HP – New Management, Same Problems

November 22, 2011 in All, Hewlett Packard (HPQ) | Leave a comment

HPQ FY 4Q 2011 Earnings – An improvement but far from fixed

HPQ’s first report in the Meg Whitman era shows improvement in communication, but not better business fundamentals.  The overriding issues for HP remain: declining PCs; weak consumer; required investments; integration; and competition.  In addition, the macro weakness and supply chain issues resulting from the floods in Thailand are now added to the mix.  All that considered HP is doing okay, but not great.  Much work and investment is needed.  Whitman’s performance on the call was average – she sounded honest in her attempts to understand HPs issues and customer concerns – the question of what to do about it remains uncertain.  From a strategy perspective it appears that HP is taking a page out of Dell’s playbook, of focusing on profits instead of revenue leading to a newfound discipline that focuses on mix and operating improvements and de-emphasizes low-margin businesses, future M&A, and even share repurchases until the balance sheet improves.

HPQ is no longer providing revenue guidance but suggested that F2012 would face pressure from a weaker macro-environment led by Europe (EMEA is 36% of sales), an inventory correction in imaging supplies, HDD supply issues, and underinvestment in key business areas that has led to market share pressures and profitability reductions.  Guidance of “at least $4.00” is achievable for this year but not without cost cuts or improved macro (likely cuts) and puts the company at a more realistic 6.6x EPS and projected FCF Yld ~8-9%. As a reference, Dell trades at 7.3x fwd EPS and the recent range during its turnaround has been as high as 8-9x.  If HP is able to execute, this is the range to focus on, not an IBM like multiple.

It is clear from the results and comments that HP is working towards a more sustainable strategy, but that this turnaround will take more than a few quarters.  We agree with the assessment that printing may see more pressure than expected and that the PC business suffered brand damage, particularly in Asia and the enterprise.  On the positive side, the R&D may actually yield product advancements for the first time in years – such as their new Moonshot servers.  Time will tell, but expect the headwinds to remain strong for Q1 and Q2 and would stay away from the potential value trap.

Results:

*EPS $1.17 vs St $1.13; revs $32.1b vs St $32.1B;

*guidance lowered to more reasonable levels – will only guide EPS from now on: Q1 83-86c vs St $1.13 (whisper $1) and FY12 >$4.00 vs St $4.69 (whisper closer to $4.10);

*commercial revs -2%, consumer -9%; strong performance in services but margins weaker; personal systems weak but margins better, units +2%

*Americas -4%; EMEA -6%; APac +3% (ex Fx – Americas -5%, EMEA -10%, APac -4%)

*ESSN -4%, Imaging -10%; Person Systems -2%; Services +2%; Software +28%; Financing +18%

*Margins: ESSN 13% (-); Imaging 12.8% (-); Personal Systems 5.7% (+); Services 12.8% (=); Software 27.7% (+); Financing 10.3% (+)

*on imaging – channel inventory reductions, broad-based weakness in EMEA and softening consumer demand, particularly for supplies. Margins were unfavorably affected by the strong yen and lower-than-normal supplies mix of 54% as we continue to work down the high supplies channel inventory. Commercial printer revenue was up 4% year-over-year with commercial hardware units up 5%. Consumer printer revenue was down 8% year-over-year with an 8% decline in units. In total, printer unit shipments were down 5% year-over-year

*on ESSN – Across ESSN, we are seeing the effects of a slower economic environment. operating margin of 13% was 210 basis points below the prior year. Operating margins were impacted by a lower mix of BCS revenue, competitive pricing pressure and incremental investments in sales and R&D

* Business Critical Systems declined 23% yoy primarily due to a decline in our Itanium-based servers – impacted by Oracle’s Itanium decision to stop support

* HP networking grew 5% year-over-year, and enterprise switching and routing grew 7% from the prior year period

* HP Software revenue of $976 million, up 28% compared with the prior year, including 33% license growth, 36% services revenue growth and 20% support revenue growth – closed Autonomy in Oct

