On April 4, 2016, following a six month search, the board of directors of 3D Systems (3DS hereafter) appointed Vyomesh Joshi, aka VJ, as president and CEO. The appointment occurred as the venerable manufacturer of 3D printers attempts to regain its footing, following an extended period of questionable acquisitions, loss of market focus, and damaged credibility among investors.
Joshi, aged 62, had been president of the Imaging and Printing Group of Hewlett Packard for 11 years, beginning in February 2001, and left as EVP in March of 2012, bringing to a close a 31-year career at HP, after HP, in one of its many reorganizations in the last number of years, combined printers and personal computers into the same business unit. While leading the $26 billion H-P printer business, Joshi doubled the division’s operating profit. Joshi appears to have been lured out of near-retirement with a stock and options package worth a potential $27 million, based in large part on 3DS’ future stock performance. Joshi is currently on the board of directors of both Wipro (NYSE: WIT) and Harris Corporation (NYSE: HRS). He received his bachelor’s degree in engineering from L.D. College in Ahmedabad, India, and a master’s degree in electrical engineering from the Ohio State University.
Joshi replaces 3D Systems’ highly flamboyant and acquisitive CEO Avi Reichental. Over the last few years 3DS has endured numerous set-backs, including an over-emphasis on acquisitions for growth, missteps in the consumer printer market, distribution channel challenges, product quality issues, a delay in the filing of its 2015 10-K, along with a lack of investor confidence, which has resulted in a more than 80 percent contraction in its share price since peaking at $97.25 in late 2013.
Since taking the helm at 3DS Joshi has been somewhat coy regarding future plans, but has noted the company’s lack of operational efficiency, and the challenge to build a sustainable corporate culture from among the company’s employee base of roughly 2,500, many of whom have come to 3DS via acquisition. In mid-June 3DS announced it had hired John N. McMullen, age 58, as VP Finance and CFO, replacing David Styka. McMullen had most recently been at Eastman Kodak, where he took the helm as CFO beginning in June of 2014. Prior to that, McMullen, was SVP Finance and Corporate Treasurer, as well as CFO of HP’s Imaging and Printing Group, where he worked alongside 3DS’ new CEO, Joshi.
The new management team will have much to confront, including helping customers sift through the reality versus the hype of 3D printing, along with the need to create printers with faster speeds and more precision to produce parts that can be used in volume production, in addition to prototypes utilized for visualization and marketing purposes. 3DS has, along with many of its competitors, from time to time over the last three years, produced printers with varying levels of product quality.
With regard to Joshi’s future strategy, we can gain a glimpse into his thinking. In an address before the Net Impact Conference at Stanford in November of 2005, Joshi spoke of the elements required to create a sustainable business. These include: identifying holes in the market, developing appropriate price models, establishing business partnerships, fostering trust and respect among employees, and providing leadership that puts business first, people second, and the egos of managers third.
With projected calendar 2015 sales of $410 million and a market cap of roughly $3.3 billion, Veeva Systems is a leading provider of cloud software for salesforce automation, content management, and sales contact data to the global life sciences industry. Based on an exclusive software license from salesforce.com (NYSE: CRM), Veeva’s CRM software is now utilized by 17 of the top 20 largest pharmaceutical and biotech companies, including eight of the top 10. Within the top 20, only three have thus far not made the switch to Veeva: Switzerland-based Roche Holding, France-based Sanofi, and France-based Novo Nordisk, which ranks in the top 15.
Veeva has identified an annual market spend of over $5 billion in software for CRM, content management, and sales data, and so it has much running room ahead. Veeva has already captured an estimated 50 percent of the CRM market for pharma and biotech, and could very well capture as much as 60 percent of the market over the next several years, as the company continues to roll out new seats to existing customers, and sell additional CRM add-on modules.
Since Veeva is cloud-based, and features a multi-tenant architecture, the company can update the software of its entire customer base at the same time, reducing the time, aggravation, and cost associated with maintaining and updating several versions of the same software program. Veeva’s cloud-based product set stands in contrast to two of its largest competitors, Oracle (NASDAQ: ORCL), and IMS Health Holdings (NYSE: IMS), which support and maintain several software packages simultaneously, many of which have been developed for older client server computer systems, and are not hosted in the cloud. Support for these older software products detracts from keeping their cloud products up to date, which will likely lead to further market share erosion.
Veeva’s newer products for content management and sales data, respectively, accounted for less than 10 percent of sales a year ago, but now account for about 20 percent of product sales. These products carry slightly higher gross margins than the company’s CRM products, and more than double its addressable market. Veeva has additional room to sell Veeva CRM, Veeva Vault, and Veeva Network to existing and new customers, as well as to sell the new products to other segments in the life sciences market, such as medical devices, laboratory instruments, and CROs—segments with which the company conducts limited business currently.
