10 Reasons To Be Cheerful (About The Macroeconomic Outlook) August 31, 2010
Posted by bernardlunn in capital markets, Predictions.add a comment
I made my 2010 Predictions in Dec 2009 and half year update in June 2010. My predictions were gloomy on the macro picture but positive on tech and online media. In June I turned more positive on the macro picture. Here is why;
1. Bull Markets “climb a wall of worry”. They always have and always will.
2. Too many commentators are bearish, much of it crazy doomster talk that sells blog page views (and is good for canned food, Montana cabins and guns). I am not simply being a “knee jerk contrarian” by pointing out that this consensus pessimism is positive. When all the commentary is negative, traders/investors move to cash. And cash needs to get a return somewhere, so people will invest and some of that investment will lead to great companies and good jobs.
3. Most commentators are US centric and so are reporting from where this recession originated.
4. This recession hit the “chattering class” worse than usual. The old saw applies, “it is a recession when your neighbor loses his job and a depression when you lose your job”". So the chattering class, often blogging for free or peanuts, will tend to talk about depression a bit more.
5. GDP and other macroeconomic statistics miss all the free agent and entrepreneurial activity, particularly in the most dynamic job market – America.
6. The global rebalancing is happening. This means that global demand is no longer dependent on the American “consumer of last resort” (who was actually just using their house as an ATM). Wages are rising in China and India (“Chindia”). The labor arbitrage is narrowing and a that means jobs will return to Western economies. The higher wages in Chindia means that Western firms will have a couple more billion consumers to sell to.
7. The American rebalancing is happening. This is shifting investment from property (fundamentally dead money other than construction jobs) to investment in business (when I read about a “seed financing bubble” I get optimistic).
8. People follow trends beyond reason. When things are going up they exaggerate how far it can go up. When things are going down they exaggerate how far it can go down. We are clearly in that latter phase.
9. This point is deliberately left blank. Most people miss the downside surprise. But equally most people miss the upside surprise.
10. We are animals and need our animal spirits, so we will work, trade, invest and shop our way through problems. Cheers mate!
In case you think I am a “perma-bull”, here is one example of my gloomy view and advice from Oct 2007..
SaaS Index Insights: The Bull & Bear Case On Salesforce.com (CRM) August 22, 2010
Posted by bernardlunn in capital markets, SAAS.add a comment
This is an extract from the SaaS Index Insights Report, which is available on CapitalMarkets.Com, price $125. Order here.
Salesforce.com (CRM) is a bellwether in the SaaS market. There are 3 reasons to think CRM is over-valued. There are also 3 reasons to think CRM is under-valued!
The 3-Point Bear Case On CRM
First, what is the case for Salesforce.com (CRM) being over-valued?
- PSR compared to peers is high. PSR (Price Sales Ratio) for the SaaS Index average (as of Aug 20th) was 5.00 and Salesforce.com is 9.01, indicating an over-valuation of 85%. Last quarter this overvaluation was “only” 60%. Given their market leader status that is not surprising. But for the first time, this level of overvaluation is flashing a warning signal. Concern factor: medium.
- Marc Benioff is selling shares. This was announced in the quarterly report on November 25th 2009. The % of his shares that is selling is significant. He has announced that he may sell 2,750,00 shares out of a total of 13,371,006 shares he owns. That is 21%. Whether investors are concerned about this remains to be seen. Insider selling is often a trigger for smart outsiders to sell. And the short sellers have picked up on this and are using it to drive their case. But it also may not mean anything. Maybe he wants to give serious money to charity and who can fault him (or Bill Gates) for doing that? Investors do not seem to be concerned so far, evidenced by the stock performance since he started selling. Concern factor: low.
- Their SaaS platform play has strategic issues. This is a more complex issue. Long-term growth will require moving beyond the original core market of sales force automation systems. They understand this very well. That is why they built the Force platform. It is also probably why they raised $500m in convertible debt, so that they can acquire businesses in adjacent markets. But making the transition from one market to being a platform for multiple markets is difficult. Very, very few companies have ever made that transition. Those that have made the transition are valued very highly. Taking a long-term position in Salesforce.com is largely dependent on your view of how well they will manage this transition. We have dedicated a separate section to this issue. Concern factor: Low for short-term traders, high for long-term investors.
