POV: Q4 2015 Quarterly Earnings Review

Mindshare Point of View

Most of the big players have reported their 2015 Q4 earnings. Below is a quick snapshot and analysis.  

Apple: Up and Down: Only Apple could record the largest profit ($18.4bn) in the history of mankind and still get mixed headlines. Sales of iPhones slowed down and as a consequence revenue was below expectations ($76bn), not a major surprise given the turmoil in growth markets such as Brazil, China, and Russia. Predictably pundits quickly declared Apple’s best days over. Certainly the combined impact of the Internet of Things (connected homes and cars) and the future advanced technology behind it (e.g. graphene chips) will bring some game-changing new products (a quantum leap iPhone and an Apple Car). Someone will need to develop a secure, simple operating system that connects all of it, including transactions (Apple Pay!); who better than Apple? Furthermore, the closure of its tiny iAd business enables Apple to focus on that bigger picture and perhaps even more controversially lay the groundwork for an ad-free (or limited) ecosystem putting serious pressure on rivals like Google. 

Facebook: The End of the Beginning: Didn’t buy Facebook stock when it was $17? Kick yourself. Real hard. Facebook is monstering it at the moment: doubling year-on-year quarterly net income ($700m to $1.5bn), with an extraordinary growth rate (52% to $5.8bn for the year). How? Facebook’s heavy investment in mobile is paying off. It arguably has the industry’s strongest mobile app portfolio, which brings a combo of strong ad formats, extensive data sets for targeting and with Atlas the means to target based on actual IDs. There is also immense room for growth with an additional four billion people coming online around the world, greater monetisation of existing platforms (particularly Messenger and WhatsApp), further investment from the migration from TV to online video and the nascent but rapidly evolving areas such as virtual reality.    

Alphabet (Google): A Tale of Two Bets: It was the first time Alphabet provided any transparency into its increasingly diverse portfolio, even if it was a simple binary split between its historical business (Google and advertising) and what it has labelled “Other Bets”. The latter includes recent acquisitions and initiatives like Nest, self-driving cars, Calico, and Fiber. What the split revealed is that while “Other Bets” includes some incredibly innovative stuff, it’s very small ($448m) in comparison to the rest of the business and loses a lot of money ($3.56bn). It’s the advertising that is clearly the cash-cow at Google and it performed well enough that Google has overtaken Apple as the world’s biggest company by market cap, a first since 2010. Google seems to have cracked mobile search (40% of total search is now on mobile, more than on desktop), continues to capitalise on the shift from linear broadcast to online spaces like YouTube (Google claims YT viewing on TV doubled in 2015 via devices like Chromecast) and is seeing the continued motion of the programmatic juggernaut. As a result the “Safe Bet” side of the business clocked a healthy $74.5bn in revenue, a 13% year-on-year increase, accounting for 98% of Alphabet’s business. The challenge for Google will be how to best leverage its massive market cap and $16bn in cash. Invest in more “Other Bets” or reinforce the core business via further acquisitions and development? It’s a choice Apple could easily make given the tiny size of its iAd business, but not so simple for the ad-revenue dependent “Moonshooters” over at Google.

Yahoo: What Next?: Yahoo’s ambitious if not controversial plan to spin off its Alibaba business into an independent company called Abacoa went off the rails when the IRS refused to confirm the tax-free benefits of such a move. Consequently, Yahoo has put the brakes on any imminent changes, leaving its future plans in doubt. CEO Mayer’s challenge over the last three years has always been to resurrect the core Yahoo advertising business and stop relying on Alibaba’s value to prop up the stock price (according to Bloomberg, if you remove the value of the Alibaba investment ($32bn) and Yahoo Japan ($13bn), the remainder of Yahoo business is worth little if anything at all). The result has been a flurry of speculation and advice from investors and industry pundits with one underlying theme: CEO Marissa Mayer is out of time and selling Yahoo is arguably the only logical path to take. So when Mayer announced she was looking at “strategic alternatives” during the quarterly earnings call, not to mention laying off 15% of its workforce, one can only assume that Yahoo is laying the groundwork for spinning off and selling its constituent parts. But to whom? There are several scenarios ranging from a reverse takeover from Alibaba who are seeking a foothold in the USA to Verizon adding more inventory to its programmatic cross-device inventory empire boosted by the AOL acquisition and Microsoft partnership. Even with all the negative noise, Yahoo still has some core strengths: one of the biggest online audiences, brand equity, strong assets such as Tumblr. However, with Facebook and Google continuing to dominate online advertising investment, something will have to change.