Apple Results & Guidance a Non-Event; Clear Sailing to iPhone X

Expect Slight Upside In Mar-17 From Easy Comps and Typical Conservative Guidance for Jun-17. Apple reports Mar-17 quarterly results tomorrow, May 2nd. Despite shares at an all time high, investor optimism for an iPhone X super cycle this fall remains high, which should continue to push AAPL’s multiple higher into the fall. There appears to be little risk from the Mar-17 results or Jun-17 guidance that would change iPhone X anticipation. Fast forwarding to the fall, shares are setting up to enter a range-bound period as investors playing the iPhone X trade will likely unwind positions.

If Apple guidance midpoint is 1-3% below our Jun-17 estimates, we will likely maintain our estimates.

Mar-17 & Jun-17 Expectations. We expect Apple’s Mar-17 quarter slightly ahead of Street consensus numbers given the 17pps easier comp, vs the Dec-16 quarter, and the Street is generally looking for similar iPhone growth from Dec-16 to Mar-17.  As for the June quarter guidance, we expect a typically conservative outlook. This is understandable given investors are expecting a step up in iPhone growth from around 7% in Mar-17 to 13-15% in Jun-17. Part of the step up in iPhone Jun-17 growth is due to the 5pps easier comp in the Jun-17 quarter.

On The Call. We will be paying close attention to the following topics:

  • Super Or Typical Cycle? Investors will be tuned into any unlikely commentary from Apple to help answer the question of whether we are entering a super cycle with the iPhone X (reason for accelerated upgrades) or just a modest step up in iPhone growth. We’re not expecting much color from Apple, but are encouraged by our estimates that this fall the 2-year old or older iPhone base should exceed 300m units, a strong base of potential customers to fuel investor expectations of the  unit sales between 235-245m phones in FY18 during the iPhone X cycle.
  • Services Potential.  Apple will continue to be heavy on the services growth message. We expect CEO Tim Cook to reiterate comments from the Dec-16 call that he expects the Services business to double in the next four years, implying annual growth of about 19%. We expect services to grow from 14% of revenue in FY17 to 20% in FY22.
  • AR & Auto Ambitions. Related to AR, Cook has made six public comments in the past 9 months and we expect him to continue to emphasize that Apple will be a winner in AR. It’s been widely reported that one version of the iPhone X will have 3D mapping capabilities.  We see the iPhone as the AR device for the next 5 years. As for automotive, recent news of Apple’s permit to test self-driving cars in California should not have come as much of a surprise given the poorly kept secret of Project Titan. The permit does beg the question of whether Apple is building a car or just building software for a car. Our take Apple is almost certainly exploring how it could build an entire car, but as we learned the hard way with Apple television, exploration does not mean a product comes to market.

What To Expect With The iPhone X. Read our thoughts on iPhone X and the features we expect to advance Apple’s lead in AR-enabled devices.

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.

Google Earnings Reiterates AI, VR, AR Ambitions

Google CEO Sundar Pichai used tonight’s Q1 call to double-down on his “AI-first” mantra.  Several areas were highlighted, where Google will lead and define its mission to organize the world’s information with machine learning.  Beyond AI initiatives to enhance core consumer products like search, mail, maps, and Google Play, increased machine learning investment was highlighted in at least two segments of Google’s ad model.  These include ‘Smart Bidding’ where machines predict in real-time how an ad should perform in front of a particular target and adjust advertiser bids to maximize ROI.  Separately, in Google’s highly profitable app install ad business, namely Universal App Campaigns, machine learning is being used to best promote developer apps across Google properties including Search, YouTube, and the Display Network.

Management also made a couple of callouts on VR.  Google’s VR platform Daydream is seeing more than half its usage consuming video, with YouTube VR being its #1 app by time spent.  At a recent event, we heard from Google that people are using the Daydream headset to “hold the phone” for them as they watch video laying down.  While not an exciting VR use case, we heard that users are spending multiple hours in VR this way, so it is getting users comfortable with the experience.  VR investment near-term still appears focused on mainstream products like Daydream and accompanied VR produced content such as YouTube VR, Google Earth VR, and Tilt Brush.  We suspect Google is also experimenting with advanced VR and AR hardware, although no mention was made on the earnings call.  We continue to believe Google is the best positioned player to provide the AR operating system of the future, and the company’s leadership position in machine learning and AI only reinforces that view.

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.

Facebook Pushes Further Into AR

In an interview with Recode following Facebook’s F8 conference, Mark Zuckerberg laid out his rationale for Facebook’s big bet on augmented reality:

“Think about how many of the things you use [that] don’t actually need to be physical. You want to play a board game? You snap your fingers, and here’s the board game. You want to watch TV? You don’t need a physical hardware TV, you buy a one-dollar app ‘TV’ and put it on the wall.” – Mark Zuckerberg

To push towards this future – and in an attempt to own the underlying technology – Facebook launched its “Camera Effects Platform,” an open platform for developers to build AR-features and lenses for the Facebook in-app camera. Zuckerberg also confirmed to Recode that Facebook is building “AR hardware” and shared his thoughts on the future of AR and VR; among them:

  • There will be demand for separate VR and AR products in the future.
  • The technology doesn’t yet exist to create the AR glasses that industry leaders are envisioning.
  • Building VR products today will help build the AR products of the future.
  • AR will be a bigger business than VR.

