My Thanksgiving Post an Ongoing Tradition

 

Last year, I posted about Alex Downie and how he invited me to dinner for my first real holiday away from home. I recall seeing him there in the Cancer ward and thinking about the friend I had lost. It still makes me sad. But today, I want to tell you about a man that was all about joy – Gene Alan.

Gene and I worked together at Racal-Milgo and later at Racal-Datacom. Gene worked in our training department and I worked in Engineering. I was part of a cool program that Milgo had that allowed fresh out Engineers to try out different departments. One of the things that we all did was go through MODEM training with Gene. He showed us the ropes on how they worked in practice. You can imagine that many Engineers are not greatly interested in these things, but Gene always had a big smile and a way of coaxing us all to enjoy ourselves strapping MODEMs. This was long enough ago that many configuration details were done by making hard wire selections on the product. They were implemented by jumpering posts together with straps, thus it was called strapping.

He and I worked together on and off as I would help bring new products to market and he would prepare our Field Sales and Support teams to handle them. He was often the face that the technical people at our customers would see and he made sure that they enjoyed being at our Headquarters learning about our products.

But I also saw Gene outside of work. We were big enough to have our in-house sports leagues. We both played in our Basketball League (those of you that know me personally can stop laughing now). He and I were always on different teams but he won with grace and lost with pride. He would rib me when I screwed up (okay it wasn’t THAT often) and praise me when I did well (which was that rare). Hey, I am not a good Basketball Player. I know my limits. I also played Flag Football with and against Gene on Saturdays. He would bring his kids and friends from the neighborhood. Those were great games. We played in torrential downpours or the beating Sun in Florida. Who won? Who cares. Just the joy of running around and competing with friends.

When it came time for me to move to California, Gene came to my office. It was my last day and I was going to miss the place. He came into my office and asked me if it was true that I was leaving. I told him that I was going to work with Vlade (a nickname for my friend Dragan). He smiled and then came over to me and hugged me. We both started crying. We stayed that way for a bit and told stories. I left that day feeling better.

The next year Gene passed away playing Basketball with his son in the driveway of his home. They named the Training Center after him. What I learned from him is that the joy and energy that he brought to his job spreads. You couldn’t help but to love him and his smile. I hope he is watching over us all.

Have a great Thanksgiving!
Jim Sackman
Focal Point Business Coaching
Business Coaching, Executive Training, Sales Training, Marketing

Change Your Business – Change Your Life!

 

Know Your Numbers: A Real Life Example

Last Monday, I finished what I had planned to do in this series. Wednesday, I reviewed Enphase’s earnings. On that post Wednesday, I promised to use the numbers from Enphase’s earnings to help people understand the Way to Wealth Formula. Before I do that, I want to say that Brian Tracy coined that phrase. Brian published 2 books: The Way to Wealth and The Way to Wealth Workbook. Both are fantastic and I highly recommend them.

What I wanted to cover today was the announcement on Wednesday that Enphase was adjusting its pricing and therefore can expect lowered Gross Margins. They also “adjusted” Operating Expenses and I want to take a look at how this runs through a set of numbers based on what they do and show the impact. In case you don’t know Enphase, they are a publicly traded Solar Power Company that focuses on power conversion and storage. They are relatively young as a company and have been really successful. Recently the stock has had issues, culminating in problems last quarter and going forward. Note, all the information I use here is public and available on the Internet.

In a typical quarter, Enphase has about (and I plan on using nice round numbers where I can) $100M in Revenue. Traditionally, they have had Gross Margins (GM) in the 30% range. This means that 70% of the money goes for Cost of Goods Sold (COGS). In real money this equates to $70M in COGS and $30M in GM.

Now let’s change the pricing. Enphase announced that Gross Margins would be in the mid-20s. I will use 25% as the number for my calculations. However, I am going to hold COGS constant in this exercise. This means I am recalculating if they sell the same number of units built at the same cost. We know that GM will be 25% and COGS is thus 75%. If that $70M is COGS (from the earlier calculation), this means that revenue is now $93.3M. Let’s get back to GM and see that it is only $23.3M. That means a 5% Price Reduction leads in a drop of $7M in GM. This is a drop in excess in 20%.

Wait, why is that such a bigger percentage change? The reason is that a Price Reduction without a Cost Reduction flows dollar for dollar into a reduction in profits. That is why the company will attempt to compensate with a reduction in Operating Expenses (OPEX). According to filings, this reduction in OPEX will be about 7%. Enphase was run as just about a break even company. This means that OPEX spent just about every dollar that GM gave. So, let’s call OPEX $30M. A 7% reduction is $2.1M or a new OPEX of just about $28M – I will use $27M to account for my rounding of numbers.

