As previously discussed (regarding both notebooks and smartphones), Apple's profit share exceeds its market share. This is a result of choosing to compete in market segments where it can command a premium, and ceding undesirable share to commodity vendors.
Recently, asymco's Horace Dediu reported on vendors' profit share in the mobile phone market. According to the article, Apple holds 2/3 of the profit among carriers with substantial market share. The asymco graphs drive this home nicely, with Apple's widening wedge of profit share squeezing everyone else into a shrinking slice of the available profit. The good news for these vendors is that in a growing market, they can still theoretically make a profit.
Of course, Motorola – whose leadership said that making cell phones was hard, and that Apple was not going to succeed as it imagined – has been pushed pretty much off the bottom of the graph since then. And the history of other handset manufacturers who tried to use Microsoft's platform in phones hasn't been much better. Apple's success hasn't been what Apple said it was hoping to achieve – 1% of the cell phone market – it's been much greater. There are complaints to be brought against Apple's products, to be sure – and these will increase in volume as Apple's success grows – but so long as Apple's products are so attractive to users we should expect to see
Sunday, July 31, 2011
Friday, July 29, 2011
And You Thought Using MSFT Products Was Bad Enough Already
You might have thought that Microsoft's customers had enough to worry about with bloatware, viruses, undocumented file formats, vendor-lock-in, unexpected network activity of word processors (for example, MS-Word opens network connections to phone about the LAN to see what license numbers other copies of MS-Word are using), and other irritations from the products themselves. New Aptiquant research suggests (as discussed on CNN) that there may be a problem with Microsoft's customers themselves: its Internet Explorer customers are reportedly also less intelligent than average.
Apparently Microsoft has had trouble getting customers to upgrade off broken and obsolete browsers it no longer supports, suggesting that there may be something to the thickness of Explorer users. Of course, with Microsoft seemingly unable to keep its own systems patched, maybe the issue is something one catches from the products ....
Apparently Microsoft has had trouble getting customers to upgrade off broken and obsolete browsers it no longer supports, suggesting that there may be something to the thickness of Explorer users. Of course, with Microsoft seemingly unable to keep its own systems patched, maybe the issue is something one catches from the products ....
Monday, July 4, 2011
iPad : Tablet :: iPod : MP3 Player
Another tablet launches, and hit-hungry web "journalists" ask breathlessly whether the iPad is finally done for. According to AllThingsD, the newest HP tablet uses an LG display akin to that of the first-generation iPad and lacks a GPS, allowing it to trim cost to $306.65 for the version it retails for $499. Electronista reckons that this puts HP's current product's parts costs (not including marketing, assembly, licensing, etc.) at $17 less than that of the iPad2. The device is a bit thicker, lacks the breadth of available applications, doesn't support HD video capture, hasn't got a rear camera, and the top user review at cnet reports the device "freezes often [but] otherwise [has a] nice interface". But the most damning indictment of the new tablet isn't something one can cure with a product refresh: it isn't an iPad. John Paczkowski of AllThingsD went beyond JadedConsumer's previous comparisons between Apple's iPad strategy and its prior success with the iPod in declaring that Apple has already succeeded in redefining the tablet product category to the point that consumers want iPads (instead of "tablets") in the same way they began shopping for iPods (instead of "MP3 players").
If Apple's steady state in the iPad market – ahem, sorry, the tablet market – comes to rest north of 70% as it did with the iPod mark– so sorry, I meant the music player market ... then Apple will be sitting pretty on a high-margin and huge-growing consumer segment with international appeal. And Apple's tech is uniquely suited to meeting international demand by supporting international needs of developers. The things that made Apple's iPhone easy to sell internationally make its WiFi and 3G-capable tablet-market-redefining iPads a cinch for international sales. DisplaySearch's forecast suggests Apple's touch screen supply control will leave it in control of the tablet market through 2011. Control of the tablet market didn't mean much a few years ago, but since the launch of the iPad the segment is looking to eclipse notebook computers in worldwide unit volume, according to UK researcher Canalys – with every two tablets costing notebook makers a unit of lost sales. So strong is this trend that Gartner has lowered PC growth forecasts based on tablet cannibalization. Counting tablets as PCs as Canalys does, Apple has grown the market and has become the fourth-largest PC vendor by worldwide unit volume.
