5M Constant Contact (CTCT) Shares Come Out

Posted on March 28, 2008
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Constant Contact filed a statement to offer shares in a secondary yesterday.  It may help sharpen the impact to the shares so they don’t end up in a longer-term slide.  Yesterday the stock was off 10% to a little over $15.

The filed offering may help since the 5M shares offered is less than half of what could have been offered and serves to lock additional shares up for another 90 days. 

Since we originally noted CTCT as a short on November 9, 2007 there have been several updates including a report that details our concerns on February 19th.  (We’re not taking new subscribers at this moment but our individual reports are available at our website.)

We can’t be sure how effective the CTCT investor presentation will be for the secondary.  It probably hasn’t changed much since the IPO and the company has executed just fine so far.  No doubt management will have to fend off more questions about customer growth in times of economic weakness.  (The will also no doubt say that in tough times successful marketing programs are even more critical. ;-)

The question is what to do now.  Our fund has remained short since our original post but we are tempted to cover part of it as the offering should be completed a clearing price fairly close to our $14 fair value estimate.

In an ideal world people would swallow the story all over again and the completion of the offer might catalyze the shares to higher price points again.  This would provide another attractive entry point *and* more shares to borrow for short sales.

The essence of the story along with our concerns haven’t changed but the stock has declined from $24 to $16 and the secondary may limit further near-term declines.  So it argues for trading around our short position in hopes for higher entry points off of a successful deal.

– Kris Tuttle

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Are better browsers a new worry for Google?

Posted on March 26, 2008
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Most of our Google searches start in our browser box.  Browsers also support multiple search engines although 99% of the time we just default to Google. 

This browser intermediary never caused us much concern until we saw some demos of new browser technology that isn’t really all that new but at some point will catch on.  (See recent WSJ article by Walter Mossberg on www.spacetime.com for one.)

The key concern with respect to these new browsing technologies is that they expand the layer of functionality between the user and the search engine.  It’s not hard to imagine that the click rates from searches might go down quite a bit if you can see the web page without having to click on it. 

The Google interface has been a winner through simplicity but it’s possible that we are reaching a point where more sophisticated post-query processing will be just as important.  Many of these new tools also offer improved filtering to better match search intention with results.

Of course experienced users know how to use more advanced search techniques like "and" or "not" operators but the average public doesn’t. 

It’s not as if this changes our thesis on Google (see website for full report) but it does add another reason for the market to worry.  There’s a good bit more to the Google story than raw search.

Disintermediation isn’t a good thing for companies.  iTunes is a good example in music and entertainment.  Maybe Microsoft (with IE) and Apple (with Safari) have a little more potential in search than we first thought.  It will be interesting to see to what extent they try and leverage their client software positions.

– Kris Tuttle

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3i finally exits early stage technology VC.

Posted on March 25, 2008
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We’ve always been mystified by the 3i technology VC practice. For those that don’t know 3i is a fairly large VC firm based in England.  We first ran into them in the 90’s as they were funding a company we were taking public.

The weird thing was that 3i looked at early stage technology deals without any deep expertise or connections in the industry.  In some cases the partner on a technology deal was the same one sitting on the board of a dairy company.

Admittedly we come from a galaxy far away where technology investments, especially at the early stages, are built upon long-term vision, management ability and product management capabilities. 

But given that 3i is a large and successful firm we wondered if maybe our view of technology investing was missing something.  Over the course of the next ten years we couldn’t find it even after meeting again with some 3i partners in the technology space.

Finally we see that the world is the place we thought it was.  3i has announced that they are exiting the early stage technology VC space.  This also comes at a time when the global market seems to have developed quite a bit.  Silicon Valley may still be a hotspot but the northeast has been pretty robust and everyone is noting how well the technology development market has been in Israel lately.

Nobody says one doesn’t want a real business focus once technology development reaches a certain stage.  But at the beginning of the cycle it’s important to be looking at future rather than current markets.

– Kris Tuttle

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HP Software: Investors should be thankful for servers and printers.

Posted on March 22, 2008
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As we did with our look at the IBM Software Group, Research 2.0 analyzed the HP software business and published an detailed report (available at our website) looking at the business.  Unfortunately for HP it paints a fairly grim picture.

Because HP has acquired and combined so many different pieces of software it’s not surprising that family may lack a coherence (think HP, Digital, Compaq, Tandem.) Between 30% and 50% of all existing HP software revenue has been acquired in the last 3 to 5 years.  On of the latest, Mercury Interactive, was itself already the product of a few acquisitions.

