AMD got crushed in Q3, following a disappointing Q2. Yet at the Q1 analyst conference AMD execs were optimistic (See AMD Guides to Strong 2012, April 19, 2012).
Right now AMD stock is trading not just near 52-week lows, but near lifetime lows. At $2.07 per share AMD has a market capitalization of $1.5 billion. Is AMD now a matter for bankruptcy courts, where stockholders will get wiped out and even bondholders get pennies on the dollar? Or is there still hope for investors?
I could pick only one cause for optimism at the recent Analyst Call. It is not the restructuring plan, which will cut costs but will also probably cut R&D and sales muscle. It is alleged design wins.
Note that as bad as the quarter was (revenue of $1.27 billion, down 10% sequentially from $1.41 billion and down 25% from $1.69 billion in the year-earlier quarter), AMD is still a large company, with annual revenues of perhaps $5 billion. Its market cap, again, is $1.5 billion. If it could make those revenues profitable its market cap should trend back up towards $5 billion.
So design wins could matter, if they either increase revenues at good margins, or replace poor-margin revenue with good margins. Margins have always been a problem for AMD because rival Intel has always been able to set good margins and leave the dregs for AMD, even when AMD has brought out products that, in certain niches, were superior.
For months rumors have circulated that AMD had won spots in some of the major forthcoming game consoles: Sony, Microsoft Xbox, and Nintendo. Rumors vary: in the most optimistic, AMD wins all three.
All CEO Rory Read would say was that AMD already has confidential high-volume design wins in place. He would not even specify if these were game console wins as opposed to tablets or just Windows 8 notebook computers.
Certainly AMD's combined CPU and GPU chips, or APUs, fit well with any graphics-intensive, low cost system design. The current generation of game consoles is ancient and are expected to be refreshed in 2013.
But as experienced tech investors know, while design wins are a necessity, they are no guarantee of commercial success. Not all products sell. Gaming consoles have to compete against everything from smartphone games to Google TV to HTPCs. We also don't know how well Windows 8 tablets that don't use ARM-based processors will sell. We don't know if Windows 8 will help or hamper computer sales (I like Windows 8 a lot, but then I can be pretty geeky. Disclaimer: I just finished a freelance subscontracting job for Microsoft).
So the good news is that you can buy AMD stock for a song right now, and it will probably survive the year 2013, and might even thrive if the console and tablet manufacturers are not able to bargain margins down too much.
I am keeping AMD to a very small percentage of my portfolio, but opportunistically accumulating more stock. The safe thing to do is to keep away from AMD unless you already own it.
I will also repeat what everyone knows: AMD's IP is worth more than its market capitalization. Korean or Chinese companies would probably be willing to pay at least $3 billion for the graphics division alone, but AMD management thinks it can do better on its own.
Disclaimer: I am long AMD. I won't make any changes for at least a week after this article is published. I do not own Microsoft, Sony, ARM, Intel or Ninendo stock.
See also my AMD Q3 2012 analyst call summary;
www.amd.com
Showing posts with label microsoft. Show all posts
Showing posts with label microsoft. Show all posts
Wednesday, October 24, 2012
Friday, July 20, 2012
ONYX Pharmaceuticals, AMD notes
I am busy with a Microsoft project, so I am unlikely to post a full article here again until some time in August.
Meanwhile, my portfolio illustrates that while diversification has its benefits, it has its risks too. My AMD stock is way, way down. I did take notes on Thursday's analyst call, which you are welcome to read, as always: AMD analyst call summaries.
Onyx Pharmaceuticals (ONXX) on the other hand is way up because Kyprolis was approved ahead of schedule for treatment of multiple myeloma. See their press release: Onyx Pharmaceuticals Receives FDA Accelerated Approval of Kyrpolis.
Great work, everyone at Onyx.
What do you think Onyx is worth now? For the moment I'll stick with my ONXX back of envelope thinking.
Meanwhile, my portfolio illustrates that while diversification has its benefits, it has its risks too. My AMD stock is way, way down. I did take notes on Thursday's analyst call, which you are welcome to read, as always: AMD analyst call summaries.
Onyx Pharmaceuticals (ONXX) on the other hand is way up because Kyprolis was approved ahead of schedule for treatment of multiple myeloma. See their press release: Onyx Pharmaceuticals Receives FDA Accelerated Approval of Kyrpolis.
Great work, everyone at Onyx.
What do you think Onyx is worth now? For the moment I'll stick with my ONXX back of envelope thinking.
Friday, March 30, 2012
Red Hat Tipping Point?
Red Hat (RHT), in the year 2000, was going to be another Microsoft. Its open source software, would, in a few years, replace the overpriced, proprietary software known as Windows.
Come Wednesday, when Red Hat reported its fiscal Q4 2012 results (for the quarter ending February 29) and held its analyst call, Red Hat GAAP net income came in at $36 million. Up 7.5% from Q4 2010, to be sure, but dwarfed by Microsoft's Q4 GAAP net income of $6.62 billion.
So Red Hat is still not the next Microsoft. Aside from that, the specialist in open source software is doing very well. Fiscal 2012 marked the first time Red Hat, and the first time a primarily open source software company, showed over $1 billion in annual revenue.
Revenue for the quarter was $297.0 million, up 2% sequentially from $290.0 million and up 21% from $244.8 million year-earlier.
GAAP net income was $36.0 million, down 6% sequentially from $38.2 million but up 7.5% from $33.5 million year-earlier. GAAP EPS (diluted earnings per share) were $0.18, down 5% sequentially from $0.19, but up 6% from $0.17 year-earlier. Non-GAAP net income was $57.2 million, for EPS of $0.29.
A 21% annual revenue ramp rate amounts to explosive growth in this slow-growth environment. Red Hat Enterprise Linux (RHEL) substantially reduces the cost of doing business and has proven itself for more than a decade it critical business environments. For enterprise data centers, switching to Red Hat is an easy decision to make. Along with Linux most companies are going to want RHEV for virtualization of servers and JBOSS middleware for applications.
Where Linux has not caught on is the corporate or home desktop. For practical purposes Red Hat no longer tries to compete in that space.
Note that net income and EPS did not ramp as quickly as revenue. Normally that might be a warning sign, but it is likely to reverse itself at a later point. Red Hat bought a storage software company last fall and has devoted a lot of R&D to getting the product ready and certified for sale. They are also in the midst of a rapid international expansion. There is a lag between setting up an office in a new nation and seeing significant revenues.
It is certainly possible that Red Hat has finally reached a tipping point where it will become the standard provider of operating systems for servers in datacenters and the cloud. In that scenario growth could even accelerate in the next few years.
Still, it would seem that Red Hat at its present price is for the boldest of investors. Currently Red Hat's P/E ratio is 80, compared to 12 for Microsoft and 17 for Apple. Keep in mind that the revenue growth rate for 2011 may not be a good predictor of future growth rates.
Disclaimer: I do not hold a position in Red Hat, or any other company mentioned in this article, though I have in the past. I won't trade Red Hat for at least one week after the publication of this article.
For more detail on Q4 results, see my notes on the Red Hat Q4 fiscal 2012 analyst call.
Keep diversified!
Come Wednesday, when Red Hat reported its fiscal Q4 2012 results (for the quarter ending February 29) and held its analyst call, Red Hat GAAP net income came in at $36 million. Up 7.5% from Q4 2010, to be sure, but dwarfed by Microsoft's Q4 GAAP net income of $6.62 billion.
So Red Hat is still not the next Microsoft. Aside from that, the specialist in open source software is doing very well. Fiscal 2012 marked the first time Red Hat, and the first time a primarily open source software company, showed over $1 billion in annual revenue.
Revenue for the quarter was $297.0 million, up 2% sequentially from $290.0 million and up 21% from $244.8 million year-earlier.
GAAP net income was $36.0 million, down 6% sequentially from $38.2 million but up 7.5% from $33.5 million year-earlier. GAAP EPS (diluted earnings per share) were $0.18, down 5% sequentially from $0.19, but up 6% from $0.17 year-earlier. Non-GAAP net income was $57.2 million, for EPS of $0.29.
A 21% annual revenue ramp rate amounts to explosive growth in this slow-growth environment. Red Hat Enterprise Linux (RHEL) substantially reduces the cost of doing business and has proven itself for more than a decade it critical business environments. For enterprise data centers, switching to Red Hat is an easy decision to make. Along with Linux most companies are going to want RHEV for virtualization of servers and JBOSS middleware for applications.
Where Linux has not caught on is the corporate or home desktop. For practical purposes Red Hat no longer tries to compete in that space.
Note that net income and EPS did not ramp as quickly as revenue. Normally that might be a warning sign, but it is likely to reverse itself at a later point. Red Hat bought a storage software company last fall and has devoted a lot of R&D to getting the product ready and certified for sale. They are also in the midst of a rapid international expansion. There is a lag between setting up an office in a new nation and seeing significant revenues.
It is certainly possible that Red Hat has finally reached a tipping point where it will become the standard provider of operating systems for servers in datacenters and the cloud. In that scenario growth could even accelerate in the next few years.
Still, it would seem that Red Hat at its present price is for the boldest of investors. Currently Red Hat's P/E ratio is 80, compared to 12 for Microsoft and 17 for Apple. Keep in mind that the revenue growth rate for 2011 may not be a good predictor of future growth rates.
Disclaimer: I do not hold a position in Red Hat, or any other company mentioned in this article, though I have in the past. I won't trade Red Hat for at least one week after the publication of this article.
For more detail on Q4 results, see my notes on the Red Hat Q4 fiscal 2012 analyst call.
Keep diversified!
Monday, September 19, 2011
AMD at the Earnings Crossroads
AMD (Advanced Micro Devices) has only two competitors in its niche: Intel (INTC) for CPUs (computer processing chips) that run x86 software and NVIDIA (NVDA) for GPUs (graphics processing chips). How much market share it takes in the PC chip market, and what margins it receives on the chips it does sell, determines its levels of revenue and profit or loss.
Historically, while AMD has been innovative, it has come in a far second against Intel and NVIDIA. In the last two years it has lost ground to Intel and gained ground from NVIDIA. The picture has been complicated further by the emergence of ARM architecture based processors as the preferred basis for smaller mobile devices like smartphones and tablet computers.
After years of development (usually corresponding to quarterly earnings losses) this year AMD is selling chips that combine a CPU and a GPU. Intel, also, has appended graphics to its new line of CPUs, but their chips are remarkably inferior, incapable of running the current Windows graphics standard, DirectX 11. As a result AMD has been selling all the Fusion chips it has been able to make.
Why then, the lack of excitement and lack of upward momentum in AMD stock? Today AMD closed at $6.92, well off its 52-week high of $9.58 and with an astonishingly low P/E ratio of 6.4, the kind you would expect from a declining industry stock.
For the moment the most visible cutting edge technology is in smartphones and Apple and Android based small tablets. That pretty much sums up tech investor thinking about AMD: that a tidal wave of 7 inch screens are going to replace PCs, including both notebook computers and desktops that can run 60 inch displays.
Let's say you have discovered the limits of small screen computing and think there is still life left in the larger form factors. How should AMD be priced then?
First—even if the economy lags, even if consumers are careful with their holiday electronics purchases, even if the economies of India and China don't grow quite as fast in 2011 as they did in 2010—in Q3 and more so in Q4 AMD will get a significant boost in profits from its new Bulldozer CPUs for the server market. They began shipping in quantity earlier this month, with most of the early allotment going directly into the supercomputer market, where they will replace, or fill empty slots in, the prior generations of AMD Opteron processors. Profit margins are better for server chips than for PC chips. AMD has lost a lot of market share to Intel in server chips these last five years. The new chips should help regain market share. They have a different architecture than the Intel chips, and hence are very cost effective at certain workloads. Bulldozer is not a conquer-the-world chip, but it will keep AMD in the most profitable part of the server CPU game.
On the down side, there are so many rumors about yields (% of good processors on a die) being poor for the Fusion chips, that I think it is fair we can treat the rumors as true. At the next AMD analyst conference there should be a question about that. At the Q2 conference the closest answer we got was that margins were good on the Fusion chips. If both are true, and AMD was right about 2nd half margin improvements, then what we have is upside potential. Yields usually improve over time; if margins are already good, they should be great when yields improve. The problem was doubtless forging the CPU and GPU on the same die; traditionally these chip types used different silicon technologies. Bulldozer yields are rumored to be good, but then these server chips don't have a GPU component.
For now I would take Q3 guidance as a fair range. The economy might push revenues down, but yield improvements could push margins up. Guidance was for Q3 revenue to increase 8 to 12% sequentially. Note that because of holiday demand, Q3 is typically the strongest quarter for AMD.
The numbers, when reported, give us hard data, but the technology trends rule long-term value. I think AMD (and for that matter Intel) are over-discounted. I think both will be taking market share in the tablet market in 2012 and 2013. I think the PC market will stay healthier than most pundits predict. Consumers and businesses who skipped a desktop or notebook upgrade to buy a tablet and smartphone will get back on the upgrade cycle.
The combination of full-powered GPUs and CPUs on a single chip may be more revolutionary than the smartphone. Essentially, we are introducing desktop (or even notebook) parallel supercomputing. We are just beginning to see software applications that utilize either a CPU plus separate GPU or the new Fusion chips. So watch for companies like Microsoft, Adobe, and Autodesk, as well as lesser-known companies and startups, to take advantage of this new paradigm.
