Naveen Selvaraj's Comments

Infosys Earnings Preview: Expect a Comfortable Earnings Beat

Tue, 13 Apr 2010 01:39:06 -0400

Results are out and here's the tally:

My Projections Actuals

Revenues $1.27-28B $1.29B
Op. Profit $370M $390M
Profit Before Tax $440M $445M
Net Income atleast $347M $349M
EPS 0.62-0.64 0.61

Guidance of 16-18% revenue growth in FY11 is as expected. Surely growth is back for IT services and we can expect a good FY2011 for Indian IT services.

They have announced nothing in terms of special dividends etc and the annual dividend is minuscule,in my view. The cash pile is becoming bigger with cash and marketable securities at $3.5B. Wonder if this is not reducing shareholder value or does INFY believe that it can act as the shareholder's cash manager!!!

Are Semiconductor Valuations Peaking?

Wed, 24 Mar 2010 05:21:43 -0400

Yes. but even the operating margins considered should not be the latest but an average. typically most firms will have cycles of impairment/restructuring charges in this industry group and latest margins might be skewed as a result(same goes for P/E as well)

Are Semiconductor Valuations Peaking?

Wed, 24 Mar 2010 00:25:55 -0400

Burnintoo,

Historical Mcap/sales ratios cannot be compared directly with current Mcap/sales ratio simply because for these companies, revenues and Mcap will be very volatile, which is why I have taken average sales during 2005-09 to compute the ratio. Also my other argument is that grow in sales/profits in this cycle(2009-2013/14) will not match the average profits/sales during 2005-09 and so these stocks cannot be viewed as growth stocks( which can have a Mcap/average sales ratio of 3.0). Stable or cyclical stocks, in my opinion should have Mcap/sales ratio of 2, and so AMAT could be more attractive compared to others in the table.

Synopsys Guidance Indicates Unlikely Growth in IC Design Starts

Tue, 16 Mar 2010 06:28:20 -0400

MENT(Mentor) had a change of Fiscal year in 2008 and so comparable fiscal data and historical quarterly data was not readily available.Else, I would have surely taken Mentor data for comparison.

Anyway the idea was to compare to a few peers and not ALL. There are other competitors like Ansys(by virtue of its Ansoft acquisition) too but getting EDA specific revenues was difficult in such cases.

Tech Profits Zoom

Tue, 23 Feb 2010 22:45:14 -0500

Yes. Not all Tech stocks are good and for stock-picking company fundamentals are important in the current scenario of expensive valuations. Please see my earlier article on STEC and the interesting comments on the article : seekingalpha.com/artic...

Leverage and China's Property Market

Fri, 08 Jan 2010 07:30:27 -0500

Very Interesting read. Ultimately to me the realization is that when supply>>>dema... demand and not speculative demand) and Price increases in this scenario it is a bubble. This goes for apartments, commodities or even stock. The dot-com bubble was created because at some point the supply of paper(equity) was far greater than demand(Investor appetite) and yet people kept buying such stocks at higher and higher values with no botheration of demand/supply and relative supply(companies in other sectors with much much better cash flows) at far cheaper valuations. The seller kept 'marketing' a scenario of limited supply and as long buyers believed it, they bought.

Another interesting point is the importance of 'cash flows' rather than just plain asset value which can be misleading to an investor as has happened in the real estate bubble.

STEC: Shareholder Lawsuits Point to Larger Problems

Mon, 04 Jan 2010 06:28:50 -0500

Augusto Solar,

You have some very valid points but I do differ on certain points.

1.STEC was not just a $100M company till mid-2009. Please check its market caps in 2007/08 and even in 2003(prior to and after its previous secondary offering) and its no where close to the $100M that you claim. Also to remind you, STEC has been listed for a decade now and is not a recent IPO . So your numbers itself are wrong.

2.As per Reuters estimates, consensus for Q4 revenue estimate was$107M while they guided for $101-103(median of 102 is 5% lower). So even if you are referring to a different set of estimates, I'm not sure it was not below estimates(please quote your source and what was the estimate). Else even this claim of not being below estimates is wrong.

