Yahoo! Q3 14A – Game of numbers

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Yahoo! must focus on registered users to have any chance of growth.

  • Yahoo! reported reasonable Q3 14A results but still the commentary and promises are failing to show through in the numbers.
  • Q3 14A Revenues-ex TAC / EPS were $1.09bn / $0.52 compared to estimates of $1.05bn / $0.30.
  • Display based advertising continues to be the biggest problem which fell heavily by 6% YoY during the quarter.
  • According to Yahoo!, it is PC based advertising that is causing all of the problems which is dragging revenues down by $60m a quarter.
  • This is offsetting growth in search (up 6% YoY in Q3 14A) and mobile which grew 100% YoY to $200m in revenues during the quarter.
  • It is here that I can’t get the numbers to add up.
  • Yahoo! claims that it will generate $1.2bn in mobile revenues for the full year 2014E but it has only generated $200m during Q3 14A.
  • If mobile is growing as fast as it claims, then Q1 14A and Q2 14A mobile revenues would have been much lower than $200m, meaning that Yahoo! will need to generate something like $800m in mobile in Q4 14E alone in order to make the target.
  • This represents QoQ growth of 4x and would massively offset further declines in PC based display advertising.
  • I can only assume that Yahoo! actually means that the run rate of mobile revenues will be $1.2bn by the end of the year implying Q4 mobile revenues of $300m.
  • Even this looks to be a stretch but it is much more credible than what the company has actually stated.
  • Even if this is correct, this represents $100m in incremental revenues compared to Q3 14A, which alone would more than offset the $60m drag from PC advertising and allow the company to see growth.
  • However, this is absent from the Q4 14E guidance with $1.14bn-$1.18bn in revenues representing a YoY decline of 4.2%.
  • The midpoint of this guidance is $1.15bn, below consensus at $1.17bn.
  • Furthermore, Yahoo!’s user figures continue to be misleading in my opinion.
  • Including Tumblr, Yahoo! now reports active monthly users at 550m up 17% YoY.
  • However, this figure includes a substantial number of users just turning up to one of its properties to browse the content.
  • I suspect that less than half of these users are registered users about whom Yahoo! can build a profile and start offering targeted advertising.
  • The rest will only receive the generic display based advertising that Yahoo! is trying so hard to get away from.
  • Consequently, I suspect that registered users are less than 300m of which the vast majority only really use Tumblr.
  • Here lies the challenge for Yahoo!
  • It must take its excellent collection of assets and integrate them such that users want to register and become part of the ecosystem rather than just turn up for a quick look.
  • To do this it must move past just content and offer users services within which they want to live their Digital Lives.
  • That is how the user profiles will be built and how Yahoo! can get access to the revenue streams where advertisers are really spending.
  • This is how Google manages to outperform Yahoo! on growth despite being nearly 15x its size.
  • Until this becomes a reality, the numbers are going to underperform the big promises, harming the potential for a stock that has a lot of fundamental upside.
  • Google, Microsoft and Apple look like better prospects and I would continue to take Alibaba related profits on Yahoo!

Apple Q4 14A – Beat and raise

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Apple on course for a superb quarter to the detriment of Samsung.

