Extended commentary by Michael Hewson, Chief Market Analyst, CMC Markets UK
Ahead of Apple’s Q3 results and Microsoft’s Q4 earnings announcement,Michael Hewson analyses the tech market and what to expect from the tech rivals.
Within the report Michael discusses:
- What investors will be looking for in Apple’s Q3 results after a successful Q2
- How cheaper devices in the Chinese markets could cast a spell for tech giants
- What we could see from Apple in the future, including an iPhone 6 made of sapphire glass, an update on iWatch or a revamp to AppleTV
- The expectations of Microsoft since their newly appointed Satya Nadella took over as CEO
- How Microsoft’s latest Q4 earnings announcement should give an update to Nadella’s new vision of a “one Windows” model for the company.
The last time Apple shares were trading at these sorts of levels (below $100) was all the way back in 2009. So last month’s stock consolidation was certainly welcome news for those investors who found themselves priced out from buying the stock in the rally that we saw from 2009, to when we peaked in 2012 at $705.
Since those peaks, we have seen a sharp decline in its share price, after the botched Apple Maps launch, which saw the shares find a base in 2013. When the recent stock consolidation was announced in April this year, the shares enjoyed a sharp rise after earnings beat expectations as the sales of the new iPhone 5 started to gain traction.
The highlights in Q2 were 43.7m iPhones sold, 16.3m iPads and 4.1m Macs, with quarterly revenue at $45.6bn and quarterly net profit of $10.2bn. With Q3 earnings due on the 22nd July, attention will inevitably be focussed on the these headline numbers once again, particularly given the very disappointing update earlier this month from its big rival Samsung.
Samsung announced earlier this month that it expected to see its third consecutive decline in quarterly profit, as it struggles to compete with cheaper devices in the Chinese market, losing market share in the process. The company did cite the strength of the Korean won as a contributory factor, but there does appear to be a significant impact to its market share, given that it appears to have a large amount of unsold inventory in Europe and China.
Samsung’s problems could also spell bad news for Apple in the wake of its recent tie up with China Mobile to sell iPhones, which did raise expectations of a significant increase in revenue growth in the rest of 2014, due to the sheer size of China Mobile’s user base. These concerns help explain the guidance for Q3, which estimates a fall in revenues to between $36bn and $38bn, and a fall in net profits to $7.4bn.
In terms of share price performance, the most recent quarter has been much better than the previous one, but be under no illusions that the forthcoming quarter will be just as much about what has happened in the last three months, but also about what the company has in its pipeline, after the announcement in May of the “best product pipeline in 25 years” by senior Apple VP Eddy Cue.
Talk about ramping up expectations, particularly with the share price closing in on its adjusted all-time highs of $100.72. A failure to deliver on these expectations could well see the share price drop sharply, particularly if details of the pipeline fail to emerge or excite.
Rumours have abounded since then of an iPhone 6, made of sapphire glass with a bigger screen to compete with the latest Samsung Galaxy phone. Any redesign of the iPad is likely to be minimal given recent upgrades; however there may also be some tweaks with iOS8. We could get some news about progress on wearable technology, like an iWatch, while AppleTV is also well overdue some form of revamp.
Recent high profile acquisitions have also seen Apple in the spotlight, particularly the purchase of Beats for $3bn, which still needs to be given the green light by the European Commission, as it looks to improve its streaming services.
It’s been nearly six months since new CEO Satya Nadella got his feet under the desk at Microsoft and this week’s latest trading update will be akin to the new boy’s first school report at the end of the first term.
Nadella’s elevation to CEO has been part of a long term strategy to reposition the software giant away from its old legacy markets and into cloud computing.
In the second quarter just after Christmas, the company beat expectations through increased Xbox One and Office sales, but its Surface tablet device has struggled to gain traction, as users struggle to get to grips with the new look of Windows 8.
As we come to the end of Microsoft’s fiscal year, the latest Q4 earnings announcement should give us some early indications of how far along we are with Nadella’s new vision of a “one Windows” model for the company.
Nadella’s determination to implement a new cloud based computing model has seen Microsoft really push its new one drive cloud storage service , with a free 15GB for everyone with a One Account, while at the same giving 1TB for Microsoft Office 365 users.