Disclosure: I am long AMD.
Historically, while AMD has been innovative, it has come in a far second against Intel and NVIDIA. In the last two years it has lost ground to Intel and gained ground from NVIDIA. The picture has been complicated further by the emergence of ARM architecture based processors as the preferred basis for smaller mobile devices like smartphones and tablet computers.
After years of development (usually corresponding to quarterly earnings losses) this year AMD is selling chips that combine a CPU and a GPU. Intel, also, has appended graphics to its new line of CPUs, but their chips are remarkably inferior, incapable of running the current Windows graphics standard, DirectX 11. As a result AMD has been selling all the Fusion chips it has been able to make.
Why then, the lack of excitement and lack of upward momentum in AMD stock? Today AMD closed at $6.92, well off its 52-week high of $9.58 and with an astonishingly low P/E ratio of 6.4, the kind you would expect from a declining industry stock.
For the moment the most visible cutting edge technology is in smartphones and Apple and Android based small tablets. That pretty much sums up tech investor thinking about AMD: that a tidal wave of 7 inch screens are going to replace PCs, including both notebook computers and desktops that can run 60 inch displays.
Let's say you have discovered the limits of small screen computing and think there is still life left in the larger form factors. How should AMD be priced then?
First—even if the economy lags, even if consumers are careful with their holiday electronics purchases, even if the economies of India and China don't grow quite as fast in 2011 as they did in 2010—in Q3 and more so in Q4 AMD will get a significant boost in profits from its new Bulldozer CPUs for the server market. They began shipping in quantity earlier this month, with most of the early allotment going directly into the supercomputer market, where they will replace, or fill empty slots in, the prior generations of AMD Opteron processors. Profit margins are better for server chips than for PC chips. AMD has lost a lot of market share to Intel in server chips these last five years. The new chips should help regain market share. They have a different architecture than the Intel chips, and hence are very cost effective at certain workloads. Bulldozer is not a conquer-the-world chip, but it will keep AMD in the most profitable part of the server CPU game.
On the down side, there are so many rumors about yields (% of good processors on a die) being poor for the Fusion chips, that I think it is fair we can treat the rumors as true. At the next AMD analyst conference there should be a question about that. At the Q2 conference the closest answer we got was that margins were good on the Fusion chips. If both are true, and AMD was right about 2nd half margin improvements, then what we have is upside potential. Yields usually improve over time; if margins are already good, they should be great when yields improve. The problem was doubtless forging the CPU and GPU on the same die; traditionally these chip types used different silicon technologies. Bulldozer yields are rumored to be good, but then these server chips don't have a GPU component.
For now I would take Q3 guidance as a fair range. The economy might push revenues down, but yield improvements could push margins up. Guidance was for Q3 revenue to increase 8 to 12% sequentially. Note that because of holiday demand, Q3 is typically the strongest quarter for AMD.
The numbers, when reported, give us hard data, but the technology trends rule long-term value. I think AMD (and for that matter Intel) are over-discounted. I think both will be taking market share in the tablet market in 2012 and 2013. I think the PC market will stay healthier than most pundits predict. Consumers and businesses who skipped a desktop or notebook upgrade to buy a tablet and smartphone will get back on the upgrade cycle.
The combination of full-powered GPUs and CPUs on a single chip may be more revolutionary than the smartphone. Essentially, we are introducing desktop (or even notebook) parallel supercomputing. We are just beginning to see software applications that utilize either a CPU plus separate GPU or the new Fusion chips. So watch for companies like Microsoft, Adobe, and Autodesk, as well as lesser-known companies and startups, to take advantage of this new paradigm.
Disclosure: I am long AMD.
Tuesday, September 6, 2011
HP, Dead or Just Resting?
HP, as the Hewlett Packard Company likes to be known, (NYSE: HPQ), is on its last legs, if you judge it by its stock price. It is selling for less than six times earnings. It has become a symbol of technological failure lately, mainly because of the failure of its tablet computer offering and its lack of presence in the smartphone market. Also, it announced it wanted to sell or spin off its personal computer (PC) business, but apparently no one with that kind of bucks wants to buy the division.
But suppose the pundits and investors arranging for a funeral are reading the symptoms wrong. In that case it possible this is a buying opportunity for those who get an accurate view of the situation. After all, a PE under 6 means trailing earnings are about 17% of the stock price. That strikes me, on the surface, as a much better deal than 2% annual returns on risky long term loans to the United States government.
The most solid evidence that things are not so bad are actual GAAP results from fiscal Q3 2011, as reported on August 18, 2011. True, revenue was up only 1% y/y, and while GAAP net earnings were $1.9 billion, up 9% y/y, non-GAAP net earnings were $2.3 billion, down 11.4% y/y.
A company with $1.9 billion in GAAP earnings in a quarter is not on death's doorstep. So the low stock price must be based on opinions about something more fundamental than mere profits: technology trends.
I have been around long enough to see a lot of companies go out of business, especially in the PC space. I know it can happen. Margins are brutal when differentiation from competitors is difficult. That is why IBM turned over its PC business to Lenovo. On the other hand, Lenovo has done quite well since then, so maybe IBM's strategy was not so brilliant.
The main theory is that tablets and smartphones are going to eat PCs, just like PCs ate up minicomputers back in the 1980s. To buy that argument you have to include servers in the PC category, because what PCs ate up was dumb terminals. Servers, based on technology similar to PCs, are what actually killed minicomputers.
Digging deep into history, recall that PDAs were going to replace PCs. Instead MP3 players replaced PDAs, because more people wanted to listen to music than wanted to carry around a tiny crippled business tool. HP was a leader in PDAs, and a failure in MP3 players, yet it did not die from the experience.
HP has several segments; the future does not look the same for each segment. The printer segment does not seem to be disappearing. The business hardware segment, excluding PCs, includes servers, enterprise-level storage, and other datacenter components like switches, routers, and the software needed to enable and manage racks of equipment. Because people are increasingly relying on mobile information, these datacenters, aka the cloud, continue to expand. Competition with IBM, Dell, Cisco, Oracle and many other companies is fierce, but so far HP has competed rather well. Services for enterprise computing are also a major source of revenue and profit.
So if the consumer PC division is seen as a weakness, the worst case scenario should be that it gets spun off. Stockholders get the enterprise and printer gravy in one tray and the consumer business in another.
If HP is making a mistake, it is not seeing the further possibilities of the PC business (with PC broadly defined). Every few years since the PC was born it has been declared to have all the computational power it needs. I have made that mistake myself. These days the new AMD A-series chips can run a pretty good game without the need for a discrete graphics card. They can put HD video on a big screen. The end of innovation must be near, except for smartphones. And tablets.
If you think PC innovation is coming to an end, you have not talked to the visionaries at Microsoft, or AMD, or even at Intel. Amazing things are just beginning to be computationally possible. A good example is the Kinect device for Xbox 360 games. There is no reason similar technology can't be attached to PCs running 60 inch displays. In fact, hackers are doing that already, with Microsoft even offering a software development kit (SDK) to help.
Yes, you will be able to wave your hand in the air, talk a bit, and do everything from altering an accounting spreadsheet to running a tractor to manipulating DNA from the comfort of your chair.
You are going to want the latest smartphone when you are on the road. But in your den or office, you are going to want a PC with a big screen, input devices more intuitive than touchscreens, and a hairy advanced processing unit to make it all work in real time.
If Leo Apotheker is too dull to see the potential of HP's PC division, it is still going to be profitable for the foreseeable future, even if it is just a commodity manufacturer of innovation spun elsewhere. A spin off suits me fine. Wish I would run it, wish I could own it. In addition I would get shares of the enterprise segment, a gold mine in itself.
Wait, I can own a piece of it. That is the great thing about stocks, you don't have to buy the whole company all at once.
Disclaimer: As I write this I own no HPQ, but it is on my wish list to buy. I do own AMD stock. I do occasional subcontracted work for Microsoft. I also own stock an HP competitor, SGI, that specializes in technical computing.
But suppose the pundits and investors arranging for a funeral are reading the symptoms wrong. In that case it possible this is a buying opportunity for those who get an accurate view of the situation. After all, a PE under 6 means trailing earnings are about 17% of the stock price. That strikes me, on the surface, as a much better deal than 2% annual returns on risky long term loans to the United States government.
The most solid evidence that things are not so bad are actual GAAP results from fiscal Q3 2011, as reported on August 18, 2011. True, revenue was up only 1% y/y, and while GAAP net earnings were $1.9 billion, up 9% y/y, non-GAAP net earnings were $2.3 billion, down 11.4% y/y.
A company with $1.9 billion in GAAP earnings in a quarter is not on death's doorstep. So the low stock price must be based on opinions about something more fundamental than mere profits: technology trends.
I have been around long enough to see a lot of companies go out of business, especially in the PC space. I know it can happen. Margins are brutal when differentiation from competitors is difficult. That is why IBM turned over its PC business to Lenovo. On the other hand, Lenovo has done quite well since then, so maybe IBM's strategy was not so brilliant.
The main theory is that tablets and smartphones are going to eat PCs, just like PCs ate up minicomputers back in the 1980s. To buy that argument you have to include servers in the PC category, because what PCs ate up was dumb terminals. Servers, based on technology similar to PCs, are what actually killed minicomputers.
Digging deep into history, recall that PDAs were going to replace PCs. Instead MP3 players replaced PDAs, because more people wanted to listen to music than wanted to carry around a tiny crippled business tool. HP was a leader in PDAs, and a failure in MP3 players, yet it did not die from the experience.
HP has several segments; the future does not look the same for each segment. The printer segment does not seem to be disappearing. The business hardware segment, excluding PCs, includes servers, enterprise-level storage, and other datacenter components like switches, routers, and the software needed to enable and manage racks of equipment. Because people are increasingly relying on mobile information, these datacenters, aka the cloud, continue to expand. Competition with IBM, Dell, Cisco, Oracle and many other companies is fierce, but so far HP has competed rather well. Services for enterprise computing are also a major source of revenue and profit.
So if the consumer PC division is seen as a weakness, the worst case scenario should be that it gets spun off. Stockholders get the enterprise and printer gravy in one tray and the consumer business in another.
If HP is making a mistake, it is not seeing the further possibilities of the PC business (with PC broadly defined). Every few years since the PC was born it has been declared to have all the computational power it needs. I have made that mistake myself. These days the new AMD A-series chips can run a pretty good game without the need for a discrete graphics card. They can put HD video on a big screen. The end of innovation must be near, except for smartphones. And tablets.
If you think PC innovation is coming to an end, you have not talked to the visionaries at Microsoft, or AMD, or even at Intel. Amazing things are just beginning to be computationally possible. A good example is the Kinect device for Xbox 360 games. There is no reason similar technology can't be attached to PCs running 60 inch displays. In fact, hackers are doing that already, with Microsoft even offering a software development kit (SDK) to help.
Yes, you will be able to wave your hand in the air, talk a bit, and do everything from altering an accounting spreadsheet to running a tractor to manipulating DNA from the comfort of your chair.
You are going to want the latest smartphone when you are on the road. But in your den or office, you are going to want a PC with a big screen, input devices more intuitive than touchscreens, and a hairy advanced processing unit to make it all work in real time.
If Leo Apotheker is too dull to see the potential of HP's PC division, it is still going to be profitable for the foreseeable future, even if it is just a commodity manufacturer of innovation spun elsewhere. A spin off suits me fine. Wish I would run it, wish I could own it. In addition I would get shares of the enterprise segment, a gold mine in itself.
Wait, I can own a piece of it. That is the great thing about stocks, you don't have to buy the whole company all at once.
Disclaimer: As I write this I own no HPQ, but it is on my wish list to buy. I do own AMD stock. I do occasional subcontracted work for Microsoft. I also own stock an HP competitor, SGI, that specializes in technical computing.
Monday, August 22, 2011
SGI Sees Revenue Growth in 2012
Silicon Graphics International (SGI) sells data processing systems with a focus on technical computing. Their high-end systems are used to solve some of the toughest computational problems encountered by government and industry. They also provide datacenter equipment for cloud computing to companies like Amazon.
The new SGI is basically a combination of the old Rackable Systems, which specialized in datacenter server systems, and the old, bankrupt SGI, which specialized in high-performance science computing. I had my doubts when the two companies merged, but the new company turned out to be better at executing than either of the old companies.
The transformation of SGI is about technology, sales, and profit margins. In last Thursday's report on fiscal Q4 2011 (ending June 24) we saw record revenues for the typically slow Q4. Revenues were $195.5 million, up 36% sequentially from $143.7 million and up 92% from $101.6 million year-earlier. While GAAP net income was negative $12.1 million, non-GAAP net income was $3.9 million. Of course I would prefer to see GAAP net income in the black too. In this case the difference is largely due to non-cash operating expenses, restructuring, and software revenue recognition rules (because the computer systems have software bundled with the hardware). As a check on the merits of GAAP vs. non-GAAP, the cash balance was up $9.4 million in the quarter.
SGI is debt-free and had a cash and equivalents balance of $143 million at quarter's end. They can fund a strong R&D effort and could make acquisitions if needed.
The new Altix UV supercomputer line has no real direct competitors. It has a memory and processor model that make it very attractive to high-end technical users. Because of that profit margins are good. The rackable systems for server farms and cloud computing continue to offer innovative designs, but margins have been improved there as well.