  • Apple reported Q4 14A results that comfortably beat estimates and guided above consensus as demand for the iPhone 6 continues to outstrip even the most bullish forecasts.
  • Q4 14A revenues and EPS were $42.1bn / $1.42 compared to consensus at $39.8bn / $1.29.
  • 39.3m iPhones shipped during the quarter compared to forecasts of 38m and I suspect that there is another positive surprise to come in January.
  • 12.3m iPads were shipped compared to consensus at 13m which is a little disappointing but not a huge surprise given:
    • Most users knew there was a new iPad coming and probably held off purchases.
    • The tablet market is slowing to almost no growth at all this year compared to 44% in 2014.
    • I suspect that the iPhone 6+ is likely to cannibalise shipments of the iPad Mini.
  • For the next quarter, weakness in iPad is not an enormous concern as all the attention is being focused on the surging demand for the iPhone 6.
  • Apple sold 5.5m Macs taking its market share to its highest level in almost 20 years as back to school demand had a significant effect this year.
  • Market share is still less than 10% globally but it is inching inexorably up with time.
  • Guidance for the coming quarter (fiscal Q1 15E) was positive with revenues of $63.5bn – $66.5bn expected which compares favourably to consensus at $63.4bn.
  • Q1 15E EBIT is implied to be $19.3bn in line with consensus at $19.4bn.
  • However, I suspect that Apple is continuing to be pretty conservative and consequently, I think that number should be comfortably beaten come January.
  • The popularity of the iPhone 6 is likely to mean market share gains both in unit terms and for the iOS ecosystem overall.
  • The main loser here is Samsung which has owned the large screen phone market for the last 3 years and is now showing every sign of rapid decline.
  • Google is likely to be unaffected in the short term as RFM estimates that 50% of its mobile advertising revenues are generated on iOS devices.
  • Hence a shift in ecosystem share to iOS away from Google’s Android is unlikely to affect revenues in the short-term.
  • However, this is not a great state of affairs for the long run as I am pretty sure that Apple would dearly love to remove Google from its devices and its App Store if it could afford to do so.
  • Reliance on its biggest competitor for its revenue growth is a state of affairs that Google will be very keen to avoid.
  • Google, Microsoft and Apple (for the next quarter) remain the top companies to look at for investing in the mobile ecosystem.


Samsung and Facebook – One chance

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Samsung has one chance to avoid the fate of its predecessors.

  • Samsung looks to be teetering on the edge of suffering the same fate as all market leaders before it as its products have become commodities.
  • In order to prevent disaster, it must add something back to its products to make them again desirable to users.
  • The iPhone now has large screens and the Chinese are voraciously attacking at the low end, leaving Samsung very little to fight with other than price.
  • This is why its relationship with developers and providers of Internet services is now so important.
  • RFM’s analysis has indicated that its best chance is to work with content developers to create Samsung specific versions of their apps. (See Samsung and Google – Gorilla war, 27th May 2014).
  • This is why Samsung’s recent meeting with Facebook is so important.
  • Smartphone users spend 24% of their time on their devices using social networking and Facebook accounts for 75% of that time.
  • If Samsung and Facebook work together to make the Facebook experience meaningfully better on Samsung devices than anyone else’s, then users will have a reason to choose a Samsung product other than price.
  • This is the key to retaining margins at attractive levels as preference is what drives pricing and how Apple makes such fantastic margins.
  • Currently, over half of the Android devices in the hands of users are made by Samsung.
  • This combined with the fact that Android remains very fragmented means that every developer wants to develop for Samsung devices before any other.
  • This creates the potential for a mutually beneficial relationship that can extend far beyond Facebook to all of the other major app developers.
  • Games can be extended with Samsung specific versions with extra levels or downloadable content as can media or productivity apps and services.
  • This is where Samsung must focus and it must do it immediately.
  • The more share that is lost, the less attractive the relationship becomes for app developers and the less willing they will be to write Samsung specific versions.
  • With Google firmly in control of the ecosystem, this is Samsung’s only option to support its handset margins and avoid the death spiral that has consumed all market leaders before it.
  • There is a chance for Samsung to avoid repeating history but it must act immediately and wholeheartedly.
  • In the short-term I still see downside in Samsung to KRW1m where there is significant psychological resistance.
  • Google, Microsoft or Apple in the short-term make far better options in the ecosystem.

Google Q3 14A – Law of large numbers

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Slowing growth does not make the shares unattractive.

