Innovate the Future

Original Web Article: Salesforce.com’s Service-as-a-Service

Review Summary: 
The small to medium enterprise (SME) market always seems to be unable to get the software functionality that will make them competitive and lower their costs. Yet, there are lots of software vendors with ‘good enough’ solutions that don’t have the sales forces or support infrastructures needed to reach the SMEs on a more local basis. With Netbooks, Software as a Service (SAAS) and other innovations, this is about to change in a very big way.
Review/Analysis:  
The small to medium enterprise (SME) owner would love to make use of products from SAP (DE:SAP) or Oracle (NASDAQ:ORCL). But, the costs of entry and maintenance are prohibitive. Products from SAP and others are great for the huge enterprise. They are too complex to meet the simpler needs of the SME. That is changing fast.
Cloud computing is one of those buzzwords that has been around for a long time. But, finally, with great virtualization and data depuplication technologies, the concept of a fully utilized data center is becoming a reality. No more idle servers or wasted storage.
All of the cloud computing options (Infrastructure as a Service (IAAS), Platform as a Service (PAAS), Software as a Service (SAAS) and Application as a Service (AaaS)) make it possible for software companies of all sizes to offer their products and services on an international basis with very low deployment costs while delivering low cost of entry and centralized support to the customer base.
Salesforce.com (NYSE:CRM) and their expansion of their Service Cloud offerings will expand the dynamic nature of centralized, cloud based applications and allow access from virtually any device and medium. 
The shift to the cloud will allow for companies to spend less CAPEX on devices and infrastructure and more on applicaiton functionality. Netbooks will simplify utilization of cloud based services while improving security and supportability from centralized IT organizations.
Success for smaller software companies will depend on delivering a ‘good enough’ product that can meet the needs of the SME. Minimizing cost of entry and shortening the return on investment cycle will be critical.
 

Original Web Article: Acer Q2 results show risks of cheap netbooks

Review Summary: 
The trend towards Netbooks will continue to accelerate and prices will remain low relative to traditional PC desktops and notebooks. Margins will improve and sales of accessory devices will increase. Microsoft (NASDAQ:MSFT) is betting the farm on this becoming a reality. Netbooks are Microsoft’s vehicle for driving sales of Windows 7 and Office 10.
Review/Analysis:  
Sales of Netbooks would be accelerating much faster, except Microsoft put the brakes on Netbook sales in June. OEMs were selling Netbooks with XP and a hybrid drive environment, a Solid State Drive (SSD) and a Hard Drive (HD). It made a lot of sense by giving the Netbook faster startup using the SSD and then the rest of the OS on the HD. But, Microsoft outlawed this in June and allows XP on Netbooks only with up to a 16GB SSD OR up to a 160GB HD.  NOT BOTH. This made the Netbook either a portable access device with minimal storage or unacceptable performance for many applications.
Microsoft understands how the Netbook will transform the computing world. The concept of a ‘network device’ with minimal built in capability has been around for years. What is new, is the ability to actually deliver one that meets the  needs of business customers and not just consumers. Microsoft didn’t want the Netbook to become too pervasive unless they could drive a completely new experience with it.
Coincidentally, Windows 7 is designed to run optimally from SSD. It is also more touch oriented, versus keyboard oriented, than XP. In short, Windows 7 is designed to maximize a Netbook environment running on lower power processors.
What about running business applications? Like Word? Excel? Check out Microsoft Office 10. Web based. Full featured. Very similar user interface to existing Office platforms. Perfect for a lower power, portable access device like a Netbook.
What about other applications like Customer Resource Management and ERP? Check out what Oracle (NASDAQ:ORCL) is trying to deliver with their Fusion products. Or, solutions from companies like Epicor (NASDAQ:EPIC). Again, perfect for Netbooks.
What about security? Netbooks are the dream of every Chief Security Officer on the planet. No data stored on the local Netbook. Add a biometric logon feature and you have a virtually impenetrable access device. Why slow down the universe with layers of antivirus, antispyware and other monitoring layers?
IT departments will love Netbooks. No applications on the end device. All web based definitions. Replacing failing devices is a breeze. Retraining for hardware upgrades becomes nonexistent. Upgrade costs are drastically reduced. Pay per use applications.
Data center’s are consolidating and outsourcing. With virtualization, inline deduplication of data and many other new technologies, the ‘cloud’ is now totally possible with a superb ROI.
Netbooks will quickly become the replacement form factor for large and small enterprises. Competition will keep prices low and features up. Look for the resulting decrease in IT expenditures on notebooks/desktops. CAPEX will shift internally to data center and infrastructure.
Will Netbooks make the OEMs rich? No. Will OEMS, like HP (NYSE:HPQ), that have large data center product bases benefit? Absolutely. Do Netbooks create tremendous opportunities for third party products, devices and software? Absolutely. Especially those with ‘good enough’ offerings that allow penetration into the small to medium enterprise space.
 

