TechTrader

Gideon Yu - Master of the Job Transition

2006-10-11T08:10:00.000-07:00

Anyone notice that Gideon Yu appears to have made one of the all-time great job transitions based upon Google's recent purchase of YouTube?!? The guy was working at the "stodgy old Internet firm" Yahoo! when he gets an offer to become YouTube's CFO. A couple of months later, YouTube gets bought out by Google. Talk about stealing home.
Gideon, you get our Real Men of Web 2.0 (SM) award!
Prediction: Gideon joins a VC firm that is looking to "understand" all of this Web 2.0 stuff by adding a partner with domain experience.
Gideon! Remember the little people!

I Call Bullsh*t on MySpace.com (NWS)

2006-05-11T11:41:00.000-07:00

They don't have over 70 million active users -- the people buying that are smoking crack. Somebody audit these crackheads.

Get out of the way of Google Insider's (GOOG)

2006-05-10T07:40:00.000-07:00

Bubble's back. Oh wait, I've said that before. Check out the MASSIVE insider selling at Google. Could Page, Brin and Kordenstani possibly sell more stock??? It's being done in $20 - 60 million chunks!

McKinsey Screws Up Ebay (EBAY)

2006-04-22T08:40:00.000-07:00

"Few at eBay initially saw reason to fear Google, say people at the company, in part because of a 2003 study it commissioned from McKinsey & Co. McKinsey concluded that Google wouldn't use its search capabilities to break into e-commerce. That made Google a manageable threat, say people familiar with the study. EBay's dependence on Google increased as it shifted ad dollars to online ads from traditional media throughout 2004."

Oops. Great article at the WSJ (sub req) discussing how eBay is trying to stem its Google addiction. Another great quote illustrating the problem: "John Aiken, managing director at Majestic Research, an independent equity-research firm, estimates that eBay spends about twice as much on Google ads as other individual search engines, and that Google brings up to three times as much traffic to eBay as other search engines."

Twice as much for three times the traffic? Sounds like Google is still a damn good buy (advertising wise).

The consolidation is coming. I think an eBay + Yahoo! merger makes a lot of sense...

Google Finance Not Quite There (GOOG)

2006-03-21T06:53:00.000-08:00

Google Finance is what happens when you get people who don't quite understand finance making financial applications. It's like Time Magazine does the stock quotes. It's interesting, but not what I would use to help me make investment decisions.
Now, I'm a fundamentalist, so it may not be targeted at me. Considering how gee-whiz cool the graphing application is, it's probably aimed at technical traders. And that's fine, I'm sure that's where Google will make a lot of ads selling ETrade, Ameritrade and Schwab ads.
For instance, their cash flow calculations -- something I love to look at -- are whacked. Google Finance has the same numbers for the quarter and the year-end. Clearly, they don't get that they could subtract the 9 month numbers from the 12 month results to get an approximation of the 3 month numbers.
Financial portals are outside Google's bailiwick anyways. It's not like the data is all standardized and you can just build your AJAXY app and toss it out there. There is a lot of tweaking and modifying to get the information right. In other words, it requires human intervention and I'm sure that's something the new millionaires at the 'plex are a bit concerned about.
They should fire whomever is the product manager for Google Finance. It underwhelms.

**Update: GigaOM gets it.***

Knight-Ridder: Out with a Whimper

2006-03-14T07:10:00.000-08:00

So, the strategic buyer eventually showed up for Knight-Ridder. McClatchy papers buys Knight -Ridder at a valuation that underwhelms the market. Why are people surprised about this?

The Good, The Bad (GOOG v. SYMC)

2006-02-01T20:32:00.000-08:00

So, the GOOG after-hours trade worked well. Unfortunately, Symantec is nothing but ugliness. Their report wasn't horrible. They missed guidance by a bit, but it's not like they have an extremely high valuation. No, I think they got hurt the most by YACD (Yet Another C-level Departure).
Their valuation remains compelling in my bloodshot, weary eyes. They estimate $5.5 billion in revenues in 2007 with a $1.14 in earnings, resulting in forward enterprise valuaton multiple of less than 3x revenues and 15x earnings (non-GAAP). It looks really cheap! Right?
Well, the big threat comes from Microsoft's impending free anti-virus offering. And buying Symantec now is a basically a bet that one or some combination of the following will occur:

Microsoft will continue to delay their AV offering.
Microsoft's AV solution will not be trusted by consumers and they will continue to consume Symantec's AV products.
Symantec will accelerate its enterprise security offerings enough to counteract the drop in AV revenues because of Microsoft.

I make my money by betting against the popular wisdom. I believe that somehow, someway Symantec will navigate this transition and protect more revenues from Microsoft than the market believes.
But now there's another threat that has me worried: What the hell is up with all of the C-level departures at Symantec?!?
Tonight, it was announced that Symantec's CIO is going to be replaced; meaning that the existing CIO is gone. Last week, it was announced that Gary Bloom, the President installed during the Veritas merger, was leaving. This after the CFO Greg Myers departed in November of last year and John Schwarz, the COO a few months before that to be CEO of Business Objects. This many departures is usually a signal that all is not well. Either John Thompson is doing one hell of a house cleaning, or his team is running for the exits...
Unfortunately, I read the signs too late on this one. There are safer bets for my money in the market.
Like picking up Google in After-Hours and getting a nice 8% return in one day!

Google Earnings: Good AH Trade - Long (seriously) (GOOG)

2006-01-31T14:59:00.000-08:00

Google earnings scared the sh*t out of the daytraders and hysterics. But they actually beat my expectations, which is great for them. If you look at the numbers, they met revenue targets; wildly hyped, overinflated targets. Yeah, they put up some big, fat revenue numbers.
Q: What does this mean?
A: This means that there is nothing fundamentally wrong with their business.
Google missed earnings because everyone f'd up their tax estimates. That's not anything wrong with Google, that's something wrong with everyone's models.
Additionally, they basically said that they haven't even begun to pull the international revenues lever yet. I assumed that they were already jerkin' this chain pretty hard.
The big funds get this and will use this opportunity to average in. It will close tomorrow over $375. Far enough over for a decent trade in my book...

Net Tech Turbulence (GOOG, EBAY, YHOO, Etc...)

2006-01-28T10:42:00.000-08:00

I've been watching the news roll by lately and I think we're in the beginning of a valuation bleed out. What do I mean by this? Well, I think the last two years have been education for investors regarding the power of Internet-based business models. Clearly, Google's launch has turned a lot of heads in the investing world; maybe too many. Now we have a rush of equity capital into the sector. GOOG, YHOO and EBAY are now well-entrenched in the largest mutual funds and market ETFs; GOOG is 2.67% of the "iShares Morningstar Large Index Fund" (JKE).
This means that they automatically get equity demand regardless of their fundamental peformance or valuation. Inclusion on indexes is not based upon investment decision, it's based upon factors such as how many people hold an issue, market cap and trading volume. And once they're included in indexes, they're stock will experience increasing demand as ETFs and Index funds become more popular. More individual investors are giving up on picking stocks and buying ETFs because its easier and "safer". More advisers are doing the same thing because of all of the literature that demonstrates you can't outperform the market. Hey, I'd do the same thing if I hadn't proven to myself that I outperform the market by a wide margin.
So, now you have stocks with valuations that imply amazing performance for the 20 years. The problem is that we're going to enter into a period where information enters the market and illustrates that these companies will face issues just like every other company that has graced the face of the earth. For instance, here are some major negative themes that I think could impact the Big Nets:

Google - "May not walk on water." We've heard that they're a one-trick pony (search). What we haven't heard is how badly they've screwed up some of their initiatives.

Froogle??? - Anyone using that? Didn't think so. Crushing Amazon? Can't even hold Amazon's jock-strap.
Google Video - Hey we launched a video store with all of these high-profile content partners and then didn't put any of them on the front page. You know: eCommerce 101 you frickin' match geniuses! Instead of writing algorithms for placements, maybe they hire someone who stocks the candy shelves at convenience stores to run this online storefront. This is a big sign that they're just a bunch of dot-commers after all. Kudos to David Pogue for the use of the term: "...appallingly half-baked."

eBay - "Quasi-governmental agency" Hey, we just make markets, we're not responsible for any of the content. Good theory, ain't gonna work in practice eBayers. Welcome to the world of social responsibility - watch it add to your SG&A expense line item. Wait until the market figures that one out...

Seeing Fakes, Angry Traders Confront eBay - NYTimes.com

Yahoo! - "The CFO doesn't know what she's talking about. Don't mind her, it's probably the medication..."

CFO says "We're not #1!", Forgets to Inform Yahoo! Search Group

Competitive Search Engines Get Funding

Check out Kosmix - it's pretty good, better than Google IMHO. (H? Who am I kidding?)

I guess my basic point is that the warts are starting to show and the sexy young teenagers are getting their freshman 15. The laws and fundamentals of business always apply, they just sometimes take time showing up. Unfortunately, the sector is valued as if no one can do any wrong...

Microsoft's Results Good For Symantec (SYMC)

2006-01-27T10:00:00.000-08:00

So, I should probably try to rescue my credibility and stop talking about Symantec, but I really think the market could be in for a surprise in the next couple of quarters; a good one. First, I believe that the Storage Refesh(TM) is driving demand for Veritas' solutions. Veritas is all about storage and data infrastructure and we all know that storage is on like Donkey Kong. Second, say what you will about Symantec's exposure to consumer Anti-Virus (AV), but we're in the middle of a huge PC refresh as well.
Check out this tidbit from Microsoft's latest quarter as observed by MicrosoftMonitor.com:

"License sales to Original Equipment Manufacturers (OEMs) again carried the quarter. Windows desktop OEM licenses grew by 15 percent...Microsoft estimates that worldwide PC shipments grew between 14 percent and 15 percent during fiscal second quarter. Consumer sales continue at a brisk pace...Microsoft expects PC growth to be 12 percent to 14 percent for fiscal 2006."

In other words, we could have a 1-2 punch from Veritas and AV outperformance coming up. Accelerating PC sales means accelerating AV sales. Pure and simple.

Doncha wish yo secta' was hot like mine! (EMC, STX)

2006-01-24T11:21:00.000-08:00

Given Seagate's killer earnings last week and EMC's aggressive guidance this week - Storage is officially off to the races!

Giga Om Sees the Light on Google (GOOG)

2006-01-18T18:35:00.000-08:00

Om Malik piles on the Google sell train. Of course, now that all of the analysts are jumping ship and everyone is suddenly an expert on the art of selling Google -- I have to ask?

Where was everyone $50 ago?

Hell yeah I toot my own horn... I think a therapist would call it: "Celebrating your victories". Rick James would call it: "It's a celebration! Bitches!"

How many times did we see this article in 1999?

2006-01-17T15:19:00.000-08:00

TheStreet.com publishes Yahoo!'s earnings disappointment. Notice the comment from Pykkonen (sp?) regarding investor expectations. Is this news or is the journalist just too young to remember 1999/00?

Simon Dumenco has it right. Bloggers = Journalists or Opinion Writers

2006-01-16T19:17:00.000-08:00

This article is on point and will be a common theme once the Web 2.0 bubble is deflated.

