Tuesday, April 26, 2016

When Analysts Surrender

 It’s bad enough when analysts thank CEOs for letting them ask a question on an company earnings call, at least when they do it in a way that goes beyond a simple act of politeness and more towards a cringe-making act of fawning, which too many analysts have a way of doing these days.
 This is, after all, a business: it’s an analyst’s job to ask questions; it’s a CEO’s job to answer them.   Get on with it.
 What’s worse, however—much worse—is when an analyst who asks a good question gets schmoozed by the CEO, and instead of following up and getting an answer, surrenders.
 It happened tonight on the Apple call.
 After thanking the company for “fitting me in” (really?) the analyst asked Tim Cook—all quotes are from the indispensable Seeking Alpha—a very reasonable question about the “top two or three things” that had changed from the previous quarter, when Apple’s CEO was way more bullish about the demand environment for iPhones than it turned out to be.
 Cook’s response turned the question into a math equation:
 “…we did not contemplate or comprehend that we were going to make a $2 billion-plus reduction in channel inventory during this quarter. And so if you factor that in and look at true customer demand, which is the way that we look at it internally, I think you'll find a much more reasonable comparison.
 The analyst jumped on Cook for changing the subject—after all, he said, the fact that you decided to cut $2 billion out of channel inventory must mean you had $2 billion more product in the channel than you expected, which means “true customer demand,” as Cook called it, was $2 billion weaker than plan, right?
 Ha!  We’re joking.
 The analyst did no such thing.   He surrendered.   “Okay, great.  Thank you,” he said, and then asked a softball follow-up.
 Tim Cook took home $10.3 million last year.   He can handle tough questions.
 Personally, I’d like to know why Cook—who gets on his high moral horse every time some politically correct brushfire starts up somewhere in America—gives up without a sound when the Chinese authorities demand the Apple Store stop carrying apps involving the Dalai Lama.
 We know the answer: money.
 Still, it would be fun to ask.
 But don’t hold your breath.

Jeff Matthews
I Am Not Making This Up

© 2016 NotMakingThisUp, LLC

The content contained in this blog represents only the opinions of Mr. Matthews.   Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.  This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever.  Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored.  The content herein is intended solely for the entertainment of the reader, and the author.

Monday, April 18, 2016

The Graduate From Spinal Tap...The NotMakingThisUp Review of Dan Lyons’ “Disrupted: My Misadventure in the Start-Up Bubble”


Mr. McCleery: You aren’t one of those agitators, are you?
Benjamin: What?
Mr. McCleery: I hate ’em. I won’t stand for it.
—The Graduate

