Posted on June 27, 2007
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I haven’t yet done any slicing and dicing of Oracle’s (ORCL) calendar 2Q07 numbers into database, middleware, transactional standalone apps and ERP but a quick top-line analysis says Oracle’s trailing-12-month growth rate dipped just a bit from calendar 1Q07. That’s to be expected given the law of large numbers but it’s a little bit of a yellow flag because the most recent reporting period (ended May 31, 2007 for Oracle) was Oracle’s fiscal 4Q, its traditional load-em-up period.
Maybe Oracle believes its approximately 14% trailing-12-month backcast growth rate (around 25% before backcasting for acquisitions) will still be good enough to gain share on BEA (BEAS), IBM (IBM) and SAP (SAP) in the middleware, database and ERP markets respectively when those other companies issue reports for comparable time periods. Maybe Oracle even kept a little business in the drawer for the summer quarter, traditionally its slowest period.
The admittedly random top-line growth-rate factoid and the general tone of the conference call leads me to believe that Oracle’s two-year PeopleSoft/Siebel-user-led growth spurt may be just about over. Up-selling and cross-selling can last only so long. Oracle has done an excellent job at both, especially at getting its acquired application users to try one or another part of Fusion middleware. But the Hyperion user base is not as likely to generate as many such opportunities, which is why many of Oracle’s remarks and answers at its June 26 conference call were rightly about execution. Oracle talked about:
In fact, in their remarks, Larry led off with a dissertation about GAAP and Charles talked about credit/debit benchmarks. Neither was as entertaining as the usual bombasts against competitors. There was no blowing by BEA or eating IBM for lunch, and just a bit of innocuous stuff about “surrounding SAP.”
Oracle did not talk much about “new software license revenue.” It said it grew that segment more slowly in fiscal 4Q than the fiscal year overall; one might have expected the opposite given the Hyperion acquisition. And I heard no mention of the Red Hat Linux knockoff program but I must admit that at about the halfway point in the conference call, all this nuts and bolt financials stuff was putting me to sleep. Well I guess that the summer doldrums affect all boats the same way as a rising tide.
–Dennis Byron
Tags: Oracle, margin expansion, Hyperion, SAP
Tags: Oracle, margin expansion, Hyperion, SAP
Posted on June 25, 2007
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Since we published our short IPO report covering Data Domain on June12, we received more in-depth information from our friends over at TheInfoPro. Their proprietary report clearly shows strong momentum for Data Domain in the enterprise market. Although EMC will take a bite out of this market, Data Domain has a very strong position.
In addition, many were reminded of the still developmental state of the backup and recovery market with the full day database-related outage over at FeedBlitz. Data management remains a complicated and still unsolved problem for most companies.
Taking all factors into account we would say the company has even better chances of executing well and achieving our fair value estimate of $23/share. Data Domain would also make a very good acquisition for a number of large industry players. The mid-point of the current range is $12.50.
Original Report Summary: Data Domain (DDUP) is showing explosive growth thanks to its ability to leverage indirect distribution channels to exploit demand for more efficient global backup solutions. We viewed the prospectus with some skepticism and have identified some real reservations. However, our long-term valuation model suggests a fair value for the shares of $23. We can’t say for sure whether or not Data Domain will be able to execute on its plan, but for now it is the company’s to lose. Even if it ends up staying in the (SMB) market its plan can work and provide very good growth with sustainable operating margins just over 20%. The offering price discounts complete success into 2008.
The full report is only available to subscribers here. Non-clients can click here to be walked through a quick purchase and then go right to the report (pdf.)
If you wish to become a paying subscriber but hate going through the process just send an email to support@research2zero.com and we will send you the PDF and handle the payment manually. It won’t be instant but we will process such requests with alacrity. – Kris Tuttle
Tags: Data Domain, EMC, DDUP, IPO Research, Data
Posted on June 25, 2007
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IBM (NYSE: IBM) announced new Notes features on June 19 along with an initiative to help organizations bring the characteristics of Web 2.0 to the enterprise. IBM defines Web 2.0 as content-rich, Internet applications for social networking and collaboration, which is a little narrower than Research 2.0’s focus but the basis for a good intellectual discussion. The press release says IBM is “uniquely positioned to develop an information ecosystem to meet the needs of organizations as they adopt Web 2.0 principles and technologies.” This is true given the original vision and subsequent capabilities of Notes and IBM’s ability to make its software industrial strength. The fact that the key guru that made “Collaboration 1.0” happen 20 years ago at IBM Lotus (when it was a separate company), Ray Ozzie, is now the visionary in waiting at Microsoft complicates matters a bit. But if IBM is known for anything, it’s the depth of its bench.