At over $100B in annual revenues the $2.3B of software reported by HP is unlikely to get much attention from top management.  As it stands the HP software product family is loosely concentrated around IT lifecycle management (ITLM) with products like OpenView and the Mercury offerings at the core. 

Reading through the full report only makes one thing clear: HP Software Group is a substantial mishmash that lacks even the semblance of a strategy from other hardware manufacturers like IBM and EMC. 

Fortunately for HP investors the company is doing well in servers, personal computers and the printer business. The risk may be that as the HP software business continues to lag overall growth management may again go out and look for a billion or two of revenue to bring in house. 

If they keep to their circumstantial heritage of ITLM we would expect them to step up to a Symantec, CA or BMC size acquisition to really rock the boat.  Otherwise they may nibble at smaller deals in places like storage management to add a few more bits to the mash.

– Kris Tuttle

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Is Iron Mountain (IRM) made of paper?

Posted on March 21, 2008
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We released a short report to subscribers last week on Iron Mountain.  Our colleagues over at New Constructs identified Iron Mountain as a dangerous stock and we decided to investigate.

What we discovered was that despite the outward projection of a great business, the fundamentals behind Iron Mountain didn’t support the rather high valuation the market was affording it.

While it is true that the company has a wholly recurring revenue model, the economic value add from driving around cartons of paper and storing them is lower than their cost of capital.

It also appears that higher costs and slower revenue growth due to a slow shift into digital technologies are beginning to have an impact on the business. 

The company has taken on a fairly heavy debt load of $3.2B and has about $3B in long-term lease obligations on top of that.  This compresses the value and opportunity for equity holders.

The stock is down sharply from $34 to $25 but we still estimate a full value on the equity to be lower still at around $19/share.

Non-subscribers who wish to see the full report may purchase it online here.

(Research 2.0 capital has a short position in IRM.)

– Kris Tuttle

Yet another reason to avoid CTCT

Posted on March 14, 2008
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We’ve been writing about our concerns surrounding the viability of the Constant Contact business from a profit generation and valuation standpoint for some time.

Our most recent entry on February 21, 2008 outlines the key points and provides a link to our full report.

Since that time yet another material concern has emerged on our radar screen.  Our report highlights competition but now we see that many site and content management solutions are being extended to include built in email marketing functionality. 

Investors should also be reminded as to just how easy it is to move from CTCT to something else.  The model starts to break down rapidly if clients don’t stay on the system as long as expected and CTCT management currently expects that to be a long time.

The stock has traded down in what is a tough market with a lock-up that came off last week.  It’s down from $24 to $17 but is still above our estimate of $10-12 fair value.

We have nothing against the solution or the company but only trying to find the truth with respect to fundamentals, expectations and valuation.)

– Kris Tuttle

(Research 2.0 Capital is short shares of CTCT.)

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O’Reilly focuses in on social networks

Posted on March 13, 2008
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Investors may only have a passing sense of what social networks and applications are all about but the valuations of companies like MySpace and Facebook are a good enough reason to pay attention.  The $850M acquisition of Bebo today by AOL adds more fuel to the fire.

O’Reilly is by no means a newcomer to the space but they have been investing in developing more analysis around these new technologies for those that need a primer.  We took at look at their new "The Facebook Application Ecosystem ($)" which begins to lay the groundwork for understand what does and doesn’t work in the social networking application world.

The fact that users mainly use these applications for enhanced communication should come as no surprise.  We find many of the subcategories to also represent enhanced communication.  It all makes sense given that for about 20 years we were stuck with email only for online communication.  Then we got IM about 10 years ago and it’s time for more.  Eventually we may all get to some grand space combining social software and environments like Second Life.

For now though there are some practical aspects of social networking systems the O’Reilly piece points out that we wish more companies would pay attention to.  That’s mainly notification and openness (we are paraphrasing a bit here.)  Many of us are members of a dozen social networks now.  We can’t be bothered to login to each one to see what is going on or force our friends to be inside to communicate.  Being able to be notified about new news and developments is a key requirement for the successful social network.

There’s plenty more in the report and there are others that start to examine the applications emerging for these new "platforms."  We are seeing these emerge on the business side over at LinkedIn as well.

Lots of these networks will fail or certainly not provide great returns for investors without perfect timing.  But the evolution of interactivity is a given and a major aspect of Web 2.0 or Web 3.0 will be all about it.  We expect the mobile Internet and advanced phones like the iPhone to usher in even more growth for social applications "on the go" which will appeal to a greater number of non-geek users.

– Kris Tuttle

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Looking at cloud computing from CIO’s perspective

Posted on March 6, 2008
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You can read what CIO magazine’s Bill Snyder is saying about cloud computing here.