Veeva benefits from an experienced management team, led by Peter Gassner, a former SVP of Technology at saleforce.com, and at Peoplesoft (later acquired by Oracle), where he was Chief Architect and General Manager for PeopleTools, and at IBM Silicon Valley Lab, where he participated in database research and development. Matt Wallach, co-founder and President, was formally GM of the Pharmaceuticals and Biotechnology division of Siebel Systems (later acquired by Oracle). CFO Tim Cabral has held financial management positions at Peoplesoft and other technology companies. Detailed knowledge of the specific needs of the pharma and biotech segments, gives Veeva a leg up over its competitors, many of whom have only general knowledge of the life sciences sector.
Veeva has a strong balance sheet, which features $438 million in cash and no debt, and continues to generate very solid cash flow, all the while growing the business, while running at a 30 percent operating margin in the most recent quarter.
With annual sales of $233 million and over 2.6 million active customers, Pompano Beach-based PetMed Express (NASDAQ: PETS) is the largest pet pharmacy in America, and a leading online provider of medication, nutrients, and health-related supplies to pet owners and their dogs and cats. Leveraging the trends toward online commerce, an aging pet population, and the impending shift from topical medication to prescription pills, PetMed focuses on the health management needs of its customers’ pets. About 45 percent of sales comes from prescription medication, 45 percent from health-related products, and 10 percent from pet lifestyle products.
Health-related trends in the pet population mirror trends affecting their owners. These include rising levels of life expectancy, yet greater presence of disease and chronic conditions such as obesity, thyroid, and arthritis. Like their human companions, pets are benefiting from greater awareness of the impact of a nutritional diet.
A key factor impeding PetMed Express’ sales growth over the last couple of years has been the emergence of numerous brick and mortar and online retailers that have expanded their efforts in the pet health category, seizing upon an obvious area of consumer interest. PetMeds’ strengths include the ability to fulfill 80 percent of prescription orders through an online customer care group, at prices that range from 10 to 50 percent below veterinarians’ prescription medication prices. PetMeds boasts an 80 percent one-day turnaround time on orders, and an 80 percent reorder rate among customers. PetMeds’ highly efficient operations yield over $1 million in revenue per employee, which enables it to achieve a 12 percent operating margin, 20 percent higher than PetSmart, its closest publicly-traded peer, despite a dramatically lower sales volume. That said, competition ranks as the number one impediment to PetMeds’ near-term growth.
An experienced management team has been focused on identifying areas of profitable growth for the company, including a greater emphasis on higher margin prescription drugs. Newly introduced creative advertising may help to generate sales to new customers, an area which has been growing at a slower rate in the last year. While the company develops a profitable growth strategy, investors can draw upon a dividend, which has increased steadily over the last several years. Its current yield is 4.4 percent.
PetMeds’ core competencies in online distribution, customer service, efficient inventory management, and advertising, combined with a 2.6 million pet owner active customer base, and solid balance sheet make it an under-valued asset, one which we believe will grow in value over time.
Mr. Chen, who hails from a modest upbringing in Hong Kong, and lived in New England for several years, where he attended the Northfield Mount Herman school on the banks of the Connecticut River, and graduated with a EE from Brown University in 1978. He then headed West to receive his masters in electrical engineering from the California Institute of Technology the following year.
John Chen began his career at Unisys, (the merger of mainframe computer companies Burroughs and Sperry) as a hardware engineer, and later became president and COO at age 38 of Pyramid Technology Corporation, a fast-growing computer company, based in San Jose, California, started by former HP engineers, and a pioneer in Reduced Instruction Set Computing. After Siemens acquired Pyramid and merged it into Siemens Nixdorf, Chen became president and CEO of Siemens Nixdorf’s Open Enterprise Computing Division in 1996.
A year later he joined Sybase, as president and CEO. Sybase, at one time, was the youngest and fastest growing database software company in the world, and a perceived challenger to Oracle for technology leadership. A series of management missteps pertaining to its products and technology, misleading financial statements, and ultimately lost investor credibility, led to a multi-year phase of purgatory—not unlike that experienced by BlackBerry.
This set the stage for a turnaround, which was led by John Chen, after he assumed leadership of the company in 1997. Under his leadership Sybase reemerged as a provider of data warehouse and other analytics software, mobile data management, messaging and virtualization technology. And the company recorded 55 consecutive quarters of profitability. In May of 2010 SAP AG the German enterprise applications software giant acquired Sybase for $5.8 billion, thus filling a gaping hole in its own product line, and better positioning itself as an Oracle competitor.
