Tag: Growth


Software AG’s Strategy To End Its 8-Year Growth Drought


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Former CEO Karl-Heinz Streibich of Software AG explains the Smart Big Data Software to German Chancellor Angela Merkel, center, and British Prime Minister David Cameron during the opening day of the computer fair CeBIT in Hannover, Germany, Monday, March 10, 2014.  (AP Photo/Frank Augstein)

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In August 2018, 50 year old Darmstadt, Germany-based enterprise software supplier, Software AG, hired a new CEO. IBM veteran Sanjay Brahmawar. Can the strategy he’s helped devise end the company’s eight year string of unchanged revenues?

In an April 9 interview, Brahmawar argued that the company’s new strategy resulting from a McKinsey study — dubbed Helix — would enable Software AG to generate profitable, sustainable growth over the next five years.

I am left with many questions about whether Software AG will grow again. (I have no financial interest in the securities mentioned).

Software AG — with $974 million in 2018 revenue and an April 19 market capitalization of $2.8 billion — “engages in the development of information technology platforms for digital transformation. It operates through the following segments: Digital Business Platform (DBP); Adabas & Natural (A&N); and Consulting,” according to the Wall Street Journal.

Brahmawar worked at PWC before IBM acquired it in 2002 and stayed with Big Blue — ultimately running IBM Watson IoT before taking on the CEO role at Software AG.

Before joining the company he conducted his due diligence and felt “excited” about the opportunity the company would provide to work in the world of digital transformation. He also believed that it had a well-regarded product portfolio and a steady $200 million flow of annual cash flow.

He believes that the company’s new strategy will keep enterprises — the company serves 50% of the Fortune 500 including banks, insurance companies, and government organizations — from being too locked in to any single supplier of cloud services — such as Amazon, Microsoft, or Google — and hence is proud of Software AG’s new tag line “freedom as a service.”

The reason is that Software AG plans to make its software work well on all these platforms.

Meanwhile Brahmawar’s objective is for Software AG to achieve 100% annual growth.

Is that possible for a 50 year old company that has not grown for so many years? It depends on how well Brahmawar can exercise what I call in my new book — Scaling Your Startup — the seven scaling levers.

I see Software AG as participating — unsuccessfully — in the fourth stage of scaling which I call running the marathon. This means it is a public company that in my view ought to strive to adapt to changing customer needs, new technology, and upstart competitors to grow faster than its rivals.

In order to do that, a public company ought to avail itself of those seven scaling levers the three most relevant of which include building growth trajectories; creating culture, and hiring, firing, and letting people go. (The other four include raising capital, holding people accountable, redefining job functions, and coordinating processes).

I am guessing that Software AG faces considerable challenges in each of these areas. Here’s why.

Building Growth Trajectories

Companies can’t rest on their laurels. Industries that years ago produced consistent, rapid growth attract rivals that vie for market share and eventually slow down and decline.

To keep growing, companies must invest in growth opportunities along three key dimensions:

  • Customer groups (selling more to current segments or targeting new ones);
  • Geography (selling more to current or new geographies); and
  • Products (building or acquiring new products).

Software AG seems to have put considerable thought into what its growth trajectory ought to be. Brahmawar said, “We are cutting some products and focusing more on  a $24 billion addressable market including Internet of Things integration (IoT) and Cloud integration solutions (where we will acquire innovative companies). We are putting more resources into North America (the U.S. is 35% of our business) and targeting a smaller set of industries.”

Software AG plans to transition to a software as a service business model in 2020. “We are investing $50 million to make this business model transformation — $20 million to $30 million of that will come from internal cash and another $30 million from R&D transfer from other product lines,” he said.

Software AG will provide three indicators of its transition. “We will experience reduced revenue, new booking, and free cash flow in a transition that is similar to the ones that Adobe, Microsoft, and PTC experienced. By 2023 we expect 80% to 90% of our business to be from subscriptions and our earnings before interest, taxes, depreciation and amortization will average 30%,” Brahmawar said.

I wonder whether Software AG will be able to gain market share in its targeted industries. Can it offer customers a better bundle of benefits for the money than competitors do?

Creating Culture

Culture is how a company encourages its employees to act in ways that embody the company’s values. In the early stages of a startup, the culture is not articulated.

To paraphrase, MIT Emeritus professor, Edgar Schein, it is only after the startup achieves success — by selling its product to many customers — that it makes sense to try to articulate what values and behavior produced that success.

Once a company adds new employees from outside its initial team, it is important to articulate the values and behavior that produced the company’s initial success so that they can be used to protect the company from hiring new people who would poison the culture.