Original Web Article: Unisys surprises analysts with 2Q profit

Review Summary: 
Unisys (NYSE:UIS)’ positive results should not really be a surprise. Ed Coleman is the right guy and they are making the right moves.

Review/Analysis:  
Unisys needed to shift more aggressively from a technology company to a services company. Ed Coleman, the new Chairman and CEO, is the right leader for the job.

Coleman is slashing costs at Unisys by more than $225 million annually.

Unisys’ services side is primarily outsourcing and consulting with a focus on secure computing. They have extensive experience in governments and law enforcement. But, for Unisys to remain a player in the enterprise space and to penetrate the SMB space more effectively, they needed something that would distinguish them from HP (NYSE:HPQ)/EDS (NYSE:EDS) and IBM (NYSE:IBM). 

In response, Unisys announced the Secure Cloud. The perfect cloud computing solution that addresses the number one fear of everyone that looks at cloud computing: security. How do I keep my business data safe. Unisys has the best solution at this time.

Also, Unisys’ cloud offering goes beyond anything that HP or IBM are deploying. With Unisys’ global data centers they are perfectly positioned to offer the full gambit of cloud computing layers. These include Infrastructure as a Service (IAAS), Platform as a Service (PAAS) and Software as a Service (SaaS). Unisys has gone one better still by defining Application as a Service (AaaS).

By offering the ‘whole enchilada’ of cloud computing, Unisys sets themselves apart from Amazon (NASDAQ:AMZN), Google (NASDAQ:GOOG), HP, IBM and all the other current players. In addition, utilization of their data centers for cloud computing and the deployment of full virtualization will allow them to lower their overall data center costs significantly while increasing the revenue per server. It will also allow Unisys to be a major player in the expansion of IT sales into the SMB space where the products have traditionally been too expensive. Cloud computing will greatly lower the cost of entry for SMBs. New, simplified Enterprise Resource Planning (ERP) solutions from companies like Epicor (NASDAQ:EPIC) (and potentially with Oracle (NASDAQ:ORCL) Fusion products) bring mainstream IT functionality to the SMBs.

In addition, Unisys is making great alliances with companies like Dell (NASDAQ:DELL). Dell is attacking the SMB space with partner ATT (NYSE:T) through Dell’s ProManage program. Unisys stands to benefit greatly.
Unisys’ positive numbers should not have been a surprise. All the signs were there. Ed Coleman will make many more changes. Look for Unisys to do very well going forward.
 

Original Web Article: Alcatel-Lucent Acquires Velocix for Multi-Source Content Delivery Network

