- Novell's open source collaboration play
- Salesforce.com for sale?
- Ouch! VMware drubbed by Wall Street
- IT may get hit as consumer spending slows
- Not too late to make small profit on BEA sale
- SaaS could hit a wall in 2008
- Intel's pain is AMD's gain
- Apple shines, while Intel gives itself a black eye
- Apple, Google predicted as stock winners in 1Q08
- Reasons to buy Microsoft
February 15, 2008 | Comments: (0)
Novell's open source collaboration play
Now that Novell has stopped bleeding and has put away some cash (nearly $1.9 billion), the company is looking to acquisitions as a growth strategy. Earlier this week it purchased SiteScape, an open source team collaboration outfit. Novell did not divulge the price, but given that analysts at The 451 Group estimate that SiteScape was on a run rate of about $10 million, it couldn’t have been very much.
Novell has had an OEM agreement since last year with SiteScape for its open source ICEcore team collaboration and Web conferencing software. The Novell Teaming + Conferencing product, which is based on ICEcore, is part of Novell's GroupWise line.
The Teaming product has only been shipping since October so there hasn't been a ton of time to work up much of a customer base. But the company apparently found enough interest from its GroupWise customers, to which it offered some pre-release purchase discounts, to merit an outright acquisition of the company, the analysts said in a published note.
Microsoft and IBM are Novell’s much larger competitors in the collaboration market. Zimbra offers collaboration products based on Linux, though as the analysts note, it faces an uncertain future if parent Yahoo combines with Microsoft.
Here’s what Novell’s CEO Ron Hovsepian said about the deal. "The acquisition of SiteScape fits squarely into the corporate strategy we have laid out," he said in a press release. "It extends our leadership in promoting open source in the enterprise market and is a key technology addition in an area where we see great growth potential. Most importantly, it allows us to move aggressively to give customers a new, open option for collaboration, helping them escape vendor lock-in and offering easy integration across platforms, whether Linux or Windows."
Well, I’ve been bearish on Novell for some time. But Hovsepian seems to be bringing some stability and fresh energy to the company. Could it be an acquisition target? Certainly. At $6.63 a share, it has a market value of $2.33 billion but the big horde of cash on hand makes the real cost considerably cheaper. By the way, a quick way to estimate the value of a company is to take the market cap (number of shares x share price) plus debt minus cash and equivalents. That’s called the enterprise value.
I welcome your comments, tips and suggestions. Reach me at bill_snyder@infoworld.com
Posted by Bill Snyder on February 15, 2008 01:35 PM
February 11, 2008 | Comments: (0)
Interesting rumor making the rounds this morning that Salesforce.com has approached Oracle and offered to sell itself for $75 a share. Wall Street is paying attention; shares of Salesforce.com have been trading as high as $10 a share above Monday’s opening price. If true the offer would be a huge premium over Friday’s closing price of $50.87 a share.
The rumor apparently started with a blog posting by Tom Foremski on his Silicon Valley Watcher Site. Foremski, a former reporter at the Financial Times and a reputable guy, attributes his scoop to a “reliable source.”
No way to know if Foremski’s source is accurate, but even if he or she is, I’d be surprised if Oracle is really interested. In a quick note this morning, Cowen analyst Peter Goldmacher, who has followed both companies closely for some time, says “While we would not be surprised if [Salesforce.com] made such an overture, we would be very surprised if Oracle didn’t laugh them out of the building.”
Goldmacher notes that the deal would start by knocking a full point off Oracle’s margins and would take Oracle way down market (that is, to smaller customers) an opportunity the company has repeatedly said it has no interest in. It’s also worth noting that most Oracle acquisitions have been very bottom-line-oriented. That’s because most of the targets have had large streams of recurring maintenance revenue, which helps margins and earnings. Salesforce.com’s software as a service model is completely different.
To be candid, I was wrong about Oracle and BEA Systems. So maybe I’m misreading this one as well. But for now, I’d remain very skeptical.
I welcome your comments, tips and suggestions. Reach me at bill_snyder@infoworld.com
Posted by Bill Snyder on February 11, 2008 11:25 AM
January 28, 2008 | Comments: (0)
Ouch! VMware drubbed by Wall Street
VMware doubled its profit in the fourth quarter, and raised revenue by 80% year over year, but missed Wall Street’s sales target by $5 million. As a result, the stock plunged after hours, losing more than 20% of its value in a few minutes.
I suspect Wall Street believes the company’s guidance for the first quarter which won’t be given for a few minutes, stinks. I’ll update you.
Turns out the company is not giving much guidance at all. But it does predict revenue growth of 50% for 2008; analysts had targeted growth of about 64%. That implies revenue of about $1.995 billion; the Street has been looking for $2.08 billion. Shares now down 26% after hours.
Re the guidance: I should have noted that this is only the company's second reported quarter since going public and it did not give guidance for the just-reported quarter. It's possible there were over-inflated expectations on the part of analysts.
This reminds me a bit of what happened to Apple earlier this month. The company had a solid quarter, but got roasted on tepid guidance. (VMware, though, missed on the top line, which is a big part of the reason for the selloff.) In any case, both Apple and VMware have been in the hypergrowth mode and both are slowing. VMware bulls (as did company execs) would say that it's the law of large numbers -- cross the $1 billion threshold and it's that much harder to sustain growth on a percentage basis.
I'm not making an excuse for VMware. It's fairly clear that competition in the market for virtualization software is heating up as the economy slows. And the tone of the questioning from analysts on VMware's earnings call indicates that there is real concern that the back half of the year will be slow. If VMware doesn't think analysts are doing a good job making projections, the company should give them more mateial i.e. forward guidance, to work with.
(Disclosure: I have small positions in VMware and its parent, EMC)
I welcome your comments, suggestions and tips. Reach me at bill_snyder@infoworld.com
Posted by Bill Snyder on January 28, 2008 02:10 PM
January 17, 2008 | Comments: (0)
IT may get hit as consumer spending slows
The American consumer has ridden to the rescue of corporate revenues for years. Buoyed by highly valued homes that served as virtual ATM machines, consumers indulged their appetite for goods and services, particularly consumer electronics and computer-related devices.
That's starting to change. As the economy slows, there are signs that the pace of consumer spending is not only slowing, but actually shrinking for the first time in years.
Bad news for consumer-oriented tech companies? Of course. But don't think that enterprise IT providers are necessarily exempt. Spending ripples through the economy; dollars spent at restaurants may ultimately result in the purchases of inventory management software from Oracle, or servers from Sun for use at corporate headquarters.
American Express, for example, is an enormous consumer of enterprise software, hardware, and services, but with late payments on the rise, the giant credit card company could well dial back IT spending.
Signs of retrenchment
Earlier this week, Bear Stearns analyst Andy Neff lowered price targets and earnings estimates for a number of hardware, data storage, and imaging companies he tracks, saying, "Recent economic data has highlighted weakness in [the] consumer [sector], which often spreads to the enterprise [sector]." Other analysts cut estimates for online retailers, including Amazon.com.
Making matters a lot worse from Wall Street's perspective was Intel's anemic fourth-quarter earnings report and a downright disappointing outlook for the first quarter.
But there was even more bad news this week.
Consider the economic news released Tuesday by the departments of Labor and Commerce. Wholesale inflation last year shot up by the largest amount in 26 years, while retailers suffered their worst December shopping season in five years. And in a third report, the federal government said that inventories held by businesses rose 0.4 percent in November, reflecting big increases in stockpiles held by manufacturers and wholesalers.
That news, coupled with more bleeding by Citigroup, prompted an ugly sell-off on Wall Street, completely erasing the gains of Monday's "Big Blue rally," even before Intel's bombshell. That pushed the market even further into negative territory.
Even the wealthy are cutting back
ChangeWave Research, which does periodic polls, found, in its latest survey of 4,600 people employed in business, medicine, and technology, that consumers are planning to spend less this year than in the past. What's more, the poll revealed that belt-tightening is occurring across all income levels -- even among respondents who earn more than $150,000 per year.
In the November survey, 21 percent of those with annual incomes over $150,000 said they were planning to cut spending in the coming year; by January that number had increased to 33 percent, the most significant backward jump in the history of the poll, said Paul Carton, research director for ChangeWave.
Europe may be next
Meanwhile, there are some signs that the weakness in the United States and Japan is spreading to Western Europe, said Bear Stearns' Neff.
