LogMeIn Files (Again) for IPO

Posted on June 16, 2009 | Leave a comment

Another tech company, LogMeIn, lit up the blogosphere (e.g., this story) today by pricing its IPO at $14 to $16 for 6.67M shares. It’s been a long row to hoe for LogMeIn; they filed their original S1 in January, 2008.

The revised S1 was filed 6/16/09. Here are some quick highlights:

  • 2008 revenues of $51.7M
  • 2008 revenue growth of 91%
  • 2008 operating “income” of -$5.4M, down from -$9.2M in 2007
  • 1Q09 revenue of $17.2M
  • 1Q09 year-over-year revenue growth of 72%
  • 1Q09 operating “income” of -$3.7M
  • 2008 sales and marketing costs of 61% of revenue
  • $27M in cash, pre-financing

At first blush, you might wonder how this sales-and-marketing-intensive, money-losing operation can be generating cash and the answer is, alas, a high-growth subscription business. You sell annual subscriptions (94% have a one-year term), take the cash up-front, and amortize the revenue over the year. This explains part of it.

But the rest comes in the renewal rate, which they say is currently 80% (page 61). Let’s do some quick, very rough math. If 80% of the 2007 revenue renews, then of the $51.7M in 2008 revenue, $30.1M is new and $21.6M is recurring.

Since the sales and marketing (S&M) cost of renewals should be negligible, you should more properly analyze S&M expense as a percent of new revenues, not total revenues. When you do so, you see that S&M as a percent of new-revenues is 105%. So they’re spending $1.05 to get each $1.00 in new revenue. Does that make sense? Sure, if the renewal rate stays high.

At some credibility risk, I’m going to argue that their financials still roughly validate my currently asserted 50/50/0 IPO bar, which means $50M in TTM revenues, 50%+ growth, and 0% EBITDA (or operating income).

LogMeIn has:

  • $59M in TTM revenues
  • 72% year-over-year quarterly growth rate (decelerating from the 91% annual growth rate)
  • -37% operating income in 1Q09 and -10% operating income in 2008

So how does this gibe with the 50/50/0 model?

  • They’re on-target with respect to size (good)
  • They’re high on growth rate (good), but it’s decelerating (bad), but then again it’s subscription (very good)
  • They’re low on operating income (bad)

Good + good + bad + very good + bad = very good. QED.

Hence, with one eye closed and some body English, I can argue that this indeed is another validation of my 50/50/0 IPO bar hypothesis.

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Posted in IPO

The First Rule of Data Centers: Don't Talk About Data Centers

Posted on June 15, 2009 | Leave a comment

Who’d have guessed that data centers were like Fight Club?

Trying to chart the cloud’s geography can be daunting, a task that is further complicated by security concerns. “It’s like ‘Fight Club,’ ” says Rich Miller, whose Web site, Data Center Knowledge, tracks the industry. “The first rule of data centers is: don’t talk about data centers.”

The excerpt is from a great article, entitled Data Center Overload, in this past Sunday’s New York Times Magazine. The article provides a layperson’s introduction to the cloud and to the hidden, massive data centers — which collectively now consume more power than Sweden — that underlie it. Excerpt:

Yet as data centers increasingly become the nerve centers of business and society — even the storehouses of our fleeting cultural memory (that dancing cockatoo on YouTube!) — the demand for bigger and better ones increases: there is a growing need to produce the most computing power per square foot at the lowest possible cost in energy and resources. All of which is bringing a new level of attention, and challenges, to a once rather hidden phenomenon. Call it the architecture of search: the tens of thousands of square feet of machinery, humming away 24/7, 365 days a year — often built on, say, a former bean field — that lie behind your Internet queries.

The full story is here.

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Posted in Cloud

Things Not To Do: Declare Your Category Dead

Posted on June 13, 2009 | 6 comments

I was reading this interesting post, Emerging Enterprise Content Management Trends, on the Gilbane Group blog this morning when I stumbled into this rather amazing soundbite.

Jeff Fried, VP Product Management for Microsoft’s FAST search engine actually proclaimed that “keyword search is dead!”

