Apple (NASDAQ: AAPL) seemingly strong results, but the market was disappointed with changes in reporting and guidelines. Ditto for Spotify (NICE: SPOT), which made some changes in the expected number of subscribers for 2018 and sold after its report. But Fitbit (NIS: FIT) made a statement with the success of its Smartvatch segment, and its shares have grown.
Would Apple and Spotifi be concerned? And does Fitbit belong to your watch list? See this episode Industrial focus: Teh, in which host Dylan Levis and Fool.com associate Evan Niu live in these topics and more.
The full transcript is followed by a video.
This video was shot on November 2, 2018.
Dilan Levis: Welcome to Industrial focus, a podcast that dives every day in a different sector on the stock market. Friday, November 2, we are talking about technical wages. I'm your host, Dylan Levis. I joined Skipeu by senior technology expert Evan Niu. Evan, how was your witch's night?
Evan Niu: It was good! The children did a good job.
Levis: You have two young children. What are the costumes this year? What did they get into that?
Niu: They did Batman and Harlee Kuinn.
Levis: OK! Have you and your wife changed? Or did you just take the kids?
Niu: My wife is in the dress. I'm not because I'm not that funny.
Levis: [laughs] Can not you even make concessions with children?! This year I finished two costumes. I had Harry Potter the murder of a mystery that I did with some friends last weekend, and then I was Morta Rick from my girlfriend Rick and Morty over the weekend. I went from a beautiful, great breed to shave it, because to be a 14-year-old for Halloween, you can not have a beard. But it sounds like we both had a good time. I hope your children have a lot of fruits. Probably driving you a little crazy.
Niu: Oh yes, of course.
Levis: We will talk about our treatment, Evan, and these are financial reports and some new earnings are taken by some companies we like to cover. We have big issues from earnings from Fitbit, Spotify and Apple. We will try to hit all three, not too much, too long. I know we can do this sometimes when we talk to Apple.
Why do not we get things off with Fitbit? This is a company that desperately needed some good news, and it looks like they finally got this new report.
Niu: In my opinion, it was quite a lot of release. The revenue was about $ 393 million, which exceeded its forecasts, as well as the expectations of analysts. The big news is that they have become profitable again. They have lost money for about two years, since people are redirecting from these basic monitoring devices to a lot of smart smart watches. The big challenge has always been, can they successfully transition from the tracker to smartvatches? And, of course, they still sell the seeker. They are really popular in the Middle East, Africa and some of these emerging markets. But in the United States, that's all about smart watches these days. They could announce a custom net income of $ 10 million or $ 0.04 per share. Go back to black.
Levis: It is important to note that, on the basis of GAAP, they lost money. We need to emphasize that adjusted income there. Quite a little exploring this effect, it seems that the company sees success with the smartvatch line. That was really great for them. With more simplified fitness trackers, and this market is a bit tougher with some competitors Xiaomi In the mix, can I go to a smart market and make a big splash? The answer seems to be.
Niu: Well, especially after the first smart wait, Jonsky, floppies. That thing did not sell well. It did not seem so attractive from the main perspective. They were thinking more about the position of niche performance, while Versa clearly answers consumers better. If you recall, they spent years acquiring different small businesses to help them build their smart saving strategy. And now, we see the results of that. In the quarter they sold about 3.5 million devices. Average sales prices have increased by just over $ 108, while the product mix continues to move towards smart watches, now about half the income. I think that they make an impressive progress here.
Levis: Looking at the overall market share, a year ago, they had a 0% market share in smart watches. The blockade so far, they are one of the main players, they are in second place in this market. Not only do financial results look good, but in a competitive landscape, they not only keep their own, but also take market share from other players.
Niu: Just so. Since Ionic was launched in the fourth quarter of last year, a year ago, they really did not have anything. Now, we are moving fast today. Android Vear OS, which used to be Android Vear, made it terrible. Nobody buys those devices. Alphabet she really failed in execution in terms of wearing wear. I think Fitbite provided this opportunity to strengthen and fill that need, to provide some sort of alternative to Apple Vatch. Apple Vatch remains the dominant smartvatch in the world, but people want competition, people want an alternative, and Fitbit really offers something else.
Levis: Outside financial means, looking at some of the user's activities, I think there are a lot of really encouraging characters out there. The full activation they see during this quarter are from new users. It seems that the engagement with the people who were users at some point, and then it falls, starts to revive itself.
