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Morning Update

With no economic news scheduled today markets are likely to be driven primarily by earnings news. Internationally, Germany approved a bailout of Spanish banks, which occurred on the heels of a weak bond auction in Spain. Spanish 10-year bond yields are trading at an unaffordable 7.1%.

Yesterday after the close Microsoft reported its first ever loss as a public company. FQ4 EPS beat consensus estimates, coming in at $0.73 on revenue of $18.6 billion (+7% Y/Y) by $470 million. Enterprise strength drove the earnings: Office division sales were up 7% Y/Y while Server and Tools were up 13% Y/Y. This strength offset at 1% drop in Windows sales. Entertainment and devices sales were up 20% Y/Y. The quarter’s net loss of $492 million occurred due to a one time write-down of Microsoft’s acquisition of aQuantive. We found these earnings to be very strong and expect a bullish tone in Microsoft’s stock leading up to the release of Window’s 8 this fall.

Google also reported earnings after yesterday’s close. Traditionally Google will either beat or miss consensus estimates of its earnings by a large margin, causing its shares to make dramatic moves in the after-hours market and following day. This quarter however, Google’s EPS of $10.12 beat consensus estimates by just $0.08 on revenue of $8.36 billion (+21% Y/Y), which missed consensus estimates of $50 million primarily due to the economic turmoil in Europe and currency volatility. Google’s site revenue jumped 21% Y/Y while ad network revenue increased 20% Y/Y. Ad click prices declined 16% Y/Y but increased 1% Q/Q, halting recent declines. Paid clicks were up 1% Q/Q and up 42% Y/Y. Declining ad click prices show the impact of mobile devices: users are less likely to click on ads when they see them on mobile devices. As more and more internet searches occur on mobile devices, Google’s ability to profit from those ads is diminished. However, Google in combating this by providing intelligent results so that users are only seeing ads they are likely to click on. This strategy is paying off with paid clicks up sharply Y/Y. As expected Motorola’s revenue was $1.25 billion and experienced an operating loss of $39 million. Google did not elaborate on their specific plans for utilizing newly acquired Motorola.

Notable earnings before today’s opening bell include General Electric, which narrowly beat earnings with Q2 EPS coming in at $0.38, a beat of $0.01. Revenue was $2.09 billion (+1.4% Y/Y), a miss by $20 million. Schlumberger and Baker Hughes both beat, showing strength in the oil services sector during a quarter with falling oil and gas prices. Executives at the two companies were “cautiously optimistic” about the future.

Vodafone announced a 7.7% decline in sales, saying on their conference call that “it’s difficult to be optimistic the near-term changes in things.” Vodafone is the world’s second largest mobile phone carrier with the bulk of its business occurring in Europe and emerging markets.

Today we will be watching the trading action in Apple, Visa, Western Digital, Netflix, and UPS as traders begin positioning themselves for their earnings announcements next week.


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