Thursday, June 25, 2009

iPhone Javascript Speed: Very Good

Those who have felt compelled to read everything written at the Jaded Consumer will have already noticed that Google entered the browser wars with an interesting entry that offers its own home-built javascript engine even though it uses Apple's WebKit for rendering pages.

The news is that with Android (Google/Chrome) and iPhone (Apple/Safari) now commercially available as smartphone browser platforms, though on different hardware), Apple's entry seems to do much faster javascript work. Given the apparent speed advantage of Apple's Squirrelfish javascript engine over Google's V8 alternative, this should not be an enormous surprise.

The good news? Squirrelfish and V8 are both standards-based open-source projects whose competition and improvement will tend to erode dependence on proprietary platforms and their APIs.

The future looks brighter than it did fifteen years ago.

Saturday, June 20, 2009

Irate In Iran: The Election That Exposed The Emperor

I'll cut to the chase: it's now evident that the Emperor has no clothes.

Not the apparently falsely-elected Ahmadinejad -- the ideology behind his religious state. As Eloquently encapsulated by Fareed Zakaria in a CNN interview:

Fareed Zakaria: One of the first things that strikes me is we are watching the fall of Islamic theocracy.

CNN: Do you mean you think the regime will fall?

Zakaria: No, I don't mean the Iranian regime will fall soon. It may -- I certainly hope it will -- but repressive regimes can stick around for a long time. I mean that this is the end of the ideology that lay at the basis of the Iranian regime.

The regime's founder, Ayatollah Ruhollah Khomeini, laid out his special interpretation of political Islam in a series of lectures in 1970. In this interpretation of Shia Islam, Islamic jurists had divinely ordained powers to rule as guardians of the society, supreme arbiters not only on matters of morality but politics as well. When Khomeini established the Islamic Republic of Iran, this idea was at its heart. Last week, that ideology suffered a fatal wound.

CNN: How so?

Zakaria: When the Supreme Leader, Ayatollah Ali Khamenei, declared the election of Mahmoud Ahmadinejad a "divine assessment," he was indicating it was divinely sanctioned. But no one bought it. He was forced to accept the need for an inquiry into the election. The Guardian Council, Iran's supreme constitutional body, met with the candidates and promised to investigate and perhaps recount some votes. Khamenei has subsequently hardened his position but that is now irrelevant. Something very important has been laid bare in Iran today --- legitimacy does not flow from divine authority but from popular support.
The idea that the state does not act from divine authorization that is clear to the competent cleric undermines not the power of the state -- it has still got its guns, for example -- but it undermines the political philosophy and the religious justifications that have given the state its heretofore-unchallenged power. Now that it's obvious that political insiders are manipulating government for their own ends and not in keeping with divinely-ordained purpose, the legitimacy of the government and its activities will erode until the country is understood by all its neighbors and inhabitants as a naked police state -- or its inhabitants will succeed in reforming the government (I don't speculate as to whether this is largely by reform or mainly by violence; I simply see only two routes).

The fact that neighbors understand Iran as a fascist regime might not seem to help anything -- residents will still live in increasingly unvarnished oppression -- but it will likely impact Iran's capacity to recruit supporters with purely religious motivations. Dividing Islamists from the Iranian state will have a beneficial impact on the state of the propaganda battle being waged in the Middle East. When the word "martyrdom" takes on the connotation of self-sacrifice by pro-democracy advocates resisting the tyranny of dictators who fix elections with blatantly illegal vote fraud, we will have improved the language with which we discuss conflict in the Middle East.

Who knows: instead of Iraq importing Iranian enemies to undermine democracy and stability, Iran may start exporting freedom-loving Shia whose bitter experience with Iran's oppressive state leave them ardent supporters of a state committed to counting votes.

Thursday, June 18, 2009

ACAS 1Q2009: What The Losses Mean

Yahoo Syndrome
I've commented before about "data" reported in summary form on free sites that fail to convey important information about the companies thus described, which seemingly causes uninformed people -- suffering from a delusion of informed-ness -- to make trades that appear irrational to people paying attention. Thus, partial-year dividends are assumed to reflect annual yields going forward, and historical yields and reported incomes may have little to do with solvency. ACAS is subject to Yahoo syndrome because SEC-reported profits, taxable profits, and cash flow are different animals -- and Yahoo reports only the FAS-157-compliant SEC-reported "income" is printed on Yahoo's financial site.