*non-GAAP gross margin of 23.2% down 170 bps yoy and down 10 bps qoq; impacted by the strong yen and a lower mix of printing supplies, as well as continued margin pressure in Services

* increased our R&D spend in FY ’11 by nearly 10%. And in 2012, we plan to do more of the same and to increase our R&D investment once again

*$2.4b in cash flow from operations; free cash flow of $1.2 billion; inventory days +4 to 27; gross cash $8.1b vs LT debt $22.5b; repurchased 17 million shares in the quarter for $500 million; roughly $10.8 billion remaining in our share repurchase authorization

Comments from Conf Call:

“Our near-term focus is on driving execution and investing for the future. But frankly, many of the FY ’11 headwinds are still with us. We’re expecting to climb in both revenue and profits in FY ’12”

“You should assume in 2012 that HP will be rebuilding its balance sheet and will not be doing any large M&A. Additionally, you should expect that share repurchases and dividends will continue to be a core part of our long-term capital allocation strategy. Over the long term, we expect HP to be a GDP-type growth company that can grow revenue in line or better than our markets, grow earnings faster than revenue and produce consistent cash flow.”.

“Macro environment remains uncertain globally and particularly in Europe. Consumer spending remains soft, and we have begun to see a slowdown in commercial spending. We expect these dynamics will lead to below-normal sequential revenue performance in Q1 and year-over-year revenue declines through 2012.”

“From a business perspective, we expect the decline in our Business Critical Systems business will remain a headwind throughout the year. Additionally, during the first half of the year, we expect to experience headwinds associated with the flooding in Thailand affecting hard disk drive supply, primarily within PSG but also across ESSN. We also expect a slow correction in our IPG channel inventory level.”

“We want to manage this company for a profitable growth. We really want to put the focus on earnings per share and cash flow so that we, particularly in some of our businesses like Services, we drive towards more profitable business”

“Appropriate to think about the Services as more as a turnaround. So turnaround is measured, success is measured in years as opposed to quarters.”

“I’m in favor of acquisitions, but I will tell you we cannot continue to rely on acquisitions alone at Hewlett-Packard. It’s just the wrong thing to do.”

Your Life in 1s and 0s

November 15, 2011 in All, Big Data, Change | Leave a comment

When will then be now?  Soon…

The first part of the migration to the online world was really about replicating activates that we previously did offline… mail a letter, make a phone call, book a reservation.  The second act was/is about improving those, scaling those, and fundamentally altering those activities…online chat and video calls, Open Table.  The third act is more immersive, it crosses more boundaries, or better said, removes them all together.  It’s about actions that are fundamentally born in the digital world – shifts that are taking place that don’t have an offline precedent.  A major driver of that third act is the influence of data and who controls it.  The start of this can be seen in social networking.  Our desire for a social network is not unique to online, nor is “sharing” and online phenomena – but the mixture of a private and public persona…a quasi public life on top of which interests, new, stories, general communication, and even commerce and business marketing all occur – that is new.  Prior to this third act this type of mixture of life and data wasn’t really available offline, and it really isn’t all about scale – sure for marketing or sharing a picture the scale is the trick – but the idea of instant updates, commentaries, locations, recommendations, and actions that leverage the social graph is unique.

But as we look forward, what will it mean to conduct a greater and greater percentage of our lives in a connected way?  The lines of traditional commerce and community, already blurred by the forces of the connected world, are all but disappearing.

Big Data: Real Time, Real People, Really Important…

Companies like Social Flow and Bitly present wonderful sets of data that show context as being the most important factor of all in a data stream.  Location is nice, demographics and history too… social circle a good bonus, but context… or the conversation as someone put it, is a much more important piece.  For example, if you and I are walking down the street near a Starbucks talking intensely about the Yankees win last night it may be more relevant for someone at that moment somehow someway to suggest I get my son a Jeter  jerseys for his birthday RIGHT THEN as opposed to interrupting me about a 10% coupon for lattes after 3pm.  Sure, I but lattees a fair amount, but right then you are interrupting my conversation, my space, to present me something that is not additive to my experience.  Yes, I understand why you are doing it, but it’s still misplaced.  The jersey is additive and captivating.  Data sets like Twitter often have better context.  The main draw back of the social data is that it is curated.  Your Facebook persona is curated.  Your search history on the other hand, is random and representative, but may just be tangents.  Twitter is RIGHT NOW.  The three are distinctly different.