IBM announced the immediate or impending availability of:
That last bullet looks to be literally an add-on to the announcement, almost a throw-away line from another IBM software group division that couldn’t justify its own press release that week. But IBM is on to something that I had only previously seen in Microsoft’s (MSFT) positioning. Mish-mashing, dash boarding, you-tubing and socially networking is great for teenagers (or at least better for them than say, binge drinking) but that’s not the eventual pay off for Web 2.0. All of these features are going to launch the next generation of ecommerce where B2B and B2C come together. As with radio and television broadcasting and many other technologies before and since, while the wide-eyed social scientists see a brave new world in technological change, the business world sees another way to reach the consumer. Research 2.0’s recent reviews of IBM and Microsoft go into more detail.
–Dennis Byron
Tags: B2B, ecommerce, B2C, IBM, Microsoft,Web 2.0
Posted on June 15, 2007
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The tepid reaction to Adobe’s (ADBE) good 2Q revenue and earnings results on June 14 (traded down after hours according to SeekingAlpha) is a result of taking the longer view. And I don’t mean the 3Q outlook. Those looking back at the trailing 12 months saw only 5-6% revenue growth adjusted for the late 2005 Macromedia acquisition, about the same as or a little below the software market average. Those looking ahead don’t see a Software as a Service (SaaS) strategy for Adobe. And the very buzzword dependent didn’t hear the words “service oriented architecture (SOA)” at all during the quarterly conference call.
Here’s Adobe’s challenge: It’s longtime bread and butter, the “creative professional,” is a dinosaur. Adobe’s doing all it can and doing it well to keep a high penetration of the desktop publishing market but the people count is shrinking. But not to worry. Seeing this and similar trends related to its Acrobat business, Adobe is rightly moving to emphasize what it calls “enterprise solutions.” It acquired Macromedia (with Allaire built in) and companies such as Accellio before that to help build a business process management (BPM) middleware capability. Both Acrobat and Flash are a key part of that capability. Last month Adobe announced the first truly integrated version of Livecycle, bringing this story to life.
But the question is, “What to do with the capability?” Adobe is a key part of the IT industry supply chain and knows its role and its strengths. It will gradually replace the creative professional with the professional developer as its key audience. The announcement a month ago that Flex would go open source is one example of this strategy. It has recently completed a revamping of its direct sales force to support this strategy and is beefing up partner programs such as the agreement with SAP. As another example, Adobe talked about the MISMO mortgage banker arrangement during the conference call. It talked about it while discussing the information worker segment, but MSMO is a BPM story long-term. Of course, Adobe can’t come out and say all of this because enterprise solutions are only 20% or less of the action at this point.
We conduct most of our research and analysis by first putting software suppliers into one of two buckets: technology providers and services providers. We think Adobe wants to be a technology provider so no SaaS strategy is needed. Adobe can make money putting its user and middleware technology into other suppliers’ SaaS services. This characterization is the kiss of death in Silicon Valley. It’s kind of like being in a windowless plant in Fort Wayne instead of in the pit at Monte Carlo. But it’s profitable in a good old Fort Wayne sort of way. The comparison with Microsoft’s and Google’s margins at similar revenue levels demonstrates their heads-down approach.
For those waiting for an IBM (IBM) bid, I can think of a few reasons why IBM would not do it. One, IBM wants its software group to contribute 50% of EPS by 2011. An Adobe acquisition—with the creative-professional-dominant revenue stream and related earnings for the next five years—would make that harder to accomplish. Two, IBM acquisitions are strategically as much about supporting business transformation services and whatever IBM calls IGS these days with BPM technology than they are about software. Although Adobe’s BPM technology is good, IBM already has more BPM technology to integrate than it can handle. On the other hand, I didn’t understand the IBM MRO acquisition at all.
And for those who want an SOA story, there is one in Adobe’s enterprise solutions but given its heritage, Adobe speaks to users not to technologists.
–Dennis Byron
Posted on June 15, 2007
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From time to time we do adjust our partners porfolio positions based on reasons outside of our current research agenda. And sometimes we even disclose these moves as they are illustrative of our thinking:
1. We remain holders of GOOG and AAPL although we are down to small positions. We especially think AAPL is likely to go down as reality settles in but don’t feel comfortable selling out our last 1/4 position.
2. Purely as a short-term trade we shorted NFLX based on flimsy takeover hype. We recently covered half due to the fortunate turn of events from Blockbuster and analyst downgrades. We may close it out any time since we have no special edge on NFLX.
3. We sold out of our long on Amazon a while back (before the recent increase from $45 to $70) because we were unimpressed with their fundamentals. Despite a better-than-expected Q1 we don’t see any fundamental changes in their investment merits. Now the stock is almost 2x where it was just a short while ago. We absolutely love Amazon as consumers and technology experts given what they are doing with EC2, S3, AWS and so forth. But as investors we felt we had to take a short position at these levels.
