Skip to content

Battleroad Blog

The New York Times: Failing or Thriving?

October 23rd, 2018 by Ben Rose

New York Times“Were it left to me to decide whether we should have a government without newspapers or newspapers without a government, I should not hesitate a moment to prefer the latter.”

—Thomas Jefferson to Edward Carrington, 1787

With over four million paid subscribers to its news, website content, and daily newspaper, The New York Times Company (NYSE: NYT) has been a trusted source of news coverage since its inception more than 165 years ago. Launched in 1851 as the New-York Daily Times by Henry Jarvis Raymond and George Jones, The Times gained momentum as a trusted news source a decade later, when it expanded its six day per week publication to seven days, in order to cover breaking news relating to The Civil War. The Times further burnished its credentials as a source of incisive coverage of the events of the day when it exposed the corrupt practices of William M. “Boss” Tweed, a New York City leader of the Democratic Party political machine.

Rescued from financial ruin by the Ochs-Sulzberger family in 1896, the paper enhanced its reputation for quality journalism. Under the slogan “All the News That’s Fit to Print” which first appeared alongside the paper’s moniker in 1897, The Times began to distance itself from many of its more sensationalistic competitors, who emphasized the more lurid stories of the day in their reportage. The Times’ focus on quality investigative journalism has enabled it to win over 122 Pulitzer Prizes—more than any other news organization—including 61 Pulitzer Prizes in the last 25 years.

The New York Times has also developed a reputation for leadership in maintaining the rights of a free press to publish articles of interest to the public at large, despite objection from the subjects of its coverage. In some cases, the company has argued its position before the US Supreme court, as it did in New York Times Co. v Sullivan in 1964, when the court established the “actual malice” standard that requires public officials or public figures acting as plaintiffs against a news organization to establish that statements about them were published in reckless disregard of their truth or falsity in order to meet the threshold of defamatory or libelous intent.

As an independent newspaper, The New York Times has had to balance its role as a responsible purveyor of news, with its responsibility to protect sensitive national security information, sometimes at the behest of the US government. Over the years the newspaper has either delayed or withheld the publication of articles, often in consultation with government officials over fears of placing lives at risk. However, the paper has at times made the decision to publish articles that it believed to be in the public interest, despite objections from the government.

In 1971, The New York Times, along with the Washington Post played a key role in publishing portions of the Pentagon Papers, a classified US Department of Defense history of the government’s conduct in the Vietnam War. When The New York Times began to print excerpts from the report, the Nixon administration sought to restrain publication on the grounds that material leaked interfered with government’s ability to conduct the war, and enter into negotiations for peace. When the newspapers refused to comply with the government’s request, the Nixon White House obtained a federal court injunction to cease publication, and called for the source of the leaks, Daniel Ellsberg, to be prosecuted under the Espionage Act of 1917. Simultaneous appeals of the government’s actions by the newspapers wound their way up the judicial chain to the US Supreme Court, which decided in a 6-3 decision in 1971 that the injunctions on the newspapers were unconstitutional prior restraints, and crucially, that the executive branch had not met the burden of proof required to enforce its order.

In addition to its award-winning news coverage over many years, the newspaper has been cited in numerous studies for the quality of its work. As a result of its reputation for quality, independent investigative journalism, The Times has become the newspaper of record for national and global events, as archived copies of the newspaper housed in libraries throughout the world are drawn upon by researchers, students, and general readers.

For more on Battle Road’s current perspective on The New York Times, please contact [email protected]

...

Akamai Technologies: A Growing Force in Cyber-Security

July 23rd, 2018 by Ben Rose

Akamai TechnologiesFounded twenty years ago by MIT graduate student Daniel Lewin, and Dr. Tom Leighton, his applied mathematics professor, Akamai Technologies, based in Cambridge, MA specializes in internet content delivery, web performance, and cybersecurity software. With trailing twelve month revenue of $2.6 billion, and a market cap of roughly $13 billion, the company serves more than 60 percent of the Fortune 500, each of the top 15 US and Canadian retailers, all of the top 20 global ecommerce companies, the 50 largest global carriers, 47 of the top 50 American television networks, 21 of the top 25 global gaming companies, 17 of the top 20 global social media platforms, the largest 25 banks in the US, the 10 largest global auto manufacturers, and all branches of the US military. More than 500 customers spend more than $1 million annually with Akamai, and no customer accounts for more than four percent of sales.

