HTC Q1 16A – Family silver.

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HTC is selling the family silver to stay alive.

  • HTC reported dreadful Q1 16A results as EBIT losses ballooned to 32% of sales while revenues fell 36% YoY and NT$5.1bn (37% of sales) of cash from operations was burned.
  • HTC has continued to lose market share triggering the classic handset death spiral.
  • This means that HTC has to continue cutting costs which means its devices become less appealing so market share falls again and so on.
  • The market (and increasingly the company) has written off the handset business and is pinning all of its hopes on the Vive, HTC’s virtual reality product.
  • This product has received good early reviews and its early move to support VR in a mobile environment and provide hand controllers puts it in a good position should this market take off.
  • However, its competitors Facebook, Sony, Microsoft, Samsung and so on are also looking to sell their VR products and aim integrate these products into their existing platforms which already have millions of users.
  • This is where HTC has is at a disadvantage as when it comes to users, it will be almost starting from scratch although it will have some help through its association with Steam.
  • To make matters worse, HTC’s war chest is diminishing fast and it is quickly selling the family silver in order to support the substantial cash burn.
  • During Q1 16A HTC recognised cash gains of NT$2.1bn from selling fixed assets, NT$6.1bn from selling non-current financial investments and NT$1.4bn from selling current financial assets.
  • This is how HTC managed to show an increase in cash and cash equivalents (compared to Q4 15A) of NT$3.7bn.
  • These sales are very likely to be one time in nature meaning that, in reality, HTC is draining its reserves by NT$5.9bn every quarter.
  • These asset sales have masked what was a dreadful 3 months for HTC and I am concerned that the Vive will not take off in the kind of volumes or soon enough to keep HTC from real trouble.
  • Consequently, 2016 is likely to be dominated by the agonising decline of its handset business raising the high likelihood of further substantial cash outflows.
  • Consequently, the most I would pay for HTC would be 1 times its cash balance as I view the Vive as a long shot to rescue the company and it is very likely that the cash balance will continue declining.
  • This would put the shares at NT$47.1 some 32% below where they are today.
  • Current holders have the opportunity to cash in on expectations of the Vive long before those expectations ever have to be met.
  • I would be taking that opportunity.

RFM 2016 – Top 5.

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CES likely to focus on dreams rather than reality

  • The CES bandwagon kicks-off on 6th January and I suspect that autonomous transport, virtual reality and wearables will grab most of the attention.
  • I think that these themes are pretty far from the mass market meaning that the reality of the technology sector in 2016 is likely to be one of steady progress rather than revolutions and hyper-growth.

Autonomous Everything

  • CES is likely to see great attention being placed on the race to produce autonomous cars, drones and so on.
  • This will set the tone for 2016 where just as everyone rushed to create an app. store when they were all the rage, everyone is now rushing to create an autonomous driving system for all types of vehicles.
  • Google and Ford are likely to dominate the headlines at CES with Ford taking the very dangerous step of allowing Google fully into its vehicles.
  • This could allow Ford to be first to market with technology that really works but comes at the very real probability of Ford being commoditised by Google.
  • Just as handset makers are merely conduits for Google services, car makers run exactly the same risk by allowing Apple and Google to come in and take over what is likely to become the most important part of their vehicles in the future.
  • I continue to believe that being first to market with this technology will not matter because the legal and regulatory hurdles will mean that the technology is ready long before the market (see here).

Monetisation

  • I think that 2016 will prove to be a critical year for internet start-ups that depend on the networked economy.
  • The focus to date has been to grow the user base as quickly as possible and vast sums have been invested to achieve that end.
  • However, I think that 2016, will see growth slow and the hype that fuels valuation continue to cool markedly.
  • This means that the focus will have to switch from user growth towards monetisation.
  • This is much harder than it sounds and I suspect that 2016 will see a clear division in performance between the unicorns and the donkeys. (see here and here)

Handset Crunch Time

  • Growth in the smartphone market is likely to slow to well below 10% in 2016, meaning that those struggling for relevance will be forced to ask themselves some very hard questions.
  • Most at risk are BlackBerry, Sony and HTC all of which have been struggling for some time to rediscover their place in the market.
  • HTC has decided to turn to virtual reality (see below) while BlackBerry has decided to try its hand in Android.
  • The essential problem is that almost every handset maker out there has very little to which users attach any value.
  • This value remains in the ecosystem where Apple, Google, Alibaba, Tencent, Baidu and Facebook remain the biggest and strongest.
  • Samsung is the one standout as its history as a shipper of commodity of products in huge volumes puts it in a good position to fare far better than anyone else.
  • Meizu is already cutting staff and I suspect that this year could see the end of both HTC and BlackBerry in the handset market.

