Category Archives: Q3 2014

US cable, satellite and telco provider review for Q3 2014

As a counterpoint to the US wireless market trends deck I published last week, today I’m making available a review of some of the major operational metrics and revenue trends for the largest publicly-held cable, satellite and wireline telecoms providers in the US market. This deck focuses on pay TV, broadband and voice telephony services, and shows growth on an annual and quarterly basis as well as total revenues and revenues per user for these services. Some of the key messages are:

  • TV subscribers aren’t shrinking – if looked at annually, to overcome the inherent cyclicality in the market, subscribers are actually growing very slightly
  • Broadband is still growing rapidly, adding several million subscribers each year
  • Voice is shrinking fast, though the rate of decline has slowed recently, as decent cable growth fails to offset the rapid shrinkage among the telcos
  • Pay TV is around a $100 billion a year market, and shows no sign of shrinking despite the shift in viewing habits towards DVR, VoD and online consumption.

I’ve embedded the deck below. You can also see it directly on SlideShare here, where you can find the code to embed it elsewhere or download it as a PDF. As with the wireless trends deck, the data behind these slides is available as a paid service from Jackdaw Research. Please contact me if you are interested in this option.

Q3 2014 US Wireless Trends Deck

Last week, FierceWireless published my brief analysis of some key trends in the US wireless market in Q3 2014, along with exclusive early access to the slide deck I do each quarter. As of this morning, the deck is now available on Slideshare for viewing, embedding and downloading (as a PDF). I’ve embedded it below for easy access, but feel free to share it and download it as you see fit.


The data behind the deck is available in Excel or Numbers format as a paid product from Jackdaw Research, on either a one-off basis or an annual subscription. Please contact me if you are interested in either of these options. I hope you find these useful. Equivalent decks for the past two quarters may be found (along with some other decks) on my Slideshare page.

Thoughts on Samsung’s Q3 2014 earnings

Note for new readers: this post is part of a series on major tech companies’ earnings for calendar Q3 2014

I’m going to link here quickly to two of my past posts on Samsung as they provide useful context which I don’t want to revisit in this post:

  • Is Samsung’s Exceptionalism Coming to an End? – on Techpinions. This post focused on the fact that Samsung had always seemed an exception to my rules for success in tech, and it seemed inevitable that its reign would sometime come to an end.
  • Thoughts on Samsung’s Q2 2014 earnings (and its future) – on this blog. In this post I talked about Samsung’s margins as being unusual for a pure consumer electronics business, and how those margins were likely to revert to the mean eventually because of Samsung’s lack of differentiation. (This is also the most-read of any post on this site since its inception a year ago)

All past analysis on Samsung on this blog can be seen here. My analysis tends to focus on Samsung’s mobile business specifically – other than a brief mention of chips, I won’t cover Samsung Electronics’ other businesses (air conditioning, TVs, refrigerators and display panels, among other things).

Plunging growth numbers

It’s worth starting with a quick financial review, to make sure we’re all on the same page. The relevant business unit from a mobile point of view is “IM”, or IT and Mobile communications. This includes PCs and tablets as well as smartphones, but it’s the lowest-level division where Samsung reports both revenues and profits, so it’s the one we’ll focus on here. However, it does report revenues for the Mobile segment specifically, so we’ll start there. First, revenue growth:

Screenshot 2014-10-30 13.51.42

As you can see, year on year revenue growth has plummeted from positive 90% in Q1 2012 to negative 30% this past quarter. The decline over the past year is alarmingly linear, and one wonders how much worse things can get before that decline levels off. Continue reading

Thoughts on Twitter earnings for Q3 2014

Note to new readers: this is part of a series on major tech companies’ Q3 2014 earnings. I do similar analysis each quarter for certain companies. Previous pieces on Twitter may be found here

Last quarter I talked a little about the challenge of Twitter’s user growth, and what I uncovered as its renewed emphasis on logged-out users (a theme Dick Costolo had first talked about three years ago and to which he has now returned). I and others have talked about Twitter’s different user groups and on yesterday’s earnings call Costolo explicitly spoke about three concentric circles (he actually said eccentric, but I’m fairly certain he meant concentric) representing Twitter’s users. That’s something I’ll return to below. There will be three major points to this analysis:

  • Twitter has given us metrics to measure its growth and potential, but it keeps backing away from or hedging on these without providing better ones
  • Twitter’s core user growth has slowed in recent quarters, and though it wants us to think about a broader group of users, this broader group is both ill-defined and much harder to monetize
  • Twitter is very successfully managing the same transition to mobile advertising as Facebook, but it’s not yet clear how sustainable this business will be for either company.