I've got a friend who's never synched either of her family's iPads, and a few months ago I sat agape wondering what century she lived in. Yet, with the iCloud announcement, Apple has signaled the view that she isn't expected to, need not be inconvenienced to do so, and should never have to bother to do so except wirelessly from the device itself. Between Apple's online application store, cloud services, and computer-free device synching, Apple stands to improve the stickiness of its products and the value they offer customers in the form of convenience.
Apple is owning this market.
If Apple's steady state in the iPad market – ahem, sorry, the tablet market – comes to rest north of 70% as it did with the iPod mark– so sorry, I meant the music player market ... then Apple will be sitting pretty on a high-margin and huge-growing consumer segment with international appeal. And Apple's tech is uniquely suited to meeting international demand by supporting international needs of developers. The things that made Apple's iPhone easy to sell internationally make its WiFi and 3G-capable tablet-market-redefining iPads a cinch for international sales. DisplaySearch's forecast suggests Apple's touch screen supply control will leave it in control of the tablet market through 2011. Control of the tablet market didn't mean much a few years ago, but since the launch of the iPad the segment is looking to eclipse notebook computers in worldwide unit volume, according to UK researcher Canalys – with every two tablets costing notebook makers a unit of lost sales. So strong is this trend that Gartner has lowered PC growth forecasts based on tablet cannibalization. Counting tablets as PCs as Canalys does, Apple has grown the market and has become the fourth-largest PC vendor by worldwide unit volume.
I've got a friend who's never synched either of her family's iPads, and a few months ago I sat agape wondering what century she lived in. Yet, with the iCloud announcement, Apple has signaled the view that she isn't expected to, need not be inconvenienced to do so, and should never have to bother to do so except wirelessly from the device itself. Between Apple's online application store, cloud services, and computer-free device synching, Apple stands to improve the stickiness of its products and the value they offer customers in the form of convenience.
Apple is owning this market.
Sunday, May 8, 2011
Apple: Still Ripening
After passing Microsoft in market capitalization, then in revenue, Apple has finally passed it in quarterly profit. This comes not in some quirk of seasonal doldrums or in the wake of some unusual charge-down, but in the very quarter Microsoft announced solid quarterly profit buoyed by record expansion of its server and tools business segment. Apple's profit – and MSFT's struggles in Windows OEM licensing (MSFT's profit surge was attributed to the Office franchise, not the the company's Windows division) – appear directly related to Apple's success against Microsoft's offerings in the netbook space. In a related move, Microsoft launched ads seeking to compare Apple's MacBook Air to underpowered Windows netbooks that are being crushed by iPads.
Netbooks aren't Apple's only success. The iPhone business has been cleaning up. In the United States, Apple's share of the smartphone platform market (as measured not by new sales, but by subscribers) was up about half a percent from 25% to 25.5% over the period Dec'10 to Mar'11, but its share of hardware share of all mobile subscribers gained 1.1% of the entire market, from 6.8% to 7.9% (a 16% gain from its position at the end of 2010). Other vendors sell some non-smartphone products, but Apple does not: as the market heads toward smartphones, it grows Apple's addressable market. Over the period, Apple gained on RIM, which lost smartphone share (from 31.6% to 27.1%) but due to shifts toward smartphones, lost only a tenth of a percent in the broader mobile hardware market.
One can look out into the future and wonder what effect some of the major competitive trends will be – whether "free" operating systems will really place hardware competitors in a position to compete with Apple on margins, or whether control of the OS will allow Apple to capture post-sales revenues that otherwise would be lost to the hardware vendors – but the near-term has a pretty clear outlook: Apple is trouncing the competition. Not by lowering prices in a bid for short-term share, but by raising quality to capture the most premium segment of a growing market. Very nice.
