Windows RT – White Elephant

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Windows RT has no future. If only Microsoft could see that.

  • The latest round of disclosures reveal what a disaster Windows RT is adding further weight to the notion that it should be killed off.
  • In its end of year filing, Microsoft disclosed that it has sold just $853m of its Surface line of tablets. (page 28 10K)
  • This number appears to include both the Windows RT version and the Windows Pro version.
  • This suggests that Microsoft has sold a total of slightly more than 1m units of both devices combined.
  • In reducing its existing Surface RT inventory by $150 per unit, Microsoft managed to wipe out more value ($900m) than both product lines managed to generate in revenues in a whole year.
  • To add salt to the wound, Asustek has joined Samsung in halting development of Windows RT devices.
  • I suspect that these two are not alone and that it will be Microsoft alone that carries this white elephant into 2014.
  • The problems with Windows RT are fourfold:
    • It looks like Windows 8 but the user can’t install anything on the desktop creating confusion and mistrust.
    • Many of the classic applications expected on a tablet are missing.
    • The devices are underpowered creating a poor user experience.
    • The devices are too expensive compared to the iPad and other tablets even after the recent round of reductions.
  • This combined with poor coverage when it comes to applications that users expect to be on tablets means that RT has no future.
  • What Microsoft needs to do is to make full Windows 8 run on ARM.
  • Then users can choose a Windows 8 device that they know will have full functionality.
  • The choice should be made on the basis of price, performance and battery life alone.
  • If this can be achieved (I am not optimistic) then ARM has a chance to grab some share in the PC market.
  • If things stay the way they are (and I can see no change before mid-2014) then ARM has no chance and estimates need to be cut.
  • Windows RT has been a very expensive experiment but it is time for Microsoft to cut its losses before they become crippling.
  • This is great news for Intel as its chips are closing in on ARM and its Windows 8 tablets are the only ones to buy (and the only ones the OEMs are making).
  • I like Microsoft as it is cheap, has great assets and has recently said exactly what I want to hear in its recent strategy announcement.
  • However, its unwillingness to admit its blunders and long legacy of poor management fill me with doubt as to whether this miracle can be pulled off.
  • I prefer Nokia.



Tablets – Google on top?

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Android now has huge share in tablets but is it really Google?

  • The latest data on the tablet market shows that Android is now far and away the biggest platform shipping with around 70% market share.
  • Apple is on around 25% with Microsoft making up almost all of the difference.
  • This is a substantial change from last year when Android and iOS were virtually neck and neck.
  • Before one gets excited about how Google is taking over the tablet market 2 questions have to be asked:
  • First. Shipments are one thing but what about the installed base?
    • I suspect that there are still more iOS tablet in the hands of users than there are Android devices although I suspect that this will soon change.
    • The traffic data still indicates that iOS tablets are used far more than Android tablets.
    • This makes the iOS user base far more valuable to anyone trying to monetise traffic through advertising.
  • Second. How many of those Android tablets does Google actually have access to?
    • Radio Free Mobile’s analysis indicates that while there will be around 1bn Android handsets in the hands of users by the end of this year, Google will have access to around 1/3 of them. (see here)
    • This is because only 54% of Android devices are Google compliant meaning that they can run the applications.
    • On top of this only 56% of Google compliant handsets are running Android 4.0 or better.
    • I have long been of the opinion that a device must be both Google compliant and running Android 4.0 or better in order for Google to monetise the device effectively.
    • I suspect that the same is true in tablets and initial research indicates that, like in handsets, Google has access to only a fraction of these devices.
  • I suspect that Google will make much of its new found dominance of tablets on its next earnings call but the reality is, in fact, very different.
  • This is both good and bad for Google.
  • Bad, because the company is spinning a story that is simply not accurate but good because there is substantial upside to mobile revenues if Google can work out how to get access to the majority of Android devices that currently pass it by.
  • I remain indifferent to Google, preferring Yahoo, but I can see scope for a bounce in 2014 if Google to get access to the devices that it currently misses.

