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Thursday, August 25, 2005

EDS Punts ATK Sale

File this under: Saw it coming from a mile away...
"Electronic Data Systems Corp. said Wednesday that it expects to reach a decision by the end of the year on the sale of its A.T. Kearney unit, later than it previously expected.


The delay comes amid reports that EDS's talks to sell the high-end consulting arm to another consulting firm, Monitor Group, collapsed after negotiations failed to yield an acceptable agreement."

And further...
"Monitor Group was reportedly the sole bidder for the consulting business that Plano, Texas-based EDS bought about a decade ago for around $600 million."
Ouch. A single-bidder process -- not good. It's amazing how many people think they can just execute an M&A process any ol' time. They will learn.

Friday, August 12, 2005

CMS Companies under pressure - Vignette (VIGN), Interwoven (IWOV), etc...

If you haven't heard of wikis, you will. They will threaten Content Management Systems (CMS) companies market share in the next couple of years. I'm glad I'm not a holder of IWOV or VIGN. Even Microsoft's Sharepoint is at risk of competing with these systems. Wikis represent crude CMS for very low price points. Interwoven and Vignette make their money selling these systems for a lot of money. While there is always a market at the high-end for systems with superior quality, the market transitions are always tough on the established market leaders when opensource/cheap solutions enter the fray. Just ask Borland about Eclipse.

Thursday, August 11, 2005

Qualcomm (QCOM) picks up Flarion - WiMax coming

I've watched Flarion ever since it was founded back in the day. It's a very interesting technology that basically allows wireless broadband over the big wireless carrier networks. Qualcomm makes a big move by acquiring Flarion. Deal is valued at $600MM with an additional $205MM in earn-out. This deal tells me that momentum for WiMax deployment is picking up and we'll see this technology in 18 months or so. This is important because WiMax enable broadband connectivity for laptops and smart phones outside of the house or office. I think this is a critical first-step towards wireless video phones.

Know your trends...

Like which states are growing the fastest. Poor North Dakota. And which counties you should buy real estate in. More interesting population/age/sex projections from the U.S. Census here.

Wednesday, August 10, 2005

Register.com's (RCOM) Bitch Fight

Very interesting developments over at Register.com. First, buy-out company Barrington, headed by James Mitaroanda, lobbed in a bid at $7.10 a share for the remaining 85% that it doesn't own. Then the ravenous tech buy-out firm Vector Capital countered with a $7.81 a share bid that was accepted by Register's board. Vector recently acquired BroadVision and tried to wrest Pinnacle Systems from Avid.
Then today Mark Cuban (of BlogMaverick fame) announces that he will actively fight the Vector offer as it the offer is too low. This gets interesting because he hold 3.3 million shares or 13% of the company. Of course one could question Mark's valuation skills based upon his recent investment and then devestment in Mamma.com, but he will always have credibility based upon his decision to fully cash out of the Internet bubble after he sold Broadcast.com to Yahoo! for $5.7 billion.
This is a classic "bird in the hand" problem for Register's board. Do they go with Vector's offer as it stands or do they hold out and demand more for their money. It's interesting that there aren't many public Internet companies involved in this scuffle -- that is always an indication of how they perceive Register's strategic market value. In this case it's not very much.

Tuesday, August 09, 2005

Shanda Interactive reports results (SNDA)

Shanda reported earnings this afternoon, making the information in the table below already obsolete (at least for SNDA). Revenues grew 8.5% QoQ to $65MM USD and profits growing to $27MM. Online gaming, which made up 87% of revenues, grew 72% YoY/6% QoQ to $56MM while Other Revenue grew substantially to $9MM.
Other snippets:
  • Peak total concurrent users: 2.5MM
  • Growth areas:
    • MMORPG - D&D, Ragnarok Online & Magic Land
    • Four casual games coming on-line
    • Home strategy (?)
  • Closed acquisition of largest PC network gaming system in China - Haofong
  • Beta-testing QuanQuan IM system
  • Strategic partnership with Sichchuan Changhon Electric to launch a home entertainment station (oh, THAT home strategy). Device will deliver music, videos, games, movies, shopping and content to home users. (Sounds very Xbox 360 meets Google's home network investment...)
Last, but not least: "We have been notified by certain of our executive officers and affiliates that they have adopted pre-arranged stock trading plans in accordance with Rule 10b5-1 under the U.S. Securities Exchange Act of 1934, as amended, and the Company's trading policy with respect to sales of the Company's securities by insiders."
Hey, diversification is apparently a concept that works under Communism too!

