HPQ Q3A – Gentle drift

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HPQ is drifting from one quarter to the next with no direction. 

  • HPQ reported good Q3A revenues as market share was gained but weaknesses in the high margin businesses kept any gains from hitting the bottom line.
  • Revenues / EPS were $27.6bn / $0.89 compared to consensus at $27.0bn / $0.89.
  • The stabilisation in the PC market that helped both Intel and Lenovo was also felt by HPQ but HPQ also managed to gain share in PCs to 18.3% just behind Lenovo on 19.4%.
  • Unfortunately Enterprise Services, Software and HP Financial Services all saw declines in revenue
  • These are the areas where HPQ needs to grow most as it is here where there is value to be added and good margins to be earned.
  • The result of these declines was lower margins which wiped out both benefits from the revenue beat in PCs and benefits delivered from the cost reduction program.
  • Guidance for Q4E was in line with expectations with EPS of $1.03 – $1.07 compared to consensus at $1.05.
  • These results are indicative of the malaise that currently besets HPQ.
  • The company is cruising from one quarter to the next with no real strategic direction which is showing through in the financial results.
  • The improvements delivered through streamlining and cost cutting are being eaten up by weaknesses in business that should be growing and badly need to be set to rights.
  • HPQ needs to decide where it wants to go as a company and make its assets all pull together in the same direction.
  • This is the only way that the company can return to growth because as things stand at the moment, the next time the PC market dips, HPQ’s earnings will go with it.
  • Lenovo, Asustek, Microsoft and Intel remain far better ways to gain exposure to theme of a recovery in the PC market.

HTC M8 for Windows – Hearts and wallets

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Microsoft needs to appeal to the user’s heart not just his wallet.

  • HTC has launched an virtual clone of its flagship HTC One M8 with two main differences from the original:
  • First, it is running Windows Phone 8.1 instead of Android / Google Mobile Services (GMS).
  • Second, after the subsidy, it is half the price of the Android / GMS version at $99 with a two year contract instead of $199.
  • The unsubsidised price of the original is $670 and I suspect that this device will be $100 less (i.e. $570) if purchased without a contract. .
  • HTC is in no position to make such a concession and I suspect that Microsoft will be providing HTC with marketing support of $100 per device.
  • Unfortunately, to make this device, as well as its own devices successful, appealing the user’s wallet is only half of the story.
  • Microsoft has only 3.2% share of the smartphone market and majority of these are the Lumia 500 and 600 series which are cheapest phones that the company makes.
  • This clearly indicates that price will only get one so far.
  • These are a great choice for a budget conscious smartphone user as he gets a lot of smartphone bang for the buck in terms of hardware specification and camera capability.
  • The user also gets access to an ecosystem that offers a comprehensive range of services within which he can live his Digital Life but I suspect that almost all of these users are unaware of this fact.
  • This is where Microsoft must step up and educate users about what it has to offer.
  • Windows Phone is a very different experience to both Android and iOS both which are now so prevalent that they sell themselves.
  • Microsoft does not have this luxury and it must show users what the ecosystem is capable of before there will be any meaningful uptake.
  • This means having live devices at the point of sale that are populated with typical user data so that users can really see how it will benefit them.
  • This is still very far from reality and until it starts to happen I think it unlikely that the ecosystem will gain much traction.
  • Appealing to the consumer’s wallet will only get Microsoft so far, it must also win his heart.
  • This is why I suspect that only a handful of these devices will sell despite the $100 discount being offered.
  • This is a minor issue for HTC which continues to struggle with its lack of scale and differentiation leaving it unable to turn a decent profit.
  • I see no real strategy at HTC to change this state of affairs and remain fearful for the long term future of this company. 



BlackBerry – Bottom bumble

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Stability buys time, but for what?