Software AG is trying to change its culture. Brahmawar said, “The biggest challenge is our culture. We are a sleeping beauty. How do you wake people up on the path to growth? We need to make people speak up, take risks, and not be afraid of failure, and collaborate with partners. Our employee value proposition is ‘Be your best you.'”

If Schein is right, for Software AG to achieve such a dramatic cultural transformation, it will need to experience new success — but can it do that without a new culture? It sounds like a Catch-22.

Hiring, Promoting, and Letting People Go

As a company grows, it must assess and change who does what job. The company must hire new people, promote those who have done well and are ready for greater responsibilities, and let go those who no longer fit with the company’s requirements.

Software AG is bringing in new people. As he said, “We are trying to recruit younger, more vibrant talent in Silicon Valley and Boston to give the company a boost. We need to increase by 30% the number of field people — including pre-sales technical specialists — in North America.”

This sounds to me like a worthy goal but given the competition from startups in the war for talent, can Software AG hire and motivate the best people?

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The Stock Market’s Biggest Risk Is Still Alive: Slowing Economic Growth


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Abstract industrial background 

Getty

Forget recession risk (at least, for now). Focus instead on the continuing signs of slowing growth. Many monthly economic reports are extending their lower growth, the concern that ignited last year’s bear market.

While growth generally remains positive, the weakening of the growth rate should be seen as an erosion of the current perfect picture, as described by JPMorgan Chase CEO Jamie Dimon to Fox Business:

What we see in the U.S. is that the American consumer, their balance sheet, their incomes are strong, not weak. Most people are going back to the workforce, which is a good thing.  Companies are in very good shape, profits are good, capital expenditures are still going up, business and consumer confidence are at high levels, housing is in short supply.  So it’s kind of a tailwind.

A common sense warning about CEO optimism…

From “Bear Market Investment Strategies” by Harry D. Schultz (Dow Jones-Irwin, 1981, page 27):

The story has long been told of the steel magnate who looked out of his office window at the rows of smoking factory chimneys, contemplated the healthy pile of unfilled orders on his desk, sent a memorandum to his production assistant to hire a hundred more men, and called his stock broker to sell all the stocks he owned.

“Are you crazy or something?” asked the broker. “No,” came the reply. “In all my years the future for our business has never looked as good as it does right now. Therefore, I must assume that from now on it can only look worse.”

Note that the company executive did not forecast a recession, only that the growth conditions would likely lessen. As the stock market showed late last year, the concerns of such slowing can sharply reduce stock prices.

A growth slowdown carries with it an increased risk – a further slowdown

The rising stock market is now close to the level preceding last year’s bear market. Why? Likely, it is the confidence that those previous worries are past and that good growth is ahead.

However, that slowing economic growth has a serious downside. A slower growth rate can cause businesses to temper plans and operations. Such actions, in turn, can spread beyond the businesses, themselves.

Focus on the industrials

While other sectors are important to the overall economy, a weak industrial sector can impair them. Slowing industrial production growth creates weaknesses elsewhere, up and down the line – think suppliers and shippers as examples.

This multiplier effect was recently presented in Economic Policy Institute: “Updated employment multipliers for the U.S. economy.”

When it comes to the ripple effects that spread to the rest of the labor market, one lost dollar of economic output or one lost job is not the same as another.

Each industry has backward linkages to economic sectors that provide the materials needed for the industry’s output, and each industry has forward linkages to the economic sectors where the industry’s workers spend their income. Therefore, in addition to the jobs directly supported by an industry, a large number of indirect jobs may also be supported by that industry. The subtraction (or addition) of jobs and output in industries with strong backward and forward linkages to other economic sectors can cause large ripple effects.

The report shows the heavy influence a manufacturing job has on the economy. One “durable manufacturing “ job is linked to 7.4 other jobs, and one “nondurable manufacturing “ job is linked to 5.1 other jobs. Therefore, slackening industrial production growth can produce a broader weakening elsewhere.

Industrial production’s negative March growth…

The March industrial production report just came out (April 16), and it showed poorer than expected results once again.

  • Industrial Production: -0.1% (vs. consensus expectation of 0.3%)

Note especially the analysts’ optimistic forecast (an annual growth rate of about 3.5%). They believed that the previous slowness was past and March would see a return to a healthy growth rate. However, “growth” was negative – a notably large underperformance.

So, why didn’t the stock market drop?

It looks like Wall Street and investors remain focused on the latest earnings reports while taking comfort, if not from the actual reports, then from CEOs’ positive comments – like Jamie Dimon’s.

