Friday, February 6, 2015

High Tech "State of the Union", Q4 2014 - Part 2


Cease, rude Boreas, blustering railer! List, ye landsmen all, to me:
Messmates, hear a brother sailor sing the dangers of the sea. - George A. Stevens, "The Storm"

Last week we saw the companies of the Big Iron slowly losing their contest with the winds and waves of today's High Tech winter storm, with IBM in particular clearly floundering with a torn mainsail, a broken rudder and an executive team that needs to be compelled to walk the plank. By contrast, Microsoft and Intel, both stereotyped by the mainstream media as ancient creaking galleons slowly rotting away in the doldrums of a stagnant sea, appear to have taken the storm on with relish, mocking Neptune's dirge of thunder, lightning and howling wind as their beards soak with sea spray and their ship's hulls cut along the surging waves with swelling canvas straining their masts.

This week we'll look at two more sets of seafarers - those who seek to rule the seven seas with fleets so vast and powerful that the sun never sets on them, and others whose course and rigging portend what will soon emerge on the horizon.

Area 51


A wet sheet and a flowing sea, a wind that follows fast
And fills the white and rustling sails, and bends the gallant mast!
And bends the gallant mast, my boys, while, like the eagle free,
Away the good ship flies, and leaves Old England in the lee. - Allan Cunningham, "Songs of Scotland"

The two companies riding highest on the waves this week are the ones whose overt mission is to build their own vision of a better tomorrow. Apple and Google had great Q4's, as the numbers attest:

Apple's quarter was apparently highest in both revenues and net income of any company in history. The company's capture of market share from smartphone competitors - especially a now-staggered Samsung - had the savage ferocity of a Viking raid. Despite the 'common wisdom' of many a contrarian industry analyst and pundit, Apple saw vast potential in larger smartphone screens, and their sales results indisputably demonstrate that Apple does indeed have the wherewithal to get along without Steve Jobs. 

The reception of the iPhone 6 was not without its sniping critics. The low end model was roundly condemned for offering only 16GB of storage. Yet despite passionate protestations to the contrary, this is clearly a minor matter. From this point forward, revenue gains in the smartphone sector will come primarily from confiscating market share. The market has reached its inevitable saturation and organic growth is now largely a thing of the past.What is much more important than the storage capacity of the lowest end iPhone 6 is the issue of how the iPhone 7 will differentiate itself from its predecessor, as well as what Apple's panicked rivals may concoct as counter-offerings. 

With such a fantastic quarterly performance under its belt, the company is moving forward on some big ticket projects. Apple is planning to refurbish a manufacturing facility outside of Phoenix that was originally intended to build scratch resistant smartphone screens and relaunch it as a datacenter, with $2B earmarked for conversion costs. The company is also making steady progress on its "flying saucer" office building currently under construction in Cupertino:

Yet not all of Apple's post-Q4 moves make immediate sense. The company sold $6.5B worth of 30-year 3.5% bonds earlier in the week for 'general corporate purposes.' It is suspected they will use most of the proceeds for share buybacks. Yet what is the point of taking out debt - and somewhat expensive debt by current market standards - in order to do this? 

The company already has $178B in cash reserves. Most of it, to be sure, is held overseas in order to avoid paying a massive repatriation tax to Uncle Sam. Yet while a sum larger than the GDP of any of the 132 poorest countries in the world sits collecting dust, Apple's loan assumption reduces the total asset profile of the company and loads a long term, relatively high interest rate obligation on the balance sheet that will be a needless drain on the company's financial resources.

Is this just a move by the finance department to tweak the company tax profile? I confess that such initiatives sit ill with me, as I inherited a mindset from my grandparents who, having experienced the Great Depression, were horrified of the idea of indebtedness.  

Well, then—our course is chosen—spread the sail—
Heave oft the lead, and mark the soundings well—
Look to the helm, good master—many a shoal
Marks this stern coast, and rocks, where sits the Siren
Who, like ambition, lures men to their ruin. - Walter Scott, "Kenilworth"

When all is said and done, the folks at Apple still have their work cut out for them. It would be patently unfair to expect Apple to repeat its Q4 growth spurt anytime soon. Even when the iPhone 7 is released, to expect another equally large chunk of market share fall into Apple's hands would be a lot to ask.