Indeed, European retail sales fell the most in at least 10 years in November as rising food and energy costs sapped consumer confidence. Retail sales declined 1.4 percent in November from a year ago, the biggest drop since at least 1997, according to wire service reports from Europe.
That's unsettling. Sales to Europe and Asia have been key to strong performances by the largest technology vendors, many of whom derive more than 50 percent of revenue from foreign sales. IBM, for example, delivered a robust quarterly report this week, built in part on strong foreign sales, which in turn were boosted by the weak dollar.
A few bright spots
To be sure, there are bright spots.
It's possible that fears of a European slowdown are exaggerated. Intel CEO Paul Otellini said during a post-earnings conference call with analysts that European sales were up 22 percent sequentially. So far, he says, Intel has not seen significant signs of slowdown in Europe.
Apple, for one, bucked the holiday ebb tide with strong computer sales, although Wall Street was not happy with iPhone sales that topped 4 million units, well below the most bullish expectations.
It's still not certain that we are headed for a recession, but the raft of bad consumer news is very worrisome, and it is not at all clear where IT investors and employees will find a safe harbor.
I welcome your comments, tips, and suggestions. Reach me at bill_snyder@infoworld.com.
Posted by Bill Snyder on January 17, 2008 03:00 AM
January 16, 2008 | Comments: (0)
Not too late to make small profit on BEA sale
Yeah, you (and I) missed the big money on Oracle’s takeover of BEA Systems. BUT, if you have some spare cash handy and low trading costs you can make a guaranteed 4% to 5% on the deal if you move fast. That’s because the stock is trading at a small discount to the offer price of $19.375 a share.
No, that’s not a lot of money unless you have a fairly good chunk of cash to put in, but given the state of the market it’s like buying a CD only better because you’ll only pay taxes on the gain. The deal will close later this year and Oracle will circulate the tender offer to shareholders.
I welcome your comments, tips and suggestions. Reach at me at Bill_Snyder@infoworld.com
Posted by Bill Snyder on January 16, 2008 10:58 AM
January 14, 2008 | Comments: (0)
The tech team at Cowen & Co. on Monday published a note containing its picks for potential surprises in the technology business this year. One of the most interesting: “The Growth of On-Demand Software Vendors Hits a Wall.”
Analyst Peter Goldmacher, who has followed the fortunes of the on-demand vendors for some time, had this ugly bottom line: Share prices of Salesforce.com, Concur, Taleo and Vocus could trade down as much as 30% - 50% relative to the market as investors decide that these companies don’t really have bulletproof business models.
There’s an unpleasant corollary as well, although the Cowen team doesn’t mention it. Salesforce and brethren have been fertile fields for IT job seekers. That could change very quickly.
The conventional wisdom, Goldmacher says, holds that SAAS will do well even if IT budgets contract because “software delivered as a service can be deployed for such a minimal up-front investment that new customer signings and net subscriber additions will continue to grow at a rapid clip.”
But those claims have not been tested in a slowing economy, he says.
HR and marketing departments -- important consumers of on-demand software -- traditionally bear the brunt of corporate belt tightening early in a business downturn, and that could but a dent on new deployments, and the growth of seats at established accounts.
The exposure of SaaS vendors is heightened by the fact that nearly all are one-product companies and are fighting the increasing inclination of corporate IT buyers to consolidate spending with a few large vendors such as Oracle, the analyst writes.
None of the potential surprises are billed as sure things; the hit to SaaS is given a probablility of 30%. Indeed, to make Cowen’s list, events had to have a probability below 50%. Still it’s interesting reading and good food for thought.
Here’s the rest of the list. Items are listed in descending order of probability; the higher up they are on the list, the more likely they are to occur.
10 - The Telco Threat to Cable Becomes Glaring
9 - The Growth of On-Demand Software Vendors Hits a Wall
8 - U.S. Legislation Favorable to Alternative Energy Is Passed During an
Election Year
7 - Google Experiences Meaningful Adoption of .Google Apps. By Medium
& Large Businesses
6 - Qualcomm Abandons Gobi
5 - PlayStation 3 Fails to Achieve Critical Mass, Developers Shift Focus to Wii
4 - AMD Loses its Infatuation with 30%+ Market Share to Focus on a
Profitable Niche Strategy
3 - DRAM Market Conditions Turn Favorable by Mid-year
2 - Cisco Lands a Major Wireless Infrastructure Deal with a Tier-1 Service Provider
1 - Hollywood Studios Announce Intention to End Physical DVD
Distribution and Embrace Cable VOD and Broadband Downloads
I welcome your comments, tips and suggestions. Reach me at bill_snyder@infoworld.com
Posted by Bill Snyder on January 14, 2008 01:19 PM
January 11, 2008 | Comments: (0)
On a day when tech stocks are taking a terrible shellacking, Advanced Micro Devices stands out as a big gainer on the news that Intel is being investigated by the New York Attorney General's office for possible antitrust violations.
New York Attorney General Andrew Cuomo served the chipmaking rivals with subpoenas as he looks into charges that Intel stifled competition and hurt consumers by pressuring customers to exclude AMD from their list of suppliers. The allegations are similar to those made in an ongoing lawsuit brought by AMD.
"After careful review, we have determined that questions raised about Intel's potential anticompetitive conduct warrant a full and factual investigation," Cuomo said in a press release.
But those charges, which echo years of industry rumors, won’t be easy to prove. In an interview with BusinessWeek, John Peirce, a partner at law firm Bryan Cave who specializes in antitrust and commercial litigation said: "Predatory pricing and exclusive dealing are a tough case under U.S. law."
AMD sued Intel in a Delaware federal court in 2005, alleging that the microprocessor giant has consistently abused its monopoly position in the market to prevent PC vendors from using AMD chips. A trial date has been set for April 27, 2009.
Regulators in Japan, South Korea and Europe (via the EU) are also investigating Intel’s competitive practices.
Intel has consistently denied the charges, saying that it never sells products below cost.
AMD has made significant market share gains in the last several years, but has been hurt by an ugly pricing war with its much larger rival. The smaller chip maker claims that its gains would have been even larger had it been competing on a level field.
In recent trading, shares of AMD were up a bit more than 7%, or 42 cents, to $6.38 a share, while Intel was off 54 cents, or 2.4% to $22.
Posted by Bill Snyder on January 11, 2008 11:38 AM
January 10, 2008 | Comments: (0)
Apple shines, while Intel gives itself a black eye
What's in a brand? Technology, of course, and a pleasing public face. Few companies are as adept at blending those ingredients as Apple and Intel. But this week, the two Silicon Valley heavyweights were a study in contrasts as Apple made an exceptionally smart PR move, while Intel gave itself an ugly black eye.
Apple shines with a smart "think pink" move
In a week when gender issues highlighted the presidential campaign, Apple garnered a basketful of good press when it named Andrea Jung to its board of directors. Of course, one could say it's about time, since Jung is, amazingly enough, only the second woman (astronaut Sally Ride was first) to sit on the company's board. Still, with Macworld Expo just around the corner, it's a good time to generate favorable publicity.
Gender and PR issues aside, the move makes enormous business sense as well. Jung is the CEO of Avon, and she obviously knows more than a little bit about marketing to women. Moreover, she also sits on the board of GE, the parent company of NBC Universal, which has been scuffling with Apple over the pricing of digital downloads.
Technology marketing has always been wildly skewed toward men. While that may have made some sense when home electronics meant only stereos and TVs, and when computers had few uses outside the office or the hands of hobbyists, it's unreasonable to assume at all today.
The electronics industry some time ago learned that young people, as in teenagers, have enormous buying power, and so it began to market to them accordingly. But the lesson that women -- more than half the population -- control big chunks of a family's discretionary spending (not to mention the legions of well-paid single, career women with their own incomes) hasn't altogether sunk in. Indeed, even today, trade-show booth babes are not extinct.
Barbara Krasnoff, who writes for our sister publication Computerworld, points out that tech companies seem to believe that making a device pink (literally) will convince women to buy it. Sorry. Women with an interest in technology are too smart to go for silly "targeted" ploys. Have you seen many homes with recipe computers in the kitchen or electronic inventory control devices on refrigerators? Yet that's what too many electronics companies think that's what women want.