4. Consistent with our piece in the May Technology Monthly we initiated a set of long positions on Microsoft which we feel has better fundamentals than the investment community is giving it credit for.
– Kris Tuttle
Tags: Microsoft, Google, Apple, Netflix, Amazon
Posted on June 14, 2007
Filed Under Companies, Markets & Finance, Research, Software, Technology & The Web | 1 Comment
Last night’s Microsoft press release about open source software (OSS) began with one of the most loaded sentences in OSS history: “Today Microsoft Corp. and Linux desktop provider Linspire Inc. announced a broad interoperability, technical collaboration (sic) that also includes intellectual property (IP) assurances.” This has OSS community drama, market-development and investment-research implications at all levels. I haven’t had time to check the blogosphere for reaction but I would expect it to be apoplectic.
This is not like last month’s announcement with the OSS company Xandros, which is more a business venture than a community, set up in 2001 to hopefully salvage Corel-sponsored OSS efforts. This is not like last year’s announcement with Novell that sent the most rabid OSS supporters into orbit. This apparently involves one of the most rabid OSS supporters. Cathedral and Bazaar and World Dominationauthor Eric S. Raymond, self proclaimed as one of the three most influential people in the OSS movement, is a member of what Freespire calls its Community Leadership Board. Freespire is the development feed into Linspire (which in turn is a Debian-based version of Linux) in the same way Fedora is the development feed into Red Hat Enterprise Linux. See more on the OSS community aspects of this announcement at ebizQ.net if interested.
The next loaded word in the first sentence of the Microsoft press release is “desktop.” The press release doesn’t even hint at this possibility but if the deal includes Linspire desktop Linux vouchers the way the Novell deal includes SUSE server Linux vouchers, it would cement Microsoft’s goal of giving its users (that is, almost everyone) true “open choice.” Helping users put Linux on servers as the Novell deal does is one thing but helping them put it on desktops with or in place of the Windows client is the first concrete recognition of my analysis that Microsoft is already end gaming its lead product and textbook cash cow.
The game will go on for a decade or more (just as IBM continues to milk its mainframes) but, to paraphrase Churchill I think, although this is not the beginning of the end, it is the end of the beginning for Windows. In my analysis, Microsoft will move away from selling technology in favor of going all SaaS (look for the Live… brand on everything from entertainment software to really cool new B2C stuff to Longhorn). The next decade for Microsoft is all about the experience according to Ray Ozzie. Therefore Microsoft doesn’t care in the long run whether users have Linux on their desktops or OpenOffice on their servers. It may even have big-time fault-tolerant Linux in its SaaS farm. Of course since Microsoft is currently doing $40 billion in “traditional” business, this transition will be evolutionary not revolutionary
From a tactical point of view, this is the beginning of Microsoft’s counterattack on the soon-to-be finalized FSF General Public License version 3 (GPLv3). GPLv3 is now in “final call for comments” and this agreement provides a great way for Microsoft to explain the differences between open choice with OSS and rabid OSS as preached by the Free Software Foundation. Through this agreement, Linspire and Microsoft say they will work to
· Advance office document compatibility with (Linspire will also collaborate with Novell)
· Enhance instant messaging interoperability (Linspire will license Microsoft’s RT Audio Codec)
· Reinforce existing collaboration on digital media (the latter being the key ESR issue with the rabid OSS movement).
Linspire customers only receive these instant messaging and digital media technologies (along with certain TrueType fonts) if they purchase a patent SKU. The technologies are not shipped with all Linspire 5.0 distributions. The patent covenants provide customers assurances that the Linspire technologies they use come with rights to relevant Microsoft patents. Implicit is the same Linux-patent thing that caused the Novell fuss.
In addition, Linspire will make Live Search the default search engine with its desktop operating system product. Ironically that is reportedly something Google is telling the U.S. Justice Department that Microsoft can’t even do.
– Dennis Byron
Tags: Microsoft, Linux, Open Source, OSS, GPL, Google
Posted on June 13, 2007
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Sramana Mitra has an excellent post out looking at the failure of Palm to grasp any of the seemingly obvious opportunities to expand their business and value over the last few years. It’s certainly true of Palm that other than slightly better hardware devices the software and web functionality is little changed in many years.
While LinkedIn and Plaxo are not huge successes on their own such services if launched back in times of greater Palm enthusiasm might have been big. Even today why not embrace Google backend technologies and make the Palm serve as the missing link for synchronized off-line access? Ideas abound but maybe they will come too late to make Palm interesting again in an iPhone, Blackberry world.
Another great aspect of this post is it brings up a facet of company analysis that should be more common in our and everyone else’s work. That is to examine what things a company could or should have done in and around their core markets. This is more than armchair quarterbacking or simply citing the innovators dilemma as to why companies fail to grasp opportunties in their markets.
