We Ran HomePod Through the Smart Speaker Gauntlet

Conclusion. Yesterday, we put HomePod through the smart speaker gauntlet which included 782 queries along with comprehensive tests of sound quality and ease of use. Our methodology was comprised of 3 HomePods being tested throughout the day by the Loup Ventures team. Here are four key takeaways.

  • HomePod is hands down the best sounding smart speaker.
  • As a smart speaker, it answered 52.3% of queries correctly compared to recent tests of Google Home at 81%, Alexa at 64%, and Cortana at 57%.
  • The user experience of HomePod is measurably better than its competition (setup, communication style, listening ability).
  • We have added HomePod to our Apple financial model. For CY18, we’re expecting HomePod unit sales of 7 million (12% global smart speaker market share) with a $349 ASP, which adds approximately 1% to revenue and earnings. In CY19, we expect unit sales of 10.9 million, which adds just over 1% to our model. While only factional revenue contribution, we expect HomePod units to grow between 40% and 45% per year over the next 3 years. Link to model here.

Query results. Siri understood 99.4% of queries and answered 52.3% of them correctly. This places HomePod at the bottom of the totem pole in terms of AI assistant performance. Siri is particularly strong in Local (where can I find a good cup of coffee around here?) and Commerce (help me buy some new shoes.) queries, handily beating Alexa and Cortana, but still falling short of Google Home in those areas. Overall, Siri performed above our expectations given the limited scope of HomePod’s music focus.

Adding domains will quickly improve Siri’s score. Some domains like navigation, calendar, email, and calling are simply not supported. These questions were met with, “I can’t ___ on HomePod.” Also, in any case that iPhone-based Siri would bring up Google search results, HomePod would reply, “I can’t get the answer to that on HomePod,” which forces you to use your phone or give up on the question altogether. Removing navigation, calling, email, and calendar-related queries from our question set yields a 67% correct response, a jump from overall of 52.3% correct. This means added support for these domains would bring HomePod performance above that of Alexa (64%) and Cortana (57%), though still shy of Google Home (81%). We know Siri has the ability to correctly answer a whole range of queries that HomePod cannot, evidenced by our note here. Apple’s limiting of HomePod’s domains should change over time, at which point we expect the speaker to be vastly more useful and integrated with your other Apple devices.

Other observations

  • HomePod has superior listening skills to other smart speakers. This is partly due to a noise cancellation feature which allows you, even at a volume where you would have to raise your voice to talk to others in the same room, to use your regular speaking voice with Siri. This was HomePod’s most stellar feature.
  • Wireless setup was super easy. In fact, it was the easiest of any of digital assistant we have used (Alexa, Google Home, Cortana, etc.). You already have a companion app and don’t need to wrestle with wifi networks.
  • Siri’s voice sounds smoother and more human than it does on your iPhone.
  • Her communication is also more human-like. Specifically, after asking a question, she does not repeat the whole thing back to you as is the case with Google Assistant and Alexa, which makes for a subtly smoother process.
  • The tap UI on the touch-sensitive display requires a small amount of instruction, as it is not immediately obvious that you tap to play.pause, double tap for next track, triple tap for previous track, and touch and hold to bring up Siri.
  • HomePod’s packaging is a new level of perfection for Apple. The perfectly fitted box requires you to open it at “reveal” pace, and even the external plastic wrap is pleasing to remove.
  • As a speaker, it sounds incredible – mission accomplished. As a digital assistant, whether it is a direct competitor or not, it is better than what we expected for version 1, but still lags behind Alexa and Google Home.

Survey suggests demand for HomePod similar to Apple Watch. Last week we surveyed 500 people in the U.S. and found 3.3% said they would purchase a HomePod in the next year. Among those surveyed who already own an Apple product, 5.2% planned on buying a HomePod. This is similar to 7% of Apple product owners planned to buy an Apple Watch ahead of its launch in Spring of 2015 (survey was conducted in December of 2014, four months ahead of the Apple Watch launch). While Apple does not disclose Watch unit sales, we estimate in its first 12 months Apple sold 10.2m Watches at an ASP of $475. This compares to our first 12 months of HomePod sales estimate of 7m units with an ASP of $349.

Smart speaker market share. We see Google Home as the long-term smart speaker unit share winner, but Alexa and Apple as the two other key players. In 2018 we expect HomePod will capture 12% of the global smart speaker units, compared to our estimate of Alexa at 52% share, Google Home at 32% and others at 4%. In 2022, we expect HomePod will hold a similar 12% market share (HomePod ASP estimate declines to $149 from $349 today), Google Home at 48% and Alexa at 37%.

Apple’s grander vision around HomePod.  Don’t be fooled by HomePod’s sound quality-focused first step into smart speakers; Apple has a grander vision than delivering a better sounding Echo. While not present in the first version of HomePod (i.e. you can’t even make a phone call with HomePod), we believe Apple’s goal is to make Siri a ubiquitous, ambient presence that connects and controls all your connected devices and services – and to make a leap forward in the transition to voice-first computing.

