Friday, April 27, 2007

A tale of two other business models

Even as Hollywood actor Richard Gere tried to quell the storm over a public kiss (Watch the kiss that caused all the fuss ) he gave a Bollywood star Shilpa Shetty at an AIDS awareness event, apologizing Friday for any offense, it was business as usual elsewhere.
Now that Apple and Microsoft has released their quarterly results, I am almost in time for crafting a tale of two other business models. Look up the related reports here, here and here.

Apple today announced financial results for its fiscal 2007 second quarter ended March 31, 2007. The Company posted revenue of $5.26 billion and net quarterly profit of $770 million, or $.87 per diluted share. These results compare to revenue of $4.36 billion and net quarterly profit of $410 million, or $.47 per diluted share, in the year-ago quarter. Gross margin was 35.1 percent, up from 29.8 percent in the year-ago quarter. International sales accounted for 43 percent of the quarter's revenue.

Apple shipped 1,517,000 Macintosh computers and 10,549,000 iPods during the quarter, representing 36 percent growth in Macs and 24 percent growth in iPods over the year-ago quarter.

Microsoft's revenue for the quarter rose 32 percent to $14.4 billion, and net earnings rose to $4.93 billion, or 50 cents a share, from $2.98 billion, or 29 cents a share, in the same period last year. Both figures benefited from the deferral of $1.67 billion of revenue from the previous quarter to account for the Windows and Office upgrade coupons distributed late last year. Even better, from the analysts' point of view, was that there were no unpleasant surprises in the company's outlook, with earnings forecast between $1.68 and $1.72 a share for fiscal 2008, and revenue between $56.5 billion and $57.5 billion.
What it all boiled down to was that, fears and perceptions aside, Windows Vista and Office 2007 have gotten off to strong starts. Chief Financial Officer Chris Liddell reportedly said consumer sales of Vista surpassed the company's own expectations by $300 million to $400 million. "There is very good acceptance from a launch perspective for the product. It's early days, but we're encouraged by it," Liddell seems to have told Reuters.
Microsoft trails Google and Yahoo in making money from Web searches, but online services revenue edged up 11 percent to $623 million in the quarter. Online advertising revenue grew 23 percent year over year, and Liddell said "revenue per search" is higher than a year ago, when the company was still using a third-party ad platform.
Wall Street analysts were relieved and heaved a collective sigh of relief.
Wow, what a business ! Some day I’d like to see one of our companies to notch up numbers like that.

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Friday, April 20, 2007

Vinnie's take on Lou Dobbs

Lou Dobbs The CNN anchor is mad as hell about offshore outsourcing and faith-based economics. Lou Dobbs Tonight attracts CNN's largest audience, of about 800,000.

A peek into Dobbs’ mind (through an interview by Jeff Fleischer as featured in on February 7, 2005)

Excerpts -

" How do you respond to the free-traders' argument that outsourcing is a short-term problem required for long-term economic growth?

LD: Well, there's nothing short-term about 28 consecutive years of trade deficits. There's nothing short-term about a mounting external debt as a result of our reliance on imports -- an external debt that has reached $4 trillion. I see no basis whatsoever for the sophistry that's coming from some of the conservative think tanks and much of academia that says this is a short-term issue. This is real and present pain for literally millions of Americans, and a clear and present danger to an economy that has generated most of the wealth of the entire world over the past 50 years. We could be near the end of that role."

Find the full interview featured here.

Here’s the humorous broadside from my favorite deal architect and consultant Vinnie Mirchandani’s post barbing Lou in the aftermath of blockbuster Q1 results of GE when it’s revenues from developing markets outgrew that of its global revenues in percentage terms.

Quoting Vinnie -

“Take a look at GE's first quarter results. Shining star - Global revenues of $19.6 billion, up 9%, and developing markets revenues of $7 billion, up 14%. Yup, those countries which "import" our jobs as Lou Dobbs would say, are also spending with our companies. Those that invest in products and sales forces that sell abroad.

The dog this quarter - GE Money with the sub-prime mortgage problems in the US. Lou, somehow we need to find a way to also blame the mortgage mess on Chinese trade and immigrants…”

I am completely sold on that, Vinnie…I did make it a point to comment under that post too. Hope you’ve noticed it J !

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Thursday, April 05, 2007

Analyst cat has ten lives....!

In an era of increasing corporate governance, SEBI with a lot more teeth to bite and disclosures by corporates coming in real time, how relevant are analysts in today’s world ? Each day as I watch business channels, they don’t give me any new insights. I don’t get any new stock ideas except the one that I’d already been fed with by other forms of online and offline media including the daily pink sheets and news portals.

The availability of free analytical tools and financial data on the Internet is a catalyst for the democratization of security analysis, and as traditional consumers of sell-side analysis learn how to do it themselves, the demand for commercially produced research decreases. The basics aren't rocket science. Most people are reasonably capable of learning them. (My friendly lassiwala knows a thing or two about bonus, dividend and stock splits – and for the rest he checks up with his savvy customers while he makes the drink for them) In this respect, sell-side analysis adds value for lazy people, but there are no real barriers to entry for people that want to learn how to do it. That's not to say that all of finance is like that, but if you want to know when to buy or sell your stock on a fundamental basis, you can easily learn to do it yourself.

Today, management isn't allowed to tell a sell-side analyst anything they haven't already told the public. You, theoretically have access to the same information as the analyst. A sell-side analyst can't give me any material information about the company that I can't, with a little effort, get myself. If sell-side analysis was considered "marketing" before, it's even more the case now.

Essentially, if you have some free time and know how to trade online after analyzing the results comparison sheet of BSE / NSE and keep a casual watch on the price movements, in about a few days you’d realize the professional analyst makes the same mistakes as you do. After all, not for nothing that random theory still holds good.

The difference could just be that he had spent a million bucks at Wharton / Harvard or from an IIM, to make it with a straight face for his clients on scales you would never imagine.
Still it's not time to sing requiem for the analyst, I guess.

Soon it would be worth their while for big brokerages and fund houses to move their Sell side analysts to trading desk and call them "desk analysts". No, they don't do housekeeping, but they can call clients and flog analysis. If they are not already at it. Why do it? That way, it is making the change to better service its best clients. Unlike normal analysts, these desk analysts can give on-the-fly recs, don't publish research, and aren't bound by any new SEBI dislosure regulations affecting research. While a cynic would call this a way to end-run regulation, I think it’s an overdue change.

Joseph Weisenthal suggests a better way for Sell-siders to escape extinction – become an outsourced Buy-siders. This is how it works. Buy-siders frequently get their sell side lap dogs to do a lot of work for them, especially if they have a favoured client. What makes this outsourcing especially appealing is the fact that it is a cost which is covertly passed on to the fund's clients. Using a "full service" broker means that a fund is accepting higher trading costs in order to get these "value-added services" for their clients. But of course the clients are the ones who pay for these services. Full blog post here.

Let's stop pretending that equity analysts can operate in a some rarified world separate from how their income is generated (i.e., trading). As Paul Kedrosky says - Analysts are salespeople. Always have been, always will be.

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