Some other numbers which could also be useful to form an opinion on 4Q09 revenues for STEC(all numbers from the company's own filings):

3.They have already billed $54M in 3Q to EMC as part of this $120M agreement(refer Nov09 10Q). So that leaves around $76M to bill as per this agreement in 4Q09 as the agreement was for 2H09. This means that if STEC supplies EMC as per plan, ~75% of its revenue would have come from a single customer in the next quarter-4Q09. The revenue concentration of EMC will therefore increase from 54% in 3Q09(again refer Nov10Q) to 75% in 4Q09(if things go as per the EMC agreement). Back-calculating from this, non-EMC customers gave ~$44M rev in 3Q09($98 of total rev-$54M from EMC). In 4Q09, that is expected to drop to $ 27 M if we go by their guidance ($103M is upper end of rev guidance-76M is expected contribution from EMC ). So is that good or bad? If as per the Nov con. call, EMC is on track, what happened to other customers then? why is their "absolute" billings from STEC going down from 3Q to 4Q?

I'm happy to have a fact based discussion as that increases everybody's understanding of STEC as a company

STEC: Shareholder Lawsuits Point to Larger Problems

Thu, 31 Dec 2009 01:24:38 -0500

Mark,

There were no questions raised on Dan. Rather the Chariman/CEO should be worried that they have had no new board appointments and the only two new appointments for a long time were due to the previous board members resigning for less than pleasant reasons. A regular churn of 'external' directors(and not an insider becoming a non-executive director) is good for a company that aspires to be in the top league.

With regards to the SEC correspondence, I don't accept STEC's argument that the EMC contract is not material. It is a $120M contract for a company which $228M in revenues in 2008. And STEC had mentioned that most of this contract was to be fulfilled in second half of 2009 as the title of its press-release on its own website suggests:

"STEC Signs a $120 Million Supply Agreement for ZeusIOPS SSDs for 2H 2009 and Now Forecasts Sales of ZeusIOPS SSDs to Exceed $220 Million in 2009"(PR dt.July 16,2009)

On Dec 30 03:00 PM MarkLSmith wrote:

> It's amazing that the author would slam Dan Moses in a fashion like
> this. The guy worked at STEC longer than anyone outside of the three
> founders. To imply that there's some level of deception dating back
> to 1992 is completely ludicrous.
>
> Also, you might want to read the SEC correspondence dated Oct. 13th,
> 2009. It's a much better explanation of the EMC disclosure issue
> from the company's perspective:
> www.sec.gov/Archives/e...

STEC: Shareholder Lawsuits Point to Larger Problems

Thu, 31 Dec 2009 01:00:55 -0500

To All Readers,
I have highlighted certain 'areas' of concern in STEC and at the same time clearly mentioned that financial performance has been good and compares favorably with the best of Tech small-caps. This by no means is a recommendation(good or bad).

Some additional information that I gathered on STEC:

1.STEC (called SimpleTech 2-3 years ago) had a secondary offering in
Oct 15,2003( see link here : studio-5.financialcont...) where STEC offered 10M shares of which the company management(selling shareholders) was offering 2.5M shares(excluding underwriter options). In Oct2003, STEC shares were at or close to their life-time high of $10 at that point and shares in this secondary sale were priced at $7. For the better part of 2003, STEC shares were in the $3-5 range. But we have to admit that STEC was in a volatile market then(memory) and so wild swings in stock prices could be expected. However, their timing for the secondary offering was spot-on then and even now!!!

2.Another issue with the Board composition was more related to 'how' independent were the non-executive directors. Granted that Mr.Dan Moses is a non-executive director as of now. But even in the past(again in 2003-04), a independent director, Mr.Thomas Beaver became a executive to run a division(Xirian) which was subsequently closed and the investment of ~$3.5M written off. In fact after the stock offering in Oct03, in Jun04, it announced the closure of Xirian and also lowered revenue guidance which resulted in the stock tanking again to the $3-4 range. The next trigger was in third quarter of 2006 where it again reached double digits after it announced a stock repurchase program and revenues also picked up.

Success Factors: Going for Break-Even Rather than Revenue Growth?

Mon, 21 Dec 2009 22:46:49 -0500

In my opinion, it is definitely an acquisition candidate...but not necessarily for the big players(IBM/HP/Cisco etc) only. It would be a nice fit even for IT services folks like Accenture/Infosys as a productized service is a good fit for pure-play IT services

On Dec 20 01:15 AM User 381292 wrote:

> I like the article and all the points made.
> Question- is SFSF a qood acquisition candidate for any of the big
> players?