Akamai’s software and services are delivered over a proprietary global network that has grown to exceed 240,000 servers embedded in 1,700 networks in 3,900 locations in 133 countries. The distributed nature of this global network with servers located locally at the “edge” of the internet ensures that content is delivered quickly and efficiently.

Versus four years ago, when cloud security comprised just $50 million in annual revenue, the Cambridge-based company has developed a growing cloud security business, which contributed $486 million in revenue last year, or 20 percent of total sales. At present growth rates, even in the absence of acquisitions, cyber security could become the company’s largest business within four years.

Increasingly sophisticated cyber attacks funded by governments, organized crime, and political activists place banks, global media, and governments and their constituents at increased risk of fraud, identity theft, loss of reputation, and loss of revenue. In response, Akamai has developed a differentiated series of cloud software services designed to protect against such attacks. The basic premise behind its approach, and the key demand driver for its services is that it is much easier to attack a corporate network, than to protect it, as even a single hole can become the stalking horse for massive bot armies that can bring a network to its knees.

Through its early work with Kona Site Defender, which protects websites and APIs against cyber attacks, Akamai developed a core competence in protecting against Distributed Denial of Service (DDoS) attacks against data center software assets. Such attacks involve the high-jacking of a large number of computer servers to overwhelm a target website or data center with malicious traffic. DDoS attacks, launched by political activists, cyber criminals, and hackers seeking notoriety have become the bane of large bank and ecommerce companies in particular. Akamai has since developed and acquired new capabilities to protect against DDoS attacks, and added products to protect against web application layer attacks, as well as solutions to block and mitigate malware, ransomware, and phishing attacks.

Akamai has also had success with Bot Manager, a product launched in 2016, which provides insight into the amount of bot traffic accessing a website, as well as prevention of price and content scraping, which is particularly worrisome to ecommerce companies. Utilizing Bot Manager, the company reports that a single bank achieved a reduction in account takeovers from 8,000 per month to just one or two per month. Bot Manager has thus helped save the bank tens of millions of dollars in direct fraud each year.

From its roots in content delivery and web performance, Akamai has been able to leverage its massive, distributed global network to delivery increasingly sophisticated lines of defense against cyber security attacks. No longer a noise level item in its income statement, cloud security now exceeds 20 percent of sales, and is growing rapidly. As IT security professionals increasingly embrace cloud solutions for perimeter defense, Akamai is well-positioned for growth.

...

Fitbit: Struggling to Stay in Shape

June 25th, 2018 by Ben Rose

Fitbit logoWith trailing 12-month sales of $1.6 billion, a market cap of $1.8 billion, $658 million in cash and zero bank debt, Fitbit, founded in 2007, and based in San Francisco, CA, is the largest provider of internet-connected health and fitness tracking devices. The company addresses a multi-billion dollar annual revenue opportunity comprised of health-conscious consumers who wish to track daily progress toward achieving weight loss and fitness goals. The company offers a broad product line, consisting of six activity trackers that range in price from $60 to $150 at retail, and two smartwatches, priced at $200 and $300, respectively. Fitness trackers account for roughly 70 percent of revenue currently, with smartwatches accounting for most of the remainder.

In the fourth quarter of 2016, Fitbit hit a brick wall amid execution challenges related to manufacturing and channel management. Missteps included being slow to address excess channel inventory, as well as operational challenges, including a poorly-timed headcount increase of 80 percent during 2016. In response to changing market conditions, management took corrective action at the start of 2017, including a six percent workforce reduction, and streamlining the number of devices offered. In addition, the company was reorganized around fitness devices and enterprise health.

While Fitbit continues to maintain a strong presence in the activity tracking market, the success of the Apple Watch, a higher end, more full-featured family of devices has redefined the market, and, to some degree, siphoned off demand for activity trackers. Fitbit has responded to this changing market dynamic through the introduction of two smartwatches, the Ionic, launched in late 2017, and more recently, the Versa. However, the company continues to face price competition in its core fitness tracker market, and has experienced soft demand for these products in the US in particular, its largest market. As a result, greater emphasis will be placed on smartwatches for future growth.