Niu: Right. It has always been a big problem with these basic tracking devices. It's like when people start to go to the gym, then you're a bit lazy, then you just will not go. People would buy these fitness seekers, use them for several months, and then just stop using them. To face, we are all lazy. [laughs] The big challenge for Fitbit has always been, how to keep these users? How do we motivate them to stay active and improve their lives and health? They started to advance there. They said that from existing users who bought new Fitbites these quarters, about half of them had previously been inactive. So, they start to return more people to the platform that was previously calm.
Levis: After a quarter of the downturn on the revenue side, the market was very pleased to see revenue growth, even though it was rather thin. How do you feel about this company? That's like 35% since this earnings are released. Did something you saw here change your view of this job?
Niu: I think it was a strong report and I think they are making progress with this turn. For some time they have been on ropes with this fitness tracking. But, at the same time, I think they are not out of the woods yet. This will be a long game. We are talking about smartvatch platforms. Any strategy of the platform, by default, is a very long-term strategy. So, they are progressing, but they still have to continue. They are also in consumer hardware. It's hard to know. You need to constantly innovate, constantly post new products that people like, you need to build your platform, you need to get more applicators there. There are so many pieces that can be well maintained over time. And, compete against the literally richest company in the world. So it will be difficult. That said I was impressed that they managed to do the same thing as those who over the past few years switched to smart watches that people want to buy.
Levis: They lead to what is essentially a slight decline in revenues in the next quarter, after initially a flat year this year in the last quarter. It's not like the hardware segment shows the glitter distance. It's a nice return, and this is showing strength in some key categories for them, but the hardware is still this job. These are all their income. That did not change. And I think what makes a hardware company really convincing is if they can create a really viable platform. And I still do not see this with this company. There is so much potential for it, but if I do not start to see the signs and money coming from the software side for them, I will remain a skeptic. I think I can find better places to use my money, honestly.
Niu: I totally agree with you. They talked about this idea of building a business service for a long time, and they continue to try, and want to venture into corporate vellness programs. But this is still less than 1% of revenue. Again, when it comes to building a platform, you want to make sure you rely entirely on hardware, and slightly increase your software and services. And on this front, they did not make much progress.
Levis: Why do not we switch speeds and talk about Spotifi? The market was pleased with the results of Fitbit, and not exactly the case for Spotifi. After the profit we saw a big sale. The company is actually on the slopes since it was published. This is the lowest thing we've seen stocks.
Niu: Investors were not too pleased with Spotifi. I think that part of that was their leadership. As for the results for this quarter, the revenue was about $ 1.5 billion. Premium subscriptions continue to grow. Now there are about 87 million premium subscribers. It's by far the largest premium paid subscriber base in the world in the music streaming industry. We talked Tencent Before, but Tencent, as we mentioned on other shows, most of their users are free users. They do not actually apply. Spotifi is by far the market leader.
They were actually profitable, but it was a one-time phenomenon, and in fact it was related to Tencent Music. They had tax relief related to adjusting the market to the market in terms of the value of Spotifi's role in Tencent Music. If you recall, last year they made capital replacements. When Tencent Music submitted the public, there was a lot of information that was basically justified to them. So, their tax relief came here. It's not a regular thing. In fact they lost less money than they thought on an operational basis, which they considered to be negative. They said, "We should have lost more money."
Levis: Right. This is a company that is growing to a great extent. They expect to spend a lot of money, especially on the employment side, in the research and research element of their business. They were disappointed that they could not spend more and bring more people.
Niu: Right. Basically, their operating margin has improved. They continued to lose money on an operational basis, but they said, "We should have lost more. We did not hire as many people as we wanted." This continues in the fourth quarter, due to which they have adjusted their guidelines. Their financial management expects to lose less money than they have previously forecast. Again, this is considered bad things. They know that they have to greatly reinvest in this job to really grow, and profitability will appear later.
Levis: You mentioned this manual. I think you're right, that's why we see sales today. The reality is that they were fooled by their own optimism. In the last quarter, they published some improved guidelines, looking at their perspectives throughout the year. They revised everything up to what they initially expected at the beginning of the year. It's not that the big reset continues. We are talking about the difference from one million premium subscribers in one way or another.
He said everything, Evan, how do you feel about Spotify? You are a shareholder.
