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Use investments to fund growth instead of handouts?

Posted on January 6, 2009
Filed Under Companies, Markets & Finance | Leave a Comment

Our friend Brian Bristol had an op-ed published over at the Orlando Sentinel that points out how powerful capital gains tax relief can be to spur investments and give the equity markets a boost in 2009 after a very rough period last year.

We’re a little surprised that there isn’t more effort being put into encouraging investors in these economic times given how beneficial real investments are for driving economic growth in the U.S.  Some of the relief efforts (like allowing businesses to get retroactive tax relief going back five years based on losses in 2008) as of very limited use.  Instead of handing out money and hoping that something good comes of it why not just provide relief from future tax burdens for those private sources of capital that are looking for places to invest?

We’d go much further than having a declaring a long-term capital gains holiday for investments made this year.  We’d certainly be happy to see it but it would be more of a short-term boost than a long-term engine.

Part of the problem is that for many Americans "investments" have increasingly looked more like financial engineering and restructuring antics rather than that which builds productive capacity, creates durable economic value and adds to job growth and quality of life.

We’re involved in a number of private financing projects right now and they all have very strong merit.  Many stand to get done or at least get enough financing to keep developing.  But what would really excited investors is not only relief from any long-term gains taxes but also a credit for investments that create jobs and/or productive capacity in the U.S. 

Tax credits like these are not a new idea at all which is why we’re surprised not to see them more featured as part of the rumored $300B stimulus package.   They could also be used to offset interest payments on debt which would further enhance the attractiveness of building economic growth. 

Although we are not fiscal or economic experts we KNOW that this will lead to much more real growth than sending out $300 checks to consumers or handing businesses tax refunds to spend as they wish.   

Providing incentives to invest in new capacity, fund companies that are ready to hire staff to ramp up operations are the best ways to use tax payer funds to fuel growth.  Why aren’t we doing more of it?

Bill Gates on Charlie Rose

Posted on December 26, 2008
Filed Under Misc, Software, Technology & The Web | Leave a Comment

Bill did Charlie Rose which gives one a 55 minute view into what he thinks about where MSFT is now and where they are going.   Given the size and importance of the company we thought we should review it.

Bill’s outside MSFT now but he clearly still cares about the company as well as some "special projects" like search. 

The odd disconnect between what Bill believes and what the reality is in software today.  The visions are fairly mainstream including thoughts about mobile computing, reading devices, video, screen technologies and so on.  (Strangely enough Bill didn’t have much to say about what we see as the medium-term future of visual computing and RealVR.)

There’s clearly big opportunity in having Bill and his resources figure out some solutions to normal world problems like how to keep vaccines viable without refrigeration and many other areas.

Having the energy and intellectual interest, combined with the financial resources of a Gates/Buffett+ is a pretty big deal.  The world isn’t rational because of dysfunctional incentive systems and it needs organizations like the Bill and Melinda Gates Foundation to address obvious problems.

Technology will play a big roll in delivering the best education effectively.  Also technology will help with problems like water and cooling in emerging economies. At the same time technology plays a generally positive role in figuring out ways to spur development. 

Go after some core problems like AIDS and Malaria are a major focus.  Gates focuses mostly on developing new solutions and then relies on governments and other organizations to fund large-scale implementations. 

On the surface having these guys go after solutions for the 10M children who die every year is obviously pretty awesome stuff. 

Lots of the major cycles are 15 years in duration when it comes to new vaccines and crops which is a major factor in limiting advances. 

The idea of taking 4-5% of the "innovation power" of large companies and directing it towards special needs of the world and the poor is a good one.  [The fact is that taking 1c out of every dollar and focusing the right way will go a along way to solving these problems.]

Bureaucrats don’t get a wake up call from customers or markets.  Same can be said in many ways about some non-profits.  The ability to prioritize and understand real business scale issues are the core of what needs to be in place to solve some of these problems.

