Twitter Q1 – Dreams meet reality

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Twitter’s Q1 was good, but not nearly good enough.

  • Twitter reported results that met headline expectations but were not the blow-out that the valuation of the stock demands.
  • Q1 revenues / adjusted-EBITDA were $250m / $37m compared to consensus at $242m / $20m.
  • The monthly active user count accelerated to grow 6% QoQ (up from 4% QoQ in Q4 13A) to 255m users but it fell short of the street which was hoping for something in the region of 260m.
  • Guidance for Q2 was in line with expectations with revenues / adjusted-EBITDA of $275m / $27.5m forecast but full year guidance fell short.
  • For FY14E revenues of $1,225m are expected which is just slightly below consensus at $1,241m.
  • This is slightly above my FY14E forecast of $1,200m which I have now raised to $1,250m. I have also raised FY15E to $1,600m from $1,500m.
  • Despite what I would call a steady set of results, the shares were off 11% in after-hours trading as the market is finally realising that the dreams are falling short of the reality.
  • This reality is that, in its current form, Twitter is a niche player and does not have the reach of Google or Facebook. (See here and here)
  • RFM’s Digital Life analysis shows that Facebook’s reach in Digital Life is 33% while Google has 66%.
  • Twitter has a paltry 7% and this fundamentally limits its potential to earn revenues. (see here and here).
  • This limitation in reach means that RFM forecasts that Twitter’s revenues will flatten out at $2bn unless it can expand its reach into other areas of Digital Life.
  • This, it is trying to do but success has been quite limited to date.
  • Twitter is a good company with a unique offering but it is no Facebook and the market is finally beginning to realise that fact.
  • Adjusting RFM’s valuation of Twitter for the slightly higher revenues as well as movements in the share prices of both Google and Facebook against whom the shares are valued, leads to a slight reduction in the valuation of the shares.
  • RFM now values Twitter at $32.0 per share, down from $33.0 on February 6th. (See here)
  • With an after-hours share price of $38 per share, the shares are much closer to reflecting the realities the company faces rather than dreams of it being the next Facebook.
  • There is still some downside but the immediate need to sell the shares has eased substantially.

Nokia – Best buddy

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Nokia’s new strategy is focused on the shareholder.

  • With the deal to sell the handset business to Microsoft now closed, Nokia has announced its new strategy, capital structure and leadership team.
  • Nokia will position each of its three remaining businesses for growth, return €3bn to shareholders over the next 18months and pay down €2bn of debt.
  • What will emerge will be a slow growing but steadily profitable infrastructure business with two smaller business both of which have significant upside potential.
  • First: HERE
    • HERE is one of only two really decent maps available to makers of devices and services that have a location element to them.
    • Now that devices has been sold, it is also the only truly independent offering and on that basis, there is scope for substantial market share gain as Google’s contracts come up for renewal.
    • This is going to be a slow burn but I expect that 2 or 3 three years will see this business significantly bigger than it is today.
    • Furthermore, I suspect that the strategic value of maps is only going to increase and I can see this business attracting some big suitors with deep pockets in a few years’ time.
  • Second: Technologies
    • This is primarily the patent portfolio which to date has really only licensed standard essential IPR, using its implementation IPR to defend its device business.
    • With this defensive strategy no longer relevant to the business, Nokia will now seek to licence this implementation IPR to make a return on the investments made.
    • Assuming there are no major hiccups, revenues should increase steadily over a few years significantly enhancing its value.
    • Again, IPR is a core strategic asset in the technology sector and I can see big suitors willing to pay a very high price for this asset in a few years’ time.
  • Nokia’s core business of infrastructure has no reason to need these businesses to be in house and I believe that if the suitors turn up, Nokia will sell both HERE and the patent portfolio.
  • This is unlikely to happen for a while as both of these businesses need to be developed and this will take time.
  • However, I believe that if suitors are willing to pay more for these assets than they could ever be worth to Nokia on a standalone basis, then Nokia will act in the best interest of the shareholder, sell them and return the cash to the shareholder.
  • In a sector where a number of the biggest and fastest growing technology companies suffer from poor corporate governance it is refreshing to find one with the right values at heart.
  • I don’t think the stock is going to reflect any of this value anytime soon, but for those with a 3-5 year horizon, Nokia is very worthy of a close look. 

