Delivering Deleveraging.
Freddie Mac released its quarterly refinance statistics today. During the middle of the decade, Freddie’s releases were something we monitored to keep tabs on the irresponsible activity among consumers. Cash out refi’s, which were also referred to as Mortgage Equity Withdrawals (MEW), were in many cases a fatal side effect of the housing bubble. Americans used their houses as an ATM, unsuspecting that home prices were setting up to lose over 30% of their value nationwide. While “Cash-out” refi’s (Chart 1) were the rage in 2005-2007, the trend in 2009-2010 is “Cash-in” (Chart 2). The strapped consumer is proactively deleveraging. Freddie Mac described the developments as such, “‘Cash-out’ borrowers, those that increased their loan balance by at least 5 percent, represented 27 percent of all refinance loans; the cash-out shares over the last three quarters were the lowest since the analysis began in 1985. The higher cash-in share in combination with low cash-out refinancing activity brought the net dollars of home equity converted to cash to the lowest level in 10 years.”
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Sprint reported Q2 results that were generally in-line with our estimates but included a post-paid churn rate of 1.85% which was below our estimate of 1.95%. We attached tables that detail Q2 results versus our estimates. The better than expected post-paid churn represents less than 100,000 customers who decided not to churn. We believe this was likely driven by the success of the EVO launch during the quarter.
The better than expected post-paid churn rate offset lower than expected gross additions to deliver post-paid net subscriber losses of 228,000 that was 64,000 better than we expected. The lower than expected gross additions in post-paid and pre-paid delivered $27 million upside to our $1.2 billion wireless EBITDA estimate. Wireline added an additional $12 million of upside to EBITDA on slower declines in revenue.
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Nine months ago we wrote a blog post (click here) entitled, “Wake-Up Call for Media Industry: Farmville and Cafe World Leading Casual Social Gaming Revolution.” Since then Zynga has grown from $130 mm to $207 mm and was featured in the NY Times this past weekend in an article (click here) called “Will Zynga Become the Google for Games” (we have also embedded a Fortune interview of Zynga founder Mark Pincus from late last year explaining the business of social gaming). Meanwhile, Playfish the #2 player was acquired by Electronic Arts in late 2009 for $400 mm (including a $100 mm earnout) and then yesterday the #3 player in social gaming, Playdom was acquired by Disney for $763 mm, including a $200 mm earnout (click here for the press release).
When you think about the traditional major media companies, CBS, Disney, News Corp., Time Warner, Sony, Viacom, the one area they are all deficient in is socially connected media (see our blog from 7/23, click here, about the importance of social media today). While News Corp. tried with Myspace, the site has ended up being far more about content discovery than social connectivity. Read the rest of this entry
Offense through Defense.
When thinking about today’s trading action, the term “summer doldrums” is a fitting description. The S&P 500 spent 75% of the trading day in what was approximately a 50 basis point range. Trading volume remains unimpressive. We suspect the tight trading action is representative of a distribution day in the equity market. As the S&P 500 runs into upside resistance, some investors took the opportunity to sell into the early strength to do some profit taking. The 1120 level which the S&P 500 tested on the open today is important resistance. It was the level where the market ran out of steam during the June rally. It is also just below the level where the flash crash rally stalled. The level was only exceeded by the EU’s announcement of the “Shock and Awe” package a few of days later, which, as we all know, was a selling opportunity. The market running out of gas as it hits resistance should not be viewed as a negative. Taking a breather at the appropriate levels should be expected and is constructive. Currently, the S&P 500 is up 8% month to date, and a little consolidation would be the healthier course. On the positive side, it was impressive that today’s reversal halted after pulling back 1%, and did not become an all out rout in this Jekyll and Hyde market that shifts from no offer to no bid on a dime.
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After watching Charlie Rose interview Pandora’s Tim Westergren earlier this month (click here for the charlierose.com video) and hearing at the Fortune Conference (click here) that Pandora now has 60 million users (without spending a penny on advertising) and is signing up 90,000 new users via mobile devices per day, one cannot help but ponder how much the media landscape is changing. The power of cloud-based storage/streaming, collaborative filtering and social media are fundamentally altering how consumers interact with media.
- Initially Pandora was only available on a computer, then it shifted to mobile devices, then it became enabled as a background activity on mobile devices (multi-tasking) and now it is set to be built right into cars (see Ford’s Youtube video embedded below). As Pandora becomes a convenient in-car option, Pandora will essentially be available whenever/wherever you would normally listen to radio and it no longer has to be the only thing you are doing at a given moment, thanks to multi-tasking.