Overall a fairly grounded and noble presentation from Bill on what he is doing and how he still feels technology will play a major role.  At the same time he hasn’t totally let go of technology projects at Microsoft but much remains to be seen about how they will do in software, search and so on.

 

Intel: Sounds like anti-trust-like behavior to me!

Posted on December 26, 2008
Filed Under Software, Technology & The Web | Leave a Comment

Intel is a tough competitor.  Maybe not as ruthless as Microsoft was but they know many of the same plays.

For example recently Intel has taken steps to tell manufacturers that it will not "unbundle" their own 945 graphic chipsets from the Atom processor lineup.  This has the fairly simple effect of locking out or making it very hard to justify a GPU from NVidea or AMD/ATI in any design.

Intel is obviously trying to control the market and ensure that Atom-based systems are useful but not too useful which they could be if other chips could be integrated into the design.  Since it is a legitimate threat one can understand Intel being concerned.  But how about competing on features and price instead of using market power to block better solutions from other companies?

As the web enters a new phase of more visual, more mobile computing it’s going to be important for the market to have freedom in designing the right architectures for these new applications. Rather than lead the way Intel seems to be keen to block innovation and eliminate those that try to compete on it.

We will always have a soft spot for Intel because they provided an educational grant to me when I was a kid to design S-100 CPU boards based on their then-new 8088 and 8086 designs.  But this behavior is sad and hurts technology in general.

[Disclosure: At the time of this writing we have a major emphasis on visual/mobile computing and a small position in NVDA shares.]

Not enough institutions are reading Seth Godin

Posted on December 19, 2008
Filed Under Companies, Markets & Finance, Misc | 1 Comment

More folks in the institutional brokerage and banking world should be reading the stuff Seth Godin and others are writing about.  We all have an intuitive feel about why the newspapers are dying in part because many of us no longer read them. 

What about institutional brokerage?  For one thing the consumers in this market are very slow adopters.  Most of these folks attend meetings, listen to voicemail and use email as their primary sources of information.  During the 90’s before the Internet adoption wave took off an analyst could have a huge amount of impact on technology stocks.  However the cost of that impact was a highly trained and hardworking staff of institutional sales and trading that cost our small boutique upwards of tens of millions of dollars per year.  It was highly effective and thanks to a steady amount of invest banking revenue and the ability to have multiple research analysts share that channel, helped everyone make a ton of money.

The crux of the problem with the institutional model is that it breaks down at revenue rates under $100M and gets pretty ugly and depressing from there.  It’s just not a viable business.

We started our independent research business in April of 2005 and have sworn off any kind of distribution or marketing costs in favor of just focusing on research and leaving the rest to our network of contacts and the growing world of online awareness and distribution.  (We’ve dabbled a little bit here and there to test our conviction it’s been clear that money spent there is money wasted.)

Despite all that and perhaps as one would expect our distribution and footprint has expanded steadily while we simply focused on doing research.  Like any business we have faced challenges and continue to hone our distribution capabilities but they largely build themselves organically or through partners.  At the same time our direct network has expanded by about 100% from what it was in April of 2005 to number about 500 direct client/customer types who we interact with on a fairly regular basis and can use to "get things done" when the need arises. 

Now of course could salespeople add value, but they may make more sense in the form of distribution partners rather than direct staff.  By staying lightweight and leveraging existing infrastructure we think that we can deliver all that we could before from a research perspective without the ancillary 50 to 60 people we needed in the 1990’s.  It’s true the revenue level is much smaller but it works with the new expense structure to create research compensation and net operating margins in line with the 90’s. 

Brokers and banks seem to have plenty of more things to worry about in the short term but if these dynamics are secular, some deeper thinking is still required there.

Notes on the Palm Call

Posted on December 19, 2008
Filed Under Companies, Markets & Finance | Leave a Comment

Stream of consciousness from the Palm call….full transcript is available here.

[This GAAP/non-GAAP thing is a huge useless pain for everyone.  Takes tons of time an does nothing but obfuscate.]

Smartphone business not too bad.  Handhelds obviously down the drain but now pretty small.