Review Summary: 
It appears that Alcatel-Lucent (EPA:ALU) might be getting their act together. Acquisitions, partnerships and outsourcing improving future outlook.
Review/Analysis:  
When you combine two behemoths like Alcatel and Lucent together, you can expect major integration issues including product differentiation, market overlaps, redundant teams and more. Alcatel-Lucent exhibited every possible problem inherent in such a huge merger and many of us wondered if they would ever recover.
But, eventually, the right leader starts to pound out the problems. Ben Verwaayen appears to be that leader. He has slashed expenses and continues to optimize the corporate structure through deals like the outsourcing agreement with HP (NYSE:HPQ) that will allow Alcatel-Lucent to focus on what it is good at: communications. The HP agreement also sets Alcatel-Lucent up to be a major player and to benefit from the changes brought on by cloud computing, virtualization, de-duplication and the shift to netbooks. HP is making key strategic moves to compete aggressively against Cisco (NASDAQ:CSCO) and Juniper (NASDAQ:JNPR). Alcatel-Lucent will undoubtedly benefit from those moves.
In addition, Alcatel-Lucent is deepening its own attack within the services space and improving its competitive position against Cisco and Juniper in the consumer, SMB, enterprise and ISP spaces. The Velocix acquisition starts to round out the picture by giving Alcatel-Lucent a content delivery network play for ISPs and carriers. Alcatel-Lucent is finally gaining credible competitive positioning beyond their legacy backbone network space.
Other acquisitions over the last two years that are critical indicators of the direction that Alcatel-Lucent is heading: Tropic Networks (a metro WDM network supplier), NetDevices (enterprise services gateways), Thompson Advisory Group (telecommunications consulting), Tamblin (IPTV solutions) and Motive (service management software for broadband and mobile data services).
Alcatel-Lucent is doing the right things to break out of the traditional network equipment vendor mold and go after recurring services revenues. Look for Alcatel-Lucent to provide the infrastructure for services delivery for many carriers like Verizon Business (NYSE:VZ).
 

Original Web Article: Is Cbeyond (CBEY) the subject of an undisclosed Law Enforcement Investigation? Citron Has the Docs.

Review Summary: 
Apparently Citron Research did not drive the stock price of Cbeyond (NASDAQ:CBEY) down far enough with its initial ‘research report’, so Citron is trying to squeeze out more of their lemon juice - frankly everything they have said is just acid with no substance.
Review/Analysis:  
Citron doesn’t seem to know how to actually produce a “research” report. They slap together some disparate information and call it research.
Let’s look at their current attack on Cbeyond one issue at a time:
1) It gets worse …. Much worse
Citron apparently did a request to the FTC to get a list of consumer complaints. Like everyone else, they have to do a Freedom of Information (FoI) request to obtain it. This is normal and the FoI request is a required step. Frequently viewed reports are available to the consumer without issuing and FOI request.
Citron states that they received: “100+ page file of customer complaints – and a lot of them are very serious indeed”.
Let’s examine what they got one step at a time:
They got “100+ pages of consumer complaints”. What they don’t tell you is that the FTC “located approximately 200 pages of responsive records”. Each record, or page, contains A SINGLE COMPLAINT. So, there are only approximately 200 complaints relative to Cbeyond on file with the FTC. Considering Cbeyond has tens of thousands of customers with thousands of new ones added all the time, having only 200 complaints is pretty darn amazing. 
 

“and a lot of them are very serious indeed”. Citron points you to a file where they scanned in FOUR COMPLAINTS. Not 100, FOUR!  The complaints they use as examples are dated 11/25/2008 (page 40), 1/15/2009 (page 23), 2/10/2009 (page 18) and 5/13/2009 (page 1). The complains are in historical date order going backwards in time. So, the most recent complaint that the FTC forwarded (page 1 - 5/13/2009) was over one month old at the time the results were pulled by the FTC for Citron’s request for a list of complaints. Also note, there can only be EIGHTEEN complaints in the three month period between 2/10/2009 and 5/13/2009 (pages 1-18). Also, notice that page 23, i.e. complaint 23 is dated 1/15/2009. Does this mean that there have ONLY BEEN TWENTY THREE COMPLAINTS FILED SINCE JANUARY? Sounds like a huge growth in the number of consumer complaints to me!
And the complaint on page 18 is about slow number portability. Number portability is one of the most common complaints on the planet and it constantly causes problems for every carrier in the U.S.

