Sonoma County: News and Notes

This week I am going to go over the results of Keysight and leave you a bit of a Thanksgiving Message.

Keysight is new as a public standalone company and is the spin off of the Test and Measurement Group from Agilent. This first year will be somewhat complicated from a reporting standpoint as there is all the work that needs to continue as part of the spin-out. This may present investment opportunities as there are potential one time events that may cause over reaction in the market.

In many ways, this newness prevents effective analysis on this first call. About all we can do is listen to the words and trust that they are meaningfully representing the business. What we can work from is the numbers that we have and we don’t really have a full set of those. The business is larger than the other 3 companies I analyze together. Keysight had $130M in profit in Q4 (What we think of Q3 has been set as their year end). This is larger than the Revenue of either Calix or Enphase. As a percentage, they are working to a long term goal of 18% profit. That is excellent for this kind of company.

There is a very good investor presentation that helps outline the business. But if I had to summarize things, Keysight is a substantial firm that is in a slow growth business. This business is highly profitable. So, as an investor I will want them to talk about a dividend about 1 year from now. They are in existing markets that are growing at single digit percentages. That means that you should not expect the kind of growth that you would from a different kind of High Tech Firm. That means that the cash needs to be deployed to do something to impact the stock price or be returned to the shareholders. If they don’t return it (partially or in full), this becomes a much riskier proposition as an investment.

Stay tuned for next quarter’s results at Keysight!

Now for the Thanksgiving message. This is starting the time of year where we do two things. Look back over the year for how we did and plan for next year. As a shout out to my clients, I have seen a tremendous growth in their businesses. I am grateful for their choice in working with me to help them grow their businesses. I look forward to a much better 2015 with them as we start to plan for next year. If you want to get the kind of results (doubling their revenue or more) that they have gotten, just let me know at jsackman@focalpointcoaching.com. The first conversation is always free and we can see if there is a fit between us.

To all have a great Thanksgiving, it is my favorite Holiday of the Year!

Jim Sackman
Focal Point Business Coaching
Change Your Business – Change Your Life!
Business Coaching, Sales Training, Marketing Consultant, Behavioral Assessments, Business Planning

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A New Tradition for Thanksgiving

I will get back to my Branding Story Arc next week. Thanksgiving has always been my favorite Holiday. It is all about people and family. I want to start a tradition in my Blog about how a business is defined by people. To start this off, I want to tell a story that comes from the very beginning of my career.

As some readers may know, I come from a small town in Upstate New York. I went to college in Rochester, New York. After college, I took my first job in Miami with Racal-Milgo (a company that changed names in the late 1980s and is now long gone). I drove with a friend from New York to Florida and took an apartment in Ft. Lauderdale right after the 4th of July.

My parents visited me for Labor Day and I had plans to visit home for Christmas. The problem for me was going to be Thanksgiving. It would be the first Holiday that I spent away from home by myself. For me, it was just depressing. My first Holiday alone and it was my favorite Holiday.

The week before Thanksgiving I was working away and my boss asked me to come to his office. His name was Alex Downie. A very funny man who was one of the most unique people you can imagine. He was born and raised in Scotland, but had to move to the US a long time ago. He still had an accent but it wasn’t bad unless he was drinking. He converted to Judaism when he got married. I thought that added the irony that just surrounded the man.

What Alex did that day was to invite me to his house for Thanksgiving Dinner. I went and had a great time with his family. I had met them before in our monthly poker games and it was very nice to be surrounded by people who loved each other.

To me, that is what Business is about – People. Alex did a very human thing and helped a young subordinate get started in his career. I could not imagine a better boss at the time. Alex was not perfect, but he was a very nice, very human man. We lost him just a few years later to cancer. That was the first time I lost someone that was that close to me. His death still makes me sad.

So as we approach the Holidays ask yourself, is there some way to bring Humanity to your Leadership? It is a great way to bring your whole person to bear as a Leader.

Jim Sackman
Focal Point Business Coaching
Change Your Business – Change Your Life!
Business Coaching, Sales Training, Marketing Consultant, Behavioral Assessments, Business Planning

Net Neutrality Friday

As I have been posting, I realized there was this huge piece missing from understanding of Net Neutrality for folks. That is essentially the CAPEX (Capital Expenditure) spending at the ISPs. One of the most important things for us as users is that the ISPs continue to invest to upgrade their networks. Under no changes that have been proposed is there a mandatory spending requirement for an ISP.