The issue becomes even more important in a period when consumer spending is likely to slow along with the economy. Already faced with increased competition from Microsoft (as in Zune), SanDisk (as in Sansa), and other vendors, Apple needs to find new customers. My take: Jung is the right person at the right time.
Intel dons "kick me" sign
Meanwhile, what was Intel thinking when it pulled out of the One Laptop Per Child coalition?
Sure, sales of the supercheap PC for third-world kids have not met expectations, and there may have been some legitimate business issues on the table. But talk about a bozo PR move. Intel already is seen in many quarters as a predatory bully. Now the giant chipmaker is taking candy from babies, as it were.
It's the kind of blunder that won't show up on the income statement. However, companies that make themselves disliked are easier targets when antitrust issues rear their heads. Enemies have a way of getting back at you by whispering in the ears of regulators, and politicians -- particularly in Europe -- are sensitive to their constituents' dislike of private-sector companies that appear monopolistic.
And customers note this sort of behavior as well. Any one such action may not turn off buyers, but several begin to switch opinion around and open the door for customers to consider an alternative. Microsoft's bad behavior has motivated a small, but growing, set of consumers to move to Linux; Intel's bad behavior could open a door to AMD. And wouldn't that be ironic, since one of the reasons Intel pulled the plug on the OLPC effort was because of AMD's presence in the box? Behave, children.
I welcome your comments, tips and suggestions. Reach me at bill_snyder@infoworld.com.
Posted by Bill Snyder on January 10, 2008 03:00 AM
January 09, 2008 | Comments: (0)
Apple, Google predicted as stock winners in 1Q08
Global Equities analyst Trip Chowdhry just published a note listing tech stocks that he believes will beat expectations this quarter, and Apple is right there. Chowdhry said iPod sales were the best in the history of Apple, probably north of 30 million units and that Macs sales remained strong.
Bolstering iPod sales is a replacement market of at least 20 million to 25 million units, and the evolution of digital entertainment towards video. Apple TV sales were “somewhat discouraging,” but Chowdhry’s sources indicate that Apple may fix the bandwidth problem by incorporating DS2 400Mbps Powerline technology.
For the record, other companies on the analyst’s “won’t disappoint” list include Google, Microsoft, Satyam Computer Services and Infosys Technologies.
(Disclosure: I own shares of Apple and Microsoft.)
Posted by Bill Snyder on January 9, 2008 12:29 PM
January 06, 2008 | Comments: (0)
Just back from a few days off to find a pair of bullish notes on Microsoft; and what a pleasure it is to see something positive after the carnage of last week.
Goldman Sachs analyst Sarah Friar raised her earnings estimates for the software giant on the strength of what she believes were strong holiday sales by the entertainment and devices division, and strong PC growth during the quarter and throughout the year.
Friar raised her earnings estimate for the second quarter by a penny a share to 45 cents, and bumped up her price target by $1 to $40 a share. Not a huge revision, obviously, but given the runup in Microsoft’s shares (about 16.7%) over the last year, her comment that the stock is still “attractive” is significant.
Friar told clients that “we still view the stock as attractive given ongoing product cycle momentum, broad international exposure, and a boost from stronger than expected PC unit growth,”
Trip Chowdhry of Global Equities Research listed a number of catalysts for the first half of the year, including the launch of Mac Office at MacWorld later this month. “We believe Mac Platform contribute to ~15% - 17% of Microsoft Office and Windows revenues,” he said in a research note.
He expects Microsoft to deliver a bullish update on the general tone of its business when it meets with analysts in February; a positive buzz caused by the meeting might well give the stock a boost. Chowdhry also sees some lift caused by the late February launch of SQL Server 2008, Windows Server 2008, Silverlight 2.0 and Visual Studio.
The analyst also expects Microsoft to sue Red Hat and perhaps other open source companies which the Redmonders allege are in violation of parts of its patent portfolio.
(Disclosure: I have a small position in Microsoft.)
I welcome your comments, tips and suggestions. Reach me at bill.snyder@sbcglobal.net.
Posted by Bill Snyder on January 6, 2008 04:51 PM
January 03, 2008 | Comments: (0)
Technology and communications companies spent nearly $500 billion buying each other in 2007. The new year will be much the same, with software and storage leading the charge.
A report by The 451 Group, a technology research firm, highlights the takeover frenzy that made 2007 a great year for the investment bankers, and a very insecure one for employees of companies that appeared on the M&A (mergers and acquisitions) radar screen.
Microsoft, Dell, IBM, SAP, and Nokia each made the largest acquisitions in their history last year, while Oracle continued its three-year acquisition spree. Interestingly, nearly all of the biggest deals of the year were cash only, explaining while Wall Street, which doesn't like stock deals (causes dilution), was generally pretty happy with them.
Drivers included deals to reach new customers, such as Google's $625 million buy of on-demand e-mail security vendor Postini; moves to next-generation technology, such as the $500 million purchase of XenSource by Citrix; a push into new markets, such as Dell's landmark purchase of storage vendor EqualLogic; and a move to new business models, illustrated by EMC's takeover of on-demand vendor Berkeley Data Systems.
Despite the constant stream of takeovers in the enterprise software sector, there is still plenty of cash available -- and plenty of tempting targets. Some of the picks made by analysts for The 451 Group include: BMC Software, Citrix Systems, CA, Informatica, Lawson, Novell, Open Text, Progress Software, Quest Software, Symantec, and Tibco Software. "We are not saying these companies will be targets in 2008, just that there are still plenty of large deals that could potentially be done," the group wrote.
I have trouble picturing either Symantec (too unwieldy unless the Veritas business were spun off) or CA (still too troubled and unfocused) being purchased, but some of the others, particularly Tibco, are intriguing possibilities.
Turning to data protection, the analysts say that potential targets include Diligent Technologies, Sepaton, FalconStor, and even potentially Quantum in the enterprise space; in the midrange market, ExaGrid Systems and Data Domain (though the latter is now richly valued, which is likely impacting the valuations of all the others); and down into the SME/distributed arena, Asigra.
As to online backup, "it's increasingly clear that any data protection vendor worth its salt needs to have an online component to cater for future demand from existing and emerging customer categories. The consumer market is potentially the most significant of these, as it dawns on the masses that it would be a good idea to have a spare copy of the vast amount of treasured memories and collections they are now accumulating and storing in digital form." Potential targets include Asigra and Carbonite.
Compliance, driven by Sarbanes-Oxley and HIPPA, is another area that looks ripe for M&A this year. Some of my colleagues at InfoWorld believe that enforcement actions have been rare, but execs that I know take those laws very seriously. (If you've had the unfortunate experience of having an adult child or friend in the hospital, you know just how hard it is to get relevant information without a signed release.)
"The concept that the government can tell a business what is important to it is laughable, but forward-thinking enterprises understand that they should use government dictates about protecting information as a reason to reexamine (or examine for the first time) how business gets done and how it can be done more efficiently. This gives rise to an increased reliance on objective enterprise metrics. We believe that companies able to provide those -- folks like Agiliance, ClearPoint Metrics, eIQnetworks, ExaProtect, Intellitactics and ArcSight spring to mind -- are better suited for acquisition in 2008 than they have been to date," the analysts wrote.
It's a long list. Not all, or even the majority, of those companies, are likely to be taken over. But some surely will go down that road, creating opportunities for investors and angst for employees. Happy New Year.
I welcome your comments, tips and suggestions. Reach me at bill.snyder@sbcglobal.net.
Posted by Bill Snyder on January 3, 2008 03:00 AM
December 31, 2007 | Comments: (0)
Another Hot On-Demand Software Vendor?
I don’t know it it’s the next Salesforce.com, but on-demand HR software vendor SucessFactors is getting a nice pop on the last trading day of the year. The only news I can see is a very positive note from Pacific Crest analyst Brendan Barnicle, who initiated coverage with a rating of “outperform.”
SFSF (its ticker) offers on-demand software for managing a variety of HR-related tasks, including employee performance management and recruiting. It went public in November and claims to have customers in 156 countries.
SucessFactors hasn’t taken off like a rocket a la Salesforce. It closed at $13.25 a share after its first trading day on Nov.7, and peaked at just below $15 in early December. At the moment it's up about 6% to $11.88 a share, on a slow trading day with most tech stocks showing red on my screen.
SFSF won’t make money in the near future, says Barnicle, but he figures that the stock is worth about $18 a share, based on a rise of booked revenue of 42% next year and 50% in 2009.
