Apple largest quarterly profit in corporate history

Expectations for Apple's (APPL) Christmas quarter were high but AAPL still blew them away. The introduction of a bigger screen lead to a record 74.5 million units blowing away expectations of 64.9 million with unit sales up 46% on last year. That's 35,000 phones sold for every hour of the past quarter. AAPL is bullish going forward they believe only a small fraction (mid-teens) of the current base of iPhone users have upgraded. The bigger screen attracted the highest number of new customers to the iPhone than any other launch. AAPL now has $177.96 billion in cash and securities.

The only disappointment was the iPad, a new thinner version didn't stop the decline in sales. It seems like the bigger screen iPhone is cannibalising iPad sales and that the replacement cycle for an Ipad is similar to the PC rather than phone. While its not material to profits 20-30% of users who buy the new iPhones have activated Apple pay.

Unlike most electronics the price of iPhones continues to go up bigger screens and more storage means we are paying $687 per phone up from $637 last year. Typically we normally see declines! China iPhone sales doubled during the quarter on a geographic basis sales were up 70%.

Source: Apple 10Q

The watch is coming. AAPL confirmed that their watches will be released in April. They reclassified segment reporting ahead of the launch to make the sale numbers more difficult to calculate. It will be interesting to see what apps and use cases developers come up with.

Source: http://www.apple.com/pr/products/apple-watch/Apple-Watch.html

Jason

http://www.decisiveassetmanagement.com/

Disclosure: Decisive does not have a long position in Apple (AAPL) stock.

The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.

Domino's delivering performance

Domino's Pizza (DPZ) has been one of the best performing restaurant stocks over the last couple of years posting record same store sales and share price performance. DPZ recently held an investor day where the major theme was why their outperformance (see below) can continue.

Source: Domino's Investor Day 2015

The three key reasons for continued out-performance

• Global opportunity
• Re-accelerating US business
• Technology adoption

Their second largest market is India

DPZ is now bigger outside of the US 6,300 out of their 11,250 stores are overseas. They have put together 20 years of consecutive quarterly same store sales a record for an international chain. Their second largest market outside of the US is surprisingly India. DPZ is the largest international foreign food chain in India with twice as many stores as McDonalds. Apparently pizza has plenty in common with local eating habits, they love share plates and food that can be eaten with your hands perfect for pizza. They can also continue to grow domestically as the US pizza industry is very fragmented. Market shares of the pizza majors are still well below that of other industries (see below).

                                                   Source: Domino's Investor Day 2015

The pie is growing and they're getting a larger slice of it
US franchise profitability is at all time highs (see below). This is important as the better the store returns the more units will get built out. DPZ has 11% market share in the US but only 4.5% internationally their edge in technology should help this grow. DPZ's online ordering apps are helping them to gain more share online. Almost a third of pizzas ordered online go to DPZ. This share of the pie still has room to grow as only 20% of purchases are made on the internet and mobile. The great thing about digital is that the customer comes back more often increasing the customer's lifetime value.

                                                   Source: Domino's Investor Day 2015

45% of DPZ's sales are digital. Their global run rate is $4 billion making DPZ one of the largest e-commerce companies. The average digital order internationally is 41%, four markets have digital sales over 50% Australia is one of them. Given DPZ's low market share and its increasing technological edge it looks like they will keep on delivering out performance for both customers and shareholders.

Jason

http://www.decisiveassetmanagement.com/

Disclosure: Decisive has a long position in Domino's Pizza (DPZ) companies mentioned.

The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.

2015 CES overview

We attended the 2015 Consumer Electronics Show (CES) in Vegas. What goes on in Vegas usually stays in Vegas but around CES some information does get out. A few products lived up to their hype while others might take a little longer to catch on. Our key takeaways are below.

• Virtual reality (VR) the Oculus Rift lived up to the hype.

My first VR experience started off with a Samsung Marvel collaboration it was good but not great. It didn't really convince me that VR was the next big thing (their slogan out at Samsung). However the experience at Oculus Rift was at another level. The demand to see the demo was high I was lucky to wait only an hour and a half for what turned out to be a 6 minute experience. They demonstrated their newest VR version Crescent Bay. It converted me into a VR believer. The demo was made up of ten different scenarios. Ranging from meeting friendly aliens to a T-Rex dinosaur which managed to scare me not once but twice and a battlefield. You know it is not real but the effects were real enough to have a physical reaction or response to something that was happening to you.

