iRobot’s Earnings Disappointment Doesn’t Change Long-Term Story

Heading into the Q4 print we were confident iRobot would report better-than-expected revenues and guide 2018 sales above street expectations (see note here), which they did, but we incorrectly judged the magnitude lower EPS could have on the stock. Shares of iRobot finished down 30% due to investors concerns with decelerating revenue growth and lower-than-expected profitability. That said, with the revenue outlook being inline with our expectations and the lower earnings forecast being largely attributed to increased marketing and R&D spend (and not price erosion), we remain believers in the long-term iRobot story. Following iRobot’s results our two key takeaways are 1) the domestic robot market is and will remain one of the fastest growing robotic markets over the next 3 years and 2) iRobot will continue to lead the wave of home robot adoption.

20% Growth Through 2020. In addition to providing 2018 guidance that implies 20% year/year revenue growth, iRobot expects this type of growth to continue through 2020. Although investors view 20% growth as a deceleration over prior years, we view this forecast as in-line to our estimates and higher than most longer-term consensus models. Given Management’s history of providing conservative guidance, we think there is room for these numbers to go higher as we make our way throughout the year. Demand will be driven by increased Roomba and Braava sales from both domestic and international homes.

iRobot Leading Domestic Robot Wave. The company announced they will be rolling out a slate of new products in 2H18, which is expected to account for 25% of total sales. While the company did not give much detail on these new products, we anticipate they will enhance both the Roomba and Braava product portfolios. The company continues to heavily invest in R&D, and we believe the company will soon expand their core presence outside of vacuums and wet-floor products.

Link to model here.

Disclaimer: We actively write about the themes in which we invest: virtual reality, augmented reality, artificial intelligence, and robotics. 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.

Tesla Earnings: Continue to Wait… and Believe

Conclusion. Our confidence in Tesla’s ability to capitalize on the EV and autonomy opportunity remains unchanged. Our perspective that reaching this EV and autonomous future will take longer than most think, but be bigger than most think also remains unchanged.

Musk commented that Tesla will, “Productize the factory,” adding, “anyone could have made that car (Model T), but not anyone could make River Rouge (Model T production line).”

Updating our Model 3 thinking. We are factoring in comments from Tesla’s Q4’17 Update Letter that call for an increase in capex largely related to retooling for the Model 3 ramp. The company added on the earnings call that part of this capex spend will include, “significant investment in our required up front for the next phase of Model 3 production… Way more than 50% (of the capex) is the Model 3.” We believe retooling could cause a temporary step down in production in the fall of 2018, and as a result, are lowering our Model 3 production target to 168,400 from 182,000. Our revised numbers are in line with Street estimates as of yesterday’s close. Our weekly Model 3 production number exiting 2018 remains unchanged at 7,150 vehicles. Importantly, our 2019-2023 Model 3 numbers remain unchanged.

Link to model here.

Autonomy. One new insight from the earnings call was Musk’s commentary into why Tesla’s vision suite (camera, radar, and ultrasonic sensors) should eliminate the need for LiDAR. The dumbed-down version is Musk believes in taking the “hard path” and using a sophisticated neural net to solve passive object identification with cameras instead of using lidar as a “crutch.” In the long run, he believes this path will not only cost less and look better, but will produce a superior system capable of seeing through rain and sleet, and performing in more complex situations. This is important given that if Tesla is successful in using its vision suite instead of LiDAR, every Tesla produced today will be upgradable to full autonomy with a software update, which would catapult the company into the lead position in the race to autonomy.

Disclaimer: We actively write about the themes in which we invest: virtual reality, augmented reality, artificial intelligence, and robotics. 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  • 

Google Stays Focused on AI Theme

AI-First. We start with artificial intelligence, as Sundar has done the last five consecutive quarters. He continues to make it more than apparent that AI is essential to Google’s vision and will be a key component of their products and services. AI topics like Google Assistant, Waymo, AutoML, and AI-first hardware were highlighted on the call, but financial metrics like TAC overshadowed. Here is a look at Sundar’s opening remarks of the last five earnings calls.

  • Dec-17 (today) – “Thanks, Ruth. Our teams are off to a great start in 2018 (omitting 6 lines) Technology is an incredibly dynamic industry. We have been laying a foundation for the next decade as we pivot to an AI first company powering the next generation of Google products like the Google Assistant.”
  • Sept-17 – “Thank you, Ruth. We had another great quarter. (omitting 1 line) Even though we are in the early days of AI, we are already rethinking how to build products around machine learning. It’s a new paradigm compared to mobile first software, and I’m thrilled how Google is leading the way.”
  • Jun-17 – “Thanks, Ruth. We had a phenomenal quarter. Google continues to lead the shift to AI-driven computing.”
  • Mar-17 – “Thanks, Ruth. It’s been a terrific start to the year. (omitting 10 lines) Now, turning first to machine learning and access to information. I’m really happy with how we are transitioning to an AI-first company.”
  • Dec-16 – “Thanks, Ruth. 2016 was a great year for Google and 2017 is shaping up to be even more exciting. (omitting 11 lines) First, machine learning and access to information. As I’ve shared before, computing is moving from a mobile­first to AI­-first with more universal, ambient and intelligent computing that you can interact with naturally, all made smarter by the progress we are making with machine learning.”

Cloud. Google’s cloud business is gaining momentum as the world’s fastest-growing major public cloud provider. It is now a $1B per quarter business, but it still dwarfed by AWS revenue of over $5B per quarter. Sundar says the momentum is coming from their efforts to be enterprise scale ready. “Now we can handle any type of enterprise,” he says. We expect Google’s Cloud business to continue this growth in market share.

Hardware. As the largest contributor to “other revenue,” and with 2000 new HTC engineers, hardware is becoming increasingly important to Google. Hardware shipments “doubled” this quarter which means sales of Google Home and Pixel 2 have been strong. Further, when asked about monetizing the voice platform around Google Home, Sundar said they will remain focused on the user experience rather than monetization for “some time.” This means we can expect an ad-free experience for the foreseeable future. We think Google Home’s superior AI will lead it to steal market share from Alexa in the coming years.

Waymo. Waymo was brought up several times, but details about the recent order for vehicles from Fiat Chrysler and timing on fleet deployment were danced around. Nonetheless, the excitement from Ruth, Sundar, and analysts was palpable. We expect Waymo to be the first to bring a widespread fleet online and will be tuning in to see how early deployments play out in Phoenix.

Buzzword Bingo. Over the same five quarters, we tracked how many times presenters and analysts made comments artificial intelligence by tallying instances of AI jargon (AI, artificial intelligence, machine learning, TensorFlow, natural language processing, etc).  This is evidence of the intensity level at which Google is pursuing AI.

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.