Salesforce, of course is profitable and been a very good buy for investors, appreciating by 274% ($17.20 a share to $64.45 a share) since going public in June 2004.
SFSF is up against Taleo, Kenexa, and Salary.com, Barnicle said in a brief interview, while Salesforce is duking it out with Oracle and other big fish of the CRM world.
What I find most interesting here is Wall Street’s continuing interest in the on-demand model. As we enter 2008, we’ll see more and more challenges to conventional software business models.
Speaking of which, I’ll toot my own horn -- after all it is almost New Year’s eve -- and point you to a piece on the IW site regarding the increasing commercialization of the open source business model. Have a safe holiday and a profitable New Year.
I welcome your comments, tips and suggestions. Reach me at bill.snyder@sbcglobal.net.
Posted by Bill Snyder on December 31, 2007 11:38 AM
December 26, 2007 | Comments: (0)
Apple Looks Tasty @ $200 a share
Whoa. Shares of Apple broke the $200 barrier for the first time Wednesday as holiday shoppers continue to snap up huge quantities of electronic goodies.
It’s been a great year for the Cupertino-based company; Apple introduced a new version of its operating system this year, refreshed its hot-selling iPod line and launched the iPhone. When trading opened on Jan. 3 of 2007, shares of Apple were selling for $86.29. Shortly before the close of trading on Wednesday, the stock was selling for $199.70, after retreating a bit from its record high of $200.96.
The company's notebooks ranked among the top-selling computers at Amazon.com during the Christmas shopping season, an important signal as iPod sales begin to flatten out.
In Apple's most recent quarter, a 34% increase in Mac unit shipments over last year yielded a 40% boost in computer sales and generated half the company's total revenue. IPod sales, by contrast, grew just 4% and accounted for 26% of total sales.
And speaking of Amazon, the giant online retailer announced that the 2007 holiday season was its best ever. Dec. 10 was Amazon’s busiest day as customers ordered more than 5.4 million items. Top sellers for the season included the Garmin GPS, Canon PowerShot digital cameras, Samsung LCD HDTVs, Apple MacBooks and HP Pavilion notebooks.
(Disclosure: I have a small position in Apple.)
I welcome your comments, tips and suggestions. Reach me at bill.snyder@sbcglobal.net
Posted by Bill Snyder on December 26, 2007 12:42 PM
December 20, 2007 | Comments: (0)
Oracle Blows Away Expectations
Finally. Some good news in tech. Oracle did more than give its own investors a great Christmas present yesterday, blowing away Wall Street's expectations for the second quarter. Larry Ellison and crew also raised the hope that we'll see broader strength in technology than we might have expected moving into 2008.
There was also significant news for investors and employees of BEA Systems. Oracle pretty much declared its efforts to buy the middleware vendor at an end. Oracle CFO Safra Catz said her company has been talking to BEA in recent weeks, but has concluded that "no friendly deal can be done with the current board or management." That leaves very little wiggle room; it's possible BEA shareholders will revolt and replace the board, but highly unlikely.
Speaking of Oracle's results, Dan Morgan, a portfolio manager for Synovus Investment Advisers, said, "The quarter was huge. It's very positive for software (as a whole) moving into 2008." Indeed, the quarter was Oracle's best in more than a decade, said Catz, who is also Oracle's co-president.
But other savvy analysts I speak to regularly were more cautious. Peter Goldmacher, who covers software for Cowen, said that Oracle's success is not necessarily a sign of overall strength in software spending. Goldmacher and Global Equities analyst Trip Chowdhry pointed out that much of Oracle's success is due to its huge footprint across product and geographical lines. Chowdhry figures that Oracle and that other software giant, Microsoft, are likely to do well in 2008, but sales could be problematic for smaller vendors.
Assuming that Chowdhry is right about Microsoft, that also bodes well for companies such as Intel whose fortunes are tied closely to PC sales.
Significantly, sales were strong across the globe. There had been fears that Oracle might deliver good results on the strength of sales abroad, with the United States lagging in the wake of the credit/sub-prime mortgage mess. But that wasn't the case.
New software license revenue, a key indicator of future business, was up 38 percent overall. Database and middleware revenue (Oracle lumps the two together) grew by 28 percent, while application licenses soared 63 percent. Those numbers should end concerns that Oracle's exposure to the troubled financial services industry has become a major problem.
Oracle's middleware business grew sharply as well, up 80 percent, though it wasn't clear if those numbers included sales from Hyperion, acquired earlier this year.
Oracle claimed that at least part of its database gains was at the expense of rival IBM, and that it's taking applications business away from SAP, but neither can be verified in a hurry.
Revenue totaled $5.31 billion, a 28 percent improvement from $4.16 billion in the same quarter last year. Analysts, on average, had projected revenue of $5.04 billion.
The company earned $1.3 billion, or 25 cents per share, for the three months ended Nov. 30. That represented a 35 percent increase from net income of $967 million, or 18 cents per share, at the same time last year.
More tomorrow when the dust settles a bit.
I welcome your comments, tips, and suggestions. Reach me at bill.snyder@sbcglobal.net.
Posted by Bill Snyder on December 20, 2007 03:00 AM
December 13, 2007 | Comments: (0)
Tech Stocks to Own in a Downturn
It's been a Maalox, or maybe even a Xanax, couple of months. Investors have been whipsawed by market tumbles sparked by the still out-of-control mortgage mess interspersed with tantalizing rallies. It's not going to get calmer anytime soon. Many investors are moving money into money market funds or CDs to preserve capital while they wait for the market to settle.
In times like this you'll hear the phrase "flight to quality" and it's an important one. There are still plenty of tech stocks that provide opportunities for growth as well as safety. Picking stocks is very difficult in the best of times. So I'm going to present the thinking of a Wall Street team that has a solid record, a reputation for clear thinking and integrity.
Tech stocks to consider in bad times: Apple, Cisco, IBM, Microsoft, Oracle, Paychex, SAP, Thermo Fisher Scientific, and Xerox.
Tech stocks to avoid in a downturn. Alcatel-Lucent, AMD, Lam Research, National Semiconductor, and SanDisk.
(Note: The above is only a partial list.)
Here’s how the Sanford Bernstein team came to that conclusion:
Earlier this month, three senior analysts at Bernstein -- Richard Keiser, Vadim Zlotnikov, and Denis Smirnov -- examined the characteristics of sectors and stocks that outperformed during prior periods of slowing growth, poor performance by the technology sector, or both.
"Not surprisingly, companies with historically low capital intensity, stable business models, and pricing power or product cycles, outperformed. From a sector perspective this strongly favored software and services, while semiconductors and storage generally underperformed," they wrote.
Just to be clear: The analysts are not saying that all software stocks will do well, and all storage and chip stocks will do badly.
Another important factor to look for (and probably to avoid unless you have strong nerves) is high volatility, known on Wall Street as "beta." Simply put, high beta stocks are more volatile than the market as a whole. A high-beta stock may well move up faster than other stocks on a good day, but it will tend to drop faster on a poor one.
Companies with historically stable business models, a high return on equity, sales stability, strong profitability and low beta include: Oracle, SAP, Xerox, and Paychex. You're well acquainted with the first three, of course, but may not have heard of Paychex, which provides payroll, human resources, and benefits outsourcing services for the SMB market.
Companies that are not only stable but have significant pricing power in their sectors, and product cycles strong enough to power through a downturn include Apple, Cisco, Electronic Arts, and Microsoft. (The report was written before Vivendi announced that it would take a majority stake in rival Activision, which could change the game for ERTS by creating a larger, powerful rival.)
You may have noticed Thermo Fisher Scientific and wondered what the heck it is. I did. Turns out that TMO (its ticker) is a supplier of instruments and software to be used for testing athletes for banned performance-enhancing substances at the 2008 Olympic Games in Beijing. Last year it earned 85 cents a share on sales of $3.8 billion, and has a market valuation of $24 billion.
About the "bad" list. Those companies aren't necessarily bad investments. But they have a history of performing badly during an economic downturn. At other times, they may well be worth considering. And please remember that stocks that have done well in previous downturns could have serious problems this time around.
I don't necessarily agree with all of the picks by the Bernstein team, but their report is a great starting point.
Good luck, and to quote Douglas Adams, "Don’t Panic."
Disclosure: My portfolio includes Apple, Cisco, and Microsoft. I never, ever, short stocks, so anything negative here is unrelated to my own investments.
I welcome your comments, tips and suggestions. Reach me at bill.snyder@sbcglobal.net
Posted by Bill Snyder on December 13, 2007 03:00 AM
December 11, 2007 | Comments: (0)
Everyone in the world of finance who was paying attention should have read the writing on the wall: The Fed was planning to cut rates by one-quarter of a point. Indeed, a poll of economist by Bloomberg, I think, showed that better than 8 out of 10 were expecting a cut of that size.
But Wall Street wanted more. When it didn’t get it, we had today’s plunge in the markets. As I wrote the other day, the 25 basis points cut was pretty much priced into stocks, and had pushed share prices up for the last 10 days or so. The Street really wanted a cut of 50 basis points, a half-percent, that is.
Tech stocks, which had gained about 180 points since late November, shed 57 points, or about 2%, in a few hours.
With the exception of VMware, which for some reason gained 2.5%, all of the major players were down.
It’s fairly obvious that speculating on what the Fed will or won’t do is very dangerous for the rank-and-file investor. Keep looking at quality. Later in the week, I’m going to present some ideas for tech investments that make sense during a downturn.
I welcome your comments, tips, and suggestions. Reach me at bill.sndyer@sbcglobal.net
Posted by Bill Snyder on December 11, 2007 02:23 PM
December 10, 2007 | Comments: (0)
Time to Wash Your Hands of Palm?
Palm is one of those companies I always root for because I’ve happily used its products for years and I admire its pioneering spirit and history. But that’s not reason enough to like the stock, and the developments of the last few days paint a dismal picture.
UBS analyst Maynard Um on Monday dropped his rating to sell and chopped his price target nearly in half to $5 a share. That follows Thursday’s announcement by the company that it has blown its second-quarter. Read, ‘em, as they, say and weep, if you own Palm, that is: Palm will post a net loss of 8 cents to 10 cents a share, compared to the 4 cent-profit expected by Wall Street. Sales will come in at $345 million to $350 million, compared to the guidance of $380 million issued when the company announced first-quarter results in early October.
Palm also said it was disappointed that it didn’t get certification on a new product, probably a handset for Verizon, although that’s not confirmed. What else could go wrong? Oh yeah, warranty repairs are up. And in one of those twists that sometimes baffle people who don’t follow the industry closely, the company said sales of the Centro are better than expected; but that’s bad news because the low-priced smart phone hurts the margin mix.
Longer term, Palm is getting its butt kicked by Apples’s iPhone and RIM’s Blackberry. It's not at all clear what it can do to regain some momentum in the marketplace. If I were an IT pro, I’d worry that the company is going to be taken out, making enterprise support that much more difficult.
As you’d imagine the stock is really getting hit. It’s off another 2.5% today to $5.60 a share, and has now lost 15% of its value since Thursday. Indeed, the stock has been this low since 2004.
My heart says, “Go, Palm,” but my investor’s brain says it may be time to wash your hands of Palm.
I welcome your comments, tips and suggestions. Reach me at bill.snyder@sbcglobal.net.
Posted by Bill Snyder on December 10, 2007 12:10 PM
December 06, 2007 | Comments: (0)
All IT surveys aren't created equal. I give Goldman Sachs more weight than most of its rivals, including JMP Securities (a boutique investment bank), and some of the lesser-known research shops. But when Goldman, JMP, and now ChangeWave, (one of the aforementioned second-tier research firms) all get on the same page, you have to pay attention.
Surveys by the three organizations indicate that the credit crunch and fears of a possible recession have convinced IT execs to rein in spending in 2008, with the software sector taking a significant hit.
In the most recent survey, JMP analyst Patrick Walravens downgraded Oracle after finding 61 percent of the 38 companies he surveyed expect their software spending to be flat or down in 2008. And in a rather unsettling aside, he said, "We think Oracle can find ways to save money to protect its earnings per share. We expect to see some reductions in the sales force as well as other cost-saving measures."
Granted, 38 companies, even if carefully selected, comprise not much of a sample. But JMP has been conducting the survey for seven years, and according to Walravens, the result is the worst since 2001 "and is similar to the result in May 2003, which marked the beginning of a two- to three-year choppy period for Oracle's business."
The JMP survey has done a decent job predicting Oracle's results.
In the 10 months following the 2001 survey, Oracle's stock price dropped from $15 to $8. After the May 2003 survey, Oracle's stock traded up and down as it made the May 2003 quarter, missed the August 2003 quarter, made the November quarter, and then missed the February 2004 quarter. "We would not be surprised to see this type of uneven performance in our software universe until the U.S. economy regains its footing," the analyst wrote.
Walravens also downgraded Ariba for similar reasons. And while shares of Oracle slipped just a bit, Ariba fell more than 5 percent following his note. (By the way, Cowen analyst Peter Goldmacher had a different take on Ariba, saying that the company would actually benefit from a modest economic downturn, since it sells itself as a resource to help companies manage procurement spending.)
The JMP survey comes a few weeks after Goldman Sachs sampled a much larger group of companies and found similar, downbeat results. "We are reducing the estimates of most of our covered companies, focusing on pure-plays that could be harmed as customers seek to purchase 'good enough' substitutes from larger vendors, as well as vendors who sell 'big ticket' items that could be delayed in a slower spending environment," analyst Sarah Friar wrote in the report.
On a more positive note, Friar said that companies selling SaaS (software as a service) would likely do better. "The ability to quickly and easily turn on new applications with a significantly lower initial cost of ownership makes SaaS an attractive offering for small and midsized businesses, significantly expanding the market for software applications."
ChangeWave sampled more than 1,900 companies and said, "Projected IT spending growth looks anemic for the coming quarter compared to the robust seasonal increases we normally see at this time of year. Simply put, this is unusually bad visibility for IT spending."
I have a quarrel with that conclusion. I've often seen spending slow down in the first quarter, following a fourth-quarter budget flush. But the fact that sentiment in so many companies is more negative than usual for this time of year gives ChangeWave's conclusion some weight.
We'll get a change to hear real numbers from Oracle on Dec. 19. The results for the quarter will likely be good, but Wall Street will be very interested in the company's outlook for the next three months.
Rate cut could change the game
As I write this post on Wednesday, the market is making a strong
upward move, after two down days. The reason is two-fold. There's
more and more confidence on Wall Street that the Federal Reserve will
cut interest rates. Moreover, there is some good economic news
buoying the market.
As I wrote last week, the potential rate cut is dominating the thinking of investors right now. The market is counting on a cut of at least one-quarter of a point and that news is essentially priced into stocks at this point. A half-point cut would obviously be welcomed with a rally, while a stand-pat stance would makes things ugly in a big hurry.
Stay tuned.
I welcome your comments, tips, and suggestions. Reach me at bill.snyder@sbcglobal.net.
Posted by Bill Snyder on December 6, 2007 03:00 AM
December 03, 2007 | Comments: (0)
Reuters carried a short item out of London today, reporting speculation that Microsoft has revived its effort to buy SAP. Wow, that would be a story.
However, it doesn’t look like Wall Street gives the rumor much credence. Shares of SAP closed up a bit Monday, gaining just 60 cents, or 1.2%. That ain’t much. Another good indicator of investor interest was flat as well. Volume, that is the number of shares traded, wasn’t much above normal, and after a flurry of trading in the first hours of the session, it dropped way off.
I was sitting in Federal Court back in 2004 when Oracle was duking it out with the feds over its planned acquisition of PeopleSoft. With little warning, Microsoft introduced evidence that it had been talking merger with SAP. I know its an over-used phrase, but most of the reporters and lawyers who were listening practically fell out of their seats, it was so surprising.
As you know, the talks failed. Remember, Microsoft said one issue was the complexity of integrating two very large -- and culturally dissimilar -- organizations.
As Eric Savitz pointed out in Barron’s earlier today, that hasn’t changed. It would still be very hard to weld a slow-moving, ERP-rooted German giant, and an American giant with roots on the desktop.
It would also be incredibly expensive. SAP’s market cap is $62 billion. Even discounting cash on hand that’s a huge buy even for Microsoft.
