What’s Important To Listen For On Upcoming Tech Earnings Calls
I don’t believe that management teams will provide investors with formal 2024 guidance on September quarter EPS calls. However, there should be some interesting data points to pick-up on.
2024 Budgets: Most companies will not provide full 2024 budget commentary and may not provide any 2024 commentary at all. However, I would expect companies to take a conservative approach as it relates to the manner in which they discuss capital allocation plans for the remainder of the year. This conservatism will be driven by the current elevated interest rate environment (especially the climbing 10-year Treasury yield) which has dramatically increased the cost of capital. Therefore, I expect that companies will selectively invest in certain areas and selectively pull back in others. For example, Microsoft (MSFT), will continue to invest heavily in Generative AI, but is pulling back on business units such as LinkedIn.
Debt on Corporate Balance Sheets and RTO: Lots of corporate debt is coming due in 2024, 2025 and 2026. It will be expensive for companies to roll over that debt versus 2 years ago. I expect that many companies will cut heads in Q4 and in January 2024 to mitigate interest rate risk and to protect EPS. My sense is that this return-to-office (RTO) nonsense is largely a tool for executive teams to use to help determine which employees they may want to keep versus which they may RIF in the coming months. This RTO effort should have been resolved in 2021.
Sales and Customer Support: Are companies investing in Sales & Marketing? I would be surprised if the answer is “yes”. I can’t think of a Technology company that is organically growing its Sales & Marketing organization. I would bet that management teams speak of a renewed focus on customer support in an effort to maximize customer retention rates and to boost customer renewals (from a rate and Dollar perspective). Companies likely have invested in their Treasury/Cash management operations so as to optimize their Balance Sheets to best take advantage of short-term rates and the like.
Discretionary Spending: I expect that most companies will have cut back on discretionary spending such as travel for conferences, travel for initial client meetings and the like. Travel is always the first major expense line to get axed along with headcount when interest rates move in a pronounced fashion.
Generative AI: I expect that companies will dramatically slow Generative AI experimentation as I doubt that many companies have achieved a meaningful ROI on Gen AI projects.