A New Approach to Earnings Calls?

I find the things I’d most like to blog about I unfortunately really can’t blog about (you’ll have to wait for my book). So I have to take advantage of industry events in which I don’t have a stake. The Oracle-SAP super heavyweight bout falls into this category except it hasn’t really turned into a bout yet – that would require SAP to fight back

So far, it’s more like Oracle coldcocked SAP in their most recent earnings call and SAP is stumbling around in a daze. SAP announces later this week and we’ll see if they ignore Oracle in their earnings call or counterpunch. In case you missed it, Oracle announced earnings on September 19th and were very “on message” versus SAP, claiming their applications business was growing ten times as fast as SAP’s and SAP’s strategy was flawed in a myriad of ways (including apparently not having enough investment bankers).  They barely mentioned their own results except to compare them with SAP’s.  They’ve been hammering away on this theme since then. There are not many companies that would include a quote like this in their earnings’ release:

“SAP appears to be rethinking their strategy as they lose application market share to Oracle and confront the difficulties of moving their application software to a modern Service Oriented Architecture (SOA),” said CEO, Larry Ellison. “They’ve just announced that they are delaying the next version of SAP applications until 2010. That’s a full two years behind Oracle’s scheduled delivery of our SOA Fusion applications. And now Kagermann is talking about an acquisition strategy to augment SAP’s slowing organic growth. These are major changes in direction for SAP.”

This is entertaining in multiple respects:

1.) This kind of brazenness is awfully rare.  Textbook Oracle: declare yourself number two (or in this case spend tens of billions of dollars to be number two) and turn your guns on number one. To come up with anything comparable, I have to go back to the ad earlier this year claiming “Computer Associates Runs SAP”, also coincidently from Oracle.

2.) SAP botched their immediate response and therefore the news cycle. They issued a statement that failed to address the share and growth accusations (which we’ll get to with #4 below) but went after the more philosophical charges leveled by Oracle:

“Larry Ellison’s statements in today’s Oracle earnings press release about SAP’s product and acquisition strategy are a complete misrepresentation,” said Bill Wohl, vice president of product and solutions public relations, SAP. “Since January of 2003, SAP has consistently articulated and delivered on its vision for enterprise SOA following a course of organic growth combined with strategic acquisitions. SAP offers customers market-leading, enterprise SOA applications today while Oracle’s next-generation applications exist only in PowerPoint and won’t be delivered until 2008 or beyond. mySAP ERP 2005 gives customers and partners a world-class ERP platform with planned, regular functionality enhancements without the need for major upgrades through 2010, and has been shipping to customers since June of 2006. By contrast, Oracle’s statements about SAP and their own Fusion progress continue to be inconsistent and misleading. In January, Oracle claimed they were halfway to Fusion and two weeks ago they said they were not even halfway done — Oracle needs to adopt one version of the truth, and be honest with the market on its actual progress.”

Am not. Are too. Am not. Are too.

3.) They’re actually having a fight about who professes to like Service Oriented Architecture more: “No, we’re more SOA than they are…” The reality is neither of them come anywhere close to offering service-oriented applications today and if anything are slowing their march to SOA. Both have yielded to a distinct lack of customer interest in major new releases by pushing their big bang roadmaps further out and focusing on incremental releases. Oracle tells customers not to pay any attention to those Fusion apps and apparently plans to obfuscate the issue with their similarly named Fusion middleware. SAP begs its customers to upgrade to the latest version of SAP and in return they promise not force any more major upgrades any time soon. Given the costs, risks and unknown benefits of these major upgrades, the ERP space is now the paragon of a “good enough” market. But even more mystifying, neither of them really want to see a SOA world come to pass as liquefying all those business processes into individual services undermines their way of life and raison d’être (I apologize for my French).  Having to sell a bundle of services as opposed to the transactional monolith undermines their business models.  The world won’t unravel into an atomistic collection of best of breed services but customers will come at it the other way, chipping off important higher value functions in favor of best of breed solutions.  We’ve seen this inside Microsoft as the move to services has let us pull relatively more important/highly specialized functions like sales commission calculation or managing the Xbox 360 supply chain out of our big, monolithic enterprise applications.

4.) Finally, people are questioning Oracle’s actual growth and share claims.  You can see the influence of the investment bankers who run Oracle. They closed the Siebel acquisition exactly one year and one day after the PeopleSoft deal closed, which means Siebel revenues look to the casual observer like growth for a year. And they’ve reclassified some of Siebel revenue into their middleware line. Oracle’s quarter is a month offset from Siebel’s quarter so it is hard for analysts to do apples-to-apples comparisons. Most of the Wall Street analysts fell for all this and exulted in the apparent success of Oracle’s acquisition strategy, pushing Oracle’s stock is up two bucks.  But as people dig deeper, organic growth looks much lower (CRN, Smart Money, eWeek and Motley Fool all dig into the numbers), possibly even lower than SAP’s.