Is it impossible? I guess not. Some people may be thinking that since IBM is moving into apps (witness the purchase of Cognos), and since Microsoft’s enterprise applications are still small potatoes in this league, the takeover would make strategic sense. But I wouldn’t buy stock in SAP on the assumption it will sell at a premium.
I welcome your comments, tips and suggestions; reach me at bill.snyder@sbcglobal.net.
Posted by Bill Snyder on December 3, 2007 04:32 PM
November 30, 2007 | Comments: (0)
Sell, sell Dell, says Wall Street
I have to admit I have a bit of a soft spot in my heart for Dell. It was the first major tech company I covered in a serious way, and I learned a lot about the industry from Dell execs and yes, pr folks. Moreover, I used to love their products and was happy to buy them and recommend them to my friends.
Not any more. Dell has really lost its way, and so far, the return of Michael Dell to the CEO’s chair hasn’t made a big difference. Thursday’s results were very disappointing. Not only because the company missed Wall Street’s expectations by a bit, but because the results show that a company that used to be synonymous with “execution,” is having trouble putting one foot in front of the other.
OK, that’s a little harsh, but I was very surprised to hear what ATR analyst Shaw Wu said about the gross margin miss (18.5% vs the expected 19.1%) that occurred despite a shift to higher margin notebooks: "We find this odd as (Apple) and HP experienced the opposite and our own supply chain checks indicate otherwise. Moreover, Dell's (average selling prices) were flat to up, indicating pricing pressure wasn't a big issue," he wrote.
Shaw said "poor procurement execution" was the main reason for the weak margins. "It is interesting to note that Dell's costs may actually now be higher than HP and Apple, something that was unthinkable not that long ago," he wrote in a note to clients.
Think about that. The company that perfected supply chain management can’t handle procurement as well as H-P or Apple. Yikes.
And that follows a year filled with problems, such as the huge battery recall a while back, not to mention evidence of deterioration in quality control and customer service. And don't forget the big accounting mess. I know Dell has been working hard to fix the customer service problems, but the glitches have really turned off a lot of Dell loyalists, including my family, which had motherboards in two not-so-old Dell machines fail this year. When I took my PC into a shop for an eval, the owner said he had seen at least four or five dead power supplies in Dell Dimensions in just one month. Coincidence? I’d give the company the benefit of the doubt, if there weren’t so many well-documented tales in the consumer mags and around the Web.
So now, I’m writing this post on an H-P Pavillion notebook which has performed flawlessly for months. No surprise then that Dell has lost share to Hewlett-Packard.
The net of all this was a terrible drubbing on Wall Street Friday, the day after the third quarter’s results were announced. Shares were off a horrific 12.79% on very heavy volume (113 million shares vs. the three-month average of about 23 million shares.)
I obviously like technology stocks, but until I see evidence that Dell is getting its act back together, I wouldn’t touch it.
I welcome your comments, tips and suggestions. Reach me at bill.snyder@sbcglobal.net.
Posted by Bill Snyder on November 30, 2007 05:25 PM
November 29, 2007 | Comments: (0)
I’m not sure what metaphors to use about the treatment this stock has been getting on Wall Street. It leaped (sprang, zoomed) out of the starting gate this summer and soared (rocketed) to as high as $125.25 a share. My thinking at the time: too far, too fast.
Then Oracle announced its virtualization play and the stock fell (tumbled, sank), only to bounce back within 24 hours as investors realized that it would take the database giant some time to be a significant threat.
Enough with the metaphors. As fears about the economy mounted, the bears took over on the NASDAQ and VMware headed south again, hitting a 52-week low of $51.50. Again, “too far, too fast” in my opinion. (Disclosure. I bought a modest number of shares on the dip and still hold them.)
But in the last week, sentiment reversed itself. With a couple of positive notes this morning, the stock is up about 4%, bringing the gain this week to more than 25%. Kash Rangan of Merrill Lynch upgraded the stock to a buy and set a price target of $105 a share, compared to the current value of $91.05.
Citi analyst Brent Thill reiterated his buy rating, and says the new “thin” version of the company’s hypervisor should keep VMware ahead of the competition into 2009.
Thill noted that that six of the leading OEMs (Dell, Fujitsu, Fujitsu Siemens Computers, HP, IBM, and NEC) will pre-install it on servers. “We believe this is a significant step towards enhancing VMW’s already dominant position in the virtualization industry, and is a pre-emptive strike against future Microsoft and Citrix/Xen releases in the battle for control of the x86 server virtualization market,” he wrote in a note to clients.
The Bottom Line: This company needs to be judged on its competitive position; the stock on its valuation, among other things. That has not been happening lately. Take a deep breath before you buy it -- or sell it.
Posted by Bill Snyder on November 29, 2007 11:57 AM
November 27, 2007 | Comments: (0)
Activision Hits Home Run; Dell on Deck
Tech investors have been looking for excuses to sell for weeks, but Activision gave them a reason to buy on Tuesday. Buoyed by strong sales of Guitar Hero and Call of Duty, the game developer substantially raised its outlook for the critical holiday quarter. The company was quickly rewarded with a bump of nearly 14% in its share price as tech stocks and the market as a whole rebounded from Monday’s drubbing
While Activision isn’t exactly a bellwether stock, its strong forecast offers a somewhat brighter outlook for holiday spending than we’ve been hearing.
"We are well on our way to delivering our 16th consecutive year of revenue growth and the most profitable year in our history," crowed Chief Executive Officer Bobby Kotick. “Due to the strong consumer response to our slate through October and strong retail sales over the Thanksgiving weekend, we are raising our financial outlook for the December quarter and the fiscal year," he said.
The company raised its third quarter forecast by 15 cents to 66 cents a share, on sales of $1.23 billion. On a continuing operations basis, the company expects 70 cents a share--which easily exceeds Wall Street’s expectations of 56 cents a share on sales of $1.04 billion.
For 2008, Activision forecasts adjusted profits of 85 cents a share on sales of $2.3 billion, compared to an earlier forecast of 65 cents a share, on sales of $2.07 billion. Analysts were looking for profits of 69 cents a share, on sales of $2.09 billion
Meanwhile, Dell is expected to beat Wall Street’s sales expectations for the October quarter when the PC maker reports financial results on Thursday, says Shaw Wu, an analyst with American Technology Research.
Although Wu is not particularly bullish on Dell, he says “Our sense is that PC demand in Q4 is shaping up better than expectations, even for weaker players.”
He figures Dell will add $300 million to Wall Street’s forecast of $16 billion in sales for the quarter, and equal the consensus earnings forecast of 38 cents a share. Even more important in the broader scheme of things will be the company’s forecast for the January quarter, which includes the holiday season.
Wu rates the stock as neutral, and says both Hewlett-Packard and Apple have “much stronger fundamentals and more attractive valuations.” If Wu is wrong, and the stock doesn’t deliver strong sales, expect a very negative reaction to ripple through other consumer-related tech stocks.
Finally, the most interesting event of the next few weeks will likely be the Dec. 11 meeting of the Federal Reserve’s Open Market Committee, which sets short term rates. There’s already some chatter that the Fed will back off its stand-pat stance and cut rates by as much as half a point. That’s pretty speculative, because it still appears that Chairman Ben Bernanke is more concerned about the threat of inflation than the slowing of the economy.
Whatever he does, it will quickly move the market. Stay tuned.
I welcome your suggestion, tips and comments. Reach me at bill.snyder@sbcglobal.net
Posted by Bill Snyder on November 27, 2007 02:37 PM
November 24, 2007 | Comments: (0)
AMD and Cisco put Band-Aids on their wounds
When business gets bad, some tech outfits will do whatever it takes to protect share prices, even it doesn’t add a bit of value to the company.
We’ve seen two good examples of this in the last few weeks: Advanced Micro Devices, whose share price has tumbled following a series of bad quarters, gave the government of Abu Dhabi 8.1% of the company in exchange for $622 million in cash. Cisco, which is doing well, freaked the market with a warning that enterprise demand is softening, announced a $10 billion buyback of common stock. The buyback is in addition to $52 billion of previously authorized share repurchases.
In AMD’s case the ploy didn’t work. Since announcing the Abu Dhabi deal on Nov. 16, the stock has shed nearly 15%. Sure, techs have taken a beating lately, but AMD’s tumble is far more severe and the stock is now trading at less than 50% of its 52-week high of $23 a share. There’s nothing wrong with borrowing money, but investors figure that the cash infusion isn’t much more than a Band-Aid covering a deep wound.
