Sonoma County: News and Notes

This week I review the earnings of Keysight Technologies. The company reported $751M in Revenue and $0.64 per share earnings. This is approximately flat results from a year ago. Since the call the stock has been up a bit but has started giving back the gains that it had from the call.

Here is a direct quote from the call (courtesy of Seeking Alpha): “Lastly, we are committed to continue to opportunistically deploy capital through our share repurchase authorization, but are assuming a base case diluted share count of 175 million shares at year end. We remain committed to investing in the key growth areas of our markets to drive the long-term growth of our business while at the same time staying consistent with our operating model. As a reminder, our operating model is structured to deliver high-teens operating margins at current revenue levels.”

Okay, that’s great. They are getting quite a lot of money out of the business. Essentially, they are making very good money. But the shareholders are not seeing the benefits of this on a return into the share price. The quote here says that they do not think that they have lots of excess cash to spend on stock. This is true even though the gain about $40M per quarter, are paying down their debt, and the operations are generating, even more, cash. This is a good sized company with meaningfully profitable results.

But the situation reminds me of a movie called “Other People’s Money” that starred Danny Devito. It was the story of a company that was about to be taken over in the 80s but done as a comedy. There is a scene in the movie where he talks about the reason he does what he does and says that he wants people to invest their money where it makes them money. And that is my commentary on management. The goal of your investment is to grow the share price or to find some way to spend the money that it returns it to shareholders. Another quote from the conference call via Seeking Alpha: “We’re very, very pleased with the progress that we’re making and again, as you know, when you invest in R&D sometimes it’s a 24 to 36 month investment before the product even hits the market and then a product ramps from there and has to go through a customer’s buying cycle so you don’t always see it in the quarter or even the fiscal year in the actual result. But, we are very pleased with the path that we’re on and the results that we’re getting in at this point.”

They have upped the R&D spend but not the value of the stock. If you can not meaningfully impact the share price, consider giving the cash to the owners via a dividend. Let them invest in areas that have a great potential for growth and help them get a return on that $40+M a quarter you get to put in the bank. The cash is doing nobody any good there.

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

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Please have an Annual Plan!

So, I beat people up every year about having a Business Plan. Business Plans are great as they set a longer term direction for a company. Even if you have one, you still need to make a shorter term version of it – an Annual Plan. Think of the Annual Plan as one of the stepping stones in the completion of the journey that your Business Plan sets you on.

So, what are the elements of an Annual Plan? They consist of 3 major sections for a Small Business – Revenue, Budget, and Initiatives. The easiest of these to understand is the Revenue line. As I have made my case in the recent series on Time Management, one should plan on Revenue Growth of at least 10% per year (preferably 15%). This is to compensate for inflation that will naturally occur. There are alternatives to growing the revenue that quickly. The first of these is to improve the profitability of the products and services. The simplest way to understand the cost of goods sold (COGS) is to think of this as the variable cost that the business has in making the products and services. This includes both labor and materials so some part of employee expenses will be in there. This can be a difficult line for some businesses as people can spend only part of their time on production. The reality is that the most important thing is that you are consistent in how you deal with it.

The second way of limiting your need to grow is in your Budget. I know that many small businesses have trouble with this, but there should be records of what was spent in the year to date and that can be extrapolated to full year. This is a great starting point for a budget. The one thing that needs to be clear is that costs are likely to rise year over year. One place I get an argument is on rent. Many businesses have a multi-year rental agreement for their property. The thing is that unless you plan for the rental increase when the new contract comes about you are likely to be flabbergasted at the increase. By planning the rent increase into the budget, you should be able to create margin in your plan for the rent increase later. In any case, if you can limit your Budget increases it can lower your need to improve Revenue. The challenge with that is that it is difficult to improve Revenue and not give raises or spend money on Marketing.

Finally, there are Initiatives. These are changes in your business that you are going to make to help you grow and meet your Business Plan goals. The first two sections of the plan should be done as if there were no changes like we will keep doing things as they are. Now we layer in these changes. Is it a new Product or Service? Are you trying a new Marketing Channel? Are you opening up a new Territory? Whatever it is, you need to plan for expenses and results dedicated to these initiatives. This will help you judge the results of the initiatives when you are done with the year.

So, I hope that simple outline helps you create an Annual Plan that you can use to operate your Business!
Jim Sackman
Focal Point Business Coaching
Business Coaching, Executive Training, Sales Training, Marketing

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Net Neutrality Friday

This week I want to talk about the potential merger of AT&T and Time-Warner. On the surface, this does not look to have too many anti-competitive issues. Deeper down there are some really troubling trends here.

AT&T/Time-Warner would be the 2nd major ISP to have control over significant amounts of content. The other is Comcast as it owns NBC-Universal. Verizon has seemed to focus more on infrastructure, but Yahoo! does have a few popular content properties (particularly Yahoo! Sports). Google has a similar business. Many infrastructure properties but not a lot of direct content. Facebook is notorious for taking ownership of the user generated content posted on its site (which is why I don’t post there originally). Apple is another company in the content infrastructure business. Amazon is starting to straddle the line by having original content.

Why should this trouble us? It smells a lot like the old movie theater days. The major studios owned the vast majority of the movie theaters. This meant that they controlled distribution as well as the content. By doing this, they limited independent competition. If you really want to focus on Net Neutrality, to me this is the fight. Can we have clear neutrality in content ownership and assure a wide distribution of original content.

I think (and this is my opinion) that Netflix will be the test case here. As large as Netflix is, they still address a pretty small market. They are starting to build a significant original content library. What will they do once those shows go out of production? Will they license the content to cable or other online or linear content delivery channels? The longer the content is on the shelf the less value that it has. One would think that they might want to capitalize on the buzz around their shows to make a bit more money.

And I hope this is what keeps content neutral. Locked up content loses value. If you own content, you want to maximize its value. Wide distribution is the best way to do that. Think about the ongoing value of Seinfeld or The Lucy Show.

But we shall see as things evolve. Have a great weekend!
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

And now for the most controversial earnings post of the quarter. That for Enphase. I have had many people be highly critical of my posts on Enphase and will talk about that later in the article. So, let’s start by going over the raw numbers. In Q3, Enphase did $88M in Revenue (down from $102M last year) and lost $0.40 cents per share. On top of that, the company used $20M Cash in Operations and left the quarter with a cash balance of $24M. During the quarter the company did a “Secondary Offering”. This means that they sold more stock @ $1.20 per share. For existing shareholders, this means that the number of shares outstanding went from just over 50M to just over 60M shares. By doing this transaction the company gained about $14M.

Using the mid-point of the conference calls numbers for guidance, the company expects to have $95M in Revenue at 18% Gross Margin and $22.5M in Operating Expenses. This would imply a loss of $5.4M or about $0.09 per share. This would be a marked improvement from Q3 but not good enough. The good news is that if the company can maintain its $22.5M Operating Expense number then the break even moves down to $125M a quarter. A long way from where the company is but better than the $150M or so of earlier quarters.  A couple of notes here. First, there are some assumptions – like Operating Expenses being held flat. You can imagine this is going to be difficult in a company that is going to grow 50% in Revenue. On top of that, there are rumors of price cuts in the market. This could lead to additional pressure on Gross Margins. This is where the company is challenged in any case.

As I have said, and reiterate, I believe the right strategy for the company is to find a buyer. It has already executed two very painful financial maneuvers to keep the doors open. Shareholders should not expect a great premium if that happens because the company teeters on the brink.

But now let’s get to the criticism of my views here. Basically, I think the company’s products are too good. I know that sounds strange but Enphase has executed a strategy where it is delivering the best products on the market. The problem is that the market is not valuing the innovation performed by the company. I think the latest round of Sprint ads are similar…you know the ones where they characterize a 1% lower performance for 1/2 the price. And that is what I think Enphase is facing. The competitors are not as good, but are lower priced and have lower cost structures in the companies. Ongoing low energy prices will continue to damp broad demand and force pricing even lower. If you can heat your house for 1/2 of what you did a year ago, you can afford about 1/2 the amount to put solar on your house.

Having great products does not guarantee a great company to invest in. We shall see how this all ends up in the next year or so.

Jim Sackman
FocalPoint Business Coaching

Business Coaching, Executive Training, Sales Training, Marketing

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Delegation and Decisions

I run into a number of Business Owners who want to change their delegation of tasks for several reasons. The one that we are following through on here is the result of our A-B-C-D-E analysis. From that, we need to figure out who to delegate a task to and then how to actually do the delegation.

But before we even get there, we need to set some expectations of the delegation. This will not be a 100% efficient process and we need to make sure that we have accounted for that. There are many reasons for this, but we need to be clear about them.

The first is the training that is required. Whenever a task is delegated, it needs to be put into a clear business process. This is the first point of inefficiency. A person that has been running a business often mixes two or more processes that should be separated. This can make the work more efficient but can make it difficult to impossible to delegate. The person that is being delegated two may not be handling both tasks. Additionally, by separating the tasks there can be clarity around what makes each process function. We can measure each process more effectively.

