The Wall Street Journal's May 20th edition contained a lot of fabulous "infoporn," as Barry Ritholtz of the "The Big Picture" blog likes to say. ("Chartporn" is another one of his favorite expressions.) See http://bigpicture.typepad.com/
1. "Economies in states that produce oil, gas and other commodities are stronger than the rest of the U.S." April 2008 Unemployment rates for Montana: 3.8%; North Dakota: 3.1%; Oklahoma: 3.2%; Texas: 4.1%; Wyoming: 2.6%. Interestingly enough, based on some other information I've seen, South Dakota is apparently doing better overall than North Dakota in terms of bank deposits. Maybe North Dakotans are more optimistic and spending more money instead of saving it like their neighbors down south?
2. For all credit card company investors and lovers of the recent Visa (V) IPO, check this out:
Default Deluge: monthly credit card losses at credit-card companies are at 6%--a three year high. (Page C14). Say it with me: upcoming recession?
3. Nothing, however, topped the article on home prices (D3). Apparently, construction companies went overboard in building condos in Chicago, so you can buy a condo for $85,000 in Bronzeville. The areas with the most supply appear to be Wicker Park, Ukrainian Village, and Bucktown (why doesn't San Jose have cool neighborhood nicknames?). With a possible Olympic bid, Bronzeville might be an interesting location. South Side...the "baddest part of town" no more?
Median Single Family Home Prices:
Boston: 357K
Chicago: 249K
L.A.: 459K
NY: 445K
S.F.: 701K
"And if an epitaph be my story, I'd have a short one ready for my own: I had a lover's quarrel with the world." -- Robert Frost
Sunday, May 25, 2008
Just Because: Golden State Warriors Stadium Picture
Just so you can see the view from the nosebleed seats. This was a good game against the Seattle Supersonics in March 2008. Kevin Durant is going to be a great player, if he spends more time playing defense.
Update on June 29, 2012: my thoughts on the 2012 NBA Finals are HERE.
Peter Peterson, a True American Hero
See CNBC interview with Mr. Peter Peterson, Blackstone Group founder, and David Walker, former U.S. Comptroller:
http://www.cnbc.com/id/15840232?video=751573252
Mr. Peterson has donated a billion dollars to raise awareness of how the American entitlement mentality is robbing the younger generation of the American dream.
http://www.cnbc.com/id/15840232?video=751573252
Mr. Peterson has donated a billion dollars to raise awareness of how the American entitlement mentality is robbing the younger generation of the American dream.
Saturday, May 24, 2008
Thomas Jefferson
"A government big enough to give you everything you want is strong enough to take everything you have." - Thomas Jefferson
I don't know if Jefferson actually made the above statement, but it is absolutely correct. To counteract a growing government, we may have to consider creating a new independent branch of lawyers with the sole purpose of litigating against the government, essentially creating a Public Prosecutor's Office for all civil cases. This way, if the government wants to exercise eminent domain over your house, you would have access to a lawyer, or if a police officer used excessive force, you would be able to file a lawsuit and pay only the costs.
Ultimately, we should explore ways to reduce government middlemen by increasing direct benefits to the public that do not require a monopoly or an exertion of power over the public. Some ideas are rebates (the 600 dollars stimulus--which would have been perfect if we had a surplus) or free or subsidized health care (why should government workers be virtually the only persons to receive free health care for life?).
I don't know if Jefferson actually made the above statement, but it is absolutely correct. To counteract a growing government, we may have to consider creating a new independent branch of lawyers with the sole purpose of litigating against the government, essentially creating a Public Prosecutor's Office for all civil cases. This way, if the government wants to exercise eminent domain over your house, you would have access to a lawyer, or if a police officer used excessive force, you would be able to file a lawsuit and pay only the costs.
Ultimately, we should explore ways to reduce government middlemen by increasing direct benefits to the public that do not require a monopoly or an exertion of power over the public. Some ideas are rebates (the 600 dollars stimulus--which would have been perfect if we had a surplus) or free or subsidized health care (why should government workers be virtually the only persons to receive free health care for life?).
Friday, May 23, 2008
Stocks Update
Today, despite my concerns about the economy, I bought 50 shares of GE, 330 shares of MMM, 100 shares of IF, and some shares of SCUR.
GE: I don't believe I can completely time the market, so I will average down if GE drops to the mid-20's.
