Peoplesoft 2.0

There is a hot new IPO that is expected to list tonight and no it is not a consumer or social technology company but a business selling services to other businesses. Workday (WDAY) is the name, they are a provider of enterprise software delivered through the cloud (internet). What makes WDAY different from other software providers is that it is backed by the founder of PeopleSoft Co-CEO David Duffield and half of WDAYs employees are PeopleSoft veterans.

Oracle took over PeopleSoft in 2005 in a bitter takeover for $10.3 billion. Now the team is back together to take them on. The idea is the same to sell human resources software but delivered through a different way. WDAY is taking advantage of the opportunity to deliver their services through the cloud and not through on premise systems. Instead of installing expensive hardware and software on the clients premises WDAY can deliver software through the internet, a cheaper and easier to manage proposition for customers.

Power of one

WDAY takes inspiration from Amazon, Google and Apple which have one version and one system. What these companies excelled at was making their systems intuitive for users and easy to use on mobile, features most business software lacked. WDAY seeks to emulate the consumer experience with what they call the power of one. The power of one is one system, one version. Even though the applications can be configured to meet individual customer needs they all share the same basic system, one version. Everyone is upgraded at the same time, users always have the most up to date version, upgrades can occur more frequently and are managed by the vendor and not by the company. One version makes it much easier for call centers to deal with any inevitable issues.

Can’t solve today’s problems with yesterday’s solutions

The enterprise software industry has seen a major shift before, transitioning from mainframe to client servers on premise and now the cloud (see chart below). 

As WDAY points out the companies that were successful during the last transition were newer companies such as SAP and Oracle which built products from the ground up. Now Oracle and SAP are saddled with legacy software with a foot in each camp. They have the opportunity to sell cloud based software but at cheaper prices which would cannibalize their high margin legacy on premise software.

As the Co-CEO of WDAY Annel Bhusris says you can’t solve today’s problems with yesterdays solutions. According to some case examples in the S1 WDAY can save customers up to 30% over 5 years when compared with traditional on premise HR systems. Also due to ease of use it has empowered employees to take advantage of information to make more timely and effective decisions.

Valuation based on sales?

It’s never a good sign when the valuation is based on sales. Consumer IPOs like Groupon, Facebook and Zynga did not do well. What makes this IPO slightly different is the management team, they have been here before and more importantly technology companies selling to other companies have done well post IPO. Palo Alto Networks is up an additional 17% and Service Now 46% from the first day of their listing, these companies did list on slightly lower sales multiplies of 12-13x.

Risks

Switching costs for companies are immense. Companies have invested substantial personnel and financial resources there is also security risks as company information is kept in the cloud and not on premise. The on premise competition is Oracle a $148 billion company and SAP $84 billion. A company with a similar cloud based approach but focused more on customer relationship than employee management is Sales Force with a $21 billion valuation. Two other cloud based companies have been taken out by the larger players over the past year.Taleo by Oracle for $1.9 billion in February 2012 and SuccessFactors by SAP for $3.4 billion December 2011. These defensive moves by the incumbents suggest that the move to the cloud is real and a major threat to their businesses.

For a $4 billion company WDAY is talked about quite a lot. According to Bloomberg Larry Ellison has mentioned WDAY 8 times on Oracle calls over the past year, a similar number to Salesforce which has turned out to be a great indicator. Larry is giving more and more credibility to WDAY, Larry you are protesting too much!

Time to upgrade

As an investor this is what we like to see no insider selling. All shares sold will be going to WDAY. Not even private equity (Greylock Partners) are selling down shares. WDAY plans to sell 16% of the company to the public. Previous investors include Michael Dell of Dell, Jeff Bezos of Amazon.

WDAY is a compelling story with a seasoned management team back together again to take advantage of technology to better deliver their services. This is an IPO to own.

http://www.decisiveassetmanagement.com/

Disclosure: Decisive has no position in WDAY

The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.

A Latin American Paypal, eBay, Amazon?