The way humans interact with computers is changing. Today, we use our keyboards, mice, and touchscreens to interact with computers, but in the future, we’ll simply rely on our voice, gestures, or even our thoughts. Voice is quickly becoming a preferred interface. Apple’s device ecosystem delivers a frictionless experience, which will only get better with the adoption of voice and with the addition of HomePod supported domains (9 supported domains today). Interestingly, Apple has included an A8 chip in its HomePod, the same chip included in an iPhone 6. The A8 chip is much more powerful than the chips competing home assistants run on, which poses the question: what else is Apple planning with the HomePod?

Disclaimer: We actively write about the themes in which we invest: artificial intelligence, robotics, virtual reality, and augmented reality. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.

Key iPhone X Suppliers Provide Robust 2H18 Outlook

Special thanks to Austin Bohlig for his work on this note. 

Two of Apple’s key iPhone X component suppliers, Lumentum (LITE) and AMS AG (AMS), reported strong Dec-17 quarter results and more importantly provided upbeat 2018 outlooks. Both company’s supply key components going into the flood illuminator and dot projector on the face of the iPhone X (see below), which allows for 3D sensing and enables augmented reality applications such as facial recognition. While Apple recently guided for lower-than-expected iPhone sales in the Mar-18 quarter, we believe the robust 2018 guidance and capacity expansion initiatives indicate two things. First, iPhone X demand is healthy, and we continue to expect iPhone X will account for about 25% of total iPhones in FY18. Second, 3D sensing, as well as augmented reality applications, will remain a core feature and be added into new iPhone SKUs to be introduced in Fall 2018.

Lumentum – Lumentum is the world’s leading vertical-cavity-surface-emitting laser (VCSEL), which is the key component going into the flood illuminator and dot projector. The company reported 3D Sensing revenues of ~$200M, which exceeded the company’s expectation and is up from $40M in the Sep-17 quarter. Due to seasonality, the company expects 3D sensing revenues to be down $60 – 65M in the Mar-18 and Jun-18 quarters. However, the company continues to see strong order flow and aggressively adds VCSEL capacity. But most importantly, Management indicated 3D Sensing volume should “more than double” in 2H18 over 2H17, which we believe a high percentage of these orders will be going into current and new Apple SKUs this fall.

AMS AG – AMS is an Austria-based semiconductor that provides additional optical components for the iPhone X that enables 3D sensing applications. While the company positively preannounced last Monday, they waited to issue guidance until they announced earnings this morning.  In-line with Lumentums comments, AMS foresees a very strong second half 2018, based on currently available forecasts, with substantial sequential revenue growth rates in the second half year, similar to 2017. AMS anticipates high volume ramps in its consumer business to drive this strong expected second half development. AMS also decided to accelerate new internal production capacity for VCSEL laser products in the second half 2018 and beyond. Lastly, AMS increased their 2016 – 2019 revenue outlook to 60%+ CAGR over this time period, which bodes well for the future for AR.

What this means for Apple. iPhone X demand is healthy, and we continue to expect iPhone X will account for 25% of total iPhones sold in FY18. Given Lumentum and AMS strong 2018 outlook, we believe 3D sensing will remain a key feature in iPhone SKUs, as well as augmented reality (AR) applications. However, both companies are beginning to work with more Android related customers, and it is not 100% clear what percentage of these sales are going to Apple. Importantly, both Management’s team’s comments around contributions from new wins, we believe the majority of these sales will continue to go Apple.

Disclaimer: We actively write about the themes in which we invest: artificial intelligence, robotics, virtual reality, and augmented reality. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.

Don’t Overthink AAPL: Growing Device Base & Increasing Revenue Per Device

Growing Device Base & Increasing Revenue Per Device. We attribute the after-market reversal in shares of AAPL to investors getting a handle during the call on Apple’s long-term opportunity. Tim Cook went out of his way to reinforce Apple’s massive and growing active device base. To summarize: 1.3B active devices including 240M Services subscribers. Couple this with the iPhone ASP increase of 15% y/y and the Apple story remains very compelling.

Updated Model. We’ve updated our Apple model, available here.

Was 2 New iPhones 1 Too Many? Apple stumbled in it’s most recent effort to expand the iPhone product line with 2 new models in 2017 (iPhone 8 and iPhone X), one potential cause of the iPhone unit miss. Apple sold 77.3M iPhones, below Street estimates at 80M. So, we were wrong; Apple didn’t nail the 2017 iPhone launches. We think it was partly due to the more complex buying decision between iPhone 8 and iPhone X and partly due to the iPhone X’s limited availability in the quarter. However, iPhone X has been the top-selling iPhone every week since it launched, which drove iPhone ASPs up 15% y/y to $796 vs. the Street at $756. Herein lies Apple’s long-term opportunity: a growing active device base coupled with increasing revenue per device.

Herein lies Apple’s long-term opportunity: a growing active device base coupled with increasing revenue per device.

ASPs are rising and Services revenue growth continues (up 18% y/y). Apple remains on pace to double its 2016 Services revenue by 2020. More importantly, however, Services revenue is an important part of increasing revenue per device. Net-net, we think the iPhone unit miss is more than offset by the ASP and Services story.

