5
Feb

Investors buy up shares of prominent social media ISVs despite slowing user growth

2-Color-Design-Hi-Res-100px-widthPerhaps investors are changing their taste in prominent social media ISVs. Could the search for a telltale sign of promise have shifted from substantial growth in users to what may be a meaningful increase in revenue? From the after hours trading experience of LinkedIn and Twitter on February 5, 2015, it would appear to be the case.

Twitter and LinkedIn both reported solid revenue growth in the quarter ending December 31, 2014. But in the case of Twitter this plus was offset by anemic growth in the number of active users. Tiernan Ray wrote in Barrons: “[Twitter] said its monthly average users (MAUs) rose 20%, year over year, to 288 million from 284 million in the prior quarter. That was down from a rate of 23% growth in Q3. Of those MAUs, 80% were on mobile devices, about the same as the prior quarter.”

Hannah Kuchler of the Financial Times also remarked on management’s forward-looking guidance, “that was above the average analyst forecasts”.

Investors looked like they liked what they were hearing and reading. Twitter’s share price was up over 10% after hours.

LinkedIn shares were also up substantially, approximately 6% above the close. The quarterly earnings report included very similar highlights: substantial growth in revenue. But I found a different nugget: Maria Armental wrote in the Wall Street Journal:“The professional social network, which this month launched a localized version in simplified Chinese and traditional Chinese that has nearly doubled its Chinese member base to more than 8 million, said nearly 70% of total members come from outside the U.S.” Eight million users is certainly not a very big number for the country with the biggest population in the world. But LinkedIn is succeeding (as Apple is also succeeding, though in a much bigger way) in a market that continues to elude Microsoft and curiously enough Google (Android).

As a user I must attest to a much more promising experience from my efforts with Twitter than has been the case for how I have worked on my LinkedIn profile. I make a lot of use of Twitter’s Analytics. As my tweets have magnetized more impressions there has been, over time, a substantial increase in the page views of this blog. But perhaps the best result of all has been a growth in our following on Facebook. But I will write more on this point in a later post.

Ira Michael Blonder

© IMB Enterprises, Inc. & Ira Michael Blonder, 2015 All Rights Reserved

12
Nov

Is Salesforce.com in the cross hairs as mature ISVs jump into the customer data and analytics markets?

Salesforce.com acquired ExactTarget in 2013. Arguably, ExactTarget can produce a comparable quality of customer data to Facebook, or the just announced IBM Twitter partnership. But as Marc Benioff, CEO remarked during Salesforce.com’s Q2 2015 Earnings Conference call, Salesforce.com is an enterprise cloud business.

We’ve written at length in this blog on the unique character of enterprise business markets for computer hardware, software (including cloud), and networking. As Benioff noted during a joint presentation with Satya Nadella, CEO of Microsoft, to announce the addition of Salesforce.com as a supported CRM option for Microsoft’s Office 365 customers, Microsoft, itself, is one of Salesforce’s largest customers for ExactTarget services.

But servicing the needs of businesses marketing non durable commodities to consumers is a very different story, which Facebook seems to be winning. Salesforce’s growth rate, at 38% year over year is enviable, but Facebook’s year over year growth rate of nearly 60% is a lot better. Would it make sense for a stagnant mature ISV named IBM, desperate for some big growth, to see an opening to bring ExactTarget-like capabilities to a different market?

IBM certainly has a presence in every leading marketing business in the US and Western Europe. As a trusted partner of Ogilvy and Mather, Forbes, etc. a partnership with Twitter, which promises to provide them with a very unique set of data collected from Twitter’s “fire hose” to be fed into their Watson analytics solution looks very promising.

Salesforce, on the other hand, with Keith Block, an exceptionally capable sales and marketing executive for enterprise business markets, as President, looks clearly dedicated to signing up more enormous businesses like Microsoft. One can certainly argue the very large marketing businesses IBM presently services (and, in turn, the manufacturing and service-providing customers of these marketing firms like Procter and Gamble) fit the bill for legitimate Salesforce targets, but in this writer’s opinion it isn’t likely the way they are leveraging ExactTarget will meet the needs of Omnicom, etc for the consumer non durable goods market. This writer spent a lot of time with IBM from 1994 to 2001 and can speak to what was then a deep, strategic relationship with Ogilvy, Forbes, and others.