Another dynamic that is emerging is true realtime web interfaces.  Not those that require a refresh or an automatic browser request.  But true interactivity on a website.  This raises the specter of “web 3.0” being something transformative for both consumers AND companies.  A company called Realtime is working on this.

Fun Data Anecdote…

This is from a data analytics professional.  The best indicator of the potential for a prison riot is…. A run on Snickers bars at the sundry shop.  This rational activity reflects concern that the sundry will close during and following the riot.

I Want My, I Want My, I Want My…

October 5, 2011 in All, Apple, Change, Facebook, Google | Leave a comment

I want my, I want my…

The big difference in the adoption of any new technology, gadget, service, or any change really is the “total pain of adoption” (hat tip to Pip Coburn).  What level of anxiety is relieved or caused by that change.  Am I willing to change certain other aspects for the perceived benefit.  We see this as an evolving issue in the privacy vs online world experience scenario.  The world at your finger tips comes at a price particularly in the freemium model economy.  The personalized experience we get on the web is a direct result of the ability to monetize our data stream, activity and potential for sale/upgrade.  The privacy battle around that data is getting heated as more and more of our lives are spent and shared online.  To the extent that consumers resist this intrusion, their experience will suffer.  However, to the extent that companies overstep their trust, the same pain will be experienced in reverse.  Security and privacy are very sensitive and convoluted topics.  In general, people are willing to allow the data flow as long as the experience is enhanced.  It is clear we need better tools to analyze the seemingly disparate data streams and enhance the experience; the old models are just not enough.

You want the world to be as open to you as possible…but at your discretion.   If the web is to continue its evolution as part of our very human fabric, then the ability to turn on and off our privacy will be increasingly necessary.  Yes, we want to share more, and by sharing data we improve our experience, much like entering a store and explaining what you want to improve the service…but, I also reserve the right for discretion and privacy – a very human feeling.   This is as much about sensitive financial and health information as it is about what information I am sourcing and from where.

We anticipate that there will be more high level security breaches in the near future that cause consternation among regulators and consumers.  One avenue we see as interesting in the future is the ability for a consumer to control, or even profit from the release of their personal information.  Currently you get a discount on a product in exchange for the data, but you are not aware of what data they are collecting and how frequently.  Think Google’s apps or Amazon’s $79 Kindle with ads.  Instead, we see an opt in world where you are paid to provide accurate details regarding your habits and preferences in exchange for a fee and a more tailored experience, which could also include deals and ads that matter to you – like %50 off at a steakhouse instead of another spa treatment.

You see something you want to buy, done.  You want to share something with one person or the entire world, done.  You need information and to get something, done.  The ONLY way to do that is with a smart device with dynamic security and privacy controls and high speed networks – otherwise the user experience is too subpar and will drive a negative feedback loop.

Positive: security software, data analytics, IBM, Splunk (private)

Negative: any privacy mishaps are bad for Google, Facebook and Apple

Note – of the three big personal data collectors, only Apple doesn’t NEED your info.  Apple makes its money sell you devices, and takes a cut of apps and content.  Google and Facebook rely solely on advertising and the ability to customize those ads to your data.

The World’s Inventory at Your Fingertips

July 11, 2011 in All, Amazon, Change, Ecommerce | Leave a comment

On the Power of Ecommerce

Update April 2012: Simple yet powerful statement from Jim Chanos during a Bloomberg interview:  “The Internet is the most efficient distribution network ever devised.  Anybody in the business of selling you a physical product that is digitized is seeing their margin collapse overtime.”