Key Data Points + Our Take:

  • Apple has 1.3B active devices, up 30% in 2 years. This is higher than the 1.2B active devices most thought.
  • Apple has 240M subscribers across their Services offerings, up 58% y/y and up by 30M subs in the past month. Apple clearly wanted to reinforce its massive, growing, and loyal base of users.
  • iPhone ASP was $796 in Dec-17 vs. the Street at $756 and vs. $695 y/y. This is a material positive as we consider the value per Apple user.
  • The stock treaded water after-market. Reaction tonight is a win for AAPL shares. Keep in mind AAPL is 7% off its all-time high and the company just guided well below expectations. Investors are on-board with Cook’s message that this is about the installed base and Services subscribers. Investors seem to be taking over from traders who had owned AAPL for the iPhone X cycle.
  • We estimate that Apple sold 8.4M Apple Watches in the Dec-17 quarter, up 10% y/y.

Disclaimer: We actively write about the themes in which we invest: artificial intelligence, robotics, virtual reality, and augmented reality. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.

Posted in Apple  • 

Apple Preview; All Is Well with iPhone

  • Despite growing investor concern, we remain comfortable that iPhone X had a favorable start in Dec-17 and the momentum will continue into Mar-18.
  • We believe iPhone X reached the important global supply-demand equilibrium in mid-January, suggesting a small amount of Dec-17 iPhone X demand spilled over into Mar-18.
  • iPhone ASP’s will be up yy in Dec-17, but the real growth in ASP’s starts in Mar-18.
  • While important, Services take a back seat to iPhone this quarter.
  • The threat of multiple compression as the risk to AAPL shares when investors shift their focus to FY19 revenue growth expectations of 3%, down from 19% in FY18.

Three key topics on the report. Apple reports Dec-17 results on February 1st. The three key topics in order of importance:

Other less important topics.

Disclaimer: We actively write about the themes in which we invest: artificial intelligence, robotics, virtual reality, and augmented reality. From time to time, we will write about companies that are in our portfolio.  Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.

Posted in Apple  • 

Apple is Flush With Cash, But Don’t Expect Big M&A

Don’t expect any big M&A. Everyone is asking who Apple will acquire. The answer is: nobody. At least nobody big ($5B+).

  • Apple announced they’re paying $38B in repatriation taxes, which implies they’re bringing $215B back to the U.S.
  • If there was no tax holiday Apple would have paid about $80B in repatriation taxes, compared to the $38B they actually are paying.
  • Apple also announced $30B in capex investment over the next 5 years, including a new Apple campus for technical support.
  • We don’t expect this infusion of U.S. cash to change Apple’s capital allocation strategy and believe share buybacks will be the primary use of funds.
  • We don’t expect any big M&A deals above $5B, but see the company continuing to do tuck-in deals and invest in their supply chain.
  • We believe 80% of Apple’s motivation related to today’s news is for economic reasons, 20% for political reasons, and both are good for the company long-term.

Potential uses of cash, by order of significance.

1. Returning capital back to AAPL investors. AAPL will increase its buyback over the next 3 years by about $70B. We also believe Apple will announce a one time cash dividend of $12B. Lastly, we anticipate a 15% annual dividend increase that will cost Apple about $10B over a 4 year period. We expect these three to be announced when Apple reports their Mar-18 quarter sometime in April. We believe most of this is already priced into AAPL’s stock price.

2. U.S. capital expenditures. As mentioned, Apple also announced $30B in capex investment over the next 5 years, including a new Apple campus for technical support. Separately, Apple increased its commitment to its Advanced Manufacturing Fund to $5B from $1B.

3. Invest in component suppliers. As they’ve done in the recent past (Corning, Finisar), Apple will continue to invest in key component suppliers, likely optics, displays, or processors, to lock out competitors and expand their lead.

4. Tuck-in acquisitions. This includes hardware, apps, and services. Hardware: Magic Leap’s AR hardware is a logical acquisition on the heels of Apple’s recent (summer of 2017) purchase of SensoMotoric. Magic Leap’s last private round was valued at $5.5B, suggesting this deal is slightly more than Apple typically would pay. Services: Apple Watch and its ecosystem would be bolstered by Peloton. This reminds us of Beats – hardware that adds to the lineup and, most importantly, a services play that would also expand the Watch/fitness data platform. Apps: We could see similar deals to the Lattice Data acquisition related to apps and AI.

5. Longshot: Auto. For starters, they should buy Tesla. But it will never happen because Musk won’t sell. Clearly, Apple believes in autonomy, through what appears to be a smart-shuttle approach. Since the shuttle initiative is early, it’s a high-probability M&A area for Apple.

6. Employee bonuses. Bloomberg is reporting that Apple will be giving to $2500 bonuses in restricted stock to most employees. We estimate about 100,000 employees will benefit, which implies a $250m liability that will vest likely in 2 years.

Disclaimer: We actively write about the themes in which we invest: artificial intelligence, robotics, virtual reality, and augmented reality. From time to time, we will write about companies that are in our portfolio.  Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.