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Expectations Management.
We have discussed the influences of sentiment and expectations all month, and today provided two excellent examples of expectations imbalances within the markets. The first is FedEx. On June 15th, FedEx shares closed at $83.01. On the morning of June 16th, the company announced earnings and provided initial guidance for 2011 of $4.70 per share below street expectations of $5.07. The stock dropped nearly 6% that day despite a very upbeat conference call by management. A sloppy broad market fueled an additional sell of FedEx shares over the next couple of weeks. As the market bounced so did FedEx and last week the rally continued on good earnings news from competitor UPS. Today, a mere 6 weeks after that initial guidance, FedEx raised 2011 expectations to $4.90 per share based upon Q1 looking 15% better than expectations. FedEx Shares closed today at $83.39, higher than the June 15th close. It is remarkable that the company has managed to bring expectations down by $0.17 and subsequently wind up with a higher share price. For the time being since the revision has been upward, as have those of the competition, the market will likely expect future announcements to go in the same direction. One might be tempted to call this chicanery, but we have seen them do the same exercise in reverse in the past. Regardless, the actions and results merit being mindful of them.
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For the first time Straight Talk and its exclusive Wal-Mart distribution channel is offering two GSM phones for its unlimited pre-paid service which we believe will be operating on AT&T Wireless’ network. Previously Straight Talk only offered CDMA phones which operated on Verizon’s network. We have confirmed with AT&T that they signed a new agreement with TracFone, (the US subsidiary of America Movil and Straight Talk service provider) but AT&T stopped short of confirming whether the new Straight Talk phones would be operating on their networks. However, multiple store representatives at Wal-Mart and Straight Talk were willing to confirm that these phones do operate on AT&T’s network and that they are currently available in stores and ready for shipment on-line. This could be bad news for Verizon, which has been relying on the growth in Straight Talk revenue to offset accelerating declines in their pre-paid business. The expansion by Straight Talk to AT&T could also explain the unlimited pre-paid plan that Verizon launched in the southeast early last week.
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APPLES TO ORANGES.
As is readily apparent, an apples to apples comparison of the European bank stress test to the U.S. bank stress test (SCAP) just over a year ago is a challenging task. The banking systems, the economies, the politics structure and the threats all differ significantly. Recognizing this fact, we realize the best option is simply to identify the similarities and differences. The SCAP was announced during the heart of the post-Lehman financial crisis here in the U.S. Its purpose was to ensure that the U.S. Banking system was solvent for both investors and the American public. The concept was modeled after FDR’s bank holiday during the Depression, which succeeded in restoring the public’s confidence in the banks that were permitted to re-open. In short, this new seal of government approval provided the public with confidence that a re-opened bank would not be shuttered in the ensuing weeks. The SCAP served a nearly identical purpose with similar success and went a step further requiring more than half of the participating firms to raise additional capital for a SCAP buffer well beyond the regulatory standards. In fact, Treasury was sure to point out that “First, the $185 billion accrues to 10 of the 19 firms, meaning 9 of the 19 firms already have capital buffers sufficient to get through the adverse scenario in excess of 6 percent Tier 1 capital and 4 percent Tier 1 Common capital. Second, the vast majority of this $185 billion comes from a shortfall in Tier 1 Common capital in the more adverse scenario, with virtually no shortfall in overall Tier 1 capital.” Essentially, all banks received a passing grade on regulatory capital.
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We have embedded below a recent update to an Espresso presentation (integrated ad agency) and an updated Socialnomics presentation that illustrate the current state of Social Media. Social media is becoming an increasingly important part of marketing and will capture an increasing share of advertising/marketing spend with the lines blurring between brand/content. As you watch these presentations, it is also hard not to step back and realize how little role Google (aside from Youtube) is playing in the evolution of social media. We highlighted earlier versions of these social media presentations in blog posts in January 2010 (click here) and July 2009 (click here).
Our favorite quotes from the the two presentations below include: Read the rest of this entry
While the cable industry has yet to begin reporting Q2 2010 results, the two major RBOCs reported net wireline broadband losses for the quarter of negative 64K (slight gain at Verizon, more than offset by losses at AT&T), implying that even if Qwest adds broadband subs in the quarter, the big three RBOCs will collectively lose broadband subs for the first time in history.
- The three major RBOCs added 331K broadband subs in Q2 ‘09, 139K in Q2 ‘08 and 787K in Q2 ‘07. We estimate loss of 46K (including Q, which is yet to report) - a notable change for the RBOCs in broadband.
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