Now, last I checked, Fast was doing around $50M — oh sorry, I mean post-correction of accounting irregularities, $35M a quarter in enterprise search revenue and that Microsoft paid $1B for the company in order to do a “best defense is a good offense” strategy vs. Google.

So regardless of what Brother Fried or his PR mavens think, I can assure you that Microsoft doesn’t think keyword search is dead. Oh, and did I forget to mention, as they say in Brooklyn, Bada-Bing!

One of my pet peeves is people or companies who think it’s cool or controversial to declare themselves dead. Why?

The first time I heard something was “dead” was in 1987 at the original Ingres. The thing in question was the relational database. At one company meeting, our executives patiently explained to us unwashed employees that because of the ANSI SQL standard relational databases were “commoditizing” and ergo that we would be de-investing in the core RDBMS engine and instead investing in application development tools.

I’m not sure there’s a font big enough to write this, but OOPS.

In 1987, the RDBMS market in total was maybe $200M. Today it’s a approximately $10B oligopoly shared by Oracle, IBM, and Microsoft. Application development tools are somewhere between 1/10th and 1/100th the size and a high fragmented market by comparison.

What went wrong?

  • Lack of understanding of product differentiation. Yes, the products were arguably becoming more similar due to the SQL standard (e.g., Ingres still primarily spoke Quel at the time), but more similar != identical != commoditized. The possibilities of high-speed, low-cost, parallel-optimized, query-optimized, platform-optimized, non-stop or a dozen other possible bases of differentiation seemed to elude Ingres management. My take: if people can differentiate white rice (e.g., regular, parboiled, in a bag, basmati, jasmine, texmati) then you can sure as hell differentiate technology.
  • Non-observance of industry structure in RDBMS. Product differences is just one piece of “degree of rivalry” in Michael Porter’s five forces analysis. Substitute threats were low (i.e., switching costs were high), buyer power was low, barriers to entry were high, and supplier power was low. By seeing only product and not seeing industry structure, Ingres missed that a huge, oligopolistic market was in formation. (Only Oracle seemed to really get that a landgrab was in progress, that switching costs were high, and that the goal should be to get as much market share as possible in the short term — even at the cost of making a mess — which you could then sort out later.)
  • Missing industry structure in application development tools. The flip-side of the attractive industry structure in RDBMS was a rather appalling industry structure in application development tools. Barriers to entry were low, competitors were numerous, the large number of competitors was putting downward pressure on prices, and the dawn of free runtimes was already under way. Simply put, it’s very hard to make money in tools and that’s one reason why “tool” really is a four-letter word on Sand Hill Road.
  • Confusing being “up the stack” with “value”. One argument is that RDBMS is just plumbing and that tools are higher in the stack and ergo deliver more value and more potential for profit. This is wrong. Why? Because while tools are indeed higher up the stack, profit potential comes from industry structure, not stack altitude. Microsoft makes plenty of profit and they are at the bottom of the stack. The Oracle DBMS business in one level up and is a key driver of Oracle’s 40%ish operating margins. There are many misconceptions about the applications business in this regard, but I won’t go there now. See the Profit Zone for more on this general topic.
  • Too much emphasis on vision. If your vision for the future goes out so far that we’re all dead, then perhaps you should dial it back a bit to make it useful. Yes, we’re all dead in 100 years and one day RDBMS services may be as commoditized as electricity. But, some 20 years later, RDBMSs are nowhere near a commodity and a lot of people have made a lot of money in the meantime. It’s not predicting the eventual end that’s the hard part. It’s figuring out what happens along the way and how to make money during that evolution.

So before you go ahead and declare your business dead, ask yourself some questions:

  • Am I doing this for PR soundbite? If so, is it really the kind of message you want to communicate? Is this the best you can do to sound visionary?
  • If you really believe it, then should you turn in your badge and let someone run the business who doesn’t?

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Posted in Marketing, Strategy

Things a VC Will Never Say

Posted on June 12, 2009 | 2 comments

I picked up this pretty funny and, shall I say, quite cynical deck on the A VC blog by NYC-based venture capitalist Fred Wilson.

Enjoy!

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Posted in VC

Critical Thinkers vs. Critics

Posted on June 11, 2009 | 5 comments

One of the most important skills underlying a successful business career is, in my estimation, the ability to think critically. While I think it’s fairly obvious why critical thinking is important (i.e., better decision making), I’m often surprised by how poorly many many executives do it.

