Sonoma County: News and Notes

Well, I think this might be the best Conference Call Review that I get to write this quarter and it is for Keysight. I haven’t done work on Autodesk yet, but this call went pretty well for Keysight.

First, let’s review the numbers. Revenue for the quarter was $735M which was near the top of the guidance but basically flat from last year. Remember, that last year’s number did not include Anite (which cost Keysight $600M). So, the year over year direct comparison is down 8% year over year. Profit for the quarter was $88M or $0.51 per share. That is down about 8% from last year. The reason is that the costs of operating Anite have added to the Operating Expense of the business. The company also repurchased $42M of the $200M shares that have been authorized for repurchase. With all of that the stock has jumped from $26 per share to $30.50 since this announcement and conference call.

Why is that? Well, I think the Market was actually expecting much worse news than it got. Why is that? Essentially, the analysis boils down to the Communications Business. The company now known as Keysight used to be part of Hewlett-Packard. When I was a Engineer on the bench, I preferred HP test equipment when I could get it. It was always easy to use and reliable. Communications has been a huge business for Keysight for a very long time (well if I used it, it has to be old). The problem is that Communications Equipment is in a huge funk and has been for a very long time. You would think with the growth of the Internet and the proliferation of Wireless Services that Communications Equipment would be growing. But it is not and has not been a great industry for a long time. Why that is will be in another post. But if your customers are not doing well, then it is hard to sell them a lot of gear.

So, what does that mean for the stock? Well, the bump from $26 to over $30 is nice, but if you compare it to a year ago it is actually slightly down after the bump. To me, investing is not day trading. I can’t time the stock market, so I look for long term trends. The question really is what will Keysight do with its cash? Right now, it is doing small amounts of stock buy back. And it says it is considering M&A. But if you are going to generate almost $90M in cash a quarter, I strongly urge Management to consider a dividend. That way the investor gets their money back and can put it in faster growing vehicles. If I were on the Board of Directors, I would be pushing for a $0.25 per share dividend each quarter. There would still be additional cash being built and shareholders would get some of their value. I don’t see huge growth or decline for the shares unless there is a significant market change external to the company. So, do you want to hold a stock for it to do very little?
Jim Sackman
Focal Point Business Coaching
Business Coaching, Executive Training, Sales Training, Marketing

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Fear of Funding

I have had some conversations lately about capital to help a business grow. The conversations have not gone well and I am trying to post here to help people be a bit more thoughtful as it relates to raising capital for their business. We have talked about all kinds of investors whether they are Financial, Strategic, or Angels. But the thing that I think people want are Unicorns. Investors who don’t actually exist.

Let me take a step back and outline the fundamental problem. I think this came from Kickstarter and the like where people give you money with really no expectation of a rate of return. This kind of funding works for a very small slice of businesses. An Electrician or a Clothing Store is unlikely to have a viable Kickstarter. They basically work for Product Development Projects that have some meaning to a Millennial Audience. Most businesses can not use that kind of vehicle to raise money.

This leaves us with our two traditional funding mechanisms: Equity and Debt. Yes, there are hybrid vehicles but most Small Businesses don’t have the infrastructure to deal with Warrants or Preferred Stock. So, let’s just stay the course and focus on our two mechanisms. Debt is a loan of some type. There is interest to be paid on a loan as well as eventually paying back the principal. This means that many people are interested in Equity investments. This way the money comes in and there is no direct obligation to pay this money back. That makes things attractive for people. The downside is that Equity likely comes with some interference with how the business is operated. This can be troubling for some owners.

But we need to talk about two things that need to be included in any request for funding: A plan for Return and Use of Proceeds. The former creates a whole set of problems as Owners are often unclear on how they are going to make the money up that they are taking in. Think about an investor. If you are unclear or uncertain, why would they give you money to use on your business. That kind of clarity is paramount. With Equity, there is an additional challenge. They are not concerned with getting interest but at some point being able to sell their portion of the business at a higher number than they put in (with some thought to a reasonable return on their investment). Does that mean you have a plan to sell the business or take it public? If not, how are they selling their stake? The Use of Proceeds asks how the money is going to be spent. Often times, owners know they need capital to grow but don’t have clarity in planning how they are going to use the money and what alternative uses their might be. Investors will evaluate the Use of Proceeds to see if the plan makes sense. If it doesn’t they are unlikely to give you capital.

