From The Street...
Thursday, May 30, 2002
Earnings and Theft...
From The Daily Reckoning
- As we noted recently in the Daily Reckoning, Standard
& Poor's has concocted something it calls "core
earnings." This new creation looks an awful lot like the
thing formerly known simply as "earnings." In order to
calculate core earnings, S&P includes the cost of
dispensing stock options to employees and excludes the
windfall "profits" that derive from pension fund
accounting. Not surprisingly, core earnings tend to be
much lower than the "pro forma" variety favored by Wall
Street.
- S&P's intent is to produce a number that, as much as
possible, reflects a company's actual operating
profitability. Sounds like a good idea to us...but S&P's
new concoction has struck a nerve with some of the folks
in the corner offices. First of all, many corporate
executives like their lavish stock option grants, and
they don't like having these obscene entitlements
exposed for what they really are - a kind of theft.
- Apparently...not all of the world's pickpockets
dress like gypsies and hang around in the Paris metro.
Some wear hand-tailored suits to work and hang out at
the country club on the weekends. Because conventional
GAAP accounting doesn't include option grants as an
expense, option programs can be used to pick the pocket
of common shareholders without them ever knowing it. But
the costs are very real. Maybe that's why Warren
Buffett's partner, Charlie Munger, calls executive stock
options "demented" and "immoral."
- Dispensing options to executives and other employees
can be an extremely expensive practice. Just how
expensive depends, of course, upon the company in
question. Dresdner Kleinwort Wasserstein has just
published a report listing the 100 stocks in the S&P 500
whose earnings benefit most from ignoring the cost of
employee options.
- "In each case," observes Philip Coggan of the
Financial Times, "the improvement is more than 20%. The
ten companies where the difference is greatest are:
Apple, Sprint, Parametric Technology, Gap, Yahoo, Walt
Disney, Mercury Interactive, Network Appliance, Rational
Software and Agilent Technologies."
Maybe there's a heretofore-undiscovered link between costly employee option
programs and other corporate shortcomings!
...
- Based on S&P's core earnings calculation, the S&P 500
sells for about 40 times earnings. If Wall Street
analysts were forced to use these numbers, says Coggan,
"it would take the courtroom powers of Perry Mason to
argue the case for U.S. equities."
Sunday, May 26, 2002
PCLE Largest? A Colleague Responds -
From a Reader -
>> Re Friday's blog.
PCLE @ US$252M - does this make Pinnacle the USA's largest broadcast manufacturer? The hope for the USA to fight an irrelevant Europe or a Japan that been in decline for a decade?
Pinnacle has used acquisitions to grow and often the new business unit has eclipsed the old..this didn't happen with Montage and so far not with Fast but I hear integration of these products is going very well (finally) and was a key reason why CNN selected Vortex for their global news editingsystem.
Could Mark Sanders be about to substantially increase revenue by taking the Leitch news editing market? Was this why DPS were on the hunt? Better to attack than defend?
I believe Pinnacle looks over three companies a quarter for new acquisitions working on the principle that only 1 in 10 new products is a world beater and only 1 in 4 acquisitions works...better odds to buy if the hunted is on a good thing. At the least, buy someone with revenue growth.
Can't see Leitch/Pinnacle merger but can see Pinnacle buyout and 450 of the 900 Leitch staff to go, to meet Pinnacle's staff-to-revenue ratio. Besides, who has the cash? <<
Well, my friend...
You can get pretty selective in counting business and where it comes from trying to prove :"largest". How about Harris? Reportedly with hundreds of digital transmitters on backorder, their newly revised accounting/reporting system shows Broadcasting second only to Government Communications in revenue and profitability. And that's after millions and millions in Louth acquisition costs write-offs. And their domination of the Broadcast digital encoder market was done with someone else inventing and developing it. They win with branding, distribution and service, it seems.