Their technology is still in the early stages. Oculus have not released a date for the consumer version but are selling developer kits to help ensure there is good content for users. So far they have included  eyes and ear in the virtual world and are currently working on incorporating your hands and feet. Apparently your hands and legs are the first things we all look for when we put on the headset. I know I did. The last demo was the most amazing you are placed into a slow motion firefight its like something out of the matrix. You would find yourself ducking and weaving through explosions in a battleground including an exploding car which sails above you. You know its not real but you just had to duck. It was well worth the experience and got my adrenalin going for the final day of CES.

Gaming is likely to be the first big VR use but there will be many other uses. It will be amazing to see what will be created for the platform as unlike other digital experience you have a physical response to events. The effects are already real with just the eyes and ear if they can get motion (legs and hands) as well as the inner ear it will be scary how real everything will seem. To get a better idea of the experience you can see IGN's Youtube review below.

• 4K (3D TV without those glasses) will give us a good reason to finally upgrade our TV's

4K TV is fantastic. A number of versions could be seen around the show. The depth and quality of the screens were generally amazing. An ultra 4K HD TV has 4 times the number of pixels compared to normal HD quality TVs. Without the requirement of 3D glasses and more reasonable prices it seems like we finally have an excuse to upgrade our TVs.

• Drones are cool but regulation will make adoption will be difficult

There were some great drone demos (see below) but there are plenty of implementation issues. You know there are problems when an innovative conference like CES cannot let drones fly around the complex. Real word problems like insurance and what happens when a drone falls on someone kept the drones in cages. Also while it is in flux currently a pilots license is needed to commercially use drones. No one can be sure how it will end up but the Federal Aviation Authority's argument is that they need to know air traffic rules and the best way to prove that is to have a pilots license.

• 3D printing capability is increasing but its still too expensive for your average household

3D printing has now evolved to the stage where you can have your own personal vending machine. A collaboration between Hershey and 3D systems showed off their chocolate making system. No prices yet but the chocolate cube took around 15 minutes to make. It made watching a boiling kettle seem fast! XYZPrinting also showed off a food printer making pizza. Its set for a release date of late 2015 but it will be around $2,000. You could try out the pizza but unfortunately not the chocolate. Thankfully for the waistline they are still too expensive for the average consumer. Can't wait to see what they cook up next year.

Jason

http://www.decisiveassetmanagement.com/

Disclosure: Decisive has no positions in any companies mentioned.

The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.

Christmas stocks and perks for the kids

Its nearly Christmas and we're all out and about searching for that perfect gift. This year it's a little bit easier shopping for the kids due to the popularity of Disney's Frozen and the continued interest in Star Wars toys. I've always thought that Disney shares are one of the best presents parents can give to kids. It can help them understand shares and investing though at the time they probably won't appreciate it! A great way to get kids involved are with companies that they can understand and perks that they can benefit from. Unfortunately Disney have closed their shareholder theme park discounts but there are some local shares that offer great perks.

Stocks with benefits
Here in Australia Amalgamated Holdings (AHD) provides some of the best discounts. Offering shareholders with at least 500 shares 15% discount at all Rydges, QT and Atura hotels including 25% discount for food and beverage. 10% discounts on lift tickets and clothing at Thredbo and also cheap movie tickets at Event Cinemas, Greater Union and Birch Carroll and Coyle. It also comes with a 5.5% dividend yield which can help you pay for all the entertainment.

For the bigger kids Echo entertainment shareholder benefits might fit the bill. The owner of the Star in Sydney, Jupiters Casino on the Gold Coast and the Treasury casino in Brisbane gives you 10% off accommodation and food. Unfortunately the trend of companies offering benefits has declined, for most companies it is not worth the cost of running the program.

2015 Ford Mustang on my Christmas wishlist for next year

In the US Ford is bucking the trend with the most interesting shareholder discount. While the kids probably appreciate model cars holders of Ford shares can apply for discounted car purchases. Known as the Xplan if you own at least 100 shares for over 6 months you can receive effectively the factory invoice price or 4% higher than what employees pay saving hundreds or thousands of dollars. It's pretty compelling when 100 shares will only set you back $1,570.