MMM: I missed the ex-dividend date for MMM, but this company still looks undervalued at these prices. I hope to sell MMM when it goes to anywhere from 78 to 84. Although I like this stock, I am just too concerned that an overall market correction will bring down good names along with bad ones.
IF: Indonesia is going to be a good investment in the long term. My plan is to hold this fund for many years.
SCUR: This is a value play that contains quite a bit of risk. Its balance sheet looks stronger than what its stock price indicates. It is also trading below its book value. I will revisit this stock in a year or two. If we are coming out of a recession, small caps will be the first stocks to lead the way.
The information on this site is provided for discussion purposes only and does not constitute investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities or make any kind of an investment. You are responsible for your own due diligence.
GE: I don't believe I can completely time the market, so I will average down if GE drops to the mid-20's.
MMM: I missed the ex-dividend date for MMM, but this company still looks undervalued at these prices. I hope to sell MMM when it goes to anywhere from 78 to 84. Although I like this stock, I am just too concerned that an overall market correction will bring down good names along with bad ones.
IF: Indonesia is going to be a good investment in the long term. My plan is to hold this fund for many years.
SCUR: This is a value play that contains quite a bit of risk. Its balance sheet looks stronger than what its stock price indicates. It is also trading below its book value. I will revisit this stock in a year or two. If we are coming out of a recession, small caps will be the first stocks to lead the way.
The information on this site is provided for discussion purposes only and does not constitute investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities or make any kind of an investment. You are responsible for your own due diligence.
Thursday, May 22, 2008
Trimble Navigation Systems Shareholder Meeting, May 22, 2008
I attended the Trimble Navigation Limited (TRMB) shareholder meeting, which was geared towards its employees rather than shareholders. Of the 100 or so people there, only about five of us were non-employee shareholders. There wasn't even a Q&A session at the end of the two hour meeting, which was highly unusual. The meeting seemed more like an internal company pow-wow, where the CEO was focused on motivating his employees, than an actual shareholder meeting.
I originally bought this stock a few months ago because it appeared to be the next GE and its price seemed too low (at the time). However, even to this day, I cannot understand the company's products very well. The CEO, Steven Berglund, spent the first part of the two hour meeting talking about how the company had "redefined" itself throughout the years and now focused on construction, advanced devices, mobile hardware, "ready-mix" solutions (just the first of very vague and confusing terms used throughout the evening), and precision agriculture. He said that TRMB does not have a growth strategy based on acquisitions, and only acquires companies to enter new markets. He focused on the fact that the "international marketplace is key to our success," and later referred to "aggressive internationalism" as the company's plan.
He indicated that he wanted to target customers in waste management, farming, forestry, and utilities. The CEO stated that in most of the markets Trimble was involved, the market penetration (a favorite phrase of CEOs) was low, and was usually around only 30%. Therefore, Trimble did not have to use words like "product life cycle" or "saturation." There was some pump-it-up phraseology of the "annihilation of complacency" and "humility and caution" being goals of the company.
Some very vague terms were used, such as saying that the company's products require "concept-selling capabilities," and Trimble "sells people things they don't know they need." For a value investor and Buffett acolyte such as myself, these phrases made me want to run for the hills.
After the CEO's presentation, there were several presenters, all of whom were touting some company product and who were unfortunately completely dull. I have heard of Six Sigma Black Belts, but now I got to hear about "Kaizen facilitators" and "customized improvement initiatives" and other terms only a business major could love. There were numerous graphs and pie charts showing how the company's products incorporated several different advantages for its customers. I felt like I was in a corporate Dilbert meeting.
But that's just it--Trimble is sort of like your Dilbert company. They are high-tech cost-saving consultants, like the guy who comes in your office and says you can save 100 million dollars by ordering fewer paper clips or by removing the olive from airplane meals. The difference is that Trimble sells high tech products that allow its customers to save money. There's no doubt that its product line is impressive--by having so many software and hardware engineers working in several different divisions, Trimble can deliver everything from its own IC Chip, boards that use other companies' IC chips, GPS systems (including ones that tell a farmer exactly where he is in his field), spatial imaging software, radios, antennas, GNSS sensors, and many other products.
There were some exhibits of the company's products, focusing on farmers, construction, GPS devices, highway projects, and reference design boards. Obviously, Trimble has a diverse product line and a diverse array of customers.