With the launch of the new iPad apps for Word, Excel and Powerpoint in the iTunes store there appears to be have been a realisation that a lot of Microsoft customers also use an Apple device and being precious about supporting Apple devices could cost Microsoft additional revenue, particularly in a world where Microsoft is no longer the only game in town.
Office 365 accounts for over 60% of Microsoft operating profit and anything that can make this much more sticky as well as potentially increase it needs to be done.
While the new apps are free to download you need an Office 365 subscription to get the most out of them and this latest update should give us some initial indications as to how successful the initial roll-out of these new apps have been.
We’ll also find out whether or not the decision to end support for Windows XP on April 8th has seen a pick-up in new PC sales this quarter, or whether this forced decision has seen people move over to Apple Macs.
The company has also taken the fight to Sony in the gaming console market by cutting the price of its Xbox One console earlier this year in an attempt to drive up its market share, given that the PS4 is estimated to be outselling it by around two to one.
As part of this new strategy Microsoft also included a new software bundle including the massively hyped TitanFall and if early reviews are any guide it appears to have had rather mixed reviews.
Pandemic risks eclipse treasury priorities as businesses diversify investments to mitigate impact
The Covid-19 pandemic has shunted aside existing challenges to sit atop treasurers’ priority lists, according to “The resilient treasury: Optimising strategy in the face of covid-19”, a survey run by the Economist Intelligence Unit (EIU) and sponsored by Deutsche Bank.
The results show that treasurers are looking to diversify their investments in a bid to mitigate the pandemic impacts, including heightened liquidity, foreign-exchange and interest-rate risk. As many as 55% plan to increase investments in long-term instruments, with 48% increasing investments in bank deposits, another 48% in local investment products, and 47% in money-market funds.
“The Covid-19 pandemic has drastically altered business plans in 2020. It has placed a certain level of strain on treasury processes, but the challenge it presents has been managed by traditional treasury skills. It is clear that pandemic risk will be on the treasury checklist for years to come, but it is one of many risks the department faces and will continue to manage,” says Melanie Noronha, the EIU editor of the report.
Despite Covid-19 looming large, other challenges wait in the wings. Notably, the replacement of the London Interbank Offered Rate was identified by 38% of respondents as the main challenge of their function.
Technology, meanwhile, continues to be a pressing issue, with treasury teams becoming increasingly reliant on IT solutions. Here, data quality is rising up the list of concerns. Already highlighted as very or somewhat concerning in 2019 by 69% of respondents, the figure rose to 78% in 2020. Acquiring the necessary skill sets to realise the full benefits of this data and technology is also a continuing priority – with some progress registered from last year. In 2020, 30% of respondents say they have all the skills they need to manage technological change, up from 22% in 2018.
“Treasury’s focus on technology is not only helping teams operate more efficiently in a remote-working environment, it has long played – and continues to play – a key role in realising their long-term priorities,” notes Ole Matthiessen, Head of Cash Management, Corporate Bank, Deutsche Bank. The survey shows that
Release 1 | 2 managing relationships with banks and suppliers (highlighted by 32% of respondents) and collaborating with other functions of the business (also 32%) remain top of the agenda – and seamless digital systems will help give treasurers the bandwidth and insight to be more effective partners for both internal and external stakeholders.
Based on a global survey of 300 treasury executives, conducted between April and May, the survey explores stakeholders’ attitudes among corporate treasurers towards the drivers of strategic change in the treasury function – from the pandemic through to regulation and technology – and their priorities for the next five years.
Digital collaboration: Shaping the Future of Finance
By Ryan Lester, Senior Director of Customer Experience Technologies at LogMeIn
With heightened economic uncertainty and increased customer expectation becoming the norm in the banking industry, it is understandable that the sector is struggling to keep afloat. Due to its precarious nature, banking institutions are trying their best to ensure they remain relevant in the competitive landscape and guarantee that their customers continue to be a priority.
When it comes to the first half of this year, the pandemic has shown how easy it is for industries to fail. Customers and companies alike had to get used to the new normal, as physical locations started to close. The banking industry felt this first hand, as banks were made to restructure how their business ran, with restricted opening hours and a wider push to motivate people to use online banking.