While smartwatches carry higher ASPs, they also feature lower gross margins than fitness trackers. Near term, the company is unlikely to improve by much its current gross margin, which hovers in the low 40 percent range. In the meantime, the company’s current cost structure prevents it from achieving break-even. While Fitbit maintains a strong cash position of more than $658 million and no debt, it has steadfastly refused to implement a share buy-back, preferring instead to utilize cash for leasehold improvements, along with tuck-in acquisitions, most recently geared to expanding its limited position in health-related services.

The firm’s reliance on the retail channel, including mass merchants and specialty retailers remains a source of concern, given the mixed signals coming from the retail industry, as well as a policy of recognizing revenue based on sell-in, rather than sell-through. As a final investor caveat, we note its dual class share structure guarantees the founders perpetual control of the voting rights of the company, which keeps it insulated from shareholder input. Overall, we see Fitbit as a company with longer term appeal, if it can manage to slim down for future success.

...

Facebook: Grappling with User Privacy

May 22nd, 2018 by Ben Rose

FacebookBalancing user privacy with the desire of advertisers to collect insightful user data is a challenge Facebook has faced since its inception. As evidenced by the company’s recent affirmation of its ad-driven business model, Facebook has no plans to alter its basic value proposition. However, recent industry events have once again brought the conflict between user privacy and advertiser demands to the attention of regulators in the US and in Europe.

By way of background, less than a year before its IPO, Facebook signed a consent decree with the US FTC, under which it agreed to settle charges without admitting or denying guilt that it had deceived consumers by telling them they could keep information private, but then sharing it repeatedly. In signing the consent decree, Facebook agreed that it must obtain consumers’ express consent before their information is shared beyond the privacy settings they create. As part of the settlement, Facebook agreed to audits conducted by independent third parties once every two years for the next 20 years to verify that its security procedures exceed the standards set by the FTC. The FTC is currently investigating whether Facebook has violated the consent decree, which could result in penalties of up to $40,000 per user per day.

Facebook maintains that the data harvested by a third party app utilized by the consultancy Cambridge Analytica was obtained and applied in violation of its policies, specifically procedures put in place in 2014 to prevent so-called “abusive apps” from gaining unauthorized data from Facebook users. The Cambridge Analytica imbroglio is particularly significant, in light of new privacy regulations that are being imposed by the European Union under the General Data Protection Regulation (GDPR), which goes into effect later this week. Under the new regulation, advertisers must be transparent about their use of customer data, and users must give their expressed consent to allow advertisers or other third parties to utilize their data. In response, Facebook and other internet advertisers are working to comply with European regulators, who could impose penalties of up to 20 million Euros, or up to four percent of annual revenue, whichever is greater. In the case of Facebook, a violation could result in a penalty of up to $1.6 billion.

The initial GDPR impact on Facebook is likely to be a decline in the rate of growth in its European user base, which currently stands at 282 million daily active users, or 19 percent of its user base. Beyond that, the impact is unclear. One school of thought suggests that Facebook could face declines in advertising revenue, based on a lower base of users reachable by advertisers. The counter argument is that users who give their consent will be more susceptible and receptive to ads that they are implicitly agreeing to view, thus making the remaining base of users even more valuable to advertisers.

In the mean-time Facebook is redoubling efforts to root out third party apps that violate its data privacy rules. Facebook has stated that it has more than 10,000 people working on security and safety issues now, with plans to double this number by the end of this year. Last week Facebook announced that it has already examined thousands of third party apps, and has suspended about 200, pending a thorough investigation into whether the apps misused user data. Any of the apps in question that are found to be in violation of Facebook’s policies will be banned from Facebook, and users of the app will be notified.

The recent Cambridge Analytica imbroglio, combined with the rollout of GDPR is likely to keep the spotlight on Facebook and other internet advertisers. By taking more proactive measures to ensure user privacy Facebook is likely to navigate the conflicting demands placed upon it by users, advertisers, and regulators.

...

Amazon.com: Eyeing the Home Robot Market?