This leads back a long way on the Telco Side to the days of the “Rate Base”. When AT&T was the largest incumbent telephone company (pre-1984 breakup), it was treated as a Utility. What this means was that AT&T received a fixed rate of return based on the cost for it to build and operate its network. The cost of the capital involved in this was called the “Rate Base”. The state Public Utility Commissions (PUCs) had the job to make sure that the Telcos did not spend more than was required to deliver service. If they did, prices could be inflated.

Now carriers work on a “Rate Cap” basis for voice. This means they can charge no more than a specific amount for service. What that means on the voice side is that the right number to spend on the network is $0. Every dollar spent is a dollar not earned. One of the challenges around what might happen is that Rate Caps might be put in for Internet Services. Nobody wants that. This would create a chill in spending and make our service quality decrease over time.

The problem is how to navigate these waters so that the network value chain works for Consumers and for the ISPs. There is no regulation that makes ISPs add capacity to their networks. Today it is all about competition. The problem is how we talk about Internet Service. I live in a Comcast property and they talk about their service in a way where they promote the maximum downstream bit rate. This is, of course, not the only part of the network. One of the ad compares the service to U-Verse and talks about how U-verse can have much slower speeds in some cases. Of course, what is not discussed is under what conditions that Comcast Xfinity can have much lower speeds. Both are possible, depending on actual network conditions.

We never talk about those conditions and how they might impact the delivery of your Netflix services. The big problem with this is the parts of the network where these impacts are have no impact on the maximum downstream bit rate of your ISP. So upgrading these facilities today gets the ISP no more money. From their perspective, you are asking them to spend a lot of money to enable the business of a 3rd party (Netflix) for no additional revenue.

So, what we need to do is figure out a value model and regulatory model that encourages everyone to invest. Just slapping on Title II with little further thought will do the exact opposite, it will cut spending. Again, from their perspective the right amount to spend is $0. We don’t want that. Netflix doesn’t want that. In fact, the ISPs don’t want that. So before we go too far, let’s make sure we understand what we want and don’t get caught up by demagogues.

Have a great weekend. No post next Friday!

Jim Sackman
Focal Point Business Coaching
Change Your Business – Change Your Life!
Business Coaching, Sales Training, Marketing Consultant, Behavioral Assessments, Business Planning

Sonoma County: News and Notes

This week we look at the results from Enphase. Clearly they are doing the best of the 3 companies that I review each quarter. But let’s take a bit of a deeper look at the company.

First off, the comparisons that they used on the Conference Call are Year over Year comparisons. The reasons for this are both good and bad. Given the nature of the Solar Power industry, there is a natural seasonality to the business. That is the good reason. The bad reason is that the results are not greatly better than Q2. They are better, but not a linear increase. I don’t view this as a problem as I think the right way to study Enphase is a calendar year at a time. This year will be much better on the top line than past years.

The bottom line is where Enphase has its challenges and where I will spend the bulk of this review. To start, you need to think about the corporate Gross Margin at 33%. It has come up rather nicely from almost 20% in 2011. The stated goal is to reach somewhere in the 40%+ range. This means that the company has over 7% more to add. This increase gets tougher to make over time, and it will be interesting to see if the margin expansion continues at a reasonable pace next year.

Operating Expenses (OPEX) was fairly well controlled and the company made a small profit. The conference call is archived on the Enphase Website and I think offers a rare view into how management of a company actually works. If you have 45 minutes sometime, I would take a listen. In particular, there is a Question asked about 2/3rds the way through the Q&A portion (the 2nd half of the call). In this case, the question was about pricing and was the company using price reductions to drive volume growth.

The answer from the CEO was one of the most powerful and thoughtful that you are likely to hear. He talked about Balance. In this case, how do you maintain growth while staying profitable. This is a hard line to draw in any company. It is extremely hard in a market like what Enphase faces. There is price pressure and you have to be anticipate where markets are heading. I do not envy them on facing these challenges, but it does give me a chance to make a point to you about investing. I invest with Management Teams. To me, a company’s top Leadership makes or breaks the long term success of a business. I suggest before you invest in a stock to look at the track record of Management. If the Management changes, it is time to take a look at a company again. Think of it like Coaching in sports. A bad coach can wreck a team. They hire a bad staff and don’t put their players in a position to win.

