Sonoma County: News and Notes

I apologize for being slow in getting these out.  Post-Fire Business Activity has been quite high and I have had some trouble getting these out.  I want to start by talking about Calix.  The company announced results before Valentine’s Day and I want to talk about that.  Revenue for the quarter was $137M and the company lost $0.15 per share.  This was slightly lower than Wall Streets estimates but at the low end of the company guidance.

Once this release was out the company was down in aftermarket trading.  The stock has since gone positive and I want to talk about both of these items.

I believe the intial negative reaction was due to two items.  The company has had lower product revenue in 2017 than it did in 2016.  The total revenue is up but is skewed by the increase in services revenue.  The challenge is that this service revenue is negative gross margin (sold at a loss) today and predicted to be substantially below product gross margins (products are a lot more profitable).  All of this came at a cost of more Operating Expense (OPEX) than in the past, though this trend has reversed itself in the 4th Quarter.

That lowered OPEX is the first reason that I think the stock has recovered.  It has been very clear that the company has been spending too much money.  By lowering these costs, there seems to be a recognition for what I have been asking the company to do for the past year.

The wild card here is the announced contract and trial deployments with Verizon.  The analysts have done a terrible job with this.  Verizon already has a substantial Fiber To The Home (FTTH) project with FiOS.  It seems unlikely that Verizon will be doing this new trial for FTTH.  It seems much more likely to part of the 5G Wireless deployments that Verizon has also announced.  There is good news and bad news for this.  A FTTH home deployment in Verizon represented millions of endpoints.  It is unclear what a 5G rollout would represent.  This is partly because the density of 5G stations is unclear.  Verizon believes that it will be able to get several hundred megabits per second with distances of say 1,000 ft (3 football fields).  Other carriers (in other spectrums) think the distance will be more like 300 feet (1 football field).  I think the issue is up for debate and you may want to look at this article as an introduction.

Wireless cells would be a nationwide rollout which would be good, but again it probably won’t be millions.  Imagine rolling out a cell antenna every couple of thousand feet across Montana on I-90.  So 5G coverage will be less than 4G for a long time.

What this means to me is that you are buying an option on this Verizon business with the stock.  Verizon will not stand for high prices and I suspect analysts question the gross margins on the deal.  No public information is available, but you would have to think that this will be a squeeze.

Finally, this notion of a multi-year ramp in Verizon is flawed (see the Q & A with Christian Schwab on the call).  The company quoted past Fiber Rollouts.  I take that to mean FiOS.  Within the 2 years from first deployment, Verizon was building FiOS at $150M/quarter business rate.  By setting the expectation at about 10% of that, I would guess that Calix is really unsure what is going to happen here.

Have a great day and weekend!

Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

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Sonoma County:  News and Notes

This week I wanted to talk briefly about Measure C and the SMART Train.

The SMART Train is supposed to be available in “Late Spring” according to the website as of today.  My understanding is that introduction in delayed until the Engines are swapped out or maybe its the Passenger Cars.  So, it is pretty clear that over 10 years after we approved the tax increase that we still don’t have a train system and we have no real timeline for service.  And I don’t know about you, but I have met nobody that can effectively use the train for commuting.  I am greatly concerned that we are going to end up spending a lot more money in the future to subsidize the operation of the train.  I am wondering when we will just call this a failed venture and move on.

Measure C is in place as a Rent Control Measure.  I have no idea whether it will pass or not.  The thing is that it will not cause more housing to be built.  That is the real thing we need.  To me, Rent Control is a distraction – a Wag the Dog type thing.  Good idea or bad, people are focused on it.  The thing that will actually fix things (more housing units available) has no discussion.  How are we going to add 10,000 new apartments?  That was the last calculation I made.  I would love to see pressure put on the local governments to come up with a plan to lower housing occupancy.

I implore you as voters to think critically about issues and hold our elected representatives to deliver solutions.  Let me just conflate these 2 issues in an odd way.  Imagine if we had taken all the money spent on the SMART Train and spent it instead on building housing.  At least 1 issue that we have would not be true today.  Remember the decisions you make today in government have a long tail to them.  Don’t fall for rhetoric or commercials.  Think about it and vote.