The company is now truly international, which is important when your key products are supercomputers. Service revenue is also a key factor in the new, profitable business model.
In response to questions from analysts management went into some detail, and speculation, about technologies they are developing. They are working with Microsoft to expand the capabilities of SQL Server. They believe that for certain types of computing they will be able to deliver performance equivalent to Oracle's Exadata systems at about one-third of Oracle's current price. Considering how successful Exadata has been, both in terms of compute ability and revenue generation, that could be highly significant in 2012.
Analysts also speculated that with budgets thin, SGI might have difficulty selling its computers to government agencies. However, SGI has little or no exposure to state and local governments in the U.S. Federal agencies still seem eager to decrease their other costs by upgrading their compute capabilities. For industry, the total cost of the design process is decreased by buying more computational power.
While not giving guidance by quarter, for fiscal year 2012 (running to June 2012) revenue is expected between $740 and $780 million, up to 24% over fiscal 2011.GAAP EPS is estimated between $0.15 and $0.30. Non-GAAP EPS expected between $0.60 and $0.80.
For more details on quarter results, see my SGI Q4 fiscal 2011 analyst call summary.
Disclaimer: I am long SGI.
The usual risks apply, so keep diversified.
See also: http://www.sgi.com/
The new SGI is basically a combination of the old Rackable Systems, which specialized in datacenter server systems, and the old, bankrupt SGI, which specialized in high-performance science computing. I had my doubts when the two companies merged, but the new company turned out to be better at executing than either of the old companies.
The transformation of SGI is about technology, sales, and profit margins. In last Thursday's report on fiscal Q4 2011 (ending June 24) we saw record revenues for the typically slow Q4. Revenues were $195.5 million, up 36% sequentially from $143.7 million and up 92% from $101.6 million year-earlier. While GAAP net income was negative $12.1 million, non-GAAP net income was $3.9 million. Of course I would prefer to see GAAP net income in the black too. In this case the difference is largely due to non-cash operating expenses, restructuring, and software revenue recognition rules (because the computer systems have software bundled with the hardware). As a check on the merits of GAAP vs. non-GAAP, the cash balance was up $9.4 million in the quarter.
SGI is debt-free and had a cash and equivalents balance of $143 million at quarter's end. They can fund a strong R&D effort and could make acquisitions if needed.
The new Altix UV supercomputer line has no real direct competitors. It has a memory and processor model that make it very attractive to high-end technical users. Because of that profit margins are good. The rackable systems for server farms and cloud computing continue to offer innovative designs, but margins have been improved there as well.
The company is now truly international, which is important when your key products are supercomputers. Service revenue is also a key factor in the new, profitable business model.
In response to questions from analysts management went into some detail, and speculation, about technologies they are developing. They are working with Microsoft to expand the capabilities of SQL Server. They believe that for certain types of computing they will be able to deliver performance equivalent to Oracle's Exadata systems at about one-third of Oracle's current price. Considering how successful Exadata has been, both in terms of compute ability and revenue generation, that could be highly significant in 2012.
Analysts also speculated that with budgets thin, SGI might have difficulty selling its computers to government agencies. However, SGI has little or no exposure to state and local governments in the U.S. Federal agencies still seem eager to decrease their other costs by upgrading their compute capabilities. For industry, the total cost of the design process is decreased by buying more computational power.
While not giving guidance by quarter, for fiscal year 2012 (running to June 2012) revenue is expected between $740 and $780 million, up to 24% over fiscal 2011.GAAP EPS is estimated between $0.15 and $0.30. Non-GAAP EPS expected between $0.60 and $0.80.
For more details on quarter results, see my SGI Q4 fiscal 2011 analyst call summary.
Disclaimer: I am long SGI.
The usual risks apply, so keep diversified.
See also: http://www.sgi.com/
Sunday, June 27, 2010
Software Industry Gains in Second Quarter 2010
I follow three software companies that reported quarter results last week: Adobe (ADBE), Red Hat (RHT), and Oracle (ORCL). All of them showed sequential and year/year increases in revenues and profits. While there may be exceptions, it is fair to conclude that businesses are back to upgrading or even buying new software now that the worst of the business panic of 2009 is behind us. [I don't currently own any of these three companies, but I have owned Red Hat in the past and I do some freelance work for a competitor, Microsoft.]
Red Hat, the open source provider of enterprise ready Linux and JBoss middleware, had revenues $209.1 million for the fiscal quarter ending May 31, 2010. That is up 7% sequentially and 20% y/y. For details see my Red Hat Q1 fiscal 2011 Analyst Conference Summary or RedHat.com.
Adobe is known for its content creation programs like Acrobat, now mostly wrapped up in its Creative Suite. Its revenues for the quarter ending June 4, 2010 were $943.0 million, up 10% sequentially and up 34% year/year. For details see my Adobe Q2 Fiscal 2010 Analyst Conference Summary or Adobe.com.
Oracle, the enterprise database and data resource management company had revenues of $9.51 billion in its fourth fiscal quarter 2010 ending May 31. That is up 49% sequentially and up 39% from year-earlier. However, some of that increase is from the acquisition of Sun, which is largely a hardware company. So Oracle is no longer a pure software play, but is more like IBM. For details see my Oracle Q4 Fiscal 2010 Analyst Conference Summary or Oracle.com.
Red Hat is probably taking market share from Microsoft, but the market is expanding so fast this should have little effect on Microsoft revenues. Oracle execs claimed to be taking market share from IBM and SAP. Much of Oracle's gain came from the release of Creative Suite 5 during the quarter. Many companies skipped Creative Suite 4, which came out during the recession. A lot has changed in content creation in the last four years, so version 5 will probably be seen as a necessity by most designers.
All of these companies are trading for spectacularly low P/E ratios compared to past technology bull markets. Investors are skeptical after being burned by technology stocks in 2001 and then by almost everything in 2008. I would say the best way to restore confidence is to give profits back to investors in the form of dividends. Every one of these companies could pay an attractive dividend and still earn plenty of cash for operations.
Red Hat, the open source provider of enterprise ready Linux and JBoss middleware, had revenues $209.1 million for the fiscal quarter ending May 31, 2010. That is up 7% sequentially and 20% y/y. For details see my Red Hat Q1 fiscal 2011 Analyst Conference Summary or RedHat.com.
Adobe is known for its content creation programs like Acrobat, now mostly wrapped up in its Creative Suite. Its revenues for the quarter ending June 4, 2010 were $943.0 million, up 10% sequentially and up 34% year/year. For details see my Adobe Q2 Fiscal 2010 Analyst Conference Summary or Adobe.com.
Oracle, the enterprise database and data resource management company had revenues of $9.51 billion in its fourth fiscal quarter 2010 ending May 31. That is up 49% sequentially and up 39% from year-earlier. However, some of that increase is from the acquisition of Sun, which is largely a hardware company. So Oracle is no longer a pure software play, but is more like IBM. For details see my Oracle Q4 Fiscal 2010 Analyst Conference Summary or Oracle.com.
Red Hat is probably taking market share from Microsoft, but the market is expanding so fast this should have little effect on Microsoft revenues. Oracle execs claimed to be taking market share from IBM and SAP. Much of Oracle's gain came from the release of Creative Suite 5 during the quarter. Many companies skipped Creative Suite 4, which came out during the recession. A lot has changed in content creation in the last four years, so version 5 will probably be seen as a necessity by most designers.
All of these companies are trading for spectacularly low P/E ratios compared to past technology bull markets. Investors are skeptical after being burned by technology stocks in 2001 and then by almost everything in 2008. I would say the best way to restore confidence is to give profits back to investors in the form of dividends. Every one of these companies could pay an attractive dividend and still earn plenty of cash for operations.
Tuesday, March 30, 2010
Oracle, Databases, Verticals and Business Intelligence
Oracle (ORCL) reported on its third fiscals quarter ending February 28, 2010 last Thursday. Along with other technology companies with fiscal calendars and some guidance changes, all indications are that the quarter ending December 31, 2009 was not an anomaly for the industry. Both consumers and businesses are resuming their purchases of hardware and software. While some areas of the world are now lagging, particularly Europe, on the whole the increase in demand is broad based. The release an adoption of Microsoft Windows 7 as well as new PC CPUs from Intel and AMD is making the refresh cycle attractive for servers, desktops, and laptops. The high-end cell phone craze is just adding to the rally. With some exceptions, technology stocks are undervalued, but probably will remain in that state until more money comes out of bonds and into stocks.
I'd buy Oracle right now for myself if I had a larger portfolio and wanted another relatively large cap stock. I believe Oracle is going to continue to eat SAP's and IBM's lunch, and probably steal some of Microsoft's afternoon snack as well. Now that Sun has been swallowed by the great white whale, or shark, companies that make high-end database server hardware need to fear Oracle as well. In Thursday's analyst conference Oracle management explained that they are already tearing out the unprofitable parts of Sun, like commodity hardware, and focusing on ramping the profitable parts. Sun has impressive hardware; combining it with Oracle's databases and other enterprise software application packages is going to allow companies to get bundles of value for their most demanding applications like transaction management. The Oracle hardware system for this is called Exadata, and it may prove to be a giant killer. Coming soon is the integration of Oracles software packages in Fusion, with will have built-in, across the board Business Intelligence (BI).
Microsoft, of course, is a far more diverse company than Oracle. It has a gravy train in its Windows operating system that is still under no real threat from Linux. Its database system for businesses, SQL Server, is competitive at every level from the home office to the enterprise. But at the enterprise level, SQL Server's main advantage is ease of use and integration into the legion of Windows PCs on corporate networks. For truly big enterprises, Oracle has two major advantages apart from its database's quality. Oracle is able to target verticals, which are industry segments like oil, financial services, and biotechnology, in a way Microsoft cannot. It also has a broader and probably better set of applications that are enterprise-specific such as ERP (enterprise resource planning). Oracle does not need to compete with Microsoft Office, and Office is just not that big of an edge when an enterprise is looking at something like a transactional database to deal with Internet content provision and commerce.
See also my Oracle analyst conference summary for fiscal Q3 2010 and www.oracle.com
As I write, according to Nasdaq, Oracle stock is trading for $25.36 cents, giving it a (non-GAAP) P/E of 16.6 and a forward P/E of 13.6. Which equates to annual earnings on investment of 6% and 7.35%. Which, however well it compares to other technology stocks, is way, way better than being in bonds, which are particularly unsafe now since any increase in interest rates will cause the sale value of past-issued bonds to fall.
But do Keep Diversified!
I'd buy Oracle right now for myself if I had a larger portfolio and wanted another relatively large cap stock. I believe Oracle is going to continue to eat SAP's and IBM's lunch, and probably steal some of Microsoft's afternoon snack as well. Now that Sun has been swallowed by the great white whale, or shark, companies that make high-end database server hardware need to fear Oracle as well. In Thursday's analyst conference Oracle management explained that they are already tearing out the unprofitable parts of Sun, like commodity hardware, and focusing on ramping the profitable parts. Sun has impressive hardware; combining it with Oracle's databases and other enterprise software application packages is going to allow companies to get bundles of value for their most demanding applications like transaction management. The Oracle hardware system for this is called Exadata, and it may prove to be a giant killer. Coming soon is the integration of Oracles software packages in Fusion, with will have built-in, across the board Business Intelligence (BI).
Microsoft, of course, is a far more diverse company than Oracle. It has a gravy train in its Windows operating system that is still under no real threat from Linux. Its database system for businesses, SQL Server, is competitive at every level from the home office to the enterprise. But at the enterprise level, SQL Server's main advantage is ease of use and integration into the legion of Windows PCs on corporate networks. For truly big enterprises, Oracle has two major advantages apart from its database's quality. Oracle is able to target verticals, which are industry segments like oil, financial services, and biotechnology, in a way Microsoft cannot. It also has a broader and probably better set of applications that are enterprise-specific such as ERP (enterprise resource planning). Oracle does not need to compete with Microsoft Office, and Office is just not that big of an edge when an enterprise is looking at something like a transactional database to deal with Internet content provision and commerce.
See also my Oracle analyst conference summary for fiscal Q3 2010 and www.oracle.com
As I write, according to Nasdaq, Oracle stock is trading for $25.36 cents, giving it a (non-GAAP) P/E of 16.6 and a forward P/E of 13.6. Which equates to annual earnings on investment of 6% and 7.35%. Which, however well it compares to other technology stocks, is way, way better than being in bonds, which are particularly unsafe now since any increase in interest rates will cause the sale value of past-issued bonds to fall.
But do Keep Diversified!
Saturday, March 28, 2009
Red Hat (RHT) Runs Through Open Field
Red Hat (RHT) is my favorite company to watch because of all the stocks I know its history most clearly demonstrates the need to differentiate between the stock value and the finances of the underlying company. I became interested in Red Hat in the last years of the last century. I am now invested in the company, so you might want to take that into account in case I fall into the cheerleading for my own stocks trap.
Investors often talk of overvalued and undervalued company stocks. Typically one looks at the market capitalization of the company: the value of the stock shares times the number of the shares. This gives a total value for the company. Then one looks at the "true" criteria, which typically is some measure of future profits the company can generate, times some multiplier of how much capital it would typically take to generate those profits. If the market capitalization is higher than the "true" value, the company is overvalued.