Leap Motion – Desk draw candy

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Leap Motion has huge potential but this version is no more than a toy.

  • The delayed Leap Motion controller is finally in the wild but it does not look ready to be the answer to the touch screen yet.
  • The Leap Motion controller is a cool looking device that sits on the desktop and allows the user to interact with a computer using 3D hand gestures.
  • The system is so accurate that it can track movements of all 10 fingers simultaneously raising the possibility of whole new way to interact with electronics.
  • This device has the possibility to turn any desktop or TV screen into a touch-based device at a much cheaper price ($80) than putting touch sensitivity into the panel. (see here)
  • Dreams of Minority Report and Tony Stark abound as one unboxes the product and plugs it in but these dreams remain unfulfilled.
  • The device comes with software for calibration as an app store that has 54 apps for Windows 7 and 8 and 58 for Mac OSX.
  • The initial set up is very encouraging as the orientation application is well crafted with light beams and ambient music synchronised with one’s fingers.
  • Unfortunately, it is all downhill from there as the experience with other applications is inconsistent at best and very frustrating at worst.
  • Trying to take control of a Windows desktop using the controller is an exercise in futility and many of the games do not work well enough to hold the attention for long.
  • The other problem is that holding ones arms freely in the air for long periods of time is actually quite tiring and a lot of tinkering was required to get the device to work properly while resting an elbow on the desk or armrest of an office chair.
  • I am a big believer in the potential of this device as it offers a highly cost effective way to turn any screen into something that is very easy to interact with.
  • The problem is that it needs to be much more robust.
  • It has to just work out of the box and work perfectly all the time.
  • Furthermore it has to be easier and more intuitive to use than a mouse.
  • If it can fulfil these criteria then I think adoption could be substantial which would lead to application developers scrambling to implement it.
  • I can also see it being integrated into keyboards, screens and laptops and becoming a standard piece of computing equipment.
  • Hewlett Packard is in the lead here as it has already announced that it will integrate the controller into some of its laptops (see here)
  • Unfortunately, in its current state Leap Motion is no more than a cool toy that will be played with for a while but then end up gathering dust in a desk draw while the real work is done.

Samsung Q2 – Sign of things to come.

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If the smartphone market fragments it will hurt Samsung’s margins.

  • Samsung reported weak results and as expected it was the handset business that was mostly to blame.
  • Revenues / Net Income were KRW 57.5tn / KRW7.58tn compared to consensus of KRW58.6tn / KRW8.02tn.
  • The biggest problem was the slowdown in the high end of the smartphone market where estimates for Galaxy S4 shipments have been falling for some time.
  • This caused the mix to move towards lower priced models which resulted in weaker than expected sales.
  • Mobile revenues / margins were KRW34.58tn / 18.2% compared to KRW31.77tn / 20.5% in Q1 2013.
  • Samsung blamed the margin decline on increased costs from new product launches and on-going investments in R&D and distribution.
  • The outlook is uncertain.
  • The company expects to grow faster than the market but it is very clear that things have meaningfully slowed.
  • This is not a problem as long as the market remains concentrated with a few models shipping most of the volume and generating most of the revenues.
  • This is because Samsung’s R&D model runs along the lines of one development team per handset SKU.
  • If the smartphone market fragments (as the voice phone market did in 2003-2006) then Samsung will need to increase the number of handsets it makes in order to meet demand.
  • This will result in flat revenues but higher costs which will then put margins under sustained pressure.
  • There are signs that this is beginning to happen and Samsung’s recent launch of 4 Galaxy S4 variants is a worrying sign of this trend.
  • For the short-term, I am less concerned, as this will be a gradual trend, and so for the balance of this year I think Samsung will be able to hold onto 17-20% EBIT margins in handsets.
  • However, if this trend takes hold, I can see Samsung’s margins in handsets decreasing to 10-12% which is where they were the last time the handset market fragmented leaving Samsung with rising costs relative to revenues.
  • The stock is cheap but it is not going anywhere while concerns circulate. These have been exacerbated by Apple’s strong iPhone shipment numbers in Q2 2013.