This implies that Enphase, in its new model, should expect to lose between $3.5M and $4M per quarter (GM of $23.3M and OPEX of $27M). What can they do? Either sell more stuff or cut costs more. How much stuff will they need to sell? Well, they need to generate $3.5M in GM that means that implies an new Revenue Number of $14M or a total Revenue of about $107M. This is about a 15% increase. Not a huge stretch, but that is just to get back to where they are today.

All of these factors of Prices and Costs factor into each business everyday. The kind of “What-If” scenarios are easy to do and something a Business Owner should be comfortable doing.

Have a great week!
Jim Sackman
Focal Point Business Coaching
Business Coaching, Executive Training, Sales Training, Marketing

Change Your Business – Change Your Life!

Net Neutrality Friday

For the next few posts I am going to in a specific direction that I think might help people understand some overall challenges in the Communications Business and how it is evolving. Some of the impacts to consumers is indirect, but I think this background will help people have greater depth on the issues. Today, I am going to focus on the M&A spree that companies that are hardware suppliers to ISPs are on. As recent examples of this, take a look at Nokia’s purchase of Alcatel-Lucent and the partnership between Cisco and Ericsson. But this has also happened at the chip level with Broadcom, ATMEL and many others. As a background you may wish to read one of my very early posts HERE!

The fundamental problem for Hardware and Chip Makers is that there to trends against them. The first is that the major ISPs are consolidating. The second is that innovation has exited the hardware world. I will address these in order.

The ISP consolidation has been going on for a decade now. I want to talk about why this is next time, but this week just take it as a given. This creates an imbalance of power between suppliers and customers. There are fewer customers and they tend to buy in higher volume. The fewer customers means that there are fewer opportunities to win business. The higher volumes have led to extreme discounts. This means that the numbers of major suppliers needs to go down. If we spread out the business to far then the effort to design a product is done against too small of a product win. You can see this in the Aircraft Manufacture business. There are two huge suppliers that make most of the world’s commercial airliners – Boeing and Airbus. There are some niche suppliers who compete in specific geographies or in small parts of the market. But at the end of the day, there are two major suppliers. The Communications Business supports many large providers today – Cisco, Ericsson, Nokia, Huawei, ZTE, and some Japanese manufacturers are the major providers. There are some smaller players that are focused like Calix, Ciena, Juniper and Coriant. Will this list boil down to two like the Aircraft Manufacturers? Probably not. If you recall, the dot.com bubble created a huge number of Hardware and Chip start-ups in the Communications business. That bubble collapse and the subsequent consolidation has driven many of these newer companies out of existence or into being parts of larger firms.

We also have this long term lack of innovation. I remember about 10 Years ago a Venture Capitalist named Drew Lanza posted on Lightreading that he was no longer going to be a part of the Communications Business. He was attacked, but has turned out to be prophetic. The last set of real advances were in Wave Division Multiplexing and Optical Switching. Both of those technologies were put into place about 15 years ago. Since then, we have truly been refining hardware not fundamentally changing it. In addition, the cost to build hardware has gotten astronomical. The old way of competing was the development of unique Hardware Architectures that made special products. The cost to develop custom chips to support this has gone crazy and is essentially impractical at this point. This also impacts the chip makers and forces them to build things that they are sure are going to sell. All of this pushes Hardware to Standardization (as much as Virtualization is pulling it). This means that everybody has similar products. If the products are similar then how can small companies innovate? Well, there has not been a truly successful hardware start-up selling to the ISPs in a long time.

Next week, I want to talk about the ISP consolidation and the impact of the reduction of innovation.

Jim Sackman
Focal Point Business Coaching
Business Coaching, Executive Training, Sales Training, Marketing

Change Your Business – Change Your Life!

Sonoma County: News and Notes

I really hate to post about Earnings this week as I will need to talk about Enphase. The stock reported last week and has been getting crushed since then. This is an extension of an ongoing decline for the last 6 months. The decline over the last 6 months has flown in the face of the results posted by the company, but it has all come to roost at this point.

The Q3 numbers were not bad. Revenue was $102M up slightly from last year. The company continued its tradition of spending what it makes and Enphase was about break-even again. The slight Revenue Growth is the first issue. Enphase had been a growth story, particularly around the spectacular top line growth. But Q3 2015 was different, it was essentially flat with Q3 2014. If the growth has slowed, then people will not want to price the company very strongly. This is a problem with Growth Investing (also called Momentum Investing). Once the growth inevitably slows, then there is a dramatic stock drop.