Gross margins down 6pts sequentially! No expansion likely in Q3.

Operating expenses are coming down nicely, should hit low-mid $90M range soon.

Non-GAAP loss of $80M and Adjusted EBITDA loss of $55M.  (What large NOL carryforwards you have grandma!)

Cash at $224M, inventory, and A/R all okay.

Sounds like this is close to the bottom for the company with the February quarter offering the most likley bottom IF the new product strategy works starting in fiscal Q4.

It’s tough out there. Maturing product line, consumer spending tough, spending on new products adding to expenses but not yet ramping.  Translates into a "few rough months ahead."

New platform is nearing completion and first phone will launch in the first half of 09 as planned. Believes it will "stand out" in the marketplace. 

For now Treo Pro continues to do okay, rolling out to new markets.  Thinks their ability to control software and hardware will help them long-term in the market.  Claims carriers are excited. [Could be an interesting alternative for carriers.]

Smartphones will continue to be gaining share as it is still early days here.  [We agree.]

Q&A starts…

Sell in and sell through mostly balanced.  Some inventory write-downs should put component WIP in line.  Cash burn will be UP in the next quarter.

Some discussion of it being "too late" for a new phone platform.  [We agree with management that is still early in the game.]

Treo Pro still plugs away in the current quarter and will roll out at a major US carrier this Q as well. All in front of the new product launch.

Company has auction rate securities but there is zero liquidity in the market right now.

[Conference call drinking game for the holidays? -  "challenged environment" or "challenging environment."]

[Pretty good live coverage by the major Street analysts on the call. Clearly they are interested in catching a potential turn at Palm if one materializes.  That's a plus.]

They are going to be aggressive at marketing and promotion for the new products and be heavily discounting older products so margins will be under pressure.  So Centros are going to be getting very cheap while the Treo Pro ramps and they work on the new platform.

Management states they will return to profitability in 2010 but mum on when exactly. Long term gross margin goal is between 33% and 36%. 

Won’t get into what features might differentiate the new Palm offering.  Is it graphics, keyboards, applications? No light shed on it.  Maintains goal of having "the most compelling platform and product on the market."  Hard to believe but they are aiming high anyway.

By Q4 of F09 their OpEx goal is mid-to-low 90M run rate.  Company has $224M in cash and will manage all cash expenses very carefully in the Q.  Claims they could raise additional cash if they needed to but that would only be to further drive initiatives rather than dig a deeper hole.

One last comment that Windows Mobile will continue to be their platform of choice for enteprise applications is interesting.  Does it imply that all the new stuff coming will be consumer only and that they will need to continue to invest heavily in Windows Mobile?  Will a Palm device work on both platforms or are we talking full separation here.

It’s going to be a volatile story the next few months.  Clearly the new platform is a major turning point and with the number of moving parts the stock may not appeal to most.  But with a market cap of $240M, $224M in cash and $400M in run rate revenues it’s an interesting stock.  With listed options the stock can be used like a non-expiring call option to implement some strategies.

[Disclosure: We have a small position in PALM at the time of this writing.]

Five things to clear the infodecks for 2009

Posted on December 19, 2008
Filed Under Misc, Software, Technology & The Web, Starting Up | Leave a Comment

This one isn’t about stocks but rather information and some of the new services out there that have changed how information is received, shared and put to use (sometimes.)

At the beginning of the year most of us weren’t using services like Twitter and social networking platforms like Facebook and LinkedIn have come a fair way over the course of the year.  At the same time filtering services, alerts and Google reader are all very good alternatives to email for processing information.