While some had already embraced digital options prior to the pandemic, this proved to be a stark contrast to the elderly population, who frequently visited branches to access their finances. Moving forward, banks have to adopt new methods to ensure customers get the most out of our their accounts, without their experience suffering.
Heightened Customer Expectations
When the pandemic reached its peak, people were encouraged to use online banking, as telephone contact was under strain with long waiting times and pressure mounting on contact centre agents. According to Fidelity National Information Services (FIS), which works with 50 of the world’s largest banks, there was a 200% jump in new mobile banking registrations in early April, while mobile banking traffic rose 85%.
With branches remaining closed, customers were continuously being urged to limit the amount of calls they made to the most urgent cases and consider whether they could solve their answers through mobile online banking or checking the company website. Although already being adopted in pockets of the industry, this was a real catalyst that spurred banks to up their game on digital channels and with self-service tools.
Banks are challenged with precariously balancing customer needs with the cost of personalised support. With the demographic of customers changing over the last few years, customers are becoming increasingly younger and more comfortable with technology. Influenced by the “Amazon Effect”, their expectations have raised to an all-time high, placing record strain on the sector
Customer experience isn’t just about support anymore, it’s about serving your customer at every point in the journey. Companies have an opportunity to elevate the experience they provide by moving beyond one-and-done interactions to create continuous engagements with their customers. It is starting to become a primary competitive differentiator in the market and one that doesn’t have a lot of variation. Deploying AI chatbot technology will be able to strategically help banks improve customer experience and raise the level of support that agents provide.
Digital collaboration: Working around the Clock
The benefits of adopting digital channels and self-service tools are second to none. By implementing chatbots, fuelled by conversational AI, banks will be able to help serve a wide range of customer queries and ensure they are protected from fraud and scams.
Conversational AI is exactly what it sounds like: a computer programme that engages in a conversation with a human. When it comes to service delivery, conversational AI can be deployed across multiple channels to engage with customers in ways that effectively address evolving customer needs. At a time defined by COVID-19, self-service tools such a conversational chatbots can work around the clock to solve customer queries in a concise and timely way. Of course, self-service tools won’t completely replace human agents in the banking industry, but they will help companies re-distribute customer traffic and workflows in ways that enhance customer experience. Self-service tools fuelled by conversational AI can also improve employee experience because service employees can handle fewer, but higher-level service tasks that chatbots might escalate to them.
Adopting new tools to help facilitate consistent and concise answers and help maintain customer experience is on the forefront of many industry minds. Banks such as the Natwest Group have seen this first-hand and are testament to the benefits that a good digital experience can provide. Simon Johnson, Capability Consultant, Digital at NatWest Group highlights NatWest’s use of digital tools during lockdown, “Over the last few months, we’ve learnt how to use digital tools to help our employees remotely. From a banking perspective, there have been a lot of changes including base rates, waive fees and the best ways of contacting our vulnerable customers, ensuring we keep them protected from frauds and scams.
“By introducing our Bold360 chatbot interface, Ella, we’ve been able to get relevant information out quickly, apply the best practice and ensure that our customer journeys are being developed correctly. Due to the volume of questions, some of our customers were finding themselves waiting longer than usual. So digital channels become essential to helping reduce the wait time. Using Bold360, we were able to mitigate issues and answer questions in a more timely way through our chatbot.
“Moving forward, as we open more digital services, we are analysing our data to see if customer will return back to their usual way of banking, now that they’ve seen what a good digital experience can provide. Either way, with Ella, we are ready.”
Chatbots and Humans: The Best Option for Customer Service
Over the last year, banking institutions have recognised the power that digital collaboration can have to their success. Delivering exceptional customer service and support is key for any business wanting to stay competitive in today’s market and banks are especially challenged with precariously balancing customer needs with the cost of personalised support. Leveraging the right technology, such as AI-powered chatbots, will enable the banking industry to provide better support and a more robust customer experience in the long term. Other institutions must follow suit, or risk becoming obsolete.