July 2011: The continued penetration of ecommerce and its scale and focus on the consumers means that anyone selling any non-exclusive physical product utilizing a pricing scheme based on limited local inventory will see their margins shrink over time and force a model change…just like those who faced the initial wave of online content – music and newspapers.   Companies not focusing on the customer “experience” and instead just the product or the store operating margin will lose.  This is going to move beyond office supplies, books and electronics, all of which have ecommerce as greater than 20% of sales, a tipping point.  The inventory of the world at your finger tips presents a huge challenge for traditional retail.  In addition, while the first three rules of retail are location, location, location, one could argue that it is even more important than before due to the added convenience and satisfaction levels of e-commerce.  Shopping is an experience, and part of that is not going “out of your way” to reach a certain store in a non-premium or stand alone location.  We expect the continued positive traction of higher end malls and full service (food, shopping and entertainment) shopping centers to force retails to pay up to be part of those experiences for shoppers.  This pattern of location issues has always been impactful for retail – think Circuit City vs Best Buy…sure the selling model was a little different, but mostly the stores were shinier and in new, more trafficked locations…so what location is better than in your living room, or office, on the palm of your hand?

Some observations to continue on…

The sense of brand has never been more leveragable or more important.  Your identity as a business and even as a person is now searchable and on display – you have to cultivate it and use it to your advantage.

From a retail perspective the concept of the “lifetime value” of a customer has taken on a new meaning… and will evolve even more.  There are real time conversations and interactions occurring.  A feedback loop that never existed before.  Brands are not perfect, and are not expected to be, but they are expected to be more transparent, thoughtful, and reactive now.  Increased amounts of data and analytics can influence these relationships for the better.

Realize there are no more lines.  People have the tools to sift through enormous amounts of information, and the speed to locate the best sources.  Being the best at what you do is vital, the next step is to be part of the network, you don’t have to BE the network, but you need to be on it.  Your product or service is potentially global the second you launch it.

Commerce will become social – in part because it already is in the off line sense, but more so because the network effect of data.   Both social activity and commerce (including media consumption) deliver valuable streams of data in isolation – but those backbones or vertical markets now mesh – presenting a cross data stream to be queried, driving ever more targeted results  and correlations.  Companies are very excited about this potential, and the potential to interact directly with their customers.  These actions stand to enhance my shopping experience and relationship with the brand.

Winners: Amazon, eBay (PayPal), Lulu Lemon, Chipotle,

Losers: Best Buy, Radio Shack, Office Depot, Staples

Microsoft’s Second Chance – The Circle of Life

May 18, 2011 in All, Microsoft | Leave a comment

There was a time not long ago that Microsoft dominated the world of computing and chaired the discussions about its future.  Today, that notion is almost laughable, or at least highly contended as Apple, Google, Amazon and Facebook dominate the landscape.  Apple in particular is leading the mobile and app economies.  However, to think that Apple’s success stems from 2002 and 2007 until now, with the introduction of the iPod, iPhone and iPad, is to miss the broader underlying shift in computing preference that have evolved.

Back in the 1980’s, the PC was a true revolution for businesses and to a lesser extent individuals. Much like Netscape and the internet would do a decade and a half later, the PC fundamentally changed our ability to perform certain tasks and relay information.  The largest push of this wave of computing was from the business and productivity side (expense being part of that issue).  The PC was a productivity tool – a way to process and create massive amounts of information and perform programmed tasks quickly.  Sure, there were early attempts at creative uses, and publishing was important.  But, by a wide margin, the driving force was productivity and interoperability.  Hence, the Microsoft software that was installed on the majority of computers (a very savvy deal with IBM) extracted nearly all of the value and mind share from computing over the coming two decades.  Apple sold PCs, and software, but it was a distant second.  By the mid 1990’s, Apple was nearly bankrupt.  This was despite a strong presence in the education market and with creative professionals.  That’s right, even back then, Apple made better multimedia software.  However, very few people outside of publishing, digital media and the yearbook committee used it.

