High Tech "State of the Union", Q4 2014 - Part 1

Source: motor-kid.com

For they have sown the wind, and they shall reap the whirlwind - Hosea 8:7 (King James Version)

There are very few things that provoke in me an instant feeling of dread. One of those is a storm-tossed sea. I have had the misfortune of being caught out on the open ocean at such a time, on a cruise ship that was skirting the edges of a hurricane. 

I was a little tike of 5 back then, traversing the north Atlantic on an Italian transatlantic liner with my mother and sister. We were on our way to the port of Genoa and then inland to Bologna to stay with my mother's family. It was a winter crossing, and the north Atlantic is notorious for its ferocious seasonal tempests. I was struggling with bouts of seasickness when the captain called all passengers and crew for an emergency evacuation drill. Mom put lifejackets on my sister and I and took us to the glass-enclosed deck on the port side where we were instructed to assemble. 

The warmth and quiet of the deck enclosure contrasted starkly with the scene of mayhem that we saw beyond the glass. 30 foot grey-green mountains of liquid fury rolled by, white spray streaming from their crests. I looked around me and saw the faces of all the adults - both passengers and crew - with fear submerged and barely contained behind a grim facade.

As part of the drill, one of the crewmen swung open a double-hinged section of the glass enclosure. The surging roar of the passing waves and the ghostly howling of the icy, bitter winds has to be experienced in order for anyone to truly appreciate it in all its frightening splendor. It was nothing less than a wet version of Hell. The raw power of nature unleashed in this display, entirely impersonal and so terrible in aspect, etched itself vividly into my mind as I stood there with my bright red lifejacket on, my mother holding my sister and I by the hand.

"Damnation seize my soul if I give you quarters, or take any from you." - Blackbeard

Yet withal, some find a foamy, white-crested sea driven by a whistling gale to be invigorating and exciting. The romantic appeal of a Viking chieftain grasping the bow's dragon head, laughing deeply and unrestrainedly in the face of death as his crew drives a longboat thru a tumultuous maelstrom on the way to raiding the English coast, or a captain of buccaneers on the Spanish Main, boldly standing on the bowsprit of his wind-buffeted, wave-tossed barque, swinging his cutlass overhead and daring Poseidon to send him down to Davey Jones' Locker, has transformed the conception of a sea storm into a supporting character that is part of the fare of grand adventure stories and films.

One's perspective on the Technology world going into 2015 likely depends on how well your own ship is sailing the High Tech seas in its first-ever season of genuine winter. A few companies are splashing thru the sea foam in high spirits with billowing canvas, while many others are battening down the hatches, reefing the mainsail and furling the jib - and a few are bailing the bilges with desperate urgency, feeling the monstrous chasm of the deep beckoning under the keel.

Let's look at the numbers reported this week, beginning with some of High Tech's most venerable dreadnaughts. (Disclaimer: I own absolutely zero equity in these companies. Also, nobody is paying me to write favorable or unfavorable reports & analyses of these firms.)

The Big Iron

The companies covered in this category remain unchanged for the moment. IBM is still king of the datacenter; Cisco the master of enterprise networking, with additional capabilities in storage, backhaul and even home gateway; and HP is a mighty presence in home computing with desktops, laptops and (of course) printers, along with its own enterprise server offerings. All three companies develop both hardware and software for their system markets, with additional support provided thru engineering services.

The numbers below now constitute a full seven years of data, and their can be no question regarding the medium and long term trends of these companies.

HP's revenue slide has been ongoing for a full 4 years at this point. The company will split into consumer and enterprise firms before the end of 2015 - a change which is overdue and reflects a new aggressive spirit from Meg Whitman, HP's CEO since September 2011. 

At least the rate of their revenue slide has decreased. Whether either or both of the new companies prospers once separated is an issue that only the passage of time can answer.

IBM's story is far more clear cut. The current state of the company is nothing short of disastrous. Not only is the revenue decline that began when Ginni Rometty assumed the CEO title in September 2011 continuing, but it is in fact plainly accelerating. There is simply no question about it - IBM is falling apart and the entire executive staff needs to be immediately axed. 

No single item better illustrates the complete failure of IBM executive management than its disposition of the microelectonics group. Big Blue actually had to pay GlobalFoundries $1.5B to take its chip business - an organization with one of the deepest talent pools and richest portfolios in semiconductor process technology, packaging and EDA software in the industry, whose chips are exquisitely engineered components that are central to the performance of the company's market-leading servers and supercomputers. 

The problems internal to IBM are at this point legion. There is widespread talk of a collapse in morale among the system engineering teams. Field reports over the last two years indicate that IBM's third party ecosystem for the server business is imploding.

Let's put this into perspective. IBM has a 104 year history of worldwide technology leadership. Its employees have won 5 Nobel prizes. The company invented the PC, the ATM, the floppy disk, hard disc drives, DRAM, the relational database, SQL, SOI, RISC, the scanning tunneling microscope and the copper metal stack for IC's. Big Blue has made profound contributions to dozens of other specialized fields in mathematics, science and technology. It is a company with more patents than most of the nations of the world combined and has been literally a central cause of the rise of the modern world in which we live today.

The current dismal state of IBM suggests one of two possibilities regarding the current executive management team:
1. They all have large short positions against IBM stock and are working night and day to harvest their maximum potential gains.
2. They are blithering idiots who collectively couldn't change a light bulb.