Stocks kids can appreciate
Kids always grow out their toys or clothes but a well chosen stock will increase in value and provide them an appreciation (am sure the kids won't realise it at the time) of investing. As mentioned above my favourite is Disney followed by Hasbro. Disney's recent movie hit Frozen is still a top seller a year on. Starting next year the new Star Wars saga will keep the momentum building with Star War toys for a new generation.

Disney shares are a great gift for kids because they are a monopoly on kids entertainment. Last year Disney controlled 80% of the entertainment category with 6 of the top 10 licensed franchises. Number one being Disney Princess, No.2 Star Wars, No.3 Winnie the Pooh, No.4 Cars, no. 6 Mickey, No.8 Toy Story. We can also add Frozen to the top ten character list, its now the highest grossing animated film of all time. The outlook for the studio also looks strong with the Avengers 2 and the first of the new Star Wars saga beginning next year (see below). Disney will also give the kids exposure to the leading sports network ESPN, the main reason why we pay for cable.

Source: Disney Bank of American presentation 2014

In a digital world Hasbro is navigating the physical toy industry a lot better than its main competitor Mattel. Disney has been so impressed with Hasbro that they are transferring the license for Disney princess (Cinderella, Snow White etc) and Frozen dolls from Mattel to Hasbro starting 2016. These licenses will join other Disney licensed properties such as Marvel and Star Wars. Hasbro has its own brands such as GI Joe, My Little Pony, Play Doh, Nerf and Transformers which has benefited from recent movie releases. Hasbro also has the license to Sesame Street. They have outperformed their competitors by getting their characters back on TV. TV shows and movies keep their characters top of mind with brand recognition and give kids stories which they can play to. Hasbro is also outperforming in the emerging markets growing 25% per annum versus industry growth of 12%. You can see their key brands below. Even in a digital world physical toys like Monopoly, Nerf and Play-Doh are priceless still growing years after they were introduced.

Source: Hasbro 2013 investor day

Hopefully you've got some good Christmas present/share ideas. Wishing you all a great Christmas and all the best in the New Year!

Jason

http://www.decisiveassetmanagement.com/

Disclosure: Decisive has a long position in Disney (DIS) stock.

The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.

Starbucks venti growth

Starbucks (SBUX) just held their biannual investor day setting out their goals for the next 5 years. Management reiterated that they are not just in the coffee serving business but in the experience and people serving business. This ambition could be seen a few years ago when they ditched Starbucks Coffee on the logo. SBUX's founder Howard Schultz wants to build a company that endures just like Disney.

Source: Starbucks, logo changes over the years

Their growth plans can be summed up in the slide below. SBUX plans to increase stores from 21,000 to 30,000 by 2019. Growth will also be driven by food and lunch leveraging their La Boulange acquisition. Currently 46% of SBUX's business is in the morning but the rest of the day is where customers spend 85% of their money. The biggest news was SBUX's plan for mobile ordering and delivery.

Source: Starbucks 2014 investor day presentation

Mobile order ahead or a coffee to your desk.
SBUX has 70 million unique US customers per month, 8 million of these are a part of My Starbucks Rewards their loyalty program. Starting in Portland SBUX will offer these customers mobile ordering. Mobile ordering will use geolocation to show users the closest cafe. It's expected to take around 5 minutes for the drinks and food to be ready after placing an order. They are also testing in select markets dedicated green apron delivery services which will be integrated in SBUX's app. Imagine being able to create a standing order of coffee delivered to your desk daily!

This is much more convenient than anything out there for customers who are typically in a rush during the mornings. This should lead to increased frequency of use. While for SBUX this will increase efficiency getting rid of ordering and payment bottlenecks while also increasing use of their reward programs. What Domino's did for pizza delivery SBUX is trying to do the same for coffee.

Source: Starbucks 2014 investor day presentation

Mobile app payments are 15% of US transactions. While this is impressive 33% of tender in stores is prepaid mostly SBUX gift cards. $4 billion was loaded onto prepaid SBUX cards in the past year in the US. Gift card holders are able to convert their gift cards to their app making it a virtual gift card suggesting much more mobile growth. Also these rewards customers tend to spend 3x more than non rewards customers. As customers join their loyalty program SBUX gets more information about their habits and can better tailor marketing messages.