SAP probably won’t descend into the mud in their earnings call, but who knows, maybe they will follow Oracle’s lead and help liven up earnings calls in this drab, Sarbanes-Oxley world we live in.

The HP Frenzy

Keep an eye on just how many reporters are getting bylines on stories about the HP corporate espionage debacle.  It isn’t just one or two at each publication.  An incomplete and cursory count reveals 16 different Wall Street Journal reporters with bylined stories.  I don’t think they had that many when they unraveled the Enron fraud. 

 

The press has “flooded the zone” which is really bad news for Mark Hurd as they seem to want blood.  Is there an ending here where he keeps his job?  He missed an opportunity Friday to raise himself above the fray.  Reporters tend to write the news straight but these new-fangled blog things give you a better sense of what they are thinking and he blew the press conference (here and here).  I don’t think Dunn’s scalp will be enough (David Kirkpatrick at Fortune has the most interesting insight into Dunn’s situation and motivations).

 

The other guy in the crosshairs is Silicon Valley uberlawyer Larry Sonsini, whose apparant oking of the HP spying comes on top of his firms’s relationship with almost half of the Silicon Valley companies implicated in options backdating. 

 

It is tough to get meetings with both industry and business press right now because they’re so focused this story.  The reporters who got spied on are getting their just revenge and the ones who weren’t spied upon are even more motivated to show they were in fact worth spying on in the first place.  And we haven’t even had the Congressional hearings yet–need I mention it is an election year?

World Cup Mania

I just got back from a week in Europe where, with the possible exception of France, it is all World Cup all the time.  Imagine the Super Bowl lasting a month.  The pads of butter on the plane were molded in the shape of a soccer ball (excuse my American characterization).  The beer garden in Munich had an enormous projection screen to ensure no one misses a single off-sides penalty.  Flying out while Germany was playing meant the airport was deserted because everyone was watching the game.  France was not so ga-ga, probably because they hadn’t won a World Cup game since they won it all in 1998.  They did manage to beat Togo later in the week, in spite of strong English fan support for Togo at least in the pub where I saw the game.  

 

But England took the prize for most nuts.  The English flag of St George, a red cross on a white flag, was everywhere as opposed to the Union Jack because it is England that is playing and not Great Britain.  You are practically an Argentina fan if you don’t have at least two of these flags on your car.  Yet all the insanity was matched with a fatalist attitude familiar to fans of underachieving sports teams everywhere that their team would find a way to snatch defeat from the jaws of victory somehow.

 

I saw perennial powers Argentina and the Netherlands play to a 0-0 tie, and while you might expect me to heap scorn on such an unsatisfying scoring performance, it was actually pretty entertaining to watch.

 

They’re setting all kinds of new records for blood, ejections and poor officiating, so they do seem to have a strategy to reach out to the American market.  And Budweiser is the official beer and they have some good Sportscenter-esque ads that don’t seem to be posted yet, but the site implies they will be.

 

So brush up on your nationalist football/drinking songs and enjoy the rest of the World Cup.

Enroncology

I’m fascinated by the Enron collapse and trial.  The sheer brazenness and magnitude of the crimes is mind-boggling.  WorldCom ended up eclipsing Enron to take the title of biggest financial fraud, but Enron is a better story.  Everything at least seems bigger in Texas.  If Shakespeare were working today, he’d he hard pressed to find better fodder for a new tragedy (admittedly he’d have to rewrite the final act to get to an appropriately Shakespearean body count).  Whatever challenges you face in your day job, you can’t help but feel better when you look at what was going on at Enron.  Here was a company that was completely out of control, yet ranked amongst the largest, most successful and most well regarded companies at the time.  Some may find inspiration in that as well.

 

I can remember first hearing about them during the bubble when they announced something they called the “Broadband Operating System”.  Having some experience with what it takes to build and ship an operating system (insert your own Windows Vista joke here), I was surprised to hear of a new player with the wherewithal to do an operating system.  Surely it was BS I thought but what company would be shameless enough to pretend they were playing in this space?  Evidently I needed to lower my shamelessness bar. 

 

A whole Enron genre has emerged.  Several of the reporters who covered the company’s downfall have written books, of which I have read a couple.  They chronicle the Enron story but also give insights into the interplay with the media, both as the company unraveled and how the press is being used by the lawyers in the subsequent criminal trials.  If you are a practitioner of the black art of PR, it is fascinating inside baseball.