  • BlackBerry has staved off the immediate threat of collapse but where it goes from here is a mystery.
  • The job cuts and consolidation have created a company with $4bn in revenues, 0.6% market share in smartphones and critically one that is cash flow neutral.
  • This gives it time to consider its options but hopes for its up and coming smartphones are not high.
  • The BlackBerry Passport has very little to entice users other than those who have no choice where the device is handed to them by IT.
  • Even in the enterprise market where BlackBerry now focuses, there is aggressive competition and I don’t think that BlackBerry’s devices are here for the long term.
  • This issue is also highlighted by BlackBerry’s recent re-organisation of its key assets into a single unit called BlackBerry Technology Solutions.
  • This new unit now holds the patent portfolio, QNX embedded software, the Internet of Things project and various other applications and innovations.
  • The idea is to generate new revenue streams along the same lines that Nokia is doing with Nokia Advanced Technologies.
  • However, the patent portfolio is not strong and QNX has a limited number of applications.
  • Consequently, this looks like a division that is not going to produce the much sort after return to growth.
  • This combined with a hardware business that also does not have much future leaves me wondering where BlackBerry intends to go.
  • One potential direction is to use the BES server to offer mobile device management for enterprises along similar lines to Good, MobileIron, AirWatch and Microsoft.
  • BlackBerry has a long history and a longer client list than many of its competitors, but this service is rapidly becoming a commodity.
  • Consequently, there needs to be innovation on top to make it interesting for clients and profitable for the provider.
  • Here, BlackBerry seems to be short of ideas and I am not optimistic that revenues will be able to outpace price erosion.
  • Consequently, I see a period where BlackBerry bumbles along the bottom while it tries to figure out where its future lies.
  • There are much more interesting places to invest in the digital and mobile ecosystem (such as Yahoo!, Microsoft and Google).

Xiaomi MIUI 6 – Mission impossible?

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Xiaomi is like Apple except for its margins.

  • Xiaomi has released the next version of its user experience which will be rolled out onto its phones, tablets and other Android powered devices.
  • Google is nowhere to be seen on this device meaning that this software is proprietary to Xiaomi and replaces the functions and services that would normally be provided by Google Mobile Services (GMS).
  • The look and feel of the UI is very similar to iOS 7, and it is clear that the aim continues to be to deliver an iPhone like experience at a fraction of the price.
  • MIUI 6 has replicated many of the functions of iOS 7 like the app. store, cloud based storage and the media and video experience.
  • MIUI 6 includes some Digital Life services such as cloud based storage, media consumption, search and reference but it is still very far short of a full suite.
  • Xiaomi is known for the high quality of its devices and its low prices which is both a blessing and a curse.
  • It has really helped the company gain market share but it makes it very difficult to actually make any money.
  • This combined with the fact that it will now be up against the big Chinese ecosystem contenders Baidu, Tencent and Alibaba, means that there is still a huge mountain to climb.
  • The usage statistics and market share are all going in the right direction but I am far from convinced that the company’s financials paint such a rosy picture.
  • Most of the other players (Lenovo, Huawei and Sony Mobile) who ship similar volumes to Xiaomi, have higher ASPs and still fail to make anything more than wafer thin EBIT margins.
  • Hence, I suspect that even at this new level of volume, Xiaomi is still loss making.
  • In order to get margins to improve, Xiaomi will have to differentiate itself further.
  • A differentiated offering through its ecosystem will enable it to shed its low pricing as it will have user preferring its devices.
  • This is what I believe must happen for Xiaomi to start making a proper return.
  • To do this, it will have to broaden its Digital Life offering and that will require further investment.
  • Xiaomi has the right strategy and is a force in the Chinese smartphone market but it must now invest in the ecosystem in order to remain there.


Facebook & friends – Internal affairs

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Facebook’s messaging mess highlights a problem for everyone.

  • The number of attempts Facebook is making to crack the millennial messaging market is growing fast and with it the bill for shareholders.
  • Facebook’s travails also highlight a very significant problem faced by all of the ecosystem contenders when it comes to developing their Digital Life offerings.
  • Many contenders are using M&A to grow their way around the Digital Life pie but unfortunately the reality is much more complicated.
  • Facebook seems to be desperately trying to win back the younger part of its user base by trying to address the success of Snapchat.
  • Following its failure to create a clone, it then tried to buy the original and when that failed, it returned to trying to copy it.
  • Its first attempt called Poke failed after a couple of months, Slingshot has suffered a similar fate and now Facebook is trying again with Bolt.
  • Bolt is a standalone app. that is derived from Instagram that effectively replicates the functionality of Snapchat.
  • So far the signs are quite good but it has only been launched in New Zealand, Singapore and South Africa.
  • These efforts also go hand in hand with the Facebook chat app. and the WhatsApp acquisition to make a very confusing messaging strategy.
  • It looks like Facebook is trying to hang onto the younger generation of users many of whom have been put off the main service by the arrival of their parents onto the system.
  • Facebook now has at least three separate messaging strategies for a single service that are all separate and distinct from one another.
  • The value to Facebook of messaging would be many times greater if all of these services were able to interact with each other.
  • Unfortunately, the agreements made at acquisition seem to ensure that the acquired entities remain separate and continue to operate independently.
  • If this remains the case then Facebook will never be able to take WhatsApp into gaming or integrate it with its other services.
  • In my mind this is the only way in which Facebook can have a hope of earning any return on the $19.6bn of shareholder’s money that it invested in acquiring this company.
  • This is the most striking example of a major problem that besets all of the digital ecosystem contenders.
  • To generate value to its full potential, a Digital Life offering needs to have all the services integrated and aware of one another.
  • This way the services work better and the owner of the services can gain a much deeper profile of the user.
  • This is critical to selling value added advertising as well as providing a deeper and richer service to the user.
  • So far only Google has come close to this ideal and this is a major reason why I believe it is by far the most successful at monetising the mobile internet opportunity.
  • Yahoo!, Microsoft, Apple, Amazon, Twitter, Facebook, Sony, Tencent, Baidu, Alibaba and so on must all get on top this issue if they are to really succeed.
  • Almost all the deals struck to date state that the acquired service or app. will continue to operate independently of the acquiring company.
  • I believe independence is the only way in which acquiring companies can entice hot new services and apps to allow themselves to be purchased.
  • Many acquirers believe that once the acquisition is closed, the problems are over but I suspect that the reverse is true.
  • The acquirer has a fiduciary duty to its owners to earn a decent return on the money it invests and without integration, this is very unlikely to happen.
  • Only a very few of the ecosystem players understand this problem and Facebook is not among them.
  • Consequently I see Facebook’s attempts at expanding outside of social networking remaining stillborn and continue to believe that it will run out of growth as soon as the social networking piece is properly monetised on mobile devices.