Microsoft / Nokia – Quick Win

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Synergies will be pretty easy to achieve.

  • With the Chinese finally signing off on the deal, Microsoft has finally managed to close its purchase of the Nokia handset business.
  • Now that handsets are now part of Microsoft, the focus will now move to profitability and how the $600m of synergies will be achieved before the end of 2015.
  • It is not obvious how Microsoft can wring synergies out Nokia by taking ownership but the answer lies in the nature of their relationship as separate entities.
  • As part of the original deal struck in 2011, Nokia agreed to pay Microsoft a licence fee for Windows Phone but actually got far more in return every time it shipped a handset.
  • RFM research suggests that Nokia was paying $10 per unit for the software but was receiving $20 per unit in terms of payments and marketing support.
  • This means that Microsoft was losing $10 every time Nokia shipped a device.
  • This created a disincentive for Microsoft to invest in Windows Phone and was one of the motivations for Microsoft to acquire the business.
  • Hence, in order to realise $600m of savings, Microsoft simply needs to reach a 60m unit annual run rate or 15m per quarter.
  • Even after adjusting forecasts downwards to reflect a weak Q1, I am still expecting Microsoft to hit 15m in quarterly shipments in Q4 this year.
  • Consequently, I fully expect Microsoft to announce that synergies have been achieved well ahead of target even if it does not really mean anything.
  • The real value in this acquisition will come from the fact that Microsoft now has an incentive to invest in this platform and push its appeal both far and wide.
  • Microsoft is still struggling to do this as most consumers are either unaware of the platform or have no clue why they should buy it.
  • With this hurdle out of the way and a new personality at the top, I have hope that this year will see these issues taken properly in hand.
  • Hence, I expect Windows Phone to gain steady share during 2014E and tablet PCs to gain some traction in H2 2014.
  • Both of these could add further increase expectations for Microsoft which should keep the current rally going.
  • Microsoft is up there with Yahoo! and Google as my favourite mobile ecosystem plays. 


Microsoft Q3 – Groundwork

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The foundations of something better are being laid.

  • Microsoft reported good results as cloud and corporate helped offset the ongoing weakness in PCs.  
  • Fiscal Q3 revenues / EPS were $20.4bn / $0.68 compared to consensus at $20.4bn / $0.63.
  • Streamlining of OPEX and the transfer of a key campaign from Q3 to Q4 was mostly responsible for the EPS beat.
  • The shares are having a relief rally as cloud is managing to offset the ongoing PC weakness while Microsoft gets its house in order.
  • On that front I am increasingly confident that Nadella is not going to abandon the consumer assets meaning that this company has a future as an ecosystem provider.
  • In fact, it is the only one that is capable of offering both a consumer and an enterprise ecosystem.
  • If Microsoft can marry the two in a way that works it will be the only offering that run the Digital Life of a user at work as well as at home.
  • They key to this will be integration.
  • Microsoft needs to be able to identify a user across all of its Digital Life services not just maintain a discrete user database for every service.
  • Right now all of the different services sit in glorious isolation within their respective ivory towers and their integration represents one of the biggest challenges that Nadella faces.
  • This is essential to get the most value from Digital Life service both in terms of quality of service and monetisation.
  • So far only Google (and to some degree Apple) have achieved this.
  • Microsoft still has a lot of work to do but it seems that Nadella has decided to take the harder road to turn Microsoft into a real ecosystem company.
  • This gives much greater upside in terms of long term revenue growth but the execution risks are much greater.
  • In the last few weeks Nadella has made moves that would have been impossible a few years ago (Office in iPad, Windows for free) and this gives me hope that Microsoft can change.
  • A steady set of Q3 results and guidance lays the groundwork for a different company to emerge from under the skin of the old.
  • Microsoft remains attractively priced given the opportunity and execution risk that lie before it. 

Apple and Facebook – 2 for 2

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Apple and Facebook raise hopes after Google.


