Daily Tech Snippet: Tuesday January 27

• Microsoft Q4 earnings: revenue $26.5B, +8% Y/Y, profit $5.86B, shares fell 3% on earnings miss: (more coverage here, here and here): Microsoft reported profit of $5.86 billion, or 71 cents per share for the latest quarter, compared with $6.56 billion, or 78 cents per share, in the year-ago quarter. Sales rose 8 percent to $26.47 billion, largely due to the acquisition of Nokia's phone handset business last year. Analysts had expected revenue of $26.3 billion and earnings of 71 cents per share, on average, including some restructuring costs. Shares of the world's largest software company, which have surged to 14 year highs in the past few months, fell 3 percent in after-hours trading, to $45.63. The company ended the quarter with $90.25 billion in cash and equivalents. According to Microsoft, its commercial cloud revenue grew 114 percent compared to the year-ago period. In the sequentially preceding quarter, the company noted a 128 percent rise. It ended the current quarter on a $5.5 billion run rate.

• Long overshadowed by its rival Alibaba, JD has emerged as China’s other online goliath by carving out its own distinct identity: While Alibaba’s marketplace serves as a platform to connect buyers and sellers, JD buys goods from manufacturers and distributors and holds the inventory in its own warehouses, in a model that echoes Amazon’s. It then arranges for quick delivery of virtually everything from television sets and refrigerators to socks and T-shirts, using motorbikes that weave in and out of traffic in some of the country’s biggest cities. Like Amazon, JD has invested heavily in infrastructure, pumping more than $1.5 billion into building and leasing warehouses and order-fulfillment centers around China. But JD has gone even further, venturing into home delivery with its own fleet of trucks and more than 20,000 couriers, all in the hope of capturing what is projected to be a $1 trillion Chinese e-commerce market by 2020. JD, which is publicly traded in the United States, is now China’s biggest direct-sales retailer, with 46 million active users and an estimated $20 billion in revenue last year. “This isn’t a business model for everyone, but they were smart to build it,” said Elinor Leung, a Hong Kong-based Internet analyst at CLSA, an investment bank. “Now, their traffic is exploding.” And yet this costly approach to building an online retailer has worried some analysts, who say that JD could be weighed down by its physical assets and mounting debt. Several analysts say the company won’t turn a profit before 2017. Competitors like Jack Ma, chairman of Alibaba, have even disparaged the company’s business model, calling it tragically flawed. “It’s not that we are better,” Mr. Ma said in a recently published interview. “It’s an issue of direction. So, I tell my people: Definitely do not get involved with JD.com. Don’t come blaming us if you die one day.” He later apologized for his comments. Executives at JD, which is based in Beijing, insist they are building a company that will eventually have a commanding advantage in e-commerce, with strong customer service, speedy delivery and assurances that the products it ships are authentic, not counterfeit. Among the biggest challenges now, they say, is keeping up with an enormous volume of online orders, which have doubled in each of the last three years. “If we wanted, we could be profitable right now,” said Shen Haoyu, chief executive of JD Mall, the company’s biggest division. “But our immediate goal is to grow our customer base.” the company boasts seven fulfillment centers and 118 warehouses in 39 cities. There are also 1,045 smaller pickup centers in about 500 cities. And since 2010, the company has pledged that most online orders placed before 11 at night will be delivered by 3 p.m. the next day. Morgan Stanley calls JD’s business model a combination of Amazon and UPS; other analysts say the company is beginning to look like Walmart, steeped in logistics and infrastructure and backed by a website.

• Verizon’s mobile ‘supercookies’ show how telcos are monetizing user data: Verizon is now at the forefront of telecommunications companies selling intelligence about their customers to advertisers. AT&T experimented last year with a similar ad-targeting program, which involved inserting a unique numeric code into a subscriber’s web requests. But after scrutiny in the news media, AT&T said it was halting its program, at least until it came up with a better approach. The ad-targeting experiments by Verizon and AT&T are striking examples of the data-mining opportunities open to phone carriers now that they have become the nexus of the information universe, providing a connection to the Internet for people anywhere they go, at any time. Verizon’s marketing efforts are part of a high-frequency digital ad trading system called real-time bidding, in which many kinds of players track and analyze users’ online activities to identify the characteristics of those who would be most receptive to certain ads. A Verizon service called Relevant Mobile Advertising, for instance, combines details obtained from information resellers like Acxiom and Experian with the wireless carrier’s own data to classify its mobile subscribers by gender, income, interests or other criteria; the company allows its subscribers to opt out of receiving ads customized through this program. Another service, called Verizon Selects — which consumers can opt in to in exchange for reward points — segments subscribers based on their web browsing and use of apps. Verizon says its customer categorization programs offer an advantage to advertisers because the company has a direct relationship with subscribers and it can understand their general location based on the places from which they make calls or send texts. The services use a unique alphanumeric code for each subscriber, rather than real names or contact information, to group them into ad clusters. Mr. Atreya, the Verizon director, says the company changes these customer codes every few days.

