Salto Partners

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Hewlett-Packard

In another interview with ECommerce Times we talked about HP. At their last earnings call Hewlett-Packard CEO Meg Whitmen had not a lot of good news to report.

1: The PC business, Servers and Storage business were down

2: Enterprise services were the boat anchor of the business

3: The Autonomy integreation was still work in progress

 A few months later Whitmen had to concede that we are not talking about a bad quarter or two. We are talking about bad fiscal years ahead perhaps until 2016 which is light years in the tech industry. HP is in a real predicament. For many moons the company could rely on their personal computer and printer divisions to make the numbers. Those days are gone. Now, we buy smart phones and tablet computers. Unfortunately, there is not one product division that really outperforms the market. Their enterprise service business struggles.

 HP was built on innovation. This is exactly what is needed. New products, world class solutions and a lean and efficient organization that is able to sell and deliver to a world-wide customer base. While not impossible to overcome, none of the challenges that Witmen is facing can be overcome quickly. Her  problem will be time. After her first year, she won’t be able to disassociate the company performance from her own.

You can read the article here.

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Twitter

Just recently I talked with E-Commerce Times about Twitter. Its CEO Dick Costolo said that his company is not going public anytime soon. I applaud this, because he gives all the right reasons why that is the case. One, they don’t need the money. Twitter has enough cash in the bank. It’s strategy is about becoming more simple, better and faster. This requires smart engineering, not so much cash or publicly traded shares to buy technology start-ups that potentially add to its value proposition (as Facebook did with its Instagram acquisition). In short Twitter doesn’t need the cash. Two, it also doesn’t need the headache that comes with an IPO. It doesn’t want or need the public scrutiny. Three, Dick Costolo wants to create a simple and effective product that appeals to advertisers. At the end of the year he wants to count his advertiser clients in the tens of thousands. Da capo! More power to him.

You can read the article here.

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Facebook – Aftermath of the Earnings Call

Facebook’s first earnings call last week was a big deal. Investors had a lot of questions after the initial IPO and the subsequent decline of the stock. I did an interview with E-Commerce Times on the results. Here is the long version of my analysis.

Numbers: Facebook was able to produce a non-GAAP profit of $0.12 per share and $ 1,184M in revenue. According to GAAP they are reporting a loss of $743M or a loss of $0.08 per share primarily driven by share based compensation expenses that they didn’t recognize pre-IPO. This is all good, though. Facebook made its numbers.

Mobile Strategy: I did like that Mark Zuckerberg discussed the mobile strategy of his company right at the beginning of the call. He acknowledged the importance of mobile for the future of his company. The company is heavily investing in this space. He mentioned that they are working on a deeper integration between Facebook and Apple’s IOS. This is very much needed, because the current Facebook experience on the iPhone is less than stellar.

Making sense of the acquisition puzzle: Two surprising statements. The Instagram-Acquistion hasn’t closed yet. The deal had been announced before Facebook’s IPO in early April 9 2012. The other surprising statement was that Facebook will continue to buy company to acquire talent. This can be truly a very expensive way to hire and even for a company with a 10B war chest it his hardly sustainable.

What to expect going forward: Here is the crux. Facebook’s user base joined the site to connect with their buddies. They want to talk about what’s on their mind, share pictures, stories and goof around. They want to continue to do this for free. That expectation was set the moment they signed up. So, Facebook won’t make money from their audience directly. They need to find ways to make the site appealing for advertising companies.

In the online advertisement space they don’t have the commanding market share we would expect from a site commanding nearly 1B strong audience. Why? It’s very easy to ignore those ads. Hence, the idea to sell “sponsored stories” which are essentially ads in disguise. They appear in the news feed of a user. It makes sense to place these “ads” in the news feed because there they are harder to ignore. However, it’s a thin line. We expect to read news from our friends. Companies are not our friends. If the news feed becomes too “spammy” users won’t go there anymore. They might leave the site altogether. Facebook has to sell to its audience that sponsored stories are cool. A fine balance act.

 Then there is the business side of this. Sponsored stories are a new concept at least in the online advertising world. Facebook started just recently to test them out more aggressively. Advertisers don’t understand the value, yet. It’s unchartered territory. Facebook’s has to explain to advertisers why they are different. They have to explain why their ads and sponsored stories are more targeted and consequently more valuable. We are talking B2B selling. The true growth of Facebook sits on the shoulders of his business development organization that has to do educate a skeptical market. This can be tedious and slow. Once again, Facebook has to sell it.

