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Friday, December 19, 2008

Software doing relatively well. I can’t believe I just said that.

Oracle and Accenture reports suggest that ex-currency, business is holding. Oracle saw some slowness in database which was expected. Accenture saw some softening of bookings which was expected. Their outlooks were cautiously optimistic. Both stocks trade at the lower end of their historical multiples. The group could be seen as a safe haven in tech – at least their numbers aren't imploding at double digit rates like semiconductors are. Like with everything else, what will matter going forward is the length of the downturn and the shape of the recovery. For now, though, Oracle and Accenture look like ports in a storm.


Research In Motion (RIMM) 3Q:2009 results

Last quarter RIMM had guided significantly lower. I suggested that there were significant margin issues developing due to the variety of products they were offering – Storm and Bold are totally different base designs than the existing line. Efficiencies of scale tend to decline as design breaks out of the box – the Bold with its 3G internals and the Storm with its multi-touch screen will cost more to produce due to their less than standard parts. Economies of scale evolve from doing the same thing repeatedly. RIMM makes a lot of QWERTY keyboards for their phones and has been doing it long enough that its cheap for them to do. By tangling with the touch screen, they've opened themselves to a whole lot of new costs and subsequently lower margins.

After preannouncing lower results for the current quarter on November 2, RIMM slightly missed consensus revenue figures due to product hiccups getting out the Bold and the Storm. They guided to much stronger revenue for 1Q:2010 (3.2 – 3.3 bil versus consensus of 2.9 bil) but EPS guidance goes up only slightly to .83 - .91 versus consensus of .83. Gross margins are the culprit – guidance of ~41% is significantly below the ~46% the street has modeled. Some of this is due to well-publicized Storm issues – its slow as hell and subject to false-clicks that make it difficult to navigate for the user. As this phone is positioned as an iPhone challenger, difficult navigation is a gigantic problem versus expectations of buyers. People are expecting an smooth as glass iPhone-like experience and instead their touchpad is like flypaper and keeps sucking them into the wrong commands. Software updates are ongoing and the problem is being corrected but the damage is done on some level – the media has thrown out numbers like 40-50% of Storms are being returned within the 30 day window. Despite this, the product is in short supply.

I worry their revenue guidance for 1Q:2010 will prove to be aggressive – they weren't as big in consumer in years past and they likely will be surprised by the magnitude of the post-holiday drop as the economy sets in and the financial layoffs discourage upgrades – blackberry has been historically very dependent on the financial community. Some of the lower margin guidance is likely related to lower anticipated enterprise sales of software – there is excess capacity on Wall Street now.

Success on new products has the effect of reducing buyers of the other lines: they're getting lots of customers for the products that are more expensive for them to make and selling less of the really profitable products. Normally this would be great but as the Storm is an "exclusive" product for Verizon, there won't be the same kind of efficiencies on it going forward. When they start to ramp touch screens for other carriers, there may be some economies of scale.

In the meanwhile, numbers will head lower on the margin guidance. The stock is cheap relative to its growth rate should margins stabilize and begin to ramp again. I'm sidelined presently and I'll be looking for signs of positive inflection. I don't want to buy the stock here. I want to buy it at $30-31. Technically that's where I think its going. It'll also be pretty cheap if it gets there as earnings estimates range from $3.00 - $3.65 for 2010.

Wednesday, December 17, 2008

Fed: We’re going to zero

Yesterday the Federal Reserve cut the discount rate to 0.50%. They talked about the diminishing threat of inflation and a commitment to promoting price stability and growth. There are unprecedented credit problems within the economy at so many levels. Previous comparable real estate troubles resulted in significant US stock market declines from 1929-1932 (down 90% peak to trough). The Fed pursued a much tighter and more restrictive policy then. The good news is the current Federal Reserve has proactive policy in place to combat the biggest threat to financial stability this country has ever faced. The bad news is it may not matter. The administration (Treasury and Fed) continue to try to loosen credit conditions by replacing frozen credit vehicles with fresh money, as if the problem is that there is not enough lending. There remains too much credit outstanding and it will require some time to repair the damage to consumer balance sheets. Americans are rightly more concerned about maintaining what they have than picking up new credit obligations. It's not the lack of lending – it's the lack of desire to borrow. Businesses borrow to fund anticipated growth opportunities and businesses see no growth opportunities at present – most seem to expect a dour 2009 at least. That will not spur demand for loans, just for refinancing. It's not about growing here – its about surviving.

Perhaps a better comparable to our current woes is Japan, which burst a real estate bubble in 1990. Interest rates in Japan did not hit zero percent until 1996. There was a brief rally during the cuts but those rallies became the highs over the next several years and not the lows in the stock market. Though the Nikkei's slide had already brought it from 38000 to 20000, it continued to spill for the next several years, reaching a low in the low 8000s – a decline of some 77% and 13 years from its 1990 high.

Monday, December 15, 2008

NPD data out - Macs down a little in November

After +28% y/y sales gains in Macs in October on the back of new Macbook releases, sales slowed. Piper's piece says now they're running up 11% y/y for the December quarter. What he's not saying is November was down 1% y/y. Big deceleration... lot of guys hiding there. Apple still holding up a lot better than you'd think -- they're priced at twice the competitive offerings. Nonetheless, the economy even catching them. Goldman had a very prescient call this morning downgrading the stock.

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