In addition to quoting Research 2.0 he talked to a number of forward-thinking IT department executives (and some other analysts, of course; he had to be unbiased).

I like the quote from Barney Pell, founder and CTO of Powerset, a San Francisco-based startup company building a natural language search engine, that said cloud computing is about elasticity. Wish I’d said that.

– Dennis Byron

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What a waste of Microsoft shareholders value

Posted on March 6, 2008
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Pardon my French but de jure information technology standards such as the Open Document Format (ODF) suck and never achieve their intended goal. Especially when they are just the creation of one company using the standards movement, and complicit governments, to try to make up for total failure in the marketplace.

To the extent that Eurocrats want to waste their time on standards, so be it. Talk about activity having a negative effect on economic development (but does it matter since the EU will shrivel to nothing as an IT market shortly anyways?)

But Microsoft (MSFT) continues to waste shareholder value on standards too, trying to placate Brussels. It’s a bunch of European academics trying to dictate that the little thing that turns on the automatic windshield washer in your car always be on the left hand side of the steering column… from the same people who cannot agree on where the steering column should be in the cabin. Or what side of the road to drive on.

Please Microsoft, for the sake of your shareholders, let these hypocrites adopt Sun’s (JAVA) and IBM’s (IBM) “standard” Open Document Format. Tell the world that this is a company vs company thing that goes back to the dirty tricks played by them in Massachusetts four or five years ago. Then let the market decide the way it always does. What’s the current score? Something like 12:1 in downloads (measured in millions) with Office with OOXML leading Sun and others’ ODF.

– Dennis Byron

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ECM pureplay investment opportunites a few years away

Posted on March 5, 2008
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The exhibit floor at the annual AiiM show from March 3-6 in Boston is an instructive walk around for the information technology (IT) investor. AiiM is now known as the Enterprise Content Management (ECM) association but we greybeards will always know it as the Association for Information and Image Management. For a technology junkie like me it is always instructive to be reminded that that the ‘I’ in IT, the information, is really more important than the ‘T.’

So if you’re thinking of investing in ECM, which is arguably something easier to get your arms around in terms of investment research than technology lower in the stack (because ECM is closer to an enterprise’s executives and users in most companies), then AiiM demonstrated that there are no real ECM-specific investment opportunities out there right now. But watch for a few open source software (OSS)-based IPOs one to three years out.

What happened to the pureplay ECM investment opportunities? Stellent became Oracle (ORCL), Documentum became EMC2 (EMC), CA (CA) bought MDY, and so forth. Microsoft (MSFT) ECM features are all wound around and integrated into Sharepoint. IBM (IBM), which bought FileNet, last year, was not at AiiM, confirming my theory that IBM didn’t even buy Filenet for its ECM features. I didn’t see Interwoven (IWOV) either but maybe I missed an aisle. Google (GOOG) was there, nibbling around the edges of ECM, wanting a bigger piece of anything with “enterprise” in the acronym.

There is always an exception of course: Day is listed in Switzerland and Kofax/Dicom in the UK. And Captaris (CAPA) might consider itself a pure play but that’s not the message it gives out via emphasis on business process management. Ditto OpenText (OTEX and in Toronto) and its various product lines.

As for some ECM investment possibilities in the out years, open source companies such as Alfresco were exhibiting and not only positioning themselves as replacements for the Stellent’s and Documentum’s of the world but as companies that will redefine ECM. Alfresco was founded by John Newton, also one of the co-founders of Documentum. I didn’t see Nuxeo but Alfresco, Nuxeo and other new OSS ECM players such as Jahia are covered in this free research document available at ebizQ.net. Although not specifically OSS, SpringCM (originally founded in 2005 as DocExchange) will presumably test the IPO waters sometime soon.

Running its own little exhibit within an exhibit in Boson were the founders of the Drupal OSS content management project (but be careful: that’s not the same as enteprise content management), who this week rolled out more details of their for-profit open source effort called Acquia.

And there are still some legs in old-school ECM perhaps; BankTec is making noises about coming out again sooner rather than later.

So if you want to invest in ECM take a breather for 2008 but add the above company names to your Google Alerts.

(As an aside, AiiM is co-located with the On Demand Conference and Exhibition so I went looking for cloud computing and software as a service suppliers only to find I had walked back into that Ozzie and Harriet-era past where people actually printed things and carried around physical representations of intellectual property. On Demand in this case refers to the ability to just print one or two copies of a book, brochure or whatever without having to “fire up the presses.” “On Demand” is already on my confusing buzzwords list but now I have to add a sentence to the definition.)

– Dennis Byron

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