Amazon Q2A – Disciplinary matters

RFM AvatarSmall

 

 

 

 

 

Amazon’s prioritisation of customers over investors shows no sign of abating.

  • Amazon reported in-line Q2A results but guided very badly for Q3E as it continues to invest heavily in the growth at the expense of profitability.
  • Q214A revenues / EPS were $19.3bn / LOSS $0.27 compared to forecasts of $19.4bn and LOSS $0.13 respectively.
  • The EPS surprise was not derived from operating as adjusted EBIT was $376m which was in line with expectations of $380m.
  • The real problem was to found in the guidance where Amazon continues to spend as much as it possibly can on expanding its operations and driving user loyalty.
  • Q314E guidance is for revenues of $19.7bn-$21.5bn ($20.6bn) and adjusted EBIT of $0m – LOSS $400m. (LOSS $200m midpoint).
  • Consensus was looking for revenues of $20.8bn in revenues and $309 in adjusted EBIT some $509m worse than expected.
  • With a sky high valuation, there is no room whatsoever for error and the market sent the shares down 10% in after-hours trading.
  • Amazon has a unique retail proposition and cloud proposition but its inability to turn a profit is starting to be a major issue.
  • Furthermore, its digital strategy looks to me to be a series of very expensive experiments which have not been properly thought through (see here and here).
  • A cursory glance through the financial statements also reveals that Amazon has spent a massive $1.4bn on corporate office space in the last quarter alone.
  • Buying spanking new offices is one of the biggest signs of inadequate fiscal discipline.
  • This, combined with the inability to turn a profit and the fuzzy thinking that surrounds digital, makes me very worried that money is being frittered away.
  • I believe strongly in investment for growth but the kind of concerns that this report highlights, keeps me well away from the shares until I can see some dimes in investors’ pockets.

Xbox One vs. PlayStation – Different minds

RFM AvatarSmall

 

 

 

 

 

Sony must fix PlayStation if it is to hold onto its lead.

  • Since the launch, PlayStation has systematically beaten Xbox One at every turn.
  • On price, accessories, used game policies, independent game developers, performance and geographic restrictions Sony has Microsoft on the run.
  • Sony has also soundly beaten Microsoft when it comes to the PR campaign and has forced Microsoft to dance to its tune.
  • This has resulted in PlayStation 4 substantially outselling Xbox One by 9m units to 5m to date.
  • This is a great start but there is one crucial aspect where the Xbox beats Sony and beats it hand down.
  • The user experience on the Xbox One is vastly superior to the PlayStation 4 which feels crude and rushed at best.
  • The Xbox user experience is fun and it is cool compared to PlayStation 4 which simply allows the user to play games and very little more.
  • It is almost a relief to leave the user experience and fire up a game as Sony has provided the user with no reason whatsoever to discover and explore.
  • A few of the most significant shortcomings are as follows:
    • The UI is bare bones with no richness or eye candy.
    • Uploading a gamer photo is impossible without downloading an app. to an iOS or Android device. It is not even possible from the website.
    • The PlayStation Network (PSN) website is slow, badly designed and is a generally frustrating experience.
    • Loading cash into the wallet for PSN purchases is an incredibly cumbersome, labour intensive and frustrating experience. This is mostly due to very tight geographic limitations on the location of the account, source of funds and badly written software.
    • Integration with any other device that is not manufactured by Sony is a pipe dream.
    • Sony has made one or two minor functionality improvements since launch whereas Microsoft has added new features and functions left, right and centre.
  • These differences speak volumes about the mindset and culture of the two companies.
  • When it comes to user experience and ecosystem, Microsoft is thrashing Sony whom I am not even sure is aware of the problem.
  • 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 great danger of losing the war.
  • If it upgrades the PS4 user experience and makes it easy and fun to use rather than a chore, then it can hang onto its formidable lead.
  • Sony has a habit of letting market dominant positions slip through its fingers and a real cultural change is needed if this, too, is not to be given away.

 

Apple and Microsoft – Quiet before the storm

RFM AvatarSmall

 

 

 

 

 

Both Apple and Microsoft reported humdrum results ahead of big events.