  • Google reported slightly disappointing results as growth from its core advertising business in fixed Internet slowed a bit more quickly than expected.
  • Q3 13A revenues (ex-TAC) and EPS were $13.2bn / $6.35 compared to consensus at $13.2bn / $6.54 and RFM at $13.0bn / $6.28.
  • RFM has tended to be more cautious than consensus due to its view that growth will slow steadily over the next few years.
  • However it should remain comfortably above 10% driven by mobile.
  • Video, multi-screen and mobile continue to be the strongest growth areas with desktop and display lagging behind.
  • Google is investing heavily in R&D as most of 3,000 recruits during the quarter were engineers.
  • This has been partially offset by a fall in the GNA spend as a % sales which is good news as I have long held the opinion that Google grossly overspends on GNA.
  • This has resulted in slightly lower operating margins which was compounded by a higher tax rate to give the EPS disappointment observed.
  • There is bad news for Lenovo in these figures (reports Q2 14E on 7th November) as losses at Motorola Mobility look to have ballooned again.
  • Losses from discontinued operations increased to $185m compared to losses of just $68m in Q2.
  • In the absence of the 10-Q filing, it is not possible to see exactly how much of the loss is coming from Motorola, but it is clear that profitability has nose-dived once again.
  • This will increase pressure on Lenovo which is taking on the loss making division for $2bn and does not have the financial flexibility to endure ongoing losses.
  • For Google, this is a rounding error that no one really notices and consequently it has no impact on my view on the company going forward.
  • In this vein, the combination of mobile and video should keep the company growing nicely and I expect a solid end to 2014E.
  • At 17.4x 2015E and 16.1x 2016E PER (close 16th Oct), Google remains attractively valued and remains one of my top places to look when considering investments in the ecosystem.

Apple vs Google – Spoiler war

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Q4 14E will be the most competitive ever for devices.

  • Apple’s accidental launch of the new iPad Air 2 and iPad Mini 3 combined with Google’s attempt to steal its thunder with its new Nexus devices sets the scene for brutal competition in Q4 14E.
  • First up was Apple’s accidental launch of its new iPads on the iTunes store.
  • Screenshots of the new devices were accidently uploaded for a short period showing new devices that offer very little more than an evolutionary upgrade.
  • The devices have added the fingerprint reader to the home button and are also expected to have faster processors and better battery life.
  • Full details will be revealed at the event today at 6pm UK / 7pm CET / 1pm ET / 10am PT but it is clear that there are going to be no fireworks.
  • Apple’s main driver for the next 2 quarters is going to be the iPhone 6 and demand for the device continues to be very strong.
  • This leaves me comfortable with Apple in the short-term although my long term concerns are still there.
  • At the same time Google has officially released its latest range of Nexus products.
  • The Nexus 6 smartphone made by Motorola is a 5.9” monster with Android L and all of the other high end specifications.
  • The device will sell for $649 compared to $749 for the iPhone 6+ and will be available through all 4 main US operators.
  • The Nexus 9, made by HTC, is a 8.9” tablet that will start at $399 and be available from next month.
  • The aim of these devices is not to sell huge volumes but to serve as a roadmap for other device makers to highlight what is possible using Google Android.
  • Google also launched a set top box called the Nexus Player that interestingly uses an Intel chip rather than one powered by ARM.
  • Given that Intel is virtually giving its chips away and compensating manufacturers for the added cost needed to use Intel rather than ARM, this looks like a cheap way to get good performance at low cost.
  • Android TV is a version of Android that is optimised for the large screen but because it is running Intel rather than ARM, it is very limited in terms of apps. that are available.
  • This device looks a lot like PlayStation TV which is hoping to piggy back on the success of the PS4 and the resurgence of Sony in gaming.
  • The device industry line up for the all-important Q4 14E selling season is now in place and it looks very much like it is Apple’s to lose.
  • At the high-end, Apple has the most fun and easiest to use ecosystem and now that it has large screen devices, it is the ecosystem that everyone wants.
  • At the low end the Chinese and Indian vendors are making inroads by selling reasonably specified devices at very low prices.
  • It seems very unlikely that they are making any money and this combined with the resurgence of desirability of Apple devices is squeezing all other handset makers from both ends.
  • Samsung has had a dreadful Q314A and Q414E looks like it will be even worse.
  • The other handset makers are faring no better and the outlook remains pretty grim when it comes to profitability.
  • In the hardware space there remains only one name to choose: Apple.
  • In the ecosystem, both Google and Microsoft look attractive.