Because I still had a hard time understanding the business, and was very surprised at the lack of a Q&A session, and I went up to CEO Steven Berglund after the meeting to ask him some questions. I am not sure if it was the way I approached him, but he seemed upset that I questioned the lack of a Q&A session; to his credit, however, he did spend about 3 to 5 minutes answering my questions (in a defensive, brusque manner). I asked him about his employee breakdown. He asked which division I was talking about, but finally indicated that software engineers, then hardware engineers, then salespersons made up much of his workforce. I asked him who his major customers were. Again, he retorted that there wasn't any one big customer, not even the Caterpillar, CNH, and Nikon companies I mentioned (they were mentioned in the 10-K) . He replied that I should go read the 10-K. But he obviously hadn't read carefully all of the 10-K, because he would have known that I referred to CAT, Nikon, and CNH from page 20: "We believe that in certain business opportunities our success will depend on our ability to form and maintain alliances with industry participants, such as Caterpillar, Nikon and CNH Global."
By this time, CEO Steven Berglund was becoming more and more agitated, so I thought I'd ask him just one more question and move on. I had read in the 10-K that salespersons were paid in part on commissions, and asked him whether a significant number of his salesforce were independent contractors rather than employees. After some brusque comments asking me what I was talking about, he finally said that no, as far as he knew, the only independent contractors were "dealers," and that his salespersons were employees. That is a good sign, as it indicates that Trimble employees would be more loyal to the company as compared to independent contractors.
The food spread was fabulous, but lacked coffee and sweets. It was basically a buffett dinner style with shish kabobs, dips, bread, vegetables, and chicken entrees.
I was disappointed that CEO Steven Berglund was so brusque, as he appeared to be a good public speaker, but I suppose when you're in that position, and your stock has done well, you can afford to be that way. I am waiting on the sidelines on this stock because of its recent run-up. Many of the potential customers Trimble wants to sell to--such as local government and smaller businesses--may be cash-strapped if the economy doesn't rebound. If you believe that companies will be more likely to hire outside consultants to show them how to save money, you would probably like Trimble Navigation. There's nothing like seeing increased costs to make a CEO jump at the chance of finding more efficient ways of doing business. But if you believe that in a recession, all companies try to save money in ways that don't require paying for major products or new ways of doing things, then you may dislike Trimble's strategy. In addition, the company didn't seem to have any devices that relied on solar or nuclear power, or some other non-semiconductor-based environmental product. I kept thinking during the meeting that there must be some reason why there is such low market penetration in all of the areas Trimble is trying to sell into. Unless Trimble has re-invented the wheel--which it very well may have done, as I've never seen some of the products it offers--there will always be competitors going after the low-hanging fruit. It appears Trimble may be going after the more specialized, difficult-to-get rewards. A recession may not be kind to this company, but perhaps the big-ticket items Trimble sells will be recession-resistant. The CEO told me that his company "sells productivity." Personally, I am more of a skeptic, but if you like the sound of a company that is diversified and sells productivity, then this is the stock for you. I just wish CEO Steven Berglund hadn't been so brusque and understood that a shareholder meeting was also designed for non-employee shareholders to understand his company.
I originally bought this stock a few months ago because it appeared to be the next GE and its price seemed too low (at the time). However, even to this day, I cannot understand the company's products very well. The CEO, Steven Berglund, spent the first part of the two hour meeting talking about how the company had "redefined" itself throughout the years and now focused on construction, advanced devices, mobile hardware, "ready-mix" solutions (just the first of very vague and confusing terms used throughout the evening), and precision agriculture. He said that TRMB does not have a growth strategy based on acquisitions, and only acquires companies to enter new markets. He focused on the fact that the "international marketplace is key to our success," and later referred to "aggressive internationalism" as the company's plan.
He indicated that he wanted to target customers in waste management, farming, forestry, and utilities. The CEO stated that in most of the markets Trimble was involved, the market penetration (a favorite phrase of CEOs) was low, and was usually around only 30%. Therefore, Trimble did not have to use words like "product life cycle" or "saturation." There was some pump-it-up phraseology of the "annihilation of complacency" and "humility and caution" being goals of the company.
Some very vague terms were used, such as saying that the company's products require "concept-selling capabilities," and Trimble "sells people things they don't know they need." For a value investor and Buffett acolyte such as myself, these phrases made me want to run for the hills.