Twitter’s metrics aren’t telling a good story

The three main metrics Twitter has established for tracking its progress are:

  • User growth: as measured by growth in monthly active users (MAUs)
  • Engagement: as measured by timeline views per MAU
  • Monetization: as measured by ad revenue per thousand timeline views.

These three may be seen as levers, or multipliers, for growth. To the extent that all three are improving, they should drive faster and faster growth for the company, as each change in the first is magnified or multiplied by growth in the second, which in turn is magnified or multiplied by the third. The challenge is that of these three metrics, only one is heading in the right direction, and that’s ad revenue per thousand timeline views:

Ad revenue per 1000 timeline views

As you can see, international monetization continues to lag significantly behind US monetization, which is a function both of Twitter’s underdeveloped overseas sales channels for ads and the lower ad spend in every other market around the world. But both sets of numbers are moving in the right direction, and in the case of US revenues very rapidly so. I’ll come back to the drivers for this growth later, but this is the single best sign about Twitter’s business: it’s able to monetize what usage there is better and better, and this in turn has driven strong overall growth in ad revenues (in thousands of dollars):

Twitter ad revenue

The challenge is that this growth is strongly tied to direct sales, which is an expensive proposition in its own right. Even as some of Twitter’s other cost lines have shrunk as a percentage of revenue, sales and marketing costs are rising over time: Continue reading

Amazon and the cost of growth

Note to new readers: This is part of a series on major tech companies’ Q3 2014 earnings. Prior analysis on Amazon can be seen here.

Last quarter I did a pretty deep dive on Amazon and many of its financial metrics, and specifically addressed the question of how sustainable its business is, and whether it’s really realistic to expect it to be able to turn on the “profit spigot” at some point in the future. This quarter I’m taking a simpler, more focused approach on the cost of growth, the pursuit of which is the core reason Amazon is losing money.

Hiring at a fierce rate

Amazon’s hiring new employees at a fierce rate. This is one of the two primary costs of having a very logistics-heavy business, and the key driver behind Amazon’s investments in robotics. But for now the company still needs lots and lots of people to staff fulfillment centers around the world. Here’s are several charts showing statistics related to the number of employees:

Number of Employees

As you can see, the growth is enormously rapid. I pointed out yesterday in a tweet that Amazon hired more than twice as many employees just in the past quarter than Facebook has employees overall. They’re obviously very different businesses, but this just highlights quite how people- and infrastructure-intensive Amazon’s business is. Amazon has now reached a rate of 40,000 net new employees per year, which is astonishing when you consider it only employed 40,000 in total back in 2011: Year on year employee growth

The other thing about Amazon which is different from many of its major competitors is that the kind of people who make up the employee ranks are very different. At Amazon they’re generally far less skilled and therefore much cheaper to employ, which means that it can afford to drive far less revenue per employee than companies such as Apple, Microsoft and Google, which employ a much more expensive mix of employees: Continue reading

Thoughts on Microsoft’s Q3 2014 earnings

Note to new readers: I use calendar rather than fiscal quarters for easier comparability between companies’ results. As such, I use Q3 2014 universally to refer to the period ending September 2014, even though some companies (in this case Microsoft) use a different reporting calendar). All the charts and analysis below use calendar rather than Microsoft fiscal quarters. This is part of a series on major tech companies’ Q3 2014 earnings. Prior analysis on Microsoft can be seen here

There are four sections in this post – click below to jump to each of them:

Consumer hardware performing surprisingly well

One of the most surprising things about today’s earnings was that the consumer hardware businesses, which are important to Microsoft’s strategy but have performed poorly, all got a bit of a boost this quarter. Xbox, Surface and Lumia devices all had strong year on year growth:

Lumia device sales Surface revenue Xbox unit salesAll three device categories saw record results, in fact – Lumia sales and Surface revenue were both the highest they’ve ever been, while Xbox unit sales were the highest they’ve ever been outside the seasonally much higher fourth calendar quarter. Now, we have to put all this in context: both Lumia and Surface sales are dwarfed by the respective markets in which they compete. But on a relative basis, the company continues to see growth in both categories, and the Xbox year on year growth was solid too.

