This week, 111 S&P 500 companies reported second quarter earnings results. Of these, 66% exceeded their analyst consensus estimates. This is below the overall beat rate this earnings season of 70%, largely due to weaker than expected earnings in the Industrials, Materials, and Utilities sectors, each of which saw fewer than half of the companies report positive surprises.
Still, the blended earnings growth rate increased to -2.6%, up from -3.0% last week. The Information Technology sector each saw every company exceed earnings expectations, while beating revenue estimates at a rate of 75%. These results helped the Technology sector continue to increase further into positive territory, up to 0.6% compared with the 2.4% decline expected two weeks ago.
Exhibit 1. S&P 500: Q2 2016 Earnings vs. Expectations – Companies Reporting August 1-5
Source: Thomson Reuters I/B/E/S
Notable this week was the effect of video game companies on tech earnings. Electronic Arts Inc. (EA.OQ) reported a profit of 7 cents per share, a large increase over the 2 cent per share loss that analysts expected. Electronic Arts saw extraordinary usage in its mobile games. CEO Andrew Wilson described some of the mobile usage metrics during the earnings call, saying, “In our mobile business, we are seeing growth across multiple genres. Star Wars: Galaxy of Heroes players spent nearly 2 1/2 hours per day on average in the game, reflecting how much players continue to enjoy the RPG style combat and in-game community events. In the sports genre, our EA SPORTS Mobile titles continue to gain momentum and connect with even more passionate fans.”
Rival game developer Activision Blizzard Inc (ATVI.OQ) also reported impressive results, with EPS of $0.54 beating the $0.42 analyst consensus. This represents 315% growth over the $0.13 the company reported in Q2 2015. Activision also cited mobile gaming as a strong contributor to earnings growth, and the company sees future growth coming to the industry as a whole due to increased mobile gaming usage. During the earnings call, Riccardo Zacconi, CEO of the King Digital Entertainment segment, addressed the benefits to mobile gaming from the success of Nintendo’s Pokemon GO, “In terms of learnings, Pokemon GO has been very successful in expanding the mobile games audience. They have brought the large Pokemon fan base to mobile and I believe this is very good for the whole gaming industry. What it has also proven is that when you pair innovation to very strong branded IP there is a huge potential. Sol, I think this is actually very good and it’s a great opportunity for Activision Blizzard on mobile.”