Friday, June 29, 2007

“Performance Transparency;” Shai Surfaces; Can Greenough Do It Again? | AMR Research

“Performance Transparency;” Shai Surfaces; Can Greenough Do It Again? | AMR Research

Listening to the earnings calls of Oracle and SAP, I only wish that they provided the same level of “performance transparency” as Tata Consultancy Services (TCS). A few years ago, SAP used to break out performance by vertical, by “pillar” or application category (such as ERP, customer management, supply chain management), and by software license and maintenance. It no longer provides that much color on the business, and the license and maintenance are combined into “software and software-related service revenue.”

The increasing levels of opaqueness make it really difficult for analysts or serious investors to get a full view. While I’m sure that’s the intent, why?

Look at Oracle: Since completing the PeopleSoft purchase in January 2005, the company has made 30 additional acquisitions, spending close to $24B in the process. But how much do investors know about the success of the acquisitions outside of some vague references to organic versus inorganic growth?

Don’t get me wrong. The have succeeded based on the strong growth in revenue, profits, cash flow, and market cap. But as a shareholder, do you know if PeopleSoft or Siebel have generated revenue or licenses anywhere near their purchase prices? Do you have a clue as to what percent of these customers renewed their annual maintenance contracts or bought more Oracle software or services?

Do you have any idea what an acquired customer is worth to Oracle, or SAP, or any of their other competitors? An Oracle sales executive once told me, “I tell my people to never lose a deal based on price because over the next five years, that customer is going to generate four to eight times the initial sales price in follow-on business with us.” Is there a model that we should be watching or building?

Contrast this with TCS

For last week’s call, Oracle provided a 14-page press release and an audio conference. On its last call, SAP arguably went one step better by providing video and hard copy of all of the presentations. In both cases, each could have provided more information.

If you have five minutes, go to the TCS’s website and click on the “investors” tab up near the top. Once on that page, open the presentations given at the May 7 analyst day in New York. Among the charts you will find are the number of clients TCS has with deals valued at $10M-to-$20M range, $20M-to-$50M, and $50M-plus, as well as the type of engagement (such as “global package implementation,” “end-to-end solutions,” and the like).

Another slide shows revenue growth for the last several years, with base revenue, organic revenue, and inorganic revenue. Later in the deck, there’s a detailed multiyear breakdown of revenue by service. This looks at assurance services, business process outsourcing, infrastructure services, asset leverage, business intelligence, enterprise solutions, and other offerings. Other slides have detailed discussions of growth strategies, cost reduction moves, and hiring plans and concerns.

I sat through a similar presentation by TCS executives when they came to Boston last spring. When it was over, you really seemed to have the sense that not only did they understand their opportunities and challenges, but also the audience did as well. This level of openness or performance transparency is not new to TCS. You will find that all of the major Indian services firms provide a lot more detail than many of their application brethren.

Calling all experts: Rob Schwartz, Jefferies & Company

Concerned that I may be overreacting to the Oracle and SAP calls, I talked to Jim Shepherd about the ever-dwindling fountain of information that flows from the largest vendors (be sure to read Shep’s in-depth analysis of Oracles Q4 and FY07 earnings in News of Note below).We talked about whether they are doing this for competitive reasons (like they don't want the other to know) or to limit comparisons from one period to the next, or has there by some other regulatory changes that is limiting a company’s ability to share more detailed information?

Shep suggested that I call an expert—Robert Schwartz, managing director of equities research at Jefferies & Company. We’ve known Rob for a long time and trust his insights. I sent him an e-mail that expressed the “why are they doing this” points from the previous paragraph. Here’s his response:

The “knife edge problem”

“Your piece is timely and your view on point.

The problem is true, especially post-acquisition in this rapidly consolidating industry. The universal excuse I hear from management teams is that the acquired organization are integrated so fast and all product lines (acquired or not) are now bundled for the customer so seamlessly at pricing, that allocation of revenue to product lines is an arbitrary exercise. But in so many cases, the field organizations run overlay or parallel sales teams by product or vertical. The parent company manages to figure out a segment revenue number for sales comp, so why isn’t that a good approximation for the Street?