 

The New York Times reporter’s book is Conspiracy of Fools, which was the best general account of the story I’ve read.  A well-written narrative, it practically reads like a novel.  It is also fascinating because the book was published before the various cases went to trial and you can perhaps discern the hand of defense lawyers trying to tee up their defense, which basically amounts to “they were incompetent fools, but not criminals”, hence the title.  Enron’s head PR guy manages to burnish his reputation and do some personal PR to go down in history as a hardworking, responsive professional who was mislead by management.  Skilling and his lawyers must not have participated in this book as he remains an enigma, in particular why he resigned just months after getting the CEO job and just months before the company blew up.

 

The other book I read was by the two Wall Street Journal reporters who broke the story (which in turn broke the company).  Titled 24 Days, it is more of a day by day account of what they discovered and how the story developed, from the initial story to Enron’s bankruptcy.  They really had no idea what they were dealing with or a clear way to unravel it.  When all they had was the name of a financial entity they thought was related to Enron but nothing more, they buried the name in the middle of a story to see what it would precipitate.  Sure enough, anonymous callers would provide the next critical nugget of information.  The stories set in motion a liquidity crisis at Enron which in turn yielded further stories which created a (virtuous?) cycle that took the company to bankruptcy in less than a month.

 

The Fortune reporters also have a book The Smartest Guys in the Room (and there is a movie by the same title) that I have not read.

Down and Out-sourced

Kind of like blogging, I never quite get around to executing various ideas for hedge funds so I’ll share one.  Big IT outsourcing deals are dead.  They just don’t pan out as advertised, end up being renegotiated and/or leave companies unable to adapt to a changing world.  The only customers with big outsourcing deals who seem to be even remotely happy are those who take solace in the fact their outsourcer had to take a big write-off on their deal.  Companies are splitting up their outsourcing into smaller pieces to get more expertise, focus and to play the vendors off against each other.  Some companies have realized elements of IT are critical to the business and are pulling them back in house.  Ultimately, people are realizing you can’t separate the business function from the technology that implements it, hence the shift to business process outsourcing.  Expect more deals that outsource say HR as opposed to IT.  The IT function goes wherever the business function goes.

 

Yet big outsourcing deals still happen.  Why?  It turns out they’re motivated by a more primal consideration – financial survival.  The investment thesis is you short any company that does a big (a billion dollars or more, but you can also look at relative size of the deal for smaller companies) outsourcing deal.  It is a great indicator of a deteriorating balance sheet.  You could have caught WorldCom, Enron, Adelphia amongst others.

 

Just look for this kind of gushing:

 

"Enron is one of the most innovative, fastest-moving companies we’ve seen in any industry," said Tom Cotney, vice president, Utility & Energy Services, IBM Global Services. "We are delighted to have the opportunity to work with Enron as it builds its information technology infrastructure for the future. IBM will deploy the people, technology, and skills Enron requires as one of America‘s leaders in the energy industry."

 

The “most innovative, fastest-moving” companies don’t elect to set their IT in concrete without a more pressing rationale.

Why X Doesn’t Matter

One of the many things low on my to-do list (right down there with blogging more often) is to do more to promote the gospel and reasoning of Nick “IT Doesn’t Matter” Carr (he uses the less definitive “Does IT Matter?” when trying to sell books to swing audiences).  His argument is that since technology is now widely available to any company, there is no sense using it for competitive advantage.  This reasoning drives technology people crazy and often results in incoherent sputtering in response.  

 

My view is the democratization of technology is something to praise, not bemoan.  I’m not sure anything provides sustainable competitive advantage over the long term and there isn’t a lot of history to suggest technology ever did.  Technology, like anything else, is a “what have you done for me lately” input.  But I’ll leave it to others to have that argument.  I’m more interested in how this reasoning might be applied in other areas.  I’ve been toying with doing a couple articles for the Harvard Business Review in this vein.

 

One is “Brains Don’t Matter”.  After all, everyone has a brain, so why bother to think?  If you come up with a good idea, someone else will see it and copy it, so why waste the time and energy?

 

Another is “Food Doesn’t Matter” for the restaurant business.  Everyone has access to the same raw ingredients, so why bother trying to differentiate yourself on the quality of the food you prepare.  Instead, focus on more sustainable advantages like parking, cushy chairs, napkin quality and maybe a nice view.  You can outsource the food preparation to a local pizza place that has economies of scale.  And in the long run, of course, visionaries tell us we’ll move to the Utility Food™ model where every restaurant has a pipe that just pumps in Soylent Green or whatever.  You may laugh, but this Utility Food™ model is being tested today.  

 

(That was a long way to go to get that last link in, but the alternative post of “My jokes are coming true” needed more context).