Looking at this aspect for a company helps investors understand their culture and attitude around innovation and growing their value-add. Yahoo is another example that seems to get blindsided by every new innovation Google rolls out, even when it is in an area that Yahoo dominates like Maps a year ago.
We have done some of that type of work in looking at Logitech in our as yet unpublished report on them. Although the company is successful we’re surprised by the continued reliance on mice and webcams. Although they have made some acquisitions of companies like Slim Devices there have been fairly major trends that they have not capitalized on; most notably digital photography, Apple and the iPod.
– Kris Tuttle
Tags: PALM, Company Analysis, Logitech
Posted on June 11, 2007
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The Dow Jones/Murdoch battle seems to be of epic proportions in part due to the size but also because it seems to pit pure popular marketing against a steeped tradition of quality news reporting and commentary.
Just last week the FOX Network ran a story about a congressman convicted of crimes while showing video images of a totally different man in the government. Besides their unvarnished biases the network shows no concern over rampant inability to get the facts right. No matter though. Ratings, revenues and profits are all there for the taking.
Everyone in the entertainment industry knows that the right target to maximize profits is the educational level of a 14-year-old. Why do you think NPR has to hit the airwaves every few months to beg for money from the relatively few intelligent people who listen to them?
Publishing is already a tough way to make a living. It’s been said that there are only about 6M people who even read poetry. They hardly buy any books at all. The WSJ and Dow Jones strive to delivery a higher form but have failed to see the opportunities evolving around them. So here they are teetering in front of the Jaws of a very savvy Murdoch.
As all deals go the pockets of those who will eventually decide to do it are lined with cash. The new CEO will take over $20M. Every senior manager has just been given extra change of control bonus stock. Now that homes in the Hamptons cost $15M (versus $5M) there’s just no voice left in the mouth of the poet, the writer, the researcher, the objective seeker of truth and quality.
Gulp. There goes another one sliding down the cash-greased gullet of a money conglomerate.
– Kris Tuttle
Tags: Dow Jones, Murdoch, Publishing
Posted on June 11, 2007
Filed Under Starting Up | 2 Comments
We think of Cisco as an enterprise technology company although they are in ohter areas including Linksys and set-top boxes. With the WebEx acquisition it stood to reason that there would be a push into the business market but we have been overwhelmed with junk marketing since signing for a WebOffice trial a few weeks ago.
Cisco/WebEx is sending out emails and calling with the hyperactive fever of an online mortgage company. The pitch got to a point where we actually told Cisco we probably wouldn’t pursue our trial because their sales and marketing efforts were disrupting our business.
Amazingly after that we continued to get besieged and today received another flashing, spinning, promotional email offering us double storage and deferred invoicing if we convert by June 15th. (!!!!!!!!!!!!)
What’s odd about the current campaign is we have been users of both WebEx and Cisco technology before the acquisition. This sort of absurd consumer style marketing isn’t even done by Microsoft or Salesforce.com.
Not a nice view of CSCO from a potential end-user point of view. Nobody wants to deal with a firm like this.
– Kris Tuttle
Tags: Cisco, WebEx, Marketing, WebOffice
Posted on June 8, 2007
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Business Week profiled the recent closure of Prudential’s equity research business. We’ve been watching this slow-motion train wreck since 2004 when we started Research 2.0. The article points out that some of the mandates on including competitive research will end in 2009; further reducing prospects for independent equity research.
The long-term decline is directly related to the shifts in the market which make it nearly impossible for an equity analyst at a major firm to have any time to actually do research. Between marketing, compliance, meetings, sales support and so on there is nothing left. Besides there are still far to many analysts publishing research without direct industry experience. This makes their ability to ground their financial analysis in business reality difficult.
The article does go on to question whether or not the companies themselves, particularly smaller ones, will have to start paying the bills to ensure ongoing research coverage. There is plenty of this going on today and it is probably a growth business. The problem with it is that it tends not to result in the best research output. It’s too soft and gentle - more like a book report than a critical analysis. Such work is still useful in cases where company fundamentals are not widely known but they are not very valuable.
As has been said many times before, if I had really great research why would I sell it to you for 5c? Good question. That’s another reason the current broker/dealer system is flawed. For one thing most would sell really good research for real money. Which means clients have to be well financed to afford it. Secondly it makes sense to give analysts exposure to their ideas directly if they want it. Such exposure should be fully disclosed with changes made only after clients are informed but the classic "put your money where your mouth is" is a great way to incent the best analysts to put forth the best, most well-researched ideas.
Being a sell-side analyst at a mainstream firm is still a good living, even if it is an uninspiring one. Creating new classes of research and online services will force instiutions to look beyond their own inhouse staffs for value and if it is there they will find a way to pay.
Tags: Prudential, Research, Analysts, Brokers, Investment Banks