Fast forward to 2002, Apple has been saved from the abyss and has a fresh look to its Mac lineup, as well as continued support from its die hard community.  But nothing ground breaking and very few new mac users.  The iPod is launched amid the surge in need for MP3 players to match the rise in downloaded music (largely by illegal means at that point). Early on the iPod had plently of competition, and while its hardware was cooler (it was) its success was not given.  The first iteration only supported iTunes on Mac and there was a slow ramp… once iTunes was introduced for Windows based PCs the growth curve went parabolic.  Apple supplied elegant hardware, smooth software, and a digital library and store that was legal.  This marriage of hardware and software is true to Apple’s roots and adding inexpensive legal downloads of songs was a differentiating factor and introduced non-Apple fans to the company’s products and services.  With each iPod iteration, leading up to the iPhone in 2007 (including improved iMacs and MacBooks) Apple improved its form factor, the software to hardware link, and continually impressed consumers with its stellar multi-media applications -winning new Apple fans.  In fact, to this day, nearly 50% of Macs sold in Apple stores are new to Mac.

One of the main reasons I see that Apple became the dominant force it is today – is not necessarily that they all of a sudden had a huge product breakthrough and quality improvement, but rather that their greatest strength, multi-media, was now what the market demanded.  The 90’s were about the productivity suite, the 2000’s shifted to multi-media.  Therefore, Apple, by staying true to its mission and core strength, dominated.

So what?  As it turns out, Microsoft was not very good at delivering a strong multimedia experience for consumers.  Not that they are “bad” – but just not in the same league as Apple.  Add to that the missteps in mobile, and Mr. Softie quickly lost mind share.  However, something funny is happening today – while Apple is slowly making in-roads in the enterprise segment due to its iPhone and iPad capabilities – the enterprise community and cloud computing are bringing productivity back into the spotlight.  Tools, platforms and apps for the cloud.  Given that the vast majority of enterprise computing still operates on Windows, Microsoft has been presented an opportunity to regain mind share   After all, productivity IS what they do.  Now, this is not a given, for sure, just like Apple had to take the reigns in multimedia with its seamless hardware / software relationship.  The push toward mobile and apps is not “traditional” enterprise and productivity computing.  Microsoft will need to deliver strong products that, in some ways, undercut their existing, traditional, enterprise software sale.  They need to be a little bold.  But think about it – if most all business documents are still Microsoft, and many businesses still run exchange servers, and Microsoft is trying to push into the data center – what better opportunity to rework the system and deliver enterprise anywhere type solution – view, edit, create, communicate on any document with anyone in you contacts from any approved device.  Productivity.

Time will tell – but it is worth noting that not all of Apples success is because Steve Jobs is a visionary (which he was) – or that “Apple just makes better products” – some of it has to do with the fact that the market finally cared about the type of product Apple made – timing matters.  Keep an eye on Microsoft’s moves to offer end-to-end productivity software solutions to the enterprise using cloud and tablets -it matters again.

Searching for Google

April 18, 2011 in All, Google | Leave a comment

The Google Dilemma

By all accounts, and rightfully so, Google has been a smashing success as a company.  They have achieved scale, prominence, profitability and brand.  However, like most every innovation that emerges, there comes a time when the landscape shifts and they must shift with it.  This topic is not new, and in fact, is covered in books like The Innovator’s Dilemma.  Google’s main product is “search” – or the indexing of the internet’s content and calculating the most relevant information per each request.  Google makes its money by selling advertisements against that page of information/links.  Search for hotels in Miami and get ads for Priceline or Hilton – simple.  Along the way Google has done two main things to enhance its business: 1) continued to improve the quality of its search results and the context of the ads it shows against them (adding display as well); 2) adding a variety of other products designed to capture more of your time spent online, therefore increasing the number of searches you perform on Google and therefore data you provide Google, and also providing more page real estate to display ads -think ads on Gmail.  Both of these efforts have delivered wonderful results.  That is the past – that is how we find Google at the top of the tech world, commanding ~70% of worldwide search, with a growing presence in e-mail, browsing, product and travel search, and business applications.

The dilemma that Google faces centers on the rapid shift from the desktop centric world that currently dominates search and most all web activity, to the mobile environment where 1) Google does not command as high a market share; 2) the monetization (or just ASP to think of it simply) of search activity is much less and 3) consumers growing knowledge of the internet landscape and lower tolerance for search time in the mobile environment is met by the advent of “apps” – which shortcut search activity.