Red Hat was one of many companies billed by Wall Street as a "next Microsoft" during the technology boom of the 1990's. Given that Red Hat was already establishing leadership in commercializing the Linux operating system, this was not an altogether dismissible line of reasoning. After all, the Microsoft empire was built around its original operating system, MS-DOS, which later evolved into Windows. The problem was that the stock was bid up to prices implying that being the next Microsoft was a done deal.
Several easily discernable obstacles stood in the way of Red Hat becoming the new Lord of the Computerverse. First, it really did not have very many paying clients in the year 2000. Second, Linux is Open Source, and can be had for free, which really cuts into profit margins compared to a proprietary system like Windows. Third, there was a lot of competition within the Linux space for the few commercial dollars available to it.
Red Hat stock took a big plunge in 2002. In retrospect, that was the time to buy. The stock was almost free. Investors did not want it. Partly they finally understood the three points I made above, but mostly investors don't like to buy stocks that are falling in price.
This week, on March 25th, Red Hat reported on its fourth quarter of fiscal 2009 that ended on February 28. Red Hat is still not the next Microsoft. But it is a highly profitable company with a secure niche in the computing space. Red Hat Enterprise Linux (RHEL) is the gold standard for Linux. Other closely related open source spaces are now attached to it, notably virtualization software and JBoss middleware. In addition, Red Hat has a huge cash reserve. Its profits on a cash basis are typically far above its profits on a GAAP basis.
It is a good company, and its earnings per share are a lot higher than what you can get on T-Bills right now. So it is not too late to buy in. But it is not the next Microsoft. Open Source people just don't bring the predatory hunger to the table that Bill Gates and crew had in their first couple of decades. Red Hat will continue to grow because it enhances the business goals of its customers. It will run profitably, but it won't be able to create the kind of monopoly profits Microsoft has been able to create.
I expect that as soon as IT budgets loosen up again, a lot of enterprises are going to make the shift to Red Hat products. But how big of an income and profit bump that will provide is not easy to predict.
So keep diversified.
And see my Red Hat Q4 fiscal 2009 analyst conference summary for details on the latest quarter.
Investors often talk of overvalued and undervalued company stocks. Typically one looks at the market capitalization of the company: the value of the stock shares times the number of the shares. This gives a total value for the company. Then one looks at the "true" criteria, which typically is some measure of future profits the company can generate, times some multiplier of how much capital it would typically take to generate those profits. If the market capitalization is higher than the "true" value, the company is overvalued.
Red Hat was one of many companies billed by Wall Street as a "next Microsoft" during the technology boom of the 1990's. Given that Red Hat was already establishing leadership in commercializing the Linux operating system, this was not an altogether dismissible line of reasoning. After all, the Microsoft empire was built around its original operating system, MS-DOS, which later evolved into Windows. The problem was that the stock was bid up to prices implying that being the next Microsoft was a done deal.
Several easily discernable obstacles stood in the way of Red Hat becoming the new Lord of the Computerverse. First, it really did not have very many paying clients in the year 2000. Second, Linux is Open Source, and can be had for free, which really cuts into profit margins compared to a proprietary system like Windows. Third, there was a lot of competition within the Linux space for the few commercial dollars available to it.
Red Hat stock took a big plunge in 2002. In retrospect, that was the time to buy. The stock was almost free. Investors did not want it. Partly they finally understood the three points I made above, but mostly investors don't like to buy stocks that are falling in price.
This week, on March 25th, Red Hat reported on its fourth quarter of fiscal 2009 that ended on February 28. Red Hat is still not the next Microsoft. But it is a highly profitable company with a secure niche in the computing space. Red Hat Enterprise Linux (RHEL) is the gold standard for Linux. Other closely related open source spaces are now attached to it, notably virtualization software and JBoss middleware. In addition, Red Hat has a huge cash reserve. Its profits on a cash basis are typically far above its profits on a GAAP basis.
It is a good company, and its earnings per share are a lot higher than what you can get on T-Bills right now. So it is not too late to buy in. But it is not the next Microsoft. Open Source people just don't bring the predatory hunger to the table that Bill Gates and crew had in their first couple of decades. Red Hat will continue to grow because it enhances the business goals of its customers. It will run profitably, but it won't be able to create the kind of monopoly profits Microsoft has been able to create.
I expect that as soon as IT budgets loosen up again, a lot of enterprises are going to make the shift to Red Hat products. But how big of an income and profit bump that will provide is not easy to predict.
So keep diversified.
And see my Red Hat Q4 fiscal 2009 analyst conference summary for details on the latest quarter.
Wednesday, December 31, 2008
Red Hat (RHT) Thrives During Recession
Red Hat (RHT), the open source Linux and middleware company, reported a very good quarter (3rd fiscal quarter ending November 30, 2008) on December 22, 2008. I've written extensively on Red Hat (See my Red Hat page) as a company whose time has come. With a 22% revenue increase since the similar quarter last year, it is doing what many other technology companies said they would do during a recession.
The basic tech stock pitch from management in 2008 was "My company's products offer a high return on investment, so if anything a recession will increase our sales as our customers seek to cut costs." As 2008 progressed more and more companies that took this line saw their sales slow or even go into reverse.
Red Hat has a solid base of subscribers who use its Red Hat Enterprise Linux (RHEL). It now has a strong middleware offering in JBoss. It costs a lot less to run a server farm on RHEL than on UNIX or Windows Server operating systems. Not every enterprise is in a position to switch every day, but every year since the 2001 tech crash Red Hat has gained substantial ground. Early investors in Red Hat, including those who bought at IPO prices, got burned, but buying at 2003 or later prices has worked out well for investors.
Guidance for fiscal Q4 ending February 28, 2009 is for only a slight increase in revenue. Fortunately Red Hat is already profitable on a GAAP, non-GAAP, and cash flow basis at this level. Management seems to understand that being a value proposition company, they should keep their own expenses down. General and administrative expense for the quarter was $24.8 million, or 15% of revenues of $165.3 million. R&D expense, while substantial, is somewhat alleviated by the open source nature of the Linux project.
Red Hat offers products that are of proprietary quality (some would argue they are better than products from companies like Microsoft, Oracle, and SAS) at prices that are substantially lower than their rivals. I know, because I have experienced, the foot-dragging nature of institutional technological change. When all you know is Windows, and you have paid for a lot of proprietary software or programming to work with it, switching to Linux is daunting. There are some advantages to Windows programming; Microsoft Visual Studio makes application-level programming relatively easy. But at the enterprise level paying for Windows licenses can really add up. So I see no reason for Red Hat not to continue to get traction in the enterprise market.
A new area for Red Hat is the MRG platform, which has already begun to sell. MRG ("merge") integrates real time, messaging, and grid technologies. Red Hat claims it can run enterprise level computing 100 times faster (though they don't say than what).
For more on Red Hat's Q3 see my summary of the 12/22/2008 Red Hat Analyst Conference.
See also:
www.redhat.com
open source software
The basic tech stock pitch from management in 2008 was "My company's products offer a high return on investment, so if anything a recession will increase our sales as our customers seek to cut costs." As 2008 progressed more and more companies that took this line saw their sales slow or even go into reverse.
Red Hat has a solid base of subscribers who use its Red Hat Enterprise Linux (RHEL). It now has a strong middleware offering in JBoss. It costs a lot less to run a server farm on RHEL than on UNIX or Windows Server operating systems. Not every enterprise is in a position to switch every day, but every year since the 2001 tech crash Red Hat has gained substantial ground. Early investors in Red Hat, including those who bought at IPO prices, got burned, but buying at 2003 or later prices has worked out well for investors.
Guidance for fiscal Q4 ending February 28, 2009 is for only a slight increase in revenue. Fortunately Red Hat is already profitable on a GAAP, non-GAAP, and cash flow basis at this level. Management seems to understand that being a value proposition company, they should keep their own expenses down. General and administrative expense for the quarter was $24.8 million, or 15% of revenues of $165.3 million. R&D expense, while substantial, is somewhat alleviated by the open source nature of the Linux project.
Red Hat offers products that are of proprietary quality (some would argue they are better than products from companies like Microsoft, Oracle, and SAS) at prices that are substantially lower than their rivals. I know, because I have experienced, the foot-dragging nature of institutional technological change. When all you know is Windows, and you have paid for a lot of proprietary software or programming to work with it, switching to Linux is daunting. There are some advantages to Windows programming; Microsoft Visual Studio makes application-level programming relatively easy. But at the enterprise level paying for Windows licenses can really add up. So I see no reason for Red Hat not to continue to get traction in the enterprise market.
A new area for Red Hat is the MRG platform, which has already begun to sell. MRG ("merge") integrates real time, messaging, and grid technologies. Red Hat claims it can run enterprise level computing 100 times faster (though they don't say than what).
For more on Red Hat's Q3 see my summary of the 12/22/2008 Red Hat Analyst Conference.
See also:
www.redhat.com
open source software
Tuesday, December 9, 2008
Novell and Microsoft: Risk Assessment
Open source advocates are unhappy with Novell because of its relationship with Microsoft regarding Linux licenses. Investors in Novell (NOVL) are not terribly happy with its track record these last few years, but the Microsoft relationship is seen as a plus. Should it be?
You can get a good picture of where Novell is financially from my summary of the Novell analyst conference of December 4, 2008. Let's say Novell tends to lose traction here while gaining traction there.
A couple of years ago Novell was a cash play. They had a lot of cash, but were losing money each quarter. Now the bulk of the cash is gone (the one billion that remains is healthy, but not enough to do cash buy backs safely in this climate). So investors need to look at the underlying business.
It isn't that Novell has not been trying hard, even undergoing a fundamental market transformation. The question is, was it the right transformation?
Novell used to be a specialist in local area network (LAN) software. But that was the sort of thing that Microsoft (and Apple, and Linux) could provide as part of the operating system. Novell, of course, featured up their offerings, but the decline in marketability was clear a decade ago and they never really did much about it until maybe 2005 or so.
Novell sold proprietary software, but I guess they could not find a proprietary area where they thought they could compete (or make an acquisition that made financial sense). So they dove into open source software, including Linux itself. Everyone admits their SUSE Linux is good. Novell's clients were happy with it, but the pricing is a problem. Open source software just can't be priced like proprietary software. Red Hat has proven that you can make money selling support expertise on Linux, but it took them over a decade to get to where they are now. There are a lot of Linux versions out there. When you go with a particular brand of Linux you are basically chosing how much support you are going to get.
Microsoft wants its customers who have mixed systems - Linux and Windows - to use Novell SUSE Linux. That makes life easier for Microsoft to support its customers. It also undercuts Red Hat, which is the greatest threat the Microsoft's lofty operating system profits.
Maybe Novell would like to be independent of Microsoft (see my Microsoft Analyst Conferences page), maybe they have some plan for weaning themselves away in the future. At present a big chunk of their revenues come from Microsoft. Three things could jeapardize this. Microsoft could release its own Linux - that would not be a big deal for Microsoft, though it would certainly raise some questions in the Linux community. Or Microsoft could switch partners. Or Microsoft could face a customer rebellion - we'll chose our Linux without your help, thank you.
In any of these scenarios Novell would be off on its own again as far as picking up Linux customers. Not a cheery thought.
Even so, the revenues that were booked for its Open Solutions segment were a mere $36 million in the quarter, of which $33 million was for Linux.
Workgroup revenue, which is the legacy business, was still the main money maker at $92 million for the quarter, down 6% from year-earlier. There are two other segments, Identity and Security Management with revenues of $37 million, and Systems and Resource Management, with revenues of $45 million. Service revenue was $34.6 million.
On the optimistic side, the variety of products is a safety feature, and only the Workgroup and Service segments had declining revenues. The acquisitions of Platespin and Managed Objects should help Novell keep close to the cutting edge in 2009.
I would like to see Novell do well, and am tempted to buy the stock at this price. But after watching it for years, I am not enthusiastic. Without the Microsoft deal Novell would have looked pathetic this last year and would not be a serious Linux contender. With the Microsoft deal, it looks pretty good, but with the dangers I stated above.
Which reminds me to keep diversified.
More data:
My Novell analyst conference summaries page
www.novell.com
I own some Red Hat stock and do occasional freelance work for Microsoft. I use Microsoft Vista (which I think is great) for my client OS running on AMD chips and my outsourced web servers run on Linux.
You can get a good picture of where Novell is financially from my summary of the Novell analyst conference of December 4, 2008. Let's say Novell tends to lose traction here while gaining traction there.
A couple of years ago Novell was a cash play. They had a lot of cash, but were losing money each quarter. Now the bulk of the cash is gone (the one billion that remains is healthy, but not enough to do cash buy backs safely in this climate). So investors need to look at the underlying business.
It isn't that Novell has not been trying hard, even undergoing a fundamental market transformation. The question is, was it the right transformation?
Novell used to be a specialist in local area network (LAN) software. But that was the sort of thing that Microsoft (and Apple, and Linux) could provide as part of the operating system. Novell, of course, featured up their offerings, but the decline in marketability was clear a decade ago and they never really did much about it until maybe 2005 or so.