Enphase also introduced some new products in the quarter, but they seem like they are longer term revenue possibilities. I think it is important to track these initiatives. Right now, Enphase is heavily dependent on US residential solar. They need to diversify both into new product areas and new markets. The company has been doing so. It is our job as an investor to see how they do. Remember all companies (and products) go through Life Cycles. You need more than one to build a sustainable company.

If you want have a business as successful as Enphase, then you need to have an Annual Operating Plan for their Business. Unlike a larger Business Plan, an Annual Plan provides very specific ideas of what will make your business work over the next 12 months. If you are interested in such a plan and don’t know where to start, contact me at jsackman@focalpointcoaching.com. A properly executed plan will more than pay for itself! If you want to understand the service better, then click HERE!

Jim Sackman
Focal Point Business Coaching
Change Your Business – Change Your Life!
Business Coaching, Sales Training, Marketing Consultant, Behavioral Assessments, Business Planning

Branding: Process

The next of the 7 P’s is Process. Process is a difficult one to describe, so I will give an example from my past. In this case, we will talk about processes that are externally facing. There are challenges making sure the way a company works internally as well is aligned but each firm works differently.

In this case, I want to draw on my experience from Red Condor. The week I arrived, the company was releasing a new version of the product. It failed on release in a way that created a large number of issues for many different subscribers. One of the problems was that the SQA department did not have an effective test for that particular issue. The cost to develop one was very large. But the problem was really a process problem and at the same time a Market/Branding problem.

So, let me back up a second and talk about the market challenge at Red Condor. The company started by providing SaaS solutions to small businesses and local governments for Spam Filtering. This became problematic to scale and there were inconsistent marketing methods applied to the scaling. At that point, the market focus was moved to small ISPs. These customers were larger and brought more subscribers in a single sale. Where an Enterprise sale might bring 1,000 users, an ISP sale brought 10s of 1000s.

The problem with this is that the feature sets and the requirements of the two markets are not the same. This was particularly true around Customer Service. ISPs were used to having their own people provide maintenance for products and had some challenges using a SaaS solution because of this. Again, not a universal issue but it did mean that we had to up our game on the service side.

So, how did this all become a Process and Branding issue? Given the financial plight of Red Condor at the time, we decided to separate out the releases between the ISPs and the smaller businesses. It was a calculated risk that losing 1 or two small customers on a new release was less painful than losing an ISP. Not a great solution, but one that cost no money to implement. Given that we were teetering on bankruptcy, it was a path forward.

From a Branding Standpoint, what it meant was that we were more about the ISPs over time than we were about the Small Business Customers. Of course the customers saw this, and the expansion of the SMB business slowed. The ISP business picked up rather dramatically over the next couple of years and it was a trade off that you had to make.

There are lots of ways that companies signal what they think about the markets that they serve and how the customers react to that. In this case, our Process changes led directly to how our Brand was perceived by the two different customer bases that we had. Something to think about as you change things!

Jim Sackman
Focal Point Business Coaching
Change Your Business – Change Your Life!
Business Coaching, Sales Training, Marketing Consultant, Behavioral Assessments, Business Planning

Net Neutrality Friday

You know some weeks I just love the US Government and this is one of those weeks. On Monday, President Obama sent out a message about Net Neutrality. This will keep us busy for at least this week and perhaps a lot more. The reason that I think that this missive will occupy us is that the message called for a lot of changes and not all of them will be easy to do at the same time. This LINK will lead you to the full text of the President’s message. I always recommend that you read the source and not the repeating of the message by news agencies wherever possible.

For example, there is a mistake right in the middle of the message about not being penalized solely for calling someone who is using another provider. In this case, the President is trying to compare phone and Internet service. Well in fact, you ARE penalized for calling someone on another service. This is called Long Distance and for a very long time this was not free. International Calling was extremely expensive in the old days (okay 10 years ago).

There were some really positive parts of the message. This included the desire to include Wireless Service inside the Net Neutrality Rules. There were other things that I think are expansions of the debate including calls for Universal Access. The biggest controversy will be around the call for the Implementation of Title II. And I won’t fully explore that today, but will try to make sure we are all on the same page about a lot of these topics.

