Sunday, April 27, 2014

The Score This Quarter: Citigroup 64, JP Morgan 56...IBM 19.


 Well IBM’s first quarter results are in, and they’re—well, they’re about what we’ve come to expect from a high-cost, brand name, big-iron tech company in a world moving to a low-cost, generic, small-iron model: revenues down, margins down, earnings down, cash flow down, service bookings way down, share buybacks up and layoffs soaring.
 Remarkably, though, one number—IBM’s earnings-per-share—came in exactly in line with what the company had predicted some 90 days ago, and that’s what Wall Street’s Finest really cared about, because it meant their spreadsheets were correct.
 All the more remarkable was the fact that while IBM was finding a way to earn the desired net EPS number, its revenues—the mother’s milk of any businesswere coming in half a billion dollars below what had been foretold.

 But the outcome was really not so remarkable as you might think.
 Quarter after quarter, as we have seen (here, for example), somehow, some way, this $100 billion-and-declining revenue behemoth with 430,000-and-declining employees selling products subject to all manner of competition across all manner of industries in more than 170 countries around the world—each with its own unique tax rates and economic cycles, not to mention currencies—always seems to find a way to report net, after-tax, after-currency, after-layoffs earnings precisely as foretold before all manner of things happen during the quarter ahead.
 In this case, before Putin grabbed the Crimea, before Amazon cut cloud prices another 40%, before the Euro gained, the Yuan fell, the Brazilian Real jumped and the Loonie dropped against the dollar.
 Here’s how one analyst—one of the few IBM followers on Wall Street who actually keeps track of the shell shuffling by IBM’s bean-counters—began a long paragraph detailing the bookkeeping moves that made this particular “in-line” quarter possible:
 “… the ‘in-line’ EPS benefited by a lower-than-expected tax rate by 10 cents, a lower than expected charge by 8 cents and a lower than expected share count by 3 cents vs. our model.  Also, a higher-than-expected IP Income [pure profit generated by IBM’s aggressive patent monetization] offset lower-than-expected...”
 You get the drift: like watching a shell game on Fulton Street, you get dizzy just trying to keep track of the moves.
 The bottom line of it all, the same analyst wrote, was that IBM “really lowered its operating profit forecast for the year quite materially.”

 Not that you’d know that from IBM’s earnings call, which was its typically antiseptic, non-informative, let-us-explain-why-we-will-still-make-the-$20-per-share-Road-Map-number post-mortem.
 Indeed, the Investor Relations Vice President moved things along so swiftly—she cut off each analyst by asking the operator “Can we go to the next question please,” or some variation on it, eight times during the Q&A—that the CFO only answered 19 questions before she brought the hammer down at the end of the allotted hour.
By rushing through the Q&A, coincidentally, IBM’s Investor Relations team managed to avoid getting a single question about what might just have been the most important number in the Niagara Falls of numbers put forth by IBM in its quarterly data sheets.
 More important than revenue, which was down; more important than service bookings, which were also down; and maybe even more important than free cash flow, which was down because of stiffer cash tax payments—an amusing excuse from a company whose Netherlands-minimized tax rate is less than what Warren Buffett’s proverbial, long-suffering secretary pays.
 Rather, the important number that wasn’t asked about has to do with “the Cloud.”
 The cloud is, after all, where the world of technology is moving.
 And by measuring IBM’s success in moving its customers “to the cloud,” outsiders monitor how IBM is doing transforming its business in the way management claims it’s transforming the business.
 According to management, IBM’s cloud revenue (inflated though it may be by hardware sales, but we go with the definition offered by the company), “was up over 50%” in most recent the quarter.
 And while “over 50%” might sound good compared to IBM’s overall topline trend, it was a slowdown from last year’s growth of 69% despite all the cloud announcements pouring forth daily from IBM’s Twitter account.
 Meanwhile, Microsoft, to name another “old technology” company navigating the shift towards “the Cloud,” reported revenue growth from its cloud platform of over 150% in the same quarter.

 IBM’s conference call management technique—while effective, if the goal is to minimize tough questions—contrasts starkly with the recent, wide-open earnings calls at JP Morgan and Citibank (not to mention BankAmerica), which literally go until the last question has been asked and answered, with no time constraints at all. 
 In fact, on the recent JP Morgan call, we counted 56 questions asked by 13 Wall Street analysts. 
 On the Citigroup call, we heard 16 analysts asking 64 questions.   
 IBM, as we pointed out, got by with only 19 questions.
 And people say the banks aren’t transparent enough!