Yahoo! Mail Beta is Overrated (YHOO)

2006-01-15T08:36:00.000-08:00

I read an interesting post on Om Malik's broadband blog trumpeting the departure of Toni Schneider from Yahoo! for Yet Another Start-Up(TM). It's interesting for a number of reasons. First, I believe that the Oddpost acquisition by Yahoo! actually started the whole Web 2.0 miasma. Oddpost was the first poster-child for "next generation Internet 'service' started by a couple of guys with a server in their room without much VC money because they were laid off dotcommers".
It also spawned the obligatory Business2.0 article which has since begat a slew of other acquisitions by big Internet companies because they can't develop this shit themselves.
Anyways, I found the timing of this executive interesting because I'm pretty sure he's responsible for integrating Oddpost's technology and creating the Yahoo! mail beta. I have the beta operating and all I can tell you is that it is mighty buggy lately. In fact, it's so buggy, I might go back to using the original version. I don't know what a "SetMessageFlag" is, but considering I see so many of them, I might Google it just to find out.
The point of this post is that we're starting to see the same sloppiness that we saw in the first bubble. The big Internet companies (Google, Yahoo!, InteractiveCorp, News Corp, MSN, etc...) are gobbling up simple little sites like del.icio.us because they have stupendous growth. This stupendous growth comes from a bunch of nerdy early adopters that write a bunch of blogs and have time to digg stories all day.
So for the big companies to spend millions of dollars of cash or shareholder equity on these start-ups to buy companies that consist of a rapidly growing user base and bunch of people with resumes that are basically graphic designers on steroids or used record shop owners -- it's stupidity. These decisions are being made on "coolness" factor but the common principles of business are being forgotten.
What does this mean? It means that if you're going to college, forget the business courses and just learn how to host a server in your dorm room and create some sort of site that bloggers around the world will love. Forget about money and profits and all that other stuff, because it won't matter. Yahoo! will buy you for millions of dollars. Then you only have to putz around the company until your options vest.
And we all know how much I love options!

Traditional Media Deathwatch: Musicland Files Ch. 11

2006-01-13T16:09:00.000-08:00

Another one bites the dust. Musicland files a pre-packaged Chapter 11 and illustrates the pressures of being a traditional media retailer in the dynamic world of media. One has to wonder about Sun Capital's abilities here. How does a sophisticated PE firm run a company into the ground? Although to be fair, they did get the company for $0. Yep, Best Buy saw the writing on the wall awhile ago and decided to get the hell out of Dodge GIVING the company away. Looks like a smart move...
I wonder if Musicland gets the plot next to Tower Records. Is Hastings (HAST) next?

Overvaluation - A good place to start (MORN)

2006-01-13T11:45:00.000-08:00

The overhaul of equity research and the entrance of new 'unbiased' (uninformed?) players is actually generating some thought-provoking pieces. This article put out by Morningstar (MORN) highlights what they believe are "The Market's Most Overvalued Stocks". Wow, we didn't see many people calling it like that back in DotCom 1.0. It makes my little heart patter! (Yes, I do have one.)
For your information their nominations are:

Sirius Satellite Radio (SIRI)
US Airways Group (LCC)
MEMC Electronic Materials (WFR)
LSI Logic (LSI)
Elan (ELN)

I actually like this piece of research, although I do think that Morningstar suffers a similar fate as Standard and Poor's research; namely, they don't really understand who has a strategic advantage in future markets. But hey, few people do.
What they do excel at, however, is the ability to rationally look at valuation against modern valuation paradigms and identify expensive stocks.
Notice that 4 out of the 5 stocks are tech stocks.
I'm just sayin'.

Tech Co Buybacks Only Mask Option Issuance (aka Whatever happened to Caveat Emptor?)

2006-01-13T08:51:00.000-08:00

Finally! The financial journalism community clues into shareholder abuse -- sort of. This article in BusinessWeek discusses how many stock buybacks aren't really reducing the number of shares, they're just counteracting the cashing out of options by company employees.
This is one of the great travesties of the public markets. The people who really have insider information, company employees, are selling in droves while the public blithely continues to buy at significant valuations. The article actually gets the perspective wrong in my humble opinion because what they should be doing is looking at massive options issuance. Whether a company decides to buyback shares to counter it is really a red-herring. As I discussed in my post regarding options expensing, most people don't understand the concept that options are about dilution, not expenses. In other words, in managing a business I would keep track of how much cash I push out the door to keep it running (the expenses) and then think about how much of the company I own (dilution).
The problem with public companies today is the classic "agency problem". I learned about this in undergrad business 101. The agency problem refers to the inevitable tension/friction that builds between a company's owners and its managers when they are separate people. Managers may want to do different things with a company than its owners would like, but since managers are running the business on a day-to-day basis, owners can find themselves left out in the cold.
Couple this tension with a rising trend of mutual funds, ETFs and hedge funds and this means that investors don't even think they own shares anymore -- they own an interest in investment vehicles. Therefore the general public is now two steps removed from their control over the assets they own.
And make no mistake, when you buy shares in a company, you own it.
What this means is that public company managers have figured out that as long as they publicly trumpet their share buybacks while doling options out the back door, they know that shareholders won't say a word. At least in an up market. Unfortunately, American investors are a retributional crowd. If share prices begin a period of sustained decline, then they'll start looking at issues like this and howling like mad. They'll say they were never informed of the level of greed, etc... What they don't understand is that their current: "If it ain't broke, don't fix it" policy is what allows the problem to fester and grow in the first place. Kind of like that whole investment banking research scam that didn't become illegal until the market tanked. I hope the public appreciates the free reach back claw option they got on that one.
There is a rising trend of hedge funds and other institutional matters that are starting to exert their influence. See Knight-Ridder for further details. You'll see more of this in the future, but the basic point that I'm working from at the moment is that the tech markets are frothy and tech co employees are cashing their options in like madmen.
That's when it becomes clear to me to start working on developing short ideas. Maybe not today, but soon.

DotCom 2.0

2006-01-11T17:33:00.000-08:00

Further proof that we're in another hypecycle. This company is being funded by "industry luminaries" including Maurice Marciano...you know, the guy who started the Guess? clothing line. Because he knows so much about startup technology companies.
File this under: "Kibu.com Was A Good Sign". Google Kibu's story if you're not aware.
P.S. Any 20-something old CEO's I can add to the list? They're some of my favorites...

Interesting analysis on shorted Internet stocks at Burnham's Beat

2006-01-11T08:08:00.000-08:00

This post at Bill Burnham's blog is interesting. He analyzes the "Top 5" shorted Internet stocks. The first on his list, Overstock (OSTK), always makes me laugh. I'm not involved with this stock, but it smells like a loser to me. Their CEO, Patrick Byrne, seems unstable and may be delusional. His company is nothing more than a third-rate Amazon but yet his hype is pure Google. I'm with the shorts on this one.
I know a little bit about the "#4" stock as well - Digital River (DRIV). DigRiv is a provider of e-commerce hosting solutions. They had great growth over the preceding few years due to the explosion of ecommerce, but it appears the shorts are very skeptical of the future. I think much of their doubt centers around the fact that Symantec is one of their biggest customers. DigRiv hosts Symantec's online store and shorts are betting that Symantec's consumer anti-virus business is going to be decimated by Microsoft's free AV. I think there may be a higher probability that Microsoft's security initiative falls short and consumers' will continue to turn to third-party vendors.
If anyone has more insight regarding DigRiv, I'm all ears. And unlike Jeff Matthews, I'll keep your posts on my comment boards. Hell, I don't have time to delete all the spam comments, much less legitimate ones!

Google (GOOG) and rationality...divergent concepts.

2006-01-09T10:45:00.000-08:00

Piper Jaffrey's piling on the Google bandwagon with it's recent Blodgetonian posting of a $600 price target for Google's stock. We're back in familiar stock market hype realms and it's comforting to see this situation set itself up so soon after we learned lessons from the last time it occurred. It's time to start sharpening the pencil on Google.

We all know the analysts won't.

**Update: Unknown firm analyst comes out with $2,000 price target for Google! Mark Stahlman, a former investment banker indicates that Google could grow to $100 billion in revenue. Hell, at this point, Google could do anything - why stop at $100 billion???**

Linux/Unix Vulnerabilities outnumber MSFT 3:1 (MSFT) and CRM

2006-01-05T11:07:00.000-08:00

Interesting post discussing statistics that debunk the commonly argued theme that Linux/Unix is a less vulnerable platform than Microsoft. It references this government 'study' which is more of a summary of vulnerabilities in the various platforms. The article doesn't really discuss the fact that most hackers have a strong anti-Microsoft bias and therefore Microsoft's platform is likely still more risky because more people are trying to break it, but it provides data that will help Microsoft's sales people as they try to crack the enterprise. This article shows one of the first births of Microsoft's recent enterprise app efforts -- their recent CRM offering.
I'm not sure this will play out too well considering Siebel...er...Oracle is being undercut by Salesforce.com who is being undercut by Sugar. And I wouldn't be surprised to see even smaller and cheaper CRM solutions for SOHO show up soon as well.

One good turn... www.casinocapitalism.com

2006-01-03T11:21:00.000-08:00

I've been monitoring a lot of trading oriented blogs, but I've noticed there are a lack of quality blogs that focus on fundamentals and secular trends. A recent one that I've noticed is Casino Capitalism. Instead of graphs or regurgitated news releases, this blogger actually puts some thought into their work, so I thought I'd give him a shout out.

Well...that and he gave me one. Never underestimate vanity!

I'm feeling shorty... (GOOG)

2005-12-28T20:59:00.000-08:00

Check out this link. It's proof that we're in Bubble 2.0. At some point in time, paying people to order an eighth of a ton of silly putty will result in a company that underperforms expectations. Of course the expectations for Google couldn't possibly be overextended...could they?

What if Veritas acquired Symantec? (SYMC)

2005-12-22T11:28:00.000-08:00

Okay, I know that's not how it happened, but bear with me here. What if Veritas had acquired Symantec and the new company was called Veritas and focused on back-end infrastructure/data management? I think it would have a completely different valuation and a higher one at that.
Listen, we all know Storage Infrastructure is on a tear. And Veritas was considered to be one of the best large enterprise storage plays. Well now they're part of Symantec, a company that was/is creating a wholistic security and data protection solution for large enterprises.
Hmm...do you think that this company will be selling more of this in the future? 5 years from now?
Of course they will, which is why I doubled, neigh, tripled down in the $16ish range. This could get exciting.

Merry Christmas Knight-Ridder! (KRI)

2005-12-22T08:40:00.000-08:00

Or should I say: Merry Competitive Bidding Situation! Who cares, it's all good for those guys. This article in Boston.com indicates there will be numerous private equity and strategic (other newspaper co's) bidding to gain control of KRI. This is a good thing for KRI's shareholders. I'm curious to find out what will happen to all of the great Internet assets that Knight Ridder Digital has assembled. That is the real prize embedded in this company -- CareerBuilder.com, Cars.com, ShopLocal.com, RealCities.com, etc... I don't know how integrated all of these assets are with KRI's newpaper assets and how difficult it would be to separate them from the pack.
KRI's sale process is going to be a classic and I can't wait to see the twist and turns that lie ahead in this plot. It's likely the deal could get done quickly if Gannett moves authoritatively and offers a "strategic" bid. However, I think there is a good chance that there will be a substantial amount of drama.
Happy Holidays Everybody!!!

Expensing Options is such a bad idea...

2005-12-19T11:08:00.000-08:00

I knew the option-expensing rules would eventually disintegrate upon itself. This article in the Washington Post illustrates why expensing options is such a bad idea. In short, what people don't get is that options are NOT AN EXPENSE. Rather, options are a CONDITIONAL FUTURE DILUTION. I know big words have a hard time resonating with the general public and most people prefer easy-to-understand solutions, but option expensing illustrates why simple answers don't always work for complex situations.
I know that Warren Buffett has come out in favor of expensing options, but I think everyone is a little gaga over Warren anyways. Maybe the guy has just been lucky. Have you seen how much money he lost investing in The Gap? But I know that what he says is gospel so many people have parrotted him on this issue as well.
See, here's the deal. The GAAP income statement tries to present a balanced view of earnings, not an accurate one. Why not accurate? Because there is no accurate way to measure earnings. Some people think that cash is a good way to measure earnings, other feel that you need to adjust for "temporal shifts" (i.e. you buy an income producing asset (a building) and you spread the expense of that asset over its "useful life"). All of these temporal shifts require making assumptions (how long is the useful life of a building?). Assumptions are an inexact science at best (e.g. SWAG). Therefore the generation of financial statements as dictated by GAAP necessarily implies inaccuracy.
So, how does this apply to options? Well, options aren't a cash expense of the company. It doesn't cost a company anything to issue options, so therefore they don't really effect cash flow. And if you're like every newly minted MBA, you know that in the long run cash flow is what really matters. If you're an economics undergrad, you also know that in the long run, we're all dead. But I digress.
So, the common response by expensing advocates is that the company is giving away value, so therefore that value should be reflected as an expense. Well, the problem is that the value is highly speculative and extremely variable. The only thing I know about option valuations is that they're often wrong. The guys who won a nobel prize for their work on options valuation also oversaw the largest hedge fund catastrophy to date. That's right; Myron Scholes and Robert Merton, two of the creators of the Black-Scholes options valuation model got hammered when it came to applying their theory in the real world of investing. My point here is that no one really knows how to value options. Why? Because their valuation also rests on a ton of assumptions. (Don't even get me started on normally distributed populations! I love heteroskedasticity.)
So, what you have is a second-order of assumptions at work. And we all know the only true thing about financial assumptions is that they're wrong.
So why would we try and affect company earnings using such an exact science?
Well partly because the general public is stupid. Unfortunately, the general public also gets to vote, which leads to all sorts of disastrous consequences and option expensing is no exception.
I think the market has a hard time wrapping its mind around the concept of a conditional future dilution. Let me explain this furthur.
If options don't have an expense, where does their value come from? The value of an option is a result of the fact that shareholders' slices of the pie (as determined by the number of shares they hold over the total) shrink -- if the options are exercisable.
The best way to really illustrate the value lost by shareholders through options is not through an expense but rather through a factor that would illustrate the shrinkage in slice (ownership) size to the increase in stock price.
Assume a company with a stock price of $10 and 1,000,000 shares outstanding. Also assume you own 10% of the company, or 100,000 shares. Now consider the following two scenarios and consider the impact to your ownership:
1. 10,000 options outstanding with a strike of $12. If the stock price goes above $12, you would be diluted by 1%. (100K/1MM = 10% v. 100K/1.01MM = 9.9%).
2. 100,000 options outstanding with a strike of $20. If the stock price goes above $20, you would be diluted by 9%. (100K/1MM = 10% v. 100K 1.10MM = 9.1%)
Which would you rather have? Well, it kind of depends on a lot of things - where the price will end up, how variable the price is normally, how much do you think management deserves to be richly rewarded, etc...
So, you can see why thinking about how the exercise will effect your position is more useful that trying to sum all of it up and putting it as an expense on the income statement.
Further proof that it's a bad idea: professional investors (ex-Buffet) often exclude non-cash charges like this one to focus on core earnings power when trying to guage a company's value. So now you have a situation where the professionals (once again!) play by a different (and more advanced) set of metrics than your average investor.
Guess who often wins these contests?

TheStreet.com comes around on HP Compaq (HPQ)

2005-12-13T20:52:00.000-08:00

Good to see I wasn't the last man on the HPQ Turnaround boat. TheStreet.com posted a fairly well written article about HPQ's recent rebound. They, too, see a rebound in storage...

Hackoff.com - Hybrid Blog and Book

2005-12-13T18:52:00.000-08:00

New methods for promoting content are appearing all the time and one that is gaining steam is Tom Evslin's book and blog hybrid, called a "blook". The title is "Hackoff.com" and it's a story about technology company set in the nadir of the tech bubble (1999 - 2000ish). It's an interesting read so far, although Tom does tend to push the pornographic aspects a little too much for my taste. Also, his descriptions of bankers are a little trite.
However, the story shines in his conveyance of executive meetings during the collapse of the company. The conversations flow naturally and convincingly and have the imprint of someone who has actually been in the room. I don't know much about Tom's background, but I've read that he was an exec at a start-up during this time period. The vignettes that involve the corporate counsel ring exceedingly true and make me believe that Tom was involved in some of these dicey situations. Additionally, his passages regarding how the investment banks made money "coming and going" off of clients illustrates a sophistication that I haven't seen even in good financial journalism. His portrayal is so accurate that I think the book may only play well to former dot-commers and tech bankers. Regardless, Hackoff.com should be required reading for all financial journalism training programs.
The interesting thing I'm drawing out of this is that it's a great example of how a traditional media channel is being altered by Internet technologies. Tom is a great test case for how to use the new Internet media to promote a book. This is a drastic departure from established book promotion techniques (as far as I'm aware). Now, will Tom's blook end-up as the model of the future? Maybe not. But this type of experimentation (and leadership) will find lucrative new models. I'm sure the big publishers are watching this closely. Wait - scratch that. They *should* be watching this closely if they were smart. But we all know about that whole "Innovator's Dilemma" issue with large, established companies when it comes to disruptive innovations - right?

Storage Refresh Gains Momo

2005-12-02T07:13:00.000-08:00

Sorry guys - I've been busy with holidays and all of the associated activities. Just thought I'd pass along a link to an article discussing the recent resurgence in storage. Interesting note in the article: Dell jumps to #4 in WW storage revenue.
Enjoy!

Len-ny! Len-ny! Len-ny! (SYMC, MVSN)

2005-11-14T16:23:00.000-08:00

I've been reading Lenny Dykstra's articles (posts?) over at TheStreet.com in order to entertain myself. I mean, hey, what could a former pro ball player possibly know about stocks? Well, today I'm his fan because he just became a fan of my goose egg, Symantec. He points out that information is, like, really valuable and the world leader in enterprise data security just happens to be Symantec. He doesn't really opine on the impending threat from Microsoft, so I hope he realizes that it's out there and that's sort of the reason why the stock has been going down faster than Bush's polling numbers. You do know that Microsoft has announced that they're giving away anti-virus software for free, right Lenny? It wasn't clear that he realizes that the bet is a bit more complex than just the CFO leaving town recently.
Interestingly, he also pointed Macrovision as a possible investment. This company is a sphinx in the world of tech stocks. It should be really valuable because of its DRM position but it has a little problem. Namely, it can't get any of the studios to use its DRM software! Sure there are some here and there and they've been getting decent volume, but not a lot of action has been seen in the music world. Interestingly, Macrovision has had pretty good success with its software licensing management system (Flexvision?). As I've mentioned earlier, with two completely different end markets, the company may want to consider splitting itself it two. Or at least selling the DRM part to a company that can make better headway in Hollywood.
I'm not sure Macrovision has the wind at its back, but the price is looking awfully tempting here. And you know how I feel about cash flow!

Maybe Private Capital Management should be sold (KRI)

2005-11-14T07:30:00.000-08:00

The latest on the saga of Knight-Ridder v. Private Capital Management. KRI succumbs to the pressure and is reportedly seeking a sale. With Goldman Sachs no less. Great, go to market with the Refco/NYSE firm. Not like Goldman doesn't have a few of their own problems at the moment.
Although, the question that I asked earlier and I have to ask again: Who are these Private Capital Management people to throw stones at KRI? The article states that they have significant holdings in other newspaper stocks. Nice going guys. And why would KRI shareholders want to have representatives from your firm on their board? It's not like you've nailed the industry with your stock picks lately... And now you're agitating for a sale at a point in time where everyone is bearish on the newspaper industry?
Don't you understand the concept of selling into a hot market? Selling a newspaper now is like selling GM now -- who exactly is your buyer? Here is a copy of PCM's letter to KRI's Board of Directors. It states that they think there is a financial buyer who is willing to pay "fair value". Let me clue you in, PCM. Financial buyers never pay fair value. These guys are the smartest in the business (most of the time) and their whole raison d'etre is about paying less than fair value. So, that eliminates 50% of your potential buyer population right there.
Let's examine the other 50%: other newspaper companies. You might have an out there. But if I'm a competing newspaper company and I know that close to 40% of a competitor's shareholders are forcing a sale on my competitor, do you think I'm going bid up? Oh, and throw in the fact that almost everyone in the industry is facing circulation revisions, margin pressures and stock price pressures as well. Think they're going to be in a buying mood for the #2 player? Actually, they probably will be. Executives love to grow regardless of whether it's a good idea or not. So maybe KRI does have an out here.

Henry Blodget clues in (GOOG)

2005-11-11T10:51:00.000-08:00

Henry Blodget expounds on the fact that Google is not a tech stock. Hmm...where have we heard before (almost a year ago)? Welcome to the party, Henry. (Wait until he finds out that Yahoo! and eBay aren't tech companies either!)
Loyal readers have been clued into this little anomaly for awhile now. Right, Salomon?

Newspaper decline fully known in market

2005-11-11T10:32:00.000-08:00

I found a post that clearly and succinctly illustrates my bearish newspaper theme from the last year. Media Stock Blog has it here. Basically, it illustrates how newspapers will suffer a long, painful decline as they try to ignore the rapid erosion of their core business model and the rise of digital media channels (Newspapers = Vinyl Record Companies). Clearly the former editor of the British-based FT had a run-in with a senior executive who doesn't understand the enormity and inevitability of this trend.
I think some papers get it and will try to make the leap. However, this leap will not be easy and only a subset of those who "get it" will cross the chasm.
My challenge is that this investment thesis is now crossing its own chasm and I need to be onto the next phase of this industry transformation. I think it comes in the form of television devolving from bundled channels to a world where we assemble our own channels show-by-show much like I assemble a MyYahoo! homepage.

More indications that the sea around MSFT is changing...

2005-11-09T12:00:00.000-08:00

Interesting post by an experienced programmer that asserts .NET/C# is more efficient language than Java. The implication? Experienced programmers can create custom enterprise applications more efficiently on Microsoft's platform than the Java/Unix platform. Granted, they're not there yet, but trend is Microsoft's friend right now. It will be interesting to see how the World That Hates Microsoft (TM) reacts as it realizes that Microsoft might have interesting technology now. I'm sure they'll throw a lot of rocks and try to create a superior OpenSource alternative. I'll be watching this race closely.
Right now, I'm betting on Microsoft.

Amazon's Mechanical Turk could revolutionize work (AMZN)

2005-11-04T11:29:00.000-08:00

Amazon has launched (or at least released) it's Mechanical Turk! What is the Mechanical Turk? I'm not a 100% sure, but it looks like a platform that allows for the atomization of work that can't adequately be performed by machines to be done by humans. What I mean is that it takes tasks that require qualitative human input, parses them out on its system, gets the results and pays whomever does the task. The amount paid per task is small but can be aggregated and transfered into a person's personal checking account.
It looks like an ingenious system and illustrates that Amazon's investment in R&D may be paying off with innovative services. It was likely developed to help Amazon with their initiative to photograph almost every business establishment in the U.S. as part of the business directory. Apparently taking the pictures was a feat they were able to easily engineer. Understanding what was in each picture appears to be a bit more difficult.
This continues a trend started by Google's AdSense in that it creates a work and compensation system tied closely to the exact value of each unit of work. This has HUGE implications when it comes to our (or any) society's concept of work, employment and making a living. You are going to hear a lot more about this over the next couple of years...trust me.

Oh, so THAT's why they hired Ray Ozzie! (MSFT)

2005-11-03T12:02:00.000-08:00

From the "What Do You Mean, Microsoft's Not A Bunch Of Idiots?!?" Department: Interesting news article from ZDNet talking about the market's sudden realization that Microsoft may get the whole "Web2.0" thing after all. Good read...and get your orders in.

Microsoft's cultural shift becomes oddly, swiftly evident by ZDNet's Dana Gardner -- The real race between Microsoft and Google may boil down to which can truly change itself best and fastest.

Wow, the Hammers are out for Knight-Ridder! (KRI)

2005-11-03T11:35:00.000-08:00

Another big institutional holder of Knight-Ridder called for a sale of the company today. Harris, which holds 8%, added it's voice to Private Capital's. This means that 27% of the shareholder base wants out. Bad.
Is this a sign of increased shareholder activism? I've seen lots of funds being raised lately using this investment style, so this would make sense. The thing I don't get is why KRI and why now? Sure, it's sector is in a squeeze, but all the papers are now. Do the agitators think they'll get a higher price by being the first head on the chopping block? Maybe they have a point. There's bound to be a paper group that still believes, would like to bulk up and is willing to pay synergy premiums. I'm assuming that Harris and Private know there are bidders in the water, otherwise, why would go so vocal so quickly?
I'm just wondering who at Harris and Private was stupid enough to buy into this clearly declining sector? (Not that I have much to say considering my recent Symantec call...)