Idea Arbitrage?
A Latin American Paypal, eBay, Amazon? That’s a lot to live up to; fortunately Mercado Libre (MELI) is keeping up with the Joneses as the dominant e-commerce player in Latin America. MELI has copied or in management’s words idea arbitraged the best ideas from the previous mentioned companies and tailored the experience to the Latin American market. eBay has given MELI its vote of confidence owning 18% of MELI, their non-compete agreement expired in 2006.

According to Deutsche Bank MELI has 22% of the online market in Latin America. This market share is larger than Amazon’s (AMZN) in the US at 19% and eBay at 12%, though it should be noted that Amazon does not have a local Latin American site.

Amazon not in the Amazon?
The risk is that AMZN opens a local site in Brazil, MELIs largest market. This rumour has been around for over a year and was recently given as a reason to stay away by Barrons in May earlier this year. As seen in the chart below AMZN is the 3^rd largest e-retailer with no Latin American operations. Investors need to keep this in mind though this risk is somewhat minimised by the availability of infrastructure. In my opinion one of the reasons for AMZN’s success has been logistics, it owns warehouses and with free shipping options has created an integrated and consistent buying/shipping process for the customer. Obviously this strategy will be much harder to implement across Latin America.

Source MELI investor day

I believe the real short term risks are with Argentina and Venezula. They are approximately 33% of MELIs revenue so any currency devaluation will impact MELI sales.  Like I have mentioned before this is all relative, currency risk is a risk all around the world (thought I would never say that) and not just Latin America.

Learning from big brother (eBay)
MELI has been able to take advantage of seeing how the US e-commerce market has evolved through competition between AMZN and eBay. MELI has followed eBay into fashion positioning themselves as the online second store for offline retailers while also adopting AMZNs fixed pricing rather than an auction system.

They also have their own Paypal called “Mercardo Pago” which has been bundled into their merchant services. This is at such an early stage that they are not currently monetising this product but driving adoption for future growth. As can be seen below Mercardo Pago is used to finance 33% of purchases on MELI's main site and if adoption continues to grow like Paypal it can be used to drive transactions on other online sites and eventually offline.

Big brother vs little brother

Source: MELI, EBAY press releases

As you can see above MELI still has a long way to grow and this is compared to eBay which is still showing high mid-teens earnings growth! According to Internet World Stats Latin American internet penetration is only 40% much lower than the US at 78.6%.  EBAY has seen this game play out before that's why they own 18% of MELI, investors would do well to follow their game plan.

http://www.decisiveassetmanagement.com/

Disclosure: Decisive is long MELI

The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.

 

 

 

Can't compete with a verb (Google)

The only thing Facebook's (FB) IPO delivered was disappointment. The winners being its main competitor Google (GOOG) and short sellers betting against the company, don’t you know you can’t compete with a verb! The transition from desktop to mobile has hurt FB’s revenues leaving FB looking like a mature established company rather than a fast growing tech company. FB is struggling just like the publishing companies struggled with their transition from print dollars to digital dimes, but FB is moving from desktop dimes to mobile pennies!

Short-sellers can thank Barrons

Barrons published a scathing report earlier in the week causing the stock to drop 9%. We have talked about FB before thinking that the low $20’s was a good long term entry point given the optionality in the business. At a recent techcrunch conference Mark Zuckerberg caused the stock to spike (finally up) talking about the potential of search. I have to admit I was surprised by the number of searches disclosed 1 billion per day but the majority of these are searches for people not transactions. FB needs to find a way to get closer to customer transactions. We have seen this trend before with Google (GOOG), the closer advertisers can target customers making a transaction the more valuable it becomes one reason GOOG has done so well.

Speaking of GOOG transactions, a recent search brought up this autosuggestion. I can think of why GOOG might suggest a cold one (beer for non-Australians) but a cheap rhinoceros?