Among the myriad challenges facing John Chen and the management of Blackberry is what to do with the company’s smart phone and tablet business, which has steadily lost market share to long-standing competitors and up-starts. The company’s software challenges are no less daunting, although the company possesses solid mobile and security assets. Blackberry also benefits from several thousand patents relating to mobile devices, software, and security, and these are sure to be powerful assets in the future.
All in all, John Chen’s challenges exceed those that he faced upon joining Sybase some thirteen years ago. It will be interesting to see whether his interim position is followed by a more permanent one in which he can reestablish the leadership once held by the venerable Canadian company.
October 13, 2014
Research on companies which have come public in the last several years is available mostly from the investment banks who were paid by the companies during the IPO process. This leads to a conflict of interest as the investment bank seeks to please the owners of the company, as well as provide an objective assessment of the company’s growth prospects to investors, the other group of clients whom the bank serves through its brokerage arm.
This conflict continues long after the IPO is complete, for once a company becomes public, investment bankers and analysts who played a role in the IPO may advise the company on future stock offerings, mergers and acquisitions, and customized plans for insiders to sell their stock.
As a research-only firm, Battle Road is focused on helping asset managers seek out stocks to buy and stocks to avoid, without the conflict presented by conducting business with the subject of its research. Since our founding in 2001, we have remained true to this principle.
The idea for the Battle Road IPO Review originated with one of our clients, a portfolio manager, who sought our help in seeking out solid companies with sustainable competitive advantages –and reasonable valuations—from among the many companies which have come public in recent years. Using quantitative and qualitative measures we developed a methodology for screening for new buy ideas.
The Battle Road IPO Review has become a monthly service that screens for new ideas from a uniquely designed universe of over 180 growth-oriented IPOs of the last seven years. The universe includes software, internet, computer hardware, cyber security, consumer, and business services companies. The median market cap. in the Battle Road IPO universe is $1.1 billion. The universe is rapidly growing with the addition of newly-minted IPOs on a regular basis.
We rank order the stocks by group each month and call out names for further exploration, based on our assessment of the company’s strengths and weaknesses, as well as other measures which include our interpretation of the company’s current valuation, balance sheet, quality of earnings, and other metrics. We draw upon these metrics, as well as qualitative factors to determine our monthly Exploration List, which is a sub-set of all stocks that we believe should out-perform the overall coverage universe. The Exploration List is therefore a screening tool for new ideas. We strive to develop a list that features both growth and value-oriented stocks. Our goal is for the median stock performance of the Exploration List to exceed the median stock performance of the coverage universe.
Our clients use the Battle Road IPO Review to:
About Battle Road Research
Battle Road Research provides fund managers and analysts with an independent voice on technology and consumer stocks. Our research process combines rigorous financial analysis with insights gleaned from industry sources. We present our findings in straight-forward Buy, Hold, or Sell research reports. In addition, we publish The Battle Road IPO Review, a monthly screen for new ideas that examines the prospects of more than 180 growth-oriented IPOs of the last seven years. Since our founding in 2001 we have refrained from investment banking, company consulting, company-paid reports, and personal investment in the stocks we research.
Battle Road Research was one of the first eleven members of the Investorside Research Association, www.investorside.com, the only trade group that certifies its members are free of investment banking, consulting, and research for hire conflicts.
For Immediate Distribution
Monday, April 2, 2012
(WALTHAM, MA) Battle Road Research (www.battleroad.com), an independent stock research firm focused on the technology, health science, consumer, and renewable energy sectors, has announced that company President Ben Z. Rose will participate in the Bloomberg Technology Roundtable, a featured event at the annual Investorside Research Conference in New York City on Tuesday, April 3rd. The conference showcases thought leadership from the industry’s leading independent research companies, all of whom refrain from investment banking, and research for hire.
This year’s conference will feature a Technology Sector Roundtable hosted by Anand Srinivasan, semiconductor and hardware analyst at Bloomberg Industries. The panel theme is entitled The Emergence of the Technology Sector from the Prolonged Recession: What has Changed and What Hasn’t? Topics to be discussed include consumer electronics and social media, corporate Capex and ROI Measurements in hardware and software, unstructured “Big Data,” and the implications for various companies throughout the technology landscape.
Battle Road’s technology research is focused on internet, software, and hardware companies that are poised to capture growth opportunities in ecommerce, online advertising, cloud computing, social media, and digital manufacturing. Through its impending launch of Small Cap Snapshots, Battle Road is also on the lookout for stocks that have been overlooked by Wall Street and regional investment banks, as well as IPOs from the last two years that have fallen off the radar, or may have little coverage beyond the research reports written by their underwriters.