May 1st, 2018 by Ben Rose

amazon logoAccording to what appears to be a credible article in last week’s Bloomberg Technology, Amazon.com is proceeding with plans to create a home robot, through a product development effort that has been code-named Vesta, as part of its Lab126 consumer device division, based in Sunnyvale, California. Lab126, led by Greg Zehr, a former head of R&D for Palm, a pioneer in mobile computing, is credited with the introduction of Kindle e-book reader, and is responsible for the Amazon Echo, FireTV set top boxes, and Fire tablets. It is unclear what purpose an Amazon.com home robot would serve, but in general terms the speculation is that Amazon.com is looking to build on the success of the Amazon Alexa assistant and Echo home speaker product line by creating a roaming version of Alexa, perhaps with the ability to conduct basic house chores.

The authors of the article indicate that prototypes have been built with advanced cameras, and that Max Paley, a former Apple executive, is working on computer vision technologies for a home robot. The Bloomberg article suggests that Amazon.com plans to “seed” robots in homes by the end of this year, and could potentially launch a commercial robot sometime in calendar 2019. The article also indicated that based on Amazon’s prototypes and tests, it may choose not to enter the market.

Is Amazon.com’s Entry Plausible?

Despite its failure in the smart phone market, Amazon.com has emerged as a prolific consumer electronics product company, having made a number of successful bets, most notably having created the e-book market with the Kindle, and more recently creating the market for smart home assistants, via Alex and Echo. Importantly, Amazon has had its greatest success in categories that it creates. In the Kindle e-reader category, Amazon used to have some competition from the Nook, but not much anymore. Google, which is looking to parlay its success with Google Assistant into the Google Home product line, is playing a severe game of catch up to Amazon.com, as the Echo device family holds a more than two-to-one market share advantage against the Google Home product. Alphabet recently merged its Nest division, which provides, smart thermostats, smoke detectors, webcams, and home alarm systems, into its Google hardware division, suggesting that the Google assistant will be more tightly integrated into Google’s smart home offerings.

At this point it remains unclear what Amazon.com’s product and delivery plans are for the smart home, beyond continued updates to the Echo device family. Amazon.com has a growing base of talented engineers, and proven expertise in addressing the smart home, through the success of Alexa and Echo. Amazon also owns its own robotics company as a result of the $750 million acquisition of Kiva Systems back in 2012. Kiva has been focused on robots for warehouse fulfillment operations, and it is unclear whether the robotic R&D efforts of Kiva, based on the East Coast, and Lab123, are linked.

Our sense is that Amazon.com has many of the pieces in pace to create some type of consumer robot. The question we have is how long it would take Amazon to commercialize a product, and what tasks it would perform. Another key question is whether Amazon.com will choose to enter the market at all, given the large number of other product opportunities that it has under consideration.

...

Care.com: A Linked In For Family Care

November 15th, 2017 by Ben Rose

Care.comWith trailing twelve month sales of $165 million, a market cap of roughly $555 million, $96 million in cash and no debt, Care.com has become the leading online destination for finding and managing family care in the US. Like LinkedIn, which matches job seekers with prospective employers, Care.com is focused on matching the needs of families and caregivers creating in essence a one-stop shop for family services throughout the lifecycle of a family or individual household.

Led by founder and CEO Sheila Lirio Marcelo, and Michael Echenberg, EVP of finance and CFO, Care.com targets a large addressable market, as evidenced by the fact that US consumers spent $300 billion on family care services last year, including child day care, housekeepers, nursing care facilities, tutoring, and pet care services. The market remains highly fragmented, served by traditional family care agencies, as well as brick and mortar chains that provide a variety of services.

Last year in the US, consumers spent over $300 billion on family care services, including child day care, housekeepers, nursing care facilities, tutoring, and pet care services. Services providers include nanny agencies, child day care centers, elderly care services, including in- home services and nursing care facilities. Specialized service providers for tutoring and pet care, as well as other online destinations provide a wide variety of competitors in this highly fragmented market.

Family care decisions often reside with a female head of a household, the primary audience targeted by Care.com. Decisions for services providers are often based on word of mouth stemming from personal networks. Decisions must be made with regard to the preference for in-home services, or brick and mortar facilities outside of the home.