Novell sold proprietary software, but I guess they could not find a proprietary area where they thought they could compete (or make an acquisition that made financial sense). So they dove into open source software, including Linux itself. Everyone admits their SUSE Linux is good. Novell's clients were happy with it, but the pricing is a problem. Open source software just can't be priced like proprietary software. Red Hat has proven that you can make money selling support expertise on Linux, but it took them over a decade to get to where they are now. There are a lot of Linux versions out there. When you go with a particular brand of Linux you are basically chosing how much support you are going to get.
Microsoft wants its customers who have mixed systems - Linux and Windows - to use Novell SUSE Linux. That makes life easier for Microsoft to support its customers. It also undercuts Red Hat, which is the greatest threat the Microsoft's lofty operating system profits.
Maybe Novell would like to be independent of Microsoft (see my Microsoft Analyst Conferences page), maybe they have some plan for weaning themselves away in the future. At present a big chunk of their revenues come from Microsoft. Three things could jeapardize this. Microsoft could release its own Linux - that would not be a big deal for Microsoft, though it would certainly raise some questions in the Linux community. Or Microsoft could switch partners. Or Microsoft could face a customer rebellion - we'll chose our Linux without your help, thank you.
In any of these scenarios Novell would be off on its own again as far as picking up Linux customers. Not a cheery thought.
Even so, the revenues that were booked for its Open Solutions segment were a mere $36 million in the quarter, of which $33 million was for Linux.
Workgroup revenue, which is the legacy business, was still the main money maker at $92 million for the quarter, down 6% from year-earlier. There are two other segments, Identity and Security Management with revenues of $37 million, and Systems and Resource Management, with revenues of $45 million. Service revenue was $34.6 million.
On the optimistic side, the variety of products is a safety feature, and only the Workgroup and Service segments had declining revenues. The acquisitions of Platespin and Managed Objects should help Novell keep close to the cutting edge in 2009.
I would like to see Novell do well, and am tempted to buy the stock at this price. But after watching it for years, I am not enthusiastic. Without the Microsoft deal Novell would have looked pathetic this last year and would not be a serious Linux contender. With the Microsoft deal, it looks pretty good, but with the dangers I stated above.
Which reminds me to keep diversified.
More data:
My Novell analyst conference summaries page
www.novell.com
I own some Red Hat stock and do occasional freelance work for Microsoft. I use Microsoft Vista (which I think is great) for my client OS running on AMD chips and my outsourced web servers run on Linux.
Wednesday, December 3, 2008
Can Marvell Smash the Atom?
Marvell Technology Group (MRVL) stock is way up today partly because investors had been overly pessimistic about its results for the October quarter (its fiscal third quarter of 2009). But the big news is that Marvel is going into the Netbook market. Which means competing with the Intel Atom processor. This is really cool. This is really exciting for investors, consumers, and gadget freaks.
Despite revenues that dropped to $791.0 million from $842.6 million in the 2nd quarter, Marvel kept its Net income high at $71 million and its free cash flow amazingly high at $246 million. For a in-depth summary of the results and what management said see my Marvell Analyst Conference Summary for December 2, 2008.
The Netbook market could be called the sub-notebook PC market. Netbooks don't have the full-powered Intel or AMD Turion processors or graphics capabilities of notebook computers, but they are cheaper. They are designed mainly to run a Web browser and do e-mail. I've seen a lot of false advertising recently, with one ad describing the Intel Atom processor in a netbook as "powerful."
But when you think about building a good Netbook from the ground up, any smart engineer would say, why Microsoft Windows for the operating system, and why Intel Atom for the processor. The only answer is that they are what people are used to. On the other hand consider a netbook not as a smaller PC, but as a larger smart phone. Suddenly there are many hardware and software choices, some of them found in devices like the Apple iPhone or the Blackberry Bold. And what you will find in many of these devices is Marvell semiconductor chips. And non-Microsoft operating systems like Linux.
Normally going up against Microsoft and Intel, even if you have better products, is not a very good business strategy. Intel in particular, in its competition with AMD, has shown a willingness to use heavy-handed tactics to maintain and extend its market share. Even its ability to subsidize advertisements for its products when people open catalogs or Web merchant sites insures that the playing field is not even. Should investors cheer Marvel tilting up against Intel?
The outcome is in doubt, so hedge your bets. But there is good reason to believe Marvell will at least carve out some good profitable market share, aside from their history of consistently entering new fields and turning the fields.
Marvell already has most of the intellectual property in place to build a single chip that can run the entire netbook. Netbook manufacturers will supply the display, case, and connectors; one chip shall rule them all. The cost will be far lower than Intel can compete with profitably. Intel will probably try to differentiate its products by saying they run Windows, but the reality is they don't really run Windows in the sense that a dual-core notebook processor runs Windows.
If you have not been following Marvell, you may not know what they already do. They specialize in combining digital and analog circuitry in a single chip. They got started by supplying chips that make hard drives capable of storing more data faster. They now dominate the drive chip industry. They branched out to a number of areas, including chips for printers. They also bought Intel's old XScale cell phone processor division, which I believe the Intel guys are going to be kicking themselves over in about October, 2009. Intel was losing money on the division, Marvell is making money.
Marvell also makes superfast chips for physical and wireless internet connections. They make video chips for DVD players and large screen TVs. Their Sheeva processor, combining technologies from ARM, XScale, and in house, runs super fast on super low amounts of power.
By building a netbook from the bottom up, based on a processor that is ultra-green because it was meant to run cell phones, incorporating all the necessary circuits on a single chip, Marvell will enable netbook manufacturers to sell their products for well under $300. Marvell says $200, then $100 is possible.
Will people mind not being able to run Windows? Some people will, but the Netbooks can't run the really cool Windows stuff, like games and Adobe design products. What Linux enables for netbooks is the ability to do email and Web browsing, plus low-overhead tasks designed for the netbook. The competitive advantage of open-source software running on Linux will really shine on a netbook.
With a Sheeva processor from Marvell running applications much faster than an Atom processor, and consuming far less power, it may be hard to keep the Win-tel team alive in this particular market. AMD's decision to stick to notebooks, where its graphics superiority over Intel gives it an advantage, may be just the right thing to do.
Of course, this is speculation about the future. Marvell is the David in this battle. But I have seen Marvell's slingshot, and I would not want to bet on the Goliath, Intel, in this market, even thought it dominates the field at the moment.
It should be noted that Marvell believes the netbooks based on the Marvell chip will open up the Internet to a new global market of between 1 and 2 billion people. Based on what I know about global income demographics, that sounds about right.
As always, keep diversified.
Despite revenues that dropped to $791.0 million from $842.6 million in the 2nd quarter, Marvel kept its Net income high at $71 million and its free cash flow amazingly high at $246 million. For a in-depth summary of the results and what management said see my Marvell Analyst Conference Summary for December 2, 2008.
The Netbook market could be called the sub-notebook PC market. Netbooks don't have the full-powered Intel or AMD Turion processors or graphics capabilities of notebook computers, but they are cheaper. They are designed mainly to run a Web browser and do e-mail. I've seen a lot of false advertising recently, with one ad describing the Intel Atom processor in a netbook as "powerful."
But when you think about building a good Netbook from the ground up, any smart engineer would say, why Microsoft Windows for the operating system, and why Intel Atom for the processor. The only answer is that they are what people are used to. On the other hand consider a netbook not as a smaller PC, but as a larger smart phone. Suddenly there are many hardware and software choices, some of them found in devices like the Apple iPhone or the Blackberry Bold. And what you will find in many of these devices is Marvell semiconductor chips. And non-Microsoft operating systems like Linux.
Normally going up against Microsoft and Intel, even if you have better products, is not a very good business strategy. Intel in particular, in its competition with AMD, has shown a willingness to use heavy-handed tactics to maintain and extend its market share. Even its ability to subsidize advertisements for its products when people open catalogs or Web merchant sites insures that the playing field is not even. Should investors cheer Marvel tilting up against Intel?
The outcome is in doubt, so hedge your bets. But there is good reason to believe Marvell will at least carve out some good profitable market share, aside from their history of consistently entering new fields and turning the fields.
Marvell already has most of the intellectual property in place to build a single chip that can run the entire netbook. Netbook manufacturers will supply the display, case, and connectors; one chip shall rule them all. The cost will be far lower than Intel can compete with profitably. Intel will probably try to differentiate its products by saying they run Windows, but the reality is they don't really run Windows in the sense that a dual-core notebook processor runs Windows.
If you have not been following Marvell, you may not know what they already do. They specialize in combining digital and analog circuitry in a single chip. They got started by supplying chips that make hard drives capable of storing more data faster. They now dominate the drive chip industry. They branched out to a number of areas, including chips for printers. They also bought Intel's old XScale cell phone processor division, which I believe the Intel guys are going to be kicking themselves over in about October, 2009. Intel was losing money on the division, Marvell is making money.
Marvell also makes superfast chips for physical and wireless internet connections. They make video chips for DVD players and large screen TVs. Their Sheeva processor, combining technologies from ARM, XScale, and in house, runs super fast on super low amounts of power.
By building a netbook from the bottom up, based on a processor that is ultra-green because it was meant to run cell phones, incorporating all the necessary circuits on a single chip, Marvell will enable netbook manufacturers to sell their products for well under $300. Marvell says $200, then $100 is possible.
Will people mind not being able to run Windows? Some people will, but the Netbooks can't run the really cool Windows stuff, like games and Adobe design products. What Linux enables for netbooks is the ability to do email and Web browsing, plus low-overhead tasks designed for the netbook. The competitive advantage of open-source software running on Linux will really shine on a netbook.
With a Sheeva processor from Marvell running applications much faster than an Atom processor, and consuming far less power, it may be hard to keep the Win-tel team alive in this particular market. AMD's decision to stick to notebooks, where its graphics superiority over Intel gives it an advantage, may be just the right thing to do.
Of course, this is speculation about the future. Marvell is the David in this battle. But I have seen Marvell's slingshot, and I would not want to bet on the Goliath, Intel, in this market, even thought it dominates the field at the moment.
It should be noted that Marvell believes the netbooks based on the Marvell chip will open up the Internet to a new global market of between 1 and 2 billion people. Based on what I know about global income demographics, that sounds about right.
As always, keep diversified.
Monday, May 26, 2008
Rackable System Misses Microsoft Container Boat
Rackable Systems (RACK) makes energy-efficient racks of servers for datacenters. Microsoft is a known client. Rackable has designed and built server farm units that fit in 40 foot standard shipping containers, calling them ICE Cubes. So imagine the disappointment of investors like myself when Microsoft announced that it would fill its new Chicago datacenter with servers in chipping containers - but not ICE Cubes. Apparently Microsoft decided to make its own customized containers, which it calls CBlox. Microsoft had installed a few of Verari Systems Forest containers in another location, and liked the overall design concept enought to plan to scale it out in Chicago. Sun also makes containerized server systems. Doubtless others will enter the fray.
Rackable has disappointed investors a number of times in the past couple of years. It is an innovative company that created a new space, the super-energy efficient datacenter. But once bigger players like Sun, IBM, HP and Dell saw what was happening, they sometimes underbid Rackable with their own less energy efficient designs and have raced get Greener in this expanding market.
One factor in the Microsoft decision was probably that Rackable does not use blade servers. So far management has been resolute in refusing to go the blade server route, claiming that such servers are actually inefficient compared to Rackable's half-depth server rack systems (with some data to back up that assertion). In any case the CBlox design, as well as Verari's, does use blade servers.
Rackable's stock has been mostly going up the last few weeks despite the Microsoft loss. Part of that is that the overall market is up due to increased liquidity. RACK's price was way low in the first quarter of this year, in my opinion. I suspect also that Rackable has its hands full with customers for its Eco-Logical servers and storage systems, and is going to sell plenty of ICE Cubes too. Most companies can't do their own engineering the way Microsoft can. One ICE Cube would go a long way for most corporations; few need to build hundreds of the things, as Microsoft does. I suspect the ICE Cube is much more portable than Microsoft's CBlox. The Pentagon will be wanting some to move around, and you can put one in a parking lot. Hook it up to electricity and the Internet and it will function just fine, without the expense of a building.
Of course we won't know more until Rackable announces its Q2 2008 results, which won't be until July. In the meantime see my summary of the Rackable analyst conference for Q1 2008.
More data:
www.rackable.com
My main Rackable page
Rackable has disappointed investors a number of times in the past couple of years. It is an innovative company that created a new space, the super-energy efficient datacenter. But once bigger players like Sun, IBM, HP and Dell saw what was happening, they sometimes underbid Rackable with their own less energy efficient designs and have raced get Greener in this expanding market.
One factor in the Microsoft decision was probably that Rackable does not use blade servers. So far management has been resolute in refusing to go the blade server route, claiming that such servers are actually inefficient compared to Rackable's half-depth server rack systems (with some data to back up that assertion). In any case the CBlox design, as well as Verari's, does use blade servers.
Rackable's stock has been mostly going up the last few weeks despite the Microsoft loss. Part of that is that the overall market is up due to increased liquidity. RACK's price was way low in the first quarter of this year, in my opinion. I suspect also that Rackable has its hands full with customers for its Eco-Logical servers and storage systems, and is going to sell plenty of ICE Cubes too. Most companies can't do their own engineering the way Microsoft can. One ICE Cube would go a long way for most corporations; few need to build hundreds of the things, as Microsoft does. I suspect the ICE Cube is much more portable than Microsoft's CBlox. The Pentagon will be wanting some to move around, and you can put one in a parking lot. Hook it up to electricity and the Internet and it will function just fine, without the expense of a building.