The 3-Point Bull Case On CRM
Second, what is the case for Salesforce.com (CRM) being under-valued?
- Internet market leaders are never cheap stocks. Waiting for these leaders to become bargains has seldom worked.
- They have executed excellently to date. They have challenges ahead of course but their track record indicates they will manage them well. Long term investing is about confidence in management and they have earned that confidence.
- SaaS/Cloud is going mainstream and they defined the market and still lead it. They serve as a proxy for many investors to invest in SaaS. They have a big enough market cap to play this “pseudo Index” role.
How Did The Market View CRM Last Quarter?
In short, CRM outperformed the market significantly. In our view, the market was giving due credit to great Q-Q revenue growth in the last quarter. Analysts were negative on the last quarter and the stock went up. Most of them missed the great Q-Q momentum. Not wanting to repeat that mistake, analysts are positive on the latest quarter. But we think they are wrong. We finally think that CRM is due for a significant correction.
Why? The same reason we were bullish last quarter – the Q-Q revenue momentum. This quarter was not as good. It is not bad, but at CRM’s lofty valuation “not bad” is not nearly good enough.
What Does The Latest CRM Qtr Report Tell Us?
What we are looking for in this report is primarily Q-Q revenue growth.
If they grew by more than last quarter, that means they have accelerating growth. That would be amazing given a) their size and b) their high growth last quarter.
First, here is what we wrote last quarter:
“To recap, last quarter they reported Q-Q growth of 7.11% by adding $23.5 million of new revenue. To match that 7.11% this quarter they would have to add about $25 million this quarter.
Anything better than that means a fantastic result.
We will be looking for any “red flags” ie concerns. But barring that we are focused on Q-Q revenue growth.
What did they report? $377 million revenue. That is $23m in new revenue, which is almost the same as the prior quarter. As a % Q-Q growth that is 6.5% versus 7.11% growth in the prior quarter.
Our analysis? Very, very good. Not quite “knock it out the park” but close.”
What about this quarter? They got $17m in new revenue, less than the prior quarter. On a % basis, they grew 4.51% Q-Q, which is great for a company over $1 billion in annual revenue. But it is still less than the 6.5% last quarter and the 7.11% in the quarter before that.
This is not just the law of large numbers. The CRM growth momentum may be slowing a bit. At this level of valuation, CRM cannot even afford for that to be a question mark. The shorts may have a good quarter.
[i] Extract from 10Q: Marc Benioff, adopted a fifth Rule 10b5-1 trading plan (the “Fifth Plan”) on September 1, 2009.Under the Fifth Plan, up to 2,750,000 Shares may be sold in open market transactions at then current market prices on Mr. Benioff’s behalf at a rate of 10,000 Shares per trading day. Sales pursuant to the Fifth Plan are expected to commence on November 30, 2009 and continue for approximately one year. Sales under the Fifth Plan are subject to certain restrictions, and may be terminated at any time. The Fifth Plan also provides for gifts of up to 275,000 Shares to funds or organizations qualifying as public charities pursuant to Internal Revenue Code Section 501(c)(3). As of November 25, 2009, Mr. Benioff had beneficial ownership of 13,371,006 Shares. Actual sales transactions will be reported through filings made with the Securities and Exchange Commission as required.
SaaS Index Insights Volume 3 August 20, 2010
Posted by bernardlunn in capital markets, SAAS.1 comment so far
The Report is available on CapitalMarkets.com , price $125.