So the ExactTarget capability does look like something a mature ISV like IBM would want to repackage for its own, and very different set of consumers.

Ira Michael Blonder

© IMB Enterprises, Inc. & Ira Michael Blonder, 2014 All Rights Reserved

10
Nov

Online conversations become even more valuable data as consumers implement new analytics designed to work with big data

On October 29, 2014, IBM and Twitter announced a partnership. Under the terms of this partnership, Twitter will provide IBM with data. In turn, IBM will permit customers to use its IBM Watson Analytics to work with Twitter data.

The Twitter data is often referred to as the “fire hose”. According to Statistic Brain, an average day sees some 58,000,000 Tweets. So it should be fair to say any effort to collect this volume of information, and, then, to analyze it, falls into the big data and analytics category.

So just who would be interested in the Twitter “fire hose”, and why? Reading further in the IBM press release one finds a clue: “The first joint solution will integrate Twitter data with IBM ExperienceOne customer engagement solutions, allowing sales, marketing, and customer service professionals to map sentiment and behavior to better engage and support their customers.” A brief look at IBM’s web site for its ExperienceOne service reveals a data analytics offer targeted to Chief Marketing Officer (CMOs), who usually lead “marketing, merchandising, sales, and customer service” (quoted from the ExperienceOne web site).

For an ISV like IBM to offer data collection, analytics, and even predictive analytics solutions, and the services required to successfully implement them, to a target market of CMOs from Lines of Business (LoBs), represents a major shift in focus from IBM’s familiar market of CIOs and enterprise IT organizations. In turn, the ExperienceOne offer stands as a testimony as to how the path by which technology innovation enters the enterprise has shifted away from the CIO and over to leaders from LoBs. Bottom line, this deal is a further indicator of why CIOs and their enterprise IT organizations are playing much more catch up than used to be the case in the past. It also can be interpreted as an indicator of a bigger enterprise need for Enterprise Device Management (EDM) and Mobile Device Management (MDM) solutions.

In this writer’s opinion the IBM Twitter partnership is a milestone in the evolution of the value of online user data. The daily production of enormous volumes of unstructured data from Tweets becomes a commodity, which Twitter can profit from in an entirely different manner than other social media sites have been able to achieve in the past. One can argue Facebook is doing much the same thing. But there is no IBM in the middle of how Facebook interacts with its customers. The data collection, warehousing, analytics, and, finally, predictive analytics capabilities a player like IBM brings to the process substantially elevates the potential represented by the Twitter fire hose for the CMOs who will ultimately consume it.

There is certainly room for firms competing with IBM to attempt to apply the same structure (with, presumably, Twitter competitors) for consumers with, perhaps, similar objectives in mind. The important point for anyone following the businesses owning the data (meaning Twitter and its competitors) is the likely need to factor in a higher valuation, should this IBM Twitter partnership pay off.

Ira Michael Blonder

© IMB Enterprises, Inc. & Ira Michael Blonder, 2014 All Rights Reserved

11
Aug

Twitter and Other Cloud Businesses Benefit from Investor Enthusiasm

Twitter and its Cloud business peers are benefiting from highly enthusiastic investor sentiment. Investors appear disinterested in a widening distance between GAAP and non GAAP earnings results for these businesses.

Sandra Ward illustrated some of this disconnect last Saturday, in an article published in Barron’s Online titled Twitter’s Results: Less Than Meets the Eye. She writes: “Using generally accepted accounting principles, or GAAP, Twitter (ticker: TWTR) lost 24 cents a share in the second quarter, but it played up a non-GAAP measure that showed a two-cent profit, versus the consensus of a penny loss.”