Now, much has been made of the fact that Microsoft reported a positive gross margin for the first time for the Surface as well. Long-time readers will now that I have teased estimated gross margin numbers out of Microsoft’s SEC filings for the past few quarters, so I thought I’d provide an update on the same basis. Here’s the chart including this quarter’s numbers:

Surface financials

As you can see, the number does indeed seem to be positive this quarter on the basis of my analysis, at a little under $100 million. That’s a gross margin of around 9%, which is not earth-shattering and in fact about half the gross margin of the phone business at Microsoft. But it’s progress, as with the growth numbers above. There’s a long way to go to get to the kind of gross margins that would lead to true profitability once marketing and other costs are factored in. How many Surface devices did Microsoft sell in the quarter? Well, they won’t say, but given the new version starts at $800, it’s entirely possible that the company sold a million or fewer Surface tablets in total, and likely well under a million Surface Pro 3s in their first full quarter on sale. It sold about ten times as many Lumia devices, and about 40-50 times as many mobile phones, just for comparison’s sake. Continue reading

Thoughts on Apple Q3 2014 earnings

Note for new readers: I stick to calendar quarters in analyzing earnings, because it makes cross-company comparisons easier. As such, all references to “Q3 2014” refer to the quarter ending September 2014, not Apple’s fiscal Q3 2014. Once again, this post is part of a series on major tech companies’ earnings (this is the second for the current round of earnings; analysis of Q1 2014 earnings can be found here, and for Q2 2014 can be found here). 

iPad plus Mac is the number to watch

Lots of attention was paid by both Apple and commentators this quarter to both the iPad and Mac numbers, but the key is increasingly to look at the combined results of these two segments, both in unit shipment and revenue terms. For a while there, as the Mac started to shrink, iPad growth offset that decline, but the two have now switched places. Nonetheless, year on year, the two combined continue to operate within a very narrow range:

Mac plus iPad revenues Mac plus iPad shipments

ASPs continue to tell an interesting story

Given the near demise of the iPod, and the declining average selling price (ASP) of the iPad, the iPhone and Mac are actually the best two products for Apple to be selling. Interestingly, they’re also the two products which are most likely to experience substitutional effects with the iPad. Note the ASP trends in the chart below, which shows trailing 4-quarter ASPs to smooth the quarter-to-quarter fluctuations:

Apple ASPs

The iPhone ASP continues to hold up remarkably well, staying within $10 of $600 for the last five quarters, though rather lower than the $640 or so it regularly hit earlier. With the launch of the iPhone 6 Plus it’s likely that ASPs will trend somewhat higher over the next couple of quarters, and this quarter’s ASP was $42 higher than last quarter’s, partly for that reason.

Who’s buying iPads?

I’ve done some analysis previously on iPad replacement cycles and theorized that we’re due for faster sales over the next few quarters as the many iPads sold 2-4 years ago become due for upgrades. I thought I’d revisit some of those numbers in the context of what we heard today to answer the question of who’s buying iPads. Tim Cook has now given several data points as to the percentage of iPad buyers who were first time buyers, and it’s interesting to look at what that data signifies. Using that data, I’ve put together estimates of the breakdown between new buyers and upgrade buyers of iPads, as shown below:

iPad Buyers By Source

If these numbers are correct, they appear to show two trends:

  • The number of people buying upgrades to existing iPads is rising slowly in a cyclical pattern, as would be expected with a growing installed base (I’ll come back to this below)
  • The number of people buying new iPads has been extremely cyclical too, but appears to have slowed somewhat over recent quarters. Though the Q4 peak last year was higher than the one the year before, every quarter since has been off the year-earlier quarter by some margin. Though Tim Cook rightly points out that the market isn’t saturated, the number of new buyers does seem to be falling somewhat.