But there is a second problem with the stock which was the projection of only around $65M of Revenue in Q4. This was noted because of extra inventory at Enphase’s distributors. This means that there was a slow down in Sales at the Distributors but they had already placed orders and those got filled before the slowdown was noticed. This is a bad sign for the future and will have to be watched. One other number that you can look at that makes me pause is the Accounts Receivable. This number was up $30M Year over Year, which means that Enphase might have shipped a significant amount of product at the end of the quarter. I don’t like these kinds of shifts as one can make some rather suspicious comments about managing Revenue to make it all happen in one bad quarter.

Then there is a third problem at Enphase. Price pressure has gotten too much and Enphase has lowered its Gross Margin forecast for the future. This is a drop of about 5% and looks to be a relatively long term drop. Because of this, Enphase has had a 7% layoff. This signifies to me that this is not a 1 quarter issue, but that the company is serious in changing its cost structure. This presents a problem in efficiency because Enphase will need to return to its former Revenue levels with 7% fewer employees. That can be a challenge, unless those were unproductive employees anyway. If they were, then one would question why they were still employed. This Gross Margin change is a great example of how to use the Way to Wealth Formula that I have been posting about. Because of this, I am extending my series on that one more week and I want to run through the consequences of these changes to a company.

Finally, there are the unstated uncertainties in the future. As many of you may be aware the vast bulk of the Tax Credits for Solar from the US Federal Government expire next year. This will put further price pressure into the market. On top of that, Oil Prices have dropped significantly over the past year. This also looks to be a long term trend. These two taken together mean that Energy Prices are likely to decline. This means the Return On Investment (ROI) for a Solar Installation will be tougher for people to make.

So, we will have to see if Enphase’s expansion Internationally and into the Storage Business will help. Right now the Market Cap of Enphase is under $100M. This means it is about 1/4th of Sales. Management will be under extreme pressure to change this.

Jim Sackman
Focal Point Business Coaching
Business Coaching, Executive Training, Sales Training, Marketing

Change Your Business – Change Your Life!

Know Your Numbers: Annual Planning

Last week, I covered the 10% Formula and this week is my final post in this thread. I said in that last post that you need to look at your numbers proactively. This means that you don’t react to what they are saying after the fact. You look at them and help create your future. The best way to start this is with an Annual Plan.

So, what does an Annual Plan consist of? Simply it consists of a Financial Plan and a number of initiatives that will happen in the upcoming year. The Financial Plan breaks down into a set of people and capabilities for each part of the company. The initiatives are actions that are taken to change the company from where it is today to where it is at the end of the following year. As I have said, this is all about alignment and this is the place where that piece of rubber meets the road.

How to start? Well, a good place is the current results for the year. It should be possible to project the rest of the year and end up at an estimated Profit and Loss (P&L) statement. The next thing is to update this P&L for next year. Price increases for standard expense items, estimated raises, and cost of products increases should all be included. Then a Revenue Plan will be created based on the selling of the Products and Services that will exist by the Year end. From that you will have next years P&L. There will be tweaks around it and it probably takes two passes to get this correct. I have called this as a “Present View of the Future” or what next year will look like assuming you make no changes.

The thing is that you may be quite unhappy with the results as they are about to happen. The good news is that you can do something about it. This is where initiatives come in. They are changes to your business that you make. They should have an impact on your bottom line that is traceable. So an Annual Plan would on consider these and add the results of them to your P&L. That final result may get you what you need for the future of your business. The challenge is to create a model that you can measure to understand the performance of these initiatives.

One method is called a Balanced Scorecard. It consists of a number of Financial and non-Financial measures that can be done monthly or quarterly. You need to have performance thresholds for each measurement period. This allows you to know whether the metric is doing poorly, reasonably or well. If things are going poorly, you can then take action to improve your execution. It is important that these initiatives are aligned with where you want your business to go. On top of that, you want to keep your total number of measurements under 10. Three of them are going to be Revenue, Gross Margin, and Net Margin. The rest should represent a set of numbers that should happen if your initiatives are doing what you want them to do.

So, have an Annual Plan. Create Some Initiatives. Measure your Results. Take action as needed!

Jim Sackman
Focal Point Business Coaching
Business Coaching, Executive Training, Sales Training, Marketing
Change Your Business – Change Your Life!

Net Neutrality Friday

In my review of Calix’s earnings on Wednesday, I said I would talk about CAF-II. I want to expand on that here.

To start out, what the heck is CAF-II? It is Phase 2 of the Connect America Fund. You can go right to the horse’s mouth at the FCC and learn more about it HERE. The big thing is that in the long term this type of funding is going to replace the Universal Service Fund (USF). That fund was put in place to help telephone companies deliver phone service to all. This became part of the trade-off within the Telecom world. When universal service was put in place, it became clear that very rural America would have to pay a lot of money to have service. My personal experience with this was with a phone line that AFC served that was 80 miles long to a single cabin. 80 miles for 1 phone. You can imagine that constructing and maintaining that line cost a lot more than $25 per month.

