Tech Letter Archives

The Resilience of Twitter

Twitter’s (TWTR) earnings offer a rough snapshot into the health of current internet users and Twitter pulling off a strong quarterly performance is a strong indication of how tech earnings as a whole will pan out.

Readers of the Mad Hedge Technology Letter know well that CEO of Twitter Jack Dorsey is one of my favorite tech CEO’s in the valley and I believe he should be leading Apple instead of Twitter and Square.

Twitter had an ideal quarter smashing estimates by surpassing every meaningful metric.

This company has turned the corner and has become the choir boy of social media in relative terms.

Purging the bots in the summer of 2018 was the right move in hindsight, and the performance in the first quarter vindicates Dorsey in making the tough decisions to clean out its system.

As Twitter grows in its Daily Active Usership (DAU), they risk becoming too large to regulate and grabbing back control over their model was the smart thing to do at the time.

Twitter has shifted from emphasizing Monthly Active Users (MAUs) to Daily Active Users (DAUs) in a sign of intent preferring to become integrated with users on a daily basis.

Total revenue of $787 million was up 18% YOY batting away any whispers that the company could be decelerating.

Another bonus was the diversity in ad revenue with 46% coming from the international segment signaling to investors that Twitter is not over-reliant on American Tweets.

American ad revenue rose 26% compared with international ad revenue rising just 10% showing that if you do social media properly instead of hatching cunning plans, it is still a growth business at its core.

The company has started to rev up profitability by reporting first-quarter earnings per share of 37 cents crushing the consensus of 15 cents.

The healthy trajectory of the company is summed up by its rise in Daily Active Users to 134 million, an increase of 11% YOY in an environment where Twitter’s competitors aren’t growing at all.

The concerns that I had about last quarter’s tech earnings report had more to do with forward guidance than the past quarter’s performance because of the supposed deceleration of the global economy.

Twitter passed with flying colors predicting next quarter’s revenue should come in between $770 million to $830 million and operating income between $35 million to $70 million.

Dorsey sees no let down in the coming quarters as the domestic economy will attempt to push its way into its 11th year of expansion.

Headcount is estimated to rise 16% in 2019 after a 2018 where staff grew by 18%.

Total ad engagements increased 23% resulting from higher ad impressions and improved clickthrough rates (CTR) across most ad formats.

Cost per ad engagement (CPE) decreased 4% due to like-for-like price decreases across most ad formats because of an improved CTR which results in advertisers achieving the same number of engagements at a lower price, and a mix shift toward video ad formats that have lower CPEs and higher CTRs.

CPE can differ from one period to another based on geographical performance, ad formats, campaign objectives, and auction dynamics.

Just as important, the customer experience for advertisers is always improving with enhancements to Twitter’s ad platform and ad formats.

Twitter is committed to delivering better relevance making it simpler for advertisers to declare their objective, initiate a campaign, and measure performance.

The possible destructive black swan strongly hovering over social media and its business model is the threat of data privacy and the subsequent regulation to it.

Facebook (FB) and less so Twitter have been dragged into the data privacy debacle, but I believe Twitter has made the moves to get the monkey off their back for at least the next two quarters.

They have also benefitted from being more conservative in how they handle data and from the bulk of tweets being parts of public discourse instead of personalized baby photos.

The structure of Twitter has led to less chaos than Facebook, and Twitter tightening the amount of acceptable mainstream topics even more will close more loopholes into the extreme parts of society that want to disperse content through Twitter.

Twitter is taking a more proactive approach to reducing abuse on the platform and its effects in 2019 with the aim of reducing the burden on victims of abuse and, where possible, taking action before abuse is reported.

As a result, enhancements in Q1 revolved around proactive detection of rule violations and physical, or off-platform, safety — including making it easier to report Tweets that share personal information, helping Twitter remove 2.5 times more of this type of content.

Twitter has also deployed upgraded machine-learning models to detect potential policy violations enabling Twitter to pinpoint Tweets to agents for review, proactively.

The result is Twitter removing more abusive content with better efficiency.

The data backs up Twitter’s abuse prevention initiative with approximately 38% of categorized abuse proactively detected.

Twitter has been profitable for a string of quarters now, responded well to looming regulation fears, and as long as the economy chugs along at its current rate, I believe Twitter will outperform the rest of tech and the domestic economy.

The short-term health of social media also opens the path for Facebook to continue the positive momentum as the summer approaches.