Let’s look at that upgrade number in the context of the installed base (the caveat here is that we’re working with two sets of estimated data now). My guess is that the percentage of the existing iPad base that upgrades in any given quarter is around 3%, with a higher number in Q4, both because it’s a big buying quarter anyway and because as a result it’s the anniversary of many earlier purchases. I think the rate in those quarters likely spikes to around 4.5%. On that basis, as the base continues to grow by a few million every quarter, if the upgrade rate holds steady, the number of iPads sold to existing owners will continue to grow steadily too. The big question then becomes whether Apple can turn around the new buyers number with the new iPads it launched last week, and the lower prices on older iPads. I suspect it will and we’ll see a really big fourth quarter, perhaps the first in a year that’s higher than the year-ago quarter.

Apple Watch buried among Other Products

One of the more interesting tidbits on the earnings call was not a financial data point in its own right, but an indicator of future reporting changes. Namely, that the Apple Watch will be reported under Other Products along with both the existing Accessories business (including Beats) and the iPod business, which was formerly reported separately but is becoming so small as to be no longer worthwhile reporting in its own right. It’s worth looking at the history of other Apple products here for a precedent:

  • The iPod launched in October 2001, and in the next earnings release Apple reported the number of shipments, but didn’t break the product out in its Data Summary with its Mac shipment and revenue data until two years after launch, in October 2003. The company continued to provide occasional iPod shipment numbers in the interim, however.
  • The iPhone and iPad both received immediate status as segments in their own right immediately after launch, with a full revenue and shipment breakdown (though in both cases muddied by the fact that other related revenue was lumped in with device sales revenue for a time).

What does it signify that Apple won’t report Apple Watch shipments and revenue in full detail from the outset? I think two things:

  • Apple is exhibiting caution ahead of what is in some ways its most unpredictable new product category in many years, since the iPod. Apple as a company has many times more customers today than it did then, but the Apple Watch is as big a departure from its current product line as the iPod was in its time, and it’s inherently difficult to predict how many it will sell. As such, the lack of reporting in the short term may reflect an abundance of caution about breaking out a nascent category.
  • Apple’s leadership alluded to this on the earnings call, but the Apple Watch will also have a far more diverse set of price points than any of its other products, ranging from $349 to several thousand dollars, and as such the average selling price will be a huge clue as to which models are selling in a way that it has never been for the iPhone, iPad or even the Mac. As such, Apple is keeping this commercially sensitive data out of competitors’ hands, at least for the time being.

However, all that said, within two years of the launch of the iPod Apple was providing a detailed breakout of both shipments and revenues, and I’d very much expect that if the Apple Watch sells at all well we’ll get (a) ad-hoc reporting of key metrics such as shipments right from the start as with the iPod and (b) a full breakout at such a time as the Apple Watch becomes significant enough as a revenue generator to warrant its own segment. With an ASP that’s likely to be in the same ballpark as the iPad or higher, it will only have to sell a few million to become material to Apple’s earnings overall, and I would expect that to happen within the first few quarters. It will be hard for Apple to keep these numbers buried out of sight for very long.

I’ll likely do another post or two this week as I continue digging through the numbers, so that’s it for now.

 

BlackBerry earnings: progress on several fronts

Having not written about BlackBerry for months, I’m now doing two posts in one week! Normal service will resume shortly. But I did want to quickly cover BlackBerry’s earnings today, because as usual many of the people covering them are misunderstanding what’s happening and focusing on the headlines instead of the underlying trends.

First off, BlackBerry’s results look horrible on the face of them. It’s losing money, it’s shrinking, it’s hardly selling any devices, and so on and so forth. If you compare them to almost any other handset vendor out there, they come off looking pretty bad. But looking at BlackBerry as just another handset vendor is making the very mistake I warned against in my post earlier in the week. BlackBerry’s future involves devices, to be sure, but it goes well beyond them. So here’s a quick take on what I see by way of underlying trends at BlackBerry.

Device shipments

Since so many people are fixated on device shipments, let’s start there. The headline here is that shipments fell significantly year on year, which is usually the best comparison to make to avoid focusing on seasonal trends. However, when a company is in turnaround mode, it’s worth looking at quarter on quarter trends too. In addition, the real number to focus on is sell through and not shipments, because that reflects what the company is actually selling without the effect of reductions in inventory. The chart below shows three key metrics related to the company’s device sales for the last few quarters:

BlackBerry device salesTaking each of those lines in turn: Continue reading