Posted on August 12, 2008
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The NYT noted in a recent article some comments by Frank Quattrone highlighting some of the dysfunction visited on the Wall Street research world several years ago.
It does a good job of highlighting one reason that Research 2.0 and the Creative Destruction Fund are such a good fit in the current environment. Investors want and need high quality independent research that focuses on emerging technology trends, disruption and company investment opportunities. It’s not likely to come from any major Wall Street firms anytime soon.
Maybe the dramatic public unraveling of the Spitzer persona will help others see the folly of some of the most extreme reforms visited on Wall Street research. It wouldn’t be hard to extend the enforcement of skills, standards and certification on publishing Wall Street research analysts and ensure their independence and integrity. No good analyst would resist it and the best ones would welcome it.
Posted on June 18, 2008
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This has been brewing for a while but has reached truly absurd proportions. For those that don’t know technology companies divide their analyst "relationships" along the lines of industry (Gartner, Forrester) and financial (Goldman Sachs, Morgan Stanley.) This means that analysts talk to different people, attend separate meetings and receive distinct types of information and contact points in the company.
Besides having no real foundation in the first place, today this practice has taken on a mantle of irresponsible idiocy that remains somewhat characteristic of large companies. Here are the key reasons:
1. Why would any industry analyst disregard the financial and business aspects of a technology vendor? Why would a financial analyst attempt to do their job without a deep understanding of the technology, product strategy and other "technical" details of the business opportunity? Can one do a restaurant review using just the prices on the menu and not tasting the food? Can you write up the food and ignore the prices of the items? Silly.
2. Industry analysts are no longer distinct from financial analysts in terms of talking to public market investors. Gartner has a huge business built around serving up their analysts to discuss companies with investors. Firms like Gerson Lehrman blur this distinction even further. Everyone is part industry analyst, part business/financial analyst. Every single "industry analyst" firm we know has a substantive business where analysts service institutional investors.
3. Companies holding industry analyst meetings no longer provide any extra information that is financial in nature. They cite the "black out period" the same way they use it in financial analyst meetings. Another distinction without a difference.
Obviously companies have lots of stake when talking to analysts which is why they work so hard to craft their message and information to market the image they want analysts walk away with. Of course the primary job of the analyst is to find the reality and relate it to the needs of their own clients, not to grasp and simply repurpose the information.
Analyst meetings are certainly valuable and should continue. But they should be open to both types and a detailed agenda allows analysts to decide how well the program fits with their needs. Pure financial types may elect to skip product briefings and industry analysts may pass on the CFO presentation if there is one.
We realize that the "blackout period" is a dumb invention to comply with "FD" regulations but since there is no objective definition of it nobody knows how to use it intelligently. CXO executives refuse to talk to financial analysts for long periods while customers and prospects continue to get detailed information and participate in regular briefings with the company. All it does is prompt analysts to develop relationships with the clients, channel partners, competitors and prospects for a company which end up being more useful anyway. However company managements lose out because they miss the advice they can get back from analysts who spend time with clients, prospects and investors. The dialog is greatly reduced. Some companies actually pay over $100K for "advice" on how to script their quarterly calls but do poorly at understanding expectations.
We could certainly go on but today most of the problems don’t impact us anymore now that we are outside the oppressive and unproductive broker/dealer research sector but the industry/financial analyst distinction gets more silly every day.
– Kris Tuttle
Tags: Research, Company Managements, Analyst Meetings
Posted on June 5, 2008
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A few days ago our friends over at New Constructs released their Most Dangerous Stocks for June list and we couldn’t help but note that SYMC was added to the large cap list.
The stock has had a great short term rally since we published our research note on April 30th, highlighting the challenges the company is facing in their core market according to their customers. We recommended it as a short but on a fundamental versus a trading basis.
With the stock up from $17 and change to about $21 we feel the short is looking more attractive. Our price target remains $14.
The company will be hosting their analyst meeting on June 12th and we expect more general enthusiasm around the meeting since management is very good at telling analysts and investors what they want to hear.
Insiders have been selling heavily with no buying. The CEO, John Thompson, has taken $3.5M out in May alone.
Sentiment on the name has improved but there continues to be room for more upside if management gets more analysts over to their way of thinking around the meeting. Despite the recent stock move analyst community is mostly at a Hold (20) with 12 at Strong Buy/Buy and 1 lone Sell rating.