A sleeping digital giant wakes? 4 key trends accelerating payments transformation in the US
By Lauren Jones, International Payments Ambassador, Icon Solutions
The US payments industry is undoubtedly ripe for change. Before the unprecedented shock of COVID-19, digitization and payments transformation initiatives had been organic, piecemeal and predominately the preserve of the largest banks.
Now, increasing pressure means that financial institutions of all sizes are working to define a digital strategy to unlock new opportunities, drive business value, and stay competitive. But beyond the immediate impact of COVID, what underlying trends are accelerating digitization in the US?
- Real-time payments – the stimulus for change
Real-time payments have been met with a degree of caution by US financial institutions. Risking traditional profit generators in return for potential revenues down the line is a gamble many have not been willing to take. But immediate payments are coming to the US whether banks like it or not.
Major payments infrastructure providers, including NACHA and The Clearing House (TCH), have moved to encourage immediate payment adoption in recent years. But the Fed, frustrated with a slow rate of progress, has announced that it is pressing ahead with the implementation of its FedNow system (despite significant industry objection). Although the Fed’s true intentions are open to interpretation and this may just be a play to accelerate private initiatives, it is a clear signal that they mean business.
This means holdouts risk their own ‘Kodak’ moment if they miss the huge opportunities in front of them by fixating on traditional revenue streams. Banks are in a position to support innovation across entire industries such as healthcare, which could be released from the constraints of paper-based bureaucracy and slow, expensive transactions.
Another opportunity that can be unlocked via instant payments is ISO 20022 (used in the TCH RTP system). It is the future of payments messaging standards and can greatly enhance various payments processes through increased data-carrying capabilities. More importantly given the current climate, citizens reliant on federal or state support can benefit from RTPs combined with additional data to immediately access emergency funds.
- The kids are growing up
The US is getting older. Consumers who were 10 when the iPhone first launched are now 23. This means we are seeing a ramp-up of digitally native Gen Z consumers (roughly those born between 1995 and 2010) accessing banking services.
Demographics are an inexact science and not perfect predictors (there are technophobe college students and 100-year-old Instagram influencers), but we can detect noticeable trends.
Younger customers don’t usually choose a bank because there is an ATM in their neighbourhood, a slightly better interest rate or an advert in the newspaper. Rather, a strong digital presence, personalised tools, rewards and experiences, and the trusted recommendations of friends and family, will have a more significant impact on customer acquisition.
Banks must look at the effect this will have on their longer-term digitalization strategy and be able to segment what this emerging customer base might want and how they will interact in years to come.
- Checkmate? Evolving corporate requirements
Corporate treasurers are people and their experience of seamless, immediate payments in their personal lives shapes expectations in the workplace. Although check usage for business-to-business (B2B) transactions is still the norm in the US and barriers remain, corporates are increasingly demanding the ability to transact in a real-time, omnichannel environment, 24×7.
The benefits are clear. Corporate treasurers stand to enjoy enhanced liquidity management and transparency, greater control over payments and enhanced data for reconciliation purposes. And for consumers, alternative digital payment options such as buy now pay later promote choice and flexibility.
- Increasing competition
A significant consequence of emerging consumer and business demand for digital offerings is the increase in competition from fintechs, technology giants and other third-parties. Traditionally, incumbent banks have enjoyed the advantage of consumer trust to offset more limited innovation. But as consumers become more comfortable entrusting their financial transactions to non-banks, banks must differentiate and digitize to remain competitive.
Data is where the technology giants excel, and their ability to personalise experiences and emotionally connect with their users is unprecedented. Banks need to learn from the positive aspects of this model to better understand their users and deliver meaningful, useful products and services.
For data to become the cornerstone of a banks’ customer relationship and take services to the next level, breaking the channel silos and extracting value from a comprehensive dataset will be decisive. But with only 18% of banks reporting that they are in the process of shifting from a transactional revenue model to a data-driven revenue model, this work has some way to go.
Taking customer propositions to the next level
Customers now expect services that work for them, not their banks. All banks, no matter the footprint, need to move quickly to offer a broad digital service platform that adds value to both the customer and the bank.
By defining a robust payments transformation strategy, banks of all sizes can remain fiercely competitive by rapidly lowering costs, unlocking revenues and promoting innovation
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