Sonoma County: News and Notes

The rain is gone for now, but cooler temperatures should help us maintain our snow pack. We are not through the drought according to the news reports, but it is very encouraging that we are at a much better place than we were last year. Some of the largest reservoirs are over normal capacity and the snow pack is near normal. All of this is good news for us in Northern California. I spoke recently to Lincoln Miller of Sonic.net about his role with Sonic and what they are up to in with their newer offerings.

Jim Sackman: Hi Lincoln, you are a Senior Fiber Specialist. Can you tell me about this? Lincoln Miller: Thanks Jim for speaking to me. I am part of the changes going on in Sonic where we are pursuing our own fiber optic network and becoming less reliant on AT&T for connectivity. As for myself, I deal strictly with Business Customers as they are connected to our network.

JS: So, where are business services available? LM: That is a huge part of my job. For example, we offer service near the Santa Rosa Airport and along North McDowell Boulevard in Petaluma. We have other neighborhoods that are opening soon. But a whole lot of my job is looking for others.

JS: Anything specific that you are looking for? LM: Well, yes actually. Sonic is currently working to build a fiber network that will essentially serve the 101 corridor in the North Bay, so I am looking to meet with business owners and commercial property owners in these areas to discuss bringing Gigabit fiber to their areas.

JS: Why would people want your service over your competition? LM: We are building a Gigabit network. People will get that extreme speed and phone service at a relatively modest price. For $40 per user per month companies can get the best service available. Imagine how it can change your business by providing such great connectivity to your customers, partners, and employees. We have award winning customer service that makes our customers can depend on. On top of that, we are a local company and that keeps the money we bring in local. As you know dollars spent locally mean that we all do better here in the North Bay.

JS: What should people do if they want this great service? LM: The easiest thing is to go to our website and connect with us. We will get them hooked up with the right person to talk about their needs. I would love to talk to anyone who has a business along the 101 corridor to see if we can get more businesses on our fiber solutions!

So, there it is. A local company trying to beat the big boys by installing a better network, delivering a better service, and doing so at a price that anyone can afford. Contact Lincoln Miller and Sonic to learn more!

Have a great week!

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

Change Your Business - Change Your Life!

 

 

Net Neutrality Friday

So, here I am sitting in Northern California listening to the rain in what is being called "Miracle March". The rain is good news for us here and I want to reflect the thoughtful and quiet times in today's post. I think we are heading for a bout of stability. Pish Posh you say? There is all this legal wrangling around the telecom network and the Internet. Well, there is always churn on debate on the regulatory side. What I mean is on the technology side. There was a period for about 15 years at the start of the Internet where things jumbled around. There were choices made, short term and long term.

If we go back to the start of the World Wide Web (which was really the start of the consumer Internet), we are in 1992. Consumers had to use dial-up Modems for service. This continued on while Broadband Technologies were being developed and commercialized. Most folks forget (for example) that the original Cable Modems were not based on the DOCSIS standard. But the availability of any Cable Modems gave the cable folks a huge leg up in the Consumer Broadband Internet Market (even today 60%+ of Broadband Connections in the US are Cable and not Telco). DSL had deployment drawbacks and the telcos were slow to respond and adopt the newer technologies. I had one of the very early DSL lines in PacBell in 1999 with Alcatel 1000 Modem and a splitter in the NID. But by 2003, we were already onto ADSL2+ and were building the prototypes for the BPON Deployment in FiOS.

Think about that. From 1992 to 2003, we adopted 4 different complete technologies to deliver the Internet on wireline networks. Since then? About the biggest change was BPON to GPON and the broader adoption of VDSL2 as part of U-verse in a Fiber to the Curb (FTTC) scheme. These were extensions of the technologies we already deployed. Cable has done its work in extending DOCSIS to get higher and higher rates.

We have had more changes in the Wireless world with the adoption of data oriented 3G and 4G networks and more importantly the elimination of the Walled Garden with the iPhone. A Walled Garden is a private service that mimics a public one. A non-wireless example would have been AOL in the old days before their subscribers could surf the true Internet. They used to have to use sites on AOL. Just like older "smartphones" only let you surf specific sites under the control of the Wireless provider.

All of this has been stable now for about 10 years. Yes, we have the refinement of technology. But no real step function changes. Don't get me wrong, it doesn't mean important things are not getting done. It just means that we are in a different period. As a consumer, it is comforting in some ways to know that the technology that I buy today is not obsolete the day I buy it. I remember PC's having a useful life of 2 years at most and phones only 1.

Will this change? At some point yes. But I have blogged at other times about how the way that things are being bought are forcing commonality between providers at all levels in the food chain. All this does create momentum away from disruption. This will be a good thing for us and may lead to some more normal investment cycles by Service Providers.

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

Change Your Business - Change Your Life!