As of the date of this blog post, August 6, 2014, a loss of $.24 per share for Twitter, amounts to $141.585 Million, USDs. This loss is actually 45.38% of all of the revenue ($312 Million, USDs) Twitter generated for the quarter. One would think investors would care about a company losing almost a dollar of every two it brought in for the quarter, but they appear not to have cared. By the time trading resumed on Monday, August 4, Twitter closed at $43.45, a mere 1% below its closing price on Friday, August 1, 2014.

While the primary driver of investor appetite for Twitter still alludes this writer, it is, perhaps, safe to assume a lot of momentum can be attributed to investor satisfaction with the non GAAP presentation of the same quarter’s results, namely the mirage of the 2 cent profit Ward notes in her article. Perhaps investors are now convinced management has “gotten the message” and subsequent quarters will continue to show profits, albeit on a non GAAP basis. Hasn’t this been the case with Facebook, which is often characterized as a direct competitor to Twitter? After all, quarter after quarter, Facebook has reported profits over the last couple of years.

What is likely to be of greater concern than this excessive investor enthusiasm in this social media business bleeding cash, (which has now opted to highlight its results, as expressed according to non GAAP) is their complacency. Maintaining confidence this business “will eventually get it right”, simply as the result of throwing cash at its problems, doesn’t make sense to this writer. When one looks at the overall market for these types of publicly traded businesses, one likely will conclude the whole sector is simply too inflated, at least at present.

Disclaimer: I am neither invested in Twitter, Facebook, nor any other social media cloud business at this time.

Ira Michael Blonder

© IMB Enterprises, Inc. & Ira Michael Blonder, 2014 All Rights Reserved

30
Jun

Gallup Poll Results on U.S. Consumer Buying Habits Support a Skeptical View of Social Media Business Valuations

Public companies in the Social Media business (facebook, Twitter, LinkedIn, Google, etc.) have all implemented global business strategies. Nevertheless, some substantial proportion of the business plans for each of these businesses, over the next near term, depend on sales to advertisers for the U.S. consumer markets. But the results of a Gallop® report on the buying habits of U.S. Consumers, published on June 23, 2014 may point to excessively optimistic revenue forecasts in these plans, and, in turn, even more inflated business valuations than previously appeared to be the case.

Here are some important points coming out of this report:

  • 62% of a cross section of respondents to the survey reported Social Media had “No influence at all” on their purchasing decisions. Two caveats on this statement should be noted: 1) the numbers of respondents from each of four groups — “Millennials”, “Generation X”, “Baby Boomers”, “Traditionalists” — are not included in the article about the report, which is now widely available to the public (a link to the article is included in this post) and 2) despite a landing web page for the report, itself, the landing page does not offer the visitor any access to the report, so it is not possible to explore the report, at least at the time this post is being written
  • But this percentage drops to 48% of “Millennials” who responded to this survey. “Millennials” are defined as people born after 1980.
  • Only 5% of a cross section of respondents reported social media exerted “A great deal of influence” over their purchasing decisions. The percentage rises by 40%, to 7% when only responses from “Millennials” are considered.

In Facebook’s 10Q filing with the U.S. SEC, dated April 25, 2014, for the three months ended March 31, 2014, 45% of total global business revenue for the quarter was reported for the United States market, alone. The sources of revenue are clearly defined in this report as follows: “We generate substantially all of our revenue from advertising and from fees associated with our Payments infrastructure that enables users to purchase virtual and digital goods from our developers with applications on the Facebook website.”

Given the claimed results included in Gallup’s report, it might make a lot of sense for investors to recalibrate the cost of an investment in Facebook. In the opinion of this writer Facebook is grossly overvalued, as are most of its peers in this segment. Online advertising is simply better suited to the promotion of tangible items, or intangibles highly dependent on tangible factors, (for example, geographical location) than it is for purely intangible offers.

Since the range of items suitable for online promotion is, therefore, limited, the extent to which valuations have been inflated is even more extreme than this writer previously assumed to the be case.