Wait for an entry point on the dip to buy Twitter.

April 25, 2019 - Quote of the Day

Tech Letter

“Twitter has been my life's work in many senses. It started with a fascination with cities and how they work, and what's going on in them right now.” – Said CEO of Twitter Jack Dorsey

April 24, 2019

Tech Letter

Mad Hedge Technology Letter
April 24, 2019
Fiat Lux

Featured Trade:

(WHO BEAT WHOM IN THE APPLE/QUALCOMM BATTLE)
(QCOM), (INTC), (AAPL)

Who Beat Whom in the Apple/Qualcomm Battle

Tech Letter

The 5G bonanza is slithering towards us in a slow yet predictable motion – that was the takeaway from Apple finally conceding that its bargaining positioning was weaker than initially thought.

Apple made amends with chipmaker Qualcomm (QCOM) in the nick of time, let me explain.

Qualcomm is the leader of 5G chip technology, and the two firms decided on a six-year pact that will allow Qualcomm to sell patent licensing to Apple while becoming a crucial supplier of 5G modems to the new iPhone that will roll-out to consumers in the back half of 2020.

Envisioning this 2 for 1 special a few weeks ago was impossible as the brouhaha spilled over into the national media with top executives exchanging barbs.

Qualcomm, to its credit, stayed steadfast on its position and was the bigger winner of the spat.

The rapid reaction in the stock price has vindicated Qualcomm’s initial reluctance to make a cut-price deal with Apple.

The new contract locks in Apple at around $9 per phone in licensing fees, almost double what many analysts were predicting.

Apple also paid a one-time fee of the backlog of patent usage from the past two years that many specialists estimate to be in the $6 billion range.

Qualcomm has previously stated that Apple owes them $7 billion from the kerfuffle and Apple’s refusal to pay stemmed from their belief that Qualcomm was “double dipping” – a claim based on Qualcomm charging a fee for each iPhone using its patents as well as a fee for the technology itself which Apple felt extortionate.

Ultimately, the jousting wasn’t worth the trouble as the best-case scenario of Apple saving $1 billion in patent fees was overshadowed by the opportunity cost which was significantly higher.

The updated terms see a substantial improvement for Qualcomm over the $7.50 per phone that Apple was paying before.

The end of the saga smells of desperation on CEO of Apple Tim Cook’s behalf, realizing that time was ticking down and competitors such as Huawei have already launched 5G-supported phones.

Apple is, in fact, late to the party and one of the main root causes was the logjam with Qualcomm.

If Apple didn’t come to terms with Qualcomm, suppliers and designers wouldn’t have enough time or supply to prepare to meet the fall 2020 deadline causing Apple to delay the new iPhone.

The worst-case scenario that became a realistic threat was that the new iPhone wouldn’t have been ready until 2021 – Apple shares would have dropped 20% in a heartbeat if this played out.

Avoiding this doomsday scenario is a massive bullish signal for Apple shares and brings forward revenue demand into 2020.

The new iPhone with ironically Qualcomm’s 5G modem technology is also the selling point for iPhone lovers to upgrade to a newer and faster iPhone iteration.

It’s a headscratcher that Tim Cook played his cards in the way that he did, another misstep in a long record of fumbles in the red zone.

Inevitably, scrunching up the production schedule heaps loads of pressure on the existing engineering teams to produce a flawless iPhone.

Apple simply couldn’t wait any longer and CEO of Qualcomm Steven Mollenkopf understood that, leading me to solely blame Tim Cook for this calculated error.

Where do the chips lie after this recent shakeout?

First, this piece of news is demonstrably bullish for Qualcomm and its business model while backloading around $6 billion or so in revenue onto its balance sheet.

In short, Qualcomm hit it out of the park and set itself up for the upcoming insatiable demand for 5G chips while publicly demonstrating they are best in show for 5G infrastructure equipment.

It might turn out to be Qualcomm’s best day in the history of the company and one that employees will never forget inside its headquarters.

This will embolden Qualcomm in the future to fight for the revenue that is rightfully theirs and they won’t be frightened by bigger sharks attempting to persuade them that they should receive a lesser share of the pie.

For Mollenkopf, this is his crowning moment and a pathway to another big-time job, the one day grabbing of the spoils has elevated his reputation.

Apple is a minor winner because of the adequate supply of chips that Qualcomm will provide that guarantees Apple’s engineers clarity instead of dragging itself deeper into a courtroom battle with a company that supplies an integral component to their iPhone.

