TMT

Quick Thoughts: Apple’s growth is all about the iPhone

Written September 17th, 2014 by

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-          The iPhone 6 and 6 Plus are Apple’s most important products since the iPad and will drive a significant upgrade cycle in its largest and most profitable product area.

-          Screen size parity will pull upgrade demand forward and take incremental share, with a similar geographic roll out as the 5S, suggesting significant upside for 2-3 quarters

-          Apple Pay and Apple Watch have grabbed the headlines, but neither will have more than a small fraction of the impact of the new iPhones on Apple sales and earnings

-          Larger screens were low hanging fruit. It is not clear that there is any further move with close to the same revenue impact available to Apple for 2015’s update.

After years of asserting that the original iPhone’s 3.5 inch display was “perfect for the human hand” and mocking the expansive screen real estate available on the leading Android models as unwieldy, Apple has now fully capitulated. The baby step forward two years ago with the iPhone 5’s 4 inch screen has precipitated a full on leap to the phablet with the iPhone 6 and 6 Plus. The September 9 unveiling was the hottest ticket since Steve Jobs last took the stage in 2011, and brought blissful relief from the unwelcome attention of the iCloud celebrity photo hacking scandal.

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September 15, 2014 – Apple Pay: Friend (and Potential Foe) to the Payments Industry Status Quo

Written September 15th, 2014 by

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Apple Pay: Friend (and Potential Foe) to the Payments Industry Status Quo

Apple Pay combines NFC, TouchID, and HW secured “tokens” on its iPhone 6 to execute retail POS transactions, meeting the security requirements of the card nets (V, MC, AMEX) and issuing banks (JPM, COF, BAC, WFC, C) that will support it. AAPL gains rate parity with “card present” transactions, and a ~15bp fee for providing ID&V assurance and assuming some fraud risk. Alternative RF mobile payment options will NOT be allowed on iOS and Apple Pay will obscure the branding by card nets and banks, threatening the ambitions of many retailers, card nets and issuers. Adoption will be slow – an iPhone6 or Watch is required, just 17% of US stores support it, and the use case is NOT yet compelling. Competitive alternatives will strengthen – the MCX consortium will fight Apple Pay, investment will narrow AAPL’s technical advantage, and open Android provides far more brand flexibility to banks, card nets and merchants. The initial benefit to AAPL will be small –a 15bp fee would bring less than $300M in new revenue. The real benefit to AAPL is in strengthening its proprietary device-centered architecture against hardware commoditization and future cloud-based threats. For now, AAPL is content to leave interchange and network fees in place, preserving the status quo for incumbents, and deny interest in transaction data, assuaging merchants. However, with critical mass, AAPL could choose to monetize Pay more aggressively.

Special thanks to SSR Financials Analyst Howard Mason 203-901-1635, whose contributions were invaluable to this report. Please visit http://www.sector-sovereign.com/topics/research/financial/to find more of his insightful research on mobile payments

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Quick Thoughts: T-Mobile’s Uncarrier 7.0 Takes Aim at VZ/T’s Profits

Written September 10th, 2014 by

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-        TMUS’ “Uncarrier” strategy is working with 2.75M gross sub ads including 1M post paid ads in August alone and porting ratios from other carriers at over 2 to 1

-        CEO John Legere unveiled a new strategy to leverage WiFi connections to bolster quality of service and offer WiFi calling and texting globally – a strategy diametrically opposed to the rest of the US Telecom industry that will improve its coverage with little cost

-        Other announcements from Uncarrier 7.0 include a couple of freebies: TMUS will give away personal cell spots to subs for their homes and will offer unlimited texting / visual voicemail on domestic flights via a partnership with GoGo

-        TMUS has been keeping the pressure on the industry, demonstrating innovation and attacking from unexpected angles – T/VZ may not have the strategy and org model to respond

Taking the stage after downing a can of Red Bull and dropping F-bombs has become a staple of TMUS CEO John Legere’s Uncarrier keynotes. This afternoon was no exception as Legere and his lieutenants announced another set of broadsides aimed at destroying the T/VZ duopoly just three months after the last Uncarrier initiative.  In his latest salvo against wireless incumbents, Legere has essentially turned T-Mobile into the first major US mobile virtual network operator by allowing subscribers to use WiFi connections for calling and texting, something rivals have been loath to do given rich margins from cellular data services. The announcement is timely, coming just a day after Apple touted its new iPhone’s ability to seamlessly handoff between cellular and WiFi networks. While rivals have responded in kind by matching TMUS offers and tactics in the past, going WiFi could be very disruptive to the most lucrative source of profit for incumbents.