FaceBook Q2 – Efficiency Engine.

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Great numbers but the bigger picture is missing.

  • FaceBook reported strong Q2 results as monetisation of mobile traffic improved much better than anyone expected.
  • Q2 Revenues / EPS were $1.81bn / $0.19 compared to consensus at $1.62bn / $0.14.
  • Mobile was the star of the day making up 41% of total revenues up from 30% in Q1.
  • Of the 1.15bn users, 819m are essentially mobile users and 61% of all users are on the site every day.
  • The best news of all was that usage is not declining even as user numbers continue to rise.
  • Typically, the latest additions are the more casual users who use a service least and hence generate the least revenues.
  • FaceBook is managing to buck the trend with its strong networking effect and per user statistics are not declining even as user numbers grow.
  • This is positive as it means that the total addressable market for FaceBook is expanding in line with its user base.
  • FaceBook is making good use of all the levers that are available to it and advertising in the newsfeed has become a major revenue driver.
  • 1 out of every 20 items is an advertisement and there has been no drop in satisfaction meaning that the advertising relevant to the users and they are tolerant to it.
  • How far FaceBook can push this is uncertain but I suspect that this could probably go to 1 advertisement in every 10 items before users start getting annoyed.
  • The problem is that when FaceBook has maximised the monetisation of social networking growth will suddenly grind to halt.
  • The better things are now, the more quickly this will happen.
  • This is why I think that the company is missing out on the bigger picture.
  • FaceBook has nearly 4x the number of users that Google does in the mobile space and yet Google is projected to have a 56% share of mobile advertising this year with FaceBook on just 13%.
  • I believe that this is because FaceBook is still a one trick pony offering very little outside of its core social networking service.
  • Social networking makes up just 26% of smartphone usage leaving the other 74% of user activity unaddressed.
  • Google has a service for 66% of a user’s activity on a smartphone which I believe is a major reason why Google is making so much more money in mobile than FaceBook is.
  • In order to catch up, FaceBook must break out of its niche and address the other activities that users do with smartphones.
  • Video on Instagram, FaceBook Home and so on are all attempts to do this but so far very little has stuck.
  • This is the key to longer term growth because without it the current run will soon run out of puff.


Apple Q3 – Middle Age Spread.

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These results have maturity written all over them.

  • Apple reported Q3 results that beat expectations as iPhone shipments beat expectations by 20%.