Apple

  • Apple reported Q314A results that were broadly in line with expectations but guided weakly as the lag effect in front of such a major hardware upgrade is going to be greater than expected.
  • Revenues / EPS were $37.4bn / $1.28 compared to consensus at $36.9bn / $1.23.
  • 35.2m iPhones shipped vs. consensus at 35.5m.
  • 13.3m iPads shipped vs. consensus at 14.3m.
  • 4.4m Macs shipped vs. consensus at 3.9m.
  • Guidance was weak with revenues of $37bn-$40bn expected compared to consensus at $40.8bn.
  • The soft guidance is pointing to a later than expected launch of the iPhone 6 and a greater period in fiscal Q4 when users are holding off from upgrading their devices.
  • All eyes are now fixed on the product launched that are expected in the September / October time frame and very little else is likely to happen before that is out of the way.
  • So much has been built into the launch of the next generation iPhone that there appears to be very little left on the table for investors in the short-term.
  • This combined with my longer term concerns around its lack of Digital Life services (see here) keeps me indifferent to the shares.

Microsoft

  • Microsoft reported Q414A and FY14A in line results that come right before one the most important events in the coming year: MGX FY15.
  • MGX FY15 is a big internal conference and one of the best chances for Nadella to push his vision deeper into the ranks of the company.
  • Revenues / EPS were $23.4bn / $0.66 compared to consensus at $23.2bn / $1.23.
  • Guidance was conservative with Q1FY15E revenues of $21.2bn-$22.3bn expected compared to consensus at $23.1bn.
  • This did not concern the market too much as Microsoft has taken on a habit of guiding conservatively on a quarterly basis.
  • The end-of-life of XP was a driver during the quarter, as Intel results predicted, but the trend started to taper off towards the end leaving tablet PCs with the job of keeping growth going during the first half of FY15E.
  • The strategic vision of becoming a full blown ecosystem was again discussed but with a bit more flesh on the bones.
  • Leaving aside the ongoing difficulties at the Nokia devices and services business, Microsoft saw great progress in the cloud and was even brave to enough to forecast that Bing will break even in FY16E.
  • Microsoft is taking the right path when it comes to differentiating itself by offering both Digital Work and Digital Life in a single device experience but there remains a very long way to go.
  • Services like Lync and Skype or OneDrive and OneDrive for Business may now be in the same teams but the applications remain blissfully ignorant of each other.
  • These and many there services have to be integrated such that they are fully aware of each other if this strategy is to work.
  • This is a herculean task and Nadella needs to really rouse his troops to get them to understand how important it is in order to get it done.
  • This week sees the first step of many Nadella will need to take to lead his company home.

Samsung vs. Google – Sun Valley tea party

RFM AvatarSmall

 

 

 

 

 

Fight over wearables looks like a storm in a teacup.

  • Samsung and Google are at it again but this time the fight is over what software Samsung should use on its wearable devices.
  • At a recent industry event in Sun Valley, Idaho it was clear that tensions between Samsung and Google are still running high.
  • This is despite a crushing victory on the part of Google when it convinced Samsung to back off from its own ecosystem in mobile phones and tablets. (see here)
  • In wearables, Samsung is not using any of Google’s software but has decided to use Tizen (Gear 2) and a proprietary RTOS (Gear Fit).
  • In Google’s mind this is bad news because it means that its services will not be running on these devices meaning that any traffic generated will not be flowing through its servers.
  • If true, it would mean that Google would understand less about what Samsung users are doing and hence not be able to target them as effectively when it comes to selling marketing to advertisers.
  • This is where all of Google’s sensitivities are to be found. If it won’t run Google apps in a way that Google likes then Google is unhappy.
  • Google’s position is that Android and its variant Android Wear should go everywhere but I think that this unlikely to be the case.
  • The biggest problems with wearables today are:
    • They are a solution looking for a problem. They don’t make the user’s life any better and consequently I can’t see users buying these devices.
    • Wearable devices today are large, mostly ugly with horrible battery life.
    • Wearable sensors to monitor things like heart rate, blood sugar and so on are large and unreliable.
  • These short comings are likely to mean that the first generation wearable devices that users are going to accept are likely to be sensors with no screens, BLE, proprietary RTOS software and very long battery lives.
  • They won’t run third party apps and will be highly specialised for the function for which they have been designed.
  • It will be the mobile device or tablet that ends up as the collection and control point for all of this data meaning that fighting over the wearable software is pointless.
  • Google now controls the software on the vast majority of Android devices that ship outside of China.
  • This means that the data from these wearable devices can be collated and used by Google regardless of what software is running the wearable or sensor.
  • Consequently, what Google should be doing is encouraging the development of wearable devices and making it very easy to collate and analyse the data on a Google Android device.
  • That way, Google will be the glue for many types of devices all optimised for different functions.
  • They won’t be using Google software but Google will still be collecting the data and reaping all the benefits.
  • This opportunity remains Google’s to lose and reminding everyone of how much power it has is unlikely to win it many friends.
  • Google remains one of my top picks (alongside Microsoft and Yahoo!) in the global digital ecosystem.