Of course we won't know more until Rackable announces its Q2 2008 results, which won't be until July. In the meantime see my summary of the Rackable analyst conference for Q1 2008.
More data:
www.rackable.com
My main Rackable page
Monday, February 25, 2008
Microsoft Silverlight Meets Adobe AIR
I've been watching the software wars since I was a child, which means when Bill Gates was a child, which means before Microsoft existed. The changes have been nothing less than astonishing. The next big thing, some people think, is applications that both sit on your desktop and run off the Web.
Before microcomputers everything ran on a central computer, first mainframes and then sometimes minicomputers. With the introduction of spreadsheets on microcomputers it became possible for ordinary people to become highly productive on a computer they controlled. In the late 1980's Microsoft emerged as king of the personal computer business application - spreadsheets for bookkeeping and analysis, databases for mailing lists, and word processing for letters and reports. At the same time Apple and Adobe came to dominate what might be called the creative side: graphics and sound, including publication layout.
At the same time networking PCs, both to each other and central computers became popular. In the mid 1990's the Internet went mainstream. Web page layout became a big deal. But open-source and standards-based protocols emerged as rivals to proprietary players like Adobe and Microsoft.
Today Adobe announced the general availability of its much-pre-announced AIR tools. The basic idea is to have applications that can run on your personal computer and also connect to Internet. It is not a new concept, but it is a new battleground. In some ways it is not really very different than Web services, which are available through standard Web browsers.
Aside from a swarm of open-source or Googled up small competitors, Adobe's big rival is still Microsoft, which introduced a similar Silverlight toolkit in 2007.
I think Microsoft has the main advantage here. It has had ASP and .NET technology for connecting PCs to servers, including Web servers, for years. The focus of ASP/.NET programmers has always been getting business data to end users. Of course you can also do that with Java and Linux, if you can get volunteers or can afford to pay that sort of brain power.
Adobe now has absorbed the old Macromedia products like Dreamweaver into its creative suites. Adobe has great technology. I use Dreamweaver to lay out my Web pages (though this blog is done within Google's blogging online service). When it comes to visual presentation, Adobe has a strong lead. So you are likely to see AIR backed by creative professionals, including advertising agencies.
What are the chances of merging Microsoft's business oriented back-end with Adobe's eye candy front ends? It is possible, but then you are dealing with two proprietary systems.
The real solution for us all would be high-end open source systems. But the money is not there. Open source mostly seems to work well when the real work is done by professionals at companies like Sun and Red Hat. So Linux is great if you are deploying a server farm, and it is a great way to share code, but commercial sites are going to continue to be built with expensive, professionally developed tools.
As in the past, Microsoft and Adobe will probably both come out winners. Microsoft's installed Windows/Office base, deep programming knowledge (Visual Studio), database expertise and ability to redeploy vast resources as necessary will keep it in the game. Adobe AIR builds on Flash and other great technologies and a general graphical advantage, plus a huge Acrobat installed base. I imagine most programmers and designers will stay in the camp they are in.
If you are an investor you can see my financial commentary on Adobe (ADBE) and Microsoft (MSFT) at:
My main Adobe page
My main Microsoft page
Before microcomputers everything ran on a central computer, first mainframes and then sometimes minicomputers. With the introduction of spreadsheets on microcomputers it became possible for ordinary people to become highly productive on a computer they controlled. In the late 1980's Microsoft emerged as king of the personal computer business application - spreadsheets for bookkeeping and analysis, databases for mailing lists, and word processing for letters and reports. At the same time Apple and Adobe came to dominate what might be called the creative side: graphics and sound, including publication layout.
At the same time networking PCs, both to each other and central computers became popular. In the mid 1990's the Internet went mainstream. Web page layout became a big deal. But open-source and standards-based protocols emerged as rivals to proprietary players like Adobe and Microsoft.
Today Adobe announced the general availability of its much-pre-announced AIR tools. The basic idea is to have applications that can run on your personal computer and also connect to Internet. It is not a new concept, but it is a new battleground. In some ways it is not really very different than Web services, which are available through standard Web browsers.
Aside from a swarm of open-source or Googled up small competitors, Adobe's big rival is still Microsoft, which introduced a similar Silverlight toolkit in 2007.
I think Microsoft has the main advantage here. It has had ASP and .NET technology for connecting PCs to servers, including Web servers, for years. The focus of ASP/.NET programmers has always been getting business data to end users. Of course you can also do that with Java and Linux, if you can get volunteers or can afford to pay that sort of brain power.
Adobe now has absorbed the old Macromedia products like Dreamweaver into its creative suites. Adobe has great technology. I use Dreamweaver to lay out my Web pages (though this blog is done within Google's blogging online service). When it comes to visual presentation, Adobe has a strong lead. So you are likely to see AIR backed by creative professionals, including advertising agencies.
What are the chances of merging Microsoft's business oriented back-end with Adobe's eye candy front ends? It is possible, but then you are dealing with two proprietary systems.
The real solution for us all would be high-end open source systems. But the money is not there. Open source mostly seems to work well when the real work is done by professionals at companies like Sun and Red Hat. So Linux is great if you are deploying a server farm, and it is a great way to share code, but commercial sites are going to continue to be built with expensive, professionally developed tools.
As in the past, Microsoft and Adobe will probably both come out winners. Microsoft's installed Windows/Office base, deep programming knowledge (Visual Studio), database expertise and ability to redeploy vast resources as necessary will keep it in the game. Adobe AIR builds on Flash and other great technologies and a general graphical advantage, plus a huge Acrobat installed base. I imagine most programmers and designers will stay in the camp they are in.
If you are an investor you can see my financial commentary on Adobe (ADBE) and Microsoft (MSFT) at:
My main Adobe page
My main Microsoft page
Friday, February 1, 2008
Microsoft Eyes Yahoo; I Sell My Microsoft Stock
A couple of years ago I bought some Microsoft (MSFT) stock because I thought it was undervalued. I do freelance technology and analysis work. Back then Microsoft was one of my customers and my analysis of the real competitive situation convinced me investors were wrong, yet again, that Microsoft was about to be destroyed by a rival. I have heard such talk since the early 1980's and so far all rivals have been left in the dust. Google is a standing man, but Google has not been around very long.
Yesterday I thought the stock was very undervalued given the recent earnings growth. But then Microsoft made what could play out to be the stupidest move in its history: a high-ball bid for Yahoo. There were rumors of this weeks ago, which may account for the Microsoft's low stock price leading up to the actual announcement.
I covered the Yahoo (YHOO) conference on Tuesday (See my Yahoo January 29, 2008 analyst conference summary). Yahoo is a good company and profitable, trying to deal with changing Internet culture and heavy competitive pressure from Google (GOOG). But its stock, by my valuation methodology, was overvalued on an absolute basis and especially when compared to the prices of other technology stocks during this liquidity sqeeze.
Now Microsoft proposes to buy Yahoo for even more than its already overvalued price. I think Microsoft would have been much better off just getting out there and competing with Yahoo and Google. Merge in Yahoo and its earnings will become stock valuation at Microsoft's relatively low PE ratio. Combined the two companies are worth less than if kept separate.
In addition, I don't see Microsoft infusing new vigor into Yahoo, or the other way around. Two heads are less than one, in this case.
So I sold me Microsoft stock today. There are better values in the market, both in technology stocks and in other segments. I still think Microsoft is a great company. For its most recent view of itself you can see my Microsoft (MSFT) analyst conference summary of January 24, 2008.
If I'm wrong, so be it. I don't see much reward, and I see a lot of risk, in this merger for Microsoft shareholders. But for Yahoo shareholders it is a great deal.
See also:
http://www.microsoft.com/
http://www.yahoo.com/
http://www.google.com/
Yesterday I thought the stock was very undervalued given the recent earnings growth. But then Microsoft made what could play out to be the stupidest move in its history: a high-ball bid for Yahoo. There were rumors of this weeks ago, which may account for the Microsoft's low stock price leading up to the actual announcement.
I covered the Yahoo (YHOO) conference on Tuesday (See my Yahoo January 29, 2008 analyst conference summary). Yahoo is a good company and profitable, trying to deal with changing Internet culture and heavy competitive pressure from Google (GOOG). But its stock, by my valuation methodology, was overvalued on an absolute basis and especially when compared to the prices of other technology stocks during this liquidity sqeeze.
Now Microsoft proposes to buy Yahoo for even more than its already overvalued price. I think Microsoft would have been much better off just getting out there and competing with Yahoo and Google. Merge in Yahoo and its earnings will become stock valuation at Microsoft's relatively low PE ratio. Combined the two companies are worth less than if kept separate.
In addition, I don't see Microsoft infusing new vigor into Yahoo, or the other way around. Two heads are less than one, in this case.
So I sold me Microsoft stock today. There are better values in the market, both in technology stocks and in other segments. I still think Microsoft is a great company. For its most recent view of itself you can see my Microsoft (MSFT) analyst conference summary of January 24, 2008.
If I'm wrong, so be it. I don't see much reward, and I see a lot of risk, in this merger for Microsoft shareholders. But for Yahoo shareholders it is a great deal.
See also:
http://www.microsoft.com/
http://www.yahoo.com/
http://www.google.com/
Sunday, January 27, 2008
Microsoft's Fourth Quarter
With Apple (AAPL) stock down Friday to $130 per share, off 36% from its recent peak of $202.96, folks might want to revisit the adage "slow and steady wins the race." Apple is a good profit generator and reported good Q4 2007 earnings recently, but its stock had been in its own private bubble. Its high PE ratio could only be maintained by the fiction of eternal rapid revenue and earnings growth. With iPod sales up only 5% from year-earlier (which I warned about: See Apple iPod Sales Decelerate?), Apple will probably continue to grow. But not at the rate it has seen since the iPod lifted it off its moribund pre-iPod base.
Even after Friday was over Apple's P/E ratio was 28.51. Microsoft had a very upbeat Q4 earnings report on Thursday, but its PE ratio at close of day Friday was a quite conservative 18 (I am using today's Nasdaq figures: be warned all PE calculations are not alike!).
See my Summary of Microsoft's January 24, 2008 Analyst Conference for details on Q4 2007 (their fiscal Q2 2008). Here I'll just highlight some issues.
Microsoft revenue was $16.37 billion, up 30% from year earlier. Basically everything sold well, from Xbox 360 consoles and games to Vista to business software like SQL Server and Office. This figure was turbocharged because in the December 2006 quarter some revenues were deferred for purchases of Windows XP that allowed a free upgrade to Vista.
Earnings per share (EPS) were $0.50, almost doubling the $0.26 of the year-earlier quarter.
Like Apple, Microsoft's business is somewhat seasonal. It is strongest in the back-to-school and Christmas periods. So for the March quarter Microsoft guidance on EPS is $0.42 to $0.45. Still, the earnings run rate is moving towards $2 per share per year.
Apple's earnings were also growing quickly, up 54% from year earlier.
A economist who believes in rational investors and pricing being automatically set by free markets would have trouble with these numbers. If what investors want is earnings, and Microsoft's earnings are growing faster than Apples, then Microsoft should have a higher PE ratio than Apple, not a lower one.
Well, in case you had not noticed, investors are not entirely rational, and auction pricing of stocks drives prices away from equilibrium in the short run.
There are many details that can be picked apart in the Microsoft and Apple stories to justify bullish and bearish attitudes towards the stocks. But overall, Apple is a pet stock just as its technologies are driven by fashion over function. Microsoft is boring. The only reason to own Microsoft stock is to make money.
The death of Microsoft has been much heralded. Many companies that were going to kill Microsoft are themselves dead. The Internet did not kill Microsoft, and neither did Google. Oh, sure, it still might happen. Microsoft has a very, very, broad set of offerings; failure in one area can be made up in other areas.
Because of the current liquidity scare both companies stock prices now look undervalued to me, and that is true of many technology companies.
The most important thing is not whether you have a lot of Apple stock of Microsoft stock, but how smart you are in diversification. Diversification hedges your bets, but you still want to be careful in the selection of each and every stock in your portfolio.
I own Microsoft stock and have worked freelance for Microsoft. I don't own Apple stock, but have friends and family that own Apple stock and/or work(ed) for Apple.
More data:
My Microsoft main page
My Apple main page
Even after Friday was over Apple's P/E ratio was 28.51. Microsoft had a very upbeat Q4 earnings report on Thursday, but its PE ratio at close of day Friday was a quite conservative 18 (I am using today's Nasdaq figures: be warned all PE calculations are not alike!).
See my Summary of Microsoft's January 24, 2008 Analyst Conference for details on Q4 2007 (their fiscal Q2 2008). Here I'll just highlight some issues.
Microsoft revenue was $16.37 billion, up 30% from year earlier. Basically everything sold well, from Xbox 360 consoles and games to Vista to business software like SQL Server and Office. This figure was turbocharged because in the December 2006 quarter some revenues were deferred for purchases of Windows XP that allowed a free upgrade to Vista.
Earnings per share (EPS) were $0.50, almost doubling the $0.26 of the year-earlier quarter.
Like Apple, Microsoft's business is somewhat seasonal. It is strongest in the back-to-school and Christmas periods. So for the March quarter Microsoft guidance on EPS is $0.42 to $0.45. Still, the earnings run rate is moving towards $2 per share per year.