  We here at NotMakingThisUp only write book reviews when we like the book.   (If we don’t like it, we don’t write anything at all, because it’s hard—really hard—to write a book, so just the fact that someone has written a book ought to be respected, not criticized.)   Journalist Dan Lyons has not only written a book, but it’s good—and not just “good,” but laugh-out-loud good.
  The subject matter, however, is not always laugh-out-loud funny. 
  It’s about Lyons’ time at HubSpot, the “cloud-based marketing and sales software platform company” he worked for at roughly the peak of the Web 2.0 cycle (Lyons would probably describe it as a “spam-based marketing and sales software platform company,” but we’ll go with the official terminology), and while you may be more familiar with the frat-boy excerpts that have already made made plenty of headlines, they’re nothing anybody who was around during the last bubble hasn’t heard about before and don’t need repeating here.  
  Way more interesting is Lyons’ take on what it’s like to be a 50+ year old Boomer working at a hotshot Millennial company—or “cult,” as he sees it.
  Lyons listens to conference calls with the company’s ‘social media scientist,’ “a competitive weightlifter who lives in Las Vegas and basically does nothing”; he spends too much time in meetings, which, “like most journalists—and, I would argue, most sane people” he detests; and he gets so fed up with the bubbly self-reinforcing “Happy!!  Awesome!! Start-Up Cult” culture that he begins sending around emails like “Jan is the best!!!  Her can-do attitude and big smile cheer me up every morning!!!!!!!” about the “grumpy woman who runs the blog,” until he is told to “cut that s--- out.”
  It’s a riot, and it makes the book swing, but that’s not the important stuff.
  The important stuff includes the sheer whiteness of the workforce, which should be no surprise to him but is (did he really report on the technology world most of his career and not notice that before?); not to mention the youngness of the place, which should also be no surprise to him (does he not know how young Mark Zuckerberg still is?)
  But the spookiest bit has nothing to do with the age thing, or the “astonishing lack of diversity” (did he think poverty-trapped kids from Harlem are actively recruited by young affluent suburban white kids?), it’s the cultish behavior reinforced from the top, most notably in the way in which employees who’ve been fired are NOT said to have been “fired” or to have “resigned to pursue other interests.”
   They are said to have “graduated.”
   “Nobody ever talks about the people who graduate,” writes Lyons, “and nobody ever mentions how weird it is to call it ‘graduation.’”   Yet “graduations” happen quite a lot, apparently: the best line in the book being “People just go up in smoke, like Spinal Tap drummers.”
  Of course, Lyons himself eventually “graduates” after the culture clash starts to get to him (which it actually did on his first day at HubSpot, but he persevered)  and he begins to set himself up in ways that make you scratch your head and wonder if he ever actually worked in a corporate environment.
  Exhibit A in the did-he-really-not-see-this-coming-a-mile-away setup to his own graduation is when Lyons pitches a new online magazine—an idea his direct boss had already rejected—to his boss’s bosses without his boss knowing Lyons was going over his head.
  “They love the idea,” he says of the meeting with HubSpot’s co-founders.  “That night I go home feeling like a conquering hero.”
  Poor bastard, you think, reading that line.
  Exhibit B in the did-he-really-not-see-this-coming-a-mile-away department is when Lyons is shocked—shocked!—that nothing subsequently happens, because he didn’t have anyone else at the meeting to verify that the two co-founders actually approved the idea. 
  As one colleague far wiser than Lyons in the ways of corporate politics tells him, “You should have had a witness.”
  Exhibit C in the did-he-really-not-see-this-coming-a-mile-away department, naturally, is when Lyons’ boss-who-rejected-the-idea-before-Lyons-chose-to-go-over-his-head appropriates the idea as his own.
  By now, however, even Lyons has figured out what’s happening: “At this point the message could not be more clear,” he writes.   His boss “is doing everything short of hiring a skywriter to scrawl GET OUT, DAN in the airspace above HubSpot headquarters.”
  Lyons at least has some fun as the clock winds down.   At an anything-goes marketing idea meeting he proposes putting an “unbearably ambitious and energetic young woman who recently graduated from college, loves HubSpot more than life itself, and would do just about anything to get a promotion” in an orange (the Hubspot color) jumpsuit and helmet and firing her “right through an open window and into a cubicle.  Bang!  There she is!  She doesn’t miss a beat.  She just starts giving a lecture about marketing.”
  To a cynical career journalist, HubSpot was a gift that kept on giving.
  On the downside, however, Lyons stretches at times to make bigger points—something book editors tend to encourage authors to do in order to gin up the meaning of an otherwise highly enjoyable, and very telling fish-out-of-water memoir.
  For example, trying to turn his time at HubSpot into a lesson about the cheerful heartlessness of the Web 2.0 revolution, he actually quotes Carl Icahn—the slimeball takeover artist who bankrupted TWA while pocketing a sweet discount airline ticket deal for himself, among many other things that make Donald Trump look magnanimous and would normally set a cynical journalist's hair on fire—about Marc Andreessen from back when they were fighting over eBay, which is stupid because Andreessen (think Netscape, Facebook, Twitter, among other life-changing companies he’s been involved in) has added more value to the current quality of life in America than even Carl Icahn has managed to extract for himself.
  Lyons also quotes, of all things, a snarky Robert Reich “Facebook post” about the sharing economy having become a “share the scraps” economy—tell that to the next Uber driver you get who’s paying his way through college or saving for a condo or running a non-profit and wouldn’t have the flexibility to earn extra income without Uber.
 Finally, Lyons surveys the money-losing business models of so many Web 2.0 start-ups and naively wonders “why there are so many companies that remain in business while losing money”—this after he has started the book with a chapter about getting fired from his prestigious and well-paying job at Newsweek Magazine, which, like most dead-tree publications “has been losing money for years.”
  Losing money, whether for a start-up with vast potential, like Amazon.com, or for a fading franchise like Newsweek, has never stopped anybody from trying.  That is, after all, Capitalism.
  But the big-picture stuff feels like an editor made him do it, because the other 98% of the book moves fast, tells a great story, and actually will make you laugh. 
  Out loud.
—JM



  NB: Just for the record, prior to its publication, the author of Disrupted asked, and I answered, a couple of questions about my perspective on the SAAS business model of Salesforce.com.

Wednesday, January 20, 2016

Don’t Mention The Earnings Miss. I Mentioned It Once But I Think I Got Away With It...