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Quick Thoughts: Apple – Go Big or Go Home

Written September 9th, 2014 by

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-           The big screen iPhone 6 and 6+ should pull upgrade sales sharply forward, even at a higher average price point than the 5S, yielding 15%+ sales growth from iPhone for AAPL’s FY15.

-           The Apple Watch is beautiful and chock-a-block with technology, but lacks a compelling use case at a price that will stretch the wallets of users already saving for an iPhone 6 upgrade.

-           Pay has uniquely integrated HW and SW for mobile payments, and has a coalition of banks, card nets and merchants, but users get little benefit and the revenue potential for AAPL is small

-           AAPL is positioned for strong iPhone 6 driven results in its 1HFY15, but we do not expect the Watch to be a repeat of the surprising iPad phenomenon. Growth worries will return in 2H.

In a super-sized version of its annual fall ritual, Apple CEO Tim Cook to the stage at the Flint Center in Cupertino to unveil two highly anticipated new iPhone models, a mobile payment solution called Apple Pay, and the company’s first new product category in four and a half years, the Apple Watch. The content of today’s presentation was hardly a surprise given bloggers and the tech press have been publishing leaked photos of the new iPhone as well as commenting on deals between Apple and payments networks in the weeks leading up to the event. Apple’s move into wearables has long been speculated, given the company’s hiring spree of executives from the luxury goods industry over the past year, though the alleged “iWatch” leaks turned out to be no more than fan boy renderings for a future product that is likely not yet in production.

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August 19, 2014 – Infrastructure as a Service: The Race Won’t Go All the Way to the Bottom

Written August 19th, 2014 by

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Infrastructure as a Service: The Race Won’t Go All the Way to the Bottom

The stakes for public cloud operators (IaaS) are huge. Annual global spending on enterprise data centers – hardware, infrastructure software, staffing, facilities, etc. – is more than $1.2T. We expect most of this will migrate to the cloud over the next 2 decades, due to the compelling economic advantages of web-scale distributed data centers, with cloud operators hosting both SaaS and customized applications. The costs and performance of IaaS are highly levered by scale and technical sophistication, factors that will force all but the biggest and best from the market with time. Currently, the 3 best positioned players – AMZN, MSFT, and GOOG – are engaged in a price war, temporarily sapping industry growth and maybe driving all 3 into losses. However, the real casualties of this war will be smaller IaaS operators, who will be uncompetitive without massive consumer cloud franchises to drive scale and sophistication. Meanwhile, we do not expect a “race to the bottom” amongst AMZN, MSFT and GOOG. Rather, as the market concentrates into their hands, we believe natural points of differentiation for each of them will allow lucrative value added services atop commodity processing and storage services. All three should be profitable long-term, with sales growing into $10s of billions before decade end. However, given a slightly richer data center cost structure and the lack of a high margin core business to cover for any losses, we are concerned that AWS will be a burden to AMZN in the near term, as it works to re-establish the confidence of investors.

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Quick Thoughts: TWTR 2Q14 – How Tweet it Is!

Written July 29th, 2014 by

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-          TWTR crushed expectations on every important metric, in particular delivering 24% growth in monthly average users, reversing a deceleration that had previously spooked investors

-          Sales growth accelerated to 124% YoY, with ad $/MAU up 85% despite a disadvantageous mix shift toward non-US users. Guidance was well above consensus, portending sharp upward revisions.

-          Future user growth should see further acceleration with a redesigned app to improve user experience and more aggressive marketing to support it on the way.

-          TWTR is very well positioned to exploit ad industry paradigm shift to digital – on and off the TWTR site. Huge scale economies will drive margins much further and faster than expectations.

The naysayers will put this all on the World Cup. Yes, monthly average users were up 24% YoY and 6.3% QoQ, beating even the highest hopes of Wall Street analysts during 2Q14, but, hey, the last two weeks of June saw the start of the globe’s biggest sporting event. Indeed, during the final on July 14, Twitter bragged that its users had set a new record, hitting nearly 619,000 tweets per minute at the peak. Surely some of these new, football-crazed, MAUs will stop using the service now that the tournament is in the history books.