  • Apple reported good results as iPhones shipped in much better volumes than expected.
  • The increased dividend and plans to return a further $30bn to investors also boosted optimism.
  • Q2A revenues / EPS were $45.6bn / $11.62 compared to consensus at $43.6bn / $10.16 respectively.
  • The iPhone was the star of the show shipping 43.7m units compared to consensus at 38.3m and RFM at 42.7m.
  • This was partially offset by weakness in iPad which shipped 16.35m units compared to consensus at 19.8m.
  • Gross margin was good which combined with steady guidance for the traditionally soft fiscal Q3 and greater cash returns to shareholders boosted optimism.
  • This is where the rally is likely to stop as there is still no real catalyst for the stock to rally further.
  • New product announcements are pretty far away and neither a TV nor a watch are going to drive earnings meaningfully anytime soon.
  • Likewise for Apple’s fledgling Digital Life services.
  • Hence, those looking for a quick buck should take it now.


  • Facebook reported good results showing that there is life left in the mobile monetisation story.
  • Q1A revenues / EPS were $2.5bn / $0.34 compared to consensus at $2.36bn / $0.24.
  • Mobile continued to be the main driver with 59% of revenues now coming from mobile.
  • Users grew slightly to 1.28bn from 1.23bn a year ago clearly indicating that the pillar of revenue growth remains improving monetisation not user or traffic growth.
  • This is all well and good but improving the degree to which existing traffic is monetised will only keep growth high in the short-term.
  • To see long term growth the company must expand into other Digital Life services as it is currently only offering a service that covers 24% of what users do on smartphones.
  • Google covers 66% and this is why I believe that its revenues from mobile will be $15bn this year and there is still space for growth.
  • Facebook is trying to achieve this with WhatsApp but the price paid makes it impossible for shareholders to see a decent return unless it is a smash hit success and takes Facebook into the critical gaming segment on mobile.
  • The nay-sayers and the bears will be silenced for a while following these numbers but the valuation is now so high, that I would look elsewhere.
  • Yahoo!, Google and Microsoft leap immediately to mind. 


Apple Q2E – Pushmi-pullyu

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A beat is on the cards but guidance could be a hiccup.

  • Apple reports Q2E results after the US close today. (Wednesday 23rd April 2014).
  • Consensus is calling for Revenues / EPS of $43.6bn / $10.16 in fiscal Q2E and $38.5bn / $8.57 for fiscal Q3E.
  • The iPhone is likely to be the key determining factor as consensus is looking for around 38.3m units with ASPs of around $605.
  • This translates into revenues of $23.17bn (53% of total revenues).
  • Indications are that the iPad and the Mac have performed in line with expectations but RFM channel checks are pointing to a healthy beat in terms of iPhone shipments.
  • RFM believes that the end market has shipped around 42.7m units which translates into extra revenues of $2.6bn which could take revenues above $46bn beating consensus by 6%.
  • All things being equal, I would expect that to flow nicely to the bottom line giving a healthy beat on the bottom line and a rally in the share price.
  • However, Apple is a company of many moving parts and there are a few caveats.
    • First. RFM figures are based on sell-out data whereas Apple will report sell-in. If inventories of iPhone 5s are already being wound down for the iPhone 6, the beat might not happen
    • Second. The Apple fan base is expecting the iPhone 6 to be a major hardware upgrade and so more users may delay purchases than is customary. This could result in weak Q3E revenue guidance.
    • Third. iPad is still 20% of revenues and the lack of a refresh this quarter and the increasing popularity of phablets may eat into demand somewhat. Hence there is a possibility that healthy demand from iPhone may be offset by a miss on iPads both for this quarter and the one to come.
  • Net net, I think that these risks have already been baked into expectations as:
    • Inventories usually move in line with demand from quarter to quarter and the checks have not revealed any abnormal inventory movements.
    • Discussion around the iPhone 6 and the iPad have been in the public domain for some time and this looks to have been taken into consideration when looking at forecasts for fiscal Q3E.
    • Consensus for fiscal Q3E has fallen from revenues / EPS of $39.91bn / $9.06 on Jan 28th 2014 to $38.26bn / $8.50 as of 20th April.
    • I hopeful that these cuts have captured the risks detailed above.
  • Therefore I am expecting a good set of earnings and a healthy beating of expectations driving a mid-single digit rally in the shares come Wednesday evening. 

Wearables – Out of fuel.

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Nike’s hardware exit is ominous for those that remain.