About Battle Road Research
Battle Road Research, an equity research firm, provides an independent voice on technology, health science, consumer, and renewable energy stocks. Our research process combines rigorous financial analysis with insights gleaned from industry sources. Since our inception in 2001 we have refrained from investment banking, company-paid reports, and personal investment in the stocks we research. Battle Road has been a member of the Investorside Research Association since its inception in 2002. Investorside monitors and certifies that its members do not perform investment banking or research for hire, thus avoiding the conflicts of interest elsewhere rampant within the equity and fixed income research business. For each of the last three years, Battle Road has received an award for its research coverage from Investorside, including the Thought Leadership in Technology award.
Ben Z. Rose, President
Battle Road Research
781-894-0705, ext. 204
Amazon’s torrid growth in electronics and general merchandise has prompted a major expansion in infrastructure to support its operations. The company now has 69 fulfillment centers around the world, having added 17 this year. Amazon plans to add 17 more in 2012. Amazon.com’s headcount now exceeds 50,000 people, having grown over 60 percent over the prior year, and it has begun to feel the strain of its warehouse and fulfillment operations.
Amazon also continues to invest heavily in cap ex related to its data center expansion, which is required to support the growing number of companies that tap into its web services. Starting with packages that offer five gigabytes of storage for free on a monthly basis, companies ranging from venture-backed start-ups to global corporations and government agencies can purchase computer and storage power on a per use basis, rather than make large capital outlays for computer servers, storage racks, and networking gear. AWS already has several hundred thousand customers across the globe in more than 180 countries. We expect the business to grow in excess of 50 percent compounded annually, though like its other businesses, Amazon does not report on its margin contribution.
Amazon recently launched a frontal assault on Apple in order to lay claim to its unfair share of the emerging computer tablet category. The Kindle Fire, a $199 color Amazon branded tablet, may have sold more than five million units in the most recent quarter, and we think that Amazon.com will confidently lay claim to the number two position in computer tablets within the next few months. The Kindle Fire enables Amazon to sell more of everything digital that it already sells, including video on demand, online game and music services, ebooks, audio books, pictures, and data and backup storage.
Amazon’s video on demand service, for example, allows access to over 100,000 movies and television show episodes s on a pay-per-view basis. Most can be rented for a price which ranges from $1.99 per television episode, to $2.99 per movie. Amazon also offers 13,000 movie and TV shows free for members of Amazon Prime, the company’s $79 per year service which provides unlimited two-day free shipping services. The Kindle Fire also fits well into Amazon’s Cloud Drive strategy, as it already offers 5 gigabytes of free storage for videos, games, music and other data.
It may be hard to believe that electronics and general merchandise now comprises more than 60 percent of Amazon.com’s quarterly sales, up from about 40 percent three years ago. From its humble roots as an online bookstore, Amazon.com now serves over 160 million active customers around the world. Traditionalists will be happy to note that despite rapid growth in electronic books, physical books, that is, hardcover and paperbacks grew by double digits in the most recent quarter.
Just three days before Christmas Akamai (NASDAQ: AKAM) put to rest speculation raised in November that it might acquire Cotendo—its only meaningful competitor in the web acceleration services market. We believe the acquisition vanquishes a key competitor, provides Akamai with excellent technical personnel, and keeps AT&T from encroaching on Akamai’s turf.
The acquisition of Cotendo for a net cash payment of $268 million should close in the first half of 2012. With 100 employees, we speculate that Cotendo’s annual sales are between $25-30 million, and growing in excess of 30 percent per year.
Cotendo is the second largest acquisition in Akamai’s history, and is strategic for five reasons: first, it vanquishes a key, emerging competitor, which had evidently been gaining ground at several large customers, including Google and Facebook. Second, Akamai will gain access to vital product and technical personnel with excellent product know-how, half of whom are based in Israel. Third, the acquisition damages AT&T’s presence and credibility in the CDN space, as a result of its much ballyhooed alliance with Cotendo, which will likely come to an end.
Cotendo was founded in 2008 by former executives from Commtouch Software and Limelight Networks. Cotendo had received private funding from Sequoia Capital, Benchmark Capital, and other venture firms, as well as investments from Citrix Systems and Juniper Networks. With cloud-based software valuations soaring to new levels, we speculate that the VCs on the deal were interested in maximizing their investment as soon as possible.