When we talk about things we need to be very clear what we are talking about. That alone creates problems. For example, Net Neutrality and Universal Access are actually separate topics within a complete framework of a social policy. I think we need to define what we all mean by Net Neutrality and the President has laid out 4 key elements. Again, I ask you to read his words.

However, I want to caution all of us about one thing. Investment. What we all want is the ongoing investment in the network by the Corporations who provide us service. As it is, they are telling us that Consumer Broadband is a low margin product. By implementing Title II, we will continue to press down on the margins. The thing that makes me nervous is how this will impact the rest of the ecosystem that supports the network.

My last job was in Spam Filtering. If any of you have Gmail, you get Spam Filtering from Google via a product named Postini. You get this for free. Needless to say, given free is your competition it is hard to drive up prices in Spam Filtering. Remember, the ISPs buy equipment from suppliers. If the ISPs get squeezed on margin, then that pushes down to the equipment vendors then the chip vendors. Without new products, innovation stops in the ISPs.

So, I will be using the President’s framework for discussion over the next few weeks. Have a great weekend!

Jim Sackman
Focal Point Business Coaching
Change Your Business – Change Your Life!
Business Coaching, Sales Training, Marketing Consultant, Behavioral Assessments, Business Planning

Sonoma County: News and Notes

This week I will be reviewing Cyan Optics Q3 results with some notes from their call. I do these reviews because I know that Quarterly Calls are the one opportunity for a company to transmit broadly to their investors. The challenge with these calls is that they have a structure and a language that is not apparent to folks outside of the investment community. On top of that, these calls are Sales calls. The product that is being sold is the stock of the company. This means that there is a tone to the conversation and the things said that are intended to a single end.

With all of that said, let’s move on to the results. In comparison to past quarters, this quarter was not as bad. Revenue was up quarter over quarter (this means that Q3 had more revenue than Q2). The company was not profitable once again and it used over $10M of cash in the quarter. There was a bright note with the inclusion of some Cisco and Juniper products within Blue Planet.

The question that I really want to address here is the future. On the call, it was announced that a 12-15% cut in expenses was planned. I know in fact that the cutting has already started. I would expect that about 10% of the firm will be laid off as part of this program. This is not enough of a cut to bring things to profitability anytime soon. In fact the company was asked about a date for being Cash Flow Positive. The answer that I would say was what I call NPNF – No Plan, No Forecast. I assume they actually have such a plan but are uncomfortable announcing what the date would be.

The second announcement was a money raise. No amount was stated nor was the mechanism. The thing is that the choices are a challenge. Debt is a problem. No bank is going to loan them money in the current state of the business. A bond issue is in the same boat. It is possible that a Preferred Stock investment might be possible by High Net Worth Individuals or by a Venture Capital Style fund. I don’t think this is likely. This means an equity investment is probably the path forward. For the same reason that a bank won’t loan Cyan money, a PE firm or a Hedge fund will not go for a minority investment. Neither will another equipment company. A carrier might have to do so (Windstream), but they will be very hesitant to do so. No Tier 1 will want to hear that a company that wants to sell to them needs an investment from them, so that is out. That leaves a secondary offering, but that will be ugly for the existing investors.

All of that brings me back to what I think should happen. Cyan needs to be sold and sooner rather than later. The longer this goes on the less Cyan is going to be worth. I am sure the management team and board want to get a Tier 1 win to raise that price. But it is a game of chicken with the cash. If a Tier 1 does select them, then they will get offers – potentially prodded by the carrier (I am winking at World Wide Packets here).

I want to be clear that none of this reflects on Cyan’s technology or people. They might have the greatest products in the world, but the SDN market is not mature. I know they have some really good folks as I know and have worked with many of them. Luck and timing are a large part of success and Cyan may not have it.

If you want to make sure that you are not on the edge like Cyan, then you need to have an Annual Operating Plan for their Business. Unlike a larger Business Plan, an Annual Plan provides very specific ideas of what will make your business work over the next 12 months. If you are interested in such a plan and don’t know where to start, contact me at jsackman@focalpointcoaching.com. A properly executed plan will more than pay for itself! If you want to understand the service better, then click HERE!

Jim Sackman
Focal Point Business Coaching
Change Your Business – Change Your Life!
Business Coaching, Sales Training, Marketing Consultant, Behavioral Assessments, Business Planning