Apple's earnings were also growing quickly, up 54% from year earlier.
A economist who believes in rational investors and pricing being automatically set by free markets would have trouble with these numbers. If what investors want is earnings, and Microsoft's earnings are growing faster than Apples, then Microsoft should have a higher PE ratio than Apple, not a lower one.
Well, in case you had not noticed, investors are not entirely rational, and auction pricing of stocks drives prices away from equilibrium in the short run.
There are many details that can be picked apart in the Microsoft and Apple stories to justify bullish and bearish attitudes towards the stocks. But overall, Apple is a pet stock just as its technologies are driven by fashion over function. Microsoft is boring. The only reason to own Microsoft stock is to make money.
The death of Microsoft has been much heralded. Many companies that were going to kill Microsoft are themselves dead. The Internet did not kill Microsoft, and neither did Google. Oh, sure, it still might happen. Microsoft has a very, very, broad set of offerings; failure in one area can be made up in other areas.
Because of the current liquidity scare both companies stock prices now look undervalued to me, and that is true of many technology companies.
The most important thing is not whether you have a lot of Apple stock of Microsoft stock, but how smart you are in diversification. Diversification hedges your bets, but you still want to be careful in the selection of each and every stock in your portfolio.
I own Microsoft stock and have worked freelance for Microsoft. I don't own Apple stock, but have friends and family that own Apple stock and/or work(ed) for Apple.
More data:
My Microsoft main page
My Apple main page
Saturday, December 22, 2007
2007 Wrap Up
This month and the first half of January 2008 I am working on a project for Microsoft; I have not had time to write blogs, though a lot of interesting things have happened with the stocks I cover. So here's a quick summary of 2007, recent events, and my thoughts on 2008 before I dive back into Windows Server 2008.
2007 was a good year for me, but not for my stock portfolio. Fortunately I resisted the temptation to try to flip houses in 2005-2006, which would have left me bankrupt. Instead I paid down my mortgage, which guarantees me about 5.5% in long term savings. So while my residence has declined in auction value, there is still a lot of net worth in it. I live in California, I've seen a couple of downturns, and as they say, you can't make new real estate near the ocean. So I'm not worried. My apple trees brought in a good crop this year, and that is a good metaphor for how I think about investing. I planted the first ones 9 years ago and now just about all I have to do is water them 4 times each summer and I get top-quality organic apples to eat or trade. The best investments may require a long time frame.
My portfolio is another matter. It was an evil year for me; I did worse than the market. There were two major killers: AMD and Marvell (MRVL).
AMD had just introduced Opterons when I made my initial investment. It looked like an Intel killer for a while. Then it bought ATI at the same time Intel tried to crush it with a price war, resulting in a string of net losses. In 2007 the quad-core Barcellona Opterons were supposed to save the day, but they never came. Now AMD says Q1 2008; we'll see. On the other hand the law suit against Intel is probably worth more than AMD's entire market capitalization today. But lawyers, judges and juries are a tricky thing. Intel was caught red handed, but will hide behind their lawyers as long as they can.
Marvell has been a profitless wonder story, which is alright with me. In 2006 they acquired Intel's mobile processor division. The costs from that and heavy investment in research has meant GAAP (and even some non-GAAP) net losses. But revenues have climbed rapidly, and Marvell management says revenues will continue to climb in 2008, but promises to hold research costs steady. Today's bargain stock price will seem cheap if management delivers on that promise. If they screw up, or if the macroeconomic picture gets worse, then the price could fall further.
The massive stupidity of both lenders and real estate investors is creating turmoil that can benefit those who were more conservative and have cash to spend. Most (but not all) stocks are cheap right now. Real estate varies by geographic area; I would not call it cheap, but low ball a house you like and chances are the owner will bargain with you. The global economy is strong with a few weak spots, but that it as usual. Agriculture is strong; land prices in Iowa and other grain-production area are actually rising. Note that sovereign investment funds are jumping in to use cash to buy U.S. assets. They may make some mistakes, but I think foreign investors will see the value in U.S. assets (stocks, bonds, and real estate) first because the dollar is weak and they can be less emotional from a distance.
The main economic problem for the U.S. is the Republican Party's "No New Taxes" pledge. It has been good for partisan politics, but bad for the nation's economy. There is still plenty of government waste, and imperialistic adventures are bleeding the U.S. dry. But mainly low taxes are the cause of the deficit. Pay now or pay more later is a rule for taxpayers. Say half the Bush tax cuts for the wealthy were eliminated. Couldn't the billionaires live with that? They'd still be paying lower tax rates than at any time since World War II, but the deficit could be eliminated and there might even be some money for infrastructure that is not Congressionally earmarked crud.
One last note: Celgene (CELG). Boy, did I think I was smart to buy this company earlier this year. Then they announced an expensive merger. Okay, I could live with that. Recently there has been speculation that a rival will cut into their Revlimid franchise. Ouch! I can't decide whether to buy more stock because it is cheap or to be cautious here.
My best stock in 2007: Microsoft (MSFT). Despite all the mud slung at it, it does a number of things way better than any of its competitors. Internet bandwidths are just not sufficient to allow serious office productivity to run on the Internet. After years of Google hype, when you look at Google numbers, all its revenues come from ad sales. That is great, it is a great, profitable, and useful company (this blog is run on Google). But it is little or no threat to Microsoft's core business, or Adobe's for that matter. Modern PCs are supercomputers; those who know how to use this amazing tool can run circles around those who use them as glorified typewriters.
2007 was a good year for me, but not for my stock portfolio. Fortunately I resisted the temptation to try to flip houses in 2005-2006, which would have left me bankrupt. Instead I paid down my mortgage, which guarantees me about 5.5% in long term savings. So while my residence has declined in auction value, there is still a lot of net worth in it. I live in California, I've seen a couple of downturns, and as they say, you can't make new real estate near the ocean. So I'm not worried. My apple trees brought in a good crop this year, and that is a good metaphor for how I think about investing. I planted the first ones 9 years ago and now just about all I have to do is water them 4 times each summer and I get top-quality organic apples to eat or trade. The best investments may require a long time frame.
My portfolio is another matter. It was an evil year for me; I did worse than the market. There were two major killers: AMD and Marvell (MRVL).
AMD had just introduced Opterons when I made my initial investment. It looked like an Intel killer for a while. Then it bought ATI at the same time Intel tried to crush it with a price war, resulting in a string of net losses. In 2007 the quad-core Barcellona Opterons were supposed to save the day, but they never came. Now AMD says Q1 2008; we'll see. On the other hand the law suit against Intel is probably worth more than AMD's entire market capitalization today. But lawyers, judges and juries are a tricky thing. Intel was caught red handed, but will hide behind their lawyers as long as they can.
Marvell has been a profitless wonder story, which is alright with me. In 2006 they acquired Intel's mobile processor division. The costs from that and heavy investment in research has meant GAAP (and even some non-GAAP) net losses. But revenues have climbed rapidly, and Marvell management says revenues will continue to climb in 2008, but promises to hold research costs steady. Today's bargain stock price will seem cheap if management delivers on that promise. If they screw up, or if the macroeconomic picture gets worse, then the price could fall further.
The massive stupidity of both lenders and real estate investors is creating turmoil that can benefit those who were more conservative and have cash to spend. Most (but not all) stocks are cheap right now. Real estate varies by geographic area; I would not call it cheap, but low ball a house you like and chances are the owner will bargain with you. The global economy is strong with a few weak spots, but that it as usual. Agriculture is strong; land prices in Iowa and other grain-production area are actually rising. Note that sovereign investment funds are jumping in to use cash to buy U.S. assets. They may make some mistakes, but I think foreign investors will see the value in U.S. assets (stocks, bonds, and real estate) first because the dollar is weak and they can be less emotional from a distance.
The main economic problem for the U.S. is the Republican Party's "No New Taxes" pledge. It has been good for partisan politics, but bad for the nation's economy. There is still plenty of government waste, and imperialistic adventures are bleeding the U.S. dry. But mainly low taxes are the cause of the deficit. Pay now or pay more later is a rule for taxpayers. Say half the Bush tax cuts for the wealthy were eliminated. Couldn't the billionaires live with that? They'd still be paying lower tax rates than at any time since World War II, but the deficit could be eliminated and there might even be some money for infrastructure that is not Congressionally earmarked crud.
One last note: Celgene (CELG). Boy, did I think I was smart to buy this company earlier this year. Then they announced an expensive merger. Okay, I could live with that. Recently there has been speculation that a rival will cut into their Revlimid franchise. Ouch! I can't decide whether to buy more stock because it is cheap or to be cautious here.
My best stock in 2007: Microsoft (MSFT). Despite all the mud slung at it, it does a number of things way better than any of its competitors. Internet bandwidths are just not sufficient to allow serious office productivity to run on the Internet. After years of Google hype, when you look at Google numbers, all its revenues come from ad sales. That is great, it is a great, profitable, and useful company (this blog is run on Google). But it is little or no threat to Microsoft's core business, or Adobe's for that matter. Modern PCs are supercomputers; those who know how to use this amazing tool can run circles around those who use them as glorified typewriters.
Sunday, October 28, 2007
Rackable Systems New Friend: Facebook
Rackable Systems (RACK) reported Q3 2007 results that showed a second quarter of good revenue improvement and brought the company back from serious losses to break-even. Management reported that at the end of the quarter the backlog of orders had reached a record high. And just in case the analysts covering the conference missed the point, Rackable named the four customers that buy the most equipment from them: Microsoft, Yahoo, Amazon, and Facebook.
Before looking at Facebook and other opportunities, recall that RACK stock has been very volatile (See chart at NASDAQ). In the past 18 months it has been over $50 and as low as $11.25. The highs were reached after Rackable ramped up its highly efficient server system sales in the previous few years. The lows came after bigger server-market players took notice and started low-balling bids on systems, causing Rackable to lose sales and to lose profit margins on some sales that took place (See Rackable, Playing With the Big Guys, April 5 2007). Rackable had to restructure and write off inventory as obsolete. So in 2007, Q1 saw a plunge in revenues and heavy losses; Q2 saw a sequential increase in revenues and heavy losses; and Q3 saw a second sequential increase in revenues and break-even on earnings.
So where do we go from here if we take a ride with Rackable? (Note that I own stock in the company.) It depends on how well Rackable does against its competition. Rackable pioneered energy-efficient server farm designs, but its equipment is not the cheapest on the market. Its servers are easy-to-manage, and it now has some new, very innovative products. One is that is has a line of servers optimized for virtualization, which is a big industry trend. It also has ICE Cube, what might be called a server-farm in a box. These are your basic cargo containers filled with servers. You can buy a server farm ready to go and just put it in the parking lot; there is a lot of interest, and only one other company is trying to compete in this space so far. Once built an ICE Cube server farm uses far less energy than a conventionally warehoused system.
Another boost going forward will further enhance Rackable's reputation for being the leader in Green computing (their slogan is "Enabling the ecological datacenter") is the release of new server systems using AMD quad core Opteron processors. Rackable started as an AMD-only company, then added lines using Intel processors that became substantial over time. Conservative customers, and IT departments whose decision makers own Intel stock, still have Intel-only buying policies. But management confirmed that demand for AMD quad-core based servers is high and systems will be shipping this quarter (I am guessing that is the reason for the record level of backorders). The AMD chips are better designed than the Intel chips and so deliver more overall computing power with less energy consumption.
It is interesting that Google is not a Rackable customer. As the largest Internet company, you would think it would be in there with Microsoft, Yahoo, Facebook and Amazon. Google succeeded in part by stringing a lot of cheap servers together with their own proprietary methods. I'm betting those servers are very un-Green, very energy inefficient, but for now Google is so profitable it probably is not concerned much about its electric bill.
Facebook suddenly has a bunch of cash from Microsoft's buying a part-interest, so don't be surprised if they use some of it to build out their server farms. Microsoft has announced plans to greatly increase their Internet presence, so they will be expanding their server farms as well. And Yahoo and Amazon are expanding too, if not quite at Google's pace.
So I think Rackable systems has a good chance of being an emerging success story in 2008. However, you should be aware that the stock is risky. Rackable is planning on spending a lot of money on expansion; in the short run that will mean even if revenues ramp up, earnings may be negligible. Rackable is playing against formidable competitors like Sun, HP, Dell, and IBM, so they are not guaranteed to win.
Always keep your portfolio well-diversified.
More data:
Rackable web site
My Rackable page
My pages on others companies in this article: AMD, Intel, Sun, HP, IBM, Dell, Yahoo
Openicon Home page
Before looking at Facebook and other opportunities, recall that RACK stock has been very volatile (See chart at NASDAQ). In the past 18 months it has been over $50 and as low as $11.25. The highs were reached after Rackable ramped up its highly efficient server system sales in the previous few years. The lows came after bigger server-market players took notice and started low-balling bids on systems, causing Rackable to lose sales and to lose profit margins on some sales that took place (See Rackable, Playing With the Big Guys, April 5 2007). Rackable had to restructure and write off inventory as obsolete. So in 2007, Q1 saw a plunge in revenues and heavy losses; Q2 saw a sequential increase in revenues and heavy losses; and Q3 saw a second sequential increase in revenues and break-even on earnings.