We’re currently short the name but secretly hoping for some further share appreciation and further confirmation of our concerns on the fundamentals.
Anyone long or short SYMC should read the research note above as it contains quite a bit of customer data that loudly suggests management is out of the loop on the fundamentals.
– Kris Tuttle
Tags: SYMC, Short Ideas, Analyst Meeting
Posted on June 3, 2008
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We’ve been documenting a broad range of sources and services we have adopted to perform our regular research tasks. In the process we have hit upon what we think is an important question for us and anyone else who is actively investing capital in the public markets.
Years ago the hedge funds helped cement the concept of the "mosaic" for a particular stock idea or market condition. When looking at buying or selling a name these portfolio managers consulted a few sources that created a picture for them from a set of well defined aspects. The classic case was a set of inputs that suggested near-term business was tracking better than consensus expectations, insiders are buying, new analysts have been visiting the company implying that new coverage is coming, and the valuation is attractive. A set of consistent positive inputs means an informational mosaic that says "buy." As we have said many times before a successful analysis includes fundamentals (business trends), expectations (consensus thinking) and valuation.
There’s been a huge proliferation of information sources, sources that vary by type, scope and quality. There’s also been a continuing trend of increased specialization. Now institutions regularly consult firms like Gerson Lehrman for internal morale or insight on a potential investment, use another to do channel checks, get models and consensus thinking from brokers, bring in raw data from services like NPD, or Majestic, commission a custom survey, use a too like Bloomberg, or Reuters for insider transactions, lock-up expirations and so on. Some are using consumer services like Google and Yahoo more to get a retail view of stocks and the market. Add to that the growing number of interesting alternative sources of information like Monitor110, Covestor, Stockpickr and other ways to glean changes in sentiment or market adoption. The full range of sources often also shifts based on whether an institution is in "idea generation" or "due diligence" mode.
As we begin to document and semi-automate aspects of our own investment process we are forced to consider some architecture to pull these diverse and changing elements into our universe of knowledge and analysis so we can further optimize our portfolio and the quality of our decisions.
Every week we find and try to incorporate more good information sources, additional industry experts and smart people, different methods of getting and sharing information (first email then Skype now Twitter?)
We’re trying to incorporate a few overlapping layers and a fairly comprehensive view but even doing the basics begs for a simpler way to match fundamentals with consensus and valuation. Why aren’t the online tools better? Who has a simple and flexible architecture to put all these research elements in a context for decision making?
Better tools are needed. Right now it looks like we need to develop most of what we want ourselves. If nothing better appears we’ll produce them for the rest of the world when we are done. Meanwhile, we welcome any good ideas.
– Kris Tuttle
Tags: research, investing, technology
Posted on June 2, 2008
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When we left the broker-dealer/investment bank universe of equity research we could certainly see the industry would have to work through a large and painful transition to a set of new products and business models. Given the huge size of the "industry" our guess was that it would take 10 years to work itself out.
When we saw news of unbundling and new funding for research startups several years ago we thought that changes might start to come quickly. These initial positive signs seemed to just die out. Recently we mused that we may have been off by a factor. The industry seems like it may need 20 years to things out. After going back to the drawing board we have decided to stick with the 10 year forecast but admit that it’s going to be as back end loaded as an enterprise software quarter.
Thanks to a number of industry changes in the broker-dealer/investment banking world we are now getting the "Street" research we asked for. That is, no research at all. The lack of value has only helped to accelerate the devaluation of the work product and create a pervasive unwillingness to pay for research in general.
Today the only high returns available from quality investment research come from investment management fees. This is why so much of the growth in research staffing has been on the so-called buy-side over the last five years.
It’s true that there have been some new and successful models. The most well-known and now broadly imitated is Gerson-Lehrman. Although their use of an expert network available to investors is fairly obvious and has been tried before, their structure of nearly all variable cost business model have been the key factors that have made them successful. There are also hundreds of small independent research shops focused on verticals or other data segments that have been able to build reasonable though less famous businesses from the institutional investment community.
That said we are still sitting in a transition stage where the basic value proposition for sell-side investment research is seriously in question. There is no better testament to this than the recent restructuring moves at Morgan Stanley. In the face of serious progress in their research ranking (moving from #8 to #6) in the widely respected Greeenwich Associates study, they have terminated a large number of their senior research staff.