Such distractions happen regularly in the stock market. However, “neglected” stock market fundamentals eventually come to the fore, causing those “unexpected” stock market moves.

An important view of slowing growth that is seldom in media reports

Media reports focus predominantly on the latest monthly economic number, often “analyzed” by comparing it to the previous month’s result. The problem is that such short-term, volatile results are hard to convert into an actionable interpretation. Even examining a table of past monthly data is a challenge.

For a better interpretation, look at trailing, annual changes

A recognized methodology for tracking economic measures is to look at the 12-month percentage change and how that measure changes from month-to-month. Thus, the growth rate is not from February 2019 to March 2019 – it is from March 2018 to March 2019. (Note: using the same months removes the need to seasonally adjust the data.)

  • Industrial Production: 2.8%

Industrial Production Index

John Tobey (Federal Reserve Bank of St Louis)

By examining how the annual growth rate has changed, we can make three observations:

  1. Investors were right to worry in October 2018 about a growth slowdown
  2. The slowdown, currently six months in length, is now turning down the Industrial Production Index, itself
  3. With the stock market near its October 2018 high even as growth slows, the pressure for something to happen is increasing

What might happen?

If there is a negative mismatch between growth fundamentals and stock valuations, the easiest fix is for stock prices to decline. This re-pricing could be done in an orderly way through company-by-company earnings reports, management outlooks and analyst forecasts. Alternatively, it could follow last year’s bear market roadmap, with a sudden, wholesale selloff.

On the bright side, though, the growth rate could turn up. Of course, one indicator turning up will not provide the proof, nor will just one month’s worth of improving indicators.

The bottom line

The 2018 bear market originated from investor worries about economic growth slowing. The economic indicators have confirmed this concern to be accurate.

However, seemingly in spite of the growth slowdown, the stock market rose and is now almost back to its pre-bear market level.

Jamie Dimon does not see a disconnect, saying, “To us it seems like it’s just a little slowdown. Other than trade, I’m not sure what’s going to stop it [economic growth] in the next year or two.”

The problem is the return/risk ratio that now exists. If Dimon is right, then stocks could rise somewhat from here. If he is wrong and growth continues to slow, another bear market leg is a real possibility (even without a recession). Therefore, a healthy allocation to cash reserves continues to look desirable.

Disclosure: Author is fully invested in cash reserves

 

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Canopy Growth to buy Acreage in $3.4B deal


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(Reuters) — Canopy Growth Corp. said on Thursday it had secured a right to buy Acreage Holdings Inc. for $3.4 billion once the United States legalizes the production and sale of cannabis.

Shares of Smiths Falls, Ontario, Canada-based Canopy Growth surged 7.5% after the two companies said the deal value was at a premium of 41.7% over the 30-day volume weighted average price of Acreage subordinate voting shares ending April 16.

“Our right to acquire Acreage secures our entrance strategy into the United States as soon as a federally permissible pathway exists,” Canopy Chairman and co-CEO Bruce Linton said.

A growing number of companies are trying to push into the U.S. cannabis industry, with the recreational use of cannabis now legal in 10 states and the District of Columbia and medical marijuana legal in 23 states.

Bank of America Merrill Lynch estimates an addressable market for the global cannabis sector at $166 billion, with the United States accounting for more than one-third.

Reuters had reported on Wednesday that Canopy and Acreage were nearing a deal.

The companies said they would also execute a licensing agreement granting Acreage access to Canopy Growth’s brands, including Tweed and Tokyo Smoke, along with other intellectual property.

Once Canopy exercises its right to buy Acreage, it will have access to Canopy’s markets beyond the United States, the companies said, adding that they operate independently until then.

 

 

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5 Dividend Growth Stocks With Upside To Analyst Targets


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To become a “Dividend Aristocrat,” a dividend paying company must accomplish an incredible feat: consistently increase shareholder dividends every year for at least 20 consecutive years. Companies with this kind of track record tend to attract a lot of investor attention — and furthermore, “tracking” funds that follow the Dividend Aristocrats Index must own them. With all of this demand for shares, dividend growth stocks can sometimes become “fully priced,” where there isn’t much upside to analyst targets.

But we here at ETF Channel have looked through the underlying holdings of the SPDR S&P Dividend ETF (which tracks the S&P High Yield Dividend Aristocrats Index), and found these five dividend growth stocks that actually still have fairly substantial upside to the average analyst target price 12 months out. Which means, if the analysts are correct, these are five dividend growth stocks that could produce capital gains in addition to their growing dividend payments.

In the first table below, we present the five stocks. The recent share price, average analyst 12-month target price, and percentage upside to reach the analyst target are presented.