AMD has been slugging it out with Intel, and the war has been very tough on the smaller company’s bottom line. I don’t think AMD is in danger of foundering any time soon, but Hector Ruiz and company need to do something fairly drastic before too long.
There’s even been speculation (see Eric Savitz’s column in Barron’s for one view) that AMD might go fabless and let someone else build its chips. Others have speculated that the company might sell itself to graphics chip maker NVIDIA, but that’s not very well informed. Since AMD already owns the former ATI, there would obviously be serious anti-trust implications.
Cisco is a different story, of course, but it's worth noting that buybacks are not an unvarnished good. Remember, a company that buys back shares is generally buying back shares that were created by the issuance of stock options. That reduces the number of shares outstanding and thus raises the earnings per share (simple math) but changes nothing except the amount of cash on hand. No real value is created, and buybacks can disguise a number of problems.
In an interview last year, Gary Lutin, a New York investment banker who gives advice in corporate control contests, likened such repurchases to a banker "giving away half of what's in the bank vault then buying it back and telling all [his] depositors 'That makes everything OK, right?' " (Lutin, a long-time source of mine, spoke during an interview with my former colleague at TheStreet.com Troy Wolverton.)
Cisco got a short-lived bump after it announced the buyback, but shares subsequently gave up all the gains and are actually trading a bit lower than they were.
Enjoy the rest of the holiday.
I welcome your comments, suggestions and tips. Reach me at bill.snyder@sbcglobal.net
Posted by Bill Snyder on November 24, 2007 02:53 PM
November 22, 2007 | Comments: (0)
Recession? Not in the cards -- yet
Leading indicators aren't pointing to recession, and the weak dollar is giving HP and other tech giants a lot of breathing room
The Baltic Exchange Dry Index isn't something you read about every day -- in fact, most of us haven't heard of it. And it's likely that you've never heard of the Economic Cycle Research Institute. But the Baltic Index and ECRI's reports on leading economic indicators give economists an important view of where the economy is going. And despite lots of reason to be nervous, neither the index nor ECRI are pointing to recession.
Meanwhile, the ever-weakening dollar (it sank to an all-time low against the euro this week) is pushing U.S. exports to record levels, and that's good news for tech giants like HP which are doing more and more business abroad as the American economy slows.
First the Baltic Index, or BDI. It measures the cost of shipping raw materials over key global trade routes. Because the number of ships in the world is pretty stable (it takes a long time to build one), increases in demand for their services push up the price of shipping. And because it measures the cost of shipping raw materials, as opposed to finished goods, it is a leading indicator. The good news: So far this year, it is up 143%, according to reports in The Financial Times and other places.
The Exchange (which is based in London, not the Baltics) also reports that shipments out of Long Beach, Calif., one of the world's busiest ports, were up a third in October. One reason: The weak dollar is making U.S. goods all the more attractive abroad. And that brings us to Hewlett-Packard's report this week of fourth-quarter sales and earnings that easily beat Wall Street's expectations.
Unlike many of its competitors, HP does about two-thirds of its business outside the U.S. "This is very different from what we heard from IBM and Cisco, in particular," said Shaw Wu, an analyst at American Technology Research. "HP continues to execute in this very tough environment. The key reason is that they're very global." (Wu made his remarks during an interview with The New York Times.)
HP is not terribly dependent on sales to financial services companies, which are apparently cutting technology spending in the wake of the credit crunch and sub-prime mortgage debacle.
Interestingly, though, CEO Mark Hurd ducked questions during a conference call about whether HP is seeing weakening demand from U.S. corporate customers. "I don't want to be confused with an economist in any way, shape, or form," he said during a conference call after the earnings announcement.
Hurd's not an economist, but Lakshman Achutan, who heads ECRI, is an economic analyst I've spoken to regularly through quite a few economic ups and downs. And his record in handicapping the economy and seeing beyond the day's headlines is well above average.
In an interview this week, Achutan said that the Weekly Leading Index shows an unmistakable weakening in the economy, but it does not yet point to a recession. Moreover, the slowing we will see when the fourth-quarter numbers come in represents a slip from a stronger-than-expected third quarter. "Slowing from 100 miles per hour is a lot different than slowing from 20 miles per hour," he said.
The weekly leading indicators include a variety of economic data, including data on housing, money supply, investor confidence, commodity prices, and more. The index peaked in early June, and then started to slip until late July when it plunged sharply. Since late August, however, the rate of decline slowed dramatically, though it is still drifting lower.
It's worth noting that the summer plunge in the index is not even close to the stunning drop we saw when the dot-com bubble burst in 2000.
(The pop-up image below is a graph courtesy of ECRI via Bloomberg that shows changes in the weekly leading index over the years.)
View image
It's also worth noting that the minutes of the Federal Reserve's last meeting indicate that the government's top economists are divided about the severity of the current downturn. I wish the news were better, but it's not as bad as you might think. It's going to be a wild ride through the end of the year, at least. But don't run for the exits just yet.
I welcome your comments, tips, and suggestions. Reach me at bill.snyder@sbcglobal.net
Posted by Bill Snyder on November 22, 2007 03:00 AM
November 15, 2007 | Comments: (0)
Don't Get Caught in the Stampede
Apple and VMware took the rap when Cisco's warning and Oracle's virtualization announcement panicked tech investors. That was a mistake.
Don't think the market is always rational. Investors, even smart ones, can get caught up in the day's news and the resulting emotion. At times, that results in wildly overinflated prices for companies that have no chance of long-term success; remember the outfit that was going to make a fortune delivering kitty litter online?
At other times, the market overcorrects the other way. A spate of bad news makes investors nervous, and suddenly everyone is looking for an excuse to run for the exits. That's what happened last week. With all sorts of bad macro news -- the continuing market meltdown, rising oil prices and the limp dollar -- investors had reason to be nervous.
Then came Cisco's first-quarter earnings call.
In fact, it was a very strong three months. First-quarter revenue was $9.6 billion, up nearly 17 percent from $8.2 billion in last year's first quarter. Net income rose more than 37 percent to $2.2 billion from $1.6 billion a year earlier. Earnings per share were $0.35, up from $0.26 in last year's first quarter. What's wrong with that? Sales to the U.S. financial sector were weaker than expected.
Investors took that as a very negative signal, and to be fair there was certainly reason. But one of the companies that took a major hit was Apple. Say what? Of all the major computer companies, Apple has the least exposure to enterprise sales, and its consumer business, headlined by the iPhone and the iPod, is terrific.
Part of the reason for the slide: momentum players. These are hedge funds and other institutions that trade directionally over the short run. When a stock moves down, short sellers can get into the game, and suddenly the stock is really tumbling. That in turn upsets the broader market, particularly retail (Wall Street lingo for Mom and Pop) investors who sell.
Apple recovered nicely on Tuesday, along with the broader market, and got a big boost from news of strong iPhone sales in the U.K. and a possible big deal in China.
Meanwhile, Oracle kicked off OpenWorld with an announcement that it was jumping on the virtualization train.
Kaboom went shares of VMware. Investors with positions in VMware and EMC, which owns most of VMware, freaked. VMware, the hottest IPO of the year, had been sliding anyway. But the Oracle news got it tumbling.
Interestingly, there are a lot of questions about what Oracle is really going to do about virtualization. Benchmark analyst Brent Williams put it this way: "We believe a product likely to add de minimis revenue to Oracle's deal size is unlikely to attract significant attention from Oracle's sales force, and thus is unlikely to be featured in significant numbers of deals."
Similarly, Citi analyst Brent Thill said in a note to clients: "Oracle's announcement to offer and support their own flavor of the Xen open source hypervisor does not affect VMW's position as the
de facto standard in server virtualization. Xen, as an open source project, is already freely available on the web or through other vendors. VMware's own base hypervisor technology, VMware Server, is available as a free download."
The Benchmark analyst noted something that struck me right away: The virtualization announcement is reminiscent of the big splash Oracle made with "Unbreakable Linux," a splash that temporarily swamped the share price of Red Hat. As it turns out, "Unbreakable Linux" isn't much of a factor in the market at all.
That's not to say Oracle won't make headway in virtualization. But not right away. Meanwhile, VMware's release of Server 2, its free virtualization product, is getting rave reviews.