Hours after the news hit the press, Intel (INTC) waived the white flag issuing a short response admitting they are exiting the 5G smartphone business, a bitter pill to swallow for a legacy company finding it difficult to stay with the big boys.

And if you remember, Intel was initially thought to be the one to provide memory to the 5G smartphone but now that notion is dead as a doornail.

Intel will hope they can capture a fair share of the 5G PC business to make up for the lost opportunity, but as consumers migrate away from PCs, shareholders could sense Intel could be left holding the bag.

Qualcomm has strengthened its stranglehold on the 5G smartphone modem market in an industry that will morph into a worldwide addressable market of $20 billion by 2025.

Even though Huawei just announced they would be willing to sell their 5G chips to Apple, Huawei and South Korea’s Samsung mainly produce chips for their in-house branded smartphones and shun feeding competitors like Apple who require the same chips.

Apple hoped to create some leveraging power to get a better 5G chip deal and loosen the jaws that gave Qualcomm a powerful position over Apple, but Intel quitting this segment left Apple with a series of bad choices and they chose the lesser of the evils.

What does this boil down to?

Qualcomm outmuscled Intel producing faster and better performing chips that supported longer battery life.

Qualcomm simply has better engineering talent.

Intel had an uphill battle in the first place, but it is clear they cut their losses because the writing was on the wall leaving Qualcomm to reap all the benefits.

April 24, 2019 - Quote of the Day

Tech Letter

“A lot of the future of search is going to be about pictures instead of keywords. Computer vision technology is going to be a big deal.” – Said CEO of Pinterest Ben Silbermann

April 23, 2019

Tech Letter

Mad Hedge Technology Letter
April 23, 2019
Fiat Lux

Featured Trade:

(WHY YOU SHOULD KNOW ABOUT ATLASSIAN CORPORATION)
(TEAM), (ZM),

What You Should Know About Atlassian Corporation

Tech Letter

Next on deck is Atlassian Corporation (TEAM).

What do they do?

They design, develop, license, and maintain global software products.

Part of the functions they provide are project tracking, content creation and sharing, and service management products.

The company's products include JIRA, a workflow management system that enables teams to plan, organize, track, and manage work and projects.

To complement JIRA, Confluence is a piece of software that acts as a content collaboration platform that is used to create, share, organize, and discuss projects.

Also, under its umbrella of software products is Trello, a web-based project management application for capturing and adding structure to fluid, fast-forming work for teams.

Cloud software has become ubiquitous because it is simpler to set up and operate, and benefits from the latest iterations through scheduled updates, and scales easily.

Most crucially, it allows customers to focus scarce time and resources on core businesses, instead of frittering it away solving infrastructure and hardware problems that often mutate into whack-a-mole by nature.

These collection of software products are uplifting Atlassian into a border line company that I would classify as a conviction buy.

Shares have demonstrated the success of the company by bursting with life, shares have doubled in the last 365 days and if you look at its performance all the way back to October 2015, shares have skyrocketed from 20 cents on the dollar to over $100 at the time of this writing.

I took a quick glance at the paying customer metrics to gain an insight into why Atlassian is turning into a dominant company.

In Q3 2018, Atlassian racked up paid customers totaling 119,158 and followed that up a year later by totaling 144,038 in Q3 2019.

Atlassian’s clients represent diverse industries and geographies, from start-ups to blue chip companies, the highly automated sales model has given them a chance to target the Fortune 500 for growing margins.

Even on a sequential basis, sales are looking bright with Atlassian adding 5,803 from Q2 2019, combined with the revealing fact that over 90% of new customers in Q3 2019 chose one or more of Atlassian’s Cloud products.

Let me roll through some of the highlight deals with the ink still drying on the paper as we speak.

Flagship customers added to the all-star line-up include European online consumer lending company Sun Finance Group, shipping and logistics services supplier Cosco Shipping, retailer Dollar General, automobile manufacturer Isuzu, financial services firm Wedbush Securities, and New Zealand-based technology solutions provider Spark Digital just to name a few.

These companies don’t use Atlassian products in the same way, while it would be difficult to list the thousands of use cases for Atlassian products, examples illustrate the breadth of application and versatility of Atlassian products and demonstrate how the cloud software can expand across teams, departments, customer organizations, and hemispheres.