My Hardware Picks: More Value, Less Glamour

Mon, 14 Dec 2009 22:26:31 -0500

Thanks, I missed that

On Dec 14 10:21 AM TraderMark wrote:

> just fyi STAR in acqusition by CSCO

Tech Sector: Does R&D Spending Matter?

Thu, 12 Nov 2009 22:35:20 -0500

Gaga,

You are right. This was exactly my thought when I was writing this article. How do we differentiate between Research $'s spent and development $ spent(for upgrades etc which is not really 'Research'). But that look's very difficult. hence my attempt to see how effective are R&D spends by trying to link it to size of company, revenue growth in times of downturn etc.

On Nov 12 01:54 PM gaga555 wrote:

> Having worked at one of the companies that made the list, I can tell
> you that this is a completely flawed analysis. It does not take
> into account how efficient those R&D dollars are nor what specifically
> the spending is on. There is R&D spend that is sustaining engineering
> and there is R&D spend that is actual innovative R&D. I
> know of companies with relatively high R&D that are not innovators
> at all. In addition, for tech companies that consistently acquire,
> much of their growth in R&D spending can be attributed to taking
> on the inorganic expense growth in R&D from adding the expense
> of the acquired company and often supplementing that expense as they
> pour more money into that technology and try to bring it to market.
> Sorry, but you would have to look individually at companies that
> launch new products and segments through internal projects, and that
> is not easy to compile.

Solid Execution Makes Western Digital a Compelling Stock

Tue, 27 Oct 2009 23:26:32 -0400

I guess you had positions in WDC a while ago. For the last year or so, I have consistently been surprised at how good WDC's results are and yet its hardly spoken about!

On Oct 27 12:01 PM Tom Armistead wrote:

> Went long WDC today.

Accenture: Why This Revenue Leader Is Not the Leader by Market Value

Tue, 06 Oct 2009 23:54:25 -0400

I have included marketcap and operating profits/margins specifically for that. I'm only trying to interpret the market's call on this group by supplying facts. I also believe that the next two quarters(Sep/Dec09 qtr) will narrow the profitability gap of INFY/WIT with Accenture and so the market's 'premium' valuation for INFY/WIT may be partially justified...not fully though.

On Oct 06 10:27 AM longyield wrote:

> What you also fail to mention is that ACN is much cheaper than INFY
> or WIT. Although its implied in your comparison of market cap and
> revenue you don't make the point that INFY and WIT are incredibly
> overvalued relative to ACN. You focus on operating margins but you
> should really look at FCF margin and ROCE. INFY trades at 26x FCF,
> ACN trades at 8x. So INFY may grow more than ACN in the future but
> the market has already priced that in. Long INFY was a good call
> a few months ago but I would be surprised if there is anymore "alpha"
> left in that trade.

Accenture: Why This Revenue Leader Is Not the Leader by Market Value

Tue, 06 Oct 2009 23:49:29 -0400

Well despite all this if Infosys and Wipro make more margins than Accenture(and not for one quarter but for the last five years!!!), then as an investor I would still go with Infosys/Wipro. Seriously, clients should give more contracts to Accenture than INFY/Wipro as per your experience but that has not happened in the last five years!!!

In fact that is the curx of my article, If I may add

On Oct 06 08:33 AM Gravity404 wrote:

> From a client POV. I have worked with ACN, INFY, WIT.
>
> What you fail to mention here is that INFY and WIT take twice as
> long to do half the work. Then the amount of time it takes to have
> another company redo their work. How do you account for that on a
> balance sheet?
>
> Oh yeah, then there is the Satyam accounting methods to consider....

Apple Needs Outside Director

Fri, 21 Aug 2009 08:35:43 -0400

Excellent article with a clear articulation of some interesting issues.

However, I would add that rather than just an outside director, Apple should have a director from outside of America. For too long, Apple has been an 'American Company' and it needs to take its innovation to growth markets like India/China.