Source: Starbucks 2014 investor day presentation

Not like other retailers
Most retailers are struggling with declining mall traffic as more consumers buy online (see below). Unlike other retailers SBUX is in the fortunate position of selling experiences that can't be found online. (It's hard to buy coffee online from Amazon.)

Source: Starbucks 2014 investor day presentation

SBUX is a company that has become a daily habit for many. In a fast paced world (especially the morning) the addition of mobile orders and delivery of an already addictive product means SBUX will likely keep up its habit as a daily habit for it's customers.

Jason

http://www.decisiveassetmanagement.com/

Disclosure: Decisive has a long position in Starbucks (SBUX) stock.

The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.

Netflix changing HR not just TV

Netflix (NFLX) has changed the way we watch TV. Their on demand TV internet service makes much more sense than traditional TV viewing. Its no surprise that they are also innovating in their own company changing the Human Resources (HR) relationship. Unlike other companies NFLX does not have a fixed amount of vacation days, if you do the work you can holiday as much as you would like. NFLX is bringing both HR and TV to the modern age.

Creative versus industrial firms
A little while ago NFLX released a slideshow talking about their values and culture, largely as a recruiting tool for the company. Its what the founder Reed Hastings wishes he knew when he started his company. It has become NFLX's constitution. You can find the full 124 page presentation at slideshare currently at 9.8 million views. Its a memo for today's businesses as the majority of human resource processes are based around managing industrial firms but not creative firms. A manufacturing company is all about efficiency and not making errors. While in a creative world small errors are okay if you are able innovate quickly and get to the desired result. In a creative firm one really great employee could be worth ten average employees so you can afford to pay up.

As they say below NFLX is run like a team not a family. But unlike a team there are no fixed positions. The numbers of superstars needed is not limited. Great people create growth which attracts more talent which lets them accomplish even more.

Source: Netflix Culture: Freedom & Responsibility

Rewarding performance not effort
At NFLX great work is rewarded even if it required minimal effort. The focus is on output not effort. This focus on performance trickles down to holidays. NFLX does not track hours worked per day so they also do not track vacation time. If you get your work done you can vacation as much as you want though if you want 30 days off in a row you need to get a sign off from HR.

Source: Netflix Culture: Freedom & Responsibility

Flexibility more important than efficiency
NFLX believes that most companies curtail freedom and become bureaucratic as they grow. Processes get introduced as companies become bigger and more complex. It is a preferred outcome to undisciplined and chaotic growth. As companies grow they tend to dilute the talent pool as the bureaucracy drives high performing employees out. The growing size means the focus becomes on being more efficient but at the cost of being less flexible. NFLX's solution is to keep the bar high by growing the amount of high performance employees faster than business complexity. This means attracting great people and giving them the freedom to make a big impact. It also means concentrating the business on a few big products versus small ones so complexity does not increase too fast.

How to get the best team?
By awarding top of the market compensation and giving them freedom to make decisions. NFLX believes that hiring and working with the best is a better perk than free lunches.

Source: Netflix Culture: Freedom & Responsibility

When paying staff NFLX management use the keeper test. They consistently look to pay the amount it would take to keep you if you were leaving. Staff can choose how much of their compensation they receive in shares or cash. No matter how well NFLX is doing they will pay top market prices for the best staff. Just like a sports team NFLX pays their top prices whether they are winning or losing. Unlike Goldmans or other high performance firms NFLX avoids top or bottom rankings. They don't want employees to compete with each other they want all their employees to be in the top 10% relative to their global peers. No annual reviews just regular talk about your performance.

They actually encourage their staff to take a recruiters call, ask them how much and send this number back to HR. Where can I apply!

 Jason

http://www.decisiveassetmanagement.com/

Disclosure: Decisive does not have a position in Netflix (NFLX) stock.

The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.

Streaming into Netflix

Netflix (NFLX) is the world's leading internet television network. Its 50 million customers are able to stream what they want to watch, anytime, anywhere on any internet connected device. It's a much better experience than linear TV as it gives you the power of choice with no advertising. NFLX can recommend shows for you based on what you have watched and you can watch as many episodes of a particular series as you want. There is no need to wait for next Sunday 7:30pm to catch up on your favourite show.