Jeff Matthews
Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”
(eBooks on Investing, 2013)    $4.99 Kindle Version at Amazon.com

© 2014 NotMakingThisUp, LLC              
The content contained in this blog represents only the opinions of Mr. Matthews.   Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.  This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever.  Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored.  And if you think Mr. Matthews is kidding about that, he is not.  The content herein is intended solely for the entertainment of the reader, and the author.

Saturday, April 12, 2014

The Easy Thing About “The Hard Thing About Hard Things”


 The easy thing about “The Hard Thing About Hard Things,” Andreessen Horowitz co-founder Ben Horowitz’s book about “Building a business when there are no easy answers,” is reading it. 
 That’s because it’s funny, to-the-point, and way more well-informed by real-world experience than most books that give advice ever are.  
 Like the secret to being a successful CEO: “Sadly, there is no secret, but if there is one skill that stands out, it’s the ability to focus and make the best move when there are no good moves.”
 And, “Managers must lay off their own people.   They cannot pass the task to HR or to a more sadistic peer.”
 And, “The job of a big company executive is very different from the job of a small company executive…big company executives tend to be interrupt-driven.   In contrast, when you are a startup, nothing happens unless you make it happen.”

 But it’s not just catchy phrases and aphorisms that make the book something pretty much anybody who wants to build a company should read, it’s the experience that created them: Horowitz provides in brutal (and, for aspiring entrepreneurs, invaluable) detail the excruciating real-life experiences behind the advice, from his years as a Silicon Valley engineer and then as the CEO of a start-up with more near-death experiences than Keith Richards before its successful sale to HP.
 Like how to fire people.   What to say at the  “all-hands” when you just had your first layoffs.   What to tell an employee who asks if the company is being sold when it is being sold, but not yet.  Why every company needs a “story,” and what makes a great company story (hint: see the letter Jeff Bezos wrote to Amazon shareholders in 1997.)  When not to listen to your board.  Even, literally, what questions a CEO should ask a prospect being considered for the key, all-important job in any start-up: head of sales.
 We here at NotMakingThisUp are not generally fans of “how-to” books, particularly those concerned with managing people, and we’ve never coded anything more complex than a bicycle lock, but the light-bulb went on reading the chapter emphatically titled “WHY YOU SHOULD TRAIN YOUR PEOPLE,” in which the author bemoans the fact that “too often the investment in people stops” with the recruitment process.
 The reason the lightbulb went is that the son of a friend of ours happens to be a software engineer for a start-up that was acquired by a large, fast-growing Silicon Valley company we won’t identify but whose name rhymes with “Shalesforce.com.”
 Anyway, this engineer is smart as hell, highly motivated, eager to learn, and miserable at his job for precisely the reason Horowitz spells out as follows in “WHY YOU SHOULD TRAIN YOUR PEOPLE”:
 “Often founders start companies with visions of elegant, beautiful product architectures that will solve so many of the nasty issues that they were forced to deal with in their previous jobs.  Then, as their company becomes successful, they find that their beautiful product architecture has turned into a Frankenstein.  How does this happen?  As success drives the need to hire new engineers at a rapid rate, companies neglect to train the new engineers properly.  As the engineers are assigned tasks, they figure out how to complete them as best they can.   Often this means replicating existing facilities in the architecture, which leads to inconsistencies in the user experience, performance problems, and a general mess.   And you thought training was expensive.”
 That line is the exact truth.   Just ask our friend’s son at Shalesforce.com.   His managers—if they exist—ought to read this book.
 In fact, anybody who wants to start a company, or work for a company, or build a company, or invest in a company, ought to read this book, because that’s not the only hard-learned truth in here.
 Some others include:
 “In high-tech companies, fraud generally starts in sales due to managers attempting to perfect the ultimate local optimization [i.e. optimize their own incentive pay].”
 “The Law of Crappy People states: For any title level in a large organization, the talent on that level will eventually converge to the crappiest person with the title.”
 “The world is full of bankrupt companies with world-class cultures.   Culture does not make a company…. Perks are good, but they are not culture.”
 “Nobody comes out of the womb knowing how to manage a thousand people.   Everybody learns at some point.”
 “The first rule of the CEO psychological meltdown is don’t talk about the psychological meltdown.”
 And maybe the best of all, because it encapsulates so much of what the book is about: “Tip to aspiring entrepreneurs: If you don’t like choosing between horrible and cataclysmic, don’t become CEO.”

 This book, on the other hand, is a choice between good and great, so read it.


Jeff Matthews
Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”
(eBooks on Investing, 2013)    $4.99 Kindle Version at Amazon.com

© 2014 NotMakingThisUp, LLC              
The content contained in this blog represents only the opinions of Mr. Matthews.   Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.  This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever.  Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored.  And if you think Mr. Matthews is kidding about that, he is not.  The content herein is intended solely for the entertainment of the reader, and the author.