So what?  Doesn’t Google own Android the 1st or 2nd largest smartphone platform with over 250m installed devices and a large App store (renamed Play Store)?

Yes, they do – and much credit should be given to Page and Brin for buying Android and fostering its growth.  Android filled a much need void in the smartphone category.  The introduction of Apple’s iOS left the RIMM’s Blackberry OS, Nokia’s Symbian, and Microsoft’s Windows looking like MS DOS.  On top of the fluidity of the OS itself, was the same tactic that brought so much success to the iPod, the marrying of hardware and software to a content delivery service.  The iTunes store was extended to deliver apps – bite sized nuggets of web activity or entertainment at the touch of an icon.  No typing, no searching – a custom built application to deliver most of what one normally seeks on the web, without the hassle of long load times and cumbersome surfing, in addition, games became a massive draw of attention.  Aside from Apple, no one delivered this type of platform or ecosystem (these words often get thrown around but have specific meanings, a more in-depth topic for later).

In stepped Android, offering full touch screen with Google integration and an app marketplace.  The UI was very similar to that of Apple and the software free (aside from the cost of internal tweaks) to OEMs – it was really obvious in hindsight that Google would take massive share.  As Google has continued to improve both its OS and ecosystem along with Apple it left RIMM, Nokia and Microsoft in the distance.  Android has 250m devices active and posted some impressive app download numbers – and aside from the holiday iPhone4S push one would expect the future for Google to be amazingly bright given brand, adoption rates, and OEM support (particularly with the advent of lower priced Android phones penetrating the market).  However, there is one large problem (aside from the Motorola deal).  The web activity on a mobile device monetizes at a far lower rate than the desktop, and the software itself is free – so how is Google going to make up for the lost economics?  They don’t know yet.

The answer from Google thus far alludes to the idea that they should gain as much share as possible first and figure out monetization second (you can’t tweak to a bigger audience). They feel the monetization of mobile is comparable to search circa 2002-2005.  Also, they faced a similar problem with YouTube – massive activity, volumes, and growth but terrible monetization.  Google has slowly ramped up the efforts and economics, but it still pales in comparison to its activity levels.  However, more importantly, the activity is additive to Google, not taking away from other businesses.  The mobile opportunity is more complicated than search and YouTube though  – the main intent of users and and flow of information is not the same.

On mobile; there are four key points 1) traditional web and search advertising is based on click through rates which are much lower on mobile devices; 2) the type of web search activity on mobile is slightly different – as is tolerance for tangent surfing; 3) apps completely circumvent the web; 4) to date, mostly all of the money made in mobile outside of ad platforms was made by Apple, Samsung and app developers.

Positives 1) the ability to cater higher value ads related to time and location; 2) the advent of HTML5 may put more activity back on web pages possibly allowing more ads vs content pages; 3) as mobile internet users mature, and tablet like devices improve, users may organically seek out more web resources – I often compare the app vs HTML5 idea to the AOL vs Netscape transition (the walled garden was great until we had a tool to tame the outside world).

Negatives 1) the Android kernel is free – and in fact, the two software companies that make money off the growth are Microsoft and likely Oracle; 2) as a free OS, OEMs are constantly tinkering with the UI to “make it their own” – this dilutes the brand power of the OS; 3) the very nature of mobile search is more action directed than desktop and the model needs to adapt; 4) social sharing and app marketplaces are the new form of discovery and take place on the “dark web” or password protected verticals that Google can’t see, track, and calculate.

So what might Google do?

Well, we’ve already seen several Nexus phones as a way to demonstrate their capabilities and improve the brand – if they can convince OEMs to follow more standards this would help a bit.  They could charge for the OS… but this goes against their philosophy, and as a free kernel it would be difficult.  They are planning a Nexus tablet and have revamped the app store – now the Play Store and it shares content across mobile, tablet and desktop.