Care.com identifies its primary target market as the roughly 46 million US households with income greater than $50,000 per year with either a child under the age of 18 and/or a senior aged 65 and over. The company also includes an estimated 15 percent of households with incomes under $50,000, with similar dynamics. Care.com’s in-home consumer services remain in the early phase of market growth, yet benefit from some compelling demographic facts and trends, which include the rise in single parent households, the prevalence of dual income households, an aging population, and increasing trust in the internet as a destination to help make decisions relating to family, home and health.

In just 10 years, Care.com has carved out an enviable internet presence, which features more than 26 million registered users, comprised of nearly 15 million families, and more than 11 million caregivers. At the end of the most recent quarter, 320,000 paying families purchased a subscription to the company’s caregiver listings, and/or the company’s service for household payroll and tax preparation services.

Key swing factors that will determine Care.com’s ability to rise or fall over the next 12-18 months include it ability to:

  • Grow its core US consumer business through continuous improvement to its core matching platform, as well as targeted initiatives to grow senior care, housekeeping, and pet care, leveraging its registered community of more than 26 million members.
  • Develop awareness as a trusted source for families and caregivers, through both its own accreditation, as well as the halo effect provided by corporations, non-profits, and potentially insurance plan providers that adopt and promote its services.
  • Drive additional revenue growth from three key growth initiatives: employer-sponsored family services for employees, overseas expansion, and marketing programs for daycare, nanny, and elderly care agencies.

For more information on Battle Road’s 24 month assessment of Care.com, please contact [email protected].

 

...

Spotlight on Social Media

October 2nd, 2017 by Ben Rose

Spotlight on Social Media: Twitter’s Registration Policies Under Review

Social Media ResearchRecognizing the rising influence of social media networks on the spread of junk news and unfiltered opinion, Facebook and Twitter have been called recently to testify before Congress to discuss their policies to monitor illegally registered and anonymous users, as well as advertisers. A wide range of concerns are under examination, including the use of social networks by foreign governments to influence the outcome of the 2016 presidential election, as well as foreign governments and hate groups seeking to inject invective into the discourse on current affairs.

Unlike Facebook, which purports to have policies in place to vet the identity of those who purchase ads and post opinions, Twitter has a looser policy as it pertains to posting opinions, one in which a user need not provide details of his or her identity to post messages.

Twitter announced on September 28th that Russia Today, a media organization with strong ties to the Russian government, purchased $274,000 in US ads in 2016 and promoted over 1,800 tweets targeted to the US market. The company also detailed some of its efforts to root out misinformation on its sites, as well as ongoing efforts to eliminate false or spam accounts, which the company estimates as less than five percent of its monthly active user base, which totals 328 million.

In light of prior concerns expressed by US and European regulators, Twitter already has policies in place to root out terrorist postings, hate-related violence, and child pornography from its web sites. Partly in response to calls for Twitter to police its user community, the company recently announced that it has suspended nearly 300,000 user accounts with links to terrorism in the first half of 2017, 95 percent of which were unmasked by the company’s automated spam-fighting tools. 75 percent of the accounts were suspended before the account could fire off its first tweet.

With regard to hate speech, Twitter and Facebook last year pledged to European authorities that they would respond to violent, xenophobic, or racist comments within 24 hours. European authorities have recently requested that the companies respond even faster in cases of suspected terrorist postings.

Twitter has, however, chosen not to be an arbiter over political views or the veracity of news sites espoused by users, in keeping with its policy to allow the free exchange of ideas and opinions, no matter how crudely expressed. This policy has placed it at odds with various national governments over the years, including the US government. Twitter has sued the US government over Twitter’s desire to publish in its transparency reports the precise number of requests sought by government authorities and FISA court orders.

Our overall sense is that government authorities will keep the heat on Twitter to suspend and remove terrorist postings on the platform, but that authorities will be less able to restrict political opinions and regulate foreign news sources, both of which would be anathema to free speech advocates.

...

ASC 606: Accounting Controversy on the Horizon

May 31st, 2017 by Ben Rose

ASC 606A new accounting standard relating to sales expense recognition is likely to create controversy in the world of software earnings quality, particularly given the recent trend toward multi-year contracts associated with software subscriptions.