Here are a few things to consider doing over the holidays (feel free to add more in comments!):

1. Most people are on far too many email lists.  This tends to make actually using email fairly difficult. Most services now have an RSS feed which means they can be received in a service like Google Reader.  If you haven’t investigated Google Reader yet now is the time to do so and set yours up.   Start at the link above.  It’s worth spending a few hours doing this instead of reading your Sunday paper.  By eliminating email subscriptions and putting them in your Google Reader you can spend time quickly scanning the news when you have time to do so.
2. Eliminate some subscriptions but save the links.  We tend to accumulate subscriptions that become junk because we can’t keep up with them.  However we still have an interest so may not want to eliminate them entirely.  One strategy is to out them into the Reader as outlined above but they can also simply be saved to shared book marking tool like Delicious.  What’s good about this is that they can be tagged with your interest (like solar or dogs) and you can find them later.  Also you’ll be able to see many other links with the same tags and expand your online resources when you find time to do so.  Again it gets things out of your inbox and available in a better way for future use.
3. Get a Twitter account and explore ways to use it.  Twitter is basically a new service that posts short messages around to people who "follow" one another.  Sometimes the services are not people but vendors like Amazon or Dell.  There are many use models for Twitter but instead of getting an email from Amazon on the "deals of the day" if you are into that maybe it’s better to get a Twitter message about it.  It’s easy to act on or ignore. No deleting is necessary.  Twitter has a passionate following but it’s also a tool that should be in your communication arsenal.
4. Set up and/or update your LinkedIn and Facebook accounts.  These are free and useful services these days. LinkedIn works well for your professional contacts and Facebook is better for those that know you but may not be in the business world.  (BTW your Twitter messages can be used to update your Facebook status, helping friends stay up to date with what you are doing.)  There are also fairly vibrant special interest groups emerging on these platforms that are worth joining.
5. In the event that you are somehow not already using IM and online collaboration tools get set-up on Skype or similar.  These tools have the somewhat unique quality of detecting and sharing online presence and allowing real-time chat, discussion, video or information sharing to occur.  They sit at the core of any high-performance team.
6. Lastly if you have even slightly considered starting a blog this is a good time to get that set up as well.  It’s just as important to have it so that others can communicate with you as you are with the world.  Some of you already have monthly updates and letters that can at least start to serve as a starting point for a blog.  We’re talking mostly professional stuff here but there’s a whole personal side there as well for those that get excited about it.  There are lots of blog choices out there.  We’ve used them all and prefer Wordpress but they are all pretty good.  Google Blogger is probably the most simple to use.  You also might want to start commenting and/or writing a guest post or two on other blogs if you’d rather get started that way.

This is also a good time of the year to consider an upgrade to a time management tool of some sort.  Lately we have been using Mac-based Things and like it quite a bit.  Reading some books like Getting Things Done or the 4-hour Work Week may also help stimulate some better work habits in the new year.

In summary this is a good time to rationalize and prioritize your information processing and the new tools out there are important elements of taking full advantage of what’s out there.  We left out as many as we included here so this is just a start.

MacWorld step is another positive for Apple.

Posted on December 17, 2008
Filed Under Companies, Markets & Finance, Software, Technology & The Web | Leave a Comment

Along with the usual economic fears and estimate reductions the news that Apple was stepping back from MacWorld and that Steve Jobs is not presenting this year has analysts and “investors” dropping AAPL hard again today.  We try not to write about Apple since the name is clearly over-covered but like many, we can’t resist.

Apple has already been visibly absent from most technology conferences as both a sponsor and a participant.  You will find Sun, Microsoft, IBM and HP all the time but just about never Apple.  Google and Facebook are appearing more and more and sending speakers along with sponsorship fees as well.   This has been true of Apple for some time.  Despite their success they just don’t play that game and I for one am glad they don’t.  (That’s a whole other post however…)

Under the “be careful what you wish for” angle this is a step away from the very thing most people complain about which is the huge value afforded to Steve Jobs and how risky it is to have it tied to one man.   The facts are that most Apple customers are buying the products because of the design and features offered rather than some cult-like following of Steve Jobs.  Of course most of the people that are into technology and blog are very into the whole cult-of-Apple thing so it gets over-covered.  Getting Steve Jobs off the stage is a good idea in terms of beginning to share the limelight and build a broad, capable team of managers.