Have a great day!
Jim Sackman
Focal Point Business Coaching
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Sonoma County:: News and Notes

 

In an update to our Rent Control, it seems that a curveball has been thrown into that plan. A petition was sent around that asked for a public vote on the issue. This is interesting because it will cause the City Council to take one of two paths. First, they could pull back and withdraw the law. Second, they could put it up for a public vote. I am led to understand that it is too close to the November ballot to be on that ballot. The next opportunity would be November 2018, unless a special election is held. Those elections cost about $350,000. Not sure how this will proceed. I don’t expect a withdrawal nor do I expect to wait until 2018. I will keep everybody informed as new information emerges.

The first debate was Monday and it reminded me that we will have an election in November. Now, I don’t pay a lot of attention to the Presidential races. California (where I vote) is going to vote for Hillary, so there is little point to my vote or opinion in any way shape or form.

However, we will have a number of initiatives. I am not a fan of Propositions for a single reason: Time. We hire professionals to sit in Washington and Sacramento, and I think they should do their job. By putting these things to the public, they are rejecting their responsibility to manage the issues. They can blame us for the consequences of the Measure that is passed. I think they are just passing the buck so that we find it harder to be accountable for voting for or against different measures.

When we talk about resources, we know that they are always limited. However, the way the proposition system works it makes it seem that they are unlimited. If you read my Friday blogs, you will know that I was against Net Neutrality because I thought it was the wrong issue and we were going to spend our political capital on something that was actually a non-issue for now. I think the propositions are like that.

Let me give you an example, last year Sacramento was up in arms for a lack of money to rebuild the water supply and control systems. I read about politicians from the Governor on down concerned that we were not investing in our water. However, we did spend a whole LOT of money on the Bullet Train from San Francisco to Los Angeles. We are going to spend over $65B to build a train that will run from San Francisco to Los Angeles in 3 hours when we already have planes that do so from all the local airports in about 1/2 that time. If you were concerned about cost, then take 1/2 that money and give out free plane tickets to those that can’t afford them and put the other 1/2 to water conservation projects.

So, before you vote on a proposition. Read it. The whole thing. Every word. If you are not willing to do that, then you are being led around how to vote by advertising dollars and not what you want. In that case, vote against the propositions. Don’t vote for something that you don’t understand. You are investing your tax dollars and they should be as precious to you as the dollars you get to keep.
Jim Sackman
Focal Point Business Coaching
Business Coaching, Executive Training, Sales Training, Marketing

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Sonoma County: News and Notes

This November we will be voting on a proposition to legalize Marijuana. I think we all expect that proposition to pass by a wide margin. The question is what does it mean to Sonoma County and the Wine Industry.

I posted a couple of years ago about the Graton Casino. Here we had a facility which by now has had about $1B spent on it. And because people fought it they never thought about what would happen when it was built. Now we have this facility in the county that brings significant numbers of tourists in. This facility has no synergy with the rest of the economy of the county. Maybe we can do better with the Cannabis folks?

How could that work? Well, one would have to assume that one could sell Marijuana as part of the Wine experience. You can imagine that there would be pairings that could be done as part of a higher end experience. This could include food as well. We need to see what kind of connection can be made. Now if I was one of the existing well know large Tasting Rooms I might not do that. But I know that many smaller Wineries struggle to turn a good profit. This pairing could represent a target market for such a Winery.

Do I know this will work? No, I don’t. But I hope to stimulate some thinking by both the Tasting Rooms and the Tour Companies. We can’t have indoor private clubs that allow smoking. But I am not sure that extends to Marijuana because the law was written predating any legalization of Marijuana. I would think it would be possible to have outdoor facilities as well. I am sure we will find ways to work it out. But the point of this is that it has to have high class. Anything that is going to pair with the Wine Business has to be upscale to the point that Wine drinkers will want to go there. So, we are not thinking West County here. Think Healdsburg or Sonoma. Right now what I see are places that are in terrible neighborhoods that will not attract the Wine tourism dollars.