Well, maybe not. First of all, those World Cup users undoubtedly stayed on board for the finals, which occurred a full two weeks into 3Q14, and probably brought even more users to the app as the knockout rounds progressed, so there is no reason to expect any drop off for September. Second, the month long event gave those users a full immersion in Twitter’s compelling use case. Surely many of them will stick around for the club football season and to keep up with any other interesting topics they may have discovered along the way. Finally, a World Cup bump bought Twitter time to fix its cumbersome mobile app and to put together a serious marketing push for the Christmas season. There are more than 100M smartphone users world-wide that have the app but don’t regularly use it. Fix it so they can easily get started using it and explain the use case with a memorable ad campaign, and I’d bet the user number can move even faster than it did this quarter.

Meanwhile, Twitter blew the doors off on monetization. Total revenues were up 124% YoY. On a global basis, monthly ad revenue per user was $1.02, up nearly 85% YoY, with total ad revenues up 129% after factoring in that strong user growth. Even while investors were collectively kvelling about the sluggish MAU growth in the last few quarters, Twitter has established itself as an ad selling juggernaut – its interest graph offers unique and valuable targeting data, its new rich media advertising formats have proven effective in delivering messages to their audience, and its MoPub network opens the door to leveraging that expertise and data to sell mobile ads across the entire internet. At this point, the mobile ad game looks like a three horse race – Google, Facebook and Twitter – and with the $1T global ad industry in the midst of a significant paradigm shift that will emphasize digital over traditional media formats, the company is in an enviable position.

Twitter is trading up big after hours and will likely keep most of those gains as investors metabolize these numbers and as analysts eat crow with their big upward revisions. After this blow out, the September quarter is set up – the new guidance is substantially above consensus, but only a modest step up on a sequential basis. Meanwhile, I expect a newly revamped app to hit the market in 4Q, along with the company’s first concerted advertising program to explain the use case and get users on board. There really is no alternative to Twitter for distributing and discovering real time information, and I think the use case is FAR more universal than the market currently believes. I think that there may be more days like this one ahead for Twitter investors.

Quick Thoughts: AMZN 2Q14 – Jeff Bezos REALLY Doesn’t Care about You

Written July 24th, 2014 by

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-          AMZN delivered its 4th quarterly loss in two years, well below both guidance and consensus, driven by massive investment in new content, devices, and services, and promised bigger losses next Q.

-          Sales were characteristically strong, up 23% YoY, but opex was up even more at 24%. As usual, management is offering no specific detail on the drivers of either sales or expenses.

-          AMZN is launching a smartphone, a set top box, streaming music, and an e-book subscription service. It is rolling out same day and grocery delivery. It is expanding AWS and int’l operations.

-          AMZN has a big lead in pursuing massive market opportunities. These huge investments will likely prove worthy with time, but Bezos may need to let up to avoid further bleeding in future quarters.

Amazon is a maddening company. It has the inside track on an e-commerce opportunity that addresses tens of TRILLIONS of dollars in global retail and wholesale sales. Against that opportunity, it is building an enormous moat of scale economies and logistic capabilities that may be impossible for future would-be rivals to counter. It is also furiously building scale to sustain its first move advantage in commercial cloud data center hosting, a business that itself targets TRILLIONS of dollars in enterprise IT spending. It is playing a high stakes competitive game and it is winning. So much for the good news.

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July 24, 2014 – TMT: Portfolio Update – Sooner, or Later?

Written July 24th, 2014 by

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TMT: Portfolio Update – Sooner, or Later?

We sorted a universe of 67 large cap TMT stocks based on the 5-year cash flow growth projected by consensus, and the percentage of EV represented by the implied 5th year terminal value. Arrayed on these axes, the companies fall into 4 distinct quartiles: 1) Fast growing, high terminal value “Dream Stocks”, where investors are betting on long-term leadership; 2) Fast growing, low terminal value “Skepticism Stocks”, where investors expect current luster to fade; 3) Slow growing, high terminal value “Comeback Stocks”, where investors believe set-backs are temporary; and 4) Slow growing, low terminal value “Death Watch Stocks”, where investors have little faith in long-term viability. With our firm belief in thematic TMT investing, the majority of our large cap model portfolio is squarely in category 1, where stocks like NFLX, AMZN, and TWTR are expected to grow into their valuations. MSFT and STX are our “Death Watch” representatives – we believe both will deliver substantial future growth not reflected in their valuations. Names like AAPL, INTC and portfolio pick QCOM inhabit quadrant 2 – this quartile can be intriguing IF results and news flow can break the deep investor skepticism over their long-term sustainability. We are most negative about the “Comeback Stocks”, generally erstwhile leaders like IBM and HPQ, where the modest enthusiasm seems misplaced and the risk skewed to the downside. However, we are adding FIS from group 2 to the portfolio, replacing IACI, as we believe mobile payments could drive significant near term upside. In small cap, we are adding RKUS, and FUEL, replacing the recently acquired OPEN and the volatile 3D printing name XONE.