 

Sonoma County: News and Notes

Its raining here in Sonoma County and that is a wonderful thing. We need the water and this is our time of year to get it. We get so much of the Sun that we need our rain as well. This week I want to talk about Autodesk's earnings from last month (just before the Holiday). The company had almost $600M in Revenue and lost almost $44M in Q3. The problem that as I have said before that Autodesk is in a conversion from purchased software to leased software (i.e. a subscription based service). The problem is that we are in the middle of this conversion so comparisons to the past are not reasonable. Nor can we understand how the company is doing until the conversion is complete.

Why is this so hard? Well, when you outright buy something the company generally gets to declare Revenue. Yes there are some exceptions under Sarbanes-Oxley, but I will try to keep it simple. When you sell a subscription you earn that money over time, even if the user buys a year at a time. In that kind of model, generally you would take 1/12th of the annual payment each month. To complicate things further, packages are owned outright when bought by customers. They generally do not buy again until there is a new version with features that they want. They do often get maintenance updates for bugs in the current version (and this is often a paid for service). By converting to a subscription model, customers will pay more over time but the company will need to deliver updates and bug fixes on a regular basis.

So, why does this create a problem? You can not directly translate the number of licenses of each product that Autodesk sells into subscriptions that it will sell. Now from the way I read the questions, it has not provided good guidance around how many subscribers will provide replacement revenue for their existing business. Now it might be possible to calculate this from the store, but the questions indicate that nobody has done so to date. On top of that there are multiple ways that the customers can buy subscriptions. This makes the reporting of Net Adds - the number of customers added subscriptions minus those who left - rather meaningless. If Autodesk wanted to make this easier for analysts it would have to provide information like ARPU and Churn data. ARPU is Average Revenue Per User which is a metric on how much an average customer buys on a monthly basis. Churn is the amount of customer loss on a monthly or quarterly basis. This is how most subscription companies report the kind of information that analysts and investors want.

Until we are through this transition, any investment in Autodesk carries risk in this change in execution. However, Autodesk is a fine company that has been around a long time. They are likely to figure this out, even if they stumble through the transition. For the average investor, I would say be cautious until you here something that you can directly relate to.

Have a great day and stay dry!

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

Change Your Business - Change Your Life!

 

Net Neutrality Friday

For the next few posts I am going to in a specific direction that I think might help people understand some overall challenges in the Communications Business and how it is evolving. Some of the impacts to consumers is indirect, but I think this background will help people have greater depth on the issues. Today, I am going to focus on the M&A spree that companies that are hardware suppliers to ISPs are on. As recent examples of this, take a look at Nokia's purchase of Alcatel-Lucent and the partnership between Cisco and Ericsson. But this has also happened at the chip level with Broadcom, ATMEL and many others. As a background you may wish to read one of my very early posts HERE! The fundamental problem for Hardware and Chip Makers is that there to trends against them. The first is that the major ISPs are consolidating. The second is that innovation has exited the hardware world. I will address these in order.

The ISP consolidation has been going on for a decade now. I want to talk about why this is next time, but this week just take it as a given. This creates an imbalance of power between suppliers and customers. There are fewer customers and they tend to buy in higher volume. The fewer customers means that there are fewer opportunities to win business. The higher volumes have led to extreme discounts. This means that the numbers of major suppliers needs to go down. If we spread out the business to far then the effort to design a product is done against too small of a product win. You can see this in the Aircraft Manufacture business. There are two huge suppliers that make most of the world's commercial airliners - Boeing and Airbus. There are some niche suppliers who compete in specific geographies or in small parts of the market. But at the end of the day, there are two major suppliers. The Communications Business supports many large providers today - Cisco, Ericsson, Nokia, Huawei, ZTE, and some Japanese manufacturers are the major providers. There are some smaller players that are focused like Calix, Ciena, Juniper and Coriant. Will this list boil down to two like the Aircraft Manufacturers? Probably not. If you recall, the dot.com bubble created a huge number of Hardware and Chip start-ups in the Communications business. That bubble collapse and the subsequent consolidation has driven many of these newer companies out of existence or into being parts of larger firms.

We also have this long term lack of innovation. I remember about 10 Years ago a Venture Capitalist named Drew Lanza posted on Lightreading that he was no longer going to be a part of the Communications Business. He was attacked, but has turned out to be prophetic. The last set of real advances were in Wave Division Multiplexing and Optical Switching. Both of those technologies were put into place about 15 years ago. Since then, we have truly been refining hardware not fundamentally changing it. In addition, the cost to build hardware has gotten astronomical. The old way of competing was the development of unique Hardware Architectures that made special products. The cost to develop custom chips to support this has gone crazy and is essentially impractical at this point. This also impacts the chip makers and forces them to build things that they are sure are going to sell. All of this pushes Hardware to Standardization (as much as Virtualization is pulling it). This means that everybody has similar products. If the products are similar then how can small companies innovate? Well, there has not been a truly successful hardware start-up selling to the ISPs in a long time.

Next week, I want to talk about the ISP consolidation and the impact of the reduction of innovation.

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

Change Your Business - Change Your Life!