Intel Q314A – Waiting for Godot

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Core M is the key to a laptop replacement cycle.

  • Intel reported solid Q314A results as corporate PC demand continues to keep the PC market on an even keel. .
  • Q314A Revenues and EPS were $14.6bn / $0.66 compared to estimates of $14.4bn / $0.65.
  • Intel won market share from AMD during the quarter, but that aside, the market has remained supported by corporate demand from developed markets.
  • This has a lot to do with the upgrade of PCs from XP to Windows 7 as well as a normalisation of inventory compared to this time last year when vendors were extremely cautious.
  • In anticipation of a more normal Q414E, guidance was a little ahead of expectations with revenues of $14.2bn-$15.2bn (midpoint $14.7bn) forecasted.
  • This compares favourably with the consensus which is expecting $14.5bn in revenues in Q414E.
  • The take home message from these figures is that the PC market remains steady thanks to the corporate upgrade cycle.
  • I am reasonably comfortable that Windows 10 will enable that cycle to remain steady and that the PC market is not about to start declining again.
  • Against this backdrop I see opportunity.
  • The most significant event during the quarter was the launch of the Core M family of products which I think are key to changing the PC landscape.
  • The Core M family are 14nm processors that use Intel’s 3D transistor technology and come with a meaningful power efficiency improvement.
  • This means that for the first time, PCs no longer need fans, enabling all the power of a laptop to be put into a form factor like the iPad Air.
  • Using Core M, the Microsoft Surface Pro 3 could be reduced in thickness by 2mm and weight by 200g.
  • This would make it 7mm thick with a weight of 600g. By comparison the iPad Air is 7.5mm thick with a weight of 469g but it only has 9.7inch screen compared to the SP3 at 12 inches. ,
  • 7mm thick and 600g is pretty much what I am expecting for the Surface Pro 4.
  • Having the full power of a laptop in a 12” tablet that weights the same as the iPad renders the laptop form factor obsolete.
  • The only reason to have the keyboard physically attached to the screen is to create space for the components and the battery.
  • This is no longer necessary and users no longer have to make the compromises in terms of ergonomics and ease of use when it comes to using portable computers.
  • Unfortunately, users have been making this compromise for 30 years and the marketing departments of Microsoft and the OEMs are so blinded by legacy that they have yet to realise that the laptop form factor is now obsolete.
  • These new devices are in fact “Portable Desktops” and offer a whole new series of use cases all of which are superior to a laptop.
  • Furthermore, there is no longer a need to buy a tablet meaning that the budget for laptop and tablet can be combined when considering the new devices.
  • The problem is that the users have no idea how much the computing experience improves with these devices and until they get it, the cycle is unlikely to take off.
  • This means that until the companies stop trying to sell these devices as laptops, users are going to remain horrified at the prices being charged and sales will stagnate.
  • I expect this problem to be solved eventually but consequently it is impossible to say when the replacement of the laptop will really begin.
  • Fortunately, the valuations of the two main beneficiaries, Microsoft and Intel, are not too demanding and so investors can afford to wait.

Google – Chasing ghosts

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Amazon is not the problem. Its Apple.

