Twitter Q2 2016 Earnings Commentary

Twitter reported its earnings this afternoon, and I’ve been sharing some quick thoughts and charts on Twitter itself, appropriately. I’m a massive Twitter fan and user, and it’s enormously important to my business, but I continue to be somewhat bearish on its potential as a business, as my earlier posts will show. This quarter’s results did little to change that perception.

MAU growth better but not great

There are lots of ways to look at Twitter’s monthly active user numbers, but they all show more or less the same picture:Twitter MAUs Q2 2016Sequential MAU growth Q2 2016Year on year MAU growth Q2 2016The fact is that, no matter how you look at it, there’s progress here, but it’s minimal. A year after taking over at CEO, Jack Dorsey still has precious little to show as far as returning his beloved Twitter to user growth, and that should be unacceptable to investors. Long-term, Twitter has to outgrow its present size and scope, and the company isn’t doing enough to make that happen. This older post outlines my thinking about how best to do this.

Worrying trends in US ARPU

The other worrying thing is that US ARPU seems to have dropped instead of rising last quarter, which shouldn’t be happening given overall trends and past patterns – I’ve included Facebook’s ARPU up to Q1 2016 as a comparison:US ARPU Q2 2016As you can see, both companies typically see a spike in Q4 each year – something that every ad company sees – followed by a drop in Q1, but then a return to growth in Q2. Twitter has seen that pattern in the past, as has Facebook, but not this quarter, when ARPU dropped back to below Q3 2015 levels. I haven’t seen an explanation for that yet, but it’s absolutely not the sort of thing Twitter or its investors should want to see happen right now.

There is some interesting commentary in Twitter’s shareholder letter about its ad rates and how they’re positioned in the market. Though there’s careful and somewhat wishy washy language in there, the biggest challenge is that CPMs are too high, and Twitter isn’t doing enough to justify its price premium. It sounds like it will now work on that, but again it feels like we’re seeing a “coming soon” sign where we should have seen real progress by now. This has been a known issue for months, and yet Twitter hasn’t done enough about it.

Live video and monetization

Lastly, live video, which seems to be Twitter’s big focus from a user perspective. We’ve already seen some trials of the capability recently, and although the concept is good, the UI needs work. But the bigger issue is that, while everyone else investing in live video is doing it for the ability to sell masses of ads users will actually be forced to watch, in most cases Twitter is investing in non-exclusive video where the vast majority of the ad space is sold by others. Can is make enough money from this marginal opportunity to make it worthwhile? Will it be a meaningful contributor to revenue and profits over time? That’s the big question here, and I still don’t feel like we have an answer for it. Meanwhile, the core product experience of Twitter continues to suffer both for existing power users and for the kind of new users Twitter needs to attract. Not good enough, in my opinion.

Apple June 2016 Quarter Chart Review

I’m on vacation this week in Europe, but I took a quick break to cover Apple and Twitter’s earnings this evening before heading to bed. I’ve tweeted quite a few charts tonight, but thought I’d pull some of the key ones together with some commentary for readers. A full deck of quarterly charts will go out to subscribers to the Jackdaw Research Quarterly Decks Service in the next few days as Apple releases its full data in an SEC filing, so look out for that if you’re a subscriber, and sign up here if you’re not.

Note: in this post, as in all my posts, I use calendar quarters for ease of comparisons with other companies and easy intelligibility by those not familiar with quirky fiscal years. As such, the labels and my commentary does not align with Apple’s fiscal calendar.

iPad returns to revenue (but not shipment) growth)

Last quarter, Tim Cook promised that the iPad would have its best year on year “compare” in over two years, which by my calculations meant something better than an 8% decline. Turns out iPad revenues actually returned to positive growth this quarter, though shipments still dropped, thanks to a really strong boost in ASPs:iPad shipments Q2 2016iPad ASPs Q2 2016Screenshot 2016-07-26 22.38.46That iPad ASP growth seems to have been driven by the launch of the iPad Pro, which in turn was likely designed in large part to drive higher ASPs as shipment growth has stalled. In other words, the strategy seems to be working. It’s also interesting that Apple reported that half iPad Pro sales went to people buying them for work, which is another validation of Apple’s strategy, but also points to a big opportunity for Apple, which is selling more devices into the enterprise, both to individual and corporate buyers. That’s something I first talked about in the context of Apple’s IBM deal, but it goes much further than that (as evidenced by subsequent Cisco and SAP deals).

iPhone sales and ASPs down – the iPhone SE effect

Unsurprisingly, iPhone sales were down again, though perhaps not as badly as they seemed to be given the changes in inventory. But the most notable thing was the drop in average selling prices – the opposite of what happened with the iPad in the quarter:iPhone ASPs Q2 2016Just as the positive change in iPad ASPs was due to the successful launch of a new product (the 9.7″ iPad Pro), so is the larger than usual quarterly drop in iPhone ASPs due at least in part to the launch of a new product – the iPhone SE. It’s not all that – there was some impact from the inventory changes, as mentioned on the earnings call – but the magnitude of the drop is an indication that the iPhone SE has also had a successful launch, and has been something of a hit. That’s a good thing, in that these sales have filled something of a hole in iPhone sales in the quarter – which was arguably the purpose – while proving that Apple can tap into a market for iPhones at a lower price point with slightly lower specs and feature functionality.

Apple Watch and Other Products

One last interesting point with regard to a specific product: the Apple Watch. It’s buried in Other Products, but perhaps a better way to look at it is that it now leads the Other Products category, which otherwise features a number of other smaller products. That’s been a double-edged sword for the reporting category over the past 18 months or so, as Apple Watch has first driven higher growth and now is driving negative growth for the category again:Other Products growth Q2 2016This is, to some extent, a temporary anomaly due to the launch of a brand new product and the subsequent (presumed) shift to a different time of year for the follow-up product as the second version of the Apple Watch launches in the fall. But it’s an indication of just how important the Watch is to that Other Products category.