Knight-Ridder's Investor Woes to be Expected (KR)

2005-11-02T12:13:00.000-08:00

I've banged on the established media channels being slow to realize that the Yahoo!s and Googles of the world are going to eat their lunch. Knight-Ridder's largest shareholder, Private Capital (Legg Mason), is agitating for a sale of the company. However, KR has been one paper company that has moved fairly aggressively into the on-line space. This link to an interview with Hilary Schneider, SVP of Knight-Ridder Digital, illustrates that they've been moving aggressively through acquisitions into the space. KRD's Topix.net acquisition was a great one. The comment that interests me is where she discusses recent acquisitions of Classified Ventures:

Q: How do the acquisitions by Classified Ventures work for KR?

A: The last two acquisitions made by Classified Ventures (NewCars.com and HomeGain) gave KR a foothold in the lead generation business, which is a high-growth sector of the online classified market. Lead generation is somewhat different than a pure listings business, since it focuses on building a portfolio of products that will draw advertisers to our markets.

"Lead generation" is the new PPC. It's all about leading horses to water... It seems to me that a lot of advertising industry standards are being broken down and the pricing is inevitably moving towards payment-per-qualified-likely-buyer.

Symantec Stumbles Big-Time (SYMC)

2005-11-02T06:30:00.000-08:00

Symantec severely disappoints with guidance. JT indicates that it is looking for $1.26B in revenue when the Street was looking for $1.35B. While normally this would be A Very Bad Thing(tm), I think more homework is needed. This flies in the face of the storage refresh cycle theme I've been working on here. Could this "refresh cycle" really be a "Everyone Takes Veritas' Customers While They're In Acquisition Integration Mode" cycle? I don't think so.
Good news: Symantec signed 67 deals worth >$1MM; good progress towards becoming the enterprise standard.

More Sun...storage refresh is on!

2005-11-01T16:15:00.000-08:00

StorageTek had a "significant and immediate" impact on Sun's storage revenues, which were down 6% ex-StorageTek.
Sun's earnings preso (PDF) here. Ignore the hippy-dippy "participation age" slides. That's the stuff that makes me think they're just a little too far out there to really be an investable story.

Sun Microsystems continues to wallow (SUNW)

2005-11-01T15:40:00.000-08:00

How much longer are investors going to put up with McNealy and his new pony-tailed sidekick "The Schwartz!"? Sun is still in a bad place. Earnings disappoint.
The bright spots? They made over $250MM in operating cash flow. I like cash flow. They also have over $4.5 billion in cash. Cash is my second favorite thing. Deferred revenue was up as well.
Software smells like it is gaining momentum and so does hardware, but my gut tells me that Sun has a huge beta to infrastructure technology cycles and I don't know how durable this rebound is. I'm seeing more moderate growth ahead with a lot of it going to newer technologies with much lower costs.
They say that results were helped by acquisitions. I'm going to guess that StorageTek contributed a good bit this quarter. Networked storage products did well but there's some distortion from the StorageTek integration. We're all about the storage refresh cycle here at TechTrader world HQ.
I guess all in all, I think the company has a hard time figuring out its hardware v. software strategy and winds up spending too much time chasing too many rabbits. If more start-ups like Fabric7 keep coming out and leveraging lower cost and OpenSource opportunities, Sun's will continue to have a hard road to hoe.

Six Apart Issues the latest Web 2.0 Boil...

2005-10-28T12:00:00.000-07:00

Mena Trott has been at every major Web 2.0 conference since AJAX stopped being laundry detergent. Maybe she should have spent more time running her company and tending to their impending technical issues. This is what happens when businesses become big time. We saw it in the first bubble and we're going to see a lot more of it in this one. For instance, Six Apart is a nice little privately-held company, right? Then why would they have an Executive Vice President of Corporate Development???
I'm not here to pile onto the current Web 2.0=Bubble 2.0 meme, but clearly, lots of lessons that should've been learned in '01 are being disregarded. Most of it is subtle stuff, too. Like why a 25 yo programmer shouldn't be a CEO of a rapidly growing company. Or why an investment in a "new and revolutionary" browser might be a bad idea.
Personally, I think a lot of the VC wannabe's are back and they're funding anything in an attempt to catch a couple of lucky breaks. This all started with OddPost getting acquired by Yahoo! and making the cover of Business2.0. The confirmationary stamps were Blogger being acquired by Google, Flickr being acquired by Yahoo! and MySpace being acquired by NewsCorp. Basically, all of this sound and fury has been ignited by large public Digital Media conglomerates realizing that they're being outpaced by a bunch of start-ups. The penalty is that they've all paid 9 figure prices to stay in the game.
It should be interesting to see where this goes...

Earnings Notes (RNWK, MSFT)

2005-10-27T16:03:00.000-07:00

RealNetworks' disappointed the momentum crowd tonight, reporting $82MM and 6 cents, about expectations - guidance not fantastic. However, I think the subscription business shows solid, fundamental, secular growth -- the kind I like. And the business is now starting to mint money ($16MM in EBITDA). If it pulls back too much on this earnings release, I'll be movin' in. Additionally, Yahoo! announced that they'll be doubling the price for their music service today, removing a competitive thorn from Real's side. (Not to mention that MSN is now an ally and not a foe anymore!) Lot's of obstacles falling for Real on the core subscription business. The question now is whether they have the Motts (as in applesauce) to get another leg of growth going...
Microsoft also disappointed, but I'm beginning my accumulation here as well. Their server offerings will be big time. Vista will have the same start that XP had -- slow intro, but eventual submission by the user base. All of this will crescendo in 18 months for the gargantua. You have a long time to get in...
The storage technology infrastructure refresh theme keeps resonating for me. I need to do more work on complementary technologies...

Google (GOOG) crushes...

2005-10-20T13:33:00.000-07:00

Check it out... when will people learn? The Internet is the new media platform for the future? It's growth, growth and growth! More people coming online every day. More advertisers advertising every day. More content being created every day.

EMC follows Datalink (DTLK) this week

2005-10-20T13:13:00.000-07:00

Hope you saw my earlier post commenting on Datalink's earnings results and management comments discussing a potential technology "refresh" at the storage infrastructure level for enterprises. (Translation: Companies are redoing their storage/disk drive set-ups and buying new, more integrated platforms.)
If you did and you bought EMC, you'd be up almost 5% for the week (6% to high this morning).
Don't fret if didn't though, I think this story has legs. Technology "refreshes" last for awhile and given that EMC reported higher earnings and growing margins...storage will be a good place to be for awhile. I mean really, a $33Billion dollar company showing 17% YoY revenue growth?!? That's like have a big man center with ball-handling skills.
Music from the earnings release:

"EMC said each of its major business segments posted double-digit gains in percentage terms over the comparable quarter a year ago, driven in part by new product additions to its Clariion and Symmetrix networked-storage systems.

"We're in the midst of the most robust wave of new product introductions in our history, and customer response to our new products has been outstanding," Tucci said."

Speaking of storage...it might be a good time to pick up some Symantec now that they're a major storage vendor and their valuation is deeply depressed by Microsoft security offering concerns. For the record, ain't no decent enterprise gonna trust Microsoft with security -- trust me on that one! It might be early as Symantec clearly has a lot of integration left on its hands considering they just picked up BindView as well, but I think the Veritas acquisition could serve them very well.

Saying hi to the readers....

2005-10-19T17:46:00.000-07:00

Prudential Securities, Brahmin Capital, Lehman, Dimensional Fund Advisors (quants!?, what are you doing here???), Motorola, Yahoo!, Cisco, Adobe -- all you guys! Love it...keep coming back!

Yahoo (YHOO) is cheap.

2005-10-19T00:16:00.000-07:00

But you probably already knew that. If not, let me give you the run-down on why Yahoo! will be a great stock to own for the next decade. Yahoo! is establishing itself as one of the premier global Internet media brands. Wow, does that sound like say-nothing business double-talk! But, in this case, it's simply true. Same can be said of Google, maaaaaybe of eBay (jury is still out on that one).
Yahoo! is and will continue to be a leading provider of all services broadband for the foreseeable future. Only roadblock that I can see at the moment is that they're acquiring a bunch of companies right now and sucking up a bunch of people who were good at making a cool Web 2.0 app but are not likely to be good managers within a publicly-traded multinational Internet media company. The types of skills and characteristics required for each world are completely different (worlds apart?). If any of these Dot-commer 2.0 types are given real responsibility inside Google, uh...I mean Yahoo!, bad stuff will happen. Regardless, Yahoo! will be a great stock to own for the long-term.

Doh! Apple (AAPL) - Samsung NAND partnership breaks down

2005-10-16T22:33:00.000-07:00

Apparently, Apple pulled out of a potential $4billion(ish) deal with Samsung for NAND flash memory because of a potential investigation by South Korea's Fair Trade Commission. Wha...? Apparently, the buzz is that Apple was getting their memory at a substantial discount. So, why exactly would Apple pull out of this deal? Apple could open weakly on this news.
Hmm... I wonder if the recently confirmed settlement between Toshiba and Lexar (LEXR) had anything to do with this? Anyone know if Samsung already has a license from Lexar?
Even if the nanopod will crush Christmas like a jelly bean.

Thoughts going into Monday, Oct. 17th

2005-10-16T21:58:00.000-07:00

The market acted interestingly last week. I noticed that the Volatility Index spike Friday morning and then reversed course - broadly lifting many stocks. I suspect that we're seeing the effects of a number of bad events work their way through the market:

Hedge Fund collapses: Bayou, Wood River, some to be named soon I'm sure...
Refco: Hey, guess what? SOX hasn't cured executive malfeasance! Who'da thunk?
Katrina, Rita, The Next Big One: What global warming?

Considering how well the market has held up, I can only surmise that it will power up when the skies begin to clear. One area that I think will brighten up things is the Christmas retail season. I've been a strong proponent of the housing sector because I feel that the "overleveraged consumer" story is a red herring (is that the right term?). Consumers aren't overleveraged, they're "right leveraged". In other words, *most* people have a good idea of what their monthly income is and what they can afford to pay out. When they do hit the heavy end of the meter, they scale back accordingly and work it off. The scare tactics are (once again) the product of a financial media that needs a story that will garner attention.
But I digress. I'll take a bid that this Christmas season will be okay. Not great, just okay. Which considering the gnashing of teeth in the market lately, will be just fine for stocks.
So, given that I'm looking for upside, here are other ideas that I'm working through:

Datalink's earnings call brought up the idea of a technology refresh for storage (and back-end infrastructure, I suspect) technology. Need to figure out if EMC or the other biggies are seeing this as well. HPQ could get a lift from this.
GE just got dinged by their NBC subsidiary. Revenues fell 4% (Olympics adjusted), reflecting a lack of ratings for hit shows. Is this another "ad dollars to Internet" data-point? Eh, I'm thinking it's just piss-poor show development. However, I can see GE working with NBC on an Internet related acquisition soon. Alloy.com? iVillage? I need to figure out what is going on with the whole MSNBC alliance/branding...thing.
Palm & RIMM announce a Blackberry/Treo phone. Is RIMM reacting to the competitive threat posed by Microsoft's impending delivery RIMM like access to email through the new Exchange 2003 update? Is this a signal of future weakness for RIMM or will getting on the Treo add enough momentum to keep the good times going?
Lexar finally gets the $465MM verdict against Toshiba confirmed. Unfortunately, it looks like this would more than wipe out Toshiba's $350MM+ operating profit expected (or unexpected) for this quarter. The reason for the strong quarter? Yep, strong NAND flash memory sales. Ouch.

More to come! Enjoy your Monday morning. Invest well...and remember, it's only money.
;)

Google helps clarify non-GAAP earnings (GOOG)

2005-10-13T14:38:00.000-07:00

Google posts a relatively cogent missive about non-GAAP earnings. They're bending to the stupidity of the sell-side and trying to make sure that the Street adds, subtracts and tax-effects correctly. Interesting that they're pandering to the Street like this. I wonder if they're running into the "Our stock price isn't going straight up anymore and we might lose all of the 30 bazillionaires that we minted in our IPO"-syndrome. Microsoft has been dealing with that issue for awhile now.

Meet your new boss... Looks a lot like the old boss...