After the CEO's presentation, there were several presenters, all of whom were touting some company product and who were unfortunately completely dull. I have heard of Six Sigma Black Belts, but now I got to hear about "Kaizen facilitators" and "customized improvement initiatives" and other terms only a business major could love. There were numerous graphs and pie charts showing how the company's products incorporated several different advantages for its customers. I felt like I was in a corporate Dilbert meeting.
But that's just it--Trimble is sort of like your Dilbert company. They are high-tech cost-saving consultants, like the guy who comes in your office and says you can save 100 million dollars by ordering fewer paper clips or by removing the olive from airplane meals. The difference is that Trimble sells high tech products that allow its customers to save money. There's no doubt that its product line is impressive--by having so many software and hardware engineers working in several different divisions, Trimble can deliver everything from its own IC Chip, boards that use other companies' IC chips, GPS systems (including ones that tell a farmer exactly where he is in his field), spatial imaging software, radios, antennas, GNSS sensors, and many other products.
There were some exhibits of the company's products, focusing on farmers, construction, GPS devices, highway projects, and reference design boards. Obviously, Trimble has a diverse product line and a diverse array of customers.
Because I still had a hard time understanding the business, and was very surprised at the lack of a Q&A session, and I went up to CEO Steven Berglund after the meeting to ask him some questions. I am not sure if it was the way I approached him, but he seemed upset that I questioned the lack of a Q&A session; to his credit, however, he did spend about 3 to 5 minutes answering my questions (in a defensive, brusque manner). I asked him about his employee breakdown. He asked which division I was talking about, but finally indicated that software engineers, then hardware engineers, then salespersons made up much of his workforce. I asked him who his major customers were. Again, he retorted that there wasn't any one big customer, not even the Caterpillar, CNH, and Nikon companies I mentioned (they were mentioned in the 10-K) . He replied that I should go read the 10-K. But he obviously hadn't read carefully all of the 10-K, because he would have known that I referred to CAT, Nikon, and CNH from page 20: "We believe that in certain business opportunities our success will depend on our ability to form and maintain alliances with industry participants, such as Caterpillar, Nikon and CNH Global."
By this time, CEO Steven Berglund was becoming more and more agitated, so I thought I'd ask him just one more question and move on. I had read in the 10-K that salespersons were paid in part on commissions, and asked him whether a significant number of his salesforce were independent contractors rather than employees. After some brusque comments asking me what I was talking about, he finally said that no, as far as he knew, the only independent contractors were "dealers," and that his salespersons were employees. That is a good sign, as it indicates that Trimble employees would be more loyal to the company as compared to independent contractors.
The food spread was fabulous, but lacked coffee and sweets. It was basically a buffett dinner style with shish kabobs, dips, bread, vegetables, and chicken entrees.
I was disappointed that CEO Steven Berglund was so brusque, as he appeared to be a good public speaker, but I suppose when you're in that position, and your stock has done well, you can afford to be that way. I am waiting on the sidelines on this stock because of its recent run-up. Many of the potential customers Trimble wants to sell to--such as local government and smaller businesses--may be cash-strapped if the economy doesn't rebound. If you believe that companies will be more likely to hire outside consultants to show them how to save money, you would probably like Trimble Navigation. There's nothing like seeing increased costs to make a CEO jump at the chance of finding more efficient ways of doing business. But if you believe that in a recession, all companies try to save money in ways that don't require paying for major products or new ways of doing things, then you may dislike Trimble's strategy. In addition, the company didn't seem to have any devices that relied on solar or nuclear power, or some other non-semiconductor-based environmental product. I kept thinking during the meeting that there must be some reason why there is such low market penetration in all of the areas Trimble is trying to sell into. Unless Trimble has re-invented the wheel--which it very well may have done, as I've never seen some of the products it offers--there will always be competitors going after the low-hanging fruit. It appears Trimble may be going after the more specialized, difficult-to-get rewards. A recession may not be kind to this company, but perhaps the big-ticket items Trimble sells will be recession-resistant. The CEO told me that his company "sells productivity." Personally, I am more of a skeptic, but if you like the sound of a company that is diversified and sells productivity, then this is the stock for you. I just wish CEO Steven Berglund hadn't been so brusque and understood that a shareholder meeting was also designed for non-employee shareholders to understand his company.