  • The exit of Nike from its FuelBand product shows how difficult hardware can be and that the real value is in the service and the data. .
  • It looks very much as if Nike has laid-off the engineering team responsible for its FuelBand product meaning that the current product will be its last.
  • Looking at the product in isolation seems likely that it has been a financial black hole.
  • On top of the high development costs, the FuelBand has not proven to be particularly reliable meaning that warranty returns have also been significant.
  • This, plus mediocre sales (partly due to its high price tag of $150), have probably meant swathes of red ink, driving management to look for another option.
  • This is an ominous sign for the fledgling wearables industry as any product without a unique use case and rock solid reliability looks destined to fail.
  • Furthermore the use cases that have emerged to date (smartphone remote control and activity tracking) can increasingly be carried out directly on the phone itself without an external sensor.
  • Hence, without either of those two criteria in the bag, it looks like it is in Nike’s best interest to bail-out of hardware.
  • However, that is not the end of the story as its close relationship with Apple could mean that Apple’s own M7 chip simply takes over the sensor function with the app doing the monitoring.
  • This would mean that Nike activity tracking becomes officially exclusive to Apple devices.
  • This could benefit both Apple and Nike as Apple would gain access to an exclusive service that would give it differentiation in the apps and services space while Nike would be out of the tricky hardware business.
  • At the end of the day, I am not sure that Nike cares about the sales of the FuelBand as they have failed to move the needle of its $7bn revenue base.
  • What it does care about is brand loyalty which is driven by users engaging with its app which will remain even as the hardware is phased out.
  • If Apple can keep Nike exclusive, then its differentiation in the Digital Life services space will improve.
  • If this differentiation can be spread right the way around the Digital Life pie, then margins could remain at supernormal levels indefinitely.
  • Apple is very far from this goal but this would represent a first step.
  • Nike would be cutting itself off from all of its customers who use Android or Windows Devices.
  • However, looking at the premium position that it occupies in the sporting goods market, I suspect that the overlap of its customers with Apple’s is big enough for this not to be a real problem.
  • This is a worrying sign for the likes of Jawbone, FITBIT Pebble and so on as the hardware is increasingly being integrated into the mobile phone giving users less and less reason to purchase extra devices.
  • None of these devices meet both of the two criteria of unique use case and rock solid reliability making me pessimistic for all of them.
  • Nike’s decision to exit early may indeed be a wise move. 



Google Q1 – Price of success

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Mobile pricing is likely to stay low for a while.

  • Google failed to beat expectations as pricing fell by more than expected due to the shift of spend from desktop to mobile.
  • Q1 14 Revenues and adjusted EPS were $12.2bn / $6.00 compared to consensus at $12.3bn / $6.39.
  • Profitability fell short as gross margin fell as a result of lower pricing while the cost of traffic acquisition continued to grow.
  • The company pointed to some one off costs in R&D as result of recent acquisitions but this did not alleviate the concerns around pricing.
  • The main problem is that, at the moment, an advertisement or search attracts a significantly lower price on a mobile device than it does on the desktop.
  • There are two main reasons for this:
    • First: The small screen is less effective for marketing as there is less spare real-estate and acting on a marketing message is more complex and potentially expensive for the user.  
    • Second: Mobile payments remain in the stone age which means that impulse purchases in response to a piece of marketing happen infrequently.
  • Hence, the return on investment for an advertiser when looking at sales from a mobile device from advertisements on mobile are lower than they are for the desktop meaning that they attract a lower pricing.
  • Google is trying to change this in two ways.
    • First: By educating the marketers to the value of cross-screen marketing. i.e. an advertisement seen and acted on in mobile resulting in a transaction by the same user on another device.
    • Second: Improve mobile payments such that it becomes quick, simple and secure to transact direct from a mobile device.
  • If Google can help fix these issues on the devices that it controls then there should be a convergence of advertising pricing between fixed and mobile.
  • Given what will now be baked into expectations this would be positive for Google but it is going to take some time.
  • The technology industry has been struggling for more than 10 years to get mobile payments to work and it is still struggling.
  • Hence I do not expect this issue to be fixed anytime soon.
  • However, if advertisers can be made to understand the value of cross platform, then some progress on pricing could be made in the short term.
  • Hence long-term I think that mobile pricing will improve but this looks like an issue that will crimp growth this year.
  • That being said, Google is in the best position of any ecosystem player to see growth from the mobile ecosystem.
  • Hence it remains one my favoured plays alongside the more controversial contenders Yahoo! and Microsoft. 