Quick overview of Chinese Internet Stocks (BIDU, CTRP, JOBS, NTES, SINA, SNDA, SOHU, 0700.HK)

After Baidu's rude awakening, I decided to review recent performance of all Chinese Internet-related stocks. Check out my findings below. In summary, they all have great growth, but it's paired with high valuations. It's clear that there will be some consolidation in this sector soon, however at a lot of these companies look very much alike. Baidu, 51Jobs and Ctrip all seem to have good differentiation. Sohu, Sina and Shanda Interactive all some variant of the wireless messaging, mobile gaming, ecommerce, advertising blend.
I don't know if this table will make it (let's hope):

Company

Category

Ticker

Mkt Cap USD

Latest Qtr Sales

51Jobs

Job search

JOBS

372MM

$17.8MM +26% YoY

“market demand for human resource services has moderated thus far in 2005”

Baidu

Search

BIDU

3.2B

$5.1MM

Google style paid search. Website 2nd largest in China, 6th globally.

Ctrip

Online travel

CTRP

914MM

$15.6MM +60% YoY +33% QoQ

“…saw excellent growth momentum across all of our travel booking services in the second quarter.”

Netease

Online media

NTES

2.4B

$50.4MM +90% YoY

+27% QoQ

Good growth and profitability. Gaming to boost Q3 sales to $59MM +17% QoQ and profits to $33MM +14%. Wireless facing competitive pressures.

Shanda

Online gaming

SNDA

2.7B

$60MM

+15% QoQ

Games grew 100% YoY. MMORPGs (D&D) significant growth. Universal Music partnership and Baidu strategic relationship.

Sina

Online media

SINA

1.4B

$45.8MM

-6% YoY

-20% QoQ

Seen as a take-out play by Shanda. Wireless bottomed and will see moderate growth going fwd but certain SMS ad svcs banned.

Sohu

Online portal

SOHU

638MM

$25.9MM

+10% QoQ

-5% YoY

Allowed to resume wireless messaging svcs in April 05, rev increased 7% QoQ.

TenCent

Online media

0700.HK

10.9B

$36MM +17% YoY -4.5% QoQ

QQ.com site showing growth. Wireless biz impacted by loss of mobile chat fee-sharing with China Mobile. Gaming driving growth.

Friday, August 05, 2005

Excellent Baidu (BIDU) site/blog: China Net Investor

Just found the blog China Net Investor. Good source of BIDU information. Not a ton of analysis, but good overall information on the company.

Why Baidu (BIDU) is not this bubble's VA Linux (LNUX)

Wow. Baidu crushes with a 354% first-day gain with its IPO today. Boy, there are a lot of scary parallels to the Internet Boom a la 1999. If anyone cares to reopen those memories, they'll find another stock that blew away previous IPO first day records: VA Linux! Remember those bad boys of Open Source software? Oh yeah, Larry Augustine and his merry band of tech geeks rang in an innovative new business model that consisted largely of giving software away for free.
That led to this horrific chart. Now we know that Open Source is just about giving really good programmers employment for life by making all software services-based. Hell of a business model.
However, I Baidu is not the next VA Linux. Baidu could be undervalued here.
Yes, the stock may pull-back tomorrow if the market decides to puke based upon rememberances of what Tequila did the last time we partied. Regardless, Baidu has two very proven variables that will make this a company and force to be reckoned with in the future:
  1. The business model has been validated - Internet search has demonstrated itself to be THE MOST LEVERAGABLE BUSINESS MODEL IN THE WORLD. All you need is a scalable website and significant end-user mindshare as the place to look for stuff. That's it! Then you get to charge people to put ads next to the search results! People still don't get the significance of this business even after Google proved it out. Look at it from an advertisers' point-of-view: would you rather pay to be in a magazine that is related to your products and hope that you're in the place that captures the eye of a potential customer? -OR- would you rather have your advertisement presented at the exact time that someone searches for "camper shells in Lincoln, NE"? Exactly. Don't doubt that Baidu has one of the most profitable business models in the world. All they have to do is make it look a lot like Google. Believe it or not, Google ain't rocket science folks.
  2. They are in the biggest and fastest growing end-customer market in the world. (Favorite quote from that link: "[population] increase is 14 million...equal to a new Australia every year". If you don't believe in the growth of consumers (and advertising) in China, then you need to stop investing and get a new line of work.
Now, I'm not a hippy-dippy, dot-com cheerleader that drinks Kool-Aid. I can be as cynical as the rest of them (see my posts on HPQ). Honestly, I think Baidu will encounter an obstacle somewhere down the road and the stock will pull back and then I'll look seriously at it.
But don't throw rocks at the business thinking this is like all of the shitty companies that came public during the first bubble. A lot of people in Silicon Valley learned a some good lessons and considering the All-Star line-up of people involved in Baidu, I think this stock will meet expectations in the long run.