Datalink (DTLK) hints at a storage technology "refresh cycle"

2005-10-12T11:56:00.000-07:00

Datalink (DTLK): Earnings came in a bit short as the enterprise storage solution company announced strong YoY and sequential quarterly earnings growth. They revenues for the quarter, rose 22 percent to $31MM from $25MM YoY and grew 9 percent sequentially from Q2 revenues of $29MM. Backlog for Q4 ended at $19MM, including $8MM of the new big fish customer. Gross profits increased to 25%(ish) and mgmt expects GM to continue to increase. Operating profits have improved because of lower fixed costs (rent at HQ – subleased saving $950K a year). Net loss included a $3.5MM non-cash charge because of subleasing costs. However, net income got hit due to “variable incentive compensation” related to performance and new customer attainment incentives, but the timing peaked in Q3 and are expected to decline. An analyst asked where leverage in the model would come from; the company’s response was that two incentive programs will phase out and others will proceed at a lower rate. Also, Datalink used more 3^rd-party contractors to fulfill professional services contracts, which is expected to decline. Tax benefits are no longer recorded due to consistent profitability. Co has $11.3MM in cash; +$2MM.

Q3 Outlook: revenue - $27-31MM, net income 2 – 10 cents per diluted share.

Interesting quote: “They are also increasingly looking for e-mail management and archiving solutions which more effectively address their regulatory compliance and data growth requirements.” – good news for wiki companies like Jotspot.com and SocialText. Wikis allow for collaborative work without passing numerous excel spreadsheets, powerpoints and word documents around that clog up a company’s servers and storage.

Another interesting comment: “Customers have storage technology infrastructures that are fully depreciated and are now looking to refresh their storage technology infrastructures.” Management furthered commented that companies are moving away from single-tier architectures and towards lower-cost infrastructures. They expect this “refresh cycle” to go on for some time as customers look to simplify heterogeneous storage structures.

Technology trends that Datalink is investing in:

ILM Technology: The ability to search all emails by sender, receiver, time and subject. Helps with regulatory compliance (SOX) and litigation discovery costs.
Server consolidation: Putting several NAS appliances on one server, saving time and money.
Tape virtualization: integration of disk-based back-up with tape environments. Benefits: higher reliability, faster single file back up, etc…

So, overall it appears that the market is spooked by the fact that while revenues grew, most of it came from a single customer that amounted for $8MM. Clearly their analyzing this company’s performance excluding this one big customer. Which, hey, I get that, but given a $37MM market cap, this company is doing pretty well when looking at total revenue growth. Plus management sounds pretty confident in future backlog and investment trends. I believe management when they say that there are lot of enterprises that have hairball storage infrastructures and are looking to consolidate and optimize accordingly. However, it begs the question that if this is true, then there are lot of players who will see a bump from this. Hello EMC, Symantec (SYMC) and even, gasp, Sun (SUNW). Hmm...

Apple's Video iPod - good for video blogging?

2005-10-12T11:32:00.000-07:00

Apple (AAPL): Announces their new video iPod to less than enthusiastic reception. The viPod will come in two sizes and prices – 30gb for $300 and 60gb for $400. (Yes, I love to round up X99 prices – let’s get real people.) The interesting part of this announcement for me is videos for $1.99 a piece. While I think it’s somewhat interesting, I’m certainly not going to go out and buy any videos for this thing. I’m sure there are people that the music videos will appeal to, I just don’t know any. I think the real play here is video blogging. People will be able to share video snippets and blogs over iTunes (I’m assuming) (vidcasts?), which will drive sales of video recorders and editing software. Sonic Solutions (SNIC) anyone?

YATOW2.0 - Yet Another Take On Web 2.0

2005-10-06T16:45:00.000-07:00

People are lazy. Analysts are lazy. The Media is lazy. Everyone likes to have a "magic bullet" and right now that bullet is "Web 2.0" (large timpani beats here). Everyone seems to have an opinion on what Web 2.0 is and what it isn't. And now we're starting to hear the "Yeah, but is it a business model?" chatter as well. I've been following this meme for awhile now and I think I have a take which is sufficiently differentiated enough to share. (Hallmark of bloggers: Narcissistic view of the importance and desireability of their opinions. I am no exception.)
What the Web 2.0 means to me:

Web 2.0 refers to a set of characteristics embodied by the recent spate of innovative Internet services that are coining big money being sold to Google, Yahoo! and Barry Diller. Those characteristics are:

Social Web Interaction: As more and more people take to the web and adopt its capabilities to communicate outward (rather than inward-only with other media forms), Web 2.0 Internet services enable, neigh - empower, those voices. Oh, and further it enables these voices to interact and communicate with each other eventually building virtual communities.

Prime Mover: Blogger.com
Special Credit: Ross Mayfield - "Web 2.0 is made of people! - people!"
Unspoken implication: Who we are will be less defined by our immediate physical community and more by our chosen Internet communities. Where is your Internet playground?
Founding dominant clique: The OpenSource/Free Media crowd.
The Bourgeoisie: Start-up flippers.

Open API's - let other bright people take an Internet service's results, features and capabilities and futz/remix them for their own purposes.

Prime mover: Google Maps

Coolest mash-up for me: GoogleMapPedometer - to measure how far you really jog...

Preferred Technology Framework: AJAX

Translation: We need real, fat, ubiquitous broadband as this is a hack to make web applications feel real-time over spotty DSL and latency-prone servers.
Underappreciated Evangelists: Adaptive Path - You go Janice!

Some cynical observations regarding Web 2.0:

Biggest misconception: Web 2.0 is a business model! No man, it's just a set of guidelines that will make an Internet service/application become more widely adopted in the current early-adopter cultural/commercial/technological milieu.
Most likely concept to be ignored as the bubble grows: The underlying application has to have its own value.
Boomerangs: Wacky, visionary, executives that have been hiding since Kibu.com blew up. Oh, and those wacky "strategy" consultants/incubators/coaches/etc... Oh, and technology that no one really understands what the hell it's good for but will likely get a huge valuation - Ning.
The new Industry Standard: AlwaysOn
Unavoidable Crash: More VC money looking for the next Google run into start-ups that don't need (or want) their capital.

So, why in the hell am I writing about this? Because of all of the M&As that are occuring in the sector. Yahoo! just bought Upcoming.org. Great, but why couldn't Yahoo! create this on their own. More importantly: why didn't they

Snarky, yes. Entertaining, maybe. Informative, hopefully...

Google (GOOG) and Sun (SUNW) p4wn Microsoft (MSFT)

2005-10-04T10:05:00.000-07:00

Google and Sun's anticipated announcement today and the impact on Microsoft's price will demonstrate the pitfall of trying to go it alone in a market where global access and standards are tearing apart proprietary ownership defenses. Microsoft's biggest defense against OpenSource office suites is that it's been relatively difficult for the average consumer to get their hands on a copy and try it out. The general public isn't really interested in going to download site, downloading the install kit, putting it on their computer and taking an office suite for a spin.
But what happens if Google decides to take one of the robust offerings that is supported by one of the major players in the market and make it widely available as a net offering? And what happens if Google decides to do this over a proprietary and robust Internet access network that they make almost universally available?
Answer: Nothing good for Microsoft (or companies that have economics related to offering Internet access for that matter).
Microsoft is a perfect example of the difficulty of managing complexity in today's rapidly innovating and evolving world. They're trying to control everything about the PC platform and the irony is that they're rapidly losing control of even their base - the Office suite. This is happening because they're still a 'command and control' type of organization in an era where collaborative innovation and ecosystem development rules.
Google will eventually wind up in the same situation, but it will probably take 10-20 years to get there. It's the ol' Innovator's Dilemma issue. Happens to every company that has economic turf to defend. Luckily, the process if continual renewal allows for upstarts to capture the flag every once in awhile.
Consider Microsoft p4wNed.

Google is going into Hardware! (GOOG)

2005-09-14T16:51:00.000-07:00

I don't know if I missed something here, but this job posting from Craigslist looks interesting. Maybe they're just having thermal issues with their enterprise search servers, but considering this position is in the New Product Development group, I think they have something else in the pipeline...is a "gphone" in the works?

Google: Mechanical Thermal Engineer

Position based in Mountain View.

We're looking for a top-notch Mechanical Thermal Engineer with expertise in small to large systems. The successful Mechanical Thermal Engineer will take responsibility for most thermal design/analysis from the circuit card component to the facility level, with a major focus on feasibility and efficiency analyses for existing and next-generation systems. You will be responsible for correlation of the analytical models with actual data and apply your industrial expertise in the design and selection of thermal management hardware including heatsinks, air movers, cooling coils, chillers, and cooling towers.

All applicants must possess the following:

Experience with heat and mass-flow balance modeling software

Good facility with thermal analysis techniques

Strong communication skills and the ability to communicate ideas with people from diverse educational, experiential, and cultural backgrounds

Exceptional analytical and organizational skills, coupled with a well-focused attention to detail; ability and commitment to produce a timely and highly accurate work product

The desire and ability to become an integral part of our highly creative, fast moving product development team

Educational Requirements::

A B.S. in Engineering, Science, or Math is desired, with an M.S. preferred. Equivalent experience will be considered.

Additional consideration will be given to individuals with the following:

Experience with CFD code (Flotherm preferred)
Specific expertise in the analysis of large-scale power plants and heat extraction
Experience with control systems including conceptual design, programming, and operational analysis
Expertise with solid modeling software (Pro/Engineer preferred), drawing creation, and assembling bills of material

EDS Punts ATK Sale

2005-08-25T16:55:00.000-07:00

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.

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

2005-08-12T09:49:00.000-07:00

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.

Qualcomm (QCOM) picks up Flarion - WiMax coming

2005-08-11T07:27:00.000-07:00

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...

2005-08-11T07:13:00.000-07:00

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.

Register.com's (RCOM) Bitch Fight

2005-08-10T10:02:00.000-07:00

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.

Shanda Interactive reports results (SNDA)

2005-08-09T16:34:00.000-07:00

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)

2005-08-09T13:30:00.000-07:00

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 2^nd largest in China, 6^th 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.

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

2005-08-05T13:55:00.000-07:00

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)

2005-08-05T13:16:00.000-07:00

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:

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.
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.

RealNetworks Bounce Underwhelms (RNWK)

2005-08-03T11:37:00.000-07:00

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

2005-08-03T10:55:00.000-07:00

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.

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

2005-08-02T13:24:00.000-07:00

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?

2005-08-02T10:08:00.000-07:00

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.

HP is less stupid now (HPQ)

2005-07-29T13:52:00.000-07:00

**Update: I've edited this post to clear up the confusing language. (Maybe we should consider the "Save as Draft" function until we've proofed the material, eh? - ed.)**
Sometimes companies will tell you how dumb they are (were). Take HP's recent announcement to unwind its partnership with Apple to resell the iPod. The coda to the divorce is that HP can't sell a competing product in the market until Aug 2006.
This divorce is actually a good thing, but it only gets HP back to ground zero and demonstrates how badly their strategy was. This partnership is an illustration of why Fiorina was better at garnering media attention than she was at building a business that makes a profit in the long term. Why?
Well, let's see, if Apple's iPod strategy was to use the media player to attract PC buyers to their computing platform, then every converted Apple buyer is one less PC buyer. Good thing HP doesn't sell PCs or laptops...oops. Therefore, HP agreed to actively undercut their own technology platform by distributing Apple's Trojan horse. The best part? It's reported that HP didn't even make much margin from their iPod sales. This is an amazing illustration of Really Bad Strategy (TM). I know what Fiorina was Trying To Do (TM) -- she wanted to show consumers that HP "got" the new digital media world and demonstrate that knowledge by allying with the best media player in the market. What she didn't understand is that the whole "building a connection with consumer" market B.S. touted by marketing consultants doesn't necessarily mean you're going to make a profit. Selling proprietary products for more than it costs to make them does.
Interestingly, HP has shown signs of strength recently. I think this comes from the Turn Around at HP. The unwinding of the above partnership demonstrates they have leadership that now understands Basic Strategy 101. And we know that investors love a turn-around story. Unfortunately, people don't understand how long or arduous turnarounds really are. As a kicker, I wonder if HP will see additional competition in its remaining core market: Printers. But I'm not saying anything new here, just staying the course.