Yahoo! Q1 – Lucky tailwind

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Opportunity remains but time shortens.

  • Yahoo! reported reasonable results from its core operations while it was Alibaba that drove Net Income to be above expectations.
  • Revenue / Net Income were $1.09bn / $402m beating consensus of $1.08bn / $372m by 1% and 8% respectively.
  • This was almost entirely driven by Alibaba which grew revenues by 66% and Net Income by 110% soundly beating most people’s expectations.
  • However, there are signs of improvement as display revenue saw its first YoY growth since 2011 with growth reaching 2%.
  • This is a major milestone confirming the trend of the last 5 quarters and following the growth of traffic across Yahoo! properties.
  • I suspect that display growth will not accelerate much beyond 3% or 4% as display is not as good as search and more importantly Yahoo! position in mobile remains weak.
  • However, as long as display can remain in positive territory, this gives the company a platform from which to grow revenue in other areas.
  • Here the company was again at pains to point out that it is all about mobile as that is where all the growth in advertising spend is currently to be found.
  • This remains Yahoo!’s weak spot as it has the assets but has yet to do a decent job of putting them together to form a decent ecosystem.
  • It is by putting the assets together and really understanding who one’s users are that real value can be created.
  • Yahoo! is very far from this goal but importantly the market gives it no credit whatsoever when it comes to delivering on this proposition.
  • The focus remains on the performance and mooted valuation of Alibaba when it goes for its IPO this year.
  • Once the value of Alibaba has been crystalised, attention will return to the core business where Yahoo! has real opportunity but has yet to deliver.
  • Of delivery there was little sign as guidance was in line with expectations with Q2 revenues expected at $1.08bn compared to consensus at $1.09bn.
  • Marissa still has time to deliver and there are glimmerings of a turnaround but much still needs to be done and the grace period is getting shorter by the day.
  • Yahoo! is still my top ecosystem pick as Alibaba gives some downside protection while there is substantial upside from a turnaround and development of a mobile ecosystem.
  • If the grace period ends with no delivery then the shortcomings in execution will be obvious for all to see. 

Microsoft – Under the rug

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Microsoft continues to hide its light under a bushel.

  • The reviews of Windows Phone 8.1 are starting to come in and they are pretty positive all round.
  • Those that have lived with the new software for several days are finding that the updates have created a significant improvement in the user experience.
  • New features such as Cortana, Action Center, WiFi/Data Sense and the UI changes have all been pretty well received.
  • Windows Phone still lacks a lot of apps. but this problem is being addressed albeit much more slowly than I had hoped.
  • Furthermore it looks like there is a whole host of Windows Phones being developed for launch this year.
  • Hence the summer and autumn should see something like 8 new devices launched all with the updated user experience.
  • This is exactly the kind of activity that is needed to make the Windows ecosystem a success but a critical piece is still missing.
  • User awareness of Windows Phone and the ecosystem remains almost non-existent and until Microsoft educates the users, many of these improvements will go unnoticed.
  • The majority of Windows Phone devices at retail which potential buyers get to play with have no data on them.
  • This effectively means that they get no real idea of what it will be like to live their Digital Lives with Windows Phone
  • iPhone and Android are brands in their own right but Windows Phone does not have this luxury and so it must tell everyone explicitly why it is great.
  • Microsoft’s marketing to date has been focused on announcing the presence of Windows 8 but has yet to explain to anyone why they should buy it.
  • Until this changes, market share is going to remain far below its potential and the good work of its device and software engineers will go unnoticed.
  • It is encouraging to see improvements at the product end but now the message must be spread far and wide.
  • I am still hopeful that Microsoft can make a real go of its ecosystem as investments in products should logically be matched with investments in marketing.
  • Microsoft has vast resources and I am hopeful that Microsoft is aware of the shortcomings in its message.
  • Microsoft along with Yahoo! and Google are my favoured ways to look at the mobile ecosystem.