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Rise, Fall, Rise Again

Posted on Friday, Mar 3rd 2006

Remember the Optical Communication bubble of the late nineties? Hundreds of companies got funded, until that market collapsed?

However, before the collapse, Finisar, founded in 1996, was one company that went public and made beaucoup d’argent for everyone around the table. Stock price hit a high of $61.67 in 2000, on an annual profitable revenue of $67 Million.

Then came the crash. In 2003, stock price collapsed to 42 cents, even though revenue was a decent $166 Million. Profitability, however, was a huge issue, and the company lost $620 Million that year.

Fast forward to 2006. Great turn-around story … pretty cool reading!

Needham & Company reports:

Finisar delivered a blowout fiscal Q3, with strong qoq revenue growth, which when combined with a sequential improvement in margins, resulted in a huge surge in profitability. This one-quarter surge in profitability has been more than three years in the making, when Finisar took the controversial steps of acquiring an offshore facility, designing its own ASICs, and buying its own fab and laser supplier. These steps have enabled Finisar to maintain performance, reliability, and service, resulting in steady gains in market share. We are raising estimates, our rating to Strong Buy, and our TP to $6.

Fiscal 3Q revenues were $93.5 million, above guidance of $88 to $93 million, up 8% qoq and 28% yoy. Organic growth of 20% is expected for F06. Pro-forma gross margins grew more than 6 points qoq, and pro-forma operating margins of 10.7% are well on their way towards the 15% targeted for 2HFY07. GAAP and pro-forma EPS were $0.03, far ahead of our breakeven estimate and guidance of $0.00-$0.01.

We are raising fiscal 2006 revenue and EPS estimates sharply to $362 million and $0.03 from $353 million and ($0.01.) We are raising fiscal 2007 revenue and EPS estimates to $434 million and $0.16 from $413 million and $0.08.

Doubling price target to $6. Our $6 target is based on 25x our unpublished fiscal 2007 EPS estimate of $0.22.

Finisar is the first of our optical communication universe companies to return to sustainable profitability. We are raising our rating to Strong Buy based on our confidence in our estimates, as supported by the strong performance in Q3 and the steady improvement in margins expected in F2007.

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Dassault Acquires MatrixOne

Posted on Thursday, Mar 2nd 2006

MatrixOne has been wanting to get acquired for quite a while. Finally, it has happened.

MatrixOne, the provider of product lifecycle management (PLM) tools, is being acquired by France’s Dassault Systems in a cash deal valued at roughly $408 million. More coverage here and here.

The basis for the deal, besides consolidation, is Dassault’s motivation to diversify in segments other than Aerospace and Automotive, their main strongholds, as well as the fact that PLM is a higher growth market than CAD, Dassault’s mainstay.

MatrixOne has been in a very tight spot for a number of years, trying to be Switzerland in an industry, that is, by and large, driven by deep CAD intergation (a la ProE+Windchill from PTC). This announcement is an absolutely splendid news for them, because now they CAN align with a deep-pocket CAD vendor, and access IBM Global Services as a powerful sales channel. IBM GS is Dassault’s primary SI channel, and is an enourmously effective one for an industry like PLM that depends heavily on third party integrators.

Frankly, I don’t think you can be successful being Switzerland in the CAD industry, which is why I have questioned Adobe’s strategy around 3D Acrobat and suggested that Adobe starts to align with Autodesk’s enemy camp.

MatrixOne has lost money every year for the last 10 years, except in 2001 they made a small profit. Revenues have stagnated and hovered around the $100M-$120M range for 5 years, causing a great deal of investor anxiety. What happened today, in form of an exit into Dassault, should have happened long back: i.e. alignment with a CAD vendor.

Meanwhile, they experimented with EDA, by acquiring Synchronicity, which was a decent strategic diversification initiative. Dassault’s interest in Electro-Mechanical will find good vibes in this area.

Bottomline: a long overdue acquisition. Glad it has happened.

RTL Hand-off & Predictive Prototyping

Posted on Sunday, Feb 26th 2006

I don’t recall exactly when Gary Smith, Chief EDA Analyst at Gartner coined the phrase Silicon Virtual Prototyping (SVP). It has been a while.

Many EDA industry insiders believe accurate SVP and RTL Hand-off to be the holy grail in the increasingly complex and expensive IC Design process. The hypothesis is, if you can find errors, including architecture level issues with a design early on in the design cycle, you can fix them early too. Degrees of freedom are high in the early stages of design, whereas after Synthesis, and even more so after Layout, fixing fundamental design problems becomes exceedingly difficult and expensive.