2) “Law Enforcement Investigation”
Citron states in their latest “report update”: “Of even more concern is that over 100 pages of documentation were specifically withheld by the FTC because, as it cites, the documents were obtained by the Commission “in a law enforcement investigation”.”
First, let’s discuss the “in a law enforcement investigation”. EVERY COMPLAINT TO THE FTC IS A LAW ENFORCEMENT INVESTIGATION. Was that enough discussion. The FTC enforces laws. A complaint is a potential violation of the law. The FTC investigates the complaints. 
Citron makes it sound like some legal entity is investigating Cbeyond. Perhaps there is somewhere, but this letter from the FTC is not saying that at all.
Now, let’s discuss the “specifically withheld” part of Citron’s statements. The FTC letter references Section 21(f) of the FTC Act as the reason the other “over 100 pages of documentation were specifically withheld” (as stated by Citron). Well, Section 21(f) of the FTC Act says that the FTC does not have to release information under a Freedom of Information request if the SUBMITTER of the complaint has defined the complain as CONFIDENTIAL and has requested under section 21(f) that the complaint not be made public. 
So, the other 100 or so complaints were withheld because the consumer requested that they be withheld. Not because Cbeyond is being investigated.
Cbeyond has consistently maintained a low churn rate of 0.4% for “controllable” reasons which they define as: “includes customers leaving for service or pricing reasons”. Kind of hard to imagine their customer service and practices being as bad as Citron states if they have maintained that 0.4% churn rate.

3) The numbers are worse than we originally thought
Citron tried to pull the wool over everyone’s eyes with their previous comments concerning Cbeyond’s supposed disastrous churn rate and their lack of growth in new markets. Well, Citron figured out another way to make things look bad in three other markets (San Diego, Detroit, and San Francisco) by referencing only the free cash flow and doing it in a rather bizarre way of combining three markets (that started at different times) and showing cumulative negative cash flow, rather than just cash flow.
Regardless, let’s take this logically, instead of Citron’s normal approach. If Cbeyond wants to open a new market then they have to spend money to create a network and delivery platforms in order to sell services. Right? In the initial years you have a large capital investment. Look at what Verizon (NYSE:VZ) is spending for FIOS. Does anyone create a bizarre cumulative negative cash flow picture for Verizon’s markets?
Over time, you get new customers and revenues and justify your investment in your new markets. Citron says Cbeyond is failing in new markets. But, what do Cbeyond’s numbers for the three markets show? Remember that San Diego started in 1Q07, Detroit in 3Q07 and San Francisco in 4Q07. Revenue is in thousands.
                            Revenue ‘07  Revenue ‘08
San Diego               2,510               10,728
Detroit                        576                  5472
San Francisco              39                  3372          
It looks like Cbeyond is adding customers aggressively in their new markets and is on track to easily exceed capital expenditures.

4) Meanwhile the company burned free cash 
Every entrepreneurial company will burn its free cash in new markets and products.
Conclusions: Here is Citron’s most recent conclusion: “Red flags are abounding here.  Citron will continue to follow the story, but reiterates its opinion that CBEY is generously overvalued at half its current share price.”
Here is mine: As of the end of 2008, Cbeyond had $37M in cash and cash equivalents and NO DEBT. They are penetrating new markets, investing wisely, growing their customer base and maintaining high customer satisfaction. They are managing the issues created by the current economic situation by tightening their credit policies and other actions. 
Note: I do not hold a position in Cbeyond nor am I affiliated with Cbeyond in any way.
 

Original Web Article: Citron asks:  Can Investors “See Beyond” market hype, and get to the cold truth about CBEY?

Review Summary: 
Citron Research, and I use the ‘research’ designation with a 40 pound grain of salt, published a report on Cbeyond (NASDAQ:CBEY) that is very unfavorable. It is amazing how someone can bash a company with no real information and get away with it.
Review/Analysis:  
This research is without a doubt one of the worst attempts at destroying the value of a stock, without any evidence, that I have ever seen or can imagine.
Let’s take the four points from the report one at a time:
1. Tracking of market penetration in newer cities is lagging disastrously far behind Cbeyond’s original “big 3?.
Wow, an amazingly round robin way to avoid discussing hugely successful markets. Let’s look at the growth rates and revenues for each of the markets mentioned in the Citron report between 2006 and 2008 (in 000s):
                                2006           2007               2008             % Change 
Atlanta                    63529         72811             81059                27.6
Dallas                     51335         61184             69501                35.4
Denver                    58531         64829             70707                20.8
Chicago                  12281          26748            36367               196.0
Houston                  26382         38990             46843                 85.1
Los Angeles             1828         12347             23669             1295.0
Hmmm…seems like the new markets are growing pretty fast in spite of competition and economic pressures.
2. Competitive forces have been mounting steadily and now present a totally different landscape than when Cbeyond established its presence in its lead cities a decade ago. 
One of the great ways to hide things is to have them somewhere else and not directly inline within a report. Why? Because most readers will never follow the links and read the other materials and then tie the multiple sources together. Seems like that is what a ‘research report’ is supposed to do, isn’t it? But, doing the external reference method is exactly what Citron did here.
First they referenced a blog posting on Telephony Online. Looks kind of official. But, the blog is TelephonyUnfiltered. Anyone can post there. So, it isn’t Telephony Online reporting anything.  But, to be fair, the blog post reports reasonable information: “Small businesses, under pressure from the sagging economy, are in turn increasing pressure on telecom service providers to lower prices”. Sounds perfectly reasonable and nothing that would not be expected in the current economic situation.