Wild Ride
It's been suggested in comments to the post on Piper's sale at a third above its FAS-157-compliant prior-quarter valuation that ACAS might be in the process of renegotiating its debt covenants with its banks, and that this is what's behind ACAS' >30% gain in a day. Well, let's face it: ACAS has been volatile as all get-out for a while now, with +/- 10% days being fairly common over the last months. Earlier today, I saw a quote of ACAS down well over 10%, and by the day's close ACAS had moved between 2.87 and 3.38 -- a range exceeding 50¢. On a stock trading near $3, this is crazy, no? Well, maybe not. It's the price action you see when there's not a broad concensus what the company is worth.

Wasn't broad mispricing of ACAS my basic reason it was worth buying? That its returns would exceed expectation because analysts weren't clued into what was right at the company? (Mind you, I wasn't clued into the company's exposure to market price chaos, especially in the bond market; I assumed foolishly that holding until maturity to get outstanding returns on debt was proof against exposure to market volatility ... but I was educated by ACAS' experience with its debt:equity ratio as its apparent equity shrank while its debt did what debt normally does when it's not subject to the same discounting as the equity.) My personal education -- and ACAS' -- that a long-term view doesn't insulate one from short-term volatility when leverage and external markets are involved was certainly painful -- but doesn't prove any thesis against the quality of ACAS' underwriting, diversity, or profitability.

ACAS: Worth It?
To understand whether ACAS is really sound near $3 (at least in the long term, assuming ACAS isn't crushed by a liquidity crisis before "long term" can arrive), one needs to know whether ACAS' investments are doing what ACAS expected them to do when ACAS entered them -- in short, whether ACAS was right about their long-term capacity for return when it bought the investments (when they were valued much higher than now).

1Q2009 Overview
From the end of 2008 to the end of 1Q2009, ACAS reduced debt by $51m and derivitive liabilities by $120m, while reducing "other" liabilities by $22m -- in all, reducing liabilities from $4.755B to $4.557B, a net improvement of $198m. Due to debt covenant breaches (following FAS-157-compliant reporting of the liquidation value of ACAS' intended-to-be-held-till-maturity debt portfolio), the "current" debt is substantial -- but ACAS reduced it from $2.512B to $2.419B during the quarter. ACAS reduced these liabilities even as its income fell.

Comparing ACAS' 1Q2009 to its 1Q2008, interest and dividend income fell from $258m to $179m, a reduction of $79m; asset management and other fee income decreased from $34m to $16m during the period, a decrease of $18m. In all, income decreased by $97m to $195m. Operating expenses shrank by $11m from $142m to $131m. Exluding the effect of ACAS' realized losses on exits from investments, ACAS had an income of $64m, plus a gain of $12m on the extinguishment of outstanding debt (presumably bought below par from owners who lost faith in its value), for an income of $76m.

However, ACAS realized a loss of $131m on investments in the quarter. This is different from the unrealized changes in value that create such confusion about ACAS' fortunes; it's also a substantially smaller number than the $492m unrealized decreases in FAS-157-compliant values (down from an unrealized decrease of $997m the prior year's first quarter). In short, during the first quarter of 2009, it looks like ACAS experienced a taxable loss of $55m ($76m income, less $131 realized losses), or a tax loss of 26.6¢ per share, while reducing liabilities by $198m. One might conclude that, following the quarter, investors should feel something like $143m better off. However, this would ignore the hard-to-quantify impact of reported unrealized losses which, for reasons discussed on this site before, are going to be very hard to pin down due to the apparent disconnect between how the government requires these values to be calculated and the way these transactions are priced when ACAS actually exits a position. Due to FAS 157, ACAS reported a per-share loss of $2.65 (down from $4.16 in the prior year's quarter). Recent exits range from within 2% of prior-quarter valuations to a third above that level, so even the current validity of the reported NAV is in question, much less the validity of the reported NAV as a predictor of the current value of eventual performance.