In comes USF. Telephone companies that had a high percentage of what were termed “High Cost Loops” could get help to keep the price of rural phone service the same as urban and suburban systems. Most large companies did not qualify for this support, since they tended to have the big cities. Think of Pacific Bell in California. How many homes are near Mount Shasta compared to the number in Los Angeles? You can see that large cities swamp the percentages for large companies. There were exceptions of course and much of this evolved as we moved from Rate Base Pricing to Rate Cap Pricing. I have reviewed this in the past, but will remind folks here. If you go back in time, you will find that Telephone companies were guaranteed a Return on Investment (ROI) by managing prices against what was called the Rate Base. The Rate Base was a summation of all the Capital Expenditures that the company put in to provide service. Rate Cap pricing means that there is a Cap (a limit) on how much a telephone company can charge for phone service. This has changed spending patterns to maximize the ROI. The right Capital Expense Level for a Rate Cap carrier is 0. Which has led to our problems with rural broadband.

To help with this transition, the FCC is managing the Connect America Fund to get broadband universally deployed. All the companies look like they are going to participate, and this is a major win for the FCC. However, it does not guarantee 100% coverage nor does it ensure that as Broadband moves forward that rural customers will recieve timely upgrades. I consider this a great step forward, but not the ultimate answer.

As it relates to Calix, the question is “So, why is the money not flowing to you?” I think the better question (as a taxpayer) is: “Are companies increasing their Capital Expenditure Budget with CAF-II or are they substituting their money with our money?” I think that is an open question, but one that Calix can not answer. This needs to come from the telephone companies.

Have a great weekend!
Jim Sackman
Focal Point Business Coaching
Business Coaching, Executive Training, Sales Training, Marketing

Change Your Business – Change Your Life!

Sonoma County: News and Notes

We are starting earnings season today with a review of Calix. They released earnings last week and have lost about 20% of the value of the company due to the earnings call. To be clear, when I talk about company value I am talking about the value of the stock. As a reminder, I am posting about Calix as an investment. Calix is a profitable company with many fine products and some good people that I know. This earnings review is put in place to help average investors understand what is happening in the stock and why. This is also not an investment recommendation. I am simply trying to help people understand the market a little better.

Calix had Revenue of $112M and earnings of $0.16 per share (non-GAAP). Those results are somewhat better than Q3 last year by about 6%. The problem was that Revenue next quarter is projected to be about $104M and earnings had a wide range from losing money to about $0.07 per share. In the recent past, Calix has not seen a dip in Q4 like this and the lowered revenue caught the analysts by surprised. This is what drove the sell off of shares. One thing that is also true is that Operating Expenses were up year over year, particularly in Research and Development. I will focus most of this post on this last issue.

Before I get there, I want to explain a couple of things that drive the stock down when a company has a down quarter. Essentially, a company is a stream of Earnings. Revenue is crucial in having Earnings, but the Stock Market is looking for growth in Earnings over the Long Term. That is why Price to Earnings Ratio (Stock Price divided by the Earnings per Share) or P/E is a critical Metric. Analysts are trying to gauge what Calix’s P/E ratio will be for next year. I think a more important metric is P/E to Growth ratio or PEG. This is the P/E ratio divided by the Growth in Earnings. A PEG over 1.0 means that there is a bet on continued Growth in the Earnings and that the stock is priced with that in mind. A PEG of less 1.0 means that people think that the Earnings will not grow quickly. Something to look for in stocks you invest in.

I want to go back to that investment in R&D. In Q3, Calix put over $22M in R&D. This is over 20% of the Revenue of the company. For a Technology Company, an investor would like to see a significant (15% or so) growth in Revenue to match this investment. That has not happened here yet, and Calix says it is due to a long term investment in software called AXOS. The information around AXOS sounds very good in the articles that I have read. It seems to make sense to me to make a product like Calix’s easier to modify and maintain. The problem is that the CEO told us that the software has been working in networks for 18 months. Well, that is great from a product stability standpoint. What is not good for investors is that this has not seemed to make any difference to Revenue. On top of that, it has not reduced R&D spending to get this Revenue. I think this aspect of the call (and thanks to Paul Silverstein for asking about it) should have set off more warning bells than a blip in Revenue.

That blip in Revenue was attributed primarily to something called CAF-II which I will cover Friday in my Net Neutrality Blog.

So where does that leave us? Well, Calix seems to be stuck and not sure how to get to the next level of Revenue. I look forward to next quarter’s results from them. Next week, I will cover Enphase.

Jim Sackman
Focal Point Business Coaching
Business Coaching, Executive Training, Sales Training, Marketing

Change Your Business – Change Your Life!