Some managements like to throw around heavy...er...richard; and have equated success with being "as big as Sony" in some areas. Generals fighting the last war? The Field of Dreams made up of "the best" editor, switcher, effects, and server solutions is fertilized with the corpses of Ampex, Accom, Philips, and others…and some dead but not buried outfits that you mentioned…
Europe has pretty well consolidated a lot of the consumer and professional business in the migration to the EU and the Common Currency. Is bigger better? Well, depends on who does the books, and how. A mammoth-sized organization may appear to have some advantages, as it can hide a lot in its accounting practices. (e.g. Bribes to Middle Eastern Officials are allowable business expenses in many European and Asian firms. You think Pinnacle (USA!) and TMM(France!) go head to head on even terms in Iraq? In Europe? In Atlanta? But I digress...)
Current innovation theory holds that large established organizations can not both operate in the best interests of their shareholders and customers AND innovate to deliver The Next Big Thing. So invest in and buy the guys that do, don't develop it yourself, has been a common practice for Biggies like Cisco and Intel and others committed to significant quarterly growth numbers by their "owners"- investment analysts. When PCLE's stock, its currency for acquisitions - indeed for salaries, incentives and stick-around bonuses as well - fell significantly, they were slowed down in going after more possible/perceived winners for a bit. Wisely ignoring the debt route, where deflation is now killing debtors, with a revitalization in their stock price, they may indeed continue on this path. But it is, upon deeper analysis, perhaps just putting off the day when lack of real - not "proforma" - earnings will undermine such neo-ponzi strategies. The Enron/Andersen fallout will sober up a lot of CFOs, and analysts - their real cusotmers. But yes, staff reduction is a key element in making it, and making earnings. Just what TMM should learn from GVG.
The News Editing Market has been undominated for awhile - the rise and fall of bubbles like Avid, That Wisconsin Company, DPS - all niching out little pieces of Sony. With CNN also choosing PowerBooks and DV cams for news, it's clear that high margin hideouts are going away, even for Sony and Panasonic. The Japanese companies company still give away editors when asked. Montage/ Fast/ Vortex/ Whomever. The value-add and IP in that business comes from years of code writing and customer handholding and interface mastering. Expensive to acquire; and probably prohibitive to learn again from the beginning; and tough to maintain as generic computing platforms, storagewidth, and networking costs plunge.
Acquisitions in a shrinking market should be for new customers in new/mebbe-nearby markets, and not done to sell two kinds (or a surviving one kind) of stuff to the same fixed/falling-revenued customers. Take medical imaging, for example. Now there's an interesting field…
But again, I digress...
Friday, May 24, 2002
Street Talk...
Sources and colleagues in the industry report:
At NAB, discussions initiated by DPS explored buying PCLE's retail/consumer editing solution, thinking perhaps that users would "graduate" up to the professional DPS solutions. Leitch Servers execs expanded these discussions somewhat to look at buying the PCLE server business. Sources say the servers are very similar; and some say they could "integrate" well if need be. This grew into more generalized discussions of a complete buyout.
PCLE was looking for an infusion of working capital as a "merge" ; LVID was looking for a buyout and takeover.
Talks broke up at this point, and no confirmed/reported continuance since.
============================================
Thomson/GVG is sending its apologists into the field to tell this story:
" We're just a buncha guys just building some stuff, so give us a chance. We won't discontinue either production switcher line - because there are 3000 GVG switchers in the USA, and another 3000 Philips switchers in the world. We’ll keep both to avoid mad customers. We've made it easy for you, Mr. Customer…No more difficult decision over which to pick - GVG or Philips…Now it's easy…Risky competition used to get in the way …competing salesmen took up your time…it was not easy. Now it is…"
Meanwhile, the Street knows differently: Ross is doing well in small markets; Leitch is doing better in Master Control; and there are lots of other guys in the router business.
And Then There Is Sony, where embattled execs are offering unprecedented discounts and other specials to boost revenues and protect their cushy posts. Those mahogany-doored Special Suites at NAB do not come cheap. And Woe Be To The VP Who Says No to any significant sales dollars opportunity regardless of "margin". And so, the pressure to Drop Trou is on the TMM/GVG folks as well. Up to 50% discounts are reported, if needed, from Sony. GVG can do this because of their efficient manufacturing operations, but it sure blows the market expectations wide open. Comparisons between actual costs, and delivery times of GVG and TMM/Philips switchers tell the story.