ASC 606, jointly issued by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) on May 28, 2014, provides guidance for revenue recognition as well as the accounting for certain sales expenses. The rule allows companies with revenue contracts extending beyond a single year to capitalize and then amortize the incremental cost of the contract acquisition over the life of the contract. Therefore, certain sales commissions can be deferred, even though the commission is paid at the time the contract is approved. This is significant for any software company whose average contract length is more than a year, for it allows the company to defer a certain portion of its sales commissions, reduce its reported sales expense, and boost earnings in the process.

Though FASB and the IASB originally envisioned adoption of the guidelines to occur after December 15, 2016, or, for practical purposes, during the first calendar quarter of 2017, an update provided by FASB last summer deferred the effective start date for one year for public entities reporting under US GAAP. Thus, companies are not required to comply until the first calendar quarter of 2018.

ASC 606, if adopted, will have a significant impact on companies which pay out the bulk of their sales commissions in a particular quarter as part of a yearly incentive structure. For companies with multi-year contracts the reduction in sales expense could be significant in the year-end quarter. It will therefore be important to evaluate the earnings performance of a company as if the accounting guideline had been implemented in the prior year, in order to ensure an apples to apples earnings comparison, and to determine whether a company’s reported earnings may have been artificially stimulated as a result of adopting ASC 606.

Proponents of ASC 606 assert that the capitalization and subsequent amortization of sales expense better matches a company’s ratable revenue recognition pattern for subscriptions. We believe that ASC 606 distorts the P&L by systematically under-reporting expenses incurred by a company at the time of payment. Another argument in favor of capitalizing commissions is that sales expense represents an incremental cost associated with a sale. Yet, so are marketing and promotional costs, as well as R&D expenses, since market awareness and the addition of new product features can directly impact the purchase decision.

In terms of historical precedent, one recalls the enactment of FASB 86, an accounting edict proclaimed in August of 1985, which enables companies to capitalize –rather than expense— certain software development activities between the point of establishing commercial feasibility and “completion” of the product. Upon review of the ruling, Francis (Frank) J. Gaudette, the late great CFO of Microsoft, who helped orchestrate the company’s IPO in 1986, refused to recognize as legitimate any interval between feasibility and product completion, with the view that research and development costs should be expensed entirely in the period in which they are incurred.
By taking a hardline stance against capitalization of R&D under any circumstance Gaudette set a precedent among software companies with conservative accounting practices, whose earnings multiples—like Microsoft’s—have been rewarded over time. As ASC 606 comes into effect, and a spotlight shines on the sales and marketing expense line of subscription software companies, one should take with a certain grain of salt the considerable operating margin improvement that some companies will claim as a result of adopting the new guideline.

...

Twitter: Obstacles to Overcome

December 27th, 2016 by Ben Rose

As of this writing in late December, Twitter (NYSE: TWTR) continues to struggle, relative to its internet advertising peers Facebook (NASDAQ: FB) and Google (NASDAQ: GOOGL). Despite a flurry of activity in the fall, during which the company was rumored to be on the auction block, the stock has floated back down to earth, and then some, as investors consider several ongoing challenges faced by the company. Among these are persistent management turnover, a struggle to rekindle user growth, and what we perceive to be mediocre earnings quality.

Management Turnover Continues

In the first 18 months following its IPO in November of 2013, Twitter was plagued by rampant management turnover, including a 60-day interval, during which three of the top five executives listed in its S-1 filing resigned or were reassigned to new posts in the company. Jack Dorsey, Twitter’s Chairman and co-founder, became CEO in October of 2015, and, until recently, management turnover had stabilized.

On November 7th Twitter COO Adam Bain informed the company of his decision to resign, after a six year stint, which featured a role as head of advertising sales. Two days later, Twitter announced that it had appointed CFO Anthony Noto as COO. Noto will continue in a dual role as COO and CFO until a new CFO is hired. The COO position is crucial, as Twitter’s CEO Jack Dorsey continues to split his time between Twitter and Square, another company that he co-founded. Noto, who had been in charge of live content, in addition to his CFO responsibilities, is now in charge of global advertising sales, data, MoPub, as well as global partnerships and business development.