For example we saw Marissa Mayer is “just a VP” at Google and she impressed a tough crowd at Le Web last week with her obvious intelligence, drive, talent and ability.   That’s probably more important for investors to know than how Larry, Sergey and Eric are dressing and saying the same general things again.

Should Apple clarify how they run the company and demonstrate that they have a deep bench and the ability to be successful if they lose some key members of their team?  Yes.  But the fact is that pulling back from MacWorld is consistent with everything they are doing and makes total sense to us.  It also ties right into what critics of the “Jobs risk” have been wanting.  So what’s all the fuss?

Amazingly Oppenheimer downgraded Apple shares today and is quoted as saying that “[until Apple elaborates on the Jobs health thing] they can no longer continue to recommend Apple as a long-term investment.”

As always we continue to be very happy about the consistently idiotic and noisy world of what now passes for “the Street.”  It reminds us of the good decision to leave it to focus on more practical, real, profitable research work.

[Update: Also the whole world moves in real-time, less on conference schedules which is another reason fewer people are going.  There's a good writeup of this over at Macworld. Here is the link.]

[Disclosure: We do have a small long position in Apple at the time of this writing. ]

Le Web comes a long way from “worst tech conference ever”

Posted on December 11, 2008
Filed Under Misc, Software, Technology & The Web | Leave a Comment

Years ago we were at Le Web in Paris on the famous day when the organizers pre-empted the event with a series of political stump speeches (in French no less) to an infuriated audience.

This year the event was an unqualified success in our view although like all such events there are always armchair critics out there sniping away at it. (Running a conference of scale is a tough problem that breaks the best of them.  Try it if you dare.)

We will publish the usual content summary note next week but in terms of the event we would highlight the following points:

1. What the agenda lacked in "tech heavy" content it more than made up for with some very high caliber presenters.  Although like all large events the big sponsors got presentation slots they sent good people.  Everyone was very impressed with Marissa from Google and even Microsoft made some real progress.  Having some notable Americans fly over (Robert Scoble, Mike Arrington, Doc Searls, Kara Swisher to name some) made the interaction more interesting.
2. Although Loic made a big mistake with the politicos years ago he scored a huge win with Christine Lagarde who is the Minster of Finance of France.  We’ve lived in France for four years and have never seriously considered practicing our technology advisory work locally here but after seeing her it’s pretty clear that France may be implementing some programs that will change the game. 
3. Having lots going on at once gives everyone something to do.  The start-up competition was mobbed (and warm by that virtue as well) and had one of the top three showcases of emerging technology companies we have seen at any conference in the world.  Beyond that the expo rooms had things to see and Google and Facebook put rooms with programs together too. 
4. As usual lots of discussion and networking was going on.  Le Web has always been fairly laid back with few people just sitting there listening to the presentations.  This venue made it even more enticing for people to be around the talks but really doing their own thing, having discussions and meeting people.  The event is especially good for the young crowd that really enjoys mixing it up with the crowd.

Part of Le Web is coming with the right attitude. Le Web was never about incredible deep technology insights but rather about seeing a bunch of interesting content and bits of technology from around Europe and interact with new people while doing some creative work yourself.  You also can’t just sit back at Le Web and expect it all to come to you. Move around and you’ll find happiness.  (It’s okay to expect heat, network connections and food but some of these were circumstances only partially in control of the organizing team.)

If I had to position it I’d say it’s kind of between an O’Reilly ETech and a TED.  It still needs to find more of a brand identity and harmonize with that.  For example how nice should the food and dinner events be?  For a poor 23 year old they were fine. For a 40 year old corporate executive or venture capitalists they were totally unacceptable.  (Remember you’re trying to get these types together right?)

All conferences suffer a bit in the online world today.  We can get so much done and participate remotely (usually for free) it makes it hard to justify the time and expense required to go somewhere.  But Le Web was worth the time.  The second day was inspiring, especially the afternoon.  That alone was worth the trip.

Tags: #leweb, leweb, conferences

Five reasons why the new Nokia N97 doesn’t matter.