Netbooks aren't Apple's only success. The iPhone business has been cleaning up. In the United States, Apple's share of the smartphone platform market (as measured not by new sales, but by subscribers) was up about half a percent from 25% to 25.5% over the period Dec'10 to Mar'11, but its share of hardware share of all mobile subscribers gained 1.1% of the entire market, from 6.8% to 7.9% (a 16% gain from its position at the end of 2010). Other vendors sell some non-smartphone products, but Apple does not: as the market heads toward smartphones, it grows Apple's addressable market. Over the period, Apple gained on RIM, which lost smartphone share (from 31.6% to 27.1%) but due to shifts toward smartphones, lost only a tenth of a percent in the broader mobile hardware market.
One can look out into the future and wonder what effect some of the major competitive trends will be – whether "free" operating systems will really place hardware competitors in a position to compete with Apple on margins, or whether control of the OS will allow Apple to capture post-sales revenues that otherwise would be lost to the hardware vendors – but the near-term has a pretty clear outlook: Apple is trouncing the competition. Not by lowering prices in a bid for short-term share, but by raising quality to capture the most premium segment of a growing market. Very nice.
Tuesday, May 3, 2011
ACAS 1Q2011 Earnings Announcement: What It Suggests
ACAS has done it again: rather than succumbing to a dissolution in bankruptcy, it's announced another profitable quarter (presentation materials here).
First: the NAV. ACAS closed the quarter with a NAV of $11.97, up $1.26 (12%) from the prior quarter and $2.99 (33%) from 1Q2010. Honestly, this is better than a dividend: you get to defer the income until disposal.
Second: NOI. NOI isn't where ACAS gets most of its money, but it tells a story about the interest income ACAS earns and the success of operations that, due to the consolidated accounting that occurs at ACAS by virtue of its >80% ownership of its control investments, flow straight to ACAS' bottom line. NOI of 23¢ per share is up $0.04 from Q42010, and "includes ... $0.04 ... of non-recurring income related to the removal of investments from non-accrual status." (presentation, p.3) So, NOI is stable except that its non-accruing investment picture has improved over the quarter. Assuming that non-accruing investments going off non-accrual status means future investment performance, this is not really non-recurring in the sense investors care about: it's a prospect for better future performance.
The third thing is realized income. This number is quite different from SEC-reported income, because that number includes things like unrealized appreciation and other factors that readers don't think about as income. It's a useful metric at a Business Development Company because it drives the obligation to pay dividends. The prospect (obligation) for a dividend is looking clear out in the future: with $0.22 in net realized earnings over the quarter, ACAS is building a record that (when its tax loss carryforward has been exhausted) will lead to a dividend-paying requirement. And not a bad one, either.
During the quarter, ACAS paid down $517m in debt, including $300m in secured debt not due to be paid until 2013. The debt-to-equity ratio of 0.4:1 gives ACAS more freedom to do creative things going forward, as it hasn't got the noose of lender veto hanging over its fundraising and financial transaction structuring options.
The $269m in cash realizations show that ACAS is still liquid. Also, it's not involved in a series of equity fire sales: $206m came from principal payments. The exits, as usual, had little impact on overall portfolio characteristics; management offers a table to this effect on page 11 of the presentation materials.
What's ACAS doing for new investments? Slide 10 is educational: ACAS invested in three portfolio companies and provided another $97m for European Capital. ACAS is investing where it understands the business. The distressed opportunities ACAS is pursuing aren't easy to see from the high-level investor presentation (acquisition by a portfolio company?), but I like to see distressed opportunity investments. I'd like that more than the debt pay-down, frankly, though the debt pay-down may be a prelude to late-in-the-year transactions designed to obtain value from soon-to-become-worthless operating losses. I can imagine a structure in which shareholders exchange shares of old-ACAS for shares of new-ACAS that contain the exact same investments but some extra cash, while old-acas merges with a company that can use operating losses and deducts them. There's quite a bit of transaction cost for something like this, but if there are enough millions for someone to make, the transaction cost will be easily worth the price of admission for the buyer. The rumor that GE Capital is interested in ACAS is less interesting than the details of management's current hypotheses regarding mechanisms by which to glean value from the loss carryforwards.