Predicated upon this premise, Tommy Eng was one of the first to launch a company, Tera Systems. There have been other players like InTime and Atrenta, and several ASIC vendors embraced the notion of RTL Hand-off as the preferred means of receiving design specs, including IBM. Almost all the structured ASIC vendors also embraced the methodology, although at this point, the industry at large is still using Netlist Handoff, as the preferred methodology, not RTL Hand-off.

The approach for estimating very large chips that Tera came up with, was to create a high-level abstraction of functional building blocks (adders, multiplexers, etc.), analyze and optimize those blocks, establish the constraints, and then prototype the full chip by applying those constraints at that higher level of abstraction. All aspects of design can be put through the same treatment: Timing, Power, Signal Integrity, Testability, and Physical, the last being one of the toughest to estimate.

I had asked industry veteran Ron Rohrer, once: “Why is it so difficult to deliver an RTL prototyping solution?” Ron identified the key issue that has killed many attempts at solving the same problem. “Accuracy”, he replied.

Indeed, the moment you have to estimate a design, the accuracy of the estimate becomes a hairy issue.

There are still other brand new startups taking a crack at the same problem, and some are walking the funding circuits. It remains to be seen who else gets how far.

It is a difficult, important problem. One of the last few BIG opportunities remaining in EDA, around which, perhaps, a reasonably large $100 Million company can be built, because no matter what, the solution is so incredibly valuable, that customers WILL pay for it.

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Steve Jobs Could NOT Care Less. He Should.

Posted on Saturday, Feb 25th 2006

Apple’s Intel Era Seen Set To Launch. Apple could be adding versions of its Mac Mini and iBook laptop with Intel chips next week.

What is Steve Jobs after? We know that he is after the iPod loving teenagers. But to win the big battle in PC market share, he absolutely needs to turn his attention to the enterprise, and sink his teeth into a killer app that aligns with Apple’s core competency.

Question: What category of applications leverages the MAC Operating System’s over-riding winning value proposition?
Answer: Graphics.

Apple already has a strong presence in the Creative Professionals segment, where Adobe’s Suite, as well as Apple’s own, have been a great success.

There is, however, the MUCH bigger CAD market, which Apple should think about as its next beachhead into the enterprise.

CAD applications are heavy, especially 3D CAD, involving intensive graphics maneuvering. Today, the global Mechanical Design (MCAD) + Product LifeCycle Management (PLM) space is well above $10 Billion. Steve should strike alliances with Dassault, PTC and UGS, and position Apple in this segment. Autodesk is already aligned with Microsoft. It has always been. Apple’s opportunity is to align with the other CAD giants.

This would create pull for a lot of Intel-MACs. After all, the killer app that established Windows, was Microsoft Office. Where is Apple’s killer app for the enterprise?

Technorati: Valuation Without Revenue?

Posted on Thursday, Feb 23rd 2006

Here is a great article by Dave Winer: How much has been invested in RSS? Besides the large company driven investment cited in the article (Microsoft, Yahoo, …), it also cites examples like venture investments in Technorati, Feedburner, Newsgator, Pheedo, etc.

Let’s take the example of Technorati. It’s Alexa traffic ranking is quite high (561 today), and it is the unquestionable center of the Blogosphere. The obvious revenue model of Google AdSense generates some money. The question is, does it generate enough?

Skype has recently proved that Valuation Without Revenue a la Hotmail, is alive and well. Will Technorati be able to follow suit?

According to Dave Winer’s calculations, more than $8 Billion has been invested in the RSS and Blog eco-system. However, as both Skype and Hotmail have proved in the past, these were businesses without business models.

In the Web 2.0 era, it appeared in the beginning that investors were gun-shy about such businesses. There was much talk about “fundamentals”.

Are we shifting gears again, and getting carried away on the wings, this time, of RSS?

There are proven models in the advertising industry, one of the most important of which is Segmentation. Advertisers like to advertise to demographics and psychographics that are likely to buy their products. Today, Yahoo is a portfolio of haphazardly organized content and services which don’t clearly align with segments desired by advertisers. Neither, for that matter, is Google. For sure, not Technorati.

For the moment, due to lack of viable alternatives, Google and Yahoo continue to reign supreme in online advertising. The rise of MySpace, however, is not going unnoticed by Madison Avenue.

Technorati, especially, needs to ask itself the question: What is my segmentation strategy, around which I can offer my advertisers a compelling marketing vehicle?

The answer is the secret to monetizing their enormous and invaluable traffic momentum.

CNet Also On The Block

Posted on Wednesday, Feb 22nd 2006

Content deals are hot.

I wrote about iVillage earlier. CNet is also an acquisition target. Rafat Ali reports that CNET Networks has hired investment banker Zander Lurie from J.P. Morgan Chase & Co. Lurie, who advised Internet companies on M&A at J.P. Morgan, will be a senior VP for strategy and development at CNET.

