opportunity to add value with solid execution. As a company that has a huge amount of data that customers have entrusted us with, the ability to remix, summarize and give that data back in different forms to customers using a lot of these large language models and machine learning technology is incredible, it’s very exciting in terms of what we can deliver.”
  • Varonis Systems ($9B, Software – Infrastructure): ”We invested tremendous effort with AI, not just for customers, but also for analysts. We are selling software to rebuild robots and interfaces to make sure that our people that provide incident response and professional services can be much, much, much more productive.”
  • Super Micro Computer ($0B, Computer Hardware): “The demand for AI inferencing systems and mainstream compute solutions has also started to grow. The exciting news is that, finally, we are entering an accelerating demand phase now from many more customer wins. Overall, I feel very confident that this AI boom will continue for another many quarters, if not many years. And together with the related inferencing and other computing ecosystem requirements, demand can last for even many decades to come. We may call this an AI revolution.”

In Closing

Despite near-term softness across some portions of the sector, most tech annual top- and bottom-line guides are setting the stage for growth in 2024, as nets have been cast on the comet known as AI, which blazes faster and brighter.

While layoff announcements in recent weeks are concerning, a new crop of techies are seeking jobs, presenting a unique opportunity for downstream companies to strategically add talent. As many young tech companies experience a true cycle for the first time, they are learning, leaning out, getting smarter.

It’s certainly an exciting time as we have seemingly entered the AI “diffusion stage”, but one that is not without risk, much of which is unknown at this time.

  1. As of February 7, 2024
  2. Based on company guidance provided at the time of publication; total number of companies differ across revenue and EPS
  3. As of February 8, 2024
  4. Source: Layoffs.fyi, inclusive of public and private companies
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