Israeli newspaper Calcalist first speculated in late November that Cotendo, a Silicon-valley, venture-backed Akamai competitor, with offices in Israel, was on the block for sale, and that Akamai, AT&T, and Juniper Networks might have been bidding for the company, at an estimated price of $300 million.
Cotendo is best known for a service which competes with Akamai’s dynamic site acceleration product, which improves the performance of high volume websites. We have seen reports that suggest that several Akamai customers, including Facebook, Microsoft, and Google, were utilizing Cotendo’s services. Facebook’s VP of technical operations, was a member of Cotendo’s advisory board.
AT&T announced in July, 2010 that it would begin to re-market website acceleration services from Cotendo. Four months later, in November 2010, Akamai, along with the Massachusetts Institute of Technology, announced a patent infringement claim against Cotendo. AT&T may have chosen not to bid for Cotendo for fear of inheriting its lawsuit, and the potential to pay Akamai and M.I.T. damages should Akamai have prevailed in the suit.
In addition to entering into a formal distribution agreement with AT&T for its website acceleration services in July of 2010, Cotendo had also announced a partnership with Citrix Systems, which made an early stage investment in Cotendo. The partnership seemed to center around services that accelerate delivery of web-based applications, which sounds very much like Akamai’s application acceleration product. Citrix and Cotendo claimed that their jointly-developed product boosts application performance by 50-80 percent, and reduced bandwidth requirements by 50-95 percent. The agreement was similar to one that Akamai announced with Riverbed Technologies not too long ago.
Akamai’s Dynamic Site Accelerator is utilized by a large number of ecommerce and media sites. A new version planned by the company was already in beta, and we learned at its analyst meeting in December that the product could ship in the first quarter of 2012. At this juncture we are unclear as to whether the product will ship, or whether Cotendo’s functionality will be melded into Akamai’s DSA product.
Akamai will ship at least four new products in 2012, and we expect that Cotendo will be able to contribute to all of them, including: (1) a new version of Akamai’s Dynamic Site Accelerator; (2) new website and ecommerce security software products; (3) a cloud accelerator optimized for mobile platforms, an area where Cotendo has evidently taken an early lead; and (4) a new CDN solution that will be licensed to network operators.
All in all we believe that the Cotendo acquisition makes strategic sense for Akamai, and should enable the company to extend its lead in its key markets.
In a brief but crystal clear announcement Monday morning, old school software giant Oracle (NASDAQ: ORCL) announced that it would acquire customer service software pioneer RightNow Technologies (NASDAQ: RNOW) for $43.00 per share or roughly $1.5 billion. Oracle’s generous valuation of 6.6 times RNOW’s projected 2011 revenue provides the latest evidence of old school, client software companies’ interest in cloud computing.
Founded by CEO Greg Gianforte in 1997, and based in Bozeman Montana, RightNow Technologies sells a suite of software products that help companies improve customer service, while reducing support costs. From its heritage in website customer support, RNOW expanded into several adjacent segments, including marketing automation, call center management, online chat, and, most recently, social computing for customer service. With an average order size of about $100,000 per customer per contract, RightNow provides hosted, or what is more commonly referred to as cloud-based services for its customers. Thus, there is no need to purchase the software outright.
Over the years, RightNow has developed a solid presence in online customer service, a critical component of customer relationship management, and can now boast the leading market position in this segment. The company serves a broad array of roughly 2,000 customers.
In November of 2010 RNOW closed a $170 million convertible debt offering, and, more recently completed the acquisition of Q-Go.com, a Dutch-based company, for which it paid $34 million. Q-Go.com offers natural language search technology that helps large banks, travel services, and telecommunications companies improve the quality of customer service on their websites.
Ironically, Right Now began fourteen years ago as a client server software company, selling on premises perpetual license software. Several years ago the company began a painful and courageous transition to adapt its core technology to harness the many benefits of cloud computing. Over the last two years, RNOW managed to grow steadily and predictably, with a top-line growth rate of roughly 20 percent, across a broad number of industries.
Oracle’s generous valuation of 6.6 times RNOW’s projected 2011 revenue, and roughly 5.4 times projected 2012 revenue, indicates the length to which client server software companies may go to improve their prospects in the public cloud. The valuation appears to be on par with other publicly-traded cloud-based software companies, such as Salesforce.com (NYSE: CRM) , athenahealth (NASDAQ: ATHN), SuccessFactors (NASDAQ: SFSF), and others.
We do not doubt that there may have been other interested bidders for RNOW, such as Salesforce.com and/or SAP—both of whom seek to extend their presence in cloud computing. However, our sense is that Oracle’s generous offer leaves little chance for an alternative bidder to emerge successfully.