But what we really want to talk about is Motorola.  Sure, the IP portfolio was important… but what do you do with the hardware piece?  Samsung is the 2nd largest smartphone player behind Apple, and largest overall, and you have the best or second best OS… do you compete with them?  Do you run it “separate” and hope they make money on their own like Samsung?  Or do you full-on integrate and run it like Apple and tell Samsung they need you more than you need them?  At the end of the day the handset business is very much like the PC business and the straight sale of commodity hardware is a no win game over the long run.  What Apple does is sell a premium product, AND a premium ecosystem.  Google sells neither, they give it away.  Recent news flow suggests that Google will launch a Nexus tablet with Asus, and it will cost $149-199.  This is essentially the Amazon Kindle market.  Google has tried a similar strategy with the Chrome OS, but has not had too much success.   There certainly is appetite for another tablet, but it has to come with a premium ecosystem …Android does have an ecosystem, but the branding is changing and developers are not making any money.  Much work needs to be done.

There remains a level of risk to the formidable Google model over the medium and long term.  In Google’s favor is the lack of competitive threat from RIMM, MSFT/NOK and others at the moment.  It takes time.  The negative is that any agreement to pursue Motorola with an Apple-like model may hasten other partnerships and even the potential for a Chinese OS.  We think Google’s current momentum in Android will likely continue, and monetization on mobile with slowly improve.  That said, it remains a core holding for exposure to the secular shifts…particularly given the sell off around the Motorola announcement…oh, and they own the information side of the internet such as maps and knowledge – which will continue to matter.

Update 4/18/2012:  Business Insider reports on 4/17 that people familiar with Google say they plan to work with the Motorola division to design build and sell hardware AND software for the phone…or basically copy the Apple model.  This will make for interesting discussion as Samsung rolls out S-Cloud, its iCloud and Google Drive competitor, at its May 3 Galaxy event.  The addition of Motorola to the Google model will cause some ripples as Motorola is questionably profitable.  In addition, tighter integration with Motorola could mean an all out Google store to sell phones and tablets (already happening with Nexus).  I don’t think Samsung will get too upset yet as they are almost half of the Android market…but they will start to hedge their bets.

Rimm-possible? Or Just the New Palm?

April 15, 2011 in All, RIMM | Leave a comment

RIMM – Research Not in Motion

The trials and tribulations of RIMM are well documented and there is no shortage of  opinions on what will become of the company and its technology.  Despite the recent surge in share price, many feel that RIMM is being outflanked by Apple and Google and is rapidly losing market and mind share (in the US this is true, though they hold a stronger Emerging Market presence at the low end, taking share from Nokia).  Many in the marketplace have strong convictions about what is coming for RIMM…resurgence, 3rd player, acquisition, bankruptcy.  We feel it will be number 3 but only after the fourth option has crossed the minds of investors.  RIMM is a damaged brand that doesn’t understand it is a damaged brand and will continue to lose market share at a rapid pace until it is worth next to nothing, save for its IP, cash, and perhaps to some competitors, its enterprise services capabilities.

Following the sort of issues laid out in The Innovator’s Dilema, RIMM was the innovative force in secure mobile email and keyboard devices.  The success was self reinforcing as customers raved about the service and keyboard functionality.  Enterprise IT departments praised the security, and faced little backlash for choosing RIMM as a) it was secure and b) competitive offerings were not that great.  But as mobile email shifted from business perk to necessity, and consumers became the driving force of innovation and choice in the market – the winds shifted.  The Apple iPhone debuted in 2007 and was the warning shot across the bow for RIMM.  The response from the Canadian company was to keep making “great” RIMM devices, as expected, and they were not too terrible.  But, a funny thing happened in the ensuing product iterations.  As RIMM was forced to consider more and more consumer “features” and design characteristics its hardware, and software became less reliable.  As we crossed from the start of the Curve series to the later iterations the software crashed more often, battery died faster, and the screen resolution and web surfing looked outdated.  At this point, RIMM made one of its more fateful decisions. Instead of doubling down on consumer and enterprise software with touch screens and trying to keep up – they decided the physical keyboard was THE key feature and something consumers would keep coming back for time and again.   Their early and continued success led them to believe they were right.  After all, enterprise renewal rates were near 100% – they must love the devices, right?  Having missed the start of touch screens and then being blindsided (like most) by the App economy, RIMM was now two generations behind and has been flailing in the wind ever since.  Each successive product became a race to match feature sets of current Apple and Android models and they never created a must have new feature.  Seeing dwindling unit numbers (and a majority of business consumers who can’t download apps anyway) the app developers didn’t create anything new either.

