Archive for the 'Publishing' Category

AAPL’s 4Q11: another strong quarter

Published October 19, 2011 Current Market Thoughts , e-readers , earnings conference calls , Industry Analysis , Retail , Stock ideas , Technology , Wireless Leave a Comment
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the results

AAPL reported 4Q11 results after the close of trading in New York yesterday.  The company earned $6.6 billion ($7.05 per share) over the three months, on revenue of $28.2 billion.  This is an advance of 52% in eps, year on year, on sales growth of 39%.  Although the company exceeded its guidance of $5.50 per share handily, it failed to beat the Wall Street analysts’ consensus, $7.39 a share, or the first time in a long while.  (The StarMine consensus of analysts who have historically been the most accurate forecasters–which in this case may simply have been the most aggressive–had been $7.51.)

EPS for the full fiscal year 2011 (ended September 24th) were $27.68, or 82% better than results for fiscal 2010.

AAPL also gave guidance for the holiday quarter we’re in now.  APPL’s 1Q12 will have 14 weeks in it instead of the normal 13.  This is an adjustment companies who organize themselves on a “weeks” basis rather than a “months” basis must make every six years or so to make sure their fiscal year remains aligned with the calendar year.  Anyway, AAPL’s guidance for 1Q12 is eps of $9.30.  My rough guess is that this equates to a “normal” quarter of $8.50,  which would be a gain of about a third over the $6.43 AAPL reported in 1Q11.

As a result of its earnings “miss,”  AAPL shares are down about 6% in pre-market trading as I’m writing this.

details

iPhone

Let’s get straight to the heart of the earnings “shortfall,” if that’s the right word to describe a quarter that’s up more than 50% year on year.  It comes in the iPhone.

AAPL sold 17.1 million iPhone units in 4Q11.  That’s up 21% year on year, and an all-time record for a September quarter, but down 16% from the record 20.4 million the company sold in 3Q11.  There were two reasons sales weren’t higher, both related to the introduction of the new iPhone 4s.

–AAPL decided not to add any new carriers to its iPhone network in the September quarter; and

–consumers slowed down purchases of the iPhone 4 in anticipation of the new model they expected to debut during 4Q11.  As demand waned toward quarter end,  carriers slowed down purchases of iPhones from AAPL.  Apple Store sales of iPhones were particularly weak.

APPL has since reported that the iPhone 4s has sold over 4 million units during the first three days of its launch in early October, more than double the rate at which the original iPhone 4 left the warehouses when it first came to market.  At $645 each, those sales amount to $2.6 billion, or about $.85 a share.  They could just as easily have occurred in 3Q11 if AAPL had moved the launch date of the 4s back to late September rather than early October.

How good is the iPhone business today? “In our wildest dreams we couldn’t have gotten off to a start as great as we have on the 4s,” says CEO Tim Cook.  Cook also noted that AAPL had anticipated a much larger reduction in telecom purchases of the original iPhone during the quarter than what actually occurred.

iPad

AAPL sold 11.1 million units during the quarter, an all-time record.  That’s up 20% quarter on quarter and 166% year on year.  AAPL finally seems to have obtained enough manufacturing capacity to keep up with demand.

Macs

Unit sales were up 37% year on year and 30% quarter on quarter.  That’s also an all-time record.  AAPL sees some cannibalization of the Mac business by iPads, but is still producing growth much greater than the PC industry.

iPods

Once half the company, iPods are now less than 10% of AAPL’s revenue.  Unit sales were 6.6 million during the quarter, down 27% year on year and 12% sequentially.

my thoughts

Even with an extra week to work with, I don’t think AAPL’s profits can be up 82% again this fiscal year.  Suppose they “only” reach $35, with (to make the arithmetic easy) $1 of that coming from the 53rd week.  Organic growth would then be in the low 20% range, which I think is easily doable.  It could be very much higher.

At a $400 stock price, AAPL would be trading at a forward multiple of under 12x on my low-ball figure.  Subtract out the $86 a share in cash (remember, AAPL has no debt) on the balance sheet from the stock price and the multiple shrinks to about 9x.  Even factoring in a substantial maturing of AAPL’s businesses, of which there’s no credible evidence yet, AAPL shares seem very cheap to me.

 

the Silk browser on the Kindle Fire

Published October 6, 2011 e-readers , Industry Analysis , internet , Publishing , Retail , Stock ideas , Technology , Wireless Leave a Comment
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what a browser does…

A web browser is a software program that finds web pages for you and renders them on your computer.  It locates the page you want and then reads and follows the HTML instructions it finds there.  The instructions may require the browser to travel to separate locations so it can get detailed–and sometimes complex–formatting instructions, or favicons, or to call up images that belong to the page.

…takes time and effort

All this can mean lots of round trips communicating between your browser and the page you’ve asked it to look for.  Once you’re on a given page, you’ll most likely want to follow links to other pages, either to watch a video, read an article or get more details about a possible purchase.  That’s a bunch more round trips.  Yes, we’re talking milliseconds (1/1000 of a second) for each one, but even milliseconds eventually add up if there are enough of them.

how AMZN makes Silk “super-fast”

Most of this has to do with the massive “cloud computing” infrastructure AMZN has built in becoming the online department store to the world.