Short-term versus long-term

In concluding, I’m going to link back to my post last quarter, in which I both reviewed the good news and bad news in the results and looked forward to the rest of the year. The point remains the same: with Apple there are two current pictures, which are very different. On the one hand, there’s the short-term picture, characterized by the anniversary of massive growth in iPhone sales driven by the iPhone 6, and also an unusually long lull in the Mac upgrade cycle driven by delays in getting new chips from Intel. That short-term picture hasn’t changed, and is so far fairly predictable.

The bigger question, though, is what happens later this year as some of the unpleasant short-term factors start to go away. As I said last quarter, with the iPad performing better, that’s the first of those positive levers coming into effect, and if that higher ASP trend continues, that will be more grist to the mill. However, the far bigger effect obviously comes from the iPhone, which I still believe might return to revenue growth later this year or early next year. Lastly, the other major product lines – Mac and Apple Watch – have potential to contribute further to that growth. We should finally see new Macs in the fall if not before, which will unleash significant pent-up demand, while new Apple Watches combined with a much more capable watchOS 3 could drive more sales there. In other words, over the long term I remain very bullish about Apple’s prospects, and we could start to see signs of that in the September quarter, but especially in the December quarter and beyond.

Why the Tesla Autopilot Crash Matters

We talked about this a little on a recent episode of the Beyond Devices Podcast, but I wanted to write down some thoughts as well. The fatal crash involving a Tesla running the Autopilot mode has already sparked lots of news articles, handwringing, an NHTSA investigation, and possibly even an SEC investigation, as well as several defensive tweets and blog posts from Tesla and Elon Musk. But as is so often the case, it feels like there’s not enough nuance on either side. The issues here are complex, and I want to address two specific ones here, one about Tesla’s statistical defense, and one about the danger of a narrative developing about autonomous driving.

Sample size problems

First off, there are the statistics that Elon Musk and Tesla have used to defend Tesla’s Autopilot mode. The one they’ve cited most frequently is that Tesla vehicles had driven 130 million miles before there was a fatal crash, while the US national rate is around 94 million miles per fatality. On paper, that makes Teslas look really good, but it’s a fairly fundamental statistical error to take those numbers at face value.

Most importantly, the sample size for Teslas is much too small. A simple thought experiment will suffice here:

  • The day before the fatal accident, Tesla’s rate was zero per 130 million miles, infinitely superior to the national rate
  • The day after the accident, the rate was one per 130 million miles, somewhat better than the national rate
  • If there had been another accident the day after, the rate would have been one per 65 million miles, worse than the national rate.

There wasn’t another accident the day after, but in such a small sample size, and given standard probabilities, there might easily have been, or there might not have been another for months or years. The point is that the sample size is far too small to derive any kind of statistical average at this point with any real rigor. Consider that Tesla has racked up 130 million miles, while those NHTSA stats are based on over 3 trillion miles traveled by car in the US in 2014.

Driving conditions

The other issue with these statistics is that the NHTSA numbers are for all driving under all conditions and on all roads in the US in 2014. The Tesla figures, by contrast, are only for those conditions where Autopilot can be activated, which in many cases is going to be restricted to freeways and other larger roads. The problem with that is that fatal car accidents aren’t evenly distributed across all road types and conditions – they disproportionately happen on certain road types including rural roads, where something like Autopilot is less likely to be used. It’s frustratingly difficult to find good statistics on this breakdown, but I suspect Tesla’s stats benefit from the fact that Autopilot is used in scenarios that are generally lower risk.

It’s the narrative that matters

So far, I’ve dealt solely with the statistics, but I want to turn to what’s actually the bigger issue here, which is the narrative. The power of narratives is something I’ve written about elsewhere, and it’s a theme I often find myself returning to, because it’s very powerful and often underestimated. The problem with the Tesla Autopilot crash is that it challenges the narrative about autonomous vehicles being safer than human driving. That’s not because it proves they’re less safe – if you take Tesla’s numbers at face value, which I see many people doing, they appear to show the opposite.

But the simple fact of such a crash featuring prominently in the news is something that will stick in many people’s minds and affect their perceptions of autonomous driving. And here I think Tesla has done itself a disfavor, by over-selling their feature. The very name Autopilot connotes something very different from and far beyond what the feature actually promises to do. Tesla has been at pains to point out since the crash that its own detailed descriptions of the feature indicate drivers should keep their hands on the wheel and stay alert and attentive, ready to take over at any moment should the need arise. But the Autopilot branding doesn’t connote that at all.

The secondary problem is that such a feature will inherently lull people into a sense of ease and less focus as they drive. What’s the point of the feature unless it frees up the driver in some way, and once they’re freed up, aren’t they almost guaranteed to want to do other things with their time while in the car? There have been news reports about people using their phones more while using Autopilot, and there were suggestions that the driver of the car involved in the fatal crash might have been watching a movie on a portable DVD player.  There’s a paradox here, where on the one hand the driver is freed up for other activities because the car takes over, and on the other they’re supposed to stay focused and not take advantage of that increased freedom.

This is the risk of Tesla’s incremental approach to autonomous driving. In general, I think there are significant advantages to this approach, which helps to build driver trust over time on an incremental basis. But the downside here is that the vehicle isn’t really capable of fully taking over yet, and yet lulls drivers into a sense that it is. That, in turn, helps to feed that negative narrative about self-driving cars in general and Teslas in particular. Tesla and Musk need to tread more carefully in both their branding of these features and their response to these tragedies if they want to avoid that narrative taking hold.