A look at ACAS' loans on non-accrual (p.6 of the presentation) shows that past-due loans at cost have plummeted. ACAS' loans are either on non-accrual, or they're paying on time. The now-nearly-binary nature of ACAS' loan performance (Performing? Y/N) helps us assess ACAS' loan portfolio performance a bit. ACAS has $3.4B in loans at cost, of which 0.7B are on non-accrual. The non-accrual loans represent a bit less than were reported last quarter at cost. This may be a number to watch; non-accrual loans that begin performing again are a potential source of future value. This quarter, loans coming off non-accrual were worth 4¢ per share, for example. I'd like to hear what management says about the extent of this possibility.
Years ago, ACAS' management used to harp on conference calls about how the market should be valuing the company as an asset manager rather than as a heap of assets. ACAS has been working to grow assets under fee-based management – first in private funds, then in ECAS and AGNC – and although ACAS took ECAS private, it's had AGNC issue quite a few shares (in accretive, above-book-value issuances) and appears set to launch a new public fund under the symbol MTGE. Currently, ACAS' $6B in assets are being dwarfed by $37B and growing assets under management (presentation, p.24). Between AGNC and MTGE, the managed-assets column will be almost all mortgage investments. What that tells the Jaded Consumer is that ACAS is getting a lot of mileage out of its mortgage investment team. Raising the deal size is a way to better leverage the same research and market-modeling costs. Management fee doesn't scale with head count, but is linear with net assets. Every above-book issuance at AGNC is a pay raise at ACAS.
Upshot? Until the dividend resumes, I think the NAV tells the story. And that story is good. I really don't want the buyout-at-$15 rumor to be true, I want a few more quarters of this kind of NAV increase. More than a few.
First: the NAV. ACAS closed the quarter with a NAV of $11.97, up $1.26 (12%) from the prior quarter and $2.99 (33%) from 1Q2010. Honestly, this is better than a dividend: you get to defer the income until disposal.
Second: NOI. NOI isn't where ACAS gets most of its money, but it tells a story about the interest income ACAS earns and the success of operations that, due to the consolidated accounting that occurs at ACAS by virtue of its >80% ownership of its control investments, flow straight to ACAS' bottom line. NOI of 23¢ per share is up $0.04 from Q42010, and "includes ... $0.04 ... of non-recurring income related to the removal of investments from non-accrual status." (presentation, p.3) So, NOI is stable except that its non-accruing investment picture has improved over the quarter. Assuming that non-accruing investments going off non-accrual status means future investment performance, this is not really non-recurring in the sense investors care about: it's a prospect for better future performance.
The third thing is realized income. This number is quite different from SEC-reported income, because that number includes things like unrealized appreciation and other factors that readers don't think about as income. It's a useful metric at a Business Development Company because it drives the obligation to pay dividends. The prospect (obligation) for a dividend is looking clear out in the future: with $0.22 in net realized earnings over the quarter, ACAS is building a record that (when its tax loss carryforward has been exhausted) will lead to a dividend-paying requirement. And not a bad one, either.
During the quarter, ACAS paid down $517m in debt, including $300m in secured debt not due to be paid until 2013. The debt-to-equity ratio of 0.4:1 gives ACAS more freedom to do creative things going forward, as it hasn't got the noose of lender veto hanging over its fundraising and financial transaction structuring options.
The $269m in cash realizations show that ACAS is still liquid. Also, it's not involved in a series of equity fire sales: $206m came from principal payments. The exits, as usual, had little impact on overall portfolio characteristics; management offers a table to this effect on page 11 of the presentation materials.