Then Citron references a Communications Technology article that states: “Comcast launched broadband wireless service in Portland today”. Uh oh, Cbeyond better watch out. But, that is not what Cbeyond does. It sells not only baseline services, like those provided by Comcast (NASDAQ:CMCSA), Verizon (NYSE:VZ) and others, it layers on applications. It sells foundational services as a package and with add ons. That is what distinguishes Cbeyond from the others, but Citron failed to make the distinction.
Citron then states: “the cable companies are simply better configured to go cheaper and wireless”. Really? I thought a Mobile Virtual Network Operator (MVNO), like Comcast, utilizes someone elses network and delivery platforms and simply resells? Coincidentally, Comcast is using Clearwire (NASDAQ:CLWR) and Sprint (NYSE:S) (as stated in the very article that Citron referenced). It would have been nice if Citron had bothered to define what a MVNO is and how two MVNOs compete against each other. Perhaps they compete based on layered applications? Like those offered by Cbeyond?
3.  Increasing churn rates.
Wow! This is an unbelievable bending of reality. What happened to comparisons in a research report? It would have been nice if Citron had stated that Verizon has a 1.3% churn rate and ATT (NYSE:T) has a 1.7% churn rate.
It would have been nice if they mentioned that Cbeyond has 3 year contracts while others normally have 2 year contracts.  
It would have also been nice if Citron had explained why the churn rate was increasing. Cbeyond, like any smart business, breaks down the churn rate into ‘controllable’ and ‘uncontrollable’. Here are Cbeyond’s definitions from their annual reports:
Controllable: “includes customers leaving for service or pricing reasons”
Uncontrollable: “includes customers leaving for reasons outside of our control, mainly for non-payment”
Cbeyond’s controllable churn rate has stayed consistently at 0.4%. It is the uncontrollable churn rate that has been increasing and it is due to the current economy, not due to customer dissatisfaction as proposed by Citron.
And what about the ’sweet spot’ that Citron mentions? The “revenue duration beyond commissionable original contract”. Baloney. They try to trick the reader by saying ‘what if the rate jumps up to 2%’? Cbeyonds loyal ‘controllable churn rate’ is only 0.4%. Sounds like the sweet spot lasts a whole lot longer than Citron reported.
Each quarter Cbeyond reports the number of customers added and the churn rate.  According to those numbers, Cbeyond’s total number of customers has increased every quarter for the last two years. From Q308 to Q408 the number of customers increased by 4.7% versus a churn rate of 1.4%.

4. Houston, we have a problem!
Citron glancingly talks about legal problems with the city of Houston suing for ‘right of way’ payments. Well, after being in executive roles in telecom for quite a while, I can tell you this happens all the time. They file the lawsuit to avoid statute of limitations issues since they normally discover discrepancies very late in the game. These always get worked out and are very common.
Conclusions:
Citron Research is trying to drive the stock price down as they have done on many other stocks. They previously called themselves: StockLemon.com. I guess that being called Citron Research lends them an air of credibility. A pity they don’t publish real research.
Cbeyond is growing, competing, and expanding.
Cbeyond has a very competitive product suite at reasonable prices.
Cbeyond is pursuing the SMB space that is almost impossible for the big boys to penetrate and succeed in.
 
Note: I do not own a position in Cbeyond.
 