Microsoft – Silent knife

RFM AvatarSmall

 

 

 

 

 

Cuts look much bigger than they seem.

  • Microsoft’s planned 18,000 job cuts seems to spell the end of in-house manufacturing and has wide implications for Microsoft overall.
  • A total of 18,000 permanent positions are to go of which 12,500 are coming from the Nokia Devices and Services business.
  • At the same time Microsoft has imposed a policy change to external workers such that they will be now precluded accessing Microsoft’s buildings or its systems for 6 months after every 18 months worked.
  • For many external workers, this will have the effect of preventing them from being able to work for the company.
  • This is significant because Microsoft is thought to have more than 70,000 external or temporary staff on its books.
  • This restriction has been nominally put in place to preserve security but will also have the effect of meaningfully reducing the number of workers on the books.
  • The Nokia devices and services business will now be combined into a single business unit under Jo Harlow and Microsoft will look to migrate as much of Nokia X to Windows Phone as it can.
  • It also looks very much as if the Asha (low end feature phone) business will be meaningfully reduced in size and all in house manufacturing will be ceased.
  • Elsewhere, the organisation is being flattened and streamlined to make it more efficient but above all nimble, aggressive and responsive.
  • In the past it has been slow and lumbering and has missed a number of large market opportunities as a result.
  • It is clear that Nadella is forcing rapid change upon Microsoft but the real cultural shift has yet to happen.
  • The different business lines inside Microsoft have existed for many years in glorious isolation, often proud of the fact that they are independent from one another.
  • If Microsoft is to have a chance at being a successful ecosystem company, the ivory towers have to be destroyed and all the businesses need to start pulling together.
  • Lack of integration is the biggest and most difficult challenge that Microsoft faces when it comes to transforming its ecosystem into one that users will love.
  • There are signs of this coming from the top of Microsoft but this has to filter down through the ranks for it to really have the necessary impact.
  • I am increasingly optimistic that Nadella will be able to implement the necessary change but there remains an awful long way to go.
  • Efficiency will boost the bottom line but the real story will come to life when the top line begins moving once again.

Google Q2A – Top of the pops.

RFM AvatarSmall

 

 

 

 

 

Good performance justifies the love

  • Google reported good results as advertising volume continued to comfortably outpace pricing declines.
  • Q2A Revenues-exTAC / Adj-EPS were $12.7bn / $6.08 compared to consensus at $12.3bn / $6.25 and RFM at $12.9bn / $6.20.
  • Margins also improved somewhat as revenue from owned and operated sites where no traffic acquisition cost has to be paid away, grew faster than revenue from third party sites.
  • This is mainly due to YouTube which is a key asset for the monetisation of video which is currently the fastest growing area where advertisers are spending their budgets.
  • This was somewhat offset by continued strong growth at Google Play (where gross margins are 30%) but this is still not big enough to have a meaningful impact on margins overall.
  • These factors allowed EBIT to come in ahead of expectations at $4.4bn compared to consensus at $4.2bn and RFM at $4.0bn.
  • However, this was hit by a higher than expected tax rate of 21% compared to RFM’s forecasts of 19%.
  • This is what caused EPS to be weaker than expected despite the better than expected revenues and higher margins.
  • Cash generation was very solid at $5.6bn from operations of which $2.6bn has been invested mostly in data centres and real estate for future installations.
  • No guidance has been given but it is clear that the company is pretty optimistic with its outlook over the next 12-18 months.
  • This is something that is not difficult to believe as the fixed internet revenues are remaining steady while mobile continues to grow at over 40%.
  • Google is doing a masterful job at getting highly specified handsets into the hands of users and then reaping all the benefits from the increased traffic that results.
  • This should keep growth comfortably above 10% until 2017E.
  • With no real challenger on the horizon, Google remains one of RFM’s top picks when it comes to the digital ecosystem.
  • Microsoft and Yahoo! also make the list.