I make a distinction between critical thinkers and critics. I don’t subscribe to the management maxim “never raise a problem unless you have a proposed solution” for several reasons:

  • Some big, hairy problems don’t have obvious solutions and thus may never get discussed
  • The maxim encourages the submission of contrived solutions in order to avoid getting blasted for not proposing one
  • Some people may be in a perfect position to spot problems but have no idea how to fix them (e.g., the valet at a restaurant may overhear numerous complaints about the vichyssoise, but isn’t about to tell the chef how to fix it).

But the intent of the maxim isn’t all wrong. Nobody wants to work with a whiner who complains all day about the organization’s problems.

I make a distinction between (1) critic, a person who criticizes everything, generally without proposed solutions, and (2) critical thinker, a person who attacks ideas in the spirit of making them better, and who can hold both sides of an argument in their head at once,

I think I’m a pretty good critical thinker. But on the other hand maybe not. (Hint: joke.)

At one point, I had a boss who loved to stop me in meetings and say: “Dave, you’re arguing with yourself.” I think he viewed that tendency as a weakness that wasted time in the meeting. I viewed it as a strength. I sometimes think I should have replied: well, I need to argue with someone who can hold their own against me, boss.” (Yes, that’s another joke.)

Here’s a quick, one-question test to help you determine if you’re a critical thinker or a critic: do you attack your own ideas as well as those of others?

Critics attack other people’s ideas but not their own. Critical thinkers attach everyone’s ideas, especially their own. For certain disciplines (e.g., marketing positioning) one of my primary tests is not to examine the substance of a proposal, but instead to examine the critical thinking in the process that led to it:

  • How many other taglines did you think of?
  • Why didn’t you pick tagline number three?
  • Did you consider taglines based on the higher-level notion of satisfaction?
  • What’s the argument against the tagline you’re proposing?
  • What are the direct and indirect competitors taglines and their relative strengths and weaknesses?

As David Ogilvy once said: “good writing is slavery” (see page 33 of Ogilvy on Advertising). So is good positioning. And it comes from critical thinking and plenty of it.

Here’s another test to see if you’re a critical thinker: can you articulate the other side of your argument so well that folks who support it would hire you to do so? If not, then you’ve not really understood it. You’ve not really thought critically. You’ve looked at the flip-side superficially and dismissed it.

Here’s a third test, which may sound a bit obsessive: do you constantly worry that you’re not critical thinking? That you’re somehow trapped so in the box that you can’t see there is a box? If so, I think that’s a very good sign.

The other thing that sometimes impedes critical thinking is experience. Many times I’ve seen executives just hit rewind/play on business ideas. “Well this worked at (Oracle, SAP, Cadence, IBM) so it’s going to work here.”

But will it? Are we actually in the same situation as Oracle, SAP, Cadence, or IBM was when the idea worked?

It’s amazing how many people fall into that trap. The other big experience trap is false knowledge. Example: ” I know that great salespeople always have something to prove.”

“How do you know that?” I often ask. Answers I receive include:

  • “Well, [indignantly] I’ve been at this 20 years and it’s true of every great salesperson I’ve ever seen.” Response: did every great salesperson you’ve worked with also have a belly button? This reminds me of Jim Collins’s observation in Good to Great that all great companies have buildings. So do all bad ones. You should be looking for what differentiates good salespeople/companies from bad ones, not just for commonalities among the good ones.
  • “Well, Mr. Bob, the greatest sales VP I’ve ever seen, said it was true.”

As the old saw goes: it ain’t what you don’t know that will hurt you, it’s what you know that ain’t so. The fact is most successful people have no idea why they have been successful. They may have risen early. They may have shook 100 hands a day. They may carried a rabbit’s foot. And they may have been quite successful. But for each billionaire early riser I can find scores of early-risers / 100-hand-shakers / rabbit’s-foot-carriers, who aren’t.

What’s the solution to avoid these experience traps? Critical thinking.

By the way, how do I know that all of above is true? I don’t. I think it is. There is some science behind a few of the views (e.g., Russo’s books and similar ones). But in the end it’s just my opinion.

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