Net Neutrality Friday

In my review of Calix's earnings on Wednesday, I said I would talk about CAF-II. I want to expand on that here. To start out, what the heck is CAF-II? It is Phase 2 of the Connect America Fund. You can go right to the horse's mouth at the FCC and learn more about it HERE. The big thing is that in the long term this type of funding is going to replace the Universal Service Fund (USF). That fund was put in place to help telephone companies deliver phone service to all. This became part of the trade-off within the Telecom world. When universal service was put in place, it became clear that very rural America would have to pay a lot of money to have service. My personal experience with this was with a phone line that AFC served that was 80 miles long to a single cabin. 80 miles for 1 phone. You can imagine that constructing and maintaining that line cost a lot more than $25 per month.

In comes USF. Telephone companies that had a high percentage of what were termed "High Cost Loops" could get help to keep the price of rural phone service the same as urban and suburban systems. Most large companies did not qualify for this support, since they tended to have the big cities. Think of Pacific Bell in California. How many homes are near Mount Shasta compared to the number in Los Angeles? You can see that large cities swamp the percentages for large companies. There were exceptions of course and much of this evolved as we moved from Rate Base Pricing to Rate Cap Pricing. I have reviewed this in the past, but will remind folks here. If you go back in time, you will find that Telephone companies were guaranteed a Return on Investment (ROI) by managing prices against what was called the Rate Base. The Rate Base was a summation of all the Capital Expenditures that the company put in to provide service. Rate Cap pricing means that there is a Cap (a limit) on how much a telephone company can charge for phone service. This has changed spending patterns to maximize the ROI. The right Capital Expense Level for a Rate Cap carrier is 0. Which has led to our problems with rural broadband.

To help with this transition, the FCC is managing the Connect America Fund to get broadband universally deployed. All the companies look like they are going to participate, and this is a major win for the FCC. However, it does not guarantee 100% coverage nor does it ensure that as Broadband moves forward that rural customers will recieve timely upgrades. I consider this a great step forward, but not the ultimate answer.

As it relates to Calix, the question is "So, why is the money not flowing to you?" I think the better question (as a taxpayer) is: "Are companies increasing their Capital Expenditure Budget with CAF-II or are they substituting their money with our money?" I think that is an open question, but one that Calix can not answer. This needs to come from the telephone companies.

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

Change Your Business - Change Your Life!

Sonoma County: News and Notes

We are starting earnings season today with a review of Calix. They released earnings last week and have lost about 20% of the value of the company due to the earnings call. To be clear, when I talk about company value I am talking about the value of the stock. As a reminder, I am posting about Calix as an investment. Calix is a profitable company with many fine products and some good people that I know. This earnings review is put in place to help average investors understand what is happening in the stock and why. This is also not an investment recommendation. I am simply trying to help people understand the market a little better. Calix had Revenue of $112M and earnings of $0.16 per share (non-GAAP). Those results are somewhat better than Q3 last year by about 6%. The problem was that Revenue next quarter is projected to be about $104M and earnings had a wide range from losing money to about $0.07 per share. In the recent past, Calix has not seen a dip in Q4 like this and the lowered revenue caught the analysts by surprised. This is what drove the sell off of shares. One thing that is also true is that Operating Expenses were up year over year, particularly in Research and Development. I will focus most of this post on this last issue.

Before I get there, I want to explain a couple of things that drive the stock down when a company has a down quarter. Essentially, a company is a stream of Earnings. Revenue is crucial in having Earnings, but the Stock Market is looking for growth in Earnings over the Long Term. That is why Price to Earnings Ratio (Stock Price divided by the Earnings per Share) or P/E is a critical Metric. Analysts are trying to gauge what Calix's P/E ratio will be for next year. I think a more important metric is P/E to Growth ratio or PEG. This is the P/E ratio divided by the Growth in Earnings. A PEG over 1.0 means that there is a bet on continued Growth in the Earnings and that the stock is priced with that in mind. A PEG of less 1.0 means that people think that the Earnings will not grow quickly. Something to look for in stocks you invest in.

I want to go back to that investment in R&D. In Q3, Calix put over $22M in R&D. This is over 20% of the Revenue of the company. For a Technology Company, an investor would like to see a significant (15% or so) growth in Revenue to match this investment. That has not happened here yet, and Calix says it is due to a long term investment in software called AXOS. The information around AXOS sounds very good in the articles that I have read. It seems to make sense to me to make a product like Calix's easier to modify and maintain. The problem is that the CEO told us that the software has been working in networks for 18 months. Well, that is great from a product stability standpoint. What is not good for investors is that this has not seemed to make any difference to Revenue. On top of that, it has not reduced R&D spending to get this Revenue. I think this aspect of the call (and thanks to Paul Silverstein for asking about it) should have set off more warning bells than a blip in Revenue.

That blip in Revenue was attributed primarily to something called CAF-II which I will cover Friday in my Net Neutrality Blog.

So where does that leave us? Well, Calix seems to be stuck and not sure how to get to the next level of Revenue. I look forward to next quarter's results from them. Next week, I will cover Enphase.

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

Change Your Business - Change Your Life!