Disclaimer: I have no current investment in any of the businesses mentioned in this post

Ira Michael Blonder

© IMB Enterprises, Inc. & Ira Michael Blonder, 2014 All Rights Reserved

9
May

A Direct Comparison Between facebook and Twitter May Not Be Useful

Analysts often compare facebook to Twitter. But does such a comparison add real value to our understanding of either business, or their industry?

During facebook’s most recent quarterly earnings conference call, Mark Zuckerberg reported “Messenger and Instagram both reached 200 million monthly actives this quarter”. Turning to Twitter’s most recent quarterly earnings report, one finds a claim of 250 million monthly active users. So does it make sense to conclude facebook’s two components, combined, have a far wider reach than Twitter, itself?

I don’t think so. People consume facebook’s Messenger and/or Instagram features for an entirely different set of requirements, I would argue, than is the case for Twitter. Messenger, Instagram, and even What’s App are all targeted to individuals, without the public reach implicit to Twitter.

An important foundation of Twitter’s broader public reach, of course, is the extensive search capability included with Twitter. This capability is not available with either of facebook’s components. Much has been made about the difficulties businesses, and even individuals experience achieving exposure across a wide range of facebook’s consumers. Perhaps the intention is to predicate this exposure on ad purchases. Nevertheless, it is not possible to achieve the same reach with facebook Messenger, for example, as is the case for Twitter. Further, facebook advertisers are not likely to consider Messenger, as a medium, for the same reasons they would consider Twitter.

The challenge for Twitter management, as I see it, is how to craft this reach into a commodity advertisers will be likely to purchase. In comparison, the challenge of maintaining a meteoric growth rate for new viewers to consume Twitter’s content is a less important objective.

But the analyst community is focusing more on the fact Twitter is approaching a viewer plateau, than the steps management is taking to monetize their content. The end result is not much progress on the revenue front and a lot of spurious attention to expanding Twitter’s reach.

Ira Michael Blonder

© IMB Enterprises, Inc. & Ira Michael Blonder, 2014 All Rights Reserved

30
Dec

Does Twitter Stock Mania Tell Us Markets Don’t Understand the True Potential of Cloud Products?

As Steven Russolillo wrote in an article titled Twitter Downgraded: Nothing Has Changed . . . ., which was published in the Wall Street Journal on Friday, December 27, 2013, “Twitter’s high-flying stock has gone too far, too fast.”

But when one considers the Twitter stock price phenomenon within the context of a few other recent nonsensical events (for example, the increase in the stock price of Adobe despite its well publicized security problems, and its comparatively unprofitable transition to a cloud, Software as a Service (SaaS) subscription model for its leading Creative Suite product set), it shouldn’t be difficult to see the difficulty markets are having identifying real lasting value in cloud product offers. The distance between stock market valuation and actual profitability for publicly traded cloud businesses, including Twitter, Facebook, or LinkedIn, along with mature ISVs like Adobe, will not last more than a week, month, or, perhaps, a quarter or two. Inevitably the prices will have to come down, perhaps via a very hard landing.

Equipping Twitter with an advertising component at once attractive for customers, and promising from a profitability perspective, is not likely to be an easy proposition. What will work for a retailer looking to move closeout stock, is not going to work for a market commentator with a small circle of readers. Each of these Twitter pages requires a different type of advertising feature. But market analysts seem to be looking for click advertising banners to simply pop up all over Twitter pages. At the same time, the most optimistic of these analysts are also expecting a lot of clicks on those ads. Not so fast is what I have to say on the subject.

Analysts like Macquarie Equities Research (the subject of Mr. Russolillo’s short article in the Journal) are sensitive to the danger. But rating the stock an “underperform” for the future, is, perhaps, too understated. I think it makes more sense to rate it a “sell.” Investors fortunate enough to have a position in the stock as it made its move should sell to lock in gains. The future for the stock prices of Twitter, and its peers, doesn’t look so bright.

I have no current investment, whatsoever, in Twitter, or any other publicly traded business mentioned in this post.

Ira Michael Blonder

© IMB Enterprises, Inc. & Ira Michael Blonder, 2013 All Rights Reserved