In particular,

–AMZN links directly to the internet backbone.  So it can connect Silk to “outside” web pages up to 20x faster than other services.

–AMZN maintains continuous connections to the “top sites on the web,” eliminating the need for initial introductions between you and the page you want.

–AMZN has a big web hosting business, so lots of sites are inside the AMZN cloud already; AMZN caches others.  No need to go hunting for them.

–for the most popular destinations, AMZN cuts through the back-and-forth between browser and web page and starts to send information it knows you need, even before your browser asks for it.

–AMZN studies how people generally behave on a given page.  Based on its conclusions, it pre-loads content on your browser that it anticiates you may ask for next.

pretty impressive–

In fact, AMZN’s description sounds an awful lot like AOL back in the heady days when dial-up was king and the AOL server farms were all the internet many people ever used.

one caveat

Anyone using the Silk browser may well spend most or all of his time inside the “walled garden” of the AMZN cloud.  This means that, like AOL decades ago, or GOOG or AAPL today, AMZN will be able to see–and analyze–large chunks of the internet life of any such customer.

This stands to give a tremendous marketing advantage to AMZN, in two ways:

–in all likelihood, AMZN will “own” the Silk customer in the way AAPL “owns” users of its app store, and

–AMZN will be able to collect huge amounts of new data about consumer behavior.

Will customers balk at giving so much personal data to AMZN?  …not at all, in my opinion.  But AMZN will have to walk a finer line than before between using customer data for marketing analysis and respecting the privacy of users.

–

4 points about the Kindle Fire

Published October 4, 2011 Current Market Thoughts , e-readers , Entertainment , Industry Analysis , internet , Publishing , Retail , Stock ideas Leave a Comment
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1. Thank book publishers for the Kindle Fire.

AMZN’s initial strategy for e-books was to compete on price.  In fact, it started out offering e-books as a loss leader.  It was paying the publishers $12.50 for a new release and selling it as an e-book for $10.

The book industry didn’t like this one bit, however, because it feared the tactic would destroy the independent bookstore distribution channel.    So it forced AMZN, by threatening not to sell books to the company, to charge $13-$15 an e-book for new releases and keep 30% for itself (see my posts on Kindle economics for more details).  Take that, AMZN!

As I pointed out then–nothing requiring much insight, only having watched Jeff Bezos operate over the years, I thought AMZN would likely shift to using its hardware as a loss leader to build up sales volume.  The process took a little longer than I anticipated, but the Kindle Fire is the result.

According to iSuppli, the components in the Fire and their assembly cost AMZN about $210 a unit, meaning the company gets no recovery of its research and development costs, and loses $10+ for each unit sold, to boot.  If AMZN marked up the Fire the way AAPL does the iPad, it would sell for $275-$300.  Vintage Bezos.

Presumably, though, the early devices have a lot of redundancy built in (what a disaster if the first ones broke a lot).  But component prices will fall, and the device will gradually be simplified.  My guess is that AMZN will cross the breakeven line in the second half of next year.

2.  Fire is the star, but there’s a mini-explosion of regular Kindles as well. 

Along with the 7″ color-screen Fire, AMZN is introducing a new 6″ e-ink Kindle with audio and text-to-speech.  The latter comes in touch screen and physical keyboard models.  With 3G connectivity, they cost $189.  They’re $40-$50 less with wi-fi only (which is what the Fire has).  You can knock another $30-$40 off is you’re willing to accept advertising.

And, of course, there’s still the original 6″ Kindle at $109 and the jumbo-size 9.7″ Kindle DX at $379.

3.  AMZN is already offering Fire extras.

For example, there’s:

–a two-year extended warranty, that also covers three instances of accidental damage, for $44.99,

–a cover for, $24.99-$44.99, and

–streaming of TV shows and movies through Amazon Prime–which costs $79 a year and also gets you free two-day shipping on all AMZN purchases.

4.  AMZN’s formidable cloud computing capabilities back the Fire, too. 

AMZN is promising super-fast internet browsing with the Silk browser every Fire comes equipped with.

How so?

AMZN’s on-line retailing operations require massive server banks.  Because the company has to have enough capacity to handle surges in demand during peak selling periods, it can often be left with as much as 90% of its servers idle.  Years ago, it turned to providing cloud computing services to third parties as a way of using this asset better.  Its careful study of its customers’ behavior while on the Amazon site has also given it the ability to anticipate their needs–meaning it will be able to pre-load onto a Fire device likely next pages even before the user tells the browser to request them.

More about this tomorrow.

my thoughts

Fire may not have the upscale cachet of the iPad.  But the price is right at the level where surveys of US consumers suggest they’re willing to buy a tablet.  It’s small, weighs less than a pound and has a battery life that AMZN puts at 8 hours of active use. 

It seems to me the Fire will prove very attractive to consumers on the go, just as the early netbooks drew traveling businessmen for their light weight and essential functionality.  I doubt the form factor will stagnate in the way that netbooks did, though, and I don’t expect the iPad will move downmarket to challenge.  AMZN could easily be a very big winner with the device.

is News Corp a buy?