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Quick Thoughts: FB and QCOM 2Q14 – Image is Everything!

Written July 23rd, 2014 by

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-          FB blew past 2Q expectations on every metric. Sales up 60% YoY. Ad sales up 67%. Mobile ad sales up 151%. Operating margins were 59% up from 44% a year ago. EPS beat by 31%.

-          Ad spending is clearly shifting to digital, and FB is executing perfectly. ARPU jumped 41% YoY to $2.24. Upward revisions are inevitable, giving the stock more room to appreciate.

-          QCOM delivered 9% YoY sales growth and 40% EPS growth, topping consensus sales and EPS by 4.4% and 18% respectively, driven by its bellwether chip business.

-          However, investors were spooked by cautious guidance for 4QFY14 earnings and concerns for collecting royalties in China. Total 2014 3G/4G units may be underreported by 15-17%.

Another day, another set of big TMT earnings report. Tonight – Facebook and Qualcomm. Both companies reported big beats. Facebook delivered a serious smack down to both consensus and its year ago compares. Sales grew at a 60%+ annual growth rate with advertising revenues up an astounding 67%. Analysts were expecting $2.81B in revenues and Facebook gave them $2.91B. Consensus EPS was $0.32 and Facebook beat it to the tune of $0.42. Mobile advertising revenues, the basis of the bear case after the 2012 IPO, were up an astounding 151%. No wonder the stock set new highs in after hours trading – bravo.

Qualcomm also delivered a big beat. Sales were 4.4% higher than consensus and up more than 9% YoY at $6.81B. Adjusted EPS was up more than 40% to $1.44, beating consensus projections by more than 18%. However, unlike Facebook, Qualcomm offered its results with a spoonful of harsh medicine. Chinese smartphone manufacturers are not complying with Qualcomm’s licensing terms – it believes calendar year 2014 3G/4G smartphone unit shipments will be under reported by nearly 200 million units, leading to a 6-8% shortfall in royalty payments. While the company will pursue its claims with full aggression, resolution will take time and near term results will suffer for it. 4QFY14 guidance pointed to EPS below the current consensus expectations, and while QCOM has often beaten its own guidance, the Chinese royalty impasse has investors worried. As such, QCOM is trading down big despite the exceptional June quarter results. Ah well.

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Quick Thoughts: AAPL & MSFT June Quarter Results – The Song Remains the Same

Written July 22nd, 2014 by

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-          AAPL’s 3QFY14 was mixed, with sales 1.5% below consensus but EPS 4% above on impressive 39.4% GMs. iPhones were in-line with strong expectations, but iPads were down YoY – again!

-          A revenue miss, 6% growth, the fast erosion of iPad sales, and tepid 4QFY14 guidance might have ordinarily spooked investors, but iPhone 6/iWatch hype has most looking ahead to Dec.

-          MSFT beat topline expectations by 1.7%, with 10% YoY organic growth driven by strong enterprise sales. EPS would have beaten by $0.06 without one-time Nokia and other charges.

-          More Nokia write downs and the costs of the upcoming layoffs will hit future quarters, but a 147% YoY increase in cloud sales, now 11%+ of total, speaks to MSFT’s real growth potential.

With the rise of the mobile/cloud era of computing, the nature of the Apple/Microsoft rivalry has changed dramatically. New rivalries with the likes of Samsung, Google and Amazon Web Services have pushed the traditional “Mac vs. PC” battles to the back burner. Still, with the two erstwhile enemies reporting on the same night, it’s an opportunity to engage in the nostalgia of comparing the two companies again.

Both companies’ results had a little bit of hair on them. Apple crushed its EPS bogie by 5 cents, juicing those earnings with 39.4% gross margins, 140bp higher than analyst expectations and the highest level since 4QFY12. However, and it’s a big however, Apple revenues were $600M below expectations at $37.4B, with disappointments in both iPad and iPhone sales not mitigated by the upside surprise in Mac revenues. Guidance for next quarter was weak, suggesting more of the same in September and pushing all of the chips on the Holiday quarter and the hotly anticipated debuts of the iPhone 6 and the iWatch. Microsoft, on the other hand, handily beat revenue expectations, with $23.4B versus the $23.0B expected, but fell short on earnings, delivering $0.55 in EPS versus the $0.60 consensus due to initial write downs associated with the acquisition of Nokia’s handset business. Absent the Nokia charges and some other one-time items, Microsoft could have beaten by $0.06.

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