Original Web Article: Dell puts customers on fast track to storage efficiency

Review Summary: 
Deduplication is a critical component to maximizing storage utilization efficiency and minimizing bandwidth requirements to offsite storage and processing. But, with shifts in solid state storage and RAID technologies, deduplication is quickly expanding beyond backup.
Review/Analysis:  
Dell is expanding its services models. It has to. Otherwise, it will stay a manufacturer of commodotized products battling to keep its share of razor thin margins.
 
Dell’s new efficient storage management services are just what the doctor ordered. Why? Because very few people know what the heck deduplication actually is! And why it is important!
 
Deduplication in its simplest form is removing redundant or duplicate data and indexing it in some way so that data retrievals return the right data. 
 
People who have actually heard of deduplication assume it has something to do with making offsite backup less expensive. Foundationally, that is exactly correct. There are two primary flavors: dedup it before you send it across the wire and dedup it after it arrives at the other end.
 
But, deduplication can be applied in-line before the information is ever written to primary storage. The problem is that deduplication can be slow and hard disk drives are already slow enough. Plus, when you add in processor and storage virtualization, you start to create a major disaster if the servers or drives crash.
 
All of the problems are about to be eliminated. Prices are dropping drastically on solid state drives (SSDs). Utilization of solid state drives can cost more than traditional hard drives, but they eliminate the disk bottleneck and eliminate most of the wait that processors have historically had to do.
 
In addition, release of new technologies like PMC-Sierra’s 6Gb/s RAID-on-a-chip further accelerates I/Os and embeds the survivability factors needed in a virtualized environment.
 
Dell hasn’t announced services in this space yet because the combination of RAID-on-a-chip, solid state drives, in-line deduplication and virtualization is still evolving. But its time has come. The costs are coming down, the needs for compressing data centers are increasing (power, ROI, virtualization) and the technologies are all converging.
 

Original Web Article: Cisco Won’t Take on Amazon in Cloud

Review Summary: 
You can actually hear those old ‘network equipment’ roots at Cisco wrapping around and strangling the neck of Cisco’s potential in new markets.

Review/Analysis: 
After over 30 years in high-tech and twenty-five patents I feel confident in my judgement that Cisco has excellent technology. They also have superb testing and packaging. Who can argue with their past numbers? If anyone can deliver a winning infrastructure, Cisco can.
 
The world of the Internet and data centers is shifting at a staggering pace. Cisco helped accelerate the shift by alienating HP and IBM when they announced their new enterprise servers and their Unified Computing System. 
 
But, the shift is far more than who is an equipment vendor, a software vendor and a systems integrator. Companies like HP want to do it all and do it well. That is why HP bought EDS. To become the management layer of their customers’ technology assets. Once you manage it, you can replace it with your own technologies.
 
In the SMB space, Dell is doing the same thing with its alliance with ATT(NYSE:T) and its ProManage offering. The combo, if properly executed, could provide a superb new area of dominance for Dell. Because Dell will manage the infrastructure not just sell the equipment.
 
Almost all software companies, either publicly or privately, are talking about creating versions of their products that are ‘good enough’ and that function in the cloud. Oracle(NASDAQ:ORCL) is doing Fusion (time will tell if Oracle can succeed at segmenting its massive applications). The goal is to lower the cost of entry and snag new customers. Once snagged, they are largely owned. And Software as a Service and Cloud Computing are the perfect ways to control the destiny of your customer base.
 
If Cisco wants to compete against HP, IBM and others in their own back yards then Cisco needs to get on the same evolutionary roadmap. It is not just about selling servers, de-depulication, storage, etc. It is about actually providing and CONTROLLING the future of the infrastructure of the customers.
 
Components to provide the infrastructure of the cloud will commoditize over time. Maybe a short period of time. Competition is fierce, is growing meaner by the hour and is accelerating the commoditization. IBM(NASDAQ:MSFT) and now HP understand that it isn’t enough to sell equipment. You have to own the customer’s infrastructure, manage it, deploy it, replace it. Microsoft(NASDAQ:MSFT) new that in the software space 20 years ago.
 
Cisco probably doesn’t want to compete against potential customers like Amazon(NASDAQ:AMZN) in the cloud computing space. Eventually Cisco will have to compete against the Cloud as a Service providers…because Cisco’s former partners and now their competitors are already doing so.