Shutterfly Shareholder Meeting, May 22, 2008
Shutterfly's (SFLY) meeting was as simple as Netflix's but with a completely different attitude. The first thing you notice is that the employees are happy and actually like being there. The vibe is absolutely wonderful, and if you are looking for a job in Redwood City, CA, you may want to apply at this company. I've never seen so many friendly people at a shareholder meeting. Of course, I was the only person there not on the payroll, so I did look out of place. Rather than ignore me, however, the staff approached me with interest.
The format of the meeting was exactly the same as NFLX's. No presentation, just the company logo in the back. As soon as the formal part of the meeting was over, we went straight to the Q&A session. I was the only one who asked questions.
The formal part of the presentation was well-organized. Specific employees had been trained beforehand to make motions and second them. They even began their motions with "Mr. Secretary," which added to the professional atmosphere. The food was standard--some fruit, some cookies, and coffee. These food items were near some company products, such as children's books, mugs, and other merchandise, showing SFLY's diverse product line.
First, I have to say that I was impressed with SFLY's CEO, Jeffrey Housenbold. Mr. Housenbold is one of the most articulate and prepared CEOs I have ever met. His responses to my questions were detailed and on point. My first question actually combined three issues, and he methodically responded to each issue with statistics and easy-to-understand responses that bolstered the company's image. Not once did I feel as if I was getting a prepared line--he was a breath of fresh air, especially after the NFLX CEO's terse responses. (SFLY's meeting, by the way, was held at 11AM, another indicator that the company wanted to welcome shareholders rather than drive them away by holding the meeting at 3PM.) SFLY's proxy statement also contains pictures and bios of the management team, which is an astute business move, because the pictures personalize the company more.
Some background from the company's Yahoo's Finance profile page: Shutterfly "produces and sells photo books; personalized calendars; greeting cards; photo-based merchandise, including mugs, mouse pads, coasters, tote bags, desk organizers, puzzles, playing cards, multi-media DVDs, magnets, and keepsake boxes; ancillary products, such as frames, photo albums, and scrapbooking accessories; and photo prints. It also produces customized children's books. "
My first question was what competitive advantage SFLY had over Flickr, whether the company was going to enter into partnerships like Flickr and Yahoo's, and what strategies the company had for growth.
Mr. Housenbold responded that SFLY manufactured its own products and was capitalizing on demand for various products, such as calendars, mugs, scrapbooking, and other merchandise. [from 10K: SFLY owns production facilities in Hayward, CA and Charlotte, NC, and may open more facilities in Charlotte.] He said that SFLY's business model was "permission-based sharing of memories," versus the less personal Flickr model. He indicated that less than 1% of Flickr's users generated about 40% of their content (my number may be incorrect, as I was quickly taking notes--but it was a very high number) and unlike SFLY, Flickr's revenue came from advertising rather than directly from its users and customers. Also, because SFLY controls its own manufacturing, they can enforce high quality standards, while Flickr cannot. The CEO continued to focus on how his company delivered quality. It was a flashback to Peet's vision, where Peet's CEO was basically saying that the company was going to focus on quality and let the product speak for itself through word of mouth.
Mr. Housenbold then talked about "customer centricity," a fun phrase. He said that his company offered 49 combinations of designs and its software and website were easy to use. On the other hand, Flickr did not have a direct e-commerce model and relied on advertising revenue, which implied that Flickr would be more beholden to its advertisers than its actual customers and consumers.
He said that Yahoo/Flickr had achieved [only] around 4 million dollars of revenue from 100 million accounts through ad-based generation (these numbers was be off due to my slow handwriting and attempt to capture all of his responses verbatim). In fact, Yahoo had actually shut down part of Flickr because it wasn't generating sufficient ad revenue. Meanwhile, with respect to growth, in 1999, SFLY started with 2 million customers and now had 9 million customers. The company was benefiting from a "viral marketing effect," where its brand name was entering the public sphere through its reputation and word of mouth on the internet.
As far as partnerships were concerned, his company has partnerships with Amazon.com, Border's, Target, and many other major companies. 78% of SFLY's revenue came from existing customers, which is impressive but indicates that the company isn't growing its customer base very quickly.
