GOOG and MSFT – Dog days

Google and Microsoft both had a difficult night.

 Google

• Google reported results that missed expectations as price erosion hit revenues and investments worsened the situation on the bottom line.
• Q2 revenues (ex-TAC) / EPS were $11.16bn / $9.56 compared to estimates of $11.3bn /$10.8.
• This represents a 1.3% and 11.5% miss respectively.
• The main problem is that advertising spending is growing much faster on mobile than it is elsewhere and these campaigns cost less than in the fixed line.
• Radio Free Mobile’s research indicates that keyword search advertisements cost around 35% less on mobile than they do in fixed.
• This is a reason why the cost per click is falling faster than expected.
• Cost per click fell by 6% in Q2 2013 compared to estimates of around 3%.
• Motorola had another awful quarter draining shareholders of a further $218m.
• The rationale for Google to hold onto Motorola Mobility remains highly questionable with the only possible reason being as a defence against Samsung in the long term (see here).
• There are signs of maturity is some of Google’s core markets and I think that growth will be much steadier from here on.
• However, there is opportunity for a bump up in revenues when Android 5.0 is released.
• Radio Free Mobile’s research indicates that while Google may have activated over 900m devices, it is earning revenues from less than one third of them.
• Although this looks bad for Google’s ability to monetise Android, it presents an opportunity should Google find a way to start earning revenues from the 2/3rds of Android devices it is currently missing.
• Android 5.0 could be a big help here and I see the possibility for an unexpected boost to Android revenues in 2014.
• While I remain very lukewarm to Google, I am, waiting for the opportunity to benefit from the bounce I see in 2014.

Microsoft

• Microsoft also had a difficult evening with Q4 results coming in below expectations.
• Q4 Revenues / EPS were $19.2bn / $0.59 compared to forecasts of $20.0bn / $0.77 representing a 4% and 24% miss respectively.
• Revenues were mostly impacted by the on-going weakness in the PC market which recorded another awful quarter in Q2 2013.
• EPS was impacted by a thumping $900m inventory write down on the Surface RT related to the recent $150 price cut.
• Taking this write down at face value, it implies that Microsoft is sitting on or is committed to a further 6m devices.
• With Microsoft having sold around 1m devices in the first 6 months of 2013, the message is very clear:
• Windows RT is a total failure and needs to be stopped now.
• I believe that ARM has a future with Windows but not as a poor cousin with hopelessly limited functionality.
• The Windows 8 experience needs to be the same for both Intel and ARM based devices with consumers making a choice based on price, performance and battery life only.
• Until this dream becomes a reality, ARM has no future in the computing market and I believe that estimates for ARM will have to be cut to reflect this.
• Intel’s position is looking far more secure now than it was a year ago and it has the blundering of Microsoft to thank for that.
• Guidance for the coming quarter was pretty cautious as there is no end in sight to the decline in the PC market.
• The main problem is that Microsoft owns 90% of this market and so it desperately needs to inform users why they should buy Windows 8.
• It’s marketing and its message to date has been limited to “if you build it they will come”.
• Unfortunately, the world has changed and this no longer works.
• Windows 8 has many features that address these changes as well as differentiate it from competitors like iOS and Chrome but no one knows about them.
• Even in its flagship stores, the devices are pretty much blank leaving prospective users pretty nonplussed once they have played with the devices for a few minutes.
• Until this changes and Microsoft actually engages users and shows them why they should buy Windows 8 this malaise is likely to persist.
• Don’t get me wrong, I am a big fan of the potential for Windows 8 but right now Nokia and the OEMs seem to have much better idea how to sell it than Microsoft does.
• Microsoft remains cheap but looks set to stay that way for a while.
• Nokia has far more upside.