  • Amazon is what keeps Eric Schmidt up at night but in reality what he should be worrying about is Apple.
  • An interview during a recent visit to Berlin revealed that he worries more about Amazon than he does about Yahoo! or Microsoft.
  • Amazon is certainly more dangerous than either of these companies at the moment but the one that can do Google real damage is Apple.
  • This is because a significant portion of Google revenues are being generated by Apple devices which is something Apple would like to put an end to.
  • RFM estimates that in 2014E, $7.9bn or 49% of all Google’s mobile advertising revenues will be generated by Apple iPhones and iPads.
  • This is still greater than the $6.9bn generated by Android despite there being over 1bn Android devices in the market.
  • I also believe that if Apple could, it would remove all of Google’s apps from the app store, which would reduce Google’s ability to generate revenues on iOS to almost zero.
  • The problem is that Apple’s own ecosystem is not yet nearly strong enough and jettisoning Google would probably lead to a large number of users switching to Android.
  • There is no sign of Apple being even close enough to contemplate this move, but in the long run, I am sure that this is on the horizon.
  • This, combined with the poor user experience on Android, is why Google is taking more and more control of the Android user experience.
  • When Google has complete control, the open source (Android Open Source Platform) piece will be a tiny kernel with Google’s software sitting on top.
  • In effect Google will have migrated Android to look just like iOS or Windows Phone.
  • In this way Google will improve the user experience on Android thereby increasing usage and consequently its own ability to monetise its users.
  • Amazon is certainly a problem for Google but users in the fixed Internet still only spend a small portion of their overall online time shopping.
  • This means that Amazon is really only competing with Google in a small portion of the overall area within which people use search.
  • It’s a valuable area but it is a small piece of the pie none the less.
  • Amazon is trying to expand outside this core area but its strategy to date looks like a series of badly thought out, very expensive experiments.
  • Outside of its core market of e-commerce, Amazon currently offers very little threat to Google.
  • I am far more worried about Apple but its current inability to do anything about Google leaves the road clear in the medium term for steady growth in revenues and profits.
  • There remains some distance to go in Google and this remains one of my favourites in the ecosystem.

Tablets – The long goodnight

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The latest releases from Apple are unlikely to reignite growth.

  • The tablet market has been the fastest market to go from birth to rapid growth to commoditisation to maturity.
  • After a few short years of stunning growth, this segment already looks very mature with just 4% growth expected this year after 44% in 2013A.
  • I think that there are three main reasons for this:
    • First. It is the smartphone that is the driver of the digital ecosystem not the tablet. I have long held the view that a tablet enriches Digital Life and skews user behaviour more towards media consumption and gaming but it is not the defining device. Therefore the tablet is a nice accessory to have but it is not a must have. Users would rather have a smartphone.
    • Second: A lot of users who only consume content (browse, email, watch and listen) have purchased a tablet instead of a laptop. For these users this device makes much more sense and this shift has been a trend over the last few years. I see this trend coming to an end and consequently the demand for tablets has slowed.
    • Third: The creation by Samsung of a segment of the market with very large screens has eroded the bottom end of the tablet market.
  • The net result is that the market is likely to stagnate from here on and Apple’s refresh of the iPad on Thursday is very unlikely to change that outlook.
  • Furthermore, I suspect that Apple will not refresh the iPad Mini as the iPhone 6+ could really cannibalise demand for this product.
  • I expect that the new iPad Air to be lighter, thinner, with longer battery life and a faster processor but that’s about it.
  • The iPhone 6 is a big deal for Apple as it addresses what has long been a major gripe with earlier devices. Hence I can see strong replacement demand and switching from large screen Android products.
  • The new iPad Air is likely to be simply a slightly better version and consequently unlikely to trigger meaningful replacements or ecosystem switching.
  • Hence, I am looking for the next two quarters to be almost entirely driven by the iPhone 6 where Apple looks extremely well placed.
  • Although the longer term margin issues persist at Apple, the short term is looking healthy and I am happy to be in this one until at least the end of January.


Xbox One vs. PS4 – The late game

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Microsoft’s understanding of the ecosystem is a big threat