Synaptics Diversifies Product Range and Rides the Smart Phone Wave

Wed, 19 Aug 2009 23:45:43 -0400

Atmel and Cypress Semiconductor supplies some SoC(semiconductor components) for touchscreens. But Im not aware any other large touchscreen vendor other than Synaptics and I feel that Synaptics is a major vendor for Apple and HTC

On Aug 12 10:27 AM Stefan_S_Sweden wrote:

> great article Naveen!! How about competition? Are there any other
> companies offering the same kind of solutions / technology (touchpads)
> ??? Do you know if Synaptics is inside the latest and upcoming models
> from the big handset makers? Samsung, SonyEricsson, LG, Iphone etc
> ??
>
>
> Stefan
> Sweden

Akamai: Short Of Expectations But Long-Term Growth Story Remains Intact

Mon, 03 Aug 2009 06:53:25 -0400

you are right.The number of customers or revenue per customer might not be strictly comparable but other financial metrics are. I just wanted to highlight the disparity in valuing two companies which operate in the same space. I did'nt want to do a product/service comparison because the in a dynamic space like Internet Services, the definition of products/services and what it constitutes will keep changing!!

On Jul 30 10:21 AM Dan Rayburn wrote:

> How can you possibly think you are doing a fair comparison from Akamai
> to Liemlight in the number of customers they have and the revenue
> per customer when we know that Akamai sells services that Limelight
> does not offer? You can only compare Akamai's CDN business to Limelight's
> CDN business, and since we don't know how many customers Akamai has
> for CDN, what percentage of their revenue comes from CDN, or how
> many customers take multiple services outside of CDN, you can't compare
> the two companies. You can only compare the CDN product, not the
> company.

EMC's Data Domain Acquisition: A Sign of Desperation

Tue, 28 Jul 2009 15:39:56 -0400

I agree. But making expensive acquisitions is not the way out,especially during a downturn. So, my argument is that EMC should acquire -but not at any cost.

On Jul 28 08:55 AM tkane90 wrote:

> This analysis needs to be done in a way that compares other players
> in the industry over the same time period. For the past twelve months
> we've been in a gobal recession (hello!) and most companies in the
> tech sector are struggling regardless of the business strategy.
> The real question is about how well placed EMC is today versus competitors
> to take advantage of a spending upswing when the economy rebounds.
> Any thoughts on that?
> -tk

Mobile Phone Market Share Relative to Profits

Tue, 21 Jul 2009 05:47:48 -0400

Atleast in India(Nokia sells a lot of phones in India). Nokia has a clear lead over Samsung, LG et all in terms of quality. Consumer generally are willing to pay a premium for Nokia over other mobile phone brands. So even if Nokia might lack in product innovation, they have a strong reputation for quality in low-cost phones too!

It would be interesting to see what happens when Apple/RIM becomes more aggressive and reduces their sticker prices.

How Does Accenture Today Compare to Post Dot-Com Bust?

Mon, 29 Jun 2009 03:41:58 -0400

You are right. The conclusions could have been more precise or done away with. My intention was to only compare and I should have stopped at that.

On Jun 27 01:24 AM Amit Jindal wrote:

> I am difficulty understanding how the comparison between now and
> then led to the conclusions. These conclusions could have been achieved
> even without the comparison.

How Does Accenture Today Compare to Post Dot-Com Bust?

Mon, 29 Jun 2009 01:56:44 -0400

As mentioned in the article, Accenture includes a host of services(SI etc) in Consulting. So what I mean by Consulting growth is not vanilla business/IT strategy consulting but all these services combined.

On Jun 27 10:56 AM Bandwagon2009 wrote:

> The conclusion in this article seems to ignore the cultural buying
> habits of APAC region -- while consulting can certainly provide higher
> value (=margins), there is pre-disposition by clients in some Asian
> countries for not wanting to pay for pure "consulting". Firms
> like ACN might be able to bundle "solutions" which include a combo
> of products and services -- and certainly there are some large scale
> government spoonsored SI projects in India and other countries that
> ACN could go after...in most cases a local tie up / JV is necessary.
> A BOT approach might be a better idea.

The Great Bing Scam

Tue, 23 Jun 2009 08:16:13 -0400

There are definitely a few positives in Bing(over Google/Yahoo) and so some of the Bing usage would HAVE TO be attributed to that.

Assuming that people are 'unwittingly' forced to search on Bing, are they staying and continuing to use Bing or are they going back to Google Search. That is the million-dollar question

Virtualization Out, Expense Management In

Thu, 04 Jun 2009 23:22:57 -0400

Thank you for your comments, Delaland. I probably should have clarified that what I meant by 'Virtualization' is all 'forms' of virtualization(if I may so) i.e Server, Application, Desktop etc.

