BlackBerry – A seat at the table.

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BlackBerry 10 hopes to sell itself on a feature that so far has not worked for Microsoft.

  • Despite being snubbed by the marketing department, I think Blackberry 10 has merit and a fighting chance.
  • At global events in New York, Toronto, London, Dubai (to which I was unable to attend), Paris, Johannesburg, Jakarta and Delhi, Blackberry 10 was launched with very little showmanship.
  • It’s a good job that the platform was able to speak for itself as BlackBerry execs did a very poor job of whipping up excitement.
  • The crash of the BlackBerry’s share price yesterday was due to only one factor, the price of the devices.
  • The market had been hoping for something cool and something cheap.
  • It got something cool but it is not cheap at $199 with a two year contract or $149 with a three year contract in the US.
  • This basically puts BlackBerry 10 in the high end of the Android market and on or just below par with the iPhone.
  • This is where the problems occur.
  • Against low and mid end Android and existing BlackBerry, Blackberry 10 is compelling but against high end Android and iPhone, the case is less obvious.
  • Blackberry 10 takes many of the innovations of Windows Phone (hubs) and takes them a step further by integrating them all together in one place.
  • The user experience is completely novel in that the user spends no time at all among the traditional grid of applications, but in an environment where he or she can swipe to move around.
  • At all times a quirky up and to the right swipe reveals the hub where all emails, SMS, BBMs, IMs, Facebook, Twitter and Skype (coming soon) notifications are displayed.
  • This is a new level of integration as the user can interact with any one of these services without having to hit the home screen and navigate to the relevant application.
  • This is exactly the innovation that Microsoft came up with in 2009 with Windows Phone, that I love, but no-one bought.
  • Maybe the market is not ready for the user experience to go to the next level but BlackBerry is the second company to go in this direction.
  • I still believe that the market will move towards integration in the longer term, and here Apple looks very vulnerable.
  • BlackBerry has put a vast amount of effort into this platform and it is slick, pretty and has plenty of differentiating functions.
  • Typing, BlackBerry Balance, BlackBerry Remember, Story Maker and Camera all offer interesting takes on digital life and I think they will appeal to many users.
  • However, the third party application offering looks poor.
  • It headlines with 70,000 applications but many of them appear mediocre, giving the impression that BlackBerry has allowed any old rubbish onto BlackBerry World just to make the numbers.
  • Android applications will also run on BlackBerry 10 (thanks to a Dalvic emulation from Myriad) but they execute very poorly and there is no consistency of usability between it and the native BlackBerry 10.
  • Enterprise has also not been forgotten with corporate software running on a completely separate kernel.
  • Data from the enterprise and consumer are presented to the user together in the hub but with enterprise on a totally separate kernel, the security and control requirements of corporates has been nicely addressed.
  • This ability to run multiple kernels is one of the main features of QNX and was a key factor behind its acquisition by BlackBerry in 2010.
  • Net net this is a really good first iteration of a new platform but it has the following problems in my view
    • It is too expensive for what are now BlackBerry’s core markets.
    • The user experience is not intuitive until you have learned how to use it. Only then does it make sense.
    • The user experience is not consistent across all functions. For example, sometimes there is a back button but sometimes there is not.
    • There are lots of applications for a just-launched platform but they are mediocre.
    • Outside of integration, it does not do anything that iOS or high end Android do not.
  • BlackBerry has done enough to give itself a seat at the table in the ecosystem war but whether or not it will succeed in being a major player is very uncertain.
  • This is particularly the case as its core appeal is a feature that Microsoft has had for 3 years and has not succeeded in selling to users, despite a far bigger marketing budget than BlackBerry.
  • If BlackBerry shares continue to weaken, an entry point may become apparent, but I don’t want in just yet.


Amazon Q4 – To hell with reason

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There is no rhyme or reason in the valuation of this company.