The real TMM/GVG story is about "industrializing" the business…it is hard to build efficiently, get quantity pricing, and invest significantly in New Products without a consumer base to provide the Critical Mass.
(to semi-retired Catholics like me, this is not the New World Order Globalized Marketing concept; rather, it's the Mass at Midnight Christmas Eve, or 5pm Saturday Before Superbowl Sunday. But I digress)
Can a well-meaning $200M revenue company (Leitch $140M (FYE4/01) 900 employees; PCLE $252M (FYE6/01) 700 employees) make it in this business? Or must they "Converge Somehow" to stay in business? That's an everyday concern for Mark Sanders and Margaret Craig…
NBC hubs. Big GVG contract from NBC ("might be worth up to $25M…") for hubs mebbe isn't exclusive. Estimates from engineers at NBC east and west coast locations are that equipment/spending is 45% GVG, 45% Leitch; and 10% others. Reportedly, there's a new $15M deal from ABC; but there is a history there of not "endorsing" any sale to their network.
FWIW.
Sunday, May 19, 2002
Japan turning around?
This from The American Spectator, now a Gilder publication:
Japan now a buy?
Freedom in US, not same as EU...
"France is even more diseased: if an election with only one viable candidate, no debate, a cheerleading media, a blind eye to corruption, and public demonstrations with bussed-in schoolchildren strengthens your democracy, then I am moving to Zimbabwe." See entire article at The Spectator.co.uk
Monday, May 13, 2002
How's business?
Not bad, say some colleagues. Ad revenue is up most places, except ABC, of course. Post NAB bounce? Mebbe, but FCC head Powell's push to get folks on board has some listening. An Urban Legend story of a small market that Just Said No to the requirement to Go Digital by May 1st - for the usual reasons - found that its license was not renewed..but decision is under appeal. But no specifics of who or when.
However, stories like this do affect Group behavior, and one hardware manufacturer reports all its USA salesmen had a million dollar month, when a few months back, fears of being under quota were Driving Depression and Career Moves.
Agilevision was bought by Leitch recently - they reportedly got it all for $1M and assumed no debt; and did an on-going consulting contract to get open projects finished by slow finishing scientists there….. R&D costs were estimated at $11 million. With 6-8 systems "in progress", breaking even would only involve selling them for $100k each. But to who? Aye, there's the rub…
As one wag put it - "Now lemme get this straight. AV sells a system for $250K that does what I can do for $40K ,without the splicing; and with encoders for less than one third the cost?" Hmmm…
They have sold two, I'm told. Perhaps victims of the Build It For PBS and They'll All Buy Fallacy. You can buy lots of British Television Content for a quarter million US.
Working For The Japanese in America: "I've worked for this company for (twenty-something) years and have never made a decision. When one was supposed to be made, I hid under my desk", says a former national sales manager.
Cameras on Microscopes…
I've started a new assignment as Director of Sales for TTI Medical here in San Ramon. TTI Medical has been in business since 1984 and supplies video and still camera adapters and systems for medical instruments, mainly surgical microscopes. With rising interest in adapting new "prosumer" digital still and video cameras for medical imaging, and a great interest in "HD", making better television for the medical market looks very promising.
Go take a look at our website to see the basics.
TTI MEDICAL - Transamerican Technologies International
We will be developing this site beyond an information portal, to a direct selling tool - the goal: Click Here To Buy...Anything!
We sell through dealers and reps to OEMs and VARs...and some sales, but few, directly to hospitals and clinics. Companies that sell surgical microscopes - both manufacturers and distributors - are the chief customers.
We look hard at the current "HD" cameras from all the usual suspects; we buy and adapt some, and stay on top of new imaging technology. As video gets properly removed from its legacy "TV scan rates" and integrates into computer processing, the medical market becomes more attractive.
We're taking a close look at our existing sales channels worldwide; if you have colleagues familiar with this market, please ask them to give me a call at TTI Medical, Phone 925 355 0750.
Saturday, May 04, 2002
Gilder in Forbes -
George justifies his continuing optimism...
Forbes.com: Gilder's Telecosm Enters Phase II