Niu: I still think it's a good company in the long run. I still believe in where this company is going. I think this reaction to the market is an overreaction. These are only small adjustments for their subscription assumptions. As you mentioned, it's like a million subscribers in one way or another. This is not the kind of number that will make or break this company. I think that investors who sell shares silently. We are just returning to the guidelines issued earlier this year, which is still very strong. They expect 93-96 million subscribers at the end of the year. Again, they are by far the largest paid service for streaming.
Levis: If you are buying in the long-term vision of this company and you are thinking: "Streaming music is the future. This is one of the two companies that is extremely well positioned to use it in the US and Europe, some of the major markets," then one million for one or two quarters should not make a big difference. An addressable market for these types of services is much larger than that. Greater possibility is much higher. I would not move too much into individual guidelines from one to a quarter if this is the narrative you are buying here.
Niu: Just so. I'm still sure. I'm already.
Levis: I think this is also a pretty good lesson in the average cost of the dollar in some positions. We talked about some newer IPOs, we made deep dives. It's really easy to get excited when you first have the chance to get out of the shares of a company you've been tracking for some time. I think this is a movement that we see very real, indeed, for a new show. We are still in the first year, the first few reports, Spotifi as a publicly traded company. I take it all as a reminder why it is so important to buy positions at times, up to the average cost of the dollar. They'll be together with the companies as they report. Breasts will be taken on the market, as we see over the past few months. You do not want to have a cost base that is related to a specific point in time. You want to take advantage of these moves and work ideally at a lower price in your position.
Niu: Especially IPO. All IPOs are so unstable and risky in the first year. Is the market trying to find out what this company is worth? It takes some time.
Levis: Our latest company today is Apple. This is one of our favorites we are talking about. Usually this is a boring quarter for Apple. Stocks fell by 7% after they reported. What happened?
Niu: [laughs] There's a lot going on here with Apple's earnings. One of the main reasons for this is that the guidelines for the next quarter were not too great. We can come later. Revenue jumped about 20% to $ 62.9 billion, which is more than its own company guidelines. The size of the iPhone was about 47 million. But revenue from the iPhone has grown 29% to 37 billion dollars, which is really more than we saw during the past year. Since last year they presented $ 1000 to the iPhone X, they pulled this lever in price. The prices are really where there is an increase in this business from today. The units are basically flat. The last four quarters, the units are more or less straightforward, but revenues have increased significantly, as they are so charged for these phones.
Levis: It's kinda incredible that in a company of 1 trillion dollars and an enterprise that pays tens of billions of dollars in revenue, they are still able to work by 20%. Not that I necessarily expect it to go forward, but it's worth noting that there is little here. Some of this is due to the success of the iPhone segment. Some of this is due to the success of their service segment.
Niu: Services hit a new record with a $ 10 million revenue per quarter. A year ago, they had a one-time positive adjustment of $ 640 million in connection with a change in the accounting estimate. But if you turn off this unique item, it basically means that this year they have grown by 27% on the services. For 12 months, the services are now 37 billion dollars. They reiterated that target of $ 50 billion by 2020. They continue to march, slowly but surely. Every quarter, they are closer to that goal. They are right by schedule.
Levis: The story with this quarter for me is, the past results are excellent, but we will see some major changes in how this company reports. I think it really signals some major changes to what the company expects from some of their production lines. The financial reporting that we are used to for Apple will soon be almost unrecognizable.
Niu: Right. They made very big announcements that will be really important for investors in terms of doing their financial reporting starting from the new fiscal year. They have just closed their fiscal year, so we start the fiscal 2019. It's a great fact that they will no longer report the sale of the unit, which will be very controversial, as it has always been one of the most-watched metrics with Apple. They will also begin to break down and separate between products and services. They will give more detailed details about the cost of revenue for products and services. You will get a much better feel of the margin profile for services vs. Products. With its emphasis on Services over the past few years, which is much more profitable, I think it's a good thing. But, of course, it's bad that you will lose unit data.
They are trying to reverse this focus in hardware-to-service narratives for two or three years. This is culmination. They just release the unit. I can not be clearer than that. They subtly said, "Hey, stop looking at the units." And now, they are: "You can no longer pay more attention to the units." You no longer have a choice.
Levis: And you've spent so much movement for so many years connecting these excellent Apple charts that track ASPs, what happens to the sale of the unit. Evan, all those nice cards will be outdated! It's such a shame!