It would be more realistic to look at other business initiatives in the company to drive future growth. Will Apple Pay take off? Google Wallet didn't, but of course, when it comes to making a business out of new consumer electronics ideas, Google most certainly is not Apple. How Apple will do in the nascent IoT market is still unresolved. Considering the flood of smart watches in the market at the moment, it would take quite an effort - maybe even a miracle - for Apple to distinguish itself in this segment.

The strategic play in the IoT is, of course, much larger than just the smartwatch segment. Does Apple truly comprehend the central role mobile computing is almost certain to play across all segments of this market? The more Apple drives the convergence of smartphones and tablets, the more we can be assured of their understanding and, ultimately, their long term vision.

Last quarter was an extreme deviation from their previous revenue trend which, over the years, had indicated revenues were rolling over and plateauing in conjunction with the growth pattern of the mobile computing market. Further growth in either smartphones or tablets will have to come the hard way. Stated differently (and more creatively): for Apple to continue riding the crests, the ship's officers and crew cannot rest, as the ocean always hungers and monsters lurk in the deep.


Q4 proved a strong quarter for Google as well, with the company growing 18% year to year and 10% quarter to quarter with consequent record revenues. $740M of the company's $18.1B in revenues stemmed from selling its Motorola phone operations to Lenovo; nevertheless, the quarter was still an outstanding one. There were some cost increases in absolute terms for factors related to the company's operations (transaction costs associated with partners, datacenter costs and the like.) Yet these costs decreased in relative terms against advertising revenues, which constitute 89% of the company's income. 

Curiously, Google's per click earnings are dropping. The simple explanation would be that this might be due to direct competition - both Yahoo and Bing search engines continue to gain market share against Google. 

Of greater concern is the fact that the company withdrew Glass from the market for a redesign, with no promises as to when or even if the company would release a new version of Glass. This suggests something a bit disturbing with regards to the ability of Google to translate its very extensive R&D efforts into revenue-generating products. More and more, Google is beginning to sound like another famous Silicon Valley denizen from the days of yore which began with dominant market presence and fantastic R&D, but which was never able to capitalize on its research work - Xerox and its PARC lab.

What is palpable at this juncture is that Google needs more Applied R&D programs with committed revenue targets and timelines. Presently, R&D appears too inwardly focused. Glass is actually a case in point - despite having extensively field-tested the product over the last two years, Google has been unable to develop a successor product and release it to the market. 

Commercially viable products cannot be developed in total isolation - you need extensive inputs and feedback from the outside world to help craft them and shake them out. Perhaps what Google needs is to introduce a Lean Startup system into its R&D portfolio. It appears Google may at least be trying to be more immediately market driven with Glass as they have announced their intent to drive future product development towards non-consumer applications. Yet Epson Moverio and Toshiba Glass seem to have figured this out already and are several steps ahead of Google in this regard.

Though things still look very good financially for Google, they need to start running the company like a true business concern. The search engine business has cushioned Google from the harshness of market forces, but other search engines are chipping away at that protective barrier. Both Yahoo and, in particular, Microsoft are demonstrating that the time for Google to be serenely complacent is coming to an end. 

The Vanara 


Sextant, compass, astrolabe, barometer - these are all instruments used by navigators ancient and modern to plot courses over the gulfs and abysses of the deep blue sea. In High Tech, on the other hand, we use different contrivances to guide our paths. Tracking ASIC activity is unreliable, as a high percentage of designs that reach the prototype stage never go into full production. But FPGA/CPLD design activity is a much more dependable gauge. Once a customer places an order for 5,000 devices or more, you can be highly confident that the board or system in which the programmable logic device is implemented will begin deployment in roughly 9 months.

So how are the shape-shifting Vanara doing, as they explore the High Tech business horizon for us? Let's take a look at the reported financials.