My second question was that I now understood how SFLY was different from Flickr (ad revenue business model vs. direct e-commerce model), but how was his company different from Snapfish? (a more similar competitor)
Mr. Housenbold first said that Snapfish (http://www.snapfish.com/) didn't own any manufacturing facilities, a hit on the quality of their products. He said that Snapfish has said they want to be the Walmart of online photos, and they are gearing their services towards consumers who are more "price-conscious." It was a very nice dig, i.e., if you're poor and dislike quality, you go to Snapfish, not us. He also politely attacked Snapfish's loyalty to its customers by saying that after 6 months of non-activity, Snapfish deletes all memory. Basically, SFLY was "Nordstrom," while Snapfish was Walmart. And if that style of polite dismantling of a competitor doesn't impress you, he ended with this riposte: as far as he knew, Snapfish has never been profitable, while SFLY has generated a profit. If I was Snapfish's CEO, I would have felt compelled to commit seppuku after hearing how different the companies were. Snapfish's own website states that it is the "best value in photography," which doesn't sound so great after hearing the comparison to Walmart. One wants a quality product when it comes to memories.
My friend, who has used SFLY's website, said that she was impressed with it. She said that the website, for free, allows users to modify their pictures, making them lighter, darker, etc. She said she was also impressed with the available products, such as the mugs. She hoped that SFLY would allow consumers to continue to keep their photos stored online for free. I indicated that the company had an incentive to allow free photo storage, because it would encourage consumers to buy SFLY's products in the future.
SFLY's 10K was one of the best-drafted 10Ks I've ever read. It had a great explanation of the U.S. Supreme Court ruling that established the principle of non-taxation for internet companies lacking a proper nexus with certain states. The 10K doesn't list any cases by name, but it is referring primarily to Quill v. North Dakota (1992). See the following webpage for more information on the list of other relevant cases, i.e. Oklahoma Tax Comm'n v Jefferson Lines (1995) and Complete Auto Transit v Brady (1977):
http://www.law.umkc.edu/faculty/projects/ftrials/conlaw/
interstatetax.htm
Basically, a company needs to have a sufficient nexus with a state before being able to tax the company. A physical presence, such as a warehouse with employees, is obviously sufficient to form the necessary connection because the company derives benefits from the state, but there are many gray areas. SFLY states that it is collecting sales and use taxes where it has "property and/or employees." (10K, page 25)
If it's not obvious by now, I am very impressed with this company. However, its share price hovers near a 52 week low. Is SFLY a value play? Here is my thinking:
1) Why does this company need to be public rather than private? There are no major liability issues or a need for money to expand or build stores. The CEO never mentioned that he wanted to build retail stores to sell directly to the public. It seems very strange that such a company would prefer to be public and endure Sarbanes-Oxley compliance and other issues that divert resources from serving its customers. I predict that at some point, perhaps within five years, if the stock price remains stagnant, this company will be bought out, merge, or go private.
2) Flickr actually does allow permission-based photo sharing--you can set certain photos to be seen only by your friends and family and can restrict permissions. But that's a minor issue, because Flickr obviously doesn't allow its users to modify photos and is clearly geared towards a different audience, just as the CEO indicated.
3) The majority (52%) of SFLY's revenue comes in the last quarter of the year, probably in X-Mas and Thanksgiving sales. (From 10K, page 14)
4) If it can convince Wall Street that it will be able to grow at double-digit rates, SFLY's stock price will increase. For now, however, I don't see how SFLY is going to achieve a high growth rate. It doesn't really advertise--and it seems like it's taking the Peet's grass roots marketing model, where word of mouth drives growth. But the problem with a company like SFLY using Peet's marketing strategy of "quality + reputation + product-sells-itself = success" (my words, not theirs) is that Peet's has retail stores, making it is easier for others to recognize its products. I am sure you can all recognize a Peet's paper cup instantly if you saw one. But SFLY's products won't enter the mainstream as readily as a food item. Instead, the growth will probably happen as family members, the ones most likely to pay for products like children's books, get introduced to the services and products. If SFLY's strategy is focused on families and grandparents, that's a slower way to grow than trying to get national brand name recognition through general advertising and by directing traffic to its website.
5) SFLY is currently being sued by Fotomedia and Parallel Networks in the Eastern District of Texas. (What's so special about the Eastern District of TX? There's definitely some forum shopping going on there.) I suspect it may be difficult to see future prospects clearly until these lawsuits get resolved.
I will keep my eye on this company. The CEO was friendly and humble and came up to me after the meeting to talk. He indicated that he was a user of SFLY before he became the CEO, which is another plus. Another shareholder came late to the meeting, and the CEO sought him out and went to speak to him. This is a friendly company that should continue to have a great reputation.