In several large coverage areas: oil and gas E&P, health-care services, and automobiles and components, the analyst teams had vaulted from rankings in the pack to #1 or #2 before being fired.
Imagine their surprise… you work for years at Morgan Stanley, crank away and in the year you break through to be the #1 coverage in your industry… they fire you along with several others who obtained the same success. If that doesn’t send a message of "research isn’t worth anything" I don’t know what does.
It also says that we are very much in the same place that we were for broker-dealer research back in 2003-2004. During that time a huge investment in research on the part of what was then Adams, Harkness and Hill was undertaken. Despite a new focus on improved research and a big ramp in the number and quality of the analysts, it didn’t move the needle. It makes no sense to invest heavily in an aspect of the business that clients are either unwilling or unable to pay for.
Where does that leave us in 2008? We have some uncertainly as to picking the starting year for this 10 year transition. It was probably 2000 at the earliest and 2004 at the latest. We do see some clear and undeniable evidence that industry conditions might be improving. (Not for research at brokers or bankers but for independents.) That would put our 10 year transition into 2010 or 2014. Based on some of the things we are seeing we are expecting it to be closer to 2010.
Some investors are getting smarter. They are beginning to understand that they need to look beyond the consumption of analyst reports and meetings with company management if they hope to outperform. Under-performance has become more of a problem thanks to increased transparency and the rise of easy alternatives like ETFs. At the same time many firms are introducing new and useful research products based on data and facts that can be tied directly into business trends and future shifts in company fortunes. We’ve also seen a dramatic increase in the straight up payment for research versus so-called soft-dollar on trading commissions.
We’re working with some of these emerging data and fact-based research organizations to incorporate their information into products that are unique and of great value to institutions. By combining proprietary and meaningful data, industry expertise and insight, and financial/stock analysis we generate the type of product upon which performance-enhancing investment decisions can be made. It takes all three.
In conclusion the move by Morgan Stanley may mark the turning point for research. It signals that the current system is so broken that what is touted as a great success leads to the elimination of the effort. Reportedly Morgan Stanley is even taking a pass on subscribing to more detailed information about how their research group is performing. Adding a form of "we don’t care" to "it doesn’t matter."
To anyone not familiar with the modern sell-side research effort in a broker dealer, getting to be the number one team involves covering the largest and most well-covered stocks in a group and then setting out to market yourself to every large institution to that votes in the annual survey. It’s a ton of work. One has to be up on every blip and nuance surrounding an industry or a stock. It requires encyclopedic knowledge and hundreds of calls a week to voting institutions. Of course this leaves little, if any, time for actual research, finding new ideas, helping people really make money in stocks. But then again that’s the sell-side research we deserve. At least Morgan Stanley has made some moves that might bring the charade to an end.
– Kris Tuttle
Tags: Research, Wall Street, Sell Side, Morgan Stanely
Posted on April 29, 2008
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Symantec reports earnings after the close on Wednesday and we have no idea what it will be like. What we do know is that the situation in the field for Symantec is going from bad to worse.
Our most recent report was produced in partnership with TheInfoPro which collects input from enterprise customers to understand fundamental technology shifts within IT. The data for Symantec has been declining steadily for some time and has recently accelerated on the downside. If the current trends continue Symantec spending intentions will suggest an actual YoY decline for the first time since data starting being collected back in 2003.
The root of the problem lies in the lack of execution between management vision and the company acquisitions and the customer. Products haven’t been integrated. The sales teams have suffered from lack of training and high turnover. Customers are relating horror stories regarding technical support and customer service.
Our report details a bit more of the data and delves into valuation using typical approaches along with our own long-term valuation framework and the forensic accounting of New Constructs. The net result is a fair value of about $14/share.
The only good news for shareholders is that the stock is already trading at a level where an acquisition by CA, HP or BMC would work. That’s the only positive scenario we see now given that management hasn’t even acknowledged the depth of the issues, let alone start solving them. (Dell is at least past the acknowledgement stage here and working on solutions.)
Based on what we see one would expect conservative guidance on Wednesday and an interesting Analyst Day on June 12th.
– Kris Tuttle
Tags: Symantec, IBM, HP, TheInfoPro, NewConstructs
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
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
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
Tags: cloud computing, CIO
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
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