Wednesday, August 03, 2005

RealNetworks Bounce Underwhelms (RNWK)

Interesting, I thought RealNetworks would respond more favorably to the recent earnings release. In my mind, it really marked an acceleration of the business from the break-even stasis that it's been in for the last few quarters.
The lid on the cooker is undoubtedly competitive pressures from Yahoo!, and I think that they're a real concern. However, Real's growth was across all of its offerings (games, advertising, technology) - not just music. Additionally, Real has been aggressively marketing its product on television lately and I think that this will continue to add users in the face of Yahoo!'s lower pricing. Music services are still at the cross-over stage where you need to educate the incremental user (i.e. The horses need to be led to water.). I believe that while price matters, being very consumer friendly and advertising aggressively is more important at this stage.
Plus: Hey, RealNetworks actually posted up some cash flow from ops this quarter! Always a good sign.
In summary, I think Real will continue to bleed upwards here as we have a transfer of holders.

The Future of Institutional Trading

Just as the media business is being dissembled by the Internet, so too are the institutional trading markets. Here's a great post at The Barnes Log illustrating just how powerful technology-enabled businesses can be. The NY Times article he references discusses how LiquidNet has taken huge market share from stalwarts such as Nasdaq and the NYSE. In 4 years LiquidNet has gone from $0 to $1.8 Billion in value. All by creating an electronic trading network that is aligned with the customers' interests. Trading spaces such as LiquidNet and Pipeline allow customers to better conceal their trading intent and remove the risk that someone on a trading desk is leaking your moves to the rest of the market.
It will be interesting to see how the market reacts to NYSE's recent acquisition of Archipelago. Their latest quarterly announcement hints at a slowdown in Nasdaq.
Various stats from the electronic exchanges:
  • Pipeline hits a record 17.3MM shares executed in June, 2005.
  • ArcaEx ETF volume increased to 6.2 Billion shares in Q205 from 3.8 Billion in Q204.
  • LiquidNet's Average Execution Size for Q105 in Large-Cap shares was 58.8K shares.
Maybe this is why Wells Fargo decided to punt its institutional sales and trading business recently.

Tuesday, August 02, 2005

RealNetworks Blows Doors Off (RNWK), finally...

The long-time disappointment stock, RealNetworks, significantly outperforms estimates and signals the beginning of a potential growth spurt. RealNetworks not only outperformed revenue expectations, but they delivered $11MM in EBITDA (before MSFT rock-throwing). Grow that number going forward and annualize it, and you can get to $60MM in EBITDA for the next twelve months rather easily. Considering how long this company has been about 'potential' and underperformed investor expectations, this stock could really move tomorrow, seeing $7-8 easily. I think you can buy this in the morning and still make money as the market digests this news.

Macrovision (MVSN) Gets Smacked, Should It Split Up?

Macrovision's results come in lower than expectations and guidance is lowered. Not good. The earnings underperformance is largely a result of DVD sales growth slowdown. They make a few cents off of every DVD that has their copy-protection scheme encoded in. It had to happen at some point as DVD sales growth rates have been exceptional and it's always hard to sustain that level of performance.
Macrovision's guidance revision:
"Looking ahead, we are lowering our FY2005 guidance for revenues to be between $205 and $215 million, and for our pro forma EPS to be between $0.89 and $0.92. For Q3 2005, we are estimating that our business will be essentially flat compared to Q2 in the range of $46-$48 million and our pro forma EPS will be in the range of $0.15 to $0.17. However, for Q4, we are expecting our traditional seasonally strong performance."
Prior to the call revenue estimates were $225MM and $57MM and EPS estimates were $1.05 and $.27 for 2005 and Q3, respectively. Given the size of the revision, it's surprising that the stock is only down 15%.
The positives for Macrovision include $268MM in cash and the fact that in a disappointing quarter they still generated $17MM in Cash Flow from Operations. Cash is a strategic asset that will enable Macrovision to potentially buy their way back into growth.
Given the stumble, however, I think we'll start to hear demands that they split the business. Macrovision seems to be having greater traction with their software licensing solution, FlexNet, while their copyprotection technologies business is less dependable. Right now, it's difficult for investors to really understand what they're holding and how the opportunity will play out for each side. I'm sure there are a whole raft of savvy Software/ISV investors that would like the software licensing story but aren't excited about the entertainment copyprotection business. Additionally, the copyprotection technology business seems much riskier since it is dependent upon the entertainment industry adopting Macrovision's technologies on a much broader scale.
I know I'd rather make those bets independently from each other and the fact they're combined confuses the story for me. Spinning out the copyprotection technology business to a new, entertainment-industry savvy management team that is located in Los Angeles and has considerable DVD, games and/or music industry experience would generate more interest from investors. Lastly, there is a lot of demand from institutional technology investors for companies that focus on one core competency and execute it well, especially for smaller names that are have had difficulty attaining growth or locking down their market.
I think that spinning-out the entertainment copyprotection technology business would enable Macrovision to unlock substantial value for shareholders.

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