I know that in a jargon-filled industry like Tech, we tend to get carried away by such jargon and many companies also 'piggy-back' on the latest fad and classify their product under the same . Your comments have made me inquisitive enough to try and unravel this jargon. Let me attempt that!

On Jun 04 10:44 AM Delaland wrote:

> Naveen:
>
> I am virtually (no oun intended) certain, that the 'virtualization'
> license revnues that Cirix is providing/reporting during this period
> is NOT hypervisor license revenue. Its their core product which,
> in a nutshell, vitualizes applications, such that you don't incurr
> desktop licensing fees (short version explanation). XEN is the technology
> they acquired when they bought Xen Source ( only 1/1/2 years ago),
> and that is the competing hypervisor technology with VMware, hyper
> V (microsoft), et. al. If you go to their website, the first thing
> you see is they offer Xen for free, using the Linnux Open-souce model.
> Ask Citrix for those numbers (Xen license adoption) and I'll guarantee
> it is growing at a fast pace. VMware, on the otherhand, licenses
> ESX for between $4K and $5K per 2-socket server. Their revenue growth
> may be declining because there are simply many more hypervisors in
> the market to compete against (Oracle, Microsoft, Citrix), where
> they were the only player years back. Plus, they compete against
> 'free' in many instances, certainly with Citrix. Hypervisors will
> eventually be a commodity. But the adoption across the industry
> is anything but slowing.

Virtualization Out, Expense Management In

Wed, 03 Jun 2009 23:53:24 -0400

Thanks for your comments. However, I disagree that since there is more hypervisor adoption, the industry is doing well. If they are not able to monetize these 'adoptions' now, how can we be so sure that monetization of all these adoptions will surely happen. further please refer the data(sourced from company filings) which Citrix has reported the following as application virtualization revenue in their own filings:

FY04 - $696.8M
FY05-$776M
FY06-$871M
FY07-$998M
Fy08-$1081M

you will get the 06/07/08 'App virtualization' revenue from their 2008 10-K filings( Page F-30). So even in FY06, quarterly run rate was >$200M for App virtualization.

On Jun 03 11:04 AM Delaland wrote:

> Mr. Selvaraj's data is way off base. First, he shows enourmous license
> revenue for Citrix since 2006, along with a recent declining growth
> of that license revenue. The fact is that Citrix only bought XEN,
> the hypervisor virtualization software Citix now sells, in 2008,
> and it did so for $500M. But XEN annual revenue to that point was
> only $5M!!! If his chart showed only the growth of Xen license adoption,
> instead of all of CItrix's software product sales, it would show
> enormous growth. Plus Citix Xen license model is the same as Linux;
> i.e. license is free, (for a few months this was not true, but it
> is now) you only pay for annual support, so there are no 'license'
> revenues to report. Finally, other comapnies have jumped in with
> their own hypervisor vitualization products, like Oracle and Microsft.
> Between Citrix (Xen), Oracle, MS, Virtual Iron (bought by Oracle),
> and others, their license growth more than makes up for the decline
> in VMware. The reason VMware growth has declined, is they are competing
> aginst more products, and competing against in some cases 'free products'.
> The assertion that overall hypervisor virtualization software user
> adoption (note I did not say license revenue), is slowing or on the
> same pace as declining server sales is rediculous.

What's Behind Cognizant's Outperformance?

Fri, 15 May 2009 00:06:23 -0400

Very valid comments, Huskar. As I has mentioned, Cognizant's short term advantage remains due to 3 reasons and not just $ strength.

But Cognizant has talked of 'superior' client engagement as a business differentiator for more than 4-5 years(their SG&A % spend validates that). But the gap in terms of Revenue per client(With Wipro and Infosys) remains and this is not just the efffect of recession but the effect of business model(more maintenance revenue). The gap is getting bigger in terms of operating profit per client between Cognizant and Infosys. So finally, if we are interested in 'absolute' profit dollars earned per client, Infosys has actually performed better during the last 2-3 quarters.

But I want to EMPHASIZE that my opinion is also that short-term advantages for Cognizant remains.