Speaking of Taxation
Outside a tax-deferred account, the case for holding ACAS has become painful: ACAS will "pay" a dividend to remain compliant with the BDC Act, so that owners can be taxed instead of ACAS, which will eliminate the double-taxation ordinarily associated with receipt of dividends -- but since ACAS will "pay" 90% of that dividend in stock instead of in cash, owners will be in effect taxed on a stock split. Those who hold ACAS in tax-deferred accounts will be able to avoid this nuisance.

Also, this year's owners will be soaked with last year's tax bill, but they won't be able to enjoy the losses of recent quarters. This is because although ACAS' BDC status allows it to pass tax obligations uphill to owners through dividends, deemed dividends, and so-called dividends that are in fact stock splits, there is no mechanism by which owners can benefit from tax benefits that might accrue by virtue of ACAS' losses: ACAS isn't a partnership, and no K-1 losses will flow uphill to owners. The tax-deferred account is looking better and better, eh?

The Future
Whether ACAS has a future depends on whether it can keep creditors at bay long enough for the quality of ACAS' due diligence to manifest in the form of returning portfolio performance. ACAS reported an "interest coverage" (EBITDA divided by cash interest expense) of 2.2x. This non-GAAP measure, not appearing on Yahoo's summaries, reflects capacity to keep creditors paid off. ACAS' debt covenant breaches have hiked ACAS' interest rates (in addition to bringing billions of its debt current), so this 2.2x metric will worsen even if earnings are maintained. Assuming ACAS' earnings don't deteriorate more than, say, another 50%, ACAS should be able to weather the storm. Decreases in earnings impact interest coverage: 1Q2008 showed ACAS with interest coverage of 3.5x, so the 2.2x that looks good now is a serious deterioration of an important metric. Whether ACAS' debtors can pay ACAS will impact ACAS' power to pay its own creditors.

Earnings doesn't pay interest as it comes due, or repay principal at the expiration of notes and bonds. Cash pays this stuff. ACAS' cash has diminished seriously in the last year, which is unsurprising considering the liquidity crisis that brought ACAS and the rest of the financial world to the present state in which we find them. Just because ACAS has an accounting profit doesn't mean ACAS is solvent. $82m of unsecured private debt, still on the books at the end of 1Q2009, will become due in September. There are supposedly rumors about ACAS negotiating a solution to ACAS' debt issues, but you can't eat rumors.

ACAS' debt ratings deterioration has driven up the interest rate ACAS must pay on publicly-traded debt to 8.6%, and no acceleration actions have been taken by holders of either public or private debt. 8.6% isn't terribly bad, but increases in ACAS' interest rates shrink the spread between what ACAS is owed and what ACAS must pay, and thus shrink its earnings. Shrinking earnings isn't something ACAS really needs.

What 2Q2009 shows us about ACAS' NOI will be very instructive to shareholders regarding ACAS' capacity to function with increased interest expense.

As illustrated by this kind of news, ACAS can still close deals. To the extent ACAS can exit deals, ACAS can raise funds to deal with its upcoming bond expiration. Exiting deals at current valuations might not seem exciting to those who bought when NAV was north of $30/sh, but given that NAV is now several times the trading price, it seems exits even at current prices offer tremendous stock price upside. The question is, how much of the exits will be in cash and how much will be in some kind of debt that holds its own future valuation and performance risks.

To the extent ACAS can negotiate a deal with its creditors to re-arrange its debt covenants (e.g., to offer some metric other than FAS-157-compliant valuations -- maybe interest coverage, or percent performing, or the like as an alternative), ACAS may be in a position to improve its solvency and drive stock price back toward NAV. And NAV itself will presumably improve as the economy, and the valuation of ACAS' portfolio, turns around. If ACAS' underwriting was as good as I have been betting all along, ACAS will do very well on its NAV recovery and its capacity to generate income regardless what happens to its share price.

Wednesday, June 17, 2009

iPhone 3G v iPhone 3GS: Evolution or Revolution?