Something to Like? Fight a verb (GOOG) with a verb (Want button)

There is still potential for FB I believe in social e-commerce. For example FB adding buttons other than like, as at the end of the day what does like mean? As a verb it means something you enjoy, to advertising companies the value is not clear. Advertisers need to know if the customer is already an owner and fan of the company’s products or a future buyer looking to transact, two different propositions to advertisers. With a like it cannot be clearly answered but a want button is clear in intent and is more similar to a specific GOOG product search, a customer interested in entering into a transaction. We are seeing signs of social e-commerce today with CNBC reporting trial runs of FB gifts. It is basically designed to take advantage of information FB has on users birthdays and can suggest gifts based on profiles. I'm guessing that birthday reminders and social peer pressure will lead to increased presents for users!

 Need to show mobile progress

This is some of the optionality that FB brings, however investors will not pay up for the optionality until a clearer path to mobile monetisation is worked out. Mobile monetisation needs a solution that is seen as enhancing a service (like GOOG showing ads based on search) and not as a nuisance. Having integrated ads in FB news feed is promising but is beginning to look like a a nuisance with users given the small mobile screen space and annoying political ads.

 

 

Source eMarketer

 

Triple Play

GOOG has taken the lead from FB a number one in online display according to eMarketer. That now leaves GOOG as the number one advertiser in search, display and mobile. This combination is a very compelling sales proposition for advertisers. GOOG has successfully balanced the fine-line between making money and making great products. Larry Page in last years CEO letter describes how important this balance is, as to innovate GOOG must have healthy revenues. This makes sense (hopefully so!) but not always to great inventors. Larry retells reading about Nikola Tesla a famous investor whose impact was limited because he failed to make money from his inventions. This is a lesson GOOG has taken to heart and one FB has to act upon.

Conclusion

The long term potential for FB has not changed so investors need to watch it, especially post the well-publicised employee lock up expiry in early November. The fact that FB has not figured out mobile monetisation is concerning given mobile monthly active users (MAU) numbered 545m last quarter or 57% of total MAU. FB only began showing ads on mobile at the start of the year. GOOG recognised the mobile threat earlier and have established themselves as the leading mobile operating system of choice (Android) with dominant mobile revenue market share. The value proposition of a potential transaction is much more compelling than just brand exposure.

Just like the advertisers we will keep our dollars with GOOG while keeping an eye out for FB progression into social e-commerce and transaction based advertising.

http://www.decisiveassetmanagement.com/

Disclosure: Decisive is long GOOG

The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.

Australians + iPhone = Gambling

Well the new iPhone 5 is officially a hit. Apple iPhone 5 pre-orders were sold out in one hour. According to Apple press releases the iPhone 5 achieved two million sales in 24 hours double the previous record of one million by the iPhone 4S, surpassing the previous single day record of 600,000 by iPhone 4. This is amazing as off a larger base the iPhone 5 has doubled pre-sales of the iPhone 4S which had increased sales 66% from the iPhone 4. I thought the growth rate slows down when you get bigger!

Source: Apple press releases

The iPhone 5 is a cultural phenomenon around the world but you’ve got to love Australia, we always have to incorporate some form of gambling around every main event. Those creative types at Sportsbet.com.au were at it again taking bets on the length of the queue to buy an Iphone5. The favourite was a crowd of 500 outside of the George street store with Sportsbet paying $3 for the win. They also got in on the action offering the use of portable toilets for the punters and of the course the free advertising. (I’ll include it here as well thought it was smart on their behalf)

 

For the punters out there and I definitely do not condone gambling. Sportsbet is currently taking bets on what will be the most popular app settled by the app store on Monday the 24^th of September. Youtube is the favourite at $1.40, Facebook no. 2 paying $5. Please note that the new iPhone software automatically deletes YouTube (Google and Apple bickering) so all users need to re-download the app, Youtube is the clear favourite for a reason!

No surprise that Australia’s most checked in facebook location is a Casino! Though I do like the other themes of shopping, sports and the beach…

Source: Facebook social landmarks

Jason

http://www.decisiveassetmanagement.com/

Disclosure: Decisive is long AAPL

The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.