To offer one example that encapsulates what Atlassian services can actually achieve for burgeoning companies insistent on digitizing is vehicle history provider CARFAX.

When the Delivery Team at CARFAX doubled in just four years, the weaknesses in its work management system reached an inflection point.

As the team grew, so did the demand for a more robust, integrated system and they had been using several types of tools, none of which were in-tune with each other or aligned well with CARFAX’s entrenched processes.

Product managers lacked transparency into portfolio-wide metrics making it impossible for top executives to make guided decisions on major transformative initiatives.

After collaborating with Atlassian solution partner cPrime and standardizing workflow challenges on JIRA and Confluence, CARFAX discovered the optimal way to streamline their toolkit, connect its departments and systems, and reach its goals.

CARFAX teams now operate through JIRA daily, managing backlogs and keeping afloat with projects enterprise-wide.

Confluence has mushroomed into the go-to collaboration tool, and now has almost the same number of users as JIRA at CARFAX.

The broad absorption of Atlassian tools is unlike anything CARFAX has ever experienced before.

CARFAX has been the recipient of double-digit revenue growth and close to 90% customer satisfaction while hoisting the pillars to scale in the future.

Atlassian and its makeover for CARFAX is a crucial reason for the additional engineering efficiency to more regular updates and scalability without interruption for IT, to consistent and real-time analytics for the C-suite.

The software enhancements are a valuable source of enhanced productivity, and CARFAX continues to eagerly grab new product updates from Atlassian to embed into a myriad of automated processes.

When many industries are on the brink of an earnings recession, Atlassian has bucked the trend with Q3 2018 revenues expanding 38% YOY to $309.3 million.

The company is even executing more efficiently by revealing healthier gross margins that increased from 79.8% in Q3 2018 to 82.5% in Q3 2019.

Even though Atlassian guided revenue to around $330 million for next quarter’s earnings, they guided down to 16 cents per share, lower than the 19 cents per share that analysts were estimating.

The expected earnings recession has offered an opportunistic chance for management to guide down, giving shares some breathing room before they march higher again which I believe is inevitable.

Atlassian is a robust enterprise software company in the early stages of hyper-growth with a long runway.

Not every company can enter into monopolies or duopolies in the tech world like Google, but the next best thing is the enterprise software market where analog companies need help juicing up products by automating the back, middle, and front end.

Companies such as Atlassian are at the forefront of this dynamic revolution and recent tech IPOs, such as video conferencing software for business users Zoom (ZM), epitomize where the pockets of growth have nestled in the current American economy.

This year is truly the year of enterprise software so enjoy the ride with Atlassian.

April 23, 2019 - Quote of the Day

Tech Letter

“If you make customers unhappy in the physical world, they might each tell 6 friends. If you make customers unhappy on the Internet, they can each tell 6,000 friends.” – Said Founder and CEO of Amazon Jeff Bezos

April 22, 2019

Tech Letter

Mad Hedge Technology Letter
April 22, 2019
Fiat Lux

Featured Trade:

(HOW TECH IS CHANGING THE ECONOMICS OF BASEBALL),
(MAJOR LEAGUE BASEBALL ISSUE)

How Tech is Changing the Economics of Baseball

Tech Letter

Several experts and even agents lament that baseball’s free agency is broken and in need of an urgent overhaul.

I would argue that baseball is merely rejigging the inefficiencies of a system from a previous broken era – a reversion back to the mean.

Technology has forced teams to evolve to survive and baseball players are divided into winners and losers with most the latter.

The digitization of baseball has given the best free agents epic paydays while feeding scraps to the rest.

Baseball is a business - they are like any firm with annual revenues, expenses, operating costs, and short-term financial goals.

This trend has picked up pace with the recent infusion of Wall Street knowledge into front offices indicating a sea of change in how management views its costs and revenues.

Expensive decisions in baseball and most any professional sport boil down to the contract length and salary of whom they employ including the groundskeeper and these decisions are made from data.

The book Moneyball by Michael Lewis was the first domino to drop and the financial side of baseball is still feeling the after-effects.

The publication became a must-read for anyone associated with professional sports and baseball with its contrarian statistic theories which promote searching a database to take advantage of unique peculiarities.

Pro sports have never looked back with many other sports taking Michael Lewis’s lead and cross-pollinating his theories into hockey, soccer, and most other industries.

Baseball’s free agency has gone through the meat grinder.

Why?

Big Data.