With the launch of the Storm and BB05 in late ’08 early ’09, their first all touch-screen phone – it became clear that RIMM’s brand was damaged.  It’s enterprise renewals,  international presence in the value segment and popular Blackberry Messenger  (BBM) product (which avoids SMS text fees) have kept the share price afloat, while solid financial management keeps the street happy.  But this is all beginning to fade.  Market share loses in the US are increasing and lower priced Android devices are popping up in emerging markets.  In addition, the budding trend of “bring your own device” BYOD, where employees use their iPhone or Android phones for personal and work is seeing massive number of Fortune 500 companies testing and deploying solutions that don’t require RIMM.  Lastly, the recently announced BlackberryPlaybook which is the response to the iPad is a complete miss and highlights the current state of the company.  The product is a smaller form factor, is being rushed to market with almost no app support and buggy software AND will not have email native on the device, you will need to tether your existing Blackberry.  The core competitive advantage of RIMM is its secure email and messaging system – how can they not have that as a core feature?

In review:  the brand is damaged, innovation is lacking, relationships with app economy are weak, core enterprise market actively testing and deploying substitutes.  No matter the valuation, these are the components of a value trap stock that will drift lower over time.  The remaining value will be its IP, who’s value is difficult to discern, and the enterprise services business – which is basically its secure on-premise servers and the software that manages them… this is a ~$3-4b/year revenue business.  The valuation range for a services business that serves a declining hardware base is difficult to nail down… a ranger of 0.3 to 2.2x sales could be used.  Clearly I would lean to the lower end for a weakening brand.  At ~$2b in cash, $4b in enterprise services value and IP – its not difficult to view a much lower market value as sales trends begin to accelerate to the downside.

As trends decline, the concept of a buyout is always enticing, but recall that all potential suitors of the hardware business are a) likely working on their own solutions; b) will be wary of buying a damaged brand and c) can wait for lower valuations.

Is a turnaround possible?  Yes, of course, but one of the great and unique aspects of technology is that it is a constant struggle to stay relevant, innovative and profitable all at once.  The technology graveyard is littered with would-be turnaround candidates.  The problem with RIMM is that once the concern reaches the brand level, the hurdle for turnaround scales parabolic.  Missing a product cycle is one thing, a damaged brand is another.  Given their difficulties in launching new products, their existing enterprise contracts and international presence will float the company for a while, but all incremental data shows that marginal movement is ALL Android and iOS, we see this as a terminal situation.  Avoid RIMM indefinitely.

Change = Opportunity

March 31, 2011 in All, Change | Leave a comment

As the investment community and world at large press ever faster toward a real time world complicated and stuffed by information and data it is increasingly more important to have time to think through the larger impacts of the major changes happening.  True shifts or change in consumer behavior, technology, and business often take place slowly at first but have recognizable patterns or traits.  The term tipping point has a lot of cache and is often misused… but more importantly I feel it is misunderstood.  It doesn’t represent a massive shift or sudden change, but rather a series of smaller or subtle changes whose cumulative impact causes a fundamental shift in the landscape.

As investors, the most important aspect of this is that true change typically does not impact business models and industries in a linear fashion.  The most relevant example may be the challenges to the newspaper industry brought about by the shift to news consumption and information gathering over the internet.  Viewing impacts through the lens of broader change helps us to look for the tipping points as opposed to the linearity of each quarter.   The goal of this blog will be to discuss relevant change topics in technology and other broader investment issues at large with an eye toward the underlying shifts.