All of these things cause people to be adverse to raising capital to properly execute their business. But all of this is well within the Owners thinking and is easy enough to write down in a clear manner. It can help a business prioritize how it is spending its money even without additional investment. If you know a business that is struggling with raising capital or is unsure what that would mean have them contact me. Would be happy to talk to them to see what their options are.
Jim Sackman
Focal Point Business Coaching
Business Coaching, Executive Training, Sales Training, Marketing

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Time and Employees: Conclusions

 

Well, hiring an employee is a transaction in leverage. By hiring an employee, the goal is to create enough additional time to justify the cost. The employee will not provide 100% additional gain, but something less than that. It is part of organizational friction and communications to keep from adding people at 100% efficiency. Writ large, it why very large organizations move slowly and are bureaucratic. It takes a lot of effort to keep 100,000 people moving in the same direction. Which is my first conclusion. Clarity and Alignment are critical here. Unless people are working to being aligned with the business, then things are much less efficient. This is why getting Vision and Mission clear are so important for a business. If you are a regular reader of what I do, then you know that I talk about this as part of your Brand. The point of this is very simple. People make decisions daily inside a business. If they are making them with the same criteria in mind, then the impact of the decisions will be cumulative and in the same direction. That is how to move a business.

To get appropriate leverage you need two critical elements. The first is a plan. That is a plan for the role or roles that the employee will fill in the organization. That will tell you what hard skills are required. But it will also help you judge success with the person. Before they start you should be able to say what will happen when they succeed at their job. This should include some business metrics that roll through to the bottom line. You can present this to the person before or after they start, but there is no reason to hide what will make them a success. They want to know. The second is diversity. In this case, I don’t mean our traditional view of diversity. Here I mean skills and personality. Many leaders want to hire people like themselves. But if they hire people that help cover their weaknesses, they can be more successful. The challenge is that this means that one must acknowledge and deal with their own weaknesses. By weaving a tapestry of skills, the leader can create a team. And it is that team that is going to win.

So, I have outlined some of the issues in getting the right folks to fill positions from creating the right job description through hiring and onboarding to delegation and performance management. Needless to say each one of these areas is fitting for a deep exploration. My goal has been to introduce the topics and help leaders think through all the aspects of having an effective employee.

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

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Sonoma County: News and Notes

Ever have to do a chore that you hate? Well, welcome to my post today – my review of Enphase’s Q1 2016 Earnings call. I have many folks I consider friends there and I really hate to say mean things about them. But the truth is that I am not talking about them. I will provide an analysis of the numbers and some thoughts about their stated strategy.

Revenue for Q1 was about $64M or off around 20% year over year. The company lost $0.41 a share compared to $0.14 per share a year ago. This is all related to price cuts that Enphase announced last year. It has driven Gross Margins for the company from the range of around 30% to around 18%. On top of that there is a revenue decline because of the price cuts. In absolute terms, Gross Margin dollars went from $28M in Q1 2015 to $11M in Q1 2016. Operating Expenses were down from $33M in Q1 2015 to $30M in Q1 2016. So, there is real trouble here.

Let me start with a break-even analysis. Right now the company is just below 20% Gross Margin and has a target to get back to 25% Gross Margin. If Opex is held flat, that means that you would need $120M (25% GM) to $150M (20% GM) to break even. Given that you can not expect to double revenues and spend no new dollars, the $150M mark is much more likely for a realistic break even. I can’t model their Opex growth against revenue, so this is just an approximation. To take a step back, the best quarter that Enphase ever had was just over $100M. That means that revenue has to grow about 50% from its maximum and over 100% from today. All of this has to happen when new competitors are coming online from China and Oil prices are very low.