Day after day, day after day, we stuck, nor breath nor motion;
As idle as a painted ship upon a painted ocean. - Samuel Taylor Coleridge, "The Rime of the Ancient Mariner"

Speaking in general terms, the three programmable logic leaders indicate that system level design activity is somnolent and perhaps slowly declining, paralleling the series trend for the Big Iron which we analyzed last week. This is very telling, and we will return to this chart in the concluding editorial of this series about two weeks from now.

Altera and Xilinx continue their near 30 year standoff where they have switched positions only twice while continually glaring at each other with daggers in their eyes. Yet while dwarfed by its two much larger cousins, it is Lattice which is the truly interesting one in this trio.


The Silicon Blue acquisition propelled Lattice into a heretofore undiscovered region of extremely low power & low cost applications. This was an untapped market which Lattice at this point completely dominates. One can even find iCE FPGAs in mobile phones - an application undreamed of in the executive suites of Xilinx and Altera.

Just last week, Lattice bought wireless and multimedia chip provider Silicon Image. The combination of the two companies will allow the merger of very low cost and low power programmable logic with a wide range of mobile computing wireless and interface IP into one chip. Since both companies are already successful in the mobile computing space, the acquisition became an obvious one for Lattice. It also indicates that Lattice has been very, very attentively while supporting its customers and actively soliciting feedback from them.

I have a dear old friend who lives up in Portland, Oregon. He's a trusted confidante who always has an insightful alternate take on Silicon Valley events, a pal whom I've come to trust unquestioningly over the years. For the purposes of this discussion, we'll call him "Steve." 

When I first heard the news about Lattice picking up Silicon Image, I wasn't quite sure what to make of it. Steve, as usual, saw to the heart of the matter instantly. Since he has two teenage kids, Steve understands how Millenials are using their smartphones and tablets in preference to any wired consumer electronics device. The desktop PC and HDTV have at best only peripheral appeal to the youngsters. 

It thus stands to reason that when it comes to viewing HD content, Millenials will not be going home to watch TV but will use something like Chromecast to stream multimedia from HBOgo, ESPN, Netflix and so forth to enjoy wherever they are and whenever they want. Furthermore, movie rental kiosks will vastly reduce inventory management and cost problems by supporting the same kind of streaming services for potential customers.

Traditional wireline and satellite internet & TV providers will almost certainly be slaughtered by such a development. The mobile computing hardware providers, though, will stand to benefit - and with great strategic shrewdness, Lattice has placed itself directly athwart the required set of chip and system capabilities.

Lattice appears to have the same spirit of adventure, exploration, daring, nerve and never-say-die attitude of the famous 20th century mariner Thor Heyerdahl. A Norwegian by birth, Heyerdahl amply demonstrated his laugh-in-the-face-of-death Viking ancestry by sailing an open, handmade wooden craft smaller than a typical Norse Longboat called the Kon-Tiki from Peru to the Tuamotu Islands in French Polynesia (5000 miles. ) He trumped this exploit by sailing another somewhat smaller handmade boat (made out of papyrus reeds no less) from Morocco to Barbados (again about 5000 miles.) Heyerdahl did this simply to prove that ancient cultures from North Africa and South America were perfectly capable of such navigational feats.

Neither Altera or Xilinx could have conceived of the value inherent in the acquisitions Lattice has made over the last 3 years. For them, programmability is still a religious issue - in effect, a blessing from on high which decries all static logic designs as inherently profane. Lattice has definitively shaken off the ideological orthodoxy of programmable logic and is demonstrably very open to learning new tricks. If I were a young whippersnapper with a freshly minted BSEE degree, Lattice would be my choice as a company to pursue for my first job, as it would be the programmable logic firm where I would be likely to learn the most, grow my skillset & expertise and enjoy what I did.

Next week, we'll look at the final two sets of High Tech companies in the portfolio - the Carolingians (the cream of the crop in European silicon firms) and the Stone Masons (the worldwide standard bearers in SoC.) We'll follow that up on February 20th with a summary and forecast for 2015 that includes a lot of macroeconomic data.

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