The only reasonable solution at this point is for investors to rally at the next stockholder's meeting, strip the executive team of their company badges, tar & feather them and throw them all out into the street. 

Cisco's status is somewhat more muddled. Though the company seems to have recovered its footing after the NSA scandal of 2014 in which its system hardware was implicated, Cisco does not appear to be on a growth path. Even before 2014, growth was clearly quite modest. 

The company recently underwent a vast reorganization, where nearly a baker's dozen of separate divisions were consolidated into four. The deliberate condensation of the company may potentially result in positive effects on supplier sourcing, after-sales support and quality control. 

However, just as in the case of HP, we will have to await future developments to understand whether these changes have been beneficial to Cisco over the long term. Furthermore, unless the company can find ways to expand its consumer, storage and wireless businesses, it will likely continue its present course down the slow road to stagnation.

Wintel

Intel and Microsoft are both over four decades old and were thought to be fading into irrelevance 20 years ago. The resilience of these two companies is laudable, with both recently demonstrating great strength, initiative, courage and resolve while most other High Tech firms today behave as if digging in for a prolonged siege.

I must down to the seas again, to the lonely sea and the sky,
And all I ask is a tall ship and a star to steer her by. - John Masefield

Guts and determination are paying off in spades for Microsoft. This is one of the companies riding the crests of the winter gale with full sails. All of the product initiatives which earned the company a tidal wave of scorn and ridicule from industry pundits & editors over the last few years have turned into winners. The Bing search engine, Azure Cloud service, Surface tablets (who some were predicting just a couple of days ago would be discontinued) and the Lumia smartphone line are growing strongly. The growth in mobile computing is especially impressive, given that it is in the face of savage competition against powerful, veteran rivals in saturating markets. 

What Microsoft has not made particularly clear in the last several quarters is what its intentions are in the IoT. We may be seeing the first inklings of its future plans with the Hololens, introduced just this week. Many comparisons have already been made with Google Glass, the consensus being that Microsoft's wearable is distinctly superior as a technology showpiece. It will pay to watch further developments in this area closely, as well as the increasingly direct rivalry emerging between Microsoft and Google.
http://www.informationweek.com/mobile/microsoft-hololens-vs-google-glass-no-comparison/d/d-id/1318851

On the surface, Intel doesn't appear to be making the same impressive financial gains as its software sibling and could even be construed as stagnating. However, there are hidden and growing strengths within the firm. Datacenter and tablet segment growth was vigorous enough to outpace further weakness in the PC market. The company is also clearly sticking to its guns in striving to extend its position in mobile computing and is obviously playing for keeps in the IoT.

Red sky at night, sailors delight; red sky in morning, sailor take warning. - Old sailors proverb

There are also indications that Intel is trying to build a commanding presence in the SoC market. Reports are that the company is aggressively and successfully challenging Broadcom in the STB segment. This is no small feat, as it requires extraordinary competence in multiple application specialties to develop such sophisticated chip hardware, supported by equally elaborate software stacks and toolchain support.

The scuttlebutt is that these first inroads on Broadcom's STB business are part of a broader Intel plan to undertake a general assault on the entire SoC market with its own SoC offerings. Internally, the company has an interesting perspective on the SoC/ASSP marketplace. Intel ostensibly views the prevailing customization of solutions for networking, storage, mobile computing and consumer electronics and their domination to a greater or lesser extent by the leading SoC houses (Broadcom, Marvell, Qualcomm and the like) not as presenting highly defensible barriers to entry but offering exceptionally favorable circumstances for penetration thru a second sourcing strategy. 

Stated differently: whereas the established SoC players perceive the increasing commoditization of their sector as a gathering storm, Intel views it as a singular opportunity. This unique perspective cries out for an explanation, so let's examine it in a bit more detail.

From Intel's point of view, the maturation of industry standards for communications protocols & interfaces, the consequent proliferation of silicon IP to support these standards and the widespread availability of multimedia codecs, OS's and other software modules makes today's SoC business as vulnerable as ASICs were back in the late 1990's and early 2000's to the first ASSPs/SoCs. Combining such now-generic IP with current and future designs of microprocessors derived from Intel architectures tailored as necessary for segment requirements, Intel seems quietly confident that it can take on all comers and appears ready and eager to raise the Jolly Roger on its mainmast. 

The news that Intel is successfully penetrating Broadcom's STB business should serve SoC executives the same warning as mariners of old, struggling to keep their ship afloat and on course in a storm, catching a fleeting glimpse of the dreaded spectre of the Flying Dutchman. As discussed in previous "State of the Union" editorials, the combination of Intel's 3D-IC capabilities with the possibilities offered by its colossal application software ecosystem could prove irresistible to systems houses and wreck the kind of havoc in the now vulnerable SoC sector not seen since British & French privateers and buccaneers preyed on Spanish galleons in the Atlantic and the Caribbean in the mid to late 1600's.

From Intel's perspective, though, this 'pirate strategy' could turn into quite an exciting time as well as a lot of fun:
http://www.trilulilu.ro/video-animatie/bugs-bunny-buccaneer-bunny

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There are many other companies reporting results next week - we'll continue our "State of the Union" discussion on February 5th. We still have 12 more companies to talk about. :-)