What's ACAS doing for new investments? Slide 10 is educational: ACAS invested in three portfolio companies and provided another $97m for European Capital. ACAS is investing where it understands the business. The distressed opportunities ACAS is pursuing aren't easy to see from the high-level investor presentation (acquisition by a portfolio company?), but I like to see distressed opportunity investments. I'd like that more than the debt pay-down, frankly, though the debt pay-down may be a prelude to late-in-the-year transactions designed to obtain value from soon-to-become-worthless operating losses. I can imagine a structure in which shareholders exchange shares of old-ACAS for shares of new-ACAS that contain the exact same investments but some extra cash, while old-acas merges with a company that can use operating losses and deducts them. There's quite a bit of transaction cost for something like this, but if there are enough millions for someone to make, the transaction cost will be easily worth the price of admission for the buyer. The rumor that GE Capital is interested in ACAS is less interesting than the details of management's current hypotheses regarding mechanisms by which to glean value from the loss carryforwards.
A look at ACAS' loans on non-accrual (p.6 of the presentation) shows that past-due loans at cost have plummeted. ACAS' loans are either on non-accrual, or they're paying on time. The now-nearly-binary nature of ACAS' loan performance (Performing? Y/N) helps us assess ACAS' loan portfolio performance a bit. ACAS has $3.4B in loans at cost, of which 0.7B are on non-accrual. The non-accrual loans represent a bit less than were reported last quarter at cost. This may be a number to watch; non-accrual loans that begin performing again are a potential source of future value. This quarter, loans coming off non-accrual were worth 4¢ per share, for example. I'd like to hear what management says about the extent of this possibility.
Years ago, ACAS' management used to harp on conference calls about how the market should be valuing the company as an asset manager rather than as a heap of assets. ACAS has been working to grow assets under fee-based management – first in private funds, then in ECAS and AGNC – and although ACAS took ECAS private, it's had AGNC issue quite a few shares (in accretive, above-book-value issuances) and appears set to launch a new public fund under the symbol MTGE. Currently, ACAS' $6B in assets are being dwarfed by $37B and growing assets under management (presentation, p.24). Between AGNC and MTGE, the managed-assets column will be almost all mortgage investments. What that tells the Jaded Consumer is that ACAS is getting a lot of mileage out of its mortgage investment team. Raising the deal size is a way to better leverage the same research and market-modeling costs. Management fee doesn't scale with head count, but is linear with net assets. Every above-book issuance at AGNC is a pay raise at ACAS.
Upshot? Until the dividend resumes, I think the NAV tells the story. And that story is good. I really don't want the buyout-at-$15 rumor to be true, I want a few more quarters of this kind of NAV increase. More than a few.
Saturday, April 23, 2011
AGNC's Offering Raises NAV
AGNC's newest offering of 28,000,000 shares has been priced to yield gross proceeds of "approximately $780 million." That means approximately $27.85 per share. Given that the last-reported NAV was $24.24, and the company's shares were just south of 65m outstanding, the issuance should result in a NAV north of $25.
Magic.
This isn't the first time existing shareholders have been blessed with a NAV boost like this. In the last quarter of 2010, the effect of issuance was 97¢ (see p.20 of the 4Q2010 presentation). Holy cow, right?
I think ACAS' management of AGNC has not only been brilliant for ACAS, but a terrific ride for shareholders of AGNC. (I told my mother to buy after the IPO at $20, then again about a year later at $15; the current quarterly dividend of $1.40 is going to do nicely for her as it continues to compound for her tax-deferred on a DRIP in her rollover IRA.)
And what does the issuance do for ACAS? Well, two things. First, 1.25% of $780,000 would be $9.75m in annual fees, but of course the gross proceeds aren't all turning into funds under management; the underwriters are getting paid from that gross. Still, adding a fee income of over $2m/quarter is nothing to sneeze at. It's about 0.7¢ per share per quarter of indefinite income, without requiring ACAS to deploy any more assets. The whole firm just got more valuable.
Dig it?
ACAS is now worth more, and so is AGNC. Who says you can't have a win-win deal on Wall Street?
Magic.
This isn't the first time existing shareholders have been blessed with a NAV boost like this. In the last quarter of 2010, the effect of issuance was 97¢ (see p.20 of the 4Q2010 presentation). Holy cow, right?