So, morning-after thoughts by analysts, plus the Server 2 release, turned VMware around.
The bottom line: There's obviously reason to worry about the strength of tech sales going forward, but take a deep breath and look closely before you sell. Indeed, the dip in VMware's value might well have been an opportunity to buy some shares at a nice discount. (In fact, I did that very thing, and now hold a small position in VMware.)
I welcome your comments, tips and suggestions. Reach me at bill.snyder@sbcglobal.net
Posted by Bill Snyder on November 15, 2007 03:00 AM
November 11, 2007 | Comments: (0)
Oracle's Worst Case Not So Bad
Shares of Oracle got creamed Friday, plunging nearly 8% after Cisco’s John Chambers spooked Wall Street with his dire-sounding warning about tech spending. In essence, investors are worried that Oracle’s exposure to the financial services industry could slam revenue and earnings over the next few quarters.
However, an interesting analysis by Sanford Bernstein analyst Charles Di Bona, indicates that the news made not be as bad as some investors fear.
Di Bona figures that roughly 4% to 11% of Oracle’s total revenues may come from sales to the
North American financial institutions. He has to estimate, because Oracle doesn’t break out its revenue that finely, but it’s likely that the actual number falls near the middle of that range, he says.
Digging further, the analyst estimates that perhaps half of the spending represented by that revenue is non-discretionary or related to necessary upgrades and maintenance. If 30% of those discretionary purchases are eliminated, “we estimate Oracle would lose $200 million to 300M of revenue through the balance of FY-08,” he says in a note to clients.
Before this week’s tech wreck sent everyone scrambling, Wall Street was expecting Oracle to post revenue of $21.4 billion, according to Thomson Financial, which means revenue would slip by 1.4% at the high end of Di Bona’s estimate. No one likes to see sales slip, but given its relatively small exposure to the financial sector, Oracle may well have taken more lumps than it really deserves.
Of course, Cisco’s scary warning may presage a general downturn in spending that would be hard on the entire software sector. Di Bona’s also notes that Oracle may have set itself up for a fall by reducing the amount of information it releases to investors, which in turn led them to assume the worst. Moreover, the stock had gained a lot of ground this year, and may have been at the top of its range.
Meanwhile, downtown San Francisco is jammed with Oracle OpenWorld attendees. With the big event kicking off Sunday evening, visiting techies were lined up to ride the nearby cable cars, and restaurants near Moscone Center were jammed. As you’d expect, traffic is ugly; if you’re going to the show, don’t drive your car.
Posted by Bill Snyder on November 11, 2007 02:41 PM
October 29, 2007 | Comments: (0)
Strong Chip and Software Sales Buoy Tech
Just days after Microsoft and EMC demonstrated strength in software and storage comes Monday’s news that semiconductor sales increased sharply in September. Global microchip sales in September were $22.6 billion, an increase of 5.9 percent from September 2006 when sales were $21.3 billion, according to the Semiconductor Industry Association. Sales were up 5.0 percent from August 2007 when sales were $21.5 billion.
Put these events together, and it’s clear that there is still strong demand and fundamental strength in tech. Key drivers for the chip sector include the expected ramp for the holiday season, plus strong demand for PCs and cellphones, the SIA said.
According to the Gartner Group, worldwide unit sales of PCs increased by 14.4 percent over the immediate-prior quarter. Gartner currently expects that PC sales will increase by 13 percent year-on-year. Microprocessor revenues increased by 18.7 percent compared to the prior quarter.
Those findings track with Microsoft’s report last week; the company did better than its own forecast, as strong sales of PCs led to stronger than expected growth in sales of Vista and Office.
Strong sales of cell phones and various consumer gadgets boosted NAND flash sales by 58.5% year over year and 46.2% over the previous month. Interestingly, ASPs (average selling prices) for NAND flash increased by nearly 32%, the SIA said.
Chips stocks are far from out of the woods, of course, and there are still concerns that the industry is moving cyclically into a supply glut. The SOXX, or more formally, The Philadelphia Stock Exchange Semiconductor Sector Index, comprised of 19 semiconductor stocks, is down nearly 10% since the start of October.
Overall, though, there’s been a burst of seriously good news since late last week. And on Wednesday the market will be watching the Federal Reserve to see if it lowers key, short-term interest rates for the second consecutive meeting.
Wall Street is expecting a cut of 25 basis points (one-quarter of one percent). If Chairman Ben Bernanke comes through, by no means a certainty, the market will react positively, although I wouldn’t expect a massive rally since the cut is already priced in to a certain extent.
I welcome your comments, tips and suggestions. Reach me at bill.snyder@sbcglobal.net
Posted by Bill Snyder on October 29, 2007 11:58 AM
October 25, 2007 | Comments: (0)
Forget today’s ticker. Tech is showing strength across the board
In a nervous market, share prices can bounce around like corn in a popper. But with the fall earnings season at the midpoint, tech companies are showing strength across multiple sectors.
There have been solid reports from chip makers, including Intel; outsourcers such as Satyam; Google, Amazon and Yahoo! in e-commerce; Seagate, whose sales are largely tied to the health of the PC industry; and Apple.
Software is still something of a mixed bag; IBM’s software business was weak, SAP is problematic and Microsoft won’t report until Thursday afternoon. Oracle, the other software bellwether, posted a 25% quarterly gain in profits when it issued its financial report last month.
Results aside, the volatility has been rather amazing. On Tuesday, Amazon, Google, and Research in Motion, chalked up big gains in share prices. Amazon’s bump was driven by a very strong quarter. But then the market decided that the online seller’s margins might not be good enough for the Christmas season, and the stock tanked Wednesday morning, taking much of the NASDAQ with it.
Even worse for the broader market was the terrible report by Merrill Lynch which reminded investors that the credit crunch is far from over. Even that could have a bright side: some Wall Streeters figure the news could convince the Fed to cut rates a bit more.
Meanwhile, it looks like Microsoft, whose share price moves at glacial speed, will give investors something to cheer. Analysts polled by Thomson Financial are forecasting 39 cents a share for the September quarter on $12.6 billion in revenue.
Both profit and sales figures would represent double-digit percentage gains over the numbers the software giant posted for the same period last year.
Halo, Microsoft’s popular first-person shooter, drove a boatload of Xbox 360 sales last month. According to NPD Group, a research outfit that specializes in retail sales data, sales of the game console hit 527,800 units during the month, nearly double the number of units sold in August.
Xbox sales are somewhat paradoxical because Microsoft loses money on each one it sells, so better sales equal slightly lower earnings. Contract manufacturer Flextronics, on the other hand, does make a profit on the Xboxes it makes for Microsoft and that helped the company post a strong quarter.
Seagate is interesting as well. In an interview with Barron’s, CEO Bill Watkins said that his company has sold out its production for the fourth quarter, and is turning away orders for millions of units. He also said that Seagate has no current plans to increase its capacity, a refreshingly conservative move in an industry driven by frenetic boom and bust cycles.
Apple hit a home run, as we all know, but it’s still worth noting that very strong iPhone sales gave AT&T a boost; the telco giant netted 2 million new subscribers in the quarter, the biggest jump in the company’s history.
EMC reports early Thursday, and it should give us answers about the enterprise storage market and important clues about the strength of business spending on IT.
And finally, the PC market: We won’t hear from Dell and Hewlett-Packard until next month, but the strong showings by Intel and Seagate certainly indicate strength in demand. Moreover, worldwide PC sales sped up in the quarter with 15.5% year-over-year growth, according to research firm IDC. Sales by Dell finally accelerated, particularly in Europe and Asia.
The bottom line: This is a brutal, volatile market. But tech’s losses have been largely caused by larger worries about the credit crunch and its parent, the sub-prime mortgage meltdown. I’d be sweating a lot more if I didn’t see solid sales and earnings by the major players.
I welcome your comments, tips and ideas. Write me at bill.snyder@sbcglobal.net
Posted by Bill Snyder on October 25, 2007 03:00 AM
TOP STORIES
ADDITIONAL RESOURCES
- Why Linux Threats Mean Business
- Do you have the power to resolve technical issues with one call?
- Take control of your content- leverage Microsoft SharePoint
- Four Steps to Disaster Recovery and Business Continuity Using iSCSI
- Flexible, Scalable, Enterprise Storage for Virtual Infrastructures
- Virtual Servers Meet Virtual Storage
