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December 1, 2014 – Twitter: Black and Blue, but Read All Over

Written December 1st, 2014 by

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Twitter: Black and Blue, but Read All Over

For the past year, TWTR has been whipsawed on the volatility of its monthly active user growth and the revolving door of the company’s management ranks. While many investors are skeptical, the company recently outlined a narrative by which its revenues could rise tenfold in the intermediate term. We believe that the scenario, which relies on doubling its monthly active users, increasing user engagement, boosting ad density and monetizing unregistered users, is conservative. TWTR’s vast unregistered user base will be tapped as the company resolves functional problems in its app design and communications strategy. Moreover, a powerful secular shift toward digital advertising and rich new ad formats will support both higher ad loads and better ad pricing. We are more skeptical on TWTR’s ambitions to monetize unregistered users, but note that the potential to leverage the platform into new products is considerably greater than has been implied by management’s new narrative. Given less intensive infrastructure requirements than either GOOG or FB, we expect TWTR to deliver superior profitability as it gains scale, and project better than 80% GM and 50% EBITDA margins for 2019. Applying a FB like 19x multiple to 2018 revenues and discounting back at a 30% discount rate, reflecting considerable market and execution risk, we believe TWTR shares have more than 100% upside from current prices.

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Quick Thoughts: Qualcomm Analyst Day – Hang On for a Bumpy Ride

Written November 19th, 2014 by

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-       China is a double-edged sword for QCOM – regulators and scofflaws plague QTL, while QCT is successfully competing for Snapdragon and baseband business.

-       Projected device ASP erosion of 9-10% will hit royalties, but will be offset by chipset unit volume growth driven by emerging market smartphone demand

-       QCOM is driving global wireless technology innovation, combining aggressive R&D spend with historical leadership and positioning itself to attack new opportunities.

-       The regulatory and licensing issues will take several quarters to resolve – meanwhile QCOM’s potentially dominant position may be temporarily immaterial to investors.

QCOM’s annual analyst day saw rookie CEO Steve Mollenkopf and his leadership team take the stage to persuade investors of the company’s dominant position in nearly all wireless markets despite headwinds from regulators in China. The company earlier in the day unveiled a new baseband chip pushing the boundaries of LTE-Advanced technology with 450 Mbps speeds in a more power efficient 20-nm package. It also revealed that it is planning on entering the server chip market, with Facebook a likely launch customer deploying QCOM’s ARM based server chips across its webscale data centers. Despite the company’s leading positions across mobile and plans to enter adjacent markets, growth over the next five years is expected to proceed at an 8-10% clip, fairly conservative guidance given the continued growth of smartphones and the likely size of emerging mobile opportunities. The prospect of Chinese regulators levying stiff penalties continues to haunt management and investors with Mollenkopf’s team giving only vague indications progress is being made for a resolution. Still, the company tried to allay China concerns with videos during the interludes between speakers featuring companies like Xiaomi, China Mobile, and foundry SMIC extolling the virtues of their QCOM partnership.

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Quick Thoughts: Twitter Stops the Bleeding

Written November 12th, 2014 by

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-        TWTR answered its doubting investors with a strong analyst day, offering new detail on its operations, articulating its long term strategy, and setting ambitious long term financial goals.

-        Management revealed that its 284M MAUs are buttressed by an additional 500M+ unregistered users generating 185B impressions/quarter. TWTR expects to monetize this.

-        TWTR plans extensive enhancements to its core product to drive registered user growth and engagement, and to add new separate apps, like TWTR’s micro video service Vine

-        New CFO Nota saved the best for last, laying out a scenario of user growth, heavier ad loads, growing engagement, and new monetization to justify a 10x growth target over the next decade

A little over a year after its IPO, TWTR welcomed investors and analysts to the Four Seasons in San Francisco for its first analyst day. The stock has had a wild ride since the IPO and most recently investors punished the stock for a modest sequential deceleration in user growth, after an otherwise respectable earnings report for 3Q14. Frustrated TWTR executives have struggled to communicate the reasons for their confidence and have reacted defensively to criticisms of its shortcomings. The turmoil around the stock has been matched by the turmoil in the management ranks. After a 6 month tenure as head of product, former Google Maps leader Daniel Graf was recently demoted as criticism of the service built. Earlier in the year, Twitter had replaced its COO, CFO and Chief of Engineering. The shuffle has contributed to the skittishness of investors. Going into the analyst day, expectations were all over the place. Arguably, Twitter management beat them all.