Published July 14, 2011 Industry Analysis , Publishing , Stock ideas , Trading Leave a Comment
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Is News Corp a buy?

The short answer is that I don’t know. But I do think that analysts recommending the stock on t idea that it’s unduly depressed by the current scandal in the UK are premature. I have two observations:

By far the most valuable asset in the News Corp empire is Fox media in the US. Your first question should be whether you really want to own it, even at today’s lower price

I also think that Americans will tend to underestimate how serious the political situation for News Corp in the UK might be.

I think Americans are most influenced by the letter of the law. We have a quiet admiration for a scoundrel who can wriggle out of the onerous terms of a business deal by finding an obscure loophole in the legal documents that govern it. And we approve of an astute lawyer who can win his case on a technicality.

In my experience, the UK is different. There, the spirit of the law is more important than the letter. The intentions of the lawmaker—which it is assumed everyone understands—are sacrosanct. In the cellphone and email hacking case, it seems to me the accepted response is not a sharp legal defense, but rather admission of guilt on all charges, immediate corrective action, and an apology and plea for clemency. Anything short of that—and I don’t perceive this as being News Corp’s response to date—will likely result in severe legal penalties of a type that Americans would never expect.

One must also ask whether what happens in the UK with News Corp will have negative fallout in the US. I don’t expect it, but I don’t see there’s any rush to buy News Corp stock, either.

I’m suddenly a tablet advocate: here’s why

Published June 15, 2011 e-readers , Industry Analysis , Publishing , Technology Leave a Comment
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my take on tablets

I like gadgets.

I’ve had my eye on a tablet since I first saw one in a university bookstore (a MSFT product) almost a decade ago.  But that one was very clunky and didn’t let you do much more than highlight Word documents.  I looked at a Lenovo combination laptop/tablet a few years later, but it was very underpowered.  And there was still no infrastructure of applications to justify the tablet part.

Now there’s the iPad.  It’s the usual well-designed AAPL consumer device.  But to me it has seemed little more than another device to lug around that’s not much more than an expensive e-reader and an extremely costly way to play Angry Birds.

my newspaper problems

Then the Financial Times newspaper stopped coming to the house.

Yes, I still read the physical newspaper.

I read:

–the FT (comprehensive global business news; a UK perspective on US/world economic and political developments),

–the NY Times (reasonable, US-oriented business news, good–though weakening–sports coverage) and

–the Wall Street Journal (good sports, lots of gossip in the NY section, almost no useful business coverage–meaning I won’t renew).

why the physical paper

I’m not a fan of wood products per se.  But I’ve thought the physical paper has several advantages over the web version:

–the amount of news in the physical paper is greater than on the front page of the newspaper website.  So the editors’ selection of what’s most important is a greater influence on what you see online than in the physical paper.  As a result, the chances of finding information whose significance is not adequately understood is greater in the physical paper.

–I think the web presentation is organized to highlight stories that will maximize visits.  In contrast, the physical paper is organized to deliver information.

–I thought (not any longer) that it’s easier to reconstruct with the physical paper a timeline of information flow by reading back editions you might not have gotten on the day of publication than it is to go back a day or two in time on the website.

my call to the FT

When I called the FT last Saturday to get replacement copies of the papers that didn’t come, the representative I talked to mentioned the e-paper that’s available through ftnewspaper.com.

The site is run with software from Olive Software, a private company in Aurora, Colorado.  ftnewspaper.com has daily back editions.  You can turn the pages of each edition, just like an online catalog.  You can pop out to larger size and different formats the articles you want to read in depth.  I also discovered that, through FT email alerts, I had already read most of “today’s” paper online yesterday!

ftnewspaper.com has been around for a couple of years.  I just didn’t know about it.

my calculation

Anyway, I can cancel my physical paper subscription and save a couple of hundred dollars a year.  No more worries about cancelling delivery when we may be travelling.  No more toting around piles of unread orange newsprint.  Less recycling to do.

All of that just means that I can rationalize paying for a tablet with the money I’ll save by stopping a newsprint subscription.  But I’ve also found a sophisticated and valuable application, other than email, that’s completely suited to what a tablet can do and that I use every day.  This means that I have a positive reason to buy one.

I’d like to see the new Google tablets, as well as iPad 3, before I take the plunge.  I have only one concern.

one concern

In my career on Wall Street, I’ve observed the long struggle for control of brokerage houses between researchers and traders that has been decisively won by the latter.  I’ve thought of this as somewhat like the age-old high school contest between jocks/cool people and the nerds.

It seems to me that the same battle is going on in newspaper firms between traditional reporters and online search engine optimizers–the latter being more interested in eyeballs than in information.  As I study successful financial websites with an eye to improving this blog, I can see the same dynamic in play in this arena–well-crafted and very popular websites with lots of advertising, but almost no useful investment information.

By shifting my financial support from the reportorial nerds to the online jocks, I’m most likely speeding the day when even the FT will suffer from a content deficiency.    But that’s a problem for another day.

 

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