Stock Recent Price Avg. Analyst 12-Mo. Target % Upside to Target
Becton, Dickinson $268.50 18.87%
Chevron $120.27 $140.62 16.92%
Abbott Laboratories $72.88 $79.93 9.68%
National Retail Properties $50.76 $54.55 7.46%
Lincoln Electric Holdings $89.70 $95.78 6.77%

The average 12-month analyst targets are only targets for the share price however, and each of these stocks are expected to pay dividends during that holding period — so the expected total return if these stocks reach their analyst targets is actually the share price upside seen by the analysts plus the dividend yield shareholders can expect. To ballpark that total return potential, we have added the current yield to the analyst target price upside, in order to arrive at the 12-month total return potential:

Stock Dividend Yield % Upside to Analyst Target Implied Total Return Potential
Becton, Dickinson 1.36% 18.87% 20.23%
Chevron 3.96% 16.92% 20.88%
Abbott Laboratories 1.76% 9.68% 11.44%
National Retail Properties 3.94% 7.46% 11.4%
Lincoln Electric Holdings 2.10% 6.77% 8.87%

Another consideration with dividend growth stocks is just how much the dividend is growing. We looked up the trailing twelve months worth of dividends shareholders of each of the above five companies have collected, and then also looked up the same number for the prior trailing twelve months. This gives us a rough yardstick to see how much the dividend has grown, from one trailing twelve month period to another.

Stock Prior TTM Dividend TTM Dividend % Growth
Becton, Dickinson $2.96 $3.04 2.70%
Chevron $4.36 $4.55 4.36%
Abbott Laboratories $1.09 $1.2 10.09%
National Retail Properties $1.88 $1.975 5.05%
Lincoln Electric Holdings $1.48 $1.72 16.22%

These five stocks are part of our full Dividend Aristocrats List. Click here to find out the Dividend Growth Stocks: 25 Aristocrats »

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Technology set to make insurance more efficient, but job growth questioned


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CHICAGO — The explosion of technological applications and the growth of data analytics is reshaping the insurance sector, a panel of industry CEOs said last week.

The introduction of artificial intelligence, robotics and other technologies will automate some work carried out by humans but will also allow companies and their staff and enhance their service offerings, they agreed during The Institutes’ Future of Risk conference in Chicago.

However, they diverged on what effect technology would have on employment levels in the sector.

“If technology is not part of every conversation, you’re not dealing with the subject correctly,” said Dave North, chairman and CEO of Sedgwick Claims Management Services Inc.

Technology pervades every part of the business, from basic office services to financial reporting to employment screening, he said.

Improved data analysis, in particular, is having a significant effect on companies in the insurance sector, said Janice Abraham, president and CEO of United Educators Insurance, a Bethesda, Maryland-based reciprocal risk retention group that provides coverage for educational institutions.

“Data-analytics is huge for us. It’s changing the way we underwrite, the way we prospect for new (clients), the way we handle claims. It’s the area we are looking to hire, it’s really changing the way we think about business,” Ms. Abraham said.

Twenty years ago, for example, United Educators’ application form for coverage was about 15 pages long. “Now, for the most part, we don’t need an application, we can price it from internal and external data,” she said.

Removing the need to manually gather basic risk information allows the insurer to focus on emerging risks, such as sexual molestation, Ms. Abraham said.

Two years ago, United Educators did not have a data analytics department, but now it has one with a staff of six, she said.

“There’s a huge amount of change, but at the core of what we do, the business stays the same: We take people’s risk,” said J. Patrick Gallagher Jr., chairman, president and CEO of Arthur J. Gallagher & Co.

“Data will allow us to specialize down to the minutest risk, it will allow us to have information about what are the risks out there that are emerging … so you will see a tremendous amount of change in how we do it, but the essence of what we do is going to stay the same,” he said.

One of the changes that technology allows is providing data to support insurance purchasing decisions for clients, Mr. Gallagher said.

Brokerage clients demand more information, he said. “They want to know ‘how do I know I’ve got a good deal’ … which is why being able to show them what’s going on in their vertical is really, really important.”

Employment outlook up for debate

While the executives on the panel agreed technology will improve productivity in the insurance sector, they offered different views on what it would mean for employment in the sector.

“I actually think we’ll be doing more with less people,” Ms. Abraham said.

Clerical tasks will be automated, so staff will need to be helped to develop new skills, she said.

But artificial intelligence, robotics and other technological advances will create better jobs for people in the business, Mr. Gallagher said.

Improved technology will allow staff to focus on solving problems, Mr. North said.