Then on December 20th, Twitter’s chief technology officer, Adam Messinger, resigned. On the same day, Twitter’s VP of product, Josh McFarland let it be known that he was leaving the company to join a venture capital firm.

Working to Rekindle User Growth

Twitter reported its lowest-ever rate of year over year revenue growth in Q3 2016, as advertising sales rose just six percent over the prior year. This was the seventh consecutive quarter that sales growth declined. Monthly active users (MAUs) grew by just three percent in the last quarter. In addition, the company has, for several years, declined to report the number of daily active users, which are suspected to be considerably lower than its 317 million MAUs.

Twitter is working behind the scenes to induce users to utilize the service more frequently. Efforts underway include the addition of new content, such as Thursday Night Football, as well as the application of machine learning and artificial intelligence to improve the user experience, particularly in the area of notifications, and home timeline, where the majority of user time is spent. The company is focusing in particular on improving the relevance of user notifications, and emphasizing topics and interests, rather than following people per se, as methods to improve user engagement.

Earnings Quality Remains Poor

Like most VC-backed West Coast technology companies, Twitter utilizes a healthy dose of stock-based compensation, which reduces the near term cost of compensating employees, but passes the longer term cost along to shareholders, who are left to absorb the increased issuance of stock in the form of reduced earnings per share, once the options grants are exercised. In the third quarter of 2016, stock-based compensation accounted for 32 percent of gross operating expenses. SBC is particularly noteworthy within research and development, where it accounted for 49 percent of gross research and development expenses in the third quarter.

Another area of concern regarding Twitter’s EBITDA presentation is how it accounts for research and development costs. Twitter continues to capitalize, rather than expense, a considerable portion of its research and development costs. While this is a perfectly legal practice, we believe R&D costs should be expensed in the period in which they are incurred, rather than capitalized as assets that can be amortized later through COGS, at which point the non-cash amortized expense is viewed by many to be inconsequential.

Twitter continues to languish relative to its internet advertising peers. Our sense is that the company still has obstacles to overcome, as its management ranks continue to shift, user growth remains tepid, and the company’s earnings quality remains low.

...

Veeva Systems: Expanding into Clinical Trials

October 21st, 2016 by Ben Rose

Veeva SystemsThe most significant development in the clinical trial software market is the recent expansion of Veeva Systems (NYSE: VEEV), which until recently had made only a light-hearted effort to address the market. As part of its previous strategy, Veeva had partnered with Medidata Solutions (NASDAQ: MDSO) in an alliance which recognized Oracle (NASDAQ: ORCL) as a common enemy. Veeva, whose strength stems from selling sales force automation software to large drug and biotech companies, including 24 of the 25 largest world-wide, has, in the last two years, set its sites on the research and development activities of the large drug companies, with a series of new database applications.

About four months ago Veeva Systems announced its intent to introduce a clinical trial management system, or CTMS, in the first quarter of 2017. This builds upon the success of the company’s eTMF and Vault Study Startup applications geared to the clinical side of enterprise content management. However, Veeva had not announced plans for an electronic data capture or EDC application, which is often seen as an essential ingredient for a fully-functioning clinical trial system. Instead, Veeva worked alongside Medidata, whose Rave EDC product is well entrenched in many large pharma accounts.

Recently, however, Veeva announced its intent to deliver a cloud-based EDC application, Veeva Vault EDC, which it expects to be available in April of 2017. In doing so, Veeva intends to build on its base of 120 clinical operations customers, which include deployments of its Veeva Vault eTMF in seven of the top 20 pharma companies. Veeva also announced that it will unveil Veeva Vault eSource, a mobile app for clinical trials, by the end of 2017.

Undoubtedly, Veeva Systems faces challenges in penetrating the market, not the least of which is the fact that its strongest relationships in the in the pharma industry have previously been confined to the sales, customer service and IT management sides of the business. Veeva has, however, sold at least one Vault module to at least 34 of the top 50 global pharma companies, and Veeva has an opportunity to expand within the R&D group, which has significant input into clinical trial software selection. Veeva also has the opportunity to approach a new set of customers in the CRO industry.

In summary, we believe that the recent expansion of Veeva into clinical trials holds much promise for the California-based company, and suggests greater ambitions to address the research and development needs of life sciences companies.

...