Superstars such as Manny Machado and Bryce Harper are the best young talents rewarded with a yearly salary of $30 to 40 million per year.

Machado was able to score a 10-year, $300 million-dollar contract with a 5-year opt out clause with the San Diego Padres, and Bryce Harper was able to land a $330 million, 13-year contract which averages over $25 million per year with the Philadelphia Phillies.

Remember that baseball contracts, unlike football contracts, are 100% guaranteed whether a player breaks a leg or not, they just need to show up to the games.

If baseball needed an encore, LA Angels capped off the shopping spree by signing baseball prodigy Mike Trout, giving him the most lucrative contract in sporting history, a 12-year, $430 million contract.

It’s no shock that the recipients are around 26-year-old because data proves this is the optimum time to make a big splash and flash the cash.

Older players aren’t so lucky.

The mid-market free agent environment has cratered, a stark difference from the Machado, Harper, and Trout market.

The hoard of data has concluded that aging 30-something baseball players post performances that deteriorate in an accelerating manner therefore are high-risk financial commitments.

Multi-year contracts are a dying breed for players who are over 30.

Veterans who were once easily commanding multi-year contracts, on the back of a famous household name, in the vicinity of $5-10 million no longer possess this type of earning power.

Aging pros in their early and mid-30s have been deemed expendable and replaced by cheaper and younger talent who teams can financially control yet produce similar stats to the aging veterans.

This development originated from teams attempting to mitigate mistakes in giving big contracts to veterans who stop producing as they got older.

Being on the hook for years of dead money has been pain points for MLB owners.

In 2019, MLB teams have never been more profitable stemming from the overall league delivering record profits from licensing advertisement, television contracts, and attendance gates.

Let me remind readers that baseball earned over $10 billion in total revenue in 2018 translating into a rise of 377% since 1992.

The teams certainly have the capacity to pay veterans more, but data suggests that only ponying up for the best and filling out the rest with younger, inexperienced players is the most prudent way to putting together a team.

The average paycheck in 2018 was around $4.1 million, down $1,436 from the 2017 season hinting that data-based decisions are filtering down to the bottom line.

Adam Jones’s case who had years of success with the Baltimore Orioles as an outfielder is a sign of the times.

He grappled with an off-season attracting no offers until the last moment when the Arizona Diamondbacks offered him a 1-year, $3 million contract.

Jones admitted that he was ready to be sat at home on the couch watching his fellow ballplayers on tv if he hadn’t received the last second offer.

Jones is 33, a death sentence in the world of baseball statistics.

Data suggests that his performance will stagnate and become worse as he ages.

One-year contracts are the best he can expect moving forward.

As negotiations approach for the next collective bargaining agreement, veterans and owners are digging their heels in threatening a player strike.

But what these aging veterans don't understand is that this is just the beginning of technology permanently reshaping how sports are managed and how players are valued.

The top 1% of premium talent will continue to accumulate rich premiums to those of mediocre standard.

A massive hollowing out of the baseball middle class will continue to purge the ranks of veterans and give chances to cheap, young upcomers.

The youth have shown to replicate similar statistics of the mediocre veterans but for a fraction of the cost.

Many accuse teams of being anti-competitive, and teams in the league benefit from being a closed off nature spurning relegation and promotion.

Another contentious issue is the pressure to digitize the game because information suggests that baseball is not attracting new or young fans.

The average age of baseball fans is over 50 and creeping older every year.

I blame the slow pace of the game.

Examples are rife with pitchers being able to step off the mound multiple times before pitches, only to face one batter before being subbed out again, forcing viewers to wait for another 5 to 7 minutes before they can watch another pitch.

Content providers must be aware of viewers' shorter attention spans and adjust content models accordingly.

The league wants to implement a pitch clock, quickening the pace of the game, but the measure was rejected by the players in 2017 and 2018.

Players are resistant to new technology in the game, because of the fear it will reduce their value even more.

Umpiring is a pain point with the status quo unable to offer competent judgments on balls and strikes.

Technology offers an in-game on-demand analysis of the ball placement and some umpires are underperforming to the extent they are perverting the course of the game and the result of it.

It’s gotten so bad that some fans suggest the sport is rigged by umpires who attempt to uphold the rules of the game.

Eventually, sports will eliminate referees and only elite players will be able to play into their 30s.

Baseball will look vastly different as a future product, and my guess is that players above 30 will go extinct in 10 years.

BATTING AGAINST THE ALGOS