“I resist the notion that technology is going to replace human beings. I don’t sit in conversations saying, ‘That’ll be great, build that and we can replace 10 people.’ It’s 10 people that get to be more powerful, do more things, be more productive and be more benefit to our customers because of technology,” he said.

For example, about half of workers compensation claims cost less than $500, which are not worth spending much time analyzing and processing, Mr. North said. The handling of those risks can be automated, which would free people up to focus on more complex and costly exposures.

“We should stop worrying about stuff that our data says is just not going to be a problem,” Mr. North said.

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5 Dividend Growth Stocks With Upside To Analyst Targets


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To become a “Dividend Aristocrat,” a dividend paying company must accomplish an incredible feat: consistently increase shareholder dividends every year for at least 20 consecutive years. Companies with this kind of track record tend to attract a lot of investor attention — and furthermore, “tracking” funds that follow the Dividend Aristocrats Index must own them. With all of this demand for shares, dividend growth stocks can sometimes become “fully priced,” where there isn’t much upside to analyst targets.

But we here at ETF Channel have looked through the underlying holdings of the SPDR S&P Dividend ETF (which tracks the S&P High Yield Dividend Aristocrats Index), and found these five dividend growth stocks that actually still have fairly substantial upside to the average analyst target price 12 months out. Which means, if the analysts are correct, these are five dividend growth stocks that could produce capital gains in addition to their growing dividend payments.

In the first table below, we present the five stocks. The recent share price, average analyst 12-month target price, and percentage upside to reach the analyst target are presented.

Stock Recent Price Avg. Analyst 12-Mo. Target % Upside to Target
Caterpillar $141.20 $153.43 8.66%
MDU Resources Group $25.79 $28.00 8.57%
United Technologies $135.30 $145.12 7.26%
RPM International $60.63 $64.83 6.93%
International Business Machines $144.35 $151.73 5.11%

The average 12-month analyst targets are only targets for the share price however, and each of these stocks are expected to pay dividends during that holding period — so the expected total return if these stocks reach their analyst targets is actually the share price upside seen by the analysts plus the dividend yield shareholders can expect. To ballpark that total return potential, we have added the current yield to the analyst target price upside, in order to arrive at the 12-month total return potential:

Stock Dividend Yield % Upside to Analyst Target Implied Total Return Potential
Caterpillar 2.44% 8.66% 11.1%
MDU Resources Group 3.14% 8.57% 11.71%
United Technologies 2.17% 7.26% 9.43%
RPM International 2.31% 6.93% 9.24%
International Business Machines 4.35% 5.11% 9.46%

Another consideration with dividend growth stocks is just how much the dividend is growing. We looked up the trailing twelve months worth of dividends shareholders of each of the above five companies have collected, and then also looked up the same number for the prior trailing twelve months. This gives us a rough yardstick to see how much the dividend has grown, from one trailing twelve month period to another.

Stock Prior TTM Dividend TTM Dividend % Growth
Caterpillar $3.11 $3.36 8.04%
MDU Resources Group $0.782 $0.802 2.56%
United Technologies $2.76 $2.87 3.99%
RPM International $0.94 $1.34 42.55%
International Business Machines $6 $6.28 4.67%

These five stocks are part of our full Dividend Aristocrats ListClick here to find out the Dividend Growth Stocks: 25 Aristocrats »

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Three Great Growth Shares That Could Still Boom In April (Like This FTSE 100 Star)


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In this article I am discussing three growth heroes whose share prices could rally in the latter half of the month.

Bunzl

Bunzl is a beautiful blue chip that I myself hold in my stocks portfolio. For investors seeking reliable profits growth year after year — and as a consequence steady dividend expansion, too — it’s extremely hard to beat.

There’s three main reasons behind this. Number one is its diversified range of operations, Bunzl’s broad range of products and end markets allowing it to absorb problems in one or two industries and keep growing earnings. Next up is its strong exposure to robust US economy, a territory from which 60% of profits are currently sourced. And thirdly the Footsie company’s dedication to acquisition activity to build its position in key markets.

In February Bunzl advised that adjusted pre-tax profit rose again in 2018, on that occasion by 3% to push the annual total to £559m. First-quarter results are expected on Wednesday, April 17 and I’m expecting another positive update, one that could see City forecasts of a 2% bottom-line rise this year upgraded.

JD Sports Fashion

With full-year results slated for release on Tuesday, April 16 I reckon JD Sports Fashion is another stock whose market value could increase in the days ahead.