Our take: AR will enhance the smartphone, then replace it. It’s consensus that AR will be bigger than VR over at least the next 10 years — and we agree. AR will enhance the smartphone, then replace it in that time frame. But if you look out further than that, perhaps 30+ years, the immersiveness of VR has the potential to be so good that it rivals base reality. This will require advances in both artificial intelligence and neuroscience, not just digital enhancement. If VR can create alternate worlds as rich as the real one, we think the opportunity would surpass anything humans have created to date.

Facebook gets it, and they are investing accordingly. In fact, the biggest players in the space will collectively spend over $51B on R&D in 2017, of which we estimate $4B will be AR-related spend.

From Google’s work on Glass (2013) and Tango (2014) to Microsoft’s investment in Hololens to Apple’s uncharacteristically vocal pursuit of AR as a core technology, the biggest players are determined not to miss out on the next dominant computing platform and the AR technology underneath it. In fact, in our assessment, Facebook lags behind other incumbents including Google, Apple and Microsoft. But they’ve got a foothold in social and, today, AR is expanding through social – the most forward-thinking AR application is Snapchat. Everyone else is following fast and F8 is a clear indicator that Facebook is doubling down on AR in the race to own the OS of the future.

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.

Apple’s Glucose Monitor Better Delivered via AirPods Than the Watch

Media reports suggest Apple is aggressively pursuing the creation of a non-invasive blood glucose monitor. The most obvious device to leverage this monitor may seem to be the Apple Watch; however, as we wrote two weeks ago, we think that, long term, AirPods are a more important product for Apple than the Apple Watch, because biological data available in the ear is much richer than the data available from the wrist. This makes AirPods a better candidate to be Apple’s glucose monitoring solution in the future.

Source: Apple

A recent study on wrist-worn heart rate monitors, including the Apple Watch, suggests that they offer spotty accuracy at best. The study showed that the Polar M7 chest-worn monitor has a 99% correlation coefficient to an electrocardiogram when measuring heart rate, the industry standard.  The Apple Watch had the next highest coefficient at 91%, with the study noting that the accuracy decreased as exercise levels increased. While 91% accuracy may be acceptable for recreational heart rate monitoring, it’s not acceptable for blood glucose monitoring.

In a separate study, scientists tested the use of an ear-based sensor to calculate VO2 max during exercise. The study showed that the ear-based sensor had a 98% correlation coefficient to an electrocardiogram when measuring heart rate, nearly the same as the Polar M7 monitor. We believe that movement of the wrist during activity is a key factor in reducing accurate biological readings, a problem that impacts ear-based wearables significantly less. We also believe that the ear offers the possibility to collect better data, which the aforementioned study seems to confirm, and richer data, because of the semi-internal nature of the ear canal, proximity to the brain, and greater blood flow in the area.

If Apple does use AirPods to monitor glucose via the ear, they wouldn’t be the first company to try it. Integrity Applications sells a product called GlucoTrack, which uses an ear-clip device to monitor ultrasonic, electromagnetic, and thermal data to produce a blood glucose reading. Apple may be able to incorporate similar functionality into AirPods, creating a multifunction device.

Transforming medicine has long been a focus at Apple, particularly under Tim Cook. The company pioneered ResearchKit to drive forward medical research through rich patient data. Apple also created CareKit to enable developers to create better applications that help users manage their health. Developing solutions for a condition like diabetes, which affects millions of people around the world, is a next logical step. We think that step happens at the ear, not the wrist.

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 Miss the Importance of Diminished Reality

Written by guest author Lindsay Boyajian, CMO at Augment 

Pairing augmented reality with diminished reality provides a superior visual experience and could help grow the AR market.

Augmented reality, virtual reality and mixed reality are three realities that exist on the reality-virtuality continuum—and they are probably the three terms you have heard again and again.  However, there is a fourth reality you probably haven’t heard of—diminished reality.

Diminished reality can be thought of as the opposite of augmented reality. Augmented reality (AR) enhances our reality by overlaying digital elements like 3D models on the physical world.  Contrary to that, diminished reality (DR) diminishes parts of the physical world. It removes unwanted objects in our view.
Karen E. Hamilton (CC BY-NC-SA 3.0)

How does diminished reality enhance augmented reality?

Although DR doesn’t lie on the virtuality continuum, it can be used in combination with AR for a greater visual impact.

Let’s take the example of interior design. AR lends itself well to interior design because it allows us to try different pieces of furniture in our homes. Thanks to AR, we can see exactly how a new chair would fit and complement our existing space.

However, often the space we are trying to redesign is already crowded with old furniture. Placing the new chair in AR on top of the old chair doesn’t serve much value. You can’t appreciate it. If you first use DR to hide the old chair from view, then use AR to place the chair in the seemingly empty space, the visual experience is much improved and valuable for the end user.

 

This combination of augmented and diminished reality is referred to as mediated reality. The term mediated reality is attributed to MIT researcher Steven Mann in 1994. Mediated reality alters our perception of reality by adding and removing information through a device such as a headset or smartphone in real time.

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