So for everyone who is investing in warehouse space to make grow houses, we need to think about how we can use Marijuana to enhance our Wine Tourism. I don’t want to see heads buried in the sand when it happens. If there is a Wine Entrepreneur, perhaps they can figure out another way or two to make this work. But rest assured we will have a change to deal with, so we might as well make it work for us.

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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Sonoma County: News and Notes

This week Santa Rosa enacted its first rent control. This covers a relatively small part of the total number of rental units – about 11,000 out of 78,000. But it does highlight the problem that I have been posting about this year. Sonoma County housing costs are out of control compared to incomes.

The problem with this rent control is that it affects so few and so it won’t actually relieve the problem. On the other hand, it is like a line in the sand was crossed and the folks against rent control are already recruiting to get it repealed. That can not happen before it goes in place on September 29th, but there it is. Battle lines are drawn. Nobody will be happy and yet the actual problem will remain. Pricing will remain too high.

The problem is that the only thing that will reduce prices or at least make increases smaller is to add more housing. Given our current occupancy rates above 96%, this means that adding a few homes here or there is not going to work. We need to add literally 1,000s of units. To get to 90% occupancy, this is over 5,000 units. In Santa Rosa. More if we want to reduce the burden on all of Sonoma County.

What are the impediments? First, regulation. Construction costs and timeframes are greatly increased by the cost of the regulation. This is particularly true in Santa Rosa but is true throughout Sonoma County. On top of that, there are height issues as well (which I will add in below). This means that builders want to maximize the value of construction. And that means, higher end units are preferable.

The second impediment is land. We have significant Green Belt initiatives and work that keep the construction boundaries smaller. We all love how beautiful the county is but do realize that taking land away from construction means an increase in home prices. The most obvious answer would be to build up in Santa Rosa. However, this is not something that is going to fly anytime soon. If we can’t build up and we have to build to a certain size and within specific zones, then we have real limits to what we can do in adding more housing.

The third impediment is transportation. We are a cul de sac. I like to call us the end of civilization in Northern California. (I am not sure the following is true but its close)…I think there are as many people in Santa Rosa as there are along 101 from Santa Rosa to Oregon. On top of that, we have a complete lack of Mass Transit that connects us to the larger employment markets in the East Bay, South Bay, and San Francisco. This is not something the SMART Train will fix. This means that a company in San Jose will have difficulty managing a significant office in Petaluma. That is the reason our tech economy does not grow. When the companies get purchased, most of them move away over time. Unfortunately, the businesses that do stay are those that generally offer lower wages.

And now we have reached full circle. We need more housing to support our local economy. We struggle with where and how to build this housing. We are not honest with ourselves about our situation and our decisions around it. I don’t have the one answer that will fix it all. I am not sure that anybody does. But we need all of us to get to (what I think) is our common goal. We want a county that we can love to live in.

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

Last week, Autodesk reported their earnings for Q2. Now they reported them on a Thursday which makes it difficult for me to get a post out on a Wednesday. Many times companies will report on a Thursday if the quarter is going to be bad. There is only 1 day of trading before the weekend, and the market has a bit of a short memory. Now the reporting date is a bit arbitrary. They have to wait to be sure that there is nothing the auditor is going to make them change, but they normally know what the quarter is the day after. Not the exact numbers but really, really close. So you have to think of the delay as crossing T’s and dotting I’s. They don’t want to have to recast earnings in the future – in other words, go back and issue a correction – so they delay until they are 100% sure.

But this past Thursday brought relatively good news to Autodesk. GAAP revenues were $550M and the company lost $0.44 per share. That is better than what was expected and they have reached a number of Annualized Recurring Revenue or ARR of $1.47B. That is the number that is important as it represents the subscription revenue for the business. This is where the company is heading and it is out of the lifetime product sale. This model shift has been painful to the income statement but there are two numbers off other statements that you should watch. The first is on the Balance Sheet and it is the Deferred Revenue number at $1.1B. This is the subscription revenue that has been paid for but not yet realized (explanation in the next paragraph). The second is from the Cash Flow Statement and is Net Cash from Operating Activities. This is the amount of Free Cash Generated in the Quarter by the Business. The Operating Cash Flow is important because this represents what the company is doing in the business. The Financing side has to do with debt, interest, stock buy backs and other activities that are outside the day to day operations in the firm.

