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Happy New Year from Oracle to investors

Posted on December 19, 2007
Filed Under Software, Technology & The Web | Leave a Comment

So what kind of year did Oracle have? Oracle doesn’t think of it this way but the year ended for it on Nov 30, 2007. I say that because IBM and SAP and many other large software suppliers (except the obvious, the largest) report their annual results on a calendar-year basis. I may be stating the obvious but it is easier for people who build investment research models to adjust Oracle’s trailing 12 months ending Nov 30 to the other leaders than to adjust all the others to Oracle’s May 31 fiscal year ending.

After backcasting for Oracle’s acquisitions in 2006 and 2007, Research 2.0 estimates that the database/application software market leader grew all types of revenue about 16% in the 12 months ending November 30, 2007 vs. the 12 months ending Nov. 30, 2006. The difference between our estimate and the higher growth rate reported in press releases is due to the fact that the press release does not take into account the timing of such acquisitions as Hyperion, Agile, Stellent, SPL Worldgroup, MetaSolv and others. Oracle itself normalizes for this difference in its most recent 10-K filing, saying that it grew its proforma revenue 13.0% in the 12 months ending May 31, 2007 (vs. the 12 months ending May 31, 2006). With our estimate of 16% trailing-12-month growth six months later, the company certainly kept the needle going in the right direction.

The company highlighted software license growth rates, as opposed to what it calls “license updates and product support” in its conference call. It looks like there is very aggressive cross selling to all of its new installed base in progress. Oracle says there is still a lot of opportunity ahead of it. Dividing license revenue from support revenue gets a little tricky because every company accounts for the two a little differently. We believe it makes more sense to look at the combination of the two for the reasons outlined in the most recent Research 2.0 report on Oracle (and all our software analyses).

Our long-term valuation estimate that Oracle is now fairly priced in the low $20s, as outlined in that Research 2.0 report, holds because it already reflected the growth that Oracle realized in its Quarter 2 and gave guidance to for the rest of its fiscal year. It looks like the market saw these results coming but it’s always nice when theory matches reality.

As for competitors, we won’t know for sure until January when we hear from IBM, SAP and get the first 6 months of FY2008 results from Microsoft. But Oracle continued to outgrow IBM, and has pulled neck and neck with SAP in terms of company growth rates. Exchange rates make the comparison tricky however. More important, while the initial view in this blogpost looks at the two companies overall, the Research 2.0 report on Oracle looks at the applications businesses head to head.

Oracle is almost keeping pace with Microsoft. Microsoft said in its recent Q1 conference call that its growth rate was unusually high so presumably that statement applies to Microsoft’s 24% year to date growth as well. If that growth rate comes down a bit after the fourth calendar quarter, the two software suppliers’ growth rates will be more comparable. Again, it is more important to look at Research 2.0’s estimates of how Oracle ERP does against Microsoft ERP, how standalone Oracle applications do against standalone Microsoft applications, and so forth. But you’ll have a hard time finding anything to complain about over your eggnog in these results.

– Dennis Byron

NetSuite IPO Preview: Right time, wrong value proposition.

Posted on December 19, 2007
Filed Under Companies, Markets & Finance, Software, Technology & The Web | Leave a Comment

This is an excerpt from a research note published and send to clients on December 18th.

NetSuite is adding its name to the mix of public companies investors will have to choose from in the software as a service (SaaS) space.  NetSuite is attempting to position itself as an integrated ERP solution for small to medium sized businesses (SMB) versus competition that aims more at a specific application area like accounting (Intuit), sales (salesforce.com), marketing (Vocus) or human resources (Workday). 

As with any IPO marketing presentation there is a mix of fact and fiction to be sorted out in terms of what they company real has and can be expected to do.   By nature the investment case is an exercise left to the viewer and we will fill in some of the gaps there.  Specifically we would note the following reality checks with respect to NetSuite:

1. Functionally speaking NetSuite comes from roots in accounting that they have expanded from to include additional areas like procurement and some others.  It’s probably not at all fair to suggest they are a real ERP or integrated solution that can be applied to companies in general  
2. With annual revenue per client routinely upwards of $20,000 per year NetSuite is not for very small companies.  This suggests that they will compete less with Intuit and more with Microsoft and SAP SaaS-based SMB offerings over time.  This niche also translates into a smaller overall market opportunity for NetSuite.  In fact NetSuite is focused on moving existing customers to higher value solutions that are closer to the $100,000 price point.
3. The company has recently entered a period of accelerated growth and improved propects thanks to the strength of the SaaS pricing model  today.  However NetSuite is still early in its ramp to profitability.  Their target model of 12-15% operating income is pretty aggressive and is more likely to be reached in 5 years versus its stated goal of 3 to 5 years.  Cash flow should  be higher and a better metric over time.

The conclusion we arrive at via the more elaborate discussion below suggests that NetSuite represents a good short-term opportunity thanks to its SaaS roots and strong market demand entering 2008.  However in the longer term NetSuite is not as well positioned as larger players and will be challenged to generate the type of growth in later years that will be needed to reach its profitability goals.  Both our long-term valuation model and an analysis of comparable companies points to a $12/share fair valuation for the company.

We love you grandma!

Posted on December 18, 2007
Filed Under Companies, Markets & Finance | 1 Comment

The banks are scrambling to figure out how to write new business but not compound the errors of their ways by creating bad mortgages.

One of the latest ideas is targeting grandma and grandpa who probably haven’t gone crazy leveraging their home which might even be paid for.  In order to get them to take on some fresh debt the appeals are for them to help their grandchildren go to college or buy their first home. 

It’s a way for banks to write mortgages that have high loan-to-value ratios and be able to collect feels and securitize them due to their added safety.

This holiday season probably more than a few grandparents will get a proposition after a few glasses of eggnog as they are sitting comfortably by the fire.

As the system searches out any potential for fresh liquidity the last bastions of safety will get assaulted.  Grandparents need to brace themselves for the marketing onslaught.

– Kris Tuttle

Tags: banking, credit, home equity

AMD is from Mars, Investors are from Venus.

Posted on December 15, 2007
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Analysts stumbled over themselves to make punishing comments on AMD post their analyst meeting. 

We don’t normally take an interest in companies like AMD but you could cut through the analyst and investor frustration with a knife.  Of course management didn’t paint a very encouraging picture.  Imagine addressing the analyst community with the line "[we admit to a] lack of profits in all businesses, appallingly negative cash flow, poor distribution management and large market share declines."  Yipes!

Part of the problem is as hard as they tried management demonstrated that they have a hard time understanding the investment community.  The fact that the Chairman of the Board, Hector Ruiz, exclaimed that he doesn’t understand how the valuation of the company could be worth 40% less than it was just a short time ago.  Well Hector, when you have a pile of debt and you are losing money in all your businesses it can compress your equity valuation pretty fast!

Setting aside the angst for a moment there is probably more potential in the name for 2008 than many might think.  Historically AMD was only an also-ran to Intel which is how they are often looked at today.  However AMD has changed some things in the last 12 months that make the situation different.

For a little while they were ahead of Intel which helped shift their image a bit (and also took a chink out of the Intel brand.)  While Intel is now back in the drivers seat AMD will lose share in servers and the core PC market.   But AMD will maintain a steady if lower share nonetheless.

AMD may have overpaid for the ATI acquisition but it has given them a much better foothold and set of growth opportunities then they have ever had.  While the Intel/AMD analysts panned AMD there were a few who cover Nvidia and the graphics space who noted that due to a fresh product cycle and a number of design wins AMD/ATI is poised to gain share in the graphics space during 2008 at the expense of Nvidia.

Beyond the two core markets there are some sideshow attractions in mobile and flat-panel TV that may also help a little bit.  If they can diversify their handset business to other manufacturers it could be more than a little.

The key is still getting operations back in order and making the new plan work.  Production has to ramp, promises have to be kept and numbers have to come in at or better than guidance which is for break-even in Q2. 

AMD will be CapEx constrained in 2008 and looking to turn some portion of their $600M in excess assets into cash which should provide some additional cushion for operations.

The last thing that is a little bothersome is the absurdly aggressive long-term targets the CFO put out there.  The near-term 2008 plans are reasonable and call for excellent execution.  Then the long-term plan jumps up to 18% to 24% operating margins!  What?!  We’d say that 15% would be an admirable and almost miraculous result from here.  How can management put these numbers out in this environment? 

It only provides evidence that AMD management just doesn’t quite know how to talk with analysts, investors and the market.   Taking it all in suggests that there probably is more value in the business than the current valuation accounts for.  We don’t agree with the management plea that "the glass is half full" but if they can execute on the basics in the next few quarters there is more upside than if they were just the #2 CPU company in the market.

– Kris Tuttle

[Research 2.0 purchased a small position in AMD post their analyst meeting.]

Tags: AMD, IR

Greenspan credibility goes to zero.

Posted on December 13, 2007
Filed Under Companies, Markets & Finance | 1 Comment

It’s too bad when someone who should be emerging as a wise and learned man after seeing and being part of so much in the last couple of decades basically melts down into an incoherent set of denials and finger-pointing.

Because papers like the WSJ and NYT feel honored to have famous people like Greenspan publishing their thoughts and opinions they run the stories.  In the rush to sell his book and paint a picture of himself as some a noble victim of the crisis is absurd.

Here is someone who should have some honor, be committed to the truth and provide some real value in the form of knowledge and experience.  That’s the character sorely needed in our leaders that seems in scarce supply.