  
  Well it’s earnings season again.  
  That means it’s time for IBM to puke another quarter and hold an incomprehensible—literally, incomprehensible—earnings call during which it spins every data point in such a positive light that you’d think they held the winning Powerball ticket, while strictly limiting analysts to one question—no follow-ups, please—and abruptly cutting things off when the hour is up.
  For those of us accustomed to the full disclosure practiced by the terrible, horrible, no-good banks, this practice of IBM’s management team not belaboring bad news is something out of Fawlty Towers (“Don’t mention The War.   I mentioned it once but I think I got away with it.”)  
  By way of comparison, Wells Fargo and Citi’s back-to-back earnings calls last Friday started at 10 a.m. E.S.T. and ended at 1:15 p.m., give or take.   
  Analysts on both calls were free to “get back in the queue,” as they say, and they did, until every question was exhausted.
  But that practice is not the IBM Way.   No sir.  
  Windy analysts are quickly cut off and the opportunity to follow-up an obfuscatory answer (the IBM norm) is not given—bringing to mind yet another Basil Fawlty line: “Trespassers will be tied up with piano wire.”
  So if you didn’t get a chance to listen to IBM’s earnings call—and we’ve poked fun at them for years, most recently here—you really ought to read the transcript courtesy of the indispensible Seeking Alpha, here.
  If you didn’t know any better, you’d think that IBM is swimming in gold, that its cloud offerings are taking the world by storm (“We’re the largest,” they declare, without mentioning that their internal measure includes low-margin IBM hardware), and that Watson, which as they always remind us won Jeopardy in 2011 (or was it 2010?  Or was it actually Wheel of Fortune during Kardashian Week?) is the next Amazon Web Services, which it is not.
  In reality, IBM’s revenues are down—even in the not-falling-apart Americas—its cash flows are down, its share repurchases are down (even though the stock is down, and presumably more attractive than the last time they spent billions propping it up), and the only reason it “beat the number” was, naturally, the tax rate, which IBM plays like Duane Allman played “Whipping Post.”   (See “Bring Out the Belgian Waffle!” here.)
  Oh, and never forget that IBM always makes sure to exclude the negative impact of currency and divestitures on these calls and in their press releases, but does not exclude the positive impact of acquisitions.   And IBM made seven cloud acquisitions alone in 2015.
  Altogether, it is, as we started at the top, literally incomprehensible.   
  And if you don’t believe us, try this answer from the CFO on for size, about the miss in IBM’s super-high-margin software business:
  Sure thank you, thanks Toni. A few comments on software, so as we said in our prepared remarks, the deceleration third to fourth really was driven by this – by the mix shift and the continuation of the transaction closing rates that we saw in September. So we talked about – coming out of September we talked about a slower rate of closing in some of our larger deals and that’s what we experienced as well in the fourth quarter. And as I mentioned in my prepared remarks, because of the mix shift alone we see an improvement and as you point out the weather company another acquisitions by the way to the extent that they are – have software in them they will obviously bolster that growth rate.
  A few things, I think are important to note within software. First, as we said in our prepared remarks and the phenomena is really no different in the fourth and what we’ve seen all year, our annuity business within the software business. So that’s about 70% of our overall software stream. Our annuity business continues to grow. So that has a service in it, it has our subscription and support business in it as well, so that continues to grow.
  And then outside of our largest clients and this is a phenomena that we’ve been talking about, outside of our largest clients where they don’t have as broad access to our software portfolio, we continue to see growth as well, both transactionally and they’re obviously part of the asset service stream. Within the large clients as I mentioned earlier and as we talked about in our prepared remarks, we provide flexibility, it gives them – it gives our clients an ability now to manage their projects and they deploy maybe differently than they anticipated at the beginning of the year. From my discussions with our clients, a lot of that depends on the visibility they have both of their demand patterns and the visibility they have to sort of the – kinds of projects they might have to implement in the near-term.
  So I don’t think that’s any different than what we’ve experienced in the past…
 If you can make anything of that—and we’re pretty sure even Warren Buffett, the largest IBM shareholder, couldn’t make anything of that—let us know.
  Meantime, don’t mention the revenue drop, the earnings decline or the cash flow shortfall.   I mentioned them once but I think I got away with it


Jeff Matthews

Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”
(eBooks on Investing, 2015)    Available now at Amazon.com

© 2016 NotMakingThisUp, LLC



The content contained in this blog represents only the opinions of Mr. Matthews.
  Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.