Walt Mossberg's seemingly tepid praise ("Or Just Get OS 3.0") leads to the question whether Apple must shock the world with every product release in order to succeed, or can do a good business by diligently keeping its buttons polished. To address that question, let's first go back in time a year and look at the 3G iPhone which is now joined by the relatively upscale 3GS.

From where I stand as an iPhone 1.0 user (8GB model), the iPhone 3G was not a must-have product.

Apple's 3G was the same processor, but a faster network connection, and I didn't jump because my beef with my phone was not AT&T's Edge speeds but the phone's anemic processor -- I got skips during scrolling and resizing, and unexpected pauses while apps are loading or changing, etc. And the camera was a disappointment: everything's blurry, because the effective shutter speed is so slow. Low light? Good luck. I couldn't use it to replace my iPod because I simply have far too much music to fit in anything like 8GB, and even with cut-down playlists I get messages about my phone filling and have to throw out voicemail.

3GS (remember the Apple GS, anyone? Maybe this is a little joke by insiders.) offers users access to faster networks just as its predecessor did, but also improves the processor speed, graphics subsystem, storage capacity (by a factor of up to 4!), camera ... and adds video, voice control, compass (what's GPS and continuously-updated maps without turn-by-turn directions?) ... 3GS is a compelling upgrade for initial iPhone users where the 3G was not. Maybe for 3G users in the US -- who enjoy GPS and can live without the compass, and who don't use the camera much or demand that it photograph moving children, and who won't notice the network improvements because AT&T hasn't supported them yet -- the 3GS isn't a must-upgrade proposition. However, for original buyers -- especially buyers whose initial 2-year contracts are just expiring -- the move from iPhone to the new GS seems a sure thing.

Now, let's look at what this means.

Apple's 3G phone is still being offered for sale -- for $99 (in the US, with a contract). This is beginning to look rather like the MacBook v MacBook Pro: if you want an Apple system, you can get in on the ground floor, or you can pay more for perks. What are those perks? Faster processors, better graphics subsystems, improved batteries, and up to quadruple the memory seems a similar recipe in both cases, notebook or phone; however, where the notebook offers perks like a backlit keyboard, the phone offers a compass (for turn-by-turn directions and enhanced gaming controls) and an improved camera that supports video (and presumably behavior as a scanner, รก la Delicious Monster). For about twice the money (more, if you max it), you can upgrade to a slicker model (again, notebook or phone). Apple hasn't done badly in notebooks, and Apple's test of this kind of product lineup in phones is far from pointless. If there's no demand for the lower-end model, it can die just like the 4GB iPhone. (Remember that model? And what people paid for it? And how long it lasted?)

Recently, Apple rolled out upgraded specs on new MacBooks. There was no big event (the Pro upgrade and its new 8GB RAM ceiling made the WWDC stage, but the non-pro MacBook upgrade got no such fanfare), there was no claim it was the cat's meow -- it was just an update. This didn't make the new MacBooks a bad deal; it just kept them competitive. Apple's changes in that upgrade might have been nice, but they were by no means a revolution. Yet, without this kind of steady improvement, where would an electronics gadget company be in a few years? Exacly: dead. Unexciting evolutionary improvements are an expected, normal, necessary part of competing in this space. The fact that compasses are cool and that 32GB makes the iPhone a much more serious music player are nice perks -- but the fact that Apple is working to keep the environment on the phone attractive to users and developers is something I think should be recognized as the real revolution.

Apple didn't set out to make its phone all things to all people, it set out to create a carefully cultivated garden and allowed outsiders to plant in the garden only after great protest about the restrictions Apple imposed on users (web-only development? only Apple-vended applications?). Apple is trying to prevent the phone from becoming a virus farm, or from suffering from horribly-behaved applications that can't be killed in the background because they spawn processes users can't see because they have no UI -- and the price at the moment is a lack of background applications (unless they are from Apple) and a single app vendor in Cupertino. Oddly, people have seemingly forgiven Apple for its draconian control over the system, and now content themselves with inquiry into whether background applications are a feature worth the price. Apple's desire to control the platform in order to control the quality of the user experience seems to have lost its ardent haters as the platform has done well in the market.