• Microsoft buys R startup Revolution Analytics to boost the data analytics offering of its cloud suite: Microsoft bought Revolution Analytics which makes tools to sift through data, to help the company build up its cloud-services business. Terms weren’t disclosed. The deal was driven by the growing volumes of data that companies are contending with and the need for more software that can help analyze the information, Microsoft said in a blog post on Friday. Revolution Analytics, based in Mountain View, California, makes a statistics programming language called R that helps analyze data. David Smith, chief community officer at Revolution Analytics, said in a blog post that the deal will spread the usage of advanced analytics within Microsoft products, including the Azure cloud service. Revolution Analytics counts financial companies such as American Century Investments and Northern Trust as customers, according to the company’s website. The R programming language is widely used by statisticians and scientists and has surged in popularity as people have turned to it to manipulate large pools of data. R was the world’s 18th most popular programming language in January, according to a study conducted by Tiobe Software, compared to 44th a year earlier. In a separate study, researcher RedMonk put R as the world’s 13th most popular programming language in January, up from 15th in 2014.

• The line between eCommerce and messaging is blurring, as messaging apps are increasingly becoming distribution and moneymaking platforms: Developers have been expanding the uses of the apps, making new functions possible. And investors, seeing huge potential, have driven the apps to ever-higher valuations. “The most popular apps that sustain themselves day after day, month after month, at the top of the leader board, are messengers,” said Fred Wilson, managing partner at Union Square Ventures and an investor in Kik, a messaging app popular with young users. “That’s a reflection of what people do on their phones.” He added, “Once they become full-blown ‘portals’ for mobile content and mobile commerce, we will really see how massive this opportunity is.” The initial appeal of the apps is simple. They are faster to use than email, and they generally allow you to send text, links, video and photos to friends more cheaply than traditional texting services offered by wireless carriers like Verizon or AT&T. The uses are multiplying, though. On the app KakaoTalk, for example, people can discover other new smartphone apps and share them with their friends. On Snapchat, users can send money to one another inside the app. And Line, a messaging app popular in Japan, lets people pay for things at brick-and-mortar retail stores using Line Pay, the company’s payments service. Soon, media outlets like ESPN, Vice and CNN will be publishing original content directly to a new editorial section in Snapchat, according to people familiar with the matter who spoke on condition of anonymity because they were not authorized to speak publicly. “Media and communication are converging,” said Jonah Peretti, chief executive of BuzzFeed. “Some of what we’re all creating now will be a huge part of these messaging apps over the next one or two years.” Some of the most popular options are Viber, which says it has more than 200 million monthly visitors; Line, Japan’s most popular messaging app, with 170 million users; and WhatsApp, the leading service, which has more than 700 million regular visitors. For now, though, not all of the apps are generating big revenue. WhatsApp, which is owned by Facebook, reported just $10.2 million in sales in 2013. The revenue came from the small fraction of users who paid $1 to use the app. Still, the valuations of many messaging start-ups continue to rise. In February, Rakuten, the big Japanese online retailer, bought Viber for $900 million. The next month, the Chinese e-commerce behemoth the Alibaba Group led a $280 million investment in Tango, valuing the nearly six-year-old start-up at about $1 billion. Facebook paid $21.8 billion for WhatsApp in February. For investors, the thesis is a Silicon Valley adage: Get millions of people to use the service first, and eventually it will find a way to make money. Many entrepreneurs see WeChat, the hugely popular Chinese service run by the Internet giant Tencent, as the ideal model for building a business in messaging. Released four years ago, the app now claims nearly 500 million monthly active users — who not only send image-laden messages, but play games and book car rides and plane tickets. The rapid growth in messaging apps, some say, has been a response to the more public nature of popular apps like Twitter and Facebook, where status updates and posts are visible to the many rather than the few. “It’s a much more intimate experience,” said Marissa Campise, a partner at SoftBank Capital, the venture arm of Japanese telecom giant SoftBank. “Messaging apps are smaller and less visible than the public networks and far more engaged and trusted. It often feels like a more controlled, real-time replacement for email,” she said. Messaging users tend on average to pick up their phones several times an hour, Talmon Marco, the chief executive of Viber, noted in an interview late last year. That makes messaging apps an ideal place to introduce other offerings like games, virtual stickers or even physical goods. Asia has been a particularly fertile breeding ground for expanding the uses of the apps. In 2013, for example, WeChat joined Xiaomi, the Chinese smartphone giant, to offer a limited quantity of the company’s newest phone for purchase on the chat app. Users could reserve and then buy the new smartphone entirely inside the WeChat app using Tenpay, the payments service owned by Tencent. Xiaomi said it sold 150,000 phones in less than 10 minutes.

• Online Storage Company Box Has Strong Debut in First Day of Trading: Although questions had arisen about how Box’s initial public offering would fare, public investors gave the company a warm welcome on Friday, its first day of trading. Shares in Box, the online file storage company, opened at $20.20 on Friday morning, 44 percent higher than its I.P.O. price of $14 a share. The stock continued to surge to close the day at $23.23, up nearly 66 percent, giving the company a market value of $2.7 billion. At that level, the start-up has surpassed the $2.4 billion valuation that it fetched in its most recent private financing round last summer. Its strong first-day performance may ease some concerns among investors that highflying Silicon Valley start-ups were looking overvalued. Now that it has gone public, nearly a year after kicking off the process during a period of market upheaval, Box can focus on a more pressing issue: standing out in an industry that has quickly filled with competition, particularly from much bigger rivals like Google and Microsoft.