In some ways, we get some transparency. In a way, we get less transparency. For my money, given how much of the work I do on the iPhone segment, I would like to know the actions there and understand what's happening on the side of the device, what happens in the prices. Очигледно, моје мишљење није битно, јер су већ одлучили да донесу ову одлуку. Једноставно морамо узети утеху у чињеници да ћемо имати бољи осећај за оно што се дешава на страни услуга.
Исто тако, напријед, наговијестили смо ово раније, упутства која су дала за наредни квартал ће бити велики успорење од тог пораста од 20% које смо управо видели.
Ниу: На средишњем нивоу, смернице су око 91 милијарди долара. То је пораст од 3% у односу на прошлу годину када су уложили 88 милијарди долара. Ово је некако као што смо раније причали – имаш тако велики посао, трчиш у закон великих бројева. Стварно је тешко подићи двоцифрену стопу раста из такве хумонгозне базе прихода. Постоје неке шпекулације, да ли ће водити ка четвртини од 100 милијарди долара? То би било преварљиво. Мислим, не то што се очекивало. Аналитичари су били око 93 милијарде долара. Дакле, они морају да достигну врхунац својих смерница како би задовољили очекивања аналитичара. То је сигурно могуће, то су већ у више наврата у четвртом кварталу, што је њихов најпродаванији квартал. Некако је глупо што су људи разочарани. Сваког дана ће продавати ствари вредне милијарду долара. Како си то разочарана?
Левис: То није ништа за кијавицу. Са продајом, Аппле је стварно опасно близу пада испод те марке од 1 трилиона долара да су то прва компанија која је погодила. Еван, пуно смо причали о Апплеу. Обојица смо имали у власништву залиху већ неко време. Мислим да су луди данови раста за ову компанију готови. Ако сте нови инвеститор, ово није ваш Апплеов старији рођак који ће се удвостручити сваке двије године. Шта радите са вашим Аппле акцијама? Како размишљате о овом послу?
Ниу: Не радим ништа с тим. Увек сам био дугорочни акционар са Апплеом. Никад нисам имао искушења да га продајем или тако нешто. Чак и ако раст више нема више, такође је вриједно памћење, овај програм откупа који имају имају толико масивног. Чак и ако њихова највиша линија не расте много, ваша зарада по акцији ће се доста повећавати. То ће помоћи у вођењу вредновања акција и држати их јефтиним, што може помоћи у превазилажењу већег удела. Не да се дуплирају одавде. [laughs] Али, програм откупа, ове године су до сада откупили преко 60 милијарди долара акција. После пореске реформе, у последња три квартала откупили су 20 милијарди долара за четвртину. То не иде ускоро. То ће помоћи да се тај низак број ЕПС-а ојача у годинама које долазе.
Левис: Да. Они су заиста одлични за своје акционаре, у смислу повратка капитала. То се неће променити. То је једна ствар за коју мислим да можемо наставити да се држимо, све док је тај новац добро и велики, и све док сегмент услуга и сегмент иПхоне настављају објављивати прилично чврсте резултате. Мислим да можемо бити сигурни да ће то бити случај.
Ниу: Ова акција је тако јефтина. Увијек сам то сматрао врло сигурним. Они тргују с попустом на тржишту, нешто попут 13Кс зараде. Ова акција је тако јефтина. Не иде у танк или ништа. То је прилично поуздана игра.
Левис: Хајде да завршимо тамо, Еван. Хвала за скакање на емисији! Слушалице, то ради за ову епизоду Индустријски фокус. Ако имате било каквих питања или ако желите само да сазнате и кажете хеј, можете нам пуцати на е-пошту на индустрифоцус@фоол.цом, или можете да нас чујете на @МФИндустриФоцус. Ако желите више наших ствари, претплатите се на иТунес или можете да ухватите све видео снимке из овог подкаста на нашем ИоуТубе каналу. Као и увек, људи у програму могу посједовати компаније о којима се дискутовало на емисији, а Тхе Мотлеи Фоол може имати формалне препоруке за или против залиха поменутих, тако да не купујте ни не продајете било шта засновано само на ономе што чујете. Захваљујући Аустину Моргану за све своје радове иза стакла данас. За Евана Ниу, ја сам Дилан Левис. Хвала на слушању и Фоол он!