As both consumer and financial journalist the FTSE 250 firm is one which I adore. It’s at the cutting edge of the so-called athleisure market, thanks in no small part to the trove of exclusive ranges it sells from sportswear giants including Nike, Adidas, Puma, Converse and the like.

But what makes JD Sports such a stunning growth share is its commitment to global expansion, a programme that’s taken it outside its traditional stomping grounds of Europe and into Asia and the US more recently. In fact, just last month the retailer boosted its operations in the UK with the £90.1m acquisition of rival Footasylum and it has the financial clout to keep the takeovers coming.

City brokers are expecting the retailer to report another double-digit-percentage earnings rise for the year to January 2019, and another chubby rise — by 12% — is predicted for the current fiscal period, too.

Flowtech Fluidpower

I reckon Flowtech Fluidpower is another great buy before its own full-year results are unpackaged on Tuesday, April 16.

Like Bunzl and JD Sports, a large part of the engineer’s appeal as a growth stock comes from its appetite for M&A action and its success in integrating acquisitions into the broader business. This was apparent in its January trading update in which it declared that revenues had increased 42% in 2018, a performance that the City expects to have pushed earnings 20% higher.

It’s no shock that the boffins are predicting that the bottom line will swell by an additional 11% in 2019, either. Flowtech advised at the top of the year that “fluid power market sentiment generally remains positive” and that its thus anticipating “a solid start” to the current year, as illustrated by order activity at its core Power Motion Control division.

Royston Wild owns shares in Bunzl.

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Zoom Has Mastered The Art Of Profitable Growth


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South Korean Unification Minister Chung Dong-young, right, President of South Korean Red Cross Han Wan-sang, center, Information and Communication Minister Chin Dae-je, left, test facilities with South Korean Red Cross officer Kim Young-hwan, shown in a video screen, in Busan, south of Seoul, for the first inter-Korean video family reunion sessions scheduled for Aug. 15 at the videoconferencing room of Red Cross in Seoul, Friday, Aug. 12, 2005. The video family reunion session will meet 20 selected families from each side. (AP Photo/ Lee Jin-man, POOL)

ASSOCIATED PRESS

Zoom Video Communications stands out from the pack of companies going public this spring — it’s doubling revenues profitably.

What’s more at its estimated IPO price range, it’s expected to enjoy an eight-fold leap in value from its last round of private funding.

If you were going to buy one company’s stock after its IPO, this would be a good one to consider. But it might be wiser to take a serious look at the stock six months after it goes public.

(I have no financial interest in the securities mentioned in this post).

This videoconferencing service provider — targeting a market expected to hit $43.1 billion by 2022, according to IDC — is planning to raise nearly $350 million when it goes public. This will value the company at around 8.7 times its last private market value of $1 billion. Zoom’s revenues doubled to $331 million in the year ending January 2019 during which it earned net income of $7.6 million, according to its S1.

Zoom is not without its woes. After all, its CFO Kelly Steckelberg, was the subject of a letter from an anonymous source claiming that she had an “undisclosed, consensual relationship” during her tenure at a previous employer, according to TechCrunch.

On April 7, CEO Eric Yuan published an open letter which concluded that Zoom’s board of directors had investigated this matter in full and determined that Steckelberg would remain as Zoom’s CFO.

Zoom is also the target of a patent infringement lawsuit. According to Reuters, “Dayton, Ohio-based digital advertising firm Krush Technologies LLC, which holds patents originally assigned to ooVoo, sued in San Francisco federal court alleging that Zoom’s app and other online meeting products infringe on three former ooVoo patents covering various aspects of video-conferencing technology.”

Having interviewed Zoom over the last couple of years, I have found much to admire about the company. Specifically, Yuan really cares about Zoom’s customers and the ones I’ve spoken to really appreciate it. Also, Zoom has the very rare and valuable financial profile — it’s growing at over 100% a year and it’s profitable.

Caring About Customers

Yuan was lead engineer at WebEx which was acquired by Cisco where he became a VP of Engineering. As he told me, he got so frustrated that he left to start a new company, Zoom, that would solve all the customer problems that he believed Cisco had caused — and strove to win back those customers with a better value proposition.

Yuan left Beijing in 1997 to be the founding engineer of WebEx. Cisco Systems bought the video conferencing company in 2007 for $3.2 billion and Yuan stuck around Cisco as a VP in its Collaborative Systems group.

In 2011, Yuan left to start Zoom. FORBES reported that Zoom grew 300% in 2016 and raised $100 million in January 2017 at a $1 billion valuation.