Apple has been rolling out desktop and notebook computers for years, and few of them have (in comparison to their immediate predecessors) represented a real revolution in computing technology. Apple's distinguishing feature has generally been where the rubber meets the road -- not under the hood, but at the interface between the user and the machine. The GUI, for example. For developers, the Cocoa API. Cultivated simplicity is an Apple virtue, as it is the result of Apple's work to prevent the interface from becoming cluttered with unnecessary and confusing options and the like. Less is more, in some ways.

An evolutionary product refresh coupled with a substantial price break on existing models is the kind of movement that offers Apple both the claim to good movement forward, and the claim to more affordable products with a larger base of increasingly diverse users. Not all these guys will buy medical management applications. But those that don't may be heavily inclined to try out the games ...

In short, Apple's new release isn't a revolution (except maybe for the price of a machine in the class of an iPhone), but this is not a bad thing. Carefully evolving what will likely become Apple's most important platform is something too important for inviring the chaos of revolution at every incarnation. Slow and steady wins the race.

UPDATE: NYT's Pogue blesses the GS: "The new iPhone doesn’t just catch up to its rivals — it vaults a year ahead of them."

Sunday, June 14, 2009

Soundest Rigged Election Ever

When Iran's President Mahmoud Ahmadinejad described the recent elections as "the soundest, the healthiest of their kind" I don't think he intended to evoke the memory of Soviet-era elections, but if so it's only because it was lawful to campaign against the incumbent. Actually counting all the votes against the incumbent was apparently not allowed, though.

Threatening mobs gathering at the doorways of anti-incumbent activists, police break-ins and threats, and other features make it doubtful the election's surprise outcome was the result of fair electioneering. Perhaps character isn't the only thing being assassinated in connection with Iranian election.

Moussavi, the leading contender in the election, has suggested nullifying the election result may be the only way to restore confidence. Asked whether he would guarantee Moussavi's safety following his claimed victory in the election, Ahmadinejad likened the post-election situation to a crowd clashing with police following a soccer match. Ahmadinejad seemed to miss the fact that claiming the rule of law would protect everyone who wasn't unruly presumed Iran to be a nation governed by the rule of law, which is the very subject of his opponent's debate.

Considering that Ahmadinejad "debated" Moussavi during the election season by waving a folder and telling Moussavi that he had a file on Moussavi's wife, it's pretty easy to see how Moussavi might get the idea the rule of law is in jeopardy in Iran.

UPDATE: Time lists a few reasons the tally seemed suspicious, including the bizarre result that the incumbent's >60% support demonstrated enormous geographic uniformity, including in his opposition candidate's own hometown (where he is hugely popular) and in cities where demographics are significantly different than in rural areas where the incumbent previously drew his apparent support in prior (alleged to have been rigged) elections.

Saturday, June 6, 2009

iPod as a Game Platform

In recent years, Apple has bought a fabless chip-making operation, an embedded graphics company, and lots of intellectual property involving image processing and user interfaces. (And a seasoned hardware manager with blade server and chip design expertise.) Apple has also introduced a wildly-successful line of handheld computers that mostly masquerade as telephones, but has distributed over a billion applications for these "phones". Not surprisingly, many of the applications in question are games.

So, when will Apple's iPhone/iPod-Touch product -- or, rather, their successors, which might include low-price models -- turn out to offer serious competition to XBox and PSP?

The iPod Dock with its video output seems to make 5.1 surround, 3D graphics, and wireless capabilities an interesting possibility near a home theater. Whether as a client console or a game server, the iPhone and iPod Touch seem to offer a way to allow Apple to make money while selling both a game platform, and selling the games. The iPhone is well-liked by game developers, which isn't a bad start. One developer declared at a conference that the iPhone would going to become the dominant games platform, though what passes for "dominant" in a field full of loss-leaders might be hard to measure: numbers of consoles sold? numbers of games sold? profit realized by various market participants? Interestingly, Apple's highly-connectde device offers opportunities for developers to be paid based not on downloads, but on use of a game -- if ad-based game support turns out to be workable.

Maybe the iPhone has become a significant game platform already. What might the future hold?