See also, Interview with Mr. Housenbold: http://sramanamitra.com/2008/03/20/
shutterflys-strategy-a-conversation-with-ceo-jeff-housenbold-part-1/
The format of the meeting was exactly the same as NFLX's. No presentation, just the company logo in the back. As soon as the formal part of the meeting was over, we went straight to the Q&A session. I was the only one who asked questions.
The formal part of the presentation was well-organized. Specific employees had been trained beforehand to make motions and second them. They even began their motions with "Mr. Secretary," which added to the professional atmosphere. The food was standard--some fruit, some cookies, and coffee. These food items were near some company products, such as children's books, mugs, and other merchandise, showing SFLY's diverse product line.
First, I have to say that I was impressed with SFLY's CEO, Jeffrey Housenbold. Mr. Housenbold is one of the most articulate and prepared CEOs I have ever met. His responses to my questions were detailed and on point. My first question actually combined three issues, and he methodically responded to each issue with statistics and easy-to-understand responses that bolstered the company's image. Not once did I feel as if I was getting a prepared line--he was a breath of fresh air, especially after the NFLX CEO's terse responses. (SFLY's meeting, by the way, was held at 11AM, another indicator that the company wanted to welcome shareholders rather than drive them away by holding the meeting at 3PM.) SFLY's proxy statement also contains pictures and bios of the management team, which is an astute business move, because the pictures personalize the company more.
Some background from the company's Yahoo's Finance profile page: Shutterfly "produces and sells photo books; personalized calendars; greeting cards; photo-based merchandise, including mugs, mouse pads, coasters, tote bags, desk organizers, puzzles, playing cards, multi-media DVDs, magnets, and keepsake boxes; ancillary products, such as frames, photo albums, and scrapbooking accessories; and photo prints. It also produces customized children's books. "
My first question was what competitive advantage SFLY had over Flickr, whether the company was going to enter into partnerships like Flickr and Yahoo's, and what strategies the company had for growth.
Mr. Housenbold responded that SFLY manufactured its own products and was capitalizing on demand for various products, such as calendars, mugs, scrapbooking, and other merchandise. [from 10K: SFLY owns production facilities in Hayward, CA and Charlotte, NC, and may open more facilities in Charlotte.] He said that SFLY's business model was "permission-based sharing of memories," versus the less personal Flickr model. He indicated that less than 1% of Flickr's users generated about 40% of their content (my number may be incorrect, as I was quickly taking notes--but it was a very high number) and unlike SFLY, Flickr's revenue came from advertising rather than directly from its users and customers. Also, because SFLY controls its own manufacturing, they can enforce high quality standards, while Flickr cannot. The CEO continued to focus on how his company delivered quality. It was a flashback to Peet's vision, where Peet's CEO was basically saying that the company was going to focus on quality and let the product speak for itself through word of mouth.
Mr. Housenbold then talked about "customer centricity," a fun phrase. He said that his company offered 49 combinations of designs and its software and website were easy to use. On the other hand, Flickr did not have a direct e-commerce model and relied on advertising revenue, which implied that Flickr would be more beholden to its advertisers than its actual customers and consumers.
He said that Yahoo/Flickr had achieved [only] around 4 million dollars of revenue from 100 million accounts through ad-based generation (these numbers was be off due to my slow handwriting and attempt to capture all of his responses verbatim). In fact, Yahoo had actually shut down part of Flickr because it wasn't generating sufficient ad revenue. Meanwhile, with respect to growth, in 1999, SFLY started with 2 million customers and now had 9 million customers. The company was benefiting from a "viral marketing effect," where its brand name was entering the public sphere through its reputation and word of mouth on the internet.
As far as partnerships were concerned, his company has partnerships with Amazon.com, Border's, Target, and many other major companies. 78% of SFLY's revenue came from existing customers, which is impressive but indicates that the company isn't growing its customer base very quickly.