Yuan was not happy with the way Cisco was managing WebEx when he left in 2011. As he said, “I was paid very well as a VP at Cisco. But WebEx was my baby. In 2010 and 2011, I did not see happy customers. I was very embarrassed that I spent so much time on the technology. Why are the customers not happy?”

He could not convince Cisco management to fix the problems. As Yuan explained, “Cisco would not change its collaboration strategy. I said I had a different view and left Cisco. 35 to 40 WebEx engineers left with me. Six years later we are doing well with 750,000 customers [up 67% from 450,000 in January 2017]. We are growing thanks to our simplicity, quality, features and price and we have a very high net promoter score of 69.”

In February, I spoke with a former Cisco customer who switched to Zoom and he revealed what look to me to be Zoom’s considerable competitive advantages — Zoom understands what this customer wants and its technology and customer service satisfy them better than competitors’ do.

How so? BAYADA Home Healthcare — a 28,000 employee, 32,000 client in-home health care service provider switched to Zoom from Cisco and Skype. As BAYADA application manager Dennis Vallone explained in a February 11 interview,

[Cisco and Skype] have been relentlessly trying to win us back since we switched to Zoom five years ago. We use video and collaboration tools for remote physician check-ins. We need high quality, reliable video in all locations — not just the ones with high bandwidth. Zoom was the only one that could deliver that. Zoom was easier to use, cloud-based, did not require a hardware investment, and its pricing model — a freemium pricing model when we signed on — made it convenient to try without an investment. We reconsider our videoconferencing needs every year — but we stay with Zoom because they listen to what we ask for and unlike the others, they actually provide it. For example, we asked for digital signage and room scheduling and they delivered.

Vallone does not know why it is so difficult for other providers to respond to its needs. As he said, “Sometimes when a company gets too big it becomes too political. It is hard to push change through. Eric Yuan has a culture of really listening to customers and responding.”

Scalable Business Model

Many company going public these days — including Lyft whose shares are down 32% from their March 29 peak — go public without figuring out how to be profitable.

As I wrote in my new book, Scaling Your Startup, such companies skip the second stage of scaling — building a scalable business model. They go from the first stage — winning the first customers — to the third — sprinting to liquidity.

But Zoom did not skip building a scalable business model because it figured out how to get more efficient at key processes like selling, marketing, service, and product development as it got bigger.

This shows up in its numbers — for instance, in the year ending January 2017, operating expense to sales was 79% — the same as in January 2019. Meanwhile, Zoom’s gross margin increased from 79% to 82%.

At the same time, it has made its product more valuable to customers — yielding a net promoter score of over 70 in 2018, according to Zoom’s S1.

Zoom does not always add the features that customers want — but it does listen and execute when it sees a significant market opportunity. As Jim Mercer, Zoom’s head of customer success, explained in a February 22 interview,

Here execution for the customer is our true north. We have a consultative approach to building our service — working with our customers and our product development teams. We listen and implement features if enough customers request them. We have a customer advisory board for our up-market customers and use AI and automated tools to boost engagement with our product for down-market customers. When it comes to the onboarding process for new customers, some of our competitors merely provide video tutorials and a one page PDF.

156,171,668 shares of Zoom’s Class B shares can be sold six months after the company goes public. If you wait to buy share until after that lockup expires, you may have a chance to buy them at a lower price.

You’ll also know whether Zoom can beat expectations and raise guidance every quarter the way investors crave.

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Which Segment Will Push 3M’s Growth Through 2020?


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Signage stands outside the 3M Co. Cottage Grove Center in Cottage Grove, Minnesota,  on Thursday, Oct. 18, 2018. (Photographer: Daniel Acker/Bloomberg)

© 2018 Bloomberg Finance LP

Trefis estimates growth in the Industrial segment’s revenue will push 3M‘s (NYSE: MMM) total revenue to nearly $34 billion in 2019 and around $35 billion by 2020. The company posted revenue of $32.8 billion in 2018.

We have created an interactive dashboard wherein you can edit the drivers to arrive at your own conclusions, What is the Revenue breakdown for 3M and its potential growth till 2020? In addition, here is more Industrials data.

Total Revenue:

  • The company has seen a constant growth in Total Revenue over the past years. The revenue has increased from $30.1 billion in 2016 to $32.8 billion in 2018.
  • Trefis estimates the growth will start stabilizing and the company will post Total revenue of around $34 billion in 2019 and about $35 billion in 2020.

Industrial Revenues:

  • Industrial Revenues has been the highest contributor to Total Revenue over the years. The revenue has increased from $10.1 billion in 2016 to $11.4 billion in 2018.
  • Trefis estimates the segment to have steady growth as the global economy shows positive signs and post revenue of approximately $11.8 billion and $12.1 billion in 2019 and 2020, respectively.