  • Amazon reported disappointing results but still managed to rise 10% in after-hours trading as the bulls dug deep to find justification.
  • Q4 Revenues / EPS were $21.3bn / $0.21 compared to estimates of $22.2bn / $0.27.
  • Guidance was also weak with Q1 revenues and EBIT of $15.0bn-$16.6bn / Loss $285m – profit $65m compared to estimates of $16.9bn / profit $261m.
  • 2 good things came from the numbers:
    • First. Margins in North America improved nicely to 5% from 3% 12 months ago.
    • This was taken as a sign that there is more to come and the turnaround in profitability is beginning.
    • Second. The attach rate of content to Kindle devices looks like it is moving in the right direction.
    • Sales of the dedicated e-book readers may be falling hard, but sales of the content that go on them grew by 70% YoY.
    • This goes hand in hand with the weakest quarter ever for regular books and a very strong quarter for tablets in general.
    • This implies that iPads and the generic Android tablets such as the Amazon Kindle Fire are being increasingly used for consuming paid content.
    • Amazon’s strategy to sell hardware at cost and make money on the content looks like it is beginning to work.
  • These are positive developments but in no way make up for the fact that Amazon barely makes any money, had puny cash flow of $395m and has a PER ratio to make your nose bleed.
  • I like Amazon’s strategy. It started as a retailer of online books, became an online seller of everything and now is a contender to be a giant of the internet.
  • There are not many companies around that have the ability to re-invent themselves in such a manner but it is already in the price.
  • To have a PER of 14x (with which I could be comfortable), net margins would need to increase 10 times from where they are expected to be in 2013 (0.2%) to 21%.
  • I would much rather have Google 16.4x or Apple at 10.2x 2013 PER and both of these have huge cash balances to deduct to make the ratio even cheaper.
  • Amazon is investing hard for the future but there are going to be bumps in the road.
  • Wait for a big bump and then revisit once Wall Street has panicked and Jeff and his chaps are fitting the wheels back on.


Yahoo! – A place in the pantheon?

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Yahoo! currently lacks the assets but has the users to be a viable ecosystem.

  • Yahoo has completed its first full quarter with Marissa A Mayer at the helm and there are signs of green shoots.
  • Q4 results were good with revenues / EPS at $1.22bn / $0.32 compared to expectations of $1.21bn / $0.28 as market share losses have been halted and cost savings have come through.
  • Guidance was conservative with Q1 Revenues and adjusted EBITDA expected at $1.07bn-$1.10bn / $340m – $360m compared to estimates of $1.12bn / $392m.
  • Guidance for the full year was also quite conservative with FY2013 revenues and adjusted EBITDA expected at $4.5bn-$4.6bn / $1.07bn-$1.10bn compared to forecasts of $4.6bn / $1.67bn.
  • Despite this hefty miss on FY expectations, the market did not seem to care, being simply relieved that most of the rot appears to have been stopped.
  • The big question now is how will Yahoo! return to growth? and it is good to see that Yahoo! has a CEO that knows how she intends to get there.
  • Firstly, the intention is to improve the experiences that users have when using Yahoo! services such as Yahoo Mail, Flickr, Messenger and so on.
  • Falling user engagement with Yahoo Mail was a major driver behind some of the weaker areas seen in Q4 and I am hopeful that the recent improvements will help shore up user engagement as this is critical to the long term survival of Yahoo!
  • The strategy here is simple. Keep as much traffic and activity on the premises as possible and Yahoo! will learn more about that user and be able to sell targeted advertising more effectively to that user.
  • It is basically the same as Google except on a much smaller scale.
  • The second area is mobile and I suspect that this will be central to the longer term growth in revenues at Yahoo!
  • The idea here is to create an ecosystem that ties together all of the assets that it already has and enrich the digital lives of the 200m unique mobile users that it already has.
  • To my mind, those 200m users are a colossal asset and Yahoo! must hold onto them at all costs.
  • However, Yahoo! is very short on assets to create a mobile ecosystem as it has no software with which to push its services, no maps, no app. store and not much when it comes to content.
  • I have set the bar at 100m users being the lower threshold of being a viable ecosystem and so Yahoo! definitely qualifies.
  • If Yahoo has the guts, determination and management depth, then there is a place for Yahoo! in the ecosystem marketplace.
  • Only time will tell but so far Marissa Mayer is making the right noises.
  • I would still prefer Google for now, which is growing faster and is much cheaper, but if Marissa can pull it off then the long term forecasts for Yahoo! are far too low.

Dell – Privacy please






Dell’s mooted move to become private looks to be about peace and quiet rather than desperation.