Build it and they will come skyscraper index

As mentioned in a previous blog the skyscraper index is one of the all time great market timing predictors (See table below). What got me thinking about the skyscraper index again was an amazing article today on Bloomberg titled Mile-High towers possible by 2025 as ego fuels race to top. What a great title!

The main commentator is the Chairman of the Chicago based council on Tall Buildings and Urban Habitat (another great title). It’s a fascinating insight into what drives these tall structures. It can be summed up in one word, ego. There is really no need to build that high. This type of behaviour tends to occur after years of strong growth and cheap money. Worryingly for China the council held its first congress in Shanghai where it says “9 of the world's highest 20 buildings under construction are going up”. 

He had an amazing admission “It might take time to fill up those buildings, but China in general has the capacity to continue to grow,” Johnson said. “Maybe you are not going to take your money back in two years, but in five or even 10 years.” Might make your money back in 5 or 10 years who knows, wish I had these sort of investors!

Building on ego and hope that in five to ten years time you can make your money back does not sound very attractive to me. As a reminder it never seems to work out investing in countries building the world's tallest skyscrapers, Dubai being the most recent example. Luckily the Saudis are looking to complete a 1km Kingdom Tower which should be complete by 2018, hopefully in China they do not look to catch up. The skyscraper index is flashing.

World's Tallest Skyscrapers and Related Busts

Building	Location (Completed)	Spire Height	Financial Crisis
Singer	New York (1908)	187 meters	Panic of 1907
Metropolitan Life	New York (1909)	247 meters	Panic of 1907
40 Wall Street	New York (1929)	283 meters	Great Depression
Chrysler	New York (1929)	319 meters	Great Depression
Empire State	New York (1931)	443 meters	Great Depression
World Trade Center	New York (1973)	526 meters	'70s Stagflation
Sears Tower	Chicago (1974)	527 meters	'70s Stagflation
Petronas Towers	Kuala Lumpur (1997)	452 meters	Asian Financial Crisis
Taipei 101	Taipei (2004)*	509 meters	Tech Bubble
Burj Dubai	Dubai (2008/9)**	828 meters	Global Credit Crunch

*Taipei 101 was financed and construction began in 1999, quite near the peak of the technology boom. **It is interesting to note that the uncompleted Burj Dubai tower was classified as the world's tallest structure on July 21, 2007, right around the peak of the U.S. market before the financial meltdown.

Source: Table sourced from http://www.forbes.com/2011/03/10/skyscrapers-burj-dubai-leadership-leaders-bubbles.html

Jason Sedawie

http://www.decisiveassetmanagement.com/

The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.

Not just about the iPhone but an iPad too

As a potential iPhone 5 user
The new iPhone 5 is good enough and a lot more revolutionary than the iPhone 4S. It is now the world’s thinnest smart phone. Main stats being

• Bigger screen 4 inches from 3.5
• 20% lighter and 18% thinner than its predecessor
• Processor twice as fast with 44% better colour saturation

What I liked

• New earphones, apparently spent 3 years designing what they now call earpods
• It’s just as much about the software as the hardware as racing games now have rear-view mirrors in the car, multiplayer is available and applications are integrated with facebook
• Own maps with 3D flyovers over cities, at least when I’m lost it looks cool
• Passbook which keeps transport such as airline tickets, event tickets and store loyalty cards in a single application

Investor viewpoint
According to the CEO Tim Cook each Apple (AAPL) owner has downloaded an average of 100 apps, an amazing competitive moat with switching costs for users increasing every year with each additional app. AAPL also has 435 million accounts with once click purchasing, more than twice as much as Amazon with 180 million accounts.  AAPL historically has sold off in the weeks after an iPhone announcement but I am not expecting the same. According to Ben Reitzes of Barclays Capital  

“Historically, AAPL’s stock performance has on average performed in line with the S&P 500 in the three-months following an iPhone announcement but significantly outperformed over the six-months following an announcement. We note that AAPL’s average six-month return following an iPhone announcement is 18 per cent compared to 6.4 per cent for the S&P 500.”