Deferred Revenue is all about recognizing the money for contracts. Let’s say you sign a 1-year cell phone contract. The phone company can not take all 12 months of revenue when you sign the contract. It can only claim 1/12th of the revenue. This is because you may not pay in the future due to issues with the service, problems with your financials, or whatever. This is even true if you pre-pay the entire year. So, subscription companies end up with a lot of Deferred Revenue and as investors, we want to see that number grow as it represents the current view of the future of committed Revenue. Imagine Autodesk sold no more software licenses. Then they are “guaranteed” $1.1B more from customers under existing contracts.

So, the future is starting to look better and better at Autodesk. One cautionary note that I have talked about comes from Kirk Adams of Rosenblatt Securities. The challenge is that the way that Autodesk is describing the subscriptions makes it really hard to understand what the business is really doing in comparison to the past. On top of this, they are creating many packaged offerings and that is making it more complicated. The way we should be evaluating this (over time) is based on New Subscriptions, Churn, and ARPU. Churn is the number of people leaving subscriptions and ARPU is the Average Revenue Per User. Those are standard metrics for Subscription companies. Today, they are still reporting more as a Product based company like talking about the number of licenses sold. Hopefully, this will change 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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Sonoma County: News and Notes

This week I review Keysight’s Q3 earnings. Note that this is Q2 of the Calendar Year but they do not align their Fiscal Calendar with the Annual Calendar. Revenue came in at $715M and Earnings at $0.53 per share. This was solid Revenue growth of 8% and good earnings growth of 29%. All of this is working from GAAP numbers. The primary contributor to growth was the Anite acquisition that was finalized last year. Without this, the company shrunk slightly.

I want to point out that Keysight generates in a Quarter more than Calix and Enphase do in a full year – combined. So, it is clearly a large company with products that are bought on a global basis. The company claims around 20% – 25% market share in the various segments that it competes. The Operating Profit runs between 15% and 20% on an ongoing basis. There are lots of “right” things about this company. And as I type the company is down almost 9% in after-hours trading. That seems extreme to me so I want to talk about why I think that is.

I want to shift the conversation to Keysight as an investment. They clearly have great products and run a good business. Why is that not reflected in a growing share price? Pretty simple. The last caller on the conference call talked about the Market Dynamics that Keysight is seeing. The Management Team talks about the “Headwinds” that it faces in many areas. The latest of these was BREXIT. What this means is that even though the company is good, the market it is in is not. Keysight faces what looks to be a market that is somewhere between slightly down and slightly up on a regular basis. The challenge is without significant market share gains, this means that Keysight will not be more profitable in the future. The company is pinning these market share gains on the next generation of their customer’s technology. The challenge is there is nothing that sounds like a game changer compared to their competitors. So, it looks to be a steady as it goes company.

What can a company do in these scenarios? There are 3 choices: Enter new businesses, Buy back the Stock, or Give a Dividend. The company can do any combination of these. The challenge with the Anite acquisition is that it has done well in a space that Keysight was already in. The next M&A deal needs to expand the Total Addressable Market of the company, not just fix a broken product roadmap. The other choices are more financial. I greatly prefer the Dividend option as I have said in the past.

Why a Dividend? The other alternatives are unclear on their investor ROI. If the company buys another firm, the acquisition could fail. If the company buys back its stock (and it has been), the price may not go up (and it hasn’t). A Dividend gives the money directly back to the shareholder. Keysight is making over $0.50 per quarter, so a $0.25 per share Dividend would be easy to swallow.

It’s hard to see why an investor would put money in Keysight when there are better return options out there until the Management Team focuses on the Shareholder instead of its internal issues.

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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