Here is the Table Of Contents:
1. Summary……….. 3
Top 5 Q-Q Revenue Momentum Winners……….. 3
Buy, Sell & Short Recommendations……….. 4
2. The SaaS Investment Thesis……….. 5
This Report Is SaaS, Not Cloud: The Top Of The Stack……….. 5
Why SaaS Is Better For Customers……….. 5
Why SaaS Is Better For Vendors (ie Management Team)……….. 6
Why SaaS Is Better For Investors……….. 6
Buy The SaaS Index Or Individual SaaS Stocks?……….. 7
SaaS And Macroeconomic Cycles……….. 7
What Investors Should Focus On During This Phase Of The Transition To SaaS……….. 7
3. Companies In The Pure SaaS Index……….. 8
Concur Technologies (CNQR)……….. 2
SALESFORCE.COM (CRM)……….. 3
Constant Contact (CTCT)……….. 3
DemandTec (DMAN)……….. 4
Kenexa (KNXA)……….. 5
LogMein (LOGM)……….. 6
NETSUITE (N)……….. 7
RightNow Technologies (RNOW)……….. 7
SuccessFactors (SFSF)……….. 8
Taleo Corporation (TLEO)……….. 9
DealerTrak (TRAK)……….. 10
Ultimate Software (ULTI)……….. 11
Vocus (VOCS)……….. 11
4. Finding The Next SaaS Momentum Play……….. 12
Revenue Is A Meaningful Comparable For SaaS Companies……….. 12
Why We Measure Q-Q Revenue Growth……….. 12
SaaS Stocks Ranked By Q-Q Revenue Growth……….. 13
SaaS Stocks Ranked Revenue By Momentum Across 2 Qtrs……….. 13
5. Finding The Next Value Play In The SaaS Index……….. 15
Value Filter # 1: PSR (Price Sales Ratio)……….. 15
Looking For Cash……….. 15
How Does The Market Trade Value In SaaS?……….. 16
The M&A Driver……….. 16
6. Who Is In Both The Value 5 And The Momentum 5?……….. 16
7. Size Matters: Escape From Small Cap Hell……….. 17
8. SaaS Index Valuation & Performance……….. 18
Tracking Versus The Big Tech Index……….. 18
SaaS Index Valuations vs Big Tech Index Valuation……….. 19
9. Valuing The Salesforce.com (CRM) Bellwether……….. 19
The 3-Point Bear Case On CRM……….. 19
The 3-Point Bull Case On CRM……….. 20
How Did The Market View CRM Last Quarter?……….. 21
What Does The Latest CRM Qtr Report Tell Us?……….. 21
10. Appendices: First Time Subscribers Start Here……….. 22
A: Index Methodology……….. 22
B. Salesforce.com (CRM) The SaaS Bellwether……….. 23
C: Force Platform – Will This Take Salesforce.com To The Next Level?……….. 23
D: Finding The Momentum Play In The SaaS Index……….. 25
E: Why Deferred Revenue May Be Becoming Less Important……….. 25
Imagine the Press Conference (to focus your sales efforts) August 13, 2010
Posted by bernardlunn in Enterprise Sales.add a comment
Early in a big complex sale, take time for a bit of daydreaming. Imagine the Press Conference where the CXO of the company you are selling to announces the project to the press.
Maybe you think that daydreaming sounds rather self-indulgent. Perhaps this is some new variant of the old “think positive” stuff?
Actually this is a very practical strategic selling tool.
Complex sales are, well, complex. Like the middle part of a chess game, it can make the brain hurt and it is really hard to see the wood for the trees. You are probably juggling internal politics, resource constraints, pressure from partners, competitive moves and customer politics – and that’s all before lunch!
You need something to keep you focused on what really matters. You need to know what is the one overriding motivation for your decision-maker. This is the story that your decision-maker will be announcing when the deal is done. She will present why her great initiative will have a big effect on one of the company’s key strategic objectives and why she was smart enough to select the one vendor that was ideal for the project.
Unless you know what this story is, you are shooting in the dark.
Even big, complex enterprise sales come down to the personal motivation of the ultimate decision-maker on your project. Customer politics can get in the way when the personal motivations of different managers are pulling in different directions. However if you know the personal motivation of the big boss (and if you are reasonably confident the big boss will stay in power long enough to get the deal signed) you cannot go far wrong. You can then focus on helping the boss align the pesky, politics-playing managers to the big objective.
To cut your way through the complexity of enterprise sales, you need to simplify. Select one person who is the key decision-maker. Understand what is important to that decision-maker. Select the one big reason why he/she wants to do this project. Select the one reason why he/she will announce your company as the right vendor.