Q3A                Consensus

Revenues                        $35.3bn          $35.0bn

Gross Margin                  36.9%             36.6%

EPS                                 $7.47              $7.34

iPhone                             31.2m              26.1m

iMac                                 3.8m               3.9m

iPad                                 14.6m             18.0m


  • Guidance was weak with revenues / gross margins of $34bn-$37bn / 36%-37% expected compared to consensus of $37.1bn / 36.9%.
  • Revenue was essentially flat YoY and there are at last signs of falling ASPs of iPhones .
  • iPhone Q3 ASPs fell to $583 from $613 in Q2 as shipments of lower priced iPhone 4 / 4S and 3GS increased their share meaningfully in the mix.
  • iPhone shipments in US, Japan, Russia, Brazil, India and Singapore all saw strong YoY growth which I suspect was largely due to price cuts making iPhone 4 / 4S more accessible to the mass market.
  • The iPhone 5 remains by far the most popular device, but the iPhone 4 / 4S and 5 look very similar to the casual observer.
  • Hence, I suspect that some of the negative stigma around owning an older model has disappeared as the older model looks very similar to the newer one.
  • This might change if the iPhone 5S (or 6) is a meaningful departure from the iPhone 5 in terms of looks, but for now I think this trend could easily continue and accelerate.
  • iPad was a real disappointment missing forecasts by 19% and a strong indication that this segment is also approaching saturation.
  • This is a positive sign for the PC market.
  • For the last few years PC users who do nothing except browse, email and shop have been deserting their PCs in favour of smartphones and tablets.
  • This has been a major factor in the weakness in PC shipments over the last few years.
  • If the tablet and smartphone segments that can adequately perform these functions are now showing signs of maturing, it is a sign that all the users who are going to ditch their PCs have done so.
  • Perhaps this is a sign that the long suffering PC market will now bottom out.
  • There are many functions that smartphones and tablets are incapable of and I am a believer that the PC market is here to stay.
  • It is much too early to get excited but I can see some light at the end of a very dark and long tunnel.
  • Apple needs a new product category in order to reignite growth as it remains the dominant force in every segment that it occupies.
  • Here, TV remains the best bet simply because I suspect that an iWatch will be an expensive mistake.
  • A mid -range iPhone is a very dangerous proposition as the cannibalisation (and subsequent fall in ASPs) could easily wipe out the impact of an increase in shipment numbers.
  • These numbers are good for a little bounce but not much more.


Google – King of data

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Google looks increasingly mature from here.

  • The key to monetisation of the internet is user data and Google has this in spades.
  • A recent study (Deepfield) has revealed that 60% of all connected devices in the US share data with Google’s servers every day.
  • This makes Google’s share of internet activity larger than Facebook, Netflix and Twitter combined.
  • It is important to make the distinction between this analysis and actual traffic volumes where Netflix is the largest.
  • A 4GB movie is an awful lot of traffic but the provider of this service will learn almost nothing when compared to the provider of an email service that serves up 4GB of emails.
  • Despite this, Google (and YouTube) still accounts for 25% of all US data traffic up from 6% just 2 years ago.
  • With more than 60% of all devices in the US exchanging data with its servers, Google knows something about almost everybody.
  • This gives it an unprecedented ability to target advertising in a way that is both accurate and relevant.
  • This is why Google remains the undisputed No1 in this space but it also begins to explain why things are beginning to slow down.
  • In the last two years its share of traffic has increased more than four-fold which has been a major factor in its growth over the last few years.
  • I suspect that this is also factor that explains why Google is beginning to slow down.
  • Market share is unlikely to improve much from here which combined with signs of greater maturity, implies that the outlook will be more modest from here on in.
  • I do see scope for an unexpected bounce in 2014 as Android 5.0 brings a lot more devices into Google’s range (see here) but until then, I think most of the growth has been captured in the valuation.
  • Yahoo! looks much more interesting on 16.4x 2013 PER and has much more space to grow than Google on 26.4x 2013 PER as it has already grabbed pretty much all the share it can get.

Apple – Maps and screens

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There is no point in acquiring Tom Tom.