  • In the next generation console war, the first round has emphatically been won by Sony.
  • The right pricing, strategy and marketing has led to the PS4 outselling the Xbox One 2 to 1 and there is no sign of that changing anytime soon.
  • While Sony has won the first battle, it has yet to win the war and Microsoft still looks incredibly dangerous.
  • Gaming is slowly becoming more of an online affair and the experience on the consoles is slowly spreading across other devices such as smartphones and tablets.
  • This means that the user experience on the console, other than selecting the game and pressing return, is becoming important.
  • Since launch Microsoft has continually updated the user experience and even went so far to put Phil Spencer (head of Xbox) on a podcast with some prominent Xbox gamers to discuss further developments.
  • In this podcast he discusses further improvements to the user experience outside of just playing games such as customisation, screenshots and backgrounds.
  • These are all small things but it is the little things that make the difference.
  • When I compare the Xbox One’s rich and fun user experience to the bare bones of Sony, I begin to fear for Sony in the long term.
  • The PS4 experience looks simply aimed at allowing the gamer to launch the game and little more.
  • Furthermore doing basic things like uploading a gamer photo or setting up payment is tortuous and frustrating. (see here).
  • When one is trying to develop an ecosystem, the user experience has to entice the user to stick around and explore what else is on offer.
  • This is how user loyalty will be generated and how an ecosystem will get its users to spend more time within its community.
  • Furthermore, the look and feel of that experience can then be replicated across other devices creating a feeling of ease and of being at home.
  • With the Sony PS4 user experience it is almost a relief to fire up a game as Sony has provided the user with no reason whatsoever to hang around and explore.
  • This is something that urgently needs to be fixed as a cool and fun user experience will be the foundation of Sony’s ecosystem and it needs to be present on every device it makes.
  • This is a major problem for Sony as the emphasis over time is going to move away from hardware and into the ecosystem and user experience.
  • Microsoft has made horrible mistakes with the launch of the Xbox One but it has learned its lesson and is now making real headway in developing the features and functions that are going to draw users and drive loyalty in the future.
  • As the user experience and ecosystem becomes more important and Microsoft levels the hardware playing field, Sony is going to look more and more out of date.
  • Sony has won the initial battle hands down but it is in danger of losing the war.

PCs Q3 14A – Big is beautiful

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Only bad marketing keeps the PC market from growth.

  • Both Gartner and IDC have released their Q314A figures for the PC market which continues to show very little movement.
  • Q314A Shipments have been essentially flat, falling by just 0.5% YoY to 79.4m units.
  • IDC reported 78.5m units shipped representing a decline of 1.7% YoY.
  • The geographic story has remained the same with Europe and North America remaining reasonably healthy while Asia saw declines.
  • The enterprise has continued to support the market in Q3 14A as companies are still migrating away from Windows XP to Windows 7.
  • Windows 8 remains of virtually no interest to anyone.
  • Consumers have no real idea why they should buy it and companies prefer the excellent Windows 7.
  • Microsoft is hoping to change that with Windows 10 which looks to be aimed at keeping the enterprise refresh cycle going (see here).
  • The latest figures also show that the biggest companies are all gaining share at the expense of the smaller ones who are increasingly exiting the market.
  • Lenovo, HP, Dell, Acer, Asustek and Apple have all gained share and remain the top six vendors globally.
  • This comes as no surprise as PCs are commodities that ship at wafer thin margins meaning that huge scale is required to eke out a living.
  • Windows 10 is probably enough to keep the PC market from entering another decline but it is very unlikely to return it to growth.
  • This is because Windows 10 is what Windows 8 should have been and as a result does not really offer anything that is very new and likely to make users rush out and buy new PCs.
  • What I think is far more likely to return the PC market to growth is the new use case that I see emerging for mobile computing.
  • The technology is finally in place for a user to have the power of a desktop in a device that is no bigger than a tablet.
  • This device with a Bluetooth keyboard and a mouse enables the user to have a desktop PC experience wherever he goes. (see here)
  • This represents a huge leap forward in the usability of computers while not physically at the office and is what I think will trigger a replacement cycle for laptops.
  • This will allow the PC market to return to growth for a couple of years and the rising tide is likely to float all boats.
  • A big hindrance to this remains price but I think that this use case is so compelling that users will be willing to pay up for it.
  • It also helps that a tablet is no longer required and so the budget for this device can be bigger, combining what would have been spent on a new laptop and a tablet.
  • The biggest problem is the fact the PC makers and Microsoft’s marketing department have been selling the laptop form factor for 30 years and have yet to realise that it is obsolete (see here).
  • This is a big problem and until they realise where the potential lies, the users are also unlikely to get it.
  • This is why it is impossible to say when this cycle will kick-off, but the valuations of both Intel and Microsoft are undemanding enough for it to be worth the wait.