I think ACAS' management of AGNC has not only been brilliant for ACAS, but a terrific ride for shareholders of AGNC. (I told my mother to buy after the IPO at $20, then again about a year later at $15; the current quarterly dividend of $1.40 is going to do nicely for her as it continues to compound for her tax-deferred on a DRIP in her rollover IRA.)
And what does the issuance do for ACAS? Well, two things. First, 1.25% of $780,000 would be $9.75m in annual fees, but of course the gross proceeds aren't all turning into funds under management; the underwriters are getting paid from that gross. Still, adding a fee income of over $2m/quarter is nothing to sneeze at. It's about 0.7¢ per share per quarter of indefinite income, without requiring ACAS to deploy any more assets. The whole firm just got more valuable.
Dig it?
ACAS is now worth more, and so is AGNC. Who says you can't have a win-win deal on Wall Street?
Saturday, April 9, 2011
Apple: 800-Pound Gorilla?
Apple is being described as "locking up" supplies of touch screens so that competitors can't buy parts. This isn't new, actually. Back before the iPod was big, Apple had ordered so many of Toshiba's new-to-the-market 1.8" hard drives (unavailable elsewhere) that Toshiba wasn't willing to give anyone else a price break: Apple had ordered first, and cornered the market, achieving "almost a complete monopoly of these drives for about a year." Competitors who wanted into the market segment targeted by the iPod had two choices: a physically larger, heavier (ick) player, or a player that had the itty-bitty capacity then supported by Flash memory (bleh). The iPod had a moat borne of superior supply agreements. Apple isn't buying a huge supply just out of spite, though: it wants to secure a large supply at a price known in advance. The cost of that deal is big up-front cash payments for continuous supply at guaranteed-stable prices.
At the very time it threatens the component pricing of its competitors, Apple is accused of "poaching" PR execs from major game companies (presumably to position iPhone/iPod/iPad against Wii/PS2/etc.). What a drag, to compete with Apple's new iPhone5 and derivative iPod Touch just as the parts supply to chase Apple's market niche vanishes beneath a wave of large-scale prepaid supply contracts. Why might Apple be keen to press its advantages so hard? For one, Apple's been on the wrong side of giants with lots of cash making platform-development deals. Apple has been taught in the roughest possible way that computing hardware is about software ecosystems and content as much as about hardware capabilities and prices, and it's a hard-won lesson that may keep Apple from making the same mistakes again in the mobile arena.
To give you an idea about the scale of Apple's current success, consider its competition with what was once the most valuable company on the planet: Microsoft. Despite Jobs' 1996 declaration that the platform wars were over, and that Apple had lost, Microsoft's 2011 chief executive has Apple envy: Ballmer wants as many retail stores as Apple, but the stores just aren't performing well enough to justify the effort.
Steve Jobs' 1996 Wired interview is an interesting read in 2011. Since his return to Apple, the company has definitely leveraged some hard-earned lessons to its great advantage. Who's the 800-pound gorilla now?
At the very time it threatens the component pricing of its competitors, Apple is accused of "poaching" PR execs from major game companies (presumably to position iPhone/iPod/iPad against Wii/PS2/etc.). What a drag, to compete with Apple's new iPhone5 and derivative iPod Touch just as the parts supply to chase Apple's market niche vanishes beneath a wave of large-scale prepaid supply contracts. Why might Apple be keen to press its advantages so hard? For one, Apple's been on the wrong side of giants with lots of cash making platform-development deals. Apple has been taught in the roughest possible way that computing hardware is about software ecosystems and content as much as about hardware capabilities and prices, and it's a hard-won lesson that may keep Apple from making the same mistakes again in the mobile arena.
To give you an idea about the scale of Apple's current success, consider its competition with what was once the most valuable company on the planet: Microsoft. Despite Jobs' 1996 declaration that the platform wars were over, and that Apple had lost, Microsoft's 2011 chief executive has Apple envy: Ballmer wants as many retail stores as Apple, but the stores just aren't performing well enough to justify the effort.
Steve Jobs' 1996 Wired interview is an interesting read in 2011. Since his return to Apple, the company has definitely leveraged some hard-earned lessons to its great advantage. Who's the 800-pound gorilla now?
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