Weary Wearables

  • 2015 was a disappointing year for wearables where even the mighty Apple was unable to really spark the market to life.
  • I continue to believe that this is because no one has thought of a use for wearables that is so compelling that they become a must have.
  • Furthermore, I still believe that health sensing and battery life are still not good enough to ensure that the few users that do purchase a device, stick with it.
  • I think that 2016 will see steady progress in improving, health sensing, the user experience and battery life but without a spark of genius there will be no inflection point.
  • I see nothing to change my view that wearables will remain a solution looking for a problem in 2016.

Virtual and Augmented Unreality

  • With numerous developer kits coming to market in Q1 2016, virtual reality and augmented reality AR) are likely to be major buzzwords in the first half of the year.
  • However, like autonomous vehicles, I think that the limitations of the technology will keep it from the mainstream for some time.
  • The bulky, uncomfortable form factor combined with the limitations of AR (see here) and high costs are likely to keep both user appeal and volumes low.
  • For situations where there are real productivity gains in the enterprise, I can see this taking-off now but for everyone else, it is going to be a question of the waiting game.

RFM Preferences going into 2016

  • Thumbs up: Samsung, Microsoft, Lenovo and Facebook.
  • Thumbs sideways: Apple, Amazon, Huawei.
  • Thumbs down: Google, Twitter, Xiaomi, Yahoo, Sony

 

Magic Leap – Field of dreams

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I think that Magic Leap has solved the field of view problem in AR.

  • There are many augmented reality (AR) companies out there but the best financed is almost certainly Magic Leap.
  • AR is very different from virtual reality as VR creates an entirely artificial world while AR superimposes virtual objects on top of what one can already see.
  • When I think about use cases, AR has far more applications that users are going to be willing to pay for in contrast to VR which looks to me to be limited to high end games and media.
  • On top of a massive $542m round in October 2014 led by Google Ventures, the company is raising another $827m with a post money valuation of around $4bn.
  • I assume that this round will also be led by Google which I suspect wants the right of first refusal on acquisition should the technology prove to be commercially viable.
  • Although I think AR has much greater commercial potential, it is much more difficult to get right and I think that it is here where the vast sums are being invested.
  • Every demonstration that I have seen is using the same basic idea to superimpose virtual objects upon the real world.
  • From the patent applications of Magic Leap and commentary from those who have been able to have a demonstration, I believe that Magic Leap is doing the same.
  • The user wears headgear through which he has normal vision of his immediate surroundings.
  • On each side there is a projector (one for each eye) which shines the virtual image across the front of the lenses through which the user sees the real world.
  • In those lenses are waveguides which pick up the light being shone across the lenses and direct it into the user’s eye giving the desired superimposition.
  • The problem is that today, limitations in the technology mean that the virtual world can only be superimposed on a portion of the user’s field of vision.
  • Effectively there is a letter box within which the virtual world exits and from which it cannot escape.
  • For many commercial and medical purposes, I don’t think that this is a problem but for the consumer it’s a deal breaker.
  • This is why I suspect that the first applications of offerings like Microsoft HoloLens and Atheer Air are likely to be focused on commercial, medical and educational use long before consumer.
  • I think that Magic Leap is going after the consumer and on that basis, I think it has found a way to fix the limited field of view problem.
  • This would also explain why its hardware is still much bigger than its competition are and why it could still be another 2 years before there is a product.
  • Developer units of Hololens and Atheer Air are shipping in early 2016.
  • Furthermore, I think it is looking to create a much more intuitive and immersive experience and consequently the system needs to track things like eye and body movements and be able to properly understand them.
  • For the consumer I still think that there are three key criteria that need to be met before real traction will result.
  • These are hardware, user experience and ecosystem and these are discussed in more detail here.
  • Hardware and user experience will be critical to getting in the game but I strongly suspect that it will be the ecosystem that wins it.
  • Here, having Google on board will be a major help but it will need a much wider base of third party developers if it ever wants to hit the mainstream.
  • With a valuation already at $4bn and the probability that more will be needed, massive success is already being assumed.
  • This is very far from guaranteed and I suspect that as Magic Leap endeavours to meet the hardware criteria (see here), the size of the technical challenge will become exponentially larger.
  • This is the biggest challenge that Magic Leap faces as I think that it is already aware of and has dealt with the user experience and is planning for the ecosystem.
  • In any event it is going to have to sell huge volumes of what is initially going to be a niche product just to keep its investors happy.