Friday, April 24, 2015

High Tech "State of the Union", Q1 2015 - Part 1

"Spring Morning, Cloudy, Eragny", Camille Pissarro (Source:

"Nunc omnis ager, nunc omnis parturit arbor; Nunc frondent sylvae, nunc formosissimus annus."
The trees are cloth'd with leaves, the fields with grass; The blossoms blow; the birds on bushes sing; And Nature has accomplish'd all the spring. - Virgil

The arrival of spring ushers in my favorite time of year, between the beginning of April to the end of June. I remember as a boy in northern NJ how the cold, dreary and sometimes freezing rains and wet snows of March would break in that first week of April, and what a glorious feeling it was to go outside when the sun emerged from the fraying blanket of grey clouds, taking my knit cap off and feeling for the first time in months the warmth of the sun's rays turning a 40 degree day into a moment of bliss.

In spring, the brown and winter-beaten grass turns green and grows lush. Trees awaken from their leaden slumber to push forth verdant shoots along with delicate, sometimes fragrant flowers as birds return to their branches, merrily chirping as they build new nests, while all sorts of shrubs and bushes release wonderful blossoms with scents of their own. 

Yet Spring's awakening is not always joyous or tranquil or beautiful. A friend of mine - someone with a uniquely sweet disposition and happy outlook on life - lost her father after an extended illness. This April proved quite difficult for me as well, as my mother suddenly became gravelly ill. Fortunately she is now on the road to recovery, but such disruptions to one's world are like personal earthquakes that indelibly reshape our perceptions and cannot be truly understood until one has such a terrible experience of their own. 

We ever seek the tranquility of stasis and dependability, but our lives are governed by change - whether seasonal or otherwise regulated by particular cycles and patterns, or on sudden, dread occasions that are disruptive, tumultuous and cataclysmic. Yet our urge to divine the future is a primal one and has been sought thru innumerable methods - Romans studying the entrails of sacrificed birds, Greeks consulting a Pythia in a vapor-induced ecstatic trance, the ancient Chinese interpretation of heat-cracked turtle bones and shell shards, an endless variety of sacrificial rituals (both animal and human), the use of sticks, bones, cards or other symbolic devices, even gazing into mirrors or crystal balls. In the end, though, these attempts at augury were all pursued by people anxious for supernatural guidance on what they might expect of the future so that they could make appropriate preparations in the present.

So as we stand on the bow of our sailing ship with lantern in hand, riding the seas of High Technology with the winds of Time filling our sails, our gaze fixed on the far horizon, what can we discern across the broad expanse of storm-tossed waves that looms across the bow and heads our way?
(Note: please do not consider the following as investment advice; it's all just my personal opinion unadulterated by any equity ownership in or compensation by the companies in question.)

The Big Iron


"Naufragium sibi quisque facit."
Each man makes his own shipwreck. - Marcus Annaeus Lucanus

The three companies in this category are barometers for the infrastructure of high technology worldwide and, in a broader sense, an indicator of the overall health of the global economy. Their servers, workstations, mainframes, supercomputers, routers, printers and associated software & services are ubiquitous. Finance, heavy industry, FMCG, textiles, construction - there is not a commercial sector which does not depend heavily on the computing and wireline communications offerings of these three firms. Even mobile computing's vigor is reflected thru the backhaul connection to WAN/Metro/LAN and, ultimately, to server farms populated by the products of the Big Iron. 

With the Q1 2015 financial reporting added, below is a chart of quarterly results for these three systems titans stretching back to Q1 2008:

Though it might surprise some, I actually view HP favorably (though admittedly with strong reservations) over the long term, despite the multi-year declining revenue trend. Note, first of all, that the downward slope is gradual. Granted, it's been quite a dropoff from the $33.6B peak in Q408 to the $26.8B result for Q115, accompanied by the layoffs of 44,000 people - but it took 6 years to reach that low point. Furthermore, the company has already gone thru two CEOs during this period to finally settle on Meg Whitman in late 2011. After a fruitless struggle to halt and reverse the downward spiral of the last three years, Whitman is finally taking some very decisive action. The company is still set to split into Enterprise and PC&Printer firms this november:

The PC&Printer subsidiary is also preparing a do-or-die gambit in the form of a server/workstation hardware architecture based on memristors which would revolutionize IT infrastructure worldwide:

The company is plainly going to great lengths to break out of its cycle of decay. Perhaps it will be enough; only time will tell. One particularly idiotic and (in my view) criminally abusive practice that must cease immediately, however, is the stock buyback program, whereby HP executive management lays off employees in part to finance stock repurchases, giving a short term boost to the company's stock price and providing the executive team an opportunity to unload a portion of their equity compensation at temporarily elevated prices, with their equity positions refilled from market purchases once the price has settled down again:

I'm not going to mince words on this issue. Though these sorts of financial shenanigans have become widely popular in High Finance circles over the last decade, they are overt violations of the RICO act in both letter and spirit and should be treated as such by federal and state authorities. The various excuses often put forth such as "But EVERYONE is doing it", "We have to do this in order to retain the talent we have at the executive level" or "We do this to protect shareholder value" are risible at best and in any event shameful and specious

The truth of the matter is that an executive management team that presides over serial quarterly and yearly revenue declines doesn't deserve bonuses; they should instead count their blessings that they're not being fired. For any readers who are investors in HP, you would be doing yourselves and the company's rank and file a great favor by insisting at the next shareholder meeting that executive bonuses, pay raises and stock awards as well as stock buybacks are to be suspended until the company shows at least three serial quarters of revenue and net income improvement.