  • The wires have been alive for the last few days with the notion that Apple is on the acquisition trail to fix its mapping issues as well as delaying its iPhone 5S launch to increase the screen size.
  • When it comes to maps the hornets are circulating around HopStop (public transport app) and Locationary (local business locations) as two potential acquisitions.
  • These would be useful bolt-ons for Apple but they will not fix the two fundamental problems that Apple has with maps.
    • First. Apple has no location based services platform upon which base all of its location and map oriented services.
    • In reality there are only two platforms out there that are both well developed and mature: Google Maps and Nokia Here.
    • Second. Both Nokia and Google have thousands of people working on their maps and it took both them more than 5 years to get to where they are today.
  • Apple has been under the illusion that it can achieve the same result with no platform and just a few hundred people working on the product.
  • Furthermore, acquiring Tom Tom will not fix Apple’s problems as Tele Atlas is really only a map. It is not a platform from which Apple could quickly re-launch Apple maps.
  • Hence, I think it is extremely unlikely that Apple will acquire Tom Tom and I think it also unlikely that Apple Maps will suddenly improve.
  • The most likely scenario will be slow gradual improvements but as most have already switched back to Google Maps on iOS, will anyone notice?
  • The other notion doing the rounds is that Apple has delayed the iPhone 5S in order to increase the screen size.
  • This is something that is badly needed in order update the iPhone and keep it competitive against Samsung’s Galaxy Series.
  • The iPhone 5 looks tired and old against its larger screen rivals and without an upgrade, the iPhone5S will be just the same.
  • Hence it makes complete sense to upgrade the screen size and it is something I have been waiting on for some time (see here).
  • However, one can’t just turn around at the last minute and change the screen size which is why I suspect that if there is a larger screen size coming, it will have been in the plan for a long time.
  • This could also co-incide with the release of a lower priced version where the differentiation could be on the size of the display as it is with the iPad and iPad Mini.
  • This is an incredibly dangerous strategy for Apple as the risk of people forsaking the high priced device for the cheaper alternative is very real indeed.
  • This would have a negative effect on margins as costs would have to rise to support more model variants but revenues could easily stay the same (lower ASPs).
  • I am still not convinced that Apple will release a mid-range iPhone but I am expecting something when it comes to addressing the screen size problem.
  • Apple remains very much on the back-foot at the moment and the next set of results (this week) and product releases look unlikely to catapult it back into the lead.
  • I remain indifferent to the stock despite an attractive valuation.

GOOG and MSFT – Dog days

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Google and Microsoft both had a difficult night.


  • Google reported results that missed expectations as price erosion hit revenues and investments worsened the situation on the bottom line.
  • Q2 revenues (ex-TAC) / EPS were $11.16bn / $9.56 compared to estimates of $11.3bn /$10.8.
  • This represents a 1.3% and 11.5% miss respectively.
  • The main problem is that advertising spending is growing much faster on mobile than it is elsewhere and these campaigns cost less than in the fixed line.
  • Radio Free Mobile’s research indicates that keyword search advertisements cost around 35% less on mobile than they do in fixed.
  • This is a reason why the cost per click is falling faster than expected.
  • Cost per click fell by 6% in Q2 2013 compared to estimates of around 3%.
  • Motorola had another awful quarter draining shareholders of a further $218m.
  • The rationale for Google to hold onto Motorola Mobility remains highly questionable with the only possible reason being as a defence against Samsung in the long term (see here).
  • There are signs of maturity is some of Google’s core markets and I think that growth will be much steadier from here on.
  • However, there is opportunity for a bump up in revenues when Android 5.0 is released.
  • Radio Free Mobile’s research indicates that while Google may have activated over 900m devices, it is earning revenues from less than one third of them.
  • Although this looks bad for Google’s ability to monetise Android, it presents an opportunity should Google find a way to start earning revenues from the 2/3rds of Android devices it is currently missing.
  • Android 5.0 could be a big help here and I see the possibility for an unexpected boost to Android revenues in 2014.
  • While I remain very lukewarm to Google, I am, waiting for the opportunity to benefit from the bounce I see in 2014.



