Google investors still get hung up on culture and strangeness.

Posted on July 9, 2008
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Institutional investors are mostly not tuned into the Google zeitgeist even though they own major positions.  As possibly the most over-followed company on the planet Google investors will hear about every little ripple of information.

The weirdness stems from the Google culture where engineers can spend time doing pet projects and see the show up as offerings in Google Labs or even as "beta" products in the Google portfolio.

When Google comes out with something like Lively it gets looked at and generates not only puzzled looks but some concerned questions of whether Google has "lost its way."  The fact is that Google throws quiet a bit at the wall to see if it sticks.  Plenty doesn’t make the cut but none (or very very few) are like Microsoft Vista or Adobe Creative Suite.  For Google and other SaaS styled companies it’s not about product cycles.  New products, particularly strategic ones do have a role to play and bear watching closely.

The problem is that many mainstream investors have a hard time sorting out the important aspects of what’s going on at Google from the unimportant ones.  Offsetting the difficulty in separating the wheat from the chaff is a blissfully short memory that generally means any Google weak launches or eventual failures are forgotten quickly.

Google remains an essential portfolio holding as they are perhaps the best technology architecture for modern computing although they occasionally put out some stinkers.  (Requires Windows XP and Internet Explorer?!)

Developing a good feel for Google as an investment requires an ability to make more "doesn’t matter" decisions than we have seen with any technology company in the past.

Symantec makes to “Most Dangerous Stocks” list.

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

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Deckchairs on the Titanic

Posted on May 1, 2008
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We did start the post on SYMC yesterday by stating we had no idea what the quarterly report would hold.  Investors were happy with posted results and guidance.   From our perspective it only makes the potential downside more acute if they company does nothing to improve their steady performance decline in customer environments.  Even though we don’t play for the quarterly reports we still focus on them to compare and contrast them with our longer-term thesis.

The company started the report by reclassifying a large number of business segments to present a different view of the business to the market.  (Why would you do this in a fiscal Q4 versus at the beginning of the next fiscal year?)  In any case we’ve lived in company environments like Symantec where "results" often depend more on presentation than execution.  This was the case at IBM during the years they tried to ignore the substantial declines in their business in the twilight of the 80’s.

The full transcript is available here to skim. As one can see lots of the statements and answers are either obscure or self-serving.  There are plenty of references to "double-digit" growth and "our <fill in the blank> business is doing great" along with repeated references to the "record" quarter.  Management even gets away with a revisionist positioning of saying they have now posted five straight quarters of stronger than expected results despite lowing guidance with the September 2007 quarter.

Clearly international was strong for the company.  We were more than a bit surprised that nobody had much of a reaction to the fact that 6 points of the 13% YoY growth was driven by foreign exchange.  Unless we misunderstood the statement it appears that the entire growth in deferred revenue came from currency effects.  Leading analysts actually said that the growth in deferred revenue was strong.  Are they even listening to the information being presented?

That said we don’t find fault with the report per se.  The company has a strong mix of businesses and recent acquisitions like Vontu are indeed best-of-breed point products.   At the same time nothing has changed in terms of our thesis on the company and the stock.  Management will be driving the field force to deliver more growth in license revenue this year at a time that existing customers are increasingly dissatisfied with Symantec and expect very little to no spending increases with them.  It could be a very interesting year for the company and investors.  To the degree that international business and currency benefits remain strong, the fundamental weakness will be masked.

Based on the quarter and the guidance we would expect the presentations on the analyst and investor day on June 12th to be another powerful marketing event which will help stoke enthusiasm for what looks like a turnaround. 

We main focused on execution which we continue to see as bad enough to jeopardize business results in the next few quarters. Management closed their call stating that F09 is going to be "their year."

– Kris Tuttle

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Symantec has more shoes to drop.

Posted on April 29, 2008
Filed Under Companies, Markets & Finance, Research, Software, Technology & The Web | 1 Comment

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

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Yahoo prices itself out of the market (again)

Posted on April 25, 2008
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It’s a small point but it’s one in a large pattern for Yahoo.