So, what changes did the company announce in its strategy to close the gap? Actually, it announced none. The CEO (Paul Nahi) said they are staying the course. The problem is that this course is not working. They can have wonderful products but they clearly are not extracting additional dollars for all Enphase’s great technology. Right now they are spending about 20% of revenue in R&D (are you listening here Calix). They are not able to turn those dollars into profits. Which is the whole point of spending money in R&D. They are talking about cost reduction plans, but to get to break-even in a cost reduction you would need to get margins to 46% to get to break even. Even the expansion to 25% or 30% will not get you there as I showed above in the break even analysis.

What can they do? Well, Enphase has the additional problem of at some point being out of cash. They will continue to burn it, but I am not going to predict when they will run out at the moment as I want to see some reduction in inventories before we go there. The only thing to do is to sell the company before it gets that far. The company has lost most of its value over the last 12 months as the stock went from over $10/share to around $2/share. If the business goes through restructuring, then the current equity holders lose. The best way to help them recover from an 80% loss is to get more money for the stock which means selling the company. One only wishes that this was done over a year ago.

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

Change Your Business – Change Your Life!

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Time and Employees: Performance

I have spent much time over my career managing groups large and small. Many of the owners that I work with are expanding and want to hire employees. They don’t have over 20 years of personnel management. They tend to make a couple of mistakes in dealing with new employees.

Mistake one is not having an employee handbook. Owners don’t want to set down a series of rules for employees that they feel are common sense. The thing is that what each person thinks of as common sense is different. The point of such a handbook is that the easy things are defined and spelled out. Don’t solicit the companies clients. Show up on time. Here is a dress code. There can be really controversial parts of these books. My son’s company wants food handlers to not wear jewelry. But does that include wedding rings? You can imagine that even simple things like that can get complicated very quickly.

Mistake two is thinking that employees are like owners. I often use the bacon and eggs breakfast analogy for this (The Chicken is interested but the Pig is committed). The employee wants the company to win, but probably not at the same level that the owner does. There is nothing wrong with that. Employment is a business transaction. Like any transaction there is an expectation from both sides of getting something that they want out of the deal. But to be clear, the employee sees this as a transaction and this is not a life commitment from them. It is a rental of their time and expertise. They are hopeful that if they do a good job that there are appropriate rewards in the future. In small business that can be a challenge, because how do you promote someone that works directly for the owner. There are ways to overcome this, but this kind of thought requires some evaluation and cooperation.

Mistake three is that performance issues are left to linger. Many owners don’t have skills in confronting these challenges effectively. When problems linger it impacts all the people around the problem. Other employees see a person getting special treatment. Customers are not getting service that is what they expect. Suppliers aren’t being provided orders soon enough to deliver. And the owner is always trying to turn away from the problem. The best way to handle any problem like this is both timely and specific. Any time you have to deal with a performance challenge the closer to the issue that you can do so the better. When talking about the problem, be specific. Using concrete examples will often remove much of the animosity from the conversation. What may be unclear is that the employee may be unaware that they did something improperly. When you don’t correct it, the employee assumes that they have done things right. If you let this fester, often times it will lead to separation when the problem does come to a head.

Now, one thing that should be made clear in all these things. It is almost impossible to provide too much positive feedback. Think about how many times a week you deal with negative situations and how many times you deal with positive ones. Don’t forget to praise good work being specific and timely in doing so. This will help create attachment by folks.

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

Change Your Business – Change Your Life!

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Sonoma County: News and Notes

Well, it is back to earnings season and both Calix and Enphase reported yesterday. I am going to start this quarter with Calix.