I am expecting AAPL to at least match this performance if not better it because of the rumoured upcoming iPad mini. Leaks from Taiwanese suppliers suggest a launch in October, the shortening of the Ipad number three to just the new Ipad is a sure indicator of an upcoming mini product. AAPL has never released 2 new products in such a short two month period.

What about mini me?

The iPad seems to get left out due to the popularity of the iPhone. As Tim Cook mentioned during his key note speech in the last quarter APPL sold 17 million iPads more than what any other PC manufacturer sold from their entire PC lineup. The iPad is on track to help the tablet market grow larger than the PC market.

The iPad has 68% tablet market share up from 62% in the prior year and amazingly is 91% of tablet web traffic. For app developers it is much more attractive developing for just one device which gets 90% of web usage especially compared to competitor systems which require more work for less reward. The iPad ties in users to AAPL's eco-system as once they have an iPhone it is a familiar transition to the iPad and vice versa.  

You can find the entire AAPL iphone 5 presentation (goes for nearly two hours but well rewarded with Foo Fighters performing at the end) at
 http://www.apple.com/au/apple-events/september-2012/

Disclosure: Decisive is long AAPL

Jason


http://decisiveassetmanagement.blogspot.com.au/

The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.

You could own.COM?

Verisign (VRSN) is responsible for the smooth functioning of the online world. VRSN operates the register/directory of all the .com and .net domain names with a 15 year uninterrupted uptime performance for .com. VRSN is also responsible for the back end systems for all .gov,.jobs and .edu domain names.

Not a monopoly its market share?

VRSN believe they are not a monopoly as companies can buy other domain names. That’s what you say when you have a dominant business/monopoly! How often have you typed in a domain name other than .com?

Surprisingly there is still decent growth in domain names driven by internet adoption, e-commerce and online advertising.

Source: VRSN 10K

A license to own.com?
Under agreement with the Internet Corporation for assigned names and numbers (ICANN) VRSN has the presumptive right of renewal as operator for the .com registry, the agreement has no rebid provisions. If performance requirements such as uptime are met the agreement is renewed. As a bit of background, ICANN is the global coordinator for domain name systems and IP address so that every address is unique. ICANN is currently a public private partnership between the US Department of Commerce and the global community. Renewal of the agreement was approved in June through to 2018. VRSN has the right to increase pricing 7% in 4 out of the next 6 years. Current domain name prices are $7.85 (put through January 2012) a tiny cost given how important domain names are for companies.

 

www.verisign.com/opportunity?

VRSN has three main growth opportunities.

1.       Introduction of new top level domain names ie .book

ICANN  is allowing companies to operate their own top level domain name extension similar to .com for example Amazon is applying for .book. There are currently 22 such top level domain names like.com and .net. On first look it seems VRSN would be negatively impacted as domains other than .com take market share but the majority of applicants do not have the capability or scale to properly operate the top level domain. It is likely a lot of this work will be outsourced, according to VRSN around 220 companies (mainly brands) have signed up for VRSN to be their back end registry services provider.

2.       Internationalising .com domain names ie .com in Arab

VRSN has applied for 9 international translations of .com, increasing the field of available .com names.

3.       Network availability services basically security

Surprisingly VRSN is only beginning to tap into the network security field. It is a differentiated sale when you can prove you have 15 years uninterrupted uptime for .com and responsibility for .gov back end systems. The Network Infrastructure Division is not yet material to disclose but the company has hinted that expenses and the structure have been put in place for growth.

Conclusion

VRSN is a beneficiary of many trends, e-commerce, online advertising, network availability and security.  VRSN has access to steady cash flows through its .com registry business and given their operational track record seemingly good prospects in network availability. With a 15 year uptime track record for .com and responsiblity to run the back end systems of .gov I think I'd sign up for their network services.

Don’t worry Kim Dotcom is not included in the .com registry business!

(Based in NZ, the founder of Megaupload shut down by the US government earlier this year.)

Jason

www.decisiveassetmanagement.com

Disclosure: Decisive is long VRSN

The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs