Posted on February 29, 2008
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The year-end IDC Worldwide Quarterly Server Tracker factory revenue numbers were released February 27. From an operating system perspective, there’s really no new news in them (but see the press release or the relevant IDC report for vendor and other characteristics). But we mention them here for comparison with the quarter-by-quarter results we blogged on in November, September and May 2007.
For 2007 vs. 2006, the net-net is Microsoft (MSFT) Windows-based systems continued to gain share primarily at the expense of “Other” (primarily legacy mainframe-operating-system based). Unix/Linux-based server revenue was basically flat year over year with Linux open source systems continuing to displace UNIX systems as expected. Linux gained slightly more than a percent of share while UNIX lost just under a percent of share.
As we noted in November, it appears from eight quarters of IDC data that the Unix/Linux share of the market is stabilizing in the 40-45% range, although they hit 46% in quarter 4 2007 only. We will need to watch to see if this is an upward trend or a seasonal issue.
Although overall Windows-based server revenues are gaining at the expense of “Other,” such as IBM (IBM) mainframe operating softwre, the trends went the other way in quarter 4, so that is something else we will watch. I believe that blip was totally seasonal because end of calendar year buying is a 40-year pattern for legacy systems.
— Dennis Byron
Tags: Microsoft, open source, Windows, Linux, IBM
Posted on February 29, 2008
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The year-end IDC Worldwide Quarterly Server Tracker factory revenue numbers were released February 27. From an operating system perspective, there’s really no new news in them (but see the press release or the relevant IDC report for vendor and other characteristics). But we lay them out there for comparison with the quarter by quarter results we blogged on in November, September and May 2007.
For 2007 vs. 2006, the net-net is Microsoft (MSFT) Windows-based systems continued to gain share primarily at the expense of “Other” (primarily legacy mainframe-operating-system based). Unix/Linux-based server revenue was basically flat year over year with Linux open source systems continuing to displace UNIX systems as expected.
Linux gained slightly more than a percent of share while UNIX lost just under a percent of share (not shown).
As we noted in November, it appears from eight quarters of IDC data that the Unix/Linux share of the market is stabilizing in the 40-45% range, although they hit 46% in quarter 4 2007 only. We will need to watch to see if this is an upward trend or a seasonal issue.
Although overall Windows-based server revenues are gaining at the expense of “Other,” such as IBM (IBM) mainframe operating softwre, the trends went the other way in quarter 4, so that is something else we will watch. I believe that blip was totally seasonal because end of calendar year buying is a 40-year pattern for legacy systems.
— Dennis Byron
Tags: Microsoft, open source, Windows, Linux, IBM
Posted on February 28, 2008
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MEMSIC is recent IPO that has been lost in the shuffle and pushed down to the single digits with the rest of the semiconductor space. However the company is growing rapidly and is already profitable.
In fact the capital raised should provide very high returns given their existing returns and strong demand for MEMS-based sensors.
The stock is thinly traded and only two analysts (underwriters) have published estimates out there. The consensus for tonight is 6c on $6.5M in revenues for the December quarter. 2008 estimates are currently at 52c on $39M.
That’s right the stock is trading at about 12x earnings and growing 56%.
We published a full report on the IPO which is available here (pdf) with more details.
Our fair value estimate for the stock is $21. If we are only 1/2 right the shares have plenty of potential from here.
The risks to the company are that the larger players will squeeze them out and that their low-cost CMOS technology has limited applications. We can’t be certain about that or the quarter per se but the company has been executing well and generating the sort of profits we find attractive.
We also are fans of the emerging MEMS technology area. The R2 Fund has a long position in MEMS.
– Kris Tuttle
Tags: MEMS, MEMSIC, STMicro, Analog Devices
Posted on February 28, 2008
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Every week we have to endure news stories about whether Apple will or will not make their 10M iPhone target this year.
The answer is simple. They will definitely make it. However that’s not really the question. The question how and at what margin? Carriers and consumers all want the iPhone so it’s not a question of demand. If Apple has to they will enhance the terms they offer carriers around the world to get the distribution they need.
Thanks to lower component costs and typical scale benefits Apple will also have price as a weapon later in the year as well, probably without hurting margins.
It’s fine to continue to track units, carrier plans, prices and margins but the focus on the 10M phone target is not the ball to keep an eye on.
Growth, market share, margins, product cycles, cash flow, returns on invested capital anyone?
– Kris Tuttle
(Research 2.0 has a long position in Apple shares.)
Posted on February 27, 2008
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The private virtualization company PlateSpin was purchased by Novell for $205M this week. Our notes from a briefing in October of 2007 are as follows:
PlateSpin Inc was formed in 1999 and brought some virtualization provisioning products to market. Basically was just too early and the company folded in 2002. VP of Product Development formed PlateSpin LTD and became the CEO in 2003.
The physical to virtual conversion model sold well as companies needed help to convert their workloads over. Their core product, PowerConvert decouples the software stack from the physical and virtual servers and provides tools similar to what you would find on a mainframe to support warm standby, job control, back-up and so on.
PowerRecon is a newer product that acts as an advisor on where to move workloads. This is not really an automatic tool now but it could evolve into one. There are two pricing models: usage-based at $175/conversion and $1.75/server/day and also perpetual. About 70% of the business today is usage-based with the balance perpetual. Must customers start out with usage and as they us it more and more they go perpetual. (They were 100% usage-based not long ago.)
The most common entry point is for disaster recover and server consolidation projects. The out of the box tools one gets from a VMWare or Microsoft only go so far and often work well only in one direction versus in multiple directions and with different platforms.
Another aspect of PowerRecon that they are hoping to add is virtual infrastructure additions which helps clients discover many servers they didn’t know about, enable service-based delivery pricing and so on.
The company has grown from 15 people and 12 customers in 2004 to over 180 people and 3,500 customers today. I got the feeling that they might be needing money now but couldn’t determine if it was another round or a potential filing. Insight appears to be the lead investor.
What Novell will do with these guys remains to be seen. I thought they would IPO but was probably not profitable.
– Kris Tuttle
Tags: Platespin, Novell, Software
Posted on February 21, 2008
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As we’ve been noting since mid-2007, Microsoft (MSFT) is making every effort to put its anti-open-source baggage behind it. This is covered in detail in our annual Microsoft report released in December. On February 21, Microsoft announced sweeping open-source interoperability “principles” related to its volume software products (Windows Vista, the .NET Framework, Windows Server 2008, SQL Server 2008, Office 2007, Exchange Server 2007, and Office SharePoint Server 2007) that basically put its agreements with the European Union Competitive Commission, announced in October 2007, into Microspeak.
The announcement has three implications:
First, previous tactical opposition to open source software (OSS) has been a distraction to Microsoft’s “Software Plus Service” strategy, which hopefully will become more about providing IT and business services than mundame closed or open technology terms and conditions. This means “Software Plus Service” is misnamed (but don’t get hung up on words, as the U.S. presidential candidates are saying to each other). The Software Plus Service strategy has been a work in progress since Ray Ozzie joined Microsoft and dropping all the anti-OSS tactics makes that clearer to investors.
Second, although at the February 21 press conference Microsoft specifically said this announcement had nothing to do with the proposed Yahoo (YHOO) acquisition, that acquisition has everything to do with bringing Microsoft services to consumers just as most of the current available Microsoft “Live” services support enterprises. Microsoft is uniquely positioned to support both enterprises and consumers. More importantly, it can support each individual in his or her enterprise and consumer roles as those roles change during the day.
Third, the announcement covers all interfaces used by Microsoft itself in tying its volume products to “other Microsoft products.” That means it will be easier for open source software (OSS) providers to connect to the BizTalk integration engine (if that’s considered separate from Windows Server 2008), the Greats Plains heritage application software (even the smallest OSS ERP provider can write its version of SAP Duet), and more.
Apparently when it crossed all the t’s and dotted all of the i’s on the agreement Microsoft made with a free-software-oriented organization called the Protocol Information Freedom Foundation in December 2007, it decided to just open the kimono and eliminate the middle man.
Can you say this means Microsoft is now open source? No, and Microsoft took time in the press conference to spell out its intellectual property rights (licenses will be reasonably available but not freely available). But anyone who argues about the differences at length (and many long-time Microbashers will of course) is strictly splitting hairs.
– Dennis Byron
Tags: Microsoft, open source, EU, Windows, Protocol Information Freedom Foundation
Posted on February 21, 2008
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We released our fuller research report on Constant Contact (pdf) yesterday to extend our client-commentary more broadly. In summary the report highlights the risks to CTCT based on a few key facts:
1) Since the IPO the investor sentiment for this company has been nearly off-the-charts positive. Company presentations focused on gross profits and adjusted EBITDA rather than discuss profits. The long-term targets provided by management are far in excess of what anyone in the SaaS business would expect.
2) Costs are fairly high in that the company feels it must be a leader in the market and outspend everyone on sales and marketing to gain new customers. The economics of new customers is reasonable today but impossible to predict.
3) There are a wealth of competitors. Many appear in any search using "email marketing" as the term. Pricing is competitive and switching costs are low. Having a 40+ month customer duration expectation seems far too optimistic.
4) Millions of shares are coming off lockup on March 2nd which should find a home closer to a market clearing price of $10-12/share as instructed by our long-term valuation model.
5) Company manages for adjusted EBITDA but investors will eventually care about ROIC versus the cost of capital for the company and their economic value add which we expect to remain precarious.
More details and proof points for the summary above can be found in the full report.
– Kris Tuttle
Tags: CTCT, Short Ideas
Posted on February 14, 2008
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Expanding on a plan it announced in November 2007 by which Red Hat (RHT) said it would capture 50% of the operating system market by 2015, the company announced on February 13 that it intends to also capture “50% of enterprise middleware workloads by 2015.” The goal comes as an interesting juxtaposition with the Alfresco Barometer Survey announced February 12 at the JBoss user conference. That survey indicated that JBoss was not even the most popular open source application server. If the latter is true Red Hat will have a tough row to hoe.
Let’s start with how Red Hat is defining middleware. The answer is very broadly (“more than just the application server alone”). To accomplish this goal using Red Hat’s broad definition of middleware, Red Hat would have to not only displace other potentially more popular open source middleware (e.g., Apache HTTP software) but billions of dollars of “closed-source” software currently in use across the world between now and then. (NOTE: The open-source vs. closed-source characterization is not meaningful in understanding or measuring the market as spelled out earlier in this blog post but the open source devotees still insist on drawing this distinction.)
To literally accomplish its goal, Red Hat would need to displace 50% of the $20-$30 billion worth of IBM (IBM) CICS and BEA (BEAS) TUXEDO shipped in the last 30 years, the $20-30 billion worth of MQ Series, TIBCO (TIBX), etc., shipped in the last 20 years, the $20-$30 billion worth of WebLogic, WebSphere and Oracle (ORCL) Application Server shipped in the last 15 years, the $10-$20 billion of BEA, IBM and so forth integration servers, development tools, ESBs, portals, and so forth. Add business intelligence software (if you use Oracle’s definition of middleware) and collaboration software (if you use IBM’s). Sorry but the aircraft carrier just does not turn that quickly.
As for how Red Hat is defining “50%,” the company says it means of that year’s “deployments of middleware technology.” Hopefully us reserachers will have some license-agnostic census software to measure that number by 2015 but to get there, do the math. No matter how you measure 50%, Red Hat would have to displace existing installed software at an astonishingly rapid rate over the next 6 years to reach its goal because the overall software market is only growing 5-6% (and the middleware market basically tracks the overall software market).
At the press conference announcing its intention, Red Hat said that its subscription model makes comparison with other middleware suppliers impossible. That is not accurate and part of the litany of open source movement claims that can be misleading to investors. Most of the current installed base of middleware has subscription maintenance revenue associated with it just like Red Hat’s.
In fact, at the press conference Red Hat showed an IDC estimate of $15 billion of middleware revenue in 2011; about 66% of that number represents subscription maintenance just like Red Hat’s (the other 33% in any given year represents license revenue for totally new business and add-ons/upgrades to the installed base). The equivalent IDC number for 2008 is probably in the $11 billion range, of which Red Hat’s total is less than $50 million.
(I am just guessing. The only access I have to IDC middleware market share data is via its press releases. On the other hand, it is a very educated guess since I popluated that database for many years and still do IDC backcasting and operating environment splits in my sleep.)
– Dennis Byron
Tags: Apache, open source, JBoss, middleware, MQ Series, Tuxedo
Posted on February 13, 2008
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In the context of economic uncertainty, financial system turmoil and a major election year it’s not surprising the market has been all over the place.
But as things begin to become more clear we expect investors to be more willing to make commitments. The fact that Obama has rolled in the past several primaries and now leads in delegates is beginning to feel like a leader for the democrats has emerged. Texas and Ohio could rock the boat but again it feels like the campaign message around "change" has stuck for Obama and we are past the point where that momentum can be stopped.
We are far from political experts but as the election outcomes sort themselves out investment scenarios are easier to consider.
Oddly we are most bullish on the prospects for what an Obama victory would do for the US markets. There’s not as much difference in the economic policies between democrats and republicans as their once was. Although the economy and the financial markets need some cleaning up this will happen under any election scenario over the next 12-18 months.
What we like about an Obama victory is that it can very materially change the world perception of the United States which has suffered terribly under the Bush/Cheney administration. We know that deficits can lead to weak currencies but in the case of the dollar a healthy part of the weakness may also be a reflection of the lack of confidence in America.
We’re not naive enough to think that Obama will change the country overnight or believe that he won’t make mistakes. But a figure like Obama is inspires an image of the U.S. as a place where equality, opportunity and possibility are very real.
A little less uncertainty and an improved appetite for things American, including the dollar, should help the market recover over time. We also don’t think current low valuations are "deceptive" at all. While some estimates may still need to come down we are still looking at sub-15 P/E ratios in most cases. In the crash of 2000 we had stocks that were trading at that multiple of *sales.*
Count us as constructive. Our top positions continue to include DELL, INTC, AAPL, CREE, ADS, and MSFT.
– Kris Tuttle
Posted on February 12, 2008
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Leading bank and investment-firm CIOs, IT directors, staff technology gurus and the like spoke February 11 at the New York City conference “Web Services/SOA on Wall Street” Their theme could have been “SOA is not on Wall St. yet” but that’s probably good news for the supplier community that packed the conference with new technology value propositions. The slow uptake of SOA means the large systems suppliers such as IBM (IBM) and HP (HP) have not run away with all the services oriented architecture (SOA) business already.
Listening to the Wall St. information-technology (IT) gurus is important because they and their peers in The City and Switzerland and Singapore are usually two or more years ahead of the curve in terms of IT implementation. When it comes to investing in (or marketing) IT, finding out how it plays in Peoria first is not good advice. So in that light, where does SOA stand?
The general feedback from the presenters, most of whom are in varying stages of evaluating or implementing SOA for their firms, is that Wall St.’s own culture of silo operations is going to make SOA a tough sell. SOA helps eliminate IT silos but if the business itself is siloed, it does not want to share its IT resources with the other departments. The speed of migration to SOA by industry may be determined by the extent it is or wants to remain siloed for business rather than technology reasons.
Secondly, SOA does not mean web services to these guys. All of the buzz about mash-ups and social computing has a bad feel to it if an enterprise has concerns about governance, security, and risk aversion. Or has governments breathing down its necks with those concerns. That’s certainly true of Wall St. but increasingly, it’s just as true of Main St.
As is often the case, the vendors sponsoring the conference wanted to push the IT users on to the next set of buzzwords. To heck with the title, “Web Services/SOA on Wall Street,” how about complex event processing and Enterprise 2.0? Wall St.’s answer, “let us walk before we run.” One of the best lines of the day: Look at the complexity of the Google (GOOG) infrastructure. And that’s “just simple event processing.”
The implications of this, as I have written about here and here and elsewhere, is that SOA is going to permeate the world’s computing infrastructure slowly, just as client/server computing did beginning 20 years ago but probably not reaching a tipping point until after the Y2K scare passed. Similarly, by the time SOA happens, the industry will be on to a whole new set of buzzwords. SOA will eventually have a major technological impact but very little impact on investment strategy.
– Dennis Byron
Tags: service oriented architecture, SOA, Enterprise 2.0, mashup, CEP, web services
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