  • Microsoft also had a difficult evening with Q4 results coming in below expectations.
  • Q4 Revenues / EPS were $19.2bn / $0.59 compared to forecasts of $20.0bn / $0.77 representing a 4% and 24% miss respectively.
  • Revenues were mostly impacted by the on-going weakness in the PC market which recorded another awful quarter in Q2 2013.
  • EPS was impacted by a thumping $900m inventory write down on the Surface RT related to the recent $150 price cut.
  • Taking this write down at face value, it implies that Microsoft is sitting on or is committed to a further 6m devices.
  • With Microsoft having sold around 1m devices in the first 6 months of 2013, the message is very clear:
  • Windows RT is a total failure and needs to be stopped now.
  • I believe that ARM has a future with Windows but not as a poor cousin with hopelessly limited functionality.
  • The Windows 8 experience needs to be the same for both Intel and ARM based devices with consumers making a choice based on price, performance and battery life only.
  • Until this dream becomes a reality, ARM has no future in the computing market and I believe that estimates for ARM will have to be cut to reflect this.
  • Intel’s position is looking far more secure now than it was a year ago and it has the blundering of Microsoft to thank for that.
  • Guidance for the coming quarter was pretty cautious as there is no end in sight to the decline in the PC market.
  • The main problem is that Microsoft owns 90% of this market and so it desperately needs to inform users why they should buy Windows 8.
  • It’s marketing and its message to date has been limited to “if you build it they will come”.
  • Unfortunately, the world has changed and this no longer works.
  • Windows 8 has many features that address these changes as well as differentiate it from competitors like iOS and Chrome but no one knows about them.
  • Even in its flagship stores, the devices are pretty much blank leaving prospective users pretty nonplussed once they have played with the devices for a few minutes.
  • Until this changes and Microsoft actually engages users and shows them why they should buy Windows 8 this malaise is likely to persist.
  • Don’t get me wrong, I am a big fan of the potential for Windows 8 but right now Nokia and the OEMs seem to have much better idea how to sell it than Microsoft does.
  • Microsoft remains cheap but looks set to stay that way for a while.
  • Nokia has far more upside.


Nokia Q2 – Hit and miss

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Light Q2 sets up potential for a bounce in Q3.

  • Nokia missed revenue expectations but profitability improved to allow profits to come in ahead of expectations.

Q2A                Consensus    RFM estimate

Units                          61.1m              74.0m                        62.0m

Mobile Phone           53.7m             66.0m           55.0m

ASPs                           €26                 N/A                 €27.0

Lumia Devices          7.4m               8.0m              7.5m

ASPs                           €157                €175                €165

D and S Revs              €2,724m        €3,091m         €2,950m

Adj-EBIT                    -€32m                -€40m           -€45m

Margin                       -1.2%               -1.2%               -1.5%


NSN Revenues         €2,781             €3,133m          €3,050m

NSN Adj EBIT           €328m           €221                €305m

Adj. Margin              11.8%               7.0%               10.0%


Group Revs               €5,695m        €6,394m        €6,221m

Group Adj EBIT        €303m           €130m            €195m

Group Adj Margin          5.3%          2.0%               3.1%

Group EPS                 €0.00           -€0.02            €0.02


Source: Company Data, RFM estimates, Bloomberg.


  • The miss was mostly due to a reduction in channel inventory in Mobile Phones but also due to a small miss at NSN.
  • The Lumia 520 and 720 were the real volume devices but this comes as no surprise as these are cheaper devices.
  • This quarter’s performance brings the Microsoft Windows Phone ecosystem into third position in terms of units shipped pushing BlackBerry into fourth.
  • RFM analysis indicates that BlackBerry still has more active users than Windows Phone but I do not expect this to last very long.
  • Cash flow was poor with a combination of an increase in working capital as well as restructuring cash outflows.
  • Cash position remains healthy at net cash of €4.1bn and so I am far from concerned regarding a liquidity shortage.
  • Q3 guidance was positive with D&S revenues expected to grow when seasonality would infer flat revenues at best.
  • Profitability forecasts were once again very cautious and very wide with D&S services margins expected to be +2.0% to -6.0%.
  • This gives the company plenty of space to manoeuver but I think that margins could easily come in better than the 1.2% recorded this quarter.
  • This is due to higher revenue as well a mix shift towards newer products in Q3 given the product launches in mobile phones towards the end of Q2.
  • Hence, I am optimistic that Nokia will have a good Q3 and this will set the company up nicely for a run into Q4 and 2014.
  • The outlook for the Windows Ecosystem is improving slowly and I am hopeful that H2 2014 will see more compelling devices in terms of tablets, hybrids, phones and ultrabooks.
  • Nokia remains the best way to play this trend and remains second only to Yahoo! in terms of stocks to look at in the world of mobile ecosystems.