Let’s start with the numbers. Revenue was up over last year by 8% to $98M and the company lost $0.22 a share. That latter number was about the same as last year. The stock has done reasonably well since the announcement and is up 10% today. The conference call was a relative non-event. There were some detailed questions trying to get a view forward of a part of the financials (that I will cover later). The rest of this was all about the Connect America Fund (CAF) Calix has said that at this point it views the CAF as primarily substitutive. That means that people are using CAF money to build networks instead of their own money. These loans (low cost especially for larger carriers) and grants (only available to smaller ones) help lower the cost of rural buildouts. The money takes marginal business cases and makes them acceptable. We will never get 100% build of broadband this way, but incrementally it gets better (see my Friday postings on Net Neutrality about this topic).

Anyway, one thing that I wanted to cover is about the conference calls and guidance. If you read the news reports, the comment on Calix’s quarter says: “4:01 pm Calix Networks beats by $0.03, beats on revs”. That sounds good, but what does it mean. It means that Calix was able to earn more money than it predicted it would in the call where it reported Q4 2015 revenue. Does this mean on its own that Calix is doing really well? No. The idea from a management team standpoint is to do better than you said you were to show that you are doing a great job executing against the plans that you set. It says nothing about how your execution compares against other investments that you might choose.

The real energy around the call was brought up by Simon Leopold. He was trying to suss out what the latter part of the year looks like from a profitability standpoint. To do this, he was going after the Operating Expense (OPEX) numbers. Given that the company does not guide that far ahead there was no direct answer, but I want to make sure that you know what he was going after. Right now, there is about $2.5M of extraordinary legal expenses a quarter that is going away. That means in the long term that OPEX looks to be around $50M a quarter. If you are going to be a company at 46% Gross Margin this means that $108M is a baseline to break even. It is probably a bit more than that, as costs tend to rise (commissions/travel/other customer facing expenses) as revenue rises. The thing is that we need to see what a reasonable Price to Earnings ratio (P/E) is to justify the stock price for a company that is not growing rapidly. If we give Calix a P/E ratio of 30, which is really high for the state of the company, Calix needs to earn $0.25 a share for a year or about $0.06 per quarter or about $3M. This puts the revenue required to hit this level at $115M (approximately). This is why the litigation expenses are a big deal. The expenses are about the same as the profit required to get to a P/E of 30 if we get to break even.

This is why Calix’s stock has gone up a small bit after the announcement. There was not a big wave of euphoria over the prospects as articulated. This was a holding pattern quarter from that standpoint. But they will earn about $10M a year more, by spending less on lawyers.

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

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Time and Employees: Effective Delegation

Last week, I talked a little bit about Delegation styles and how they related to trust. This week I want to talk about how to delegate a task and it is all about Clarity.

That starts with clarity around the actual task. Many times people will have something in their head that is perfectly clear but may not realize that the other person has a different view of the basic description. What is important here is that there is 2 directional communication. Once the task is described, questions to be sure that the delegatee is clear on what is desired. In some tasks, there will be decision points that are clear. How the person should proceed based on decision points needs to be part of the conversation. Many people want to only talk through success paths, but failure paths and how to deal with contingencies is part of the delegation process.

The next step is to establish metrics around the task. This would include a timeline as well as any tangible milestones or benchmarks that are needed. Early on in a delegation relationship, early measurables are important. Anything that can be done to show definitive progress really helps things along. Tasks that go a long time without a tangible deliverable tend to wander and have problems meeting deadlines. That is why having clear timelines and metrics are so important. It gives everyone a temperature guage to know where the project is and how it is doing. How often these metrics will be reported on has to do with style. The more trust that has been built the metrics can be measured less often. But please note that employees care the most about the things that you care about. The best way to demonstrate care is to measure those things that you care about and report on them regularly. This will show those who work for you that you are engaged in the most important things in your business.

Finally, there is the follow-up at the end. It is important that the outcome be acknowledged and dealt with. This is true for either a negative or positive outcome. Any consequences for either a greatly positive or negative outcome should have been worked out ahead of time and would be applied at this point. One thing that is often left off is what I call a postpartum analysis. This is where the person talks about what went right, what went wrong and any learnings that can be gleaned from this project. This is a great way of creating a learning organization that gets better over time.

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

Change Your Business – Change Your Life!

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