Lenovo Q1A – Breathing space

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Improvements give Lenovo more space to invest and execute.

  • Lenovo reported good Q1 results as its handset business and PC business both grew share.
  • This gives the company more breathing room when it comes to turning around the loss making Motorola Mobility that it is about to acquire from Google.
  • Q1 revenues and net income were $10.4bn / $213m compared to consensus forecasts of $9.9bn / $201m.
  • Lenovo saw a 15% increase in PC shipments despite a stagnant market and also registered a 16% increase QoQ in smartphone shipments against a market that grew by just 4.6% QoQ.
  • Market share in PCs has hit an all-time high of 19.4%, nearly 1% clear of HP while smartphone share has reached 5.1%.
  • Including Motorola, smartphone share is now at 7.6% making it comfortably number 3, although it now has Xiaomi snapping at its heels.
  • EBIT margin has inched up to 2.7% from 2.5% in Q4 but the revenue increase has driven Q1A operating profit to $283m.
  • This combined with the fact that EBIT Losses at Motorola almost halved in Q2 to $99m (Google Q1 10Q) gives Lenovo much more room to effect its strategy.
  • Additionally, the IBM server business is more profitable than the Lenovo group which should also help keep the company in the black when the two transactions have closed.
  • Lenovo has $5.5bn in the bank much of which will be spent on the transactions to come.
  • However, this combined with the improving fundamentals gives Lenovo enough space to give its strategy to become a major player a proper chance.
  • That being said, this will not be easy. I have long believed that at least 10% market share is needed before any scale related benefits start to kick in leaving Lenovo 2.4% adrift.
  • This means that heavy investments are going to have to be made which could easily push Lenovo into loss making territory.
  • Furthermore, sooner or later Lenovo is going to have to contend with the fact that all the value in its industry is migrating to the ecosystem for which it has no answer.
  • It claims to have a stake in the digital ecosystem with its SHAREit application but this is merely a tool for transferring content between different Lenovo devices and is not a Digital Life service in its own right.
  • Hence Lenovo continues to get a 0% score on the RFM Digital Life Pie analysis but I can see it starting to think about being a contender.
  • Historically, I have been concerned regarding Lenovo’s strategic depth but I have to admit that in the last three months it has surprised me.
  • Lenovo remains one to watch but I still think that the new strategy will make a dent in earnings and the valuation before it can hope to come good.

Tizen – Duck in danger.