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November 10, 2014 – SaaS Revisited: Still Growing After All These Months

Written November 10th, 2014 by

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SaaS Revisited: Still Growing After All These Months

The dramatic cost and performance advantages of web-scale cloud platforms over private data centers have lowered the barriers to entry for “Software as a Service” (SaaS) application developers – opening the door to innovation and competition in enterprise applications, pressuring SaaS pioneers with older architectures, and posing an existential threat to traditional application vendors. Sales of applications delivered from the “cloud,” are expected to more than double to nearly $56B by 2018. New SaaS companies continue to emerge with 6 companies having gone public in the US during the last 6 months. More SaaS IPO are likely into 2015. SaaS names have performed relatively poorly since our last note on SaaS in March, with an average decline for US listed SaaS companies with market cap in excess of $500M of 6.6%, This presents buying opportunities for companies, such as WDAY, SPLK, ULTI, and VEEV, that are innovating, executing, and building scale economies. This, rather than locking-in customers or depending on product life-cycles, will win share. Winners will also include old paradigm companies that are successfully transitioning to the cloud, e.g. MSFT, ADBE, and ADSK.

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Quick Thoughts: QCOM – Little Trouble in Big China

Written November 5th, 2014 by

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-       QCOM delivered 4QFY14 results EPS of $1.26 on sales of $6.69B, falling short of the consensus expectations of $1.32 and $7.03B in revenue

-       QCOM is struggling to collect royalties from unprofitable secondary Chinese brands in the midst of its antitrust dispute with the Chinese government

-       Long term, we expect the problem to become moot as Chinese share consolidates toward large licensees prepared to pay QCOM because of their export ambitions

-       This may take more than a quarter or two to play out, putting near term expectations at risk, but we are bullish on QCOM’s long term position for both patents and chips

At least when Qualcomm misses a quarter, they actually give you some detail about why it happened. (Hint, hint, Jeff Bezos) Sales came in $340M lighter than expected at $6.69B and EPS missed by 4.5%, coming in at $1.26. Along with the admirably granular report and sober guidance by business unit, Qualcomm spoke frankly about its current difficulty in collecting 4G royalties from vendors in China and of new antitrust investigations by regulators in the US and the EU. Those issues have the stock down more than 5% afterhours. While that’s probably appropriate given the short term headwinds and uncertainty created by these challenges, I remain very bullish on Qualcomm’s position for the future of TMT.

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October 30, 2014 – TMT: Portfolio Update – Dreams, Comebacks, Skeptics and the Death Watch Redux

Written October 30th, 2014 by


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TMT: Portfolio Update – Dreams, Comebacks, Skeptics and the Death Watch Redux

Last quarter, we created a framework to assess TMT stocks, juxtaposing near-term cash flow expectations (5-year consensus cash flows) with long term expectations (post 5 year cash flows implied by residual value). Arrayed on these axes, companies fall into 4 distinct quadrants 1) High near-term/High long-term “Dream Stocks”, 2) High/Low “Skepticism Stocks”, 3)Low/High “Comeback Stocks”, and 4) Low/Low “Death Stocks”. We extended this analysis to all US-traded TMT stocks with market cap above $3B, yielding a universe of 180 names, updating it to account for recent changes in valuation. As with the original analysis, the stocks largely fall into intuitively sensible quadrants. We believe the categorization has clear implications for investment – Dream Stocks are easily forgiven for short term transgressions, Skepticism Stocks are chronically “undervalued”, Comeback Stocks must justify their valuations or rerate, and Death Stocks have potential to surprise but could be value traps.

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Quick Thoughts: TWTR 3Q14 – It’s Always Something

Written October 27th, 2014 by

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-        TWTR posted 3Q14 results that either met or beat consensus for every reported metric, including 23% growth in users, 14% growth in timeline views, and 114% growth in revenue

-        Nonetheless, shares traded off 10%+ after hours, leading reporters to speculate the cause – 4Q sales guidance? Views per user? Whisper numbers? Decelerating QoQ MAU growth?

-        The worst number in the report was a 7% sequential jump in stock based compensation expense, which wiped away the benefit of record EBITDA margins, and then some.

-        4Q compares are relatively easy on MAUs, engagement and sales. 4Q guidance could be a low ball –3Q sales were 6% above the high end of guidance. Perhaps TWTR will answer the skeptics.

In its fourth quarter of reporting earnings as a public company, Twitter once again reported generally strong results that were either in line or beat consensus. Top line revenue was a clear beat at $361M against the $352 expected by consensus, growing 114% YoY. EBITDA came in at $68M, well above the consensus target of $54M, on operating margins that were, again, well above analyst expectations. EPS was on target at a penny, but save for some extraordinary expenses including forex and increased interest expense on a convertible note offering, it would have been $0.02.