• Yahoo likely to announce plans to avoid huge tax hit on Alibaba windfall - two possible structures considered plausible: Yahoo on Tuesday is expected to reveal something most companies usually try to keep secret: how it plans to avoid a multibillion-dollar tax bill. The Web portal has spent more than a year figuring out how to cash out a chunk of its $40 billion stake in China-based Alibaba Group Holding Ltd. Typically, a U.S. company faces a federal tax bill of about 35 percent when it sells stock in another enterprise for cash. Yahoo took a $3 billion tax hit last year when it sold about $10 billion in Alibaba shares. This time around, activist investors are leaning on the Sunnyvale, California-based company to be more savvy. Marissa Mayer, Yahoo’s chief executive officer, probably will maintain at least part of the Alibaba holding to keep a finger in China’s fast-growing Web market. Were Yahoo to sell the entire stake, it could face a federal tax bill of as much as $14 billion.Here are some of Yahoo’s options to avoid capital-gains tax, both legal: Option One: Last summer, John Malone’s Liberty Ventures wanted to avoid taxes on selling its stake in travel website TripAdvisor Inc. Liberty did so by transferring that stake, as well as online costume-retailer BuySeasons, to a new unit created specifically for the deal. Under the plan, the new unit took out a $400 million bank loan. Most of that cash was destined for Liberty and the new unit’s stock spun off to Liberty shareholders. The expectation was that TripAdvisor would acquire the new unit in exchange for the travel site’s own stock. TripAdvisor also agreed to repay the $400 million loan. When it’s all wrapped up, Liberty Ventures gets cash and exits TripAdvisor -- without incurring the tax bill a straight sale would trigger. Liberty’s shareholders get stock in TripAdvisor as though Liberty had distributed its holding in the site to its own investors. Liberty’s investors also don’t face taxes on the deal. In Yahoo’s case, it would spin off its stake into a new entity, which would borrow money and distribute the cash to the Internet company. “The tax savings sort of gets carved up between the two parties and they each get a chunk,” Option Two: Another option is to follow Warren Buffett’s lead, with what’s known in tax circles as the cash-rich split. Berkshire Hathaway Inc. and Graham Holdings Co. last March agreed to a deal that lets Buffett’s company unload its stake in the former Washington Post Co. while avoiding capital-gains tax. That deal called for Graham to transfer cash and a Miami television business -- combined, roughly equal to Berkshire Hathaway’s investment -- into a new subsidiary. Graham then shifts stock in that new unit to Berkshire Hathaway, while Buffett’s company moves its Graham stake back to the media company. Economically, it’s as though Berkshire Hathaway sold its Graham stake for cash -- and a TV station. But because the deal is structured as an exchange of shares, not a straight-up sale, it gets tax-free treatment. Were Yahoo to follow this route, it would exchange Alibaba shares for a stake in a new unit that would consist mostly of cash. Alibaba would have to shed some assets for Yahoo to get the advantage of such a deal; a cash-only transaction probably would trigger a tax bill. Accounting experts say it shouldn’t be difficult to find something to throw in the pot.

• As Alibaba and Chinese investors pour into Israel, the nation's high-tech startups scored big exits in 2014: With nearly $15 billion in exits through mergers and acquisitions and public offerings, 2014 was an all-time record year for the Israeli hi-tech industry, compared with a mere $1.2 billion raised in 2013, according to a PwC report for 2014. The exits were spread out between a variety of tech industries, including Internet, IT, life sciences, communications and semiconductors. Semiconductors had a 38% of the share, but just one semiconductor IPO out of the 18 in total. The road accident avoidance technology developerMobilEye raised $1.023 billion in its August IPO, a record an Israeli company. As for new giant exits emerging, most argue that Israel’s hi-tech diversity is its strength. “While there seems to be a general hype around IoT, security and fintech, I find Israel to be a very unique place in the fact that entrepreneurs don’t tend to have group think and as such, we are seeing ventures tackling a very wide array of industries.” said Yaron Carni, the founder of two Israeli VC fundsMaverick Ventures and Tel Aviv Angel Group. And more international companies are beginning to take notice of Israel’s technological strengths. In fact, 2014 ended with a news item that might indicate China’s increasingly hefty presence in the Israeli hi-tech sector. Last year might be remembered as the time when Chinese technology companies embraced Israeli startups in a big way. On December 20, The Chinese eCommerce giant Alibaba invested in Visualead, a company that specializes in QR code generation. Based in Herzliya, the Israeli equivalent of Silicon Valley, the 15-person start-up was Aliababa’s first Israeli acquisition. Last September, China’s Yuanda Enterprise Group bought AutoAgronome, a maker of smart irrigation and fertilization systems for $20 million in order to move into high-tech agriculture.