  • Dell is certainly at a cross roads but it is very far from being in dire straits.
  • Last time I checked, it had some $14bn in cash and $1.3bn in positive cash flow in the last quarter meaning that there is no need to rush headlong into the first solution that presents itself.
  • However, it is struggling with a business that looks to be in decline and a strategy that has been commoditised.
  • Dell was the champion of logistics and manufacturing but unfortunately the Asians have caught up and this model no longer produces anything like the margins that it used to.
  • Dell has been trying to fight back against this trend by diversifying into software and services but the acquisitions that it has made have done little to fill the void.
  • Hence Dell finds itself in quandary.
  • Its core business has become a commodity, it has failed in its strategy to become a software and services company and most worryingly the PC market is changing into a beast it does not understand.
  • For years, PCs have been commoditised boxes with the value being in the CPU or the OS.
  • Now, thanks to Apple, form factor is important again which combined with the advent of touch, means that in-house research and development has become relevant once again.
  • Most R&D has been outsourced to the ODMs meaning that PC makers (with the exception of Samsung and Asustek) are struggling to adapt to the changing nature of the PC market.
  • Hence Dell needs to take a long hard look at itself and decide:
    • What do I do about software and services?
    • Should I go back to in house R&D?
    • How do I adapt to the changes I am facing in my core market?
  • Dealing with these questions requires a fundamental change at Dell and one best effected far away from the harsh reality of publically traded shares and howling commentators.
  • This is why I believe that Dell is considering going private rather than any notion of it being in real trouble.
  • Even for the largest private equity groups, it’s a vast transaction and re-inventing a PC maker is enough to make even the hardiest investor think twice.
  • Whatever it decides to do, it had better hurry up as the two key rivals (Samsung and Asustek) are already fighting fit and are already out there with the sole intent of grabbing as much share as they can.

Google – Nothing better to do?






Building a spanking HQ new is a sure sign of future underperformance.

  • It looks very much as if Google is about to commit the cardinal sin of blowing $1bn from which shareholders have no chance of seeing a return.
  • Google’s UK HQ is currently comfortably housed in rented offices close to Victoria station but it has decided to purchase land near King Cross and build new offices that will cost around $1bn.
  • I have been watching stocks a long time and in my experience building a glitzy new HQ is the biggest sign of a stock that is about to underperform for a sustained period.
  • It tells you that the company has run out of ideas for investing in projects that have a positive return for shareholders.
  • It is a sign that company management is thinking more about itself than about shareholders.
  • This situation and this mindset inevitably leads to lower growth in earnings and poor stock performance.
  • One excuse likely to be proffered is the problem of returning cash to the US where it attracts a heavy tax on entry into the country.
  • Google is only able to buy back shares and pay dividends with cash that is in the US.
  • For me, this is not nearly good enough. Google still has the ability to invest in growing its business outside the US and this move clearly shows that it has run out of ideas.
  • In my view, the excess cash should be returned to shareholders even if the company has to pay tax on repatriation.
  • Shareholders receiving 70% of the cash that belongs to them is far better than receiving 0% which is what will happen when the cash is poured into a building to house employees that already have a home.
  • I like Google long-term but this move really gives me cold feet.


Apple Q4 – Bond scenario






If Apple was a bond, I would be buying every scrap I could get my hands on.

  • Apple reported disappointing results as the woes that have plagued the rest of the tech sector are coming home to roost.
  • Q1 revenues and EPS were $54.54bn / $13.81 compared to estimates of $54.88bn / $13.53.
  • Cash balance was reports at a staggering $137bn
  • Unit shipments
    • iPhone – 47.8m units shipped compared to estimate of 47.8m (43.1m-53m)
    • iPad – 22.9m compared to estimates of 22.4m (18.4m-26m)
    • iPod – 12.7m units shipped compared to estimates of 11.4m (9.6m-13.4m)
    • Mac  – 4.1m units shipped compared to estimates of 5.1m (4.8m – 5.4m)
  • Guidance
    • Q2 revenues will be $41bn-$43bn compared to estimates of $45.81bn ($38.76bn-$50.12bn).
    • Q2 Gross margins are expected to be 37.5%-38.5% compared to estimates of 40.6% (37.8% – 43.5%).
    • Apple has historically guided meaningfully lower than what it thinks it can really achieve.
    • However, from now on Apple will guide towards what it believes it can actually achieve meaning that there will be no more deliberate low balling of guidance.
    • This basically means that everyone is likely to get the knives out and cut their numbers to the guided range.
  • The adjustment of revenues and gross margins should translate into a consensus estimate cut of around 15% when it comes to EPS.
  • This would give EPS for fiscal year 2013 of around $40.
  • With a 10% hit from last nights close this puts the shares on 11.6x 2013 PER.
  • If I take the $137bn of cash out of the equation (which is $145 per share) then the shares will be trading on 8.0x 2013 PER when the stock opens this morning.
  • When a company gets to be this big there is no way it can grow at a breakneck pace.
  • So let us assume that it never grows again and spends the rest of its life innovating just to stay where it is.
  • This would mean continuing the huge investments in innovation just to keep revenues, market share and margins where they are today.
  • This would mean a company generating around $80bn in cash from operations each year.
  • If I hold the shares now, Apple will have generated the full value of my investment within 4 years.
  • If Apple was a bond and free cash flow the coupon, it would be the most exciting fixed income investment I have ever seen.
  • Of course, one takes the risk that revenues and margins fall anyway and that one never gets one’s paws on the huge cash pile but with a 25% yield, that’s a risk worth taking.
  • It is much too late to sell and while everyone else is heading for the door, I am increasingly looking in the other direction.



Google Q4 – Blot on the landscape






A nice set of numbers are obscuring the indelible stain of a company beginning to be run for the benefit of employees over shareholders.

  • Google reported in -line Q4 numbers as advertising revenues rose for the traditional Q4 push to consumers.
  • The shares experienced what I would consider to be a relief rally as the advertising revenues are holding up better than many had feared given the economic outlook.
  • Revenues, EPS were $12.2bn, $10.65 compared to Bloomberg consensus at $12.4bn, $10.50.
  • No meaningful guidance was given.
  • UK and US remain the major markets while southern Europe dragged down the overall growth rate somewhat.
  • Losses at Motorola Mobility declined compared to last quarter but the company managed to lose another $152m equating to margins of around -10%.
  • Bear in mind that this was a company that Google acquired for $12bn, where it has made nothing for shareholders from the patents and which has persistently lost huge sums ever since acquisition.
  • Despite big talk on the call about developing the business, the background of new management of Motorola paints a picture of bean counting rather than innovation.
  • This means to me that, at best Motorola will dwindle further into insignificance in mobile phones with the exception of rivers of red ink presented each quarter.
  • Why Google holds onto Motorola remains a total mystery as it adds nothing but losses and I am sure that the Chinese would jump at the opportunity to own something in the US.
  • This combined with the fact that Google is ranked by Forbes as the best place in America to work for the fourth time and the $1bn being blown on a swanky new London HQ (of which more tomorrow), leads to me think that Google is starting to look like Siemens.
  • Siemens is a company, which to my mind has long been run for the benefit of the employees to the detriment of shareholders.
  • Companies that prefer employees to shareholders are more often than not serial underperformers and I am starting to get worried that Google is edging in this direction.
  • Don’t get me wrong, I like Google for the position that it has craved for itself in the new economy and its long-term outlook but these red flags are becoming too numerous to ignore.



RIM – Hope springs eternal






RIMM must hold onto hardware if BlackBerry 10 is to have a chance of being a viable ecosystem.

  • The big event is next Wednesday (30th Jan 2013), but already the essence of what will be announced has been leaked.
  • The bottom line is that BlackBerry’s new OS 10 is a vast improvement on the old system against which it has been benchmarked, but is it enough to take on Android or Microsoft?
  • From looking at the demonstrations and leaks, I think it looks quite promising.
  • Developer traction has been far greater than anticipated which combined with a usable user experience will help to stabilise what has become a sinking ship.
  • The other burning questions are related to what strategy RIM will follow in its quest to retain some of its former glory.
  • I look at things from the ecosystem perspective and in that regard I think RIM has a chance.
  • The main reason for this is that this is going to be a massive market where there is room for multiple players.
  • Pretty soon there will be 1bn smartphone users and I would guess that any ecosystem with 100m+ active users is probably sustainable.
  • RIM still has close to 80m users meaning that if it can hold onto those and win a few more as BlackBerry 10 develops, it could reach the magic threshold quite easily.
  • A lot will depend on how easy and fun it is to access ones digital life on BlackBerry 10 and how integrated and easy to set up the system is.
  • If BlackBerry 10 can fare reasonably well on these measures then I can see the user haemorrhage slowing and maybe even reversing somewhat.
  • RIM is woefully short of many of the assets that will be needed to create a long-lasting ecosystem (maps, cloud storage, content, and so on) but there will be time to fix these issues once the rot has been stopped.
  • Also of importance is whether RIMM will dispose of its hardware business and return to its roots.
  • Frankly I think this is extremely unlikely.
  • If RIMM was to dispose of its hardware business, revenues would fall by 80% overnight and it would fly in the face of the way returns are earned on software in mobile phones.
  • In general, returns on software are made by selling the hardware that runs that software.
  • The better the software, the higher the price and the gross margin that one can earn on the hardware. (Apple is the prime example).
  • If RIMM exits hardware it will be dependent on third parties to get its software ecosystem to market.
  • This was exactly the problem back in 2000 and the whole reason why RIMM got into hardware in the first place.
  • Hence, if RIMM exits from the hardware business I will be forced to downgrade my expectations from “some chance” to “no chance”.