Anyone really trying blame Greenspan is irresponsible as well.  There are many factors to consider and at the time the lower rates were not doing much stimulating.  Greenspan made a famous statement about the US Economy when rates were low and still declining to the effect that: To not invest in the US now is to believe that the country would not grow economically with 0% interest.  Now that made it clear he was about growth at any and all costs.  But even then he was still arguing with people who felt that the growth wouldn’t come. 

The asset and real-estate bubble were consequences of that and the abandonment of any standards in the doling out of the free money to anyone who was willing to borrow the money.  Homes and automobiles became basically free given the financing terms. 

Greenspan could be useful if he would help us understand what really should be done at this point.  How deeply should we "bite the bullet" and force write-downs and workouts on portfolios?  How much should the Fed do now?  His insights would be helpful but they have to start with reality and accountability.

Like others who have read and commented on the sad state of Greenspan these days we’re disappointed and exasperated by his character meltdown.  

– Kris Tuttle

Tags: Greenspan, Fed, Economy

IBM has not given up on the Software Factory of the Future?

Posted on December 12, 2007
Filed Under Companies, Markets & Finance, Software, Technology & The Web | Leave a Comment

It’s common at the end of calendar years, to think back and think ahead. At least that’s the case at the end of Gregorian calendar years when there is so little daylight here in the mid to northern latitudes of the Northern hemisphere and nothing else to do but think.

As an aside, how come the political-correctness police haven’t eliminated a calendar named after a pope (or at least renamed it)? And do people in Australia and Chile think “southern” is pejorative the way lefthanded people think of “right?” The guy who promotes this map must think so:

Which takes me full circle to thinking back and thinking ahead.

Whatever happened to the Factory of the Future? GM MAP and all that stuff?

And whatever happened to the Software Factory?

Well on the Factory of the Future question, Google didn’t turn up much written after 1990. I suspect it all happened with a different buzzword a la the way articfical intelligence is all around us but no one dares whisper the term AI.

But I don’t think IBM (IBM) has forgotten about the Software Factory and I think it wants to own the machines that run the Software Factory of the Future. The December 11, 2007 IBM announcements about new Rational capabilities is just an example. It means there are some legs in the software development tools market despite the open source software (OSS) development trend. While heavily funding OSS as a tactical move vs. Microsoft, IBM is really thinking long term to the Software Factory.

A big part of my research agenda is OSS but I am constantly amazed at what a cottage industry OSS development is. I don’t mean it literally takes place in homes per conventional wisdom (in fact it is completely dominated by IBM and other leading IT supplier funding) but it is still highly individualistic (which means full of errors that no one else can correct because they don’t know what the individual that made the error was thinking). That fact means that software development today is still figuratively where shoe manufacturing was in the 1860s when my great grandfather beat leather around a last in what is now my sister’s kitchen. A generation later his son (not my line of the family which is why I think for a living rather than make something useful) founded Plymouth Rubber to make soles and heels with a machine. Is the software industry still a generation away from automating the manufacture of its piece parts?

If so, IBM looks like it plans to be there. Of course, given IBM’s overall business strategy of building up its IT services businesses and becoming more of a management services provider you constantly have to ask whether it will spin Rational back out the way it has spun out PCs to Lenovo and so forth. You never say never but in the short term, the answer is probably no. PCs had truly become a commodity. Because of OSS, software is almost the opposite of a commodity. Even layers of the software stack such as application/web server software that I have dubbed commodity still offer dozens of choices. Rational development tools give IBM a leg up on everyone else in the services business in dealing with these choices. Almost everyone else in the services business such as HP (HP) and even in higher layer parts of the software industry is highly dependent on OSS for their tooling. Or, like SAP (SAP) they still have to build their own tools.

This recent Rational announcement tells me IBM’s services guys do not want to be caught sitting in a little shoe shop waiting for the leather guy to drop off a hide–Dennis Byron

It’s a fact: eBay Management is a dud.

Posted on December 10, 2007
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There has been another small dust up of interest in eBay as the shares look cheap and some of their business opportunities, like PayPal, are mouth-watering.

Company management is making an effort to sell the story and Street analysts are taking their numbers up on the stocks.  Listings are more steady and the stock has languished. 

Giving it a fresh look this morning we could certainly see one thing.   If senior management were working in the kitchen they could make any dish taste like broccoli.  The recent presentations are available here but they come across as a dull corporate overview of three, basically separate businesses. 

Putting a presentation together for investors is a golden opportunity.  Even a mediocre company can often put something together which is compelling.  But eBay, with all their market position, cash flow generation, and opportunity delivers one that makes you start checking your email instead of paying attention.  Some may say that it’s "just a presentation" but we disagree. It is the essence of the understanding management has of their value proposition and their ability to mobilize interest, resource, investors, employees and customers.   It’s also something that a large chunk of time is spent on.  If one goes to an investor conference to present the company story the idea is generally to make it as engaging and compelling as possible. 