Let’s take a look at CNet’s financials.

They did ~$350 Million in revenues in 2005, a decent 120% growth over 2004. Since 2004, they have also started being profitable. Things have certainly started looking up.

To build this company, however, has been an uphill task. Between 1995 and 2003, CNet lost $2.5 Billion. 1998 and 1999 were profitable years, and at the height of the boom, they made a net profit of $417 Million in 1998. But the most severe downturn years ’00 – ’02 have been terribly challenging.

Stock Price has been a dizzying roller-coaster ride, with an all-time high of $79.88 in 1999, to a frightening 60 cents in 2002.

At the moment, CNet has a good $2 Billion market cap, and a stable mid-teens stock price. With a premium, a deal price will probably amount to about $2.5 Billion.

Today’s content businesses, I am sure, will have it a lot easier. However, CNet and iVillage are pioneers of the pure content business model. They deserve a lot of applause for sticking it out.

Indian Cricket Reaches Commercial Maturity

Posted on Wednesday, Feb 22nd 2006

These days, sports like Football, Baseball, Basketball, and Soccer are huge commercial eco-systems. Nimbus Communications recently bought Digital Media rights for Indian Cricket for $612 Million in a four year global deal, underscoring Cricket’s status gain in the big-money world of sports marketing.

Cricket, however, owes its commercial maturity to a man named Jagmohan Dalmiya.

An excerpt from his profile by Tanmoy Mitra:

“He is considered a master strategist, an opportunist who plays the waiting game and a man who almost never loses his cool. In essence, Jagmohan Dalmiya has all the qualities of a politician who has been accused of bringing politics in to cricket in sharp contradiction to the adage that sports and politics do not mix. But even his worst critics will admit that Jagmohan Dalmiya’s business vision has transformed Indian cricket.

If the Board of Control for Cricket in India (BCCI) is the richest cricketing body in the world, Dalmiya deserves his fair share of credit. Everyone, from the players to those remotely associated with the game, is making serious money. His marketing skills have taken the game to new geographies. From Bangladesh to the Netherlands and Bangkok to Toronto, Dalmiya has explored every possible angle to popularise cricket around the world.

As a cricketer, he opened the batting and kept wicket for one of Kolkata’s leading clubs and also represented his university. Dalmiya joined the BCCI in 1979 and played a major role in bringing the cricket world cup to India and Pakistan in 1987. In 1992-93, as secretary of the board, he strategised the commercialisation of the game, which turned around the financial status of the BCCI, bringing the body some serious money — the board’s balance sheet, which showed a deficit of Rs81.60 lakh in 1992-93 had declared a working profit of Rs15.34 lakh by the end of the next financial year.

Dalmiya brought the 1996 World Cup to the Indian subcontinent by promising a larger share of profits to the International Cricket Council’s 23 associate members, should they vote for it to be held in the subcontinent. The world cup was a huge financial success for the Asian Cricket Council.

Globalisation of cricket entered a new phase with Dalmiya being elected chairman of the ICC in 1997. Expansion of cricket began at this stage. From Asia to Europe and to the North American continent, cricket generated millions in sponsorships and television rights and the ICC became a rich sporting body. With improved infrastructure, cricket started to be recognised seriously in the world of sports. It will soon join the Olympics as a competitive global sport.”

Nimbus Communications bid $612.18 million (Rs 2,714 crore) to bag the four-year global media rights for cricket in India, clearly an endorsement of the sport as a leading advertising vehicle.

There are many other sports, worldwide, with affinities within specific cultures. The Chinese love Table Tennis, for instance.

A couple of years back, a new venture called The Tennis Channel was launched, which counts amongst its investors Andre Agassi and Pete Sampras, as well as Battery Ventures, Bain Capital, and leading sports marketing firm, IMG.

Digital Media could benefit immensely if some of those other under-marketed sports are brought up a few notches, and, needless to say, so would the sports.

Should Google Support Useless Sites?

Posted on Tuesday, Feb 21st 2006

Simon Dumenco writes in AdAge:

Meanwhile, everybody talks about how Google’s AdSense program is great and revolutionary because it’s given all manner of Web sites and blogs easy access to advertising dollars. But actually, I think it sucks that AdSense offers automatic, indiscriminate ad support to lots of awful, amateurish, useless sites. Forgive me, but I’m nostalgic for the days when media buyers, rather than computer algorithms, decided what advertising vehicles were actually roadworthy.

As an inevitable side-effect of the spread of democratic new media, lots of garbage has accumulated on the web. Simon poses a very important and appropriate question: should Google AdSense, Yahoo Publisher’s Network, and other big algorithm-driven Ad networks support these, without any calibration of whether their content is worthy of advertising dollars?