There is tremendous power in keeping the focus to one. Find one decision-maker, one business driver and one vendor selection driver. When you see multiple answers, keep drilling and imagine that press conference. The CEO will only have one minute to describe the vendor and why he/she chose you, so there cannot be lots of reasons.
Imagine yourself in his/her shoes. Remember when you have had to make an important decision and how you finally made up your mind. What you will usually find is that it was one simple reason and everything else was incidental.
Even more powerful is the realization that there is often one precise moment when you win or lose a deal, even if the whole sales cycle is 12 months or more. Everything before that is preparation to sell and everything after that is managing the process to closure. Think about decisions you have made and how you made them. There might have been lots of research to get you to a certain point and then a key point when in your mind you think “this is it”. Then you may still spend lots of checking to make sure you are doing the right thing, but you want the answer to be positive. You are looking for verification not problems.
In some sales, you may not be there when that key moment happens. This is not ideal, but it is the reality in many enterprise sales. At the crucial moment of decision, your decision-maker is probably sitting with the one manager he/she holds accountable for this decision. Again, there is one key manager, although lots of other managers may be involved in the research and diligence stages.
Although you may not be there at that critical moment, you must have a very close relationship with the manager who is doing the briefing and you and he/she must have total alignment on the key objectives.
In long sales cycles, take time to imagine the press conference. Use this to get clarity on the “key ones” – one decision-maker, one business driver and one vendor selection driver.
Stomach knots, table banging and other good signs August 5, 2010
Posted by bernardlunn in Enterprise Sales.1 comment so far
If you sell the big-ticket deals, you don’t need that many to make your numbers. These deals also take a long time to get to closure, almost never less than 3 months and often 12 months or more. By the time you get into the “closing zone” you and your teammates have expended lots of time and energy, your company is relying upon you to close the deal and you are starting to think about what you will do with the commission.
This is an exhilarating, scary and dangerous time. Exhilarating because you are close to a big “high five” success. Scary because if you lose at this point when you can almost taste the success, it will be a bitter disappointment. Dangerous because a smart buyer can easily exploit your intense need to close the deal and thus win major concessions.
Donald Trump (the real estate developer) in the Art of the Deal, talks about getting the other side to the stage where they really want the deal and think it is in the bag. Then he backs off and demands major concessions. Smart buyers everywhere have learnt some variation on these tactics.
So this is when you get a knot in the stomach and you might start to witness table banging and hear raised voices. All this unpleasant stuff is good news. Experienced deal closers recognize these as signs that a deal is closing. The absence of these signs is actually a cause for concern!
One consistent thread in all negotiations is that you must see some sign of real pain from the buyer in order to be confident that you are not leaving too much money on the table. Of course the buyer knows you will be looking for this and will be sending the signals that you have reached the limit. The skill comes in differentiating between fake pain as in “this is well above our budget and my boss will kill me if I agree” with the real thing. The buyer is also looking for the same signs from you.
Losing your temper is usually not good. It implies a lack of control and usually signals fear and weakness rather than strength. However sometimes it can be very effective. It worked for me once at a critical point in the middle of a complex contract negotiation. The buyer was a large bank, we were a small vendor and our competition was the obvious “you never got fired for buying XXX” in this market. Our sponsor got board approval to negotiate with us but only if he used a very tough lawyer, who had just published a booking on negotiating software contracts, to tie us up in knots and ensure no risk to the bank. After days of intense sessions arguing about tortuous legalese I had finally had enough. Without thinking I stood up, banged the table, raised my voice and made it clear I was pretty pissed. I am fairly big guy and at it’s most elemental this was physical intimidation. Things got a lot easier after that!
Negotiators use many tactics to simulate the table banging without killing the deal. You can use good cop/bad cop, or the “my intransigent boss will never agree” or you can use a stalking horse to lay down a negotiating line.
The tactics will depend upon the specifics of the sale, but the common thread is that when the stomach knot gets tight, you are probably in the closing zone and that is good. We were engineered for fight or flight for a reason!