So where do we go from here if we take a ride with Rackable? (Note that I own stock in the company.) It depends on how well Rackable does against its competition. Rackable pioneered energy-efficient server farm designs, but its equipment is not the cheapest on the market. Its servers are easy-to-manage, and it now has some new, very innovative products. One is that is has a line of servers optimized for virtualization, which is a big industry trend. It also has ICE Cube, what might be called a server-farm in a box. These are your basic cargo containers filled with servers. You can buy a server farm ready to go and just put it in the parking lot; there is a lot of interest, and only one other company is trying to compete in this space so far. Once built an ICE Cube server farm uses far less energy than a conventionally warehoused system.
Another boost going forward will further enhance Rackable's reputation for being the leader in Green computing (their slogan is "Enabling the ecological datacenter") is the release of new server systems using AMD quad core Opteron processors. Rackable started as an AMD-only company, then added lines using Intel processors that became substantial over time. Conservative customers, and IT departments whose decision makers own Intel stock, still have Intel-only buying policies. But management confirmed that demand for AMD quad-core based servers is high and systems will be shipping this quarter (I am guessing that is the reason for the record level of backorders). The AMD chips are better designed than the Intel chips and so deliver more overall computing power with less energy consumption.
It is interesting that Google is not a Rackable customer. As the largest Internet company, you would think it would be in there with Microsoft, Yahoo, Facebook and Amazon. Google succeeded in part by stringing a lot of cheap servers together with their own proprietary methods. I'm betting those servers are very un-Green, very energy inefficient, but for now Google is so profitable it probably is not concerned much about its electric bill.
Facebook suddenly has a bunch of cash from Microsoft's buying a part-interest, so don't be surprised if they use some of it to build out their server farms. Microsoft has announced plans to greatly increase their Internet presence, so they will be expanding their server farms as well. And Yahoo and Amazon are expanding too, if not quite at Google's pace.
So I think Rackable systems has a good chance of being an emerging success story in 2008. However, you should be aware that the stock is risky. Rackable is planning on spending a lot of money on expansion; in the short run that will mean even if revenues ramp up, earnings may be negligible. Rackable is playing against formidable competitors like Sun, HP, Dell, and IBM, so they are not guaranteed to win.
Always keep your portfolio well-diversified.
More data:
Rackable web site
My Rackable page
My pages on others companies in this article: AMD, Intel, Sun, HP, IBM, Dell, Yahoo
Openicon Home page
Thursday, June 28, 2007
Investing in Linux
You could not keep eager investors from bidding sky high prices for Linux companies back in 2000. I tried to explain that Linux was not likely to hurt Microsoft in the short run, and that something that is available for free is a tad difficult to turn a profit on.
Come 2007 and the promise of Linux to make a profit for investors looks much brighter. But the premier Linux stock, Red Hat (RHT), while recovering from $3 lows in 2001, is only worth 1/6th of its January 2000 high. Its main competitor, Novell, is also not getting high P/E ratios for its efforts. The Linux plays that are doing relatively well are seen with companies where Linux plays a supporting role, rather than being a revenue driver itself. Companies like IBM and Oracle.
Is Linux still suffering from fundamental defects in its profit model? Or are investors missing the boat at Red Hat and Novell? How should these stocks be priced?
Let's start with Red Hat, which is a pure open-source play with income primarilly from Linux. It just reported Q2 2007 results that disappointed some investors. [See my summary of the analyst conference.] Revenues were up 47% from year-earlier: sounds like a growth stock to me. Net income was $16.2 million if you like GAAP, and I do; they also claimed non-GAAP net income of $33.7 million.
So what is their market capitalization, end of day today? $4.3 billion. That is pretty hefty. Using GAAP, factoring out the Q2 income to $64.8 annual, you have a ratio of 66. If revenues are up again 47% a year from now, and if economies of scale make earnings grow faster than revenues (or GAAP EPS converge to non-GAAP EPS), the stock will look cheap in retrospect. But projecting rapid growth out more than a year or two in advance is a good way to get taken to the cleaners.
Linux has changed. It is still geek friendly, not general population friendly. But the general population is not running corporate server farms. Linux evolves faster than Microsoft Server or the IBM OS's. And you can charge enough for support and service and bundling features to make a profit. Linux can be had for free, but that works only if you are highly skilled. So corporations are willing to pay for getting a well-tested version and support services.
Oracle has proven, yet again, that it is smarter than we think. Oracle is more of a threat to Microsoft now than at any time in history. Why? Because instead of butting heads with Microsoft it went after weaker, higher-margin opponents. It is killing SAP and shoving IBM around too. Its database system is the jewel, but the strategy of creating a full service ecosystem around the database has given the company new life. Oracle's offering Linux is not so much a danger to Red Hat, or even Microsoft, as a demonstration of what the tech jungle may look like a few years from now. Oracle software runs well on Microsoft Server products. It runs well on Unix and Linux. It plays well with CRM and ERP. And if you are buying most of your stuff from Oracle, there is no need to get your Linux from Red Hat. For more dope on Oracle see my summary of their June 26, 2007 analyst conference.
So far the conversion of Unix to Linux is happening so fast that there is plenty of pie for everyone. Another player is Novell. They have a big pot of cash ($1.8 billion) and a stategy for providing Linux and other services, but have been hard pressed to show a profit on a regular basis. They generate more revenue than Red Hat, but much of that is from legacy products that are clearly in decline. If they find their footing it will probably be through acquisitions.
Another issue for investors is the swarm of small Linux players. There are lots of versions of Linux available, all of them free. Some probably have ambitions to become serious players, and nothing is in place to stop that from happening.
More data:
Red Hat investor relations page
My Red Hat page
Oracle investor relations page
My Oracle page
Novell investor relations page
My Novell page
Come 2007 and the promise of Linux to make a profit for investors looks much brighter. But the premier Linux stock, Red Hat (RHT), while recovering from $3 lows in 2001, is only worth 1/6th of its January 2000 high. Its main competitor, Novell, is also not getting high P/E ratios for its efforts. The Linux plays that are doing relatively well are seen with companies where Linux plays a supporting role, rather than being a revenue driver itself. Companies like IBM and Oracle.
Is Linux still suffering from fundamental defects in its profit model? Or are investors missing the boat at Red Hat and Novell? How should these stocks be priced?
Let's start with Red Hat, which is a pure open-source play with income primarilly from Linux. It just reported Q2 2007 results that disappointed some investors. [See my summary of the analyst conference.] Revenues were up 47% from year-earlier: sounds like a growth stock to me. Net income was $16.2 million if you like GAAP, and I do; they also claimed non-GAAP net income of $33.7 million.
So what is their market capitalization, end of day today? $4.3 billion. That is pretty hefty. Using GAAP, factoring out the Q2 income to $64.8 annual, you have a ratio of 66. If revenues are up again 47% a year from now, and if economies of scale make earnings grow faster than revenues (or GAAP EPS converge to non-GAAP EPS), the stock will look cheap in retrospect. But projecting rapid growth out more than a year or two in advance is a good way to get taken to the cleaners.
Linux has changed. It is still geek friendly, not general population friendly. But the general population is not running corporate server farms. Linux evolves faster than Microsoft Server or the IBM OS's. And you can charge enough for support and service and bundling features to make a profit. Linux can be had for free, but that works only if you are highly skilled. So corporations are willing to pay for getting a well-tested version and support services.
Oracle has proven, yet again, that it is smarter than we think. Oracle is more of a threat to Microsoft now than at any time in history. Why? Because instead of butting heads with Microsoft it went after weaker, higher-margin opponents. It is killing SAP and shoving IBM around too. Its database system is the jewel, but the strategy of creating a full service ecosystem around the database has given the company new life. Oracle's offering Linux is not so much a danger to Red Hat, or even Microsoft, as a demonstration of what the tech jungle may look like a few years from now. Oracle software runs well on Microsoft Server products. It runs well on Unix and Linux. It plays well with CRM and ERP. And if you are buying most of your stuff from Oracle, there is no need to get your Linux from Red Hat. For more dope on Oracle see my summary of their June 26, 2007 analyst conference.
So far the conversion of Unix to Linux is happening so fast that there is plenty of pie for everyone. Another player is Novell. They have a big pot of cash ($1.8 billion) and a stategy for providing Linux and other services, but have been hard pressed to show a profit on a regular basis. They generate more revenue than Red Hat, but much of that is from legacy products that are clearly in decline. If they find their footing it will probably be through acquisitions.
Another issue for investors is the swarm of small Linux players. There are lots of versions of Linux available, all of them free. Some probably have ambitions to become serious players, and nothing is in place to stop that from happening.
More data:
Red Hat investor relations page
My Red Hat page
Oracle investor relations page
My Oracle page
Novell investor relations page
My Novell page
Wednesday, May 30, 2007
Adobe's New Products Roll On
Adobe (ADBE) stock recently made it back up to its year-2000 highs. It is not a cheap stock; its PE ratio is about 47. But it is in an enviable position. It has virtually a monopoly in its chosen field of graphics development software for professionals.
Almost all professional graphics designers prefer Adobe Photoshop. While free and lower-cost photo-manipultion programs abound, they are used almost exclusively by amateurs. While any file format, such as Microsoft Word, can be posted in a web link, some how Adobe made the PDF/Acrobat file format the ubiquitous alternative to HTML pages. Now Flash is becoming the favorite for posting Web videos.
My regular web pages at Openicon.com are laid out in Dreamweaver, created by Macromedia but now a part of the Adobe empire. At the low end competitors, including Microsoft, basically have to give away programs to compete with Abobe. Once people get to a point where they are willing to pay for professional software, Adobe goes to the cash register.
I think Microsoft's Silverlight initiative is very intersting, but it is no immediate threat to Adobe.
This year Adobe is in a product renewal cycle. Professionals everywhere will groan as they are milked for their upgrade money, but they have learned through bitter experience they have no choice. They must pay for the upgrades or fall behind their peers.
Management, of course, is proud of itself and feels it is doing fine. The new products will be great and sell. To get last quarters results and insight from management you can read my summary of the March 20, 2007 analyst conference.
This week Adobe launched a public Beta of ColdFusion 8 Software. This is more esoteric than Photoshop. It allows software teams to build dynamic Web sites. It even supports sites requiring integration with Microsoft .NET products and enterprise Java.
A full Version 8 of Acrobat 3D was also released. This allows professional CAD/CAM designers to share designs, including over the Internet.
Creative Suite 3 has been introduced and will be the big money generator for most of 2007. Depending on which version you buy, it includes such products like Photoshop, Illustrator, Flash, Dreamweaver, or Acrobat.
With design for Internet, including Internet video, still being a growth area, Adobe's revenues and profits are almost certain to continue to grow over the next few years. That said, 2006 revenues were $2.58 billion. There was a bit of an end-of-year pause as some customers delayed purchases until the new products were released. And because of development costs, net income in 2006 was down from 2005. Expect it to be up again in 2007.
Adobe is not a bargain stock, but it is one that is highly likely to pay off in the long run. The company has $2.3 billion in cash in the bank, too. With low risk and high long-term potential, this is a good stock for certain types of portfolios.
I don't own the stock.
See also:
My Adobe (ADBE) page
Adobe corporate web site
Almost all professional graphics designers prefer Adobe Photoshop. While free and lower-cost photo-manipultion programs abound, they are used almost exclusively by amateurs. While any file format, such as Microsoft Word, can be posted in a web link, some how Adobe made the PDF/Acrobat file format the ubiquitous alternative to HTML pages. Now Flash is becoming the favorite for posting Web videos.
My regular web pages at Openicon.com are laid out in Dreamweaver, created by Macromedia but now a part of the Adobe empire. At the low end competitors, including Microsoft, basically have to give away programs to compete with Abobe. Once people get to a point where they are willing to pay for professional software, Adobe goes to the cash register.
I think Microsoft's Silverlight initiative is very intersting, but it is no immediate threat to Adobe.
This year Adobe is in a product renewal cycle. Professionals everywhere will groan as they are milked for their upgrade money, but they have learned through bitter experience they have no choice. They must pay for the upgrades or fall behind their peers.
Management, of course, is proud of itself and feels it is doing fine. The new products will be great and sell. To get last quarters results and insight from management you can read my summary of the March 20, 2007 analyst conference.
This week Adobe launched a public Beta of ColdFusion 8 Software. This is more esoteric than Photoshop. It allows software teams to build dynamic Web sites. It even supports sites requiring integration with Microsoft .NET products and enterprise Java.
A full Version 8 of Acrobat 3D was also released. This allows professional CAD/CAM designers to share designs, including over the Internet.
Creative Suite 3 has been introduced and will be the big money generator for most of 2007. Depending on which version you buy, it includes such products like Photoshop, Illustrator, Flash, Dreamweaver, or Acrobat.
With design for Internet, including Internet video, still being a growth area, Adobe's revenues and profits are almost certain to continue to grow over the next few years. That said, 2006 revenues were $2.58 billion. There was a bit of an end-of-year pause as some customers delayed purchases until the new products were released. And because of development costs, net income in 2006 was down from 2005. Expect it to be up again in 2007.
Adobe is not a bargain stock, but it is one that is highly likely to pay off in the long run. The company has $2.3 billion in cash in the bank, too. With low risk and high long-term potential, this is a good stock for certain types of portfolios.
I don't own the stock.
See also:
My Adobe (ADBE) page
Adobe corporate web site
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