We all recognize the “knife edge problem” for management from breaking out segment performance, particularly after an acquisition. If the acquired revenue is high, the company is questioned about slow growth in its traditional businesses. If the acquisition out-performs early after it is bought, the upside can be dismissed as a springboard from deals held back by the acquired company to aid the post-acquisition performance.

The same skepticism is given to business unit performance even if there is no acquisition. In a solid quarter often there is some segment that looks light. It seems some analysts and investors regularly ignore the natural variability of segment performance and focus on the lower-than-expected numbers.

Management is now eliminating the scrutiny by aggregating. They report less detail because they can, not because of competitive concerns or regulators preventing them from giving more visibility into the business. If they couldn’t really get at revenue by product line, they could give us other metrics—number of deals with a product from the vertical in the mix, number of new customers to the product. Management shouldn’t expect full credit for cross-selling and integration success if they won’t give us data. The criticism and questions comes with the territory and will be forgotten if the aggregate cash, revenue, and profit numbers keep rising.

Oracle would not quote organic license growth for Q4. The only help it gave investors was a license number for the Hyperion acquisition, which closed in the quarter. Yet, on the Q3 call, Safra Katz gave the applications license revenue growth rate estimate, excluding i-flex, MetaSolv, Portal Software, SPL WorldGroup, and even Siebel. It’s in the transcript. The explanation for the limited reporting this quarter was a “materiality” hurdle on the size of the deals—i.e., if they aren’t big enough, the accountants aren’t requiring disclosure—but it is not clear what changed for the other recent acquisitions to make them immaterial. Since Oracle’s explicit strategy is to consolidate the applications world, it is relevant to investors to know how acquisitions fare after they are brought on board.

To the point, the Q4 Q&A had questions about how long it takes to get an acquisition integrated and how we should layer them into our models.

Hope this helps.”

Yes, it does. Thanks Rob.

Shai Agassi surfaces—sort of—at Better PLC

A few days after Shai Agassi left SAP in late March, he noted on his blog ( that he had decided to take 100 days to go through the 100 or so offers he received in the first 100 hours. Well, we’re approaching the 100-day mark.

His latest post is called “Blog Interrupted.” It opens with an apology for not updating the blog in three weeks. He then adds that “we are raising money to start this new company called Better PLC. After years of fighting for budget allocations, I forgot how much fun it is to actually go convince investors that your idea has enough merit that they should put their money, and much more importantly - their trust in you.”

That got our attention so we Googled “Better PLC.” The only mention was that of a summer internship opportunity. Here is the description:

“This is the ‘Google’ opportunity of electric automotive transportation. Come be a part of an exciting project that will have an immense impact on climate change, the transportation industry, and the way we commute on a daily basis.

Located in Palo Alto, California, Better PLC is a start-up company still in stealth mode that is focused on scaling the deployment of non-hydrocarbon powered cars through a combination of infrastructure, public policy and financial frameworks. The company establishes and manages a multi-year transformation mega-project that drives complete transformation at the scale of city to country.

This summer we are looking to build a series of electric car concepts and prove technical feasibility of various ideas which will serve as prototypes for our car and battery manufacturers (we are working with various manufacturers including one of the top 5 carmakers in the world).”

I’m assuming that the company name is to be pronounced “Better Place.” We will attempt to reach Mr. Agassi to confirm this and to search for more details. Look for an update in a future First Thing Monday.

Former SSA Global CEO Mike Greenough surfaces, too

Speaking of new sightings, we received a press release that a unit of Cerberus Capital Management had acquired Torex Retail for $420M, and that the large private equity firm had named Mike Greenough as Torex’s new chairman and CEO (see the News of Note item on this below).

Mr. Greenough was formerly the chairman, president, and CEO of SSA Global. During his five years at the helm, he acquired at least a dozen software companies, including Baan, Epiphany, EXE, Infinium, and Marcam. In May 2006, he sold SSA Global to Infor Global Solutions for $1.4B in cash. While I was unsuccessful in my attempt to reach him before writing this, I am fairly confident that he will repeat his strategy of growth through acquisitions. Cerberus is a good partner for him; according to its website, the firm has $25B under management.

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