On May 14 10:43 PM Huskarl wrote:

> Naveen - You have established that Cognizant has added a significant
> number of clients recently and is almost close to Infosys in that
> respect. Is that not a reason by itself for revenue per client to
> be lower?
> Clients can be added overnight but generating revenue out of them
> takes time. Naturally during the initial phases, the revenue per
> client is going to be lower as your client base has increased significantly
> but revenue is yet to show up. Add a recession and this makes revenue
> accretion even slower.
> But through superior client engagement, Cognizant can, over time,
> generate that revenue with these new clients. An Infy or Wipro will
> not be able to do that as they are not investing in building client
> engagement.
> With half the base of Infosys and one third that of TCS, Cognizant
> has added more revenue in 2008 in absolute terms (and not percentage
> terms). Clearly this cannot be because of dollar strengthening.
>

Oracle CEO to IBM, HP: Don't Get Your Hopes Up, We're Keeping Sun's Hardware

Mon, 11 May 2009 08:13:02 -0400

Oracle has hardly shown any innovation in its bread and butter business - database and applications. It has largely grown on the strength of its acquisitions in the last 3-4 years.

So expecting them to drive innovation in the SPARC business is a little far fetched. Are they going to do a better job than HP or IBM which have been at it(Silicon to Software) for years. Unlikely!

Larry's sales talk is just that - sales talk!

Synaptics Diversifies Product Range and Rides the Smart Phone Wave

Tue, 05 May 2009 03:15:16 -0400

Very true. In fact their 'touch' screen design wins could help them for such similar interfaces in PC monitors/netbooks etc. What one needs to watchout in the PC segment is that total market size could remain flat while market share could change among the vendors. This in turn could lead to lesser margins.

On May 01 10:14 PM Chad Gray wrote:

> Don't forget the netbook trend. If unit volumes in this new form
> factor take off as many trend-watchers are prognosticating, SYNA
> may see revitalized PC segment growth along with their handheld design
> wins.

Apple: Three Battles Won, Nicely Positioned for the Fourth

Fri, 24 Apr 2009 06:35:54 -0400

Thanks for the comments,Moon.

All I'm saying is that Apple is among the select few companies which can claim that all their major business lines are successful and more profitable than peers at that. I feel that iTunes will shortly become their fourth.

I disagree that its one sided stock hyping for there was never a argument to buy Apple stock but the argument was to admire Apple for the way it has built its businesses. And when they look set to build another business into significant size, why not highlight that?

If you actually wanted to disagree that Apple doesn't have all that great business lines, then the cost-cutting and other arguments that you put forth are not relevant. Can I see Apple making profits in all these product/business lines even after 3-4 years? Yes I do. Will they make more money that they do now? I don't know and I never wanted to answer that in the article.

On Apr 24 03:53 AM Moon Kil Woong wrote:

> My take. According to filings Apple dropped its employees 10% from
> 15,600 to 14,000 and is currently under consolidation. It's margins
> rose due to cost cutting and a revenue mix shifting from hardware
> sales to software which means less market share gains.
>
> Looking at Apple to total PC shipments make more sense than comparing
> them with HP and Dell which they are loosing market share. This makes
> sense since Apple sells at a premium and we are in a recession.

>
> One can see positives as well as negatives in this filing. Cost cutting
> is not bad if management is honest about it. Expanding into China
> this year is a positive if Apple is honest about it combating expected
> domestic sales. Choosing not to get into Net books is fine if you
> think it undermines your value proposition with 13" Macbooks and
> iPhones around that price and functionality area. Dissing netbooks
> for no good reason isn't so intelligent. Apple should be happy it's
> computers sell for a premium and commit to those price points even
> if it looses market share. Jobs was always clear it was not his intention
> to try to become 20 or 30% of marketshare.
>
> The fact that Apple sells its iPods in Wal-Mart is unsettling for
> a few reasons 1) it doesn't fit their demographic niche, 2) it doesn't
> ring brand value, 3) it sounds like a good place to dump, and 4)
> shows Jobs is utterly absent in making corporate decisions there
> anymore.
>
> So yes, Apple had a nice quarter but it doesn't smell like victory
> to me.
>
> I don't own or short Apple. I'm a fan of their products but don't
> like one sided stock hyping.

Apple: Three Battles Won, Nicely Positioned for the Fourth

Fri, 24 Apr 2009 06:35:54 -0400