Apple / IBM – Juicy fruit.

RFM AvatarSmall

 

 

 

 

 

Alliance is just a first step in addressing the enterprise.

  • Apple and IBM have announced an exclusive partnership that will make iOS devices a much more realistic option for an enterprise when purchased through IBM.
  • For Apple, this means that IBM will encourage its customers to use iOS devices ahead of anything else for mobile when buying its software and data analytics offerings.
  • For IBM, it means that desirable hardware will now be optimised to run its software and services to give superior performance when compared to competitors.
  • To date, iOS has been predominately a consumer based offering and its penetration into the enterprise has been driven almost exclusively by its desirability to users in their personal lives.
  • For IT departments, managing and securing these devices has been a problem which is only now beginning to be solved by the likes of Good Technologies, MobileIron, AirWatch, Microsoft and so on.
  • I suspect that IBM will get much greater access to iOS functionality than is normally allowed to software developers and this will allow it to deepen its functionality on these devices.
  • This could include:
    • First: Removal of the limitation that prevents distinct apps. from sharing data with each other.
    • This would allow different enterprise apps. running on the device to share data with each other meaningfully enhancing their functionality.
    • Second: Deep integration of IBM software will allow the enterprise to control the devices to a much greater level of detail than other device management platforms.
    • Third: IBM apps will now be optimised for iOS meaning that they run more efficiently and consume less battery life.
    • Users should also see a meaningful improvement in performance, stability and reliability.
  • This is positive for both Apple and IBM but this is very far from a deal that will ensure that Apple will become the enterprise mobile device of choice.
  • iOS in the enterprise is predominantly driven by users buying their own devices and then getting the IT department to make them work as best they can with their infrastructure.
  • This deal goes some way towards making that much easier for the enterprise, and especially for IBM customers, but huge pieces are missing.
    • SAP. SAP runs the key operations of a very large number of the biggest companies in the world.
    • Hence, an enterprise offering needs to be working well with SAP systems to have wide ranging appeal.
    • Microsoft: Microsoft’s exchange server is an integral part of the communications infrastructure of most companies.
    • Microsoft has plans of its own when it comes to offering devices and services to corporates.
    • Oracle. Oracle runs the databases of many companies and again, integration with Oracle is going to be needed to have a deep and rich offering for the enterprise.
  • Consequently, while this is undoubtedly a good step forward for both Apple and IBM, it is very far from a killer blow that will ensure that Apple and IBM will romp home taking the enterprise for themselves.
  • This deal is certainly negative for Blackberry which is trying to orchestrate a recovery around its offering for the enterprise and has most to lose.
  • It is also negative for the other hardware makers like Samsung and Microsoft who are also targeting the enterprise for mobile device and service sales.
  • However, there is so much more to the enterprise than IBM and Apple that much more needs to be offered to really change the existing status quo.
  • The key to the enterprise will be offering users a series of services within which they can fulfil all of their professional duties in an easy, fun and secure user experience.
  • This is what Radio Free Mobile refers to as the Digital Work Pie which will be the subject of future research publications.
  • This deal is just the first broadside in a battle that is likely to be fought with increasing intensity over the next 5 or more years.

Yahoo! Q2A – Chinese spotlight.

RFM AvatarSmall

 

 

 

 

 

Alibaba hides very disappointing display revenues.