Posted on December 2, 2008
Filed Under Companies, Markets & Finance, Research | 1 Comment

We got excited for a moment about the prospect of Nokia waking up and coming to grips with the fact that the Apple and Research in Motion phones were eating their lunch.  This week they have number of announcements coming and the first one we looked at was the new N97 phone.  The engadget post is a good place to see it.

To be sure it’s a very nice smart phone and since it’s the newest it probably has the best collection of high end features for now.  It also a fairly big, expensive, slide-with-a-full-keyboard, kind of thing.  We’ll let the gadget and phone industry and street analysts have their day of doing a full analysis but this model isn’t enough to stop the secular slide for Nokia in the mobile Internet space (at least in the US.)

Here are our five reasons why:

1. It’s not a high unit phone: Of course the pricing will get much lower than the $600 or so list price with carrier plans.  But even if it is offered at $149 it’s just too much phone for many users.  Nokia has other models of course but these haven’t been helping the company versus the other players either.

2. It’s not sexy or business.  The iPhone wins in sexy category.  The N97 looks like a brick next to an iPhone.  It’s not something a business person is going to be fiddling with either.  They will stick to the blackberry.

3. The "mobile computer" positioning is confusing.  The two things that have momentum right now are netbooks (eePC, mini9, Samsung, etc.) and smart phones.  Nokia may want this to be a mainstream category, but it’s not.

4. Services are lame and suffer from a lack of integration and elegance.  Nokia has a number of refreshed and new services as part of the announcement as well.  They include Ovi, Games, Music, Navigation and also a set of development services to build on.  But they are nothing like what Apple is offering now.  Possibly closer to what the blackberry offers but again, business users who are into games and music are more likely to push for an iPhone.

5. Beyond the "big three" there are strong new offerings out there from a variety of players.  The new Samsung phones are actually pretty impressive.  Phones based on Google are getting into the marketplace to reasonably good reviews and it’s just the beginning.  The Google phone will undoubtedly improve rapidly.  Even the lowly Palm is surviving for now and planning something big in 2009 (hope it doesn’t look like an N97!

In conclusion we thought this might be a week where Nokia really "woke up" to the reality in the mobile Internet space.  So far the evidence suggests that is not the case.  We are still rooting for them but only they can help themselves out of this.

How much are smartphones and weePC’s are eating PC demand?

Posted on November 19, 2008
Filed Under Companies, Markets & Finance | Leave a Comment

The recent excitement over small carry-along computers has been fairly high.  These small, fairly cheap ($300 to $400) machines have been emerging as a category.  Asus got things started with the eePC and now mainstream companies like Dell have their own models.  We noted that they obviously carry smaller gross and net dollars for the industry than full fledged notebooks but they didn’t represent that many units.

But then we added the recession and data out of several research firms showing a rather drastic decline in expected IT spending in the current quarter (budget flush gets flushed?) and in Q1 of 2009.  That’s not much of a surprise.

At the same time we were surprised to see relatively strong continuing plans on the purchase of smartphones. In particular the Blackberry and the iPhone are looking like business adoption will remain brisk.  Is it coincidence or is there some relationship?

Obviously Cloud Computing will ultimately mean less processing power needed in stand-alone configurations as only the basic UI and network connections will be really needed for many basic functions.  Unless somone is actively creating presentations, documents or content, it’s now possible to do most things on a smartphone. 

It’s more than email.  Web browsing, social networking, even stock trading applications are well established.  The wave of new applications coming for the iPhone and Blackberry are such that more and more people will leave their laptops at home.  Especially for short trips.

Like many things this is pretty "obvious" and we wrote about the trend three times already this year in our Mobile Internet segment.  However the stock market has punished every name on our list.

These emerging data points increase our conviction on core names like Apple and Google.  We’re in no rush to buy anything in this market but as the year turns over we will be adding to positions in these names.  The data continues to suggest these firms are getting stronger, not weaker as we work through the recession.