Ariba Shareholders are Being Ripped-Off by Management (ARBA)

2005-07-26T11:08:00.000-07:00

Wow. Read this article in the MercuryNews regarding executive pay in the Valley and figure out which company appears to have inordinate salary relative to performance.
Yep, it's Ariba. Top four executives got paid $11.4 million (according to the table). CEO Robert Calderoni made $6MM. Cash. Way to go, Bob! Fordham better get their alumni donation director to camp out in this guy's driveway, pronto.
DAAAAAAMMMMMMNNNNNNNNN...how do I get that job? I'll run a company's stock price into the ground for $6MM in cash any day of the week! Looks like Footnoted.org has mentioned other exec comp shenanigans previously.
Don't hate the player, hate the game...right? Good thing the SEC is all over this...pfft, whatever.

Vector pounces on Avid's (AVID) weakness to take away Pinnacle (PCLE)

2005-07-26T09:34:00.000-07:00

Interesting article in TheDeal.com regarding a bid by Vector Capital and Tennenbaum Capital Partners for Pinnacle's "main business line". Vector offered $200MM for the Liquid editing product line, which they claims values the company at approximately $423MM. Since Avid's big fall recently, their offer has declined in value to about $335MM. However, the value of Vector's offer is dependent upon the value of Pinnacle's remaining Broadcast and Professional division. Vector puts this at $120MM, but it's not clear that free-standing Broadcast division would do well in a market that is dominated by Avid and Apple. Now, there is a rage among small public companies to core down and focus products, strategy and operations. And one could argue that this could rejuvenate Pinnacle, but those types of restructurings can be difficult.
Regardless of the issues with Vector's bid, it's interesting that the board has denied the offer, urging shareholder's to vote for Avid's offer even though it's potentially 26% less. I hope the shareholders are sophisticated enough to...wait, nevermind, hoping that "shareholders are sophisticated enough" is never a winning strategy. Unfortunately, board of directors are still creatures of comfort, and Avid's bid is comfortable - a bid from financial concerns that involve splitting the company are not comfortable for Boards of Directors. Even if they're a much better deal for the shareholders.
I get sick when I see BoDs destroy shareholder value like this. Granted, I don't know how deep the caveats on Vector's bid are, but for an extra 26%, I think Pinnacle's BoD has a fiduciary duty to find out. I wonder about Patti's motivations here. Maybe Pinnacle's professional division is in disarray and she knows that building a stand-alone company around it would be worth a lot less than $120MM. Maybe she's tired of being the Chairperson and CEO of a company that has lost the competitive battle in the consumer/prosumer DVD editing market to Sonic, Adobe and Apple. Maybe she's scared that Vector will buy this line of business and turn it around, illustrating her underperformance as a CEO. Regardless, I'd be pissed if I was a PCLE shareholder right now.

News Corp's acquisition of Intermix (MySpace) is a bad one

2005-07-19T17:53:00.000-07:00

I've been musing over News Corp's recent acquisition of Intermix and I'm beginning to feel like News Corp made a bad move here. At the 50K ft level, it makes sense. If you've been reading this blog, you know that I've been bearish on the newspaper groups because I believe they will be severely impacted by advertising dollars flowing into Internet properties. Actually I think all media is now having to compete with the 4 1/2th estate. But online properties feel the most like newspapers and magazines to me. Add in the fact that circulation numbers are now being skeptically questioned, and you have a recipe for advertiser discontent which will result in migration to trackable online properties and/or lower print rates. But I digress. What this means is that mainstream media companies have to buy Internet media companies. It's the best move they can make. Dow Jones purchased MarketWatch.com - makes sense. News Corp purchasing Intermix - could make sense. Some are developing their own blogging outlets - check out BusinessWeek's online presence and note their post regarding how blogging is eroding newspaper revenues. So, they're on to the game now, eh?
In other words, it's clear that the future for multi-channel media companies includes Internet as a core channel. So they have to start buying Internet media companies.
But here's the rub. Many of these mainstream media companies may have waited too long and now have to pay up. Now that the future strategy is clear, they're having to pay up to get their Internet channel and it's not clear that they're necessarily paying for quality.
News Corp's acquisition of Intermix is a great illustration. Intermix is not what I would consider to be a quality Internet property. They're a collection of some so-so sites like Grab.com, but the "crown jewel" is supposedly MySpace.com. Here's the thing with MySpace: to me it "smells" like AdultFriendFinder.com (AFF) (interesting choice of words - ed.). What do I mean by that? Well, AFF is an adult oriented personals site that obstensibly connects swingers to other swingers. However, if one reviews the "free" listings that they post, it's seems to me that some or most of the posts are of dubious origin -- i.e. they're fake. I've actually suspected that this occurs in a lot of the personals sites; so Match.com could also be critiqued here as well. Why is this important? Because if you tour around MySpace, it's clear that the main appeal of the site is it's network of numerous teen hotties. Look at this "browse our community page", it's all nubile young women and a good portion of them have posted pictures of themselves in their underwear. Yes, I said it, but trust me on this, a lot of other people are thinking it. I don't know about you, but I'm somewhat skeptical that all of MySpace's user base is, well, real. I think there is a good chance that MySpace may use the same tactics that AFF uses to garner users and traffic, namely fill the user base with a lot of fake users that are really, for lack of a better word - hot. Of course, I'm not a paid member, so it may just be a ruse to lure people into paying and once you get behind the wall, one finds out that the real user base is considerably more mundane. I think that it's recent growth is a function of people being enticed by the pseudo-sexual content. This strategy has a very short life.
Even if the users are real, what happens when all the dorky old dudes sign up hoping to become cool and hip? Right, all the teeny-boppers move on to the next big thing.
So what does this mean? Well, for News Corp it means a couple of things. One, they likely bought a website that drives a significant portion of its recent growth (MySpace) based upon sexual innuendo that may not be real. So, even if the user growth is real, buyers may figure out that the content is less than advertised and cancel as soon as it loses appeal.
We've seen the rapid rise (and fall) of similar services. Yahoo! Profiles (not Personals) started out like this until the porn companies figured out how to inundate their system with fake profiles. Yahoo! doesn't really do much with their Profiles anymore. Actually, I'm surprised they're still available. This tells me that they draw enough traffic to keep it switched on.
Other social networking sites in general also have issues with rapid rise popularity followed with rapid descents. My understanding from various industry sources is that LinkedIn and the others are experiencing hiccups in their expected growth as well.
This is why I think InterMix also accepted only a 12% premium to their stock price. Management may have taken a look and realized that getting $508MM, almost 7x their 2004 revenue numbers, reportedly based on MySpace's recent growth. BTW, there's an interesting analysis of VC returns on the deal at Bill Burnham's blog.
I think that InterMix wanted out while the getting was good and I think News Corp gave it to them. But then again, I'm nothing if not opinionated.
If anyone has news to the contrary, I'm all ears.
**Update: Another issue - how will MySpace's young & hip user base react to Fox as a parent company?
**Another update: I've read a bit about MySpace becoming the next great music promotion channel, but I'm not buyin' it.
Sorry for all of the republishing, but I'm obviously adding to the story as I find additional info...

Tech Bullish - Leaders Breaking Away (AAPL) and Losers Bouncing (HPQ)

2005-07-19T10:22:00.000-07:00

Loved the Apple earnings announcement last week -- the Street was POSITIVE that the iPod was ready to slow down; estimates for iPod shipments stood a little over 5MM. They KNEW iPods were slowing, it was just a matter of by how much. I was talking with a medium sized ($800MM) hedge buddy of mine and he asked me, "When does Apple break down?" I told him I didn't think that it would because of the strength of the iPod and the lift it would provide on the business. What is the Street missing? Apple's proprietary retail strategy. By having it's own retail locations, Apple now has a distribution arm that won't abandon it the second Sony (SNE) announces yet another ill-fated initiative. Developing the retail arm was (another) genius move by whomever at Apple figured it out. I loaded up the day of the earnings call because I believed that the Street is dying to find the short side of Apple's story.
Keep looking boys.
Now, on to losing trades. HPQ is making a great run based on the restructuring moves of Hurd and the announcement of a new line of printers.
They've gotten a very optimistic lift from the announcement that HPQ will eliminate 10% of the company's workforce. Having experience in restructurings and companies in distress, I know that this is actually a very tortured, long road to recovery. I suspect that remaining HPQ salaries are still bloated across the board, which will create a very real management problem. Namely, the superstars within the organization realize that compensation will come down across the board, regardless of actual performance. They will naturally begin to entertain offers from companies with better growth profiles (Salesforce.com et al.) because this provides a chance to lock-in the high levels of compensation they currently have and swap-out their equity (options) with a better stock. Naturally, fast-growing organizations will be happy to have such experienced people and will be able to afford the steep ask.
The counter to this is the fact that HPQ is well-positioned to sell into the tech rebound in effect. They've got enough fundamental technologies that they will get a lift from strong IT spending. Additionally, the Street loves turn-around stories. Remember the early days of Chainsaw Al Dunlap? Same story, different company. There are buyers on the hope that this will change HPQ's position as there is no proof yet that the initiatives will or won't work. So, the rebound on the stock does not surprise me and is why I haven't instituted a short yet.
But I'm watching this one like a hawk...

AVID's house comes tumblin' down (AVID)

2005-07-13T16:20:00.000-07:00

I've been negative on AVID for over a year now (how many TV stations can they upgrade anyways?). I haven't paid attention to the company lately which is too bad, because they definitely surprised the Street with this guidance update. Down over $10 in after hours trading.
Ouch.

Apple crushes, UPODs - will trade up (AAPL)

2005-07-13T14:26:00.000-07:00

Apple crushes (predictably). I talked with a colleague the other day who asked me, "When does Apple break down?" I told him that it didn't because it's a strong company and is actually very cheap on a cash-flow basis for a growth company." He didn't like that answer. I think he's short. Too bad. Besides, when is the last time you heard a growth company was cheap on a Cash Flow from Operations basis? Exactly.
The skepticism of the institutions here tells me that the company has additional buyers. If they have another strong quarter, then these guys will have to flip, providing another push on valuation. Good thing I juiced with calls today before the close! I love being right.

Navarre's Little Understood Secular Trend (NAVR)

2005-07-07T12:31:00.000-07:00

This article from SFGate.com discusses an emergent trend that could benefit Navarre enormously: the rise of Anime as a cultural phenomenon. I don't personally dig Anime, but there are plenty of people who do and the content is creating big bucks. Navarre's purchase of FUNimation puts them squarely in the middle of this secular trend as FUNimation is a leading content developer of Anime content.
Navarre is a stock that I follow as a part of my "Growing Acculturalization of America" trend. I believe that the racial make-up of America is changing drastically due to Asian and Hispanic immigration, and I want to invest accordingly. If the Anime trend has additional legs and continues to grow, then Navarre's FUNimation buy will look extremely smart. Beyond being a driver for sales, it will improve Navarre's margins as well. Their current distribution business averages about 15% with the FUNimation business coming in around 30%. If that holds, Navarre's income could improve drastically. Considering how little the Street likes this stock, it could be a great contrarian play.

Bad news for EDS (EDS): spin-out trouble

2005-06-23T11:38:00.000-07:00

Just saw some bad news for EDS; mainly they're cutting off plans to spin-out AT Kearney to the partners of the consultancy and are looking to sell it to a 3rd party. Why is this news negative? Because services businesses are fragile business models and in situations like their value can be destroyed quickly. In this case, it's clear that there were negotiations with ATK managing partners. These managing partners wanted to take the brand as their own and spin out of EDS. But now EDS is going to try and extract more value from a 3rd party. Did the discussions between EDS and the ATK managing partners deteriorate? If so, how motivated are these partners to stick around and be compliant under another firm?
Here's the rub: The value of ATK lies in the consulting firms partners and employees. It will be very difficult for EDS to sell this value to another firm and keep that value for themselves. Why? Because it will be likely that the existing partners and employees of ATK will leave for other firms and/or start their own consultancy.
In other words, the value of ATK lies within the employees that compose ATK, not EDS. This is the paradox of services businesses; they don't scale well and the owner never really owns all of the value -- the consultants do.
I noticed that EDS' stock is declining on the news.