That process will have a set of elements and many people just train for those elements to go correctly. The better way to go about this is to also cover the failure paths. These are the ways that things can go wrong in the flow of the work. And this is where we come to the challenges that we have with delegating. When things go wrong is when people need to make decisions about the way they are going to course correct and get back on track. This is where we need to make sure that the training is clear. When somebody is just starting a new task, you need them to make black and white decisions. The less chance that they have to make a mistake in decision-making the better off the delegation will be. You also need to provide them a path for escalating decisions back to you. This gives them the ultimate out when they are unclear on what to do.

Finally, you need to let them know what you need as status updates. This will allow you to monitor the delegation efficiently.

With all of that, you will have started delegating tasks as effectively as you can. This is a great way of getting more time back in your day.

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

Election Season is over but Earnings Season has just begun. This week we cover Calix and I will be showing you a bit of what gets missed on these calls because of who is on them.

We will start by capturing the raw numbers. Revenue was $121M in Q3 and this was a record number for Calix and growth of 8% year over year. Earnings were $0.12 per share non-GAAP and $0.01 per share GAAP. Now just a reminder there was some extraordinary benefit this quarter in Operational Expenses (OPEX) due to the end of the litigation over the acquisition of Occam Networks some years ago. Q4 looks strong on the Revenue side as well but lower Gross Margin and a return to more normal OPEX numbers make the company break-even at best.

The stock reacted with a shrug. To put things in perspective, from September 2011 to today the stock has hovered from about $6 to $12 with the bulk of the time above $8/share being in the 2nd half of 2013 through the first half of 2014. Meaning that if you play the stock as a long-term investment that it has really not done anything over the last 5 years. In fact during that span, Calix stock is down over 45%, the S&P 500 is up over 30%, and the NASDAQ is up over 45%. The company is solid financially and has good products and customers. But the last 5 years has not been kind to investors.

So, I read the call transcripts and want to point out some things that the analysts missed. I know most of these analysts and if they want to hire me to help them ask better questions, they know how to find me. Simon Leopold was answered about the products in the Verizon trial. The follow-up that Simon missed was to ask about the ONT. Here is why. You could have figured out what services were being tested. Verizon used MOCA to deploy data in residential and had 3 wavelengths for overlay video. I suspect (nobody has said this) that the trial is an overlay of FiOS for wireless deployment. If that is true, then the ONT would not need voice ports, MOCA or a 3rd wavelength. That would help us understand any upside from a Verizon contract.

Another miss was on Gross Margins. The analysts both Greg Mesniaeff and George Notter asked follow-ups around the guidance down on Gross Margin. The company laid this off on an increase in Service Revenue and that Revenue has lower margins. Here is the thing. Calix has now announced its 2nd Cloud “product” as part of this call. These products should have very high Gross Margins if they are doing well – not quite software margins but well above corporate average. To answer George’s question, these products SHOULD be the path to the goal of 50% gross margin and SHOULD offset the lower margins of Professional Services. If they aren’t then that will tell you something about the customer’s use of them.

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

Change Your Business – Change Your Life!

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A-B-C-D-E

Last week I talked about the Average Hourly Wage as a way of evaluating quantitatively all the tasks that you have. That is a more personal way to look at Zero Basing, which is more of a company way of evaluating. As you recall, we are talking about this so that we can look at ways to improve the productivity at your business. We want to improve productivity so that we can grow the business greater than inflation and grow the profits of the business.

This week we want to look at a qualitative way of evaluating Time and Tasks called the A-B-C-D-E method. This provides a counterpoint to the quantitative method of the Average Hourly Wage. You start by putting every task you perform on a weekly basis on a list. You then assign one of the letters to each of the tasks. A is used to describe those things that you must do. B is used to note a task that you should do. A C task is one that you can do. D tasks are those that should be delegated to others, either internally or externally. If a task gets an E, then it should be eliminated. Those Es are much like the processes eliminated in Zero Basing.

Now the challenge comes up that when people do this, they end up with a lot of As and a few Ds and Es. This is a bit helpful as those D and E tasks are going to be off your plate. The reality is that not every task is an A. This is where the use of the Average Hourly Wage can come in handy. If you take all those tasks in the A bucket and then write down their Average Hourly Wage, you now have a way of comparing tasks in the A bucket. Those with the highest hourly wage will be As. Those with the lowest are generally Cs. Now, there will always be exceptions but most of your tasks should be Cs. The A rating should be reserved for those things that really move the needle at the company.

Well, we have talked about some things that can be used to evaluate personal and corporate productivity. These tools can be used to make sure that you and your employees are working on the right things for your business.
Jim Sackman
Focal Point Business Coaching
Business Coaching, Executive Training, Sales Training, Marketing

Change Your Business – Change Your Life!

Visit the FocalPoint Norcal Forum – We have many tools for helping your Business!