Monthly Active Users (MAUs), 284M, were up 13M from last quarter and 52M from last year, representing YoY growth of 23%, in line or ahead of analyst projections that had been quoted in the press. Timeline views by logged in users reached 180.6B, up from 158.8B last year, growing at 14%. The company had phenomenal success monetizing mobile, with the category now representing 85% of revenue, up from 70% last quarter. The “data licensing & other” category was up 171% to $41M driven by MoPub. Its international user monetization more than doubled in value as the company now has a presence in 60 countries, and is aggressively targeting certain growth markets. BAM! The stock is trading down more than 10% after hours. What happened?

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Quick Thoughts: MSFT – Not Your Father’s Microsoft

Written October 23rd, 2014 by

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-          MSFT’s 1QFY15 were stellar – 11% YoY organic sales growth, strength in both devices/consumer and commercial businesses, and a solid EPS beat.

-          MSFT is killing it in the cloud – commercial sales up 128% YoY, likely to a $5B+ annual run rate. Commercial Windows and Server both delivered double digit growth

-          Consumer was a surprise. Xbox sales doubled YoY. Surface Pro 3 is selling at 2X the pace of Pro 2. Office 365 up 25% QoQ. Even Nokia was surprisingly strong.

-          Margins are down, but the fruits of MSFT’s significant restructuring are yet to be felt. 2015 should yield significant earnings acceleration.

Microsoft delivered another extraordinary quarter under CEO Satya Nadella showing the “mobile-first and cloud-first” strategy articulated in July is working. Top line revenue was up 25% to $23.2B, and backing out Nokia, the organic growth was a still impressive 11%. The top line figure handily beat consensus expectations of $22.0B and the bottom line was a solid beat of $0.54 in EPS against $0.49 expected. The company’s restructuring expenses also came in at the lower end of guidance with some $1.14B in write offs related to the Nokia handset business. With other traditional enterprise IT players struggling to adapt their businesses for new cloud and mobile opportunities, Microsoft has shown it’s successfully making the transition.

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October 21, 2014 – Sensors: What’s in YOUR Smartphone?

Written October 21st, 2014 by

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Sensors: What’s in YOUR Smartphone?

In the growing functionality of high end devices, the spread of basic smartphones, and the emergence of new device types – wearables, etc. – sensors are a $60.4B market that is growing at a 9.2% CAGR. We categorize them into 5 groups – physical, optical, radio, electrical and chemical – each serving specific applications and requiring particular design and manufacturing disciplines. As such, competition amongst sensor manufacturers stays within these silos. For sensor functions already well embedded into portable devices, suppliers are challenged to minimize cost, footprint and power draw, often integrating multiple functions of a type into a single solution. Emerging functions, such as gesture control or biometric ID, have drawn approaches using different sensor types, although economics and performance will eventually drive standardization. New devices are a growth market for existing sensor types, but may also create opportunity for new sensor components suited to specific applications. While we are bullish on new portable device opportunities for sensor components, we note that many longstanding sensor products are commoditized, particularly within well established traditional end markets, such as automotive and industrial automation.

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Quick Thoughts: AAPL – SURPRISE! AAPL beats! (actually, not a surprise)

Written October 20th, 2014 by

-          AAPL delivered 4QFY14 EPS of $1.42 on sales of $42.1B, handily beating the published consensus, on very strong sales of the iPhone 6 and 6 Plus that had been widely anticipated

-          Sales growth of 12.4% was the best since December 2012. iPhone unit sales of 39.3M were up 16.2% YoY, with ASPs up 4.3% to $6.02. iPhone is 56.2% of AAPL sales, up 340bp YoY.

-          Mac sales had a big quarter, up 18% YoY and 15.7% of total. The iPad franchise, down 14% to 12.6%. of AAPL sales, is deteriorating. iTunes grew 8% YoY, falling to 10.9% of total sales.

-          We expect another big beat in December. Increasing dependence on iPhone raises risks as high end smartphone market saturates. Strong Apple Watch sales needed to sustain growth in 2015.

Having already reported selling 10 million units during the opening weekend sales of the iPhone 6 and iPhone 6 Plus, and ongoing press commentary of the vigorous global demand for Apple’s foray into modern larger screen form factors, it would have been shocking if the company had not blown out the published consensus numbers. In that context, the fairly sleepy after-hours response to the obviously excellent results is not all that surprising.

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