Over the years we have probably flicked through a few thousand corporate presentations and these are pretty dull.  But the opportunities for a company like eBay should be electrifying. Amazon certainly can demonstrate that many things are possible.  Like eBay Amazon has their share of failed offerings but the overall projection of the company is innovation, excitement and turning it into money.  We should come away with the same perception regarding eBay.

Given the market and the company it probably can only be one thing the management in general and Meg Whitman in particular.  We were unimpressed with Ms. Whitman when we met her early on when she took over at eBay. Our thoughts at the time were along the lines of "what a lucky break for her."  (The CEO record is still held by Eric Schmidt for moving from Novell to Google.)

As she nears the 10-year mark in the job some, notably Henry Blodget, are calling for her to step aside and turn over the reins. We have never owned eBay and are still not inclined given current management.  But if a change at the top occurred that was encouraging we would take another fresh look.

– Kris Tuttle

Tags: EBAY, Management, IR

NOK finally finds a keeper…

Posted on December 10, 2007
Filed Under Companies, Markets & Finance, Software, Technology & The Web | Leave a Comment

The deal that Universal has struck for consumers to get music on their Nokia cellphones for 12 months is a winner.  Felix Salmon over at Portfolio.com published some commentary on the deal a few days ago. 

Focusing on "free" misses the point.  Consumers are going to be paying a low subscription fee to access the music on their cell phones.  They won’t be able to move into iTunes or burn a CD but then the point is to provide them with the content on the phone itself.  (These other options will be available if the customer decides to actually purchase the music.)

The iPod and iTunes are great but they are also limiting in that one needs to carry the device and agree to the iTunes way of doing things.  It’s a worthwhile trade-off for many.  However there is another huge (probably far larger) segment of the market that this Universal/NOK deal can begin to tap into. 

Entertainment is a personal matter but for many it involves more listening than buying, arranging, and playing.  This is where services like XM Radio have found success.  XM Radio on a cell phone is probably another great idea.  But by paying a small fee to have a music library on the mobile phone is something that can probably net tens of millions of customers quickly *if* it is well-designed and implemented. 

In Europe the phone is the key personal device.  More than 1/2 of the folks one sees on the train are playing games, doing SMS and listening to music on their mobile phone.  (Not nearly as much email as in the States.. in Europe train time for most  is personal time.)

The Universal/NOK deal may or may not be a game-changer depending on how well they execute but the structure of the value proposition for a big swath of the potential user base looks to be on target.

– Kris Tuttle

Tags: NOK, AAPL, Music, Mobile Phones

Pain suggests a reversal in the Dollar/Euro tend.

Posted on December 5, 2007
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Currencies may not be our bag but we read the output of just about everyone who makes it their own.  Most are quite smart and some are brilliant.  After digesting it all a few things come to the surface.

1. It’s true the consumer, real estate and financial segments will be poor for at least months to come.

2. The flip side if increased exports is working as it is supposed to, we see it in the monthly figures.

3. The current level of the Eurodollar exchange rate is painful enough to change behavior (unlike $4/gallon gas in the US.)

In support of 3. we will go beyond the widespread carping about Europe being too expensive to visit or do business in right now and point to major players like VW and Airbus that are seriously looking at building factories in America (thanks to Steve Waite for the pointer to the Spiegel Online source.)

Economic indicators are not our stock and trade but the behavior of market participants is.  Based on the attitudes we see it would seem more likely for the $/Euro ratio to move closer to $1.25 than $1.75.  These things take time and the lag effects are well-documented.  But come they do… changes in behavior seem to suggest real money is starting to consider $-based assets and production too tempting to pass up.

– Kris Tuttle

Tags: Currency, Markets, Dollar, Euro

Stewart Airport Goes Private

Posted on December 4, 2007
Filed Under Air | Leave a Comment

Recently Stewart Airport, only about 90 minutes from NYC has gone private and will be building flight offerings in the region. Unknown to most is the fact that Stewart has the second longest landing strip in the country thanks to their military beginnings and status as the backup landing site for the space shuttle.

This is an important development in our Air 2.0 theme and suggests that the momentum behind the trend to begin to revitalize the fast network of mostly dormant local airports is building.  It’s a fact that the existing commercial system is at capacity and no additional traffic is possible.

For a variety of reasons we see the Air Taxi and Very Light Jet space evolving to fill the need for incremental transportation services.  In some cases this will substitute for a commercial flight but more often than not will take the place of a long drive or multi-mode trip (plane, train, automobile.)

– Kris Tuttle