Its here March 2015
NFLX has announced that it is finally coming down under. It charges $8.99 a month in the US but there has been no announcement of the pricing here. NFLX can charge cheaper prices as it cuts out the middle man it doesn't need to pay a cable operator half their revenues. NFLX has a relationship direct with the consumer, there is no need for a commitment users can come and go as they please. It is likely that Australians will get less choice than US viewers as NFLX has to separately license shows for each region. But this should change over time, this year NFLX plans to spend $3 billion on content.

30% of all internet traffic
NFLX is a big success in America with more subscribers than HBO. The picture below is over a year old but the data is still the same NFLX basically takes over the internet during prime time. Traditional TV viewing is dropping because of increasing internet television. Since this chart was released a year ago Youtube has actually dropped to around 13% of usage.

http://www.statista.com/chart/1620/top-10-traffic-hogs/

Originally original
NFLX is all about TV series and movies. It does not stream news, sports or music videos. It is beginning to differentiate itself with exclusive content like HBO that you cannot find elsewhere. NFLX has produced House of Cards, Hemlock Grove and Orange is the New Black which have all been hits. While it did not win any Emmy's 31 nominations is a great start for a company that has just started to produce their own shows. The next big series to be released will be Marco Polo on December 12 a ten part series. Developed by the Weinstein brothers they are talking it up as their Game of Thrones. The series is estimated to have cost $90 million see preview below. To put this spend into context the first Mission Impossible movie cost $80 million.

Getting the best talent
NFLX has an advantage in launching new shows as they don't have limited viewing spots like traditional TV. NFLX is much more flexible with programming and can attract some of the best creative talent because they know NFLX will stick with their show and not pull it after two weeks.
NFLX is also looking to upend the movie release schedule. NFLX has announced a sequel to Crouching Tiger Hidden Dragon and will give subscribers instant access to the movie at the same time its shown at the cinema. It will be released on the same day as it appears in Imax theatres most other movie chains are refusing to show the film.

The power to binge
The great thing about NFLX is choice and many viewers choose to binge watch. Binge watching has been defined as watching 2-6 episodes of one TV series in a sitting. NFLX conducted a survey last year and found that 61% of members binge watch regularly. The majority of NFLX's most popular shows are Breaking Bad, Mad Men and the Walking Dead that are perfect for binge viewing. Starting Jan 1 they will stream the entire series of Friends. There were also rumours that they were in talks for the Seinfeld series, fingers crossed.

Just in case you get too carried away apparently the best way to stop the binge cycle is to watch the first couple of minutes of the next episode. If you can stop yourself early all your problems/concerns will be resolved and you won't be engrossed enough yet in the current episodes issue or drama! The current record for binge watching is 87 hours straight.

Watching the investment
I personally like to invest in companies that I love as a consumer. NFLX is a killer consumer product disrupting the industry but as an investment it is trickier. Their last result was a little concerning it hiked prices by $1 to $8.99 which resulted in new subscriber sign ups which were less than the prior year. This was worrisome as they should still be in the early innings of growth. They have guided to an addressable market of between 60-90 million just in their domestic market the US. This subscriber number is the most important as NFLX has fixed content costs. A new subscriber is more profitable as fixed costs are covered the extra revenue drops to the bottom line. Its a virtuous circle the more subscribers they have the more content they can spend on which creates more subscribers.

Free cash flow was also an issue. Funding new shows is expensive with costs created up front before the benefits come in. NFLX have hinted that free cash flow will suffer as they spend more on original content. I personally think these are short term issues but given the stocks high valuation we will watch the subscriber numbers very closely.

TV or Netflix
NFLX has given users the power of choice. It hasn't even entered Australia yet but it is already bringing benefits to Australian consumers. Forcing Foxtel to finally compete by dropping the price of its basic package in half from $50 to $25. The conversation is no longer which channel to watch but whether to put on TV or NFLX. Traditional TV is great for news or sports but for everything else there's NFLX.

Jason

http://www.decisiveassetmanagement.com/

Disclosure: Decisive does not have a position in Netflix (NFLX) stock.

The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.