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Tizen increasingly looks like it has no real future at Samsung

  • As more and more time passes the less likely it becomes that Samsung will ever make anything of Tizen.
  • Instead it will be forced to try and preserve its margins by sticking to Android devices.
  • This is a feat that will be very difficult, but not impossible (see below).
  • Samsung was expected to launch a Tizen device for the Russian market during the third quarter.
  • However Samsung has decided to delay the launch yet again in order to “enhance the Tizen ecosystem”.
  • Even the Samsung execs seem to be struggling with the concept of Tizen as the only advantage in developing an app. for it is that one will be at the top of the store. Unfortunately it is an empty store.
  • Furthermore Samsung’s failure to launch a device speaks volumes regarding how little Samsung understands anything outside of hardware.
  • To get app developers to write apps. one needs to have devices in the market.
  • This is how the whole virtuous circle begins. Devices means more apps. which in turn leads to more devices and so on.
  • Priming this circle is difficult and expensive (as Microsoft is finding) but it will have to be done if Tizen is not remain on the lab bench.
  • I suspect that the device will never launch particularly as Samsung is now in a very tight spot and cannot afford expensive experiments.
  • Hence, I would not be surprised to see the whole Tizen development shelved as Samsung scrambles to preserve its device margins.
  • Now that it has ceded control of the ecosystem to Google (see here) Samsung has 4 options to preserve margins.
    • First. Drill down on costs. This will be difficult as its products are fast becoming a commodity but there are savings to be had in R&D as Samsung is no longer developing an ecosystem.
    • Second. Offer Digital Life services on a local basis that do not compete with Google’s global offering. Samsung is already trying this but I am not holding out much hope.
    • Third. Work with developers to produce Samsung specific versions of their apps. I think that this is Samsung’s best shot at preserving margins but I have seen no progress to date.
    • Fourth. Create a cross device experience so compelling that owners of Samsung TVs and tablets prefer to buy a Samsung phone. This is still at a very early stage and I am not convinced that Samsung will succeed here.
  • Consequently, I still see Samsung’s handset margins declining to around 11% over the next few years resulting in a meaningful decline in group earnings.
  • Samsung is cheap but I can’t think of a single tech company that has ever outperformed with declining earnings.

Apple – Conspicuous absence.

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No wearables expected next month.

  • The first days of September are going to be littered with new device launches.
  • The IFA trade fair has become a great place for stealing Apple’s thunder as it occurs in early September, right before Apple’s traditional launch window.
  • Two new iPhones, the Galaxy Note 4, the Sony Experia Z3 and a new Windows Phone have all been widely leaked.
  • Furthermore, it now appears that the new iPad has just gone into mass production implying a launch date in early October.
  • It was only just over a month ago (see here) when the speculation regarding the launch of an iWatch was at fever pitch.
  • Prototypes were popping up all over the place and Apple was frantically recruiting from the Swiss watch industry (see here).
  • Since that time there has been no mention whatsoever of an iWatch going into mass production and no leaked photos from clumsy beta testers.
  • This tells me what I suspected all along, and that is that this product remains the same as all the others: a prototype.
  • A wrist mounted device is probably a direction in which Apple needs to go at some stage but until it figures out a real use for this device it will continue to tinker.
  • This means that prototypes will continue to be ordered and the cycle of speculation and disappointment will continue.
  • For now wearables remain a solution looking for a problem. This problem has yet to be solved despite huge R&D expense by all concerned.
  • I continue to believe that the key signal in the launch of any device remains chatter from Asia regarding a device going into mass production.
  • Hence I suspect that the launch program for next month remains:
    • September 3rd – Sony Experia Z3 and Z3 Compact
    • September 3rd – Samsung Galaxy Note 4
    • September 4th – Microsoft Lumia 730 and 830.
    • September 9th – iPhone 6 (possibly in two sizes).
    • October – New iPad Air.
  • Q4 is going to be a crucial quarter as Apple will have finally put to bed the screen size issue that has been a major draw for Android users to date.
  • How many now take the plunge and switch will be critical but I suspect that price will continue to be a significant limiting factor.

Surface Pro 3 – Portable desktop.

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Not a laptop replacement but something much better.