  • Once again Yahoo! has managed to keep poor results hidden amongst the spotlight glare of Alibaba.
  • Q2A Revenues / EPS were $1.04bn / $0.37 compared to consensus at $1.09bn / $0.38.
  • The biggest disappointment was in revenues from display advertising.
  • Yahoo! has been promising a turnaround in these revenues for some considerable time and last quarter (see here) saw the first uptick for a very long time.
  • As a long-term believer in Yahoo!, I was hopeful that this was a sign that the transformation of the core products was at last bearing fruit.
  • Unfortunately, this quarter’s display revenues are down 7% YoY compared to up 2% YoY that was seen in Q1 14A.
  • Yahoo! attributes this to poor revenue mix but the fact that search revenues and revenues from mobile have not been able to take up the slack is worrying.
  • Consequently, I have to conclude that Yahoo!’s efforts to migrate its usage into mobile is still floundering which is why it is not seeing anything like the growth of Google, Facebook or Twitter.
  • Yahoo! has great services and great traction in fixed Internet but its efforts in mobile have yet to bear any fruit and time is running short.
  • The good news is that Yahoo! has reduced the number of shares that it will sell in Alibaba from 208m to 140m and will return at least half of the net proceeds to investors.
  • The problem is that as soon as the IPO is over, the share price of Alibaba will crystallise the value at Yahoo!.
  • This will end the speculation and return the market’s focus to the underperforming core business.
  • With the IPO expected in mid-August, Marissa effectively has one more quarter to show some progress before the grace period is over.
  • Yahoo! has the assets with which to create a great ecosystem but currently the assets are disparate with the majority of the traffic being generated in fixed.
  • These assets have to be integrated and modified such that they work well together to encourage the user to use his Digital Life within Yahoo!’s services.
  • Critically, Yahoo! must entice the user to do that on his mobile device.
  • Yahoo! has been working on this for a long time and with the progress shown to date, there still seems to be a long way to go.
  • Hence, I am worried that there are more difficult quarters ahead where there will be no glitter from Alibaba to spice up the earnings report.
  • Yahoo! still has great potential but execution is becoming a serious concern as time continues to drift by.
  • Yahoo! remains in my top 3 but is certainly drifting to the back of the pack behind Google and Microsoft.

Microsoft – Field of dreams.

RFM AvatarSmall

 

 

 

 

 

If all you do is build it, they won’t come.

  • Nadella’s recent memo says all the right things but reveals the vast amount of work that is needed to make this dream a reality.
  • All through the 3,000 word memo it is clear that Microsoft intends to make the most of the assets it has and become a full ecosystem company.
  • With its combination of corporate and consumer assets, Microsoft is unique in being able to address both the Digital Life Pie and the Digital Work Pie.
  • With its mixture of software and services, it has an offering for almost everything that a user does in his personal and professional life but the key will be bringing it together.
  • It is here where the hardware assets of Surface, handsets and Xbox come in.
  • The idea is to use these as a showcase for how both Digital Work and Digital Life can work seamlessly on cool hardware.
  • The boundaries are becoming blurred with many users using devices in both a professional and a personal capacity.
  • At the end of the day Microsoft wants a user to feel that almost every digital need that he has can be taken care of in a seamless, easy-to-use and incredibly fun way.
  • If this can be achieved, then Microsoft will have a unique ecosystem giving it both appeal and pricing power.
  • This is the biggest driver for long-term revenue and profit growth.
  • If Microsoft is to decouple from the PC and enterprise spending cycles, it is here that it will be achieved.
  • However this is where the trouble starts.
  • In order to achieve this, every asset that Microsoft has must be fully integrated with everything else.
  • Every service must be fully aware of the other services that the user is signed up for and be able cater to that.
  • The current state of Microsoft’s portfolio is very far adrift of this requirement and the required integration is going to be a herculean effort of messy plumbing.
  • Examples of the problems are:
    • There is a personal and professional version of OneDrive but the two have nothing to do with each other.
    • Integration between Lync (Professional VoIP) and Skype (Personal VoIP) is almost non-existent.
    • The databases for many of the Personal Digital Life services remain separate from each other and do not share user information.
  • Furthermore Microsoft must completely change the way markets its offering and deal with the fact that users have no real idea of what the Microsoft ecosystem can for them.
  • The market is likely to remain fixated on a potential headcount reduction at Nokia, share buybacks and the PC market but the real future of this company will be decided by its ability to execute this vision.
  • Microsoft has the right vision and my confidence that the culture can be changed continues to improve.
  • Hence, I am increasingly optimistic that Microsoft can achieve this vision and as a result increasingly place Microsoft in my top 3 companies to look at when considering the ecosystem.
  • These are Google, Yahoo! and Microsoft.