We still used them for domain registration which is a fairly innocuous administrative function.  We knew we were overpaying a little at $9.95/year per domain but even with 100 domains it’s small change.  But when they increased the renewal price 30% to $12.95/year we decided to take a look around.  It turns out that there are services that are much more robust than Yahoo and the best news is that charge less than half the new Yahoo price. 

So we get vastly improved administration and control at half the cost of Yahoo (again.)  Now it’s true we will be paying some students to move everything over but it’s a wash the first year and we save money after that.  More importantly the functionality is improved and every new domain we register is only a third of the Yahoo price.

We know Yahoo can turn their existing traffic into more money using Google which is perhaps the best indicator of their failure.  They are lucky to be getting what they are being offered for their deteriorating online assets.

Basically their investment and innovation in building their online services has been been far below the market.  So their offerings have deteriorated relative to other firms.

– Kris Tuttle

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Hard to shake some old thinking.

Posted on April 25, 2008
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For the last three years we have been working on leveraging new technologies and methods to create a much more effective model for research and investments in emerging technology investments.  As one of our colleagues pointed out, we have an opportunity to stand on the shoulders of giants.

Internet technologies and companies like Google, PayPal and Skype are clearly shifting the strength to weight ratio of what an online business.  Companies like FaceBook and YouTube can go from zero to $billions very quickly.  But moving from the established methods to the new platform isn’t as simple as pushing a button. 

There are several reasons why it’s tricky to do in a real business context.  Here are the ones we have run into:

1. Some of the new things are just not ready to scale.  We’re using Google Apps and it’s had very mixed results when we try and push it beyond the basic use cases.  It will certainly come along but it’s going to take time.

2. Many clients and business partners are slow movers.  Even if we were ready to move entirely to new technologies many of our customers are not.  At the same time many of the new technologies do a poor job of integrating with the old.  There are some gap-filling technologies that help.  For example Feedburner and Feedblitz can turn blog posts into email, IM messages or even Twitter posts.  However many wouldn’t be able to navigate the simple set up process.

3. A few of the things we thought were core values may not be.  We’ve always believed that high production values in terms of published research were important.  The downside is that it takes a substantial amount of time and cost to produce output of this caliber.  I’m beginning to think that the written report may be of far less value than I realized.  So we will be revamping our delivery methods to reflect this.

4. There are a few things we thought would go away that are really core.  It turns out that the old fashioned phone conversation or meeting is less replaceable than we thought.    In fact this may be the only real high value service left in an increasingly noisy and information crowded online space.  Email is getting less and less effective as a medium of distribution.

5. Sometimes you forget to pay attention to Internet effects.  We tend to start with an approach of what is "best" when we look at a new technology choice.  However any choice that doesn’t keep us 100% on the Internet curve starts to conflict with our business model very quickly.  There are been many cases where we have had to back off from a decision to use a piece of software, a service or even a whole approach when it became clear that the choice was not on the Internet productivity and cost curve. 

6. Simple things get hard, then you learn.  Even a task as easy as keeping your background of online CV up to date starts easy and then gets complicated. So we first wrote a great one for our own site.  But then one needs to keep LinkedIn up to date if you are going to use it (which we do.)  But then there is FaceBook, Xing and so on.  At first it’s all extra work and then conditions become right so you can just use a link to your public profile in LinkedIn and take the brave step of removing it from your website.   Then it’s back to easy street.  Hopefully we’ll get more of this.

Each one of these may seem easy to avoid but taken together it’s hard to do.  It’s easy to forget Internet effects when some of your highest paying clients depend on a phone and a secretary for all their interaction.  We’ve not done a count but as we start to plot our "core" technology suppliers the list is much longer than we realized.  Considering that we’ve cycled through several in most categories, that’s quite a bit of churn.

Of course some of the providers have changed quite a bit over the years.  We started out with Yahoo on Day One for many services and their platform is now years behind what is generally available.  So we’ve migrated nearly everything from them over time.  Google has a way to go but at least they are moving *forward* to deliver more.

The implications for our business, research and investments in emerging technology, are easy to see and already happening.  The first is that we are increasingly making more from the direct investment side of our business than from the published research and advisory side.  The second is that there will be a smaller (<100) clients that will really be on the inside and close to what we do.   Even the ability to achieve this number depends on the successful deployment of some new technology and dynamic delivery methods we are still developing.

– Kris Tuttle

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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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