  • The Surface Pro 3 has significant issues but it is the first product capable of changing the higher-end mobile computing landscape.
  • (It is important to note that I am specifically excluding the tablet market as tablets are focused on content consumption which is now a very different market).
  • Both Microsoft’s and the reviewers’ fixation on the laptop is the wrong way to view the Surface Pro 3 which offers so much more.
  • I believe that the real value in this form factor is its ability to provide the user with such flexibility that it becomes a no brainer to ditch the laptop.
  • A generation of mobile computer users are fixated on the laptop form factor which offers a horrible, uncomfortable and un-ergonomic computing experience.
  • Until recently, technology limitations have meant that the keyboard had to be attached to the screen which is what led to the laptop form factor in the first place.
  • However, now a computer with the power of desktop can now be crammed into a tablet weighing 800g.
  • I have been using the Surface Pro 3 i5 / 8GB / 256GB for two months and am now comfortably over the initial euphoria stage.
  • This device has issues.
  1. It is a little bit heavy for extended one-handed use.
  2. The WiFi and Bluetooth performance are far from ideal.
  3. Battery life in real usage is 6 hours in the best instance.
  4. It requires restarting far more often than my Windows 7 desktop.
  5. It is expensive. My device costs $1,299.
  • Against this, the 12” screen, pen based input and powerful innards give the user 3 further use cases that a laptop cannot.
  1. The use of a Bluetooth keyboard and mouse allow the device to be used just like a desktop almost anywhere. This offers far better usability with much greater comfort for extended use, much easier interaction with the device and far superior ergonomics.
  2. The pen allows the device to be used as both a notebook for taking handwritten notes as well as annotating and marking-up documents created by others.
  3. Held in both hands, the device can be comfortably used for reading for watching video.
  • The use of the attachable keyboard cover can re-create the laptop form factor when there is no table upon which to rest the device but it does not do a very good job of it.
  • I believe that this is a minor issue as the vast majority of laptop use is not done on the lap of the user but on a table.
  • Here the greater versatility of the Surface Pro 3 leaves a laptop in the dust.
  • The user can easily purchase an excellent bluetooth keyboard, tablet stand and the superb Arc Touch Mouse Surface Edition for less than the optional Surface Pro type cover. 
  • When I pick up the Surface Pro 3 my first action is almost always to remove the cover and to use it one of the three configurations above.
  • The problem is that users are so fixated on mobile computing being based on a laptop form factor, that they have completely missed the other options that this form factor offers.
  • I am hoping that the lumbering marketing machines of Microsoft, Intel and the OEMs will finally realise where the real value in this form factor lies, and will stop trying to replicate the laptop.
  • Instead they should educating users that this form factor offers a far superior, more comfortable and healthier computing experience when not at one’s desk.
  • Once this is achieved, this form factor could easily trigger a strong replacement cycle where laptops are replaced with devices of this form factor.
  • Price is going to be an issue but I think that the usability improvement that is offered will go a long way towards enticing users to pay-up.
  • I would also not be surprised to see a future generation of the MacBook Air incorporate touch and a form factor with a separate keyboard and mouse that all click together for easy transport.
  • Intel and Microsoft are the obvious winners from this but if Apple is sharp there is an opportunity for it to upgrade its entire MacBook population with new high margin devices.
  • Apple also has the opportunity to meaningfully gain share if it can use its expertise in form factor innovation and design to produce cool looking devices that are even better at meeting these use cases.

Zynga Q2A – Chalk and cheese

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Bad results show the difference between consoles and handhelds.

  •  Zynga reported weak Q2A results and cut its 2014E guidance as new revisions of its flagship games will take longer than expected to reach the market.
  • The key metric for Zynga is bookings which is the value of virtual goods sold during the quarter.
  • Q2A bookings and EPS were $175m and $0.00 compared to consensus at $191m and $0.00 respectively.
  • Only aggressive cost management enabled Zynga from slipping into negative territory.
  • On this front, it looks very much as if Zynga is cutting in the muscle of its creative machine as crucial new products such as Poker and Words with Friends will now be delayed.
  • The result is that the outlook for the rest 2014E has been cut hard.
  • Q3 bookings are expected to be $165m-$175m with EPS at LOSS$0.01 – $0.00.
  • This is way below consensus at $212m in bookings and EPS of $0.01.
  • Booking for the full year 2014E will now be $695m-$725m which is a meaningful reduction on the $770m-$810m that was forecast in April.
  • The one bright spot was cash. This remained almost unchanged at $1.15bn compared to $1.14bn in April.
  • This gives the company time to turn itself around despite the fact that aggressive cost cutting has meant that everything will now take longer than originally planned.
  • Zynga’s business is now focused on bringing its existing and new titles to mobile in a new and exciting way.
  • Unfortunately, the edge that it once had in social gaming has long since been competed away.
  • Gaming is a brutally competitive space and Zynga seems to lack the innovation that will allow it to regain some of the lustre that it has lost.
  • Mattrick has been in charge for a year and I suspect that he is finding it much more difficult than he expected.
  • There is a big difference between console gaming and casual based gaming in that user loyalty and stickiness is much lower.
  • This means one has to wow users with something that is really out of the ordinary to keep them coming back for more.
  • Against the juggernauts of Clash of Clans (Supercell) and Candy Crush (King), Zynga still has no real answer and its pipeline is not exactly encouraging.
  • Dominance in this industry can change very quickly which gives Zynga the opportunity.
  • However, it will have to come up with something pretty special to breathe new life into the financials.
  • Of this there is currently no sign.