Google Nexus 4 – Horror story






Anyone who is trying to make money from selling Android devices will be looking at the Google Nexus 4 by LGE with horror.

  • This new Android device has supreme specifications but is being offered at 70% of the price of similarly specified rivals.
  • The device has a 4.7 inch screen, 2GB RAM, 1.5Ghz quad core processor which measures slightly better than the Samsung Galaxy SIII but is available in the UK at £279 (SIM Free) compared to the Galaxy SIII at £400.
  • The reviews of this device are very good with the bottom line being massive bang for the buck.
  • It comes as no surprise to learn that demand for the device has outstripped expectations by 10 times and once again LGE has run up against its old bug bear execution.
  • LGE is ramping up production but I am certain that somewhere someone is sucking up a hefty loss on this device.
  • At this price, the Samsung Galaxy SIII would destroy Samsung’s handset margin even including all the advantages that the company has of scale, distribution, logistics and brand.
  • My bet would be that its Google taking the pain on this one, as there is no way that LGE could possibly have agreed to take a hit of this size.
  • LGE has spent the last year or two balanced on a knife edge and it has neither the financial robustness nor the incentive to take the hit.
  • Again this will all be about Google trying to make sure that it is its applications and its version of Android that is in the user’s hands so that the traffic that the device generates will be coming to Google’s servers.
  • This gives Google the information on users that it needs to sell targeted advertising and to make a return on the money invested in Android.
  • This is really bad news for all of the Android vendors as it will put further downward pressure on devices where everyone except Samsung is already struggling to make any money.
  • This further confirms my view that Android is a bad place to be unless you have an edge that users are willing to pay for.
  • Sony, HTC, Motorola, LGE and the like seem to believe that they have an edge but I see nothing that would make anyone pay over the odds for a device that looks and feels just like everyone else’s.
  • The android shipment figures in 2013 are likely to look great but outside of Samsung, the operating profit line and cash flow are likely to be yet another horror story.

Ultra HD – So big it fails






Ultra HD looks great on the stands and in the shops but the dimensions of the living room are likely to mean that it will fail.

  • It is the all the rage and I have to admit that when I saw it for real, I was impressed.
  • However, what I failed to notice was that the seat, from which I was to marvel at this new wonder, was less than 6 feet away from the massive 85” screen.
  • The problem is that with each successive jump in resolution, one has to sit closer and closer to the screen in order to be able to appreciate the difference.
  • With 4K or Ultra HD (which is 2160p) the maximum distance at which one can appreciate the difference is so small that in the vast majority of living rooms, and critically review rooms, the sofa will be too far away from the screen to be able to appreciate the difference between 1080p and 2160p.
  • It is totally counterintuitive but I have tested it and it appears to be true.
  • The chart below shows that maximum distance that you can sit from the screen in order to tell the difference between different movie resolutions depending on what sized screen you have.



  • As the screen size increases so does the maximum distance from which you can tell the difference but not nearly fast enough.
  • The other problem is that, the bigger the screen size, the further one tends to sit away from the screen as one’s living room tends to be bigger.
  • I have tested this on my 58” plasma TV where I sit about 11 feet away and I struggle to tell the difference between 720p and 1080p but the difference between DVD and 720p is as clear as day.
  • My dimensions put me above the 1080p line but below the 720p line.
  • In my living room, I would to have a television greater than 130” in order to be able to appreciate 2160p.
  • My living room can not accommodate a television of that size and one can quickly see how a 2160p television can never be big enough to really deliver the “wonders” of 4K.
  • I suspect that my living room is typical of many around the world meaning that virtually no-one is going to appreciate the difference.
  • Hence, no one will be willing to pay a premium for either TV sets or the content meaning that vast sums are likely to be lost by those dashing headlong into this space.
  • This is yet another classic case of engineering disease where engineers were so consumed by making the technology that they never bothered to ask whether anyone would want it.
  • I am not surprised to find the Japanese companies at the forefront of this latest push.
  • While they may see an initial bounce in demand as the technophiles pick it up, its all likely to horribly wrong again when the average consumer doesn’t care because he can’t see an improvement worth paying for.