My second question was that I now understood how SFLY was different from Flickr (ad revenue business model vs. direct e-commerce model), but how was his company different from Snapfish? (a more similar competitor)
Mr. Housenbold first said that Snapfish (http://www.snapfish.com/) didn't own any manufacturing facilities, a hit on the quality of their products. He said that Snapfish has said they want to be the Walmart of online photos, and they are gearing their services towards consumers who are more "price-conscious." It was a very nice dig, i.e., if you're poor and dislike quality, you go to Snapfish, not us. He also politely attacked Snapfish's loyalty to its customers by saying that after 6 months of non-activity, Snapfish deletes all memory. Basically, SFLY was "Nordstrom," while Snapfish was Walmart. And if that style of polite dismantling of a competitor doesn't impress you, he ended with this riposte: as far as he knew, Snapfish has never been profitable, while SFLY has generated a profit. If I was Snapfish's CEO, I would have felt compelled to commit seppuku after hearing how different the companies were. Snapfish's own website states that it is the "best value in photography," which doesn't sound so great after hearing the comparison to Walmart. One wants a quality product when it comes to memories.
My friend, who has used SFLY's website, said that she was impressed with it. She said that the website, for free, allows users to modify their pictures, making them lighter, darker, etc. She said she was also impressed with the available products, such as the mugs. She hoped that SFLY would allow consumers to continue to keep their photos stored online for free. I indicated that the company had an incentive to allow free photo storage, because it would encourage consumers to buy SFLY's products in the future.
SFLY's 10K was one of the best-drafted 10Ks I've ever read. It had a great explanation of the U.S. Supreme Court ruling that established the principle of non-taxation for internet companies lacking a proper nexus with certain states. The 10K doesn't list any cases by name, but it is referring primarily to Quill v. North Dakota (1992). See the following webpage for more information on the list of other relevant cases, i.e. Oklahoma Tax Comm'n v Jefferson Lines (1995) and Complete Auto Transit v Brady (1977):
http://www.law.umkc.edu/faculty/projects/ftrials/conlaw/
interstatetax.htm
Basically, a company needs to have a sufficient nexus with a state before being able to tax the company. A physical presence, such as a warehouse with employees, is obviously sufficient to form the necessary connection because the company derives benefits from the state, but there are many gray areas. SFLY states that it is collecting sales and use taxes where it has "property and/or employees." (10K, page 25)
If it's not obvious by now, I am very impressed with this company. However, its share price hovers near a 52 week low. Is SFLY a value play? Here is my thinking:
1) Why does this company need to be public rather than private? There are no major liability issues or a need for money to expand or build stores. The CEO never mentioned that he wanted to build retail stores to sell directly to the public. It seems very strange that such a company would prefer to be public and endure Sarbanes-Oxley compliance and other issues that divert resources from serving its customers. I predict that at some point, perhaps within five years, if the stock price remains stagnant, this company will be bought out, merge, or go private.
2) Flickr actually does allow permission-based photo sharing--you can set certain photos to be seen only by your friends and family and can restrict permissions. But that's a minor issue, because Flickr obviously doesn't allow its users to modify photos and is clearly geared towards a different audience, just as the CEO indicated.
3) The majority (52%) of SFLY's revenue comes in the last quarter of the year, probably in X-Mas and Thanksgiving sales. (From 10K, page 14)
4) If it can convince Wall Street that it will be able to grow at double-digit rates, SFLY's stock price will increase. For now, however, I don't see how SFLY is going to achieve a high growth rate. It doesn't really advertise--and it seems like it's taking the Peet's grass roots marketing model, where word of mouth drives growth. But the problem with a company like SFLY using Peet's marketing strategy of "quality + reputation + product-sells-itself = success" (my words, not theirs) is that Peet's has retail stores, making it is easier for others to recognize its products. I am sure you can all recognize a Peet's paper cup instantly if you saw one. But SFLY's products won't enter the mainstream as readily as a food item. Instead, the growth will probably happen as family members, the ones most likely to pay for products like children's books, get introduced to the services and products. If SFLY's strategy is focused on families and grandparents, that's a slower way to grow than trying to get national brand name recognition through general advertising and by directing traffic to its website.
5) SFLY is currently being sued by Fotomedia and Parallel Networks in the Eastern District of Texas. (What's so special about the Eastern District of TX? There's definitely some forum shopping going on there.) I suspect it may be difficult to see future prospects clearly until these lawsuits get resolved.
I will keep my eye on this company. The CEO was friendly and humble and came up to me after the meeting to talk. He indicated that he was a user of SFLY before he became the CEO, which is another plus. Another shareholder came late to the meeting, and the CEO sought him out and went to speak to him. This is a friendly company that should continue to have a great reputation.
See also, Interview with Mr. Housenbold: http://sramanamitra.com/2008/03/20/
shutterflys-strategy-a-conversation-with-ceo-jeff-housenbold-part-1/
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