Health Care Revenues:

  • Health care Revenues has seen fluctuating growth over the years. The revenue has increased from $5.4 billion in 2016 to $5.6 billion in 2018.
  • Trefis estimates the segment to have steady growth on the back of pricing in the near term and to post revenue of approximately $5.74 billion and $5.9 billion in 2019 and 2020, respectively.

Safety and Graphics Revenues:

  • Safety and Graphics Revenues has seen high growth over the years. The revenue has increased from $5.5 billion in 2016 to $6.3 billion in 2018.
  • Trefis estimates the segment to have steady growth mainly due to better pricing in the near term and post revenue of approximately $6.6 billion and $6.8 billion in 2019 and 2020, respectively.

Consumer Revenues:

  • Consumer Revenues has seen fluctuating growth over the years. The revenue has increased from $4.38 billion in 2016 to $4.44 billion in 2018.
  • Trefis estimates the segment to have steady growth and post revenue of approximately $4.66 billion and $4.72 billion in 2019 and 2020, respectively.

Electronics & Energy Revenues:

  • Electronics & Energy Revenues has seen constant growth over the years. The revenue has increased from $4.7 billion in 2016 to $5.1 billion in 2018.
  • Trefis estimates the segment to continue its growth and post revenue of approximately $5.2 billion and $5.4 billion in 2019 and 2020, respectively.

What’s behind Trefis? See How It’s Powering New Collaboration and What-Ifs

For CFOs and Finance Teams | Product, R&D, and Marketing Teams

More Trefis Data

Like our charts? Explore example interactive dashboards and create your own.

 

 

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Collectors, Not Art Businesses, Have Profited Most From Art Market’s Growth


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Edward Dolman, CEO of Phillips auction house, said this week that art buyers, not auction houses or dealers, have made the most money from the rapid growth of the global art market in recent years.

“The people who have really made a great deal of money in the art market over the last few years are the people who put capital to work in it,” he said in a speech at The Art Business Conference in New York on Tuesday, pointing out that although global art sales are growing, revenues at auction houses and dealers are falling. “The onus is on us to be able to compete with much lower revenues than we expected in the past.”

He said that those who are reaping the biggest financial rewards from selling art today are not recent investors, but billionaire collectors such as Francois Pinault, the owner of Christie’s, who could afford to spend millions of dollars on art twenty years ago. “If you were lucky enough to be able invest a few tens of millions of dollars in the art market in the 1990s and bought well, you have made extraordinarily returns,” he said.

David Hockney’s “Portrait of an Artist (Pool with Two Figures)” set a new record for a living artist when it sold for $90.3 million at Christie’s last November. (AP Photo/Kin Cheung)

ASSOCIATED PRESS

Dolman said that the large influx of new buyers in the art market today are forward looking, increasingly interested in artists as brands and looking for “a unifying language in their art that speak to everyone very clearly”. He said the $14.7 million sale of THE KAWS ALBUM, a painting by graffiti artist KAWS at Sotheby’s in Hong Kong earlier this month, more than 15 times the high estimate, made more sense in this context.

Postwar and contemporary art accounts for more than 50% of auction house sales today, which Dolman said was evidence of the complete transformation of the art market – and the tastes of art buyers – in the last 20 years.

Before then, contemporary art sales at auction were rare. He cited the sale of works by Young British Artists from Charles Saatchi’s collection at Christie’s in 1998, featuring living artists such as Damien Hirst and Jenny Saville, when he was managing director of the firm in London. “The directors refused to have works in the building because they thought it would be an affront to our clients, “ he said. “We had to hold the sale off the premises so we didn’t poison the purity of their 18th and 19th century mindsets.”

Art businesses, including auction houses, are struggling to keep up with this rapid pace of change and their current global client base that’s ever more demanding, according to Dolman, who said that Phillips is trying to focus on growing parts of the market and keeping costs as low as possible. He added that to attract increasingly savvy buyers, all auction houses are offering very preferential deals to sellers to win the highest quality consignments.

That’s a mixed blessing for art buyers, because auction houses are offering sellers an increasing percentage of the buyer’s premium (the fee buyers pay the auction house for art purchased at auction) to attract the best consignments, which has contributed to auction houses charging art buyers higher and higher fees, said Dolman. Christie’s, Sotheby’s and Phillips all increased the fees they charge buyers in February, following several other fee hikes in recent years. He described the fierce competition among auction houses for consignments as a “race to the bottom”, with buyers being asked to pay more. “I have to say, I do wonder when it might end,” he said.

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