This colossus of the enterprise networking sector seems to have shaken off the effects of the terrible revelation of a year ago that the NSA was intercepting its product shipments to embed snooping hardware. Making every effort to ensure that such damage cannot be imposed again on its international business, the company is attempting to deliberately 'spoof' the NSA and thwart further attempts at tampering with its products:

The news cycle itself may further help customers forget about last year's news, as the NSA is busy trying to ruin other systems houses - this time, the disc drive makers:

Yet there is hardly cause for celebration in Cisco hallways. The revenue numbers clearly indicate a fundamental inability on the part of the executive team to substantively grow the company. Even the explosive rise of mobile computing over the last 6-7 years and its cascading benefits to backhaul and wireline networking to support internet-based services hardly made a difference in Cisco's revenue trajectory. My outlook is thus moribund for the firm, in tandem with its historic revenue performance.


"The Ship of Fools", Heironymous Bosch (Source:

As an ex-member of Big Blue, it is distressing for me to witness the collapse of what was formerly one of the absolutely mightiest business concerns on earth. No company has done more in the last century to shape the world we live in today. 

Yet from Sam Palmisano and his rise from the perennial money-losing PC division to head the company in 2002 and his passing the baton to hand-picked successor Ginni Rometty in 2012, IBM's executive management has been permeated by people who have no conception of how important hardware engineering excellence - from chip to board/blade to system - has been to the company's long term dominance in IT and has treated anything associated with hardware as a balance sheet cost that needs to be reduced. 

The complete route in IBM's revenues since Q4 2011 speaks for itself. You don't drop 1/3 of your quarterly revenue in a three year period if you're doing things well. The fact that Big Blue's management threw itself headlong into the extremely cost sensitive Cloud market (and cost leadership has NEVER been an IBM strength), actually PAID Global Foundries $1.5B to take its Microelectronics division and is now dabbling in the IoT defines an executive management team that makes a group of Soviet factory directors look like heroes of capitalism.

The fact that Rometty is a big fan of the Wall Street stock buyback scam and has heavily leveraged the company in pursuit of this over the years reveals her objectives to have nothing at all to do with Big Blue's long term success. IBM's executive team is indeed either a band of plundering privateers or a Ship of Fools. They need to be canned NOW. Every day they get to keep their jobs is just another day that they have to feed poison into the company's veins.



Blow wind, swell billow, and swim bark!
The storm is up, and all is on the hazard. - Shakespeare, "Julius Caesar"

They say you can't teach an old dog new tricks. But as it turns out, Sea Dogs are a bit of a different breed, as the old buccaneers of the High Tech seas are proving to be the most savvy concerning the tides and currents of change. One can see it plainly in the data below, as both companies grew in 2014 in the face of -6.7% headwinds in the PC market.

"The Gang That Couldn't Shoot Straight" continues to befuddle critics by growing, particularly in markets where growth is becoming very hard to come by: mobile computing and the cloud. The Azure cloud service is expanding very robustly, particularly as Microsoft orients its Office 365 software around it. Furthermore, the hybrid tablet/laptop Surface line and the Lumia phone business continue to expand. Stated differently: Microsoft, a software company if there ever was one, is demonstrating real strength and value-add in increasingly commoditized hardware - quite a feat.

At first glance, the Q1 2015 number is a bit worrisome. However, when one scrutinizes the historical data, two facts leap out:
1. Microsoft always has a Q1 dip after a holiday season spike.
2. If one draws a line thru each calendar quarter across the years, they all continue to trend up - including the Q1 line. This growth trend has been continuous since revenue bottomed out in Q3 2009.

XBox One sales continue to trail PS4 and it seems unlikely that Microsoft will be able to catch up during this round of the console wars. It would not surprise me if XBox engineers are already working on an XBox Two that will be a PS killer in every respect. 

Clearly the current executive team under Nadella knows their stuff and is getting maximum returns on the talent embedded in its rank and file. It is worth noting as well that all of Microsoft's long term strategic moves in Search, VR and AI are consistently and decisively beating Google to the punch (for those of you who haven't had the chance to read them, I cover the differences between MSFT's and Google's AI work in the AI and Robotics editorials penned earlier this year.) I think we can safely conclude that Microsoft's best years ever are likely ahead of them. As for Google: they're steadily losing their position of influence over the future of things to Microsoft. (We'll cover Google in greater depth next week.)

The wind and waves are buffeting Intel more ferociously than Microsoft for a rather simple reason - while MSFT has completed its tack and is surging thru the ocean swell with billowing sails, Intel is still executing its maneuver to change course, her sailors scrambling thru the rigging and only halfway thru resetting and trimming the sheets while the helmsman wrestles with the rudder.

The datacenter business continues to grow while the company's IoT efforts continue to be a strategic priority. What is as yet unrealized is a major breakout the SoC segment, as reported in earlier "State of the Union" posts. The company appears to be still in an exploratory stage. However, the strategic imperative and its importance to executive management is evident in the company's M&A activity:

The last three quarters of 2014 had shown impressive growth, and the severity of the Q1 2015 retreat is disconcerting. There's nothing to suggest that the difficulties encountered in the company's transformation have unnerved its executive team - at least not yet. We'll have to wait and see what tidings the future bring us.

"Eight Bells", Winslow Homer (Source:

But more wonderful than the lore of old men and the lore of books is the secret lore of ocean. - H.P. Lovecraft, "The White Ship"

There are, of course, quite a few other companies remaining in the portfolio. Their reporting schedule is stretched out over the next two weeks and I'll cover them as their results are announced. 

Who knows what tales of hidden reefs, whirlpools, mountainous waves, sea battles, sirens beckoning bewitched sailors to dash their barques against forbidding cliffs or dread monsters emerging from the fathomless deep await us?

Tune in next Friday to find out. ;-)

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, "Sea-Fever"
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