IP Network Stock Movement - Savvis (SVVS) & VitalStreams (VSTH.OB)

2005-06-21T15:05:00.000-07:00

Interestingly, two stocks that I follow in IP Networks, Savvis and VitaStreams Holdings, both spiked +10% today. I'm not sure what's going on as I've just had these stocks on "watch" for awhile. I think recent deals are illustrating undervaluation on these neglected stocks.

Watch out below....Arbinet revises downward (ARBX)

2005-06-21T14:03:00.000-07:00

I don't follow Arbinet, but based upon this news release, I would watch out for this one tomorrow morning. Watch out below!
The release also wins the award for: "Longest Explanation To Finally Make the Point That We're Actually Lowering Our Guidance By A Significant Amount".
**Oops, looks like it's already down $2 in after-hours trading.**
***More on Arbinet: Check out their stock price since IPO -- ouch.***

More on Adobe (ADBE) + Macromedia (MACR) = Microsoft (MSFT)

2005-06-21T11:21:00.000-07:00

CNet talks about the impending competitive aspects of a combined Adobe and Macromedia versus Microsoft. There's an interesting quote saying that the idea is ridiculous as Adobe and Macromedia aren't operating systems. It ain't about the OS, it's about the applications managing and distribution data.
The investment thesis I'm working:
Old way: Microsoft Word & PowerPoint
New way: Adobe PDF (with editing capabilities) combined with Macromedia that extracts data directly from documents and sends to enterprise applications/ERP systems/Oracle databases.
I haven't reached a conclusion, but that's my thought process at this moment...

Register.com rejects buy-out offer (RCOM) and implications for InfoUSA (IUSA)

2005-06-21T10:30:00.000-07:00

Register.com's board rejected the buy-out offer of $7.10 a share as inadequate. Apparently, the independent board members felt the offer is too low. Huzzah for independent directors! Finally, a situation where board members appear to be exercising their fiduciary duty and muscle. A review of the board member biographies shows lots of VC and Private Equity experience -- in other words, people who know about value and how to extract value in a transaction.
It will be interesting to see if InfoUSA's board follows the same process. IUSA has traded above it's buy-out offer of $11.75 recently (as predicted).

People are starting to figure it out: Symantec + Veritas makes sense

2005-06-18T10:23:00.000-07:00

This article in the NYTimes illustrates why storage and security are, in fact, intimately related and should be sold as a system. Go Symantec. Other players in the market are starting to figure it out: NetApp bought a security company (Decru).

Google (GOOG) starting epayment service?

2005-06-17T17:56:00.000-07:00

WSJ Online just issued an article stating that Google might start an electronic payments service similar to eBay's PayPal. This could be a catalyst for the stock. Why?
ePayment systems are seen as inevitable as people look for convenient alternatives to credit card accounts in paying for on-line goods. As more products (especially media) move onto the internet, ePayment systems become an alternative to traditional banking and credit accounts. Credit cards don't handle micropayments well and smaller transaction sizes seem logical based upon the migration of discrete Digital Media content.
Interestingly, this news is in the rumor stage. Upon reading the article, however, it seems like it has enough credible buzz to be true. I'm not sure that Google will verify the rumor anytime soon as they've indicated they're not trying to manage to Wall Street's expectations and the rumor seems like they're in the beginning stages of such an effort. However, if more information validates the service it will move stock as people realize that Google has a lot of skunk-works projects and the stock isn't just a one-trick pony.

Hussman throws rocks at Google (GOOG)

2005-06-16T10:50:00.000-07:00

Interesting Weekly Market Update from John Hussman, the founder of Hussman Funds (I'm assuming), regarding valuation and some specific comments regarding Google. It's actually a very intelligent discussion, so I recommend you read it if you get a chance.
The first paragraph discussion of "fair" and "over" valuation is very well put and I recommend any serious investor try to understand those concepts.
The second paragraph gets into a topic that I warned you would become very hotly debated for GOOG; namely, what will be the growth over the next few years? Is it 50%, 30%, 10%? No one knows, but this is where the market begins to gamble. I liken this situation to poker where you have to decide whether to call the pot with a 9-10 suited. If the pot is small, I like to make that bet because I have a chance to make a flush which is a great hand and a straight which is also a good hand. Both hands beat three of a kind but lose to a full house. So, at GOOG's IPO I felt like I was calling a very low pot ($85) to see the flop, and guess what? It came up Jack, Queen, Four -- same suit. So now I know I'm sitting on a flush, which is a very good hand and a likely winner, but the possibility remains that I may see a suited King or Eight somewhere on the turn or the river! A straight flush is a very rare bird indeed and you will win with that hand.
So, back to the original point of this post: Google's valuation. I think that there is an 8 or a King of my suit coming on the turn or the river. Why? Because I believe that Google is part of a new breed of Internet-enabled business models that combine Media and Business. This statement is very important because of the Media component. I believe that the media business is much different than normal consumer or widget businesses and is subject to different rules and strategies. Media businesses create defensible advantages by creating an emotional attachment to their consumer that continues to attract their attention over time. It's this attention that makes money. The fact that someone can create another search engine with different algorithms doesn't scare me because I believe that Google is creating attachments with consumers with their focus on giving users what they want (and doing no evil). It's clear that Google understands how to give people what they want when it comes to Internet products. Isn't Google Maps head and shoulders above MapQuest.com? The satellite thing? Freaking amazing! The interface? Much better and more usable than Yahoo! Maps. Gmail.com? Another great email program with much less clutter and more direct access than Yahoo! Mail (I have accounts with both). Google Answers? Basically a very simple Gurunet.com. I've used it and it actually works great. This understanding of the customer, this prescience, will result in Google doing what eBay has been doing for the last five years -- namely, continually outperforming expectations.
So, while Mr. Hussman can argue that the business model is indefensible and growth rates are not extrapolatable, I'm betting against him. I think the current consolidation in the stock is a great opportunity to build a position before the next earnings report.

Apple (APPL) rises today on strong PC forecasts

2005-06-15T12:37:00.000-07:00

Apple is up today, as it should be, on news of strong PC sales. Actually, that's a bit of a misnomer as it's actually not PCs that are strong, but notebooks that are selling well. This is better for Apple than the average investor might believe because Apple is the "highest Beta" play on strong notebook sales.
Why? The Apple iPod is successful in boosting laptop sales because iPod users are being drawn to the Apple platform in search of simplicity, style and grace. Once they step inside an Apple store, they're faced with laptops (and desktops) that blow away PCs on the aforementioned dimensions. Microsoft's issues with viruses and spyware have made buyers realize that there is a case to paying a price for a "better" system platform. The last factor is digital media production. If you're a pro or hobbyist, the Mac platform is preferred for a whole bunch of reasons which reduce down to: the Mac platform dominates for Digital Media production.
So, if "PC" sales are stronger than expected, then Apple sales should be much stronger than expected.
The caveat? The announced Intel chip switch has got the loyalists crying foul and newbies who look to this community will likely be scared off by the hysterics surrounding this. I obviously disagree with predictions of armageddon here, but this is political, and politics has nothing to do with rationality.
The kicker? Best Buy announced that mp3 player sales helped drive their killer quarter. Good for iPod sales -- they will likely exceed the Street's determined forecast of a drastic iPod slowdown. Even if Apple doesn't have any more shortages...
This is going to be a bare-knuckled brawl over the next couple of quarters. Keep a close eye on Apple.

PartyGaming pending FTSE IPO illustrates the power of internet IPOs

2005-06-15T07:54:00.000-07:00

There is a new breed of businesses popping up that are demonstrating the power of distributed consumer applications. One we've already seen blow investors' minds is Google. You can read my previous ponderings them elsewhere in this blog. One you may not have seen yet, but you will be hearing a lot about in the near future is PartyGaming, the company that runs PartyPoker.com. This article illustrates the speed and profitability that these companies spring up. PartyGaming recently set its IPO price on the FTSE.
It's clear that the Internet represents a new medium which is just now beginning to be appreciated and companies like PartyGaming and Google have come from nowhere within a few years to rival the biggest old economy companies in terms of valuation.
This is a big deal and represents a seachange for equity investment opportunities. Staying in front of this trend will help an investor tremendously.
Key observations from the article:

Growth Metrics: In three years PartyGaming's pre-tax profits have jumped from $5.8m to $89.2m to $372m. In the first three months of this year it made $125m. Huge and real growth. Like Google, everyone will trash-talk this IPO until it continually beats their expectations over the next year.
Poker as a trend: PartyGaming and its rivals make their money by taking a small slice - the "rake" - from each hand of poker they host for real money. The rake is typically only 1% or 2% of the pot, but a dollar here and a dollar there add up. More than 70,000 people regularly play simultaneously at PartyPoker and the site has captured half the market.
Globalization: PartyGaming's head office is in Gibraltar; its computer servers run from there and from Kahnawake, a Mohawk Indian reserve within Canada; its marketing office is in London but most of its 1,000 staff work in a call centre and software development site in Hyderabad, southern India.
Future market opportunity: China, with a significant gambling population remains untapped.

IUSA - That was fast! CEO's buyout offer gives 20%!

2005-06-14T11:32:00.000-07:00

I was taking a hard look at IUSA after it was knocked down 20% when it reduced guidance last week. Well, it appers that I should've moved sooner because the CEO, Vin Gupta came out with a buy-out offer today that put the price of the company back right up to where it was before the hit. By the way, CSFB looks like idiots here. "Well, we thought there might be a bid that would make our downgrade look stupid and...uh...there was." Smooth move, dorks.
FYI - I think there's a good buy-out arb here as the first offer in a buy-out is likely not the highest/best offer...
Relevant information:
- $11.75 cash per share (25% premium to price immediately prior to offer)
- Vin currently already holds 38% of the company.
- Transactions funds solely from acquistion debt financing
- Anticipated closing timeline: within 90 days
- Advisor: Rick Massey of Stephens, Inc. (Let's hear for those backwater Little Rock boys! They seem to have some staying power down there...)
- Other offers will not be supported by Vin
Damn, I wish I would've bought yesterday. Lesson learned.

Earningscast.com - a great idea

2005-06-13T00:56:00.000-07:00

I found this site called Earningscast.com which allows you to subscribe to earnings call by podcast - a great f'ing idea. Finding and linking to earnings calls can be a pain. Having them aggregated so that you can listen to the call and hear first-hand how executives address issues and answer questions is invaluable.

The Overreaction to Apple's IBM-Intel Switch

2005-06-10T23:22:00.000-07:00

It amazes me how much the blogiverse is overreacting to the Apple's decision to switch to Intel. The speculation (and that's all that it is) that I've read so far is so ludicrous that I seriously wonder about the state of mind of 80% of the people out there that are supposed technology industry experts. It's clear to me that a lot of people out there who use technology and know technology don't understand a lot about business; which is scary. I've worked in a public tech company before and I can support this assertion first-hand. Otherwise intelligent professionals make insane decisions because they can't think economically. Some of the hysteria surrounding Apple's move also supports my feelings as well.

Robert X. Cringeley speculates that Apple and Intel are going to merge. Clearly this is tongue in cheek analysis, but interestingly it seems to be getting traction in the blog and slashdot set. This idea is absurd. Apple's switching to Intel because it realizes that IBM will never be able to address its needs as well. Clearly, Intel has been wooing Apple for some time now and IBM's recent inability to make Apple feel wanted precipitated the move. Jobs is smart enough to know that Intel will more aggressively help it innovate in certain areas. IBM has other designs.
Now the idea that does have a basis for merit is the idea that Apple is switching in order to provide stronger DRM. The copyleftists hate this, but I think it makes a lot of sense. Intel is clearly developing chips that will enable stronger DRM; at least strong enough to deter most users from doing it. Apple clearly loves being the premier provider of media-savvy computing technology to the market and having stronger DRM capabilities will go a long way in keeping content owners happy.