We are past the times when concepts and visions convinced investors to write checks. The stock market is much more demanding. Facebook has a lot of potential. No doubt. Its success depends heavily on the ability of its leadership to pull it all together: The shift to mobile, the user experience that keeps the audience on the site and sustainable monetization strategies. It’s future growth depends on succeeding in unchartered territory while everybody is watching.

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Apple Q3 Earnings

This week I sat down with MacNewsWorld on Apple after it missed its earnings the day before. So, here is what happened.

1. The company posted fiscal third-quarter earnings of $9.32 per share, up from $7.79 a share in the year-earlier period. Net income was $8.8 billion, or $9.32 per share. That was up 21 percent from $7.3 billion, or $7.79 per share, a year ago. Revenue rose 23 percent to $35 billion from $28.57 billion a year ago. Apple sold 26 million iPhones in the quarter, at the low end of expectations. However, it sold 17 million iPads, exceeding forecasts. The company reported that its cash pile rose to $117 billion, an increase of $7 billion during the quarter. Most CEOs would announce such results with goose bumps of excitement. But we are talking about Apple as in AAPL. Analysts had expected the company to report earnings excluding items of $10.37 a share on $37.22 billion in revenue, according to a consensus estimate from Thomson Reuters. Apple’s fourth-quarter guidance also disappointed: It forecast $7.65 a share for earnings on revenue of $34 billion vs. analysts’ expectations of $10.22 a share earnings on revenue of $38 billion.

2. Let me state the obvious first. Apple will need to come out with the iPhone 5 rather sooner than later. People wait for it to hit the market. It will close the gashing revenue wound.

3. The bigger question for Apple is: what is the next mega gadget everybody wants next year that has not been created today? That enormous $117B stockpile of cash would allow the company to do all kinds of mergers and acquisition. Yet, given the type of company Apple is, I believe that the answer will come from Apple’s own labs.

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Facebook – Before the Earnings Call

This week I had a few conversations with Forbes on Facebook. It started out with the question: “Is the stock at $29 a clear buy?” The answer is like always highly dependend on the investment objectives and horizon of an investor. But here were some of my thoughts. Please also read the Forbes article on this topic .

Facebook’s IPO was a success – for Facebook. Not so much for the individual investor. The stock closed at a little over $38 dollars on its first day. Now, it’s trading in the $29 range trending lower. Has it dropped enough? Is it a good time to buy now? After all, this company has 900 million users worldwide. The upside seems enormous.

There are three major issues with the stock that investors have to take into account. While Facebook has a huge global audience its appeal to advertisers is limited so far. People use the site but are not clicking on the ads. Then, its mobile monetization is unclear. That’s a big gap because we increasingly access the web via mobile platforms. Last but not least there is the lock-up expiration issue. There a lot of folks on the sell side with strike prices well below the current $29 mark. If they decide to buy that house, that boat or that car right away instead of holding on to stock, then this could create additional price pressure.

Another question was, what to look for at the earnings call. Please read the article on Forbes. Here are my thoughts.

Numbers: Are they able to hit the analyst earnings expectations of  $0.12 per share and $1.15 B in revenue. In order to afford the multiples they are commanding right now, the company should achieve or exceed their numbers. Why is this important? It shows the ability to tactically execute. Hitting their numbers helps to build trust into deal making machinery that needs to take the business to unprecedented levels quarter after quarter.

Mobile Strategy: The world is going mobile. Traffic from mobile devices is growing at an astounding rate — by some estimates, mobile visits now account for fully 20 percent of Web traffic. Cisco estimates that global mobile data traffic will increase 18 times over between 2011 and 2016. Compared with all that growth, mobile ad spending is still small, and even though it’s projected to more than double in 2012 to $11.6 billion, according to Strategy Analytics, advertisers will still spend nearly four times as much on online advertising. Yet, someone will figure out how make money on mobile. The question is, is Facebook one of them? Looking at their next earning calls it would be refreshing to understand how they plan to become a major player in the mobile world. Besides selling mobile ads what other plausible monetization strategies do exist?

Making sense of the acquisition puzzle: Facebook has been very active during the past months acquiring different companies in different areas. Among those were Instagram, a photo sharing app, and Face.com, a face recognition company. What is the grand plan behind those transactions. Most importantly: how do they help to grow the top-line?