Is this bad for Apple? Not really. Are they going to Osborne themselves because of the preannounce? I don't think so. Apparently, Adam Osborne himself agrees. I'd buy a Mac tomorrow if I had to. I never buy v.1 of anything (especially cars and computers). The next generation of PowerPC Macs are going to be kick-ass machines and have very mature applications already on them. It's not clear that you'll need the new Macintels for awhile.
So what does this mean? It means that the hysteria is punishing Apple's stock price. Which means that I think it will trade down for a few weeks - months.
But I'll be watching for the turn-around when everyone figures out that it's not that big of a deal.
**Update: I found a short, but good summary of someone in the blogiverse that is positive on the switch here.**

Some perspective on HPQ

2005-06-10T08:02:00.000-07:00

Just to put into perspective how much value I think HPQ is destroying, read this article on how much money HPQ just spent on severance (short answer: $236 million). Those kinds of figures boggle my mind. Think about the alternative uses for $236 million other than compensating all of the people who are deemed unworthy to continue to move HP forward. For instance, you could give 10 small, growth technology companies $23.6 million a piece for development and growth initiatives. Heck, structure it as equity and you'd like get over a 50% stake in each one. Think about it, HPQ could have bought vast majority stakes in 10 companies that have technology that is currently viable but just needs growth capital. One could go even further and say that HPQ could seed fund 100 companies with $2.36 million a piece. HPQ could've created a portfolio of 100 small start-ups that could be creating the next big thing 10 years from now.
But no, they spent $236 million firing people they hired. I don't think HPQ investors realize just how painful (or how long) an extensive, fundamental turnaround is. However, the more HPQ spends on severance, the more they'll find that out.

CA's acquisition of Niku (NIKU) - Good Deal

2005-06-09T12:05:00.000-07:00

CA's acquisition of Niku is a great deal for both companies. I know a lot about this space (Project & Portfolio Management or IT Governance) from previous experience. This is a hot market need. Sarbanes is forcing pubcos to account and control for internal operations and finance. One area of internal expenditures which has become a large part of G&A for companies is IT. However, the rise of this organization has not been accompanied with standard management and control activities, which makes it very difficult to sign off on the internal auditing requirements now required by public companies. So, that's the bad news.
The good news is that companies are now trying to prioritize spending within IT and align it with business objectives. A lot of companies are trying to ensure that the money spent on IT delivers the intended objectives and moves the business forward. A very difficult task to do when IT people show up and spout gibberish about needing X dollars or the whole system will blow up. PPM systems allow for accountability in IT spending.
That's where Niku comes in. Niku provides a platform for PPM control by tracking spending and resulting delivery of business deliverables. Their platform also allows for a way to wholistically look at IT spending and prioritize spending on those activities which are strategically important -- you know, the whole "Important But Not Urgent" quadrant that we all pay lip service too.
So, how does this make sense to CA? Well, CA sells a lot of software management infrastructure...uh...software to large companies. Niku as a stand-alone company was too isolated. It was a good little yacht in an IT world that has a lot of aircraft carriers. CA is big enough to resolve the size issue.
The price? Well, it's pricey, but there is a lot of forward opportunity in this sector. Besides, they didn't pay nearly as much as Mercury Interactive did for Kintana.
The one caveat on this story is that I'm not sure that this makes for a tight integration with CA's other acquisition, Cornerstone. I don't think PPM's first integration is with network management; at least not yet. I don't think it will hurt, but I'd rather see Niku's technology develop deep integrations with other BPMs and/or ERP systems. This will provide linkages needed to provide the full dashboard for IT management and governance.

The "Jimmys" Face Off over Google! (GOOG)

2005-06-08T20:41:00.000-07:00

Sorry to beat this Google thing to death, but per my previous post, Cramer had Stewart on his show and got him to admit that while he's taking money here, he's reserving it to buy-in at a later point in time because he believes in the long-term trend for Google. Cramer also illustrated the fallacy of saying that Google is worth more than Time-Warner (TWX) because valuation also includes debt. This highlights a central point I was making earlier: Stewart had no idea what Jimmy was talking about -or- as soon as Cramer pointed it out, Stewart realized he made a rookie mistake (I'm talking about Enterprise Value: the concept that a company is worth Market Cap + Debt - Cash). Either way, believe the money man and not the guy who writes about other people doing stuff for a living -- there is no substitute for actual experience.

InfoUSA (IUSA) lowers 2005 guidance...

2005-06-08T18:39:00.000-07:00

Wow, I don't really follow IUSA, but their guidance revision is a whopper. I'm glad I'm not in that stock. In summary, they lowered revenue expectations from $395MM to $375MM and EBITDA from $70 to $65MM for fiscal 2005. The weakness is largely attributed to the Donnelly and Small Business BUs.
I've believe that IUSA is in a tough business; selling marketing leads. I think I'd rather own a company like Dun & Bradstreet (DNB) in this space -- they just announced a strong quarter and confirmed guidance. Execution matters and considering that they're both trading around 10.5x EBITDA (I believe -- rough estimate), then DNB is clearly a better hold here.

Misinformation and worry around Google (GOOG)

2005-06-08T13:56:00.000-07:00

While I’m just as nervous as anyone with Google, I’m beginning to think that this might be a good time to reinvest in the stock. The following paragraph is from an article written by James B. Stewart for WSJ:

“No other company is like Google, but any valuation has to begin by looking at its two major peers in the Internet sector, Yahoo and eBay, with Yahoo being the closer comparison. Google's trailing-12-month price/earnings ratio was around 115 yesterday, nearly double Yahoo's P/E of about 60. EBay, further along its growth curve, has a P/E of 62, comparable to Yahoo's. Google's price/sales ratio is a lofty 21.3; Yahoo's is 13.4; eBay's is 14.7. Back at the time of Google's IPO, I met stiff resistance when I argued that Google deserved to be valued on a par with Yahoo and eBay. Now that Google's valuation has far surpassed that of its peers, I find people arguing that Google deserves even higher multiples. This worries me.”

Now, before I disagree with his analysis, let me say this: I love Jim Stewart as a writer. Den of Thieves is arguably on of the best business exposes of all time. But, he is falling trap to the same phenomenon that a lot of famous business journalists seem prey to; largely, they think that people should hear their opinion on complex topics such as valuing a high-growth company. Now notice I said, “should” and not, “want”. I have no doubt that many people would love to hear Jimmy’s opinion on Google’s valuation. He did write some of the greatest behind-the-scenes exposes about business, right? This is a subtle point, so I hope I can convey it adequately. Jimmy should now be asking himself this question: “Am I qualified to discuss this topic?” I would argue that despite being able to author many great books, that doesn’t qualify him to opine on topics like this. Has he ever worked for a hedge fund? Has he taken any courses on valuation? Is he a CFA (Chartered Financial Analyst? I think the answers to all of these questions is, “no”.

And that’s too bad because if he had any idea of what he’s talking about, he would realize that you don’t value a high-growth company like Google off of trailing earnings. Individual investors would be much better off heeding the advice of another commentator (and guy named James) that I do respect with regards to opining on valuation: Jim Cramer. Cramer has repeatedly pointed out lately the correct way to think about Google; namely that one needs to value Google on forward earnings. If you believe that Google will make $8 next year and also believe that it will continue to grow as fast as Yahoo! and eBay, then it should receive the same forward multiple, which is approximate 43x and equates to $344 a share. Now, consider the fact that Google is growing much faster than Yahoo! and eBay; this would imply that Google deserves a higher multiple than either of those stocks. Some people believe Google could make as much as $9 share.

So, isn’t interesting that the person who has extensive experience as a hedge fund manager, Cramer, has reached an entirely different conclusion than the journalist, Stewart? Which should you believe?

Now, one could argue that eBay and Yahoo! are overvalued, which is an appropriate argument. However, if you believe this to be true, then you would still want to short eBay and Yahoo! while maintaining a long position in Google considering that Google has a much higher growth rate. Additionally, one could argue that Google will not make $9 a share next year and that would also cause valuation concern, but I don't hear anyone using these arguments.

But, then again I’m not a journalist, so what do I know?

Keyword pricing decline worries hammer Google (GOOG)

2005-06-08T08:06:00.000-07:00

Such is the life of a high-multiple stock like Google. It's down $11ish bucks today on news that keyword pricing has come down in the month of May. Considering that I was thinking of taking profits anyway, this might be a good reason. Today's action illustrates what happens to growth companies when they become overbought and there is a lack of information to support the valuation. We all know that Google is going to grow like crazy, but that is now priced into the stock. The debates will now be along the lines of how fast and how long it will grow. 75% a year for 5 years? 50% for 4 years? 33% for 3 years? This starts to matter with a company that just became the most valuable media stock in the nation in about a year.
However, if I were a long-term investor, I'd actually hold through this rough spot. Google has a good chance of pulling an eBay and continuing to outgrow expectations for an extended period of time.

Greenspan comments on interest rate divergence

2005-06-06T23:08:00.000-07:00

This article indicates that Greenspan is befuddled by the fact that long-term interest rates have fallen in the face of 8 sequential Fed rate increases. Some people suspect foreign governments buying large amounts of US securities, but Greeny indicates that they have ruled it out with a special study they performed.
A couple of comments:
1. The answer is always in supply and demand. I think the reason why long-term rates are so low is because there are a lot of lenders looking to provide capital to good credits on a long-term basis. Look at the home mortgage market -- it is much easier to get a mortgage today than it was 10 years ago. I was speaking to a mortgage broker the other day who only did loans to 'subprime' prospects (i.e. filed bankruptcy previously). He commented that he couldn't believe that one of his clients took a loan at 11.3% - fixed for three years. I thought to myself, who is the sap that loaned $250K to someone that filed for BK and is only getting 6% above treasuries. Obviously, there are many, many businesses and professionals whose only goal in life at the moment is to lever your ass up to the hilt. I find that when business interests, careers and paychecks are aligned towards a goal, a little thing like the Fed's opinion on rate levels will not get in the way. Sorry Greeny.
2. I'd like to see this 'special study' Greeny talks about regarding foriegn investors. I'm not sure that I trust any government (or quasi-government) study right now. The only source for information worse than Big Media is the Government; and that's sayin' something.

CNBC Guests Talking Down HPQ...

2005-06-06T10:51:00.000-07:00

Another case where the media makes my investments work for me. CNBC's guests are talking about how HP is "stuck at current levels" because the new CEO isn't "doing anything different than Carly Fiorina". HP is a conglomerate mish-mash without any real sense of direction other than cutting 10% of the workforce. It *could* be a long-term turn-around play, but it will take a LONG while before that begins to bear fruit, much less make the stock a solid, long-term investment.

Internet Advertising, Google (GOOG) and Point #1...

2005-06-06T10:08:00.000-07:00

Another datapoint that bolsters my confidence in Point #1 of 3Things You Need To Believe to Invest in Google. Q1 Internet ad spending rises to $2.8 billion (yes, billion with a "B"). The article describes the inevitable flow of advertising dollars from Newspapers, TV and Radio into Internet-based ad models. This is such a no-brainer -- it really puts all of that trash-talk surrounding Google's IPO into perspective, doesn't it?
I think this is a mega-trend that lasts for the next 5-10 years.

From Barrons.com: The Trouble with Newspaper Stocks

2005-06-02T17:57:00.000-07:00

I love it when the market comes to where I already am at! From Barrons.com, a recent research highlight from Goldman Sachs. Welcome!

"The Trouble With Newspaper Stocks

Goldman Sachs
One New York Plaza,
New York, NY 10004
(Tel) (866) 727-7000

JUNE 2 -- The trouble with newspaper stock valuations is threefold. The stocks aren't cheap relative to historic valuation standards, even after the group's sharp underperformance over the past year.

Current operating fundamentals remain sloppy, suggesting the potential for further earnings-driven downside. And we don't see any near-term catalysts that might serve to bolster investor enthusiasm for the group.

The newspaper group needs to correct on average by another 16% before the stocks can be considered "value" stories. Dow Jones, McClatchy Co. and the New York Times are the most expensive names in the group based on our valuation methodology.

-- Peter P. Appert"