Curated Insights 2018.10.26

A change in perspective

Which one of these investments would you want for the next 20 years? Mathematically you should be indifferent, but behaviorally you won’t be.

If you are aged 25-44, asset C will be cheap while you are still in the wealth accumulation stage of your life. This is why Josh Brown says millennials should be stoked for a market crash, and he is right. However, since we don’t know the future, it would be near impossible to stay with asset C while assets A and B also exist. Once again, the deciding factor is perspective.

This is why you should never forget the impact of your perspective, and the perspectives of others, when making investment decisions. You have to consider someone else’s investment umwelt before you make any important financial choices. When you see friends rushing into the hottest asset class, consider what their goals are. When you hear about a new stock tip from a broker, think about why they would be telling you that. When you feel the panic set in as everyone around you is selling, remind yourself of your long term financial plan.

Can the stock market predict the next recession?

By my calculations, the S&P 500 has had 20 bear markets (down 20% or worse) and 27 corrections (down 10% but less than 20%) since 1928. The average losses saw stocks fall 24% and lasted 228 days from peak-to-trough. Of those 47 double-digit sell-offs, 31 of them occurred outside of a recession and didn’t happen in the lead up to a recession. That means around 66% of the time, the market has experienced a double-digit drawdown with no recession as the main cause. Of those 31 which occurred outside of a recession, the losses were -18% over 154 days, on average.

We’ll have a recession at some point but odds are the stock market won’t tip us off ahead of time. In fact, most of the time people don’t even realize we’re in a recession until after it’s already begun. NBER typically gives the official word for a recession around the time they’re ending or already in the midst of a slowdown. The recession that began in March 2001 wasn’t officially called a recession by NBER until November 2001, the month it ended. The recession that began in the summer of 1990 wasn’t determined until the spring of 1991. And the recession that began in the summer of 1981 wasn’t called a recession until January of 1982.

21 lessons from Jeff Bezos’ annual letters to shareholders

2017: Build high standards into company culture
2016: Move fast and focus on outcomes
2015: Don’t deliberate over easily reversible decisions
2014: Bet on ideas that have unlimited upside
2013: Decentralize decision-making to generate innovation
2012: Surprise and delight your customers to build long-term trust
2011: Self-service platforms unlock innovation
2010: R&D should pervade every department
2009: Focus on inputs — the outputs will take care of themselves
2008: Work backwards from customer needs to know what to build next
2007: Missionaries build better products
2006: Nurture your seedlings to build big lines of business
2005: Don’t get fixated on short-term numbers
2004: Free cash flow enables more innovation
2003: Long-term thinking is rooted in ownership
2002: Build your business on your fixed costs
2001: Measure your company by your free cash flow
2000: In lean times, build a cash moat
1999: Build on top of infrastructure that’s improving on its own
1998: Stay terrified of your customers
1997: Bring on shareholders who align with your values
Links to Jeff Bezos’s Shareholder Letters (1997-2017)

The quality of quantity at Netflix

Calculating the customer acquisition cost for Netflix is easy — take the segmented marketing costs (handily provided by the company), and divide by the number of paid subscribers added.

The lifetime value of a Netflix subscriber. To work this out: 1. take the average revenue of a user in the quarter; 2. multiply it by the gross margin (to figure out how profitable a subscriber is), then
3. divide this figure by the churn rate — the proportion of customers which leave each quarter.

On to stage 2 of our calculation: the profitability per user. So that’s the numbers above, multiplied by the gross margin (revenues, minus the cost of providing the service).

Lower gross margins in the future due to higher content costs might effect the lifetime value assessment, but lets stick with existing numbers for now. So we’ve got the first two parts of our customer lifetime value calculation, leaving just the churn rate.

But that isn’t really what we’re after, what we want to know is the ratio between how much money a paid subscriber is worth — the lifetime value — and how much it costs Netflix to pull one in to its platform — the customer acquisition cost.

Tesla short seller warns of ‘massive’ supply-chain disruption

“We question the ability for Tesla to actually deliver on their promises to their customers when they’re on the brink of potentially a massive supply-chain disruption,” Quadir said in an interview on Bloomberg Television. “We see very little contingency planning, and we also see executives from the supply chain department departing in recent weeks and months.’’


Trupanion stock sinks after report of state probe

Part of the short thesis on Trupanion is based on the idea that vet activity may not comply with some state insurance regulations. It represents a bigger risk than consumer complaint investigations, which are commonplace for insurers. If regulatory challenges continue it could further dent investor sentiment about the shares.

Serverless computing’s innovative approach to software development

“By purchasing more cloud computing capacity then they really need – even as a deliberate strategy to safeguard against crashing key systems – or buying advanced reserves that they will never use, companies across all industries may be overspending on cloud services by an average of 42%, according to data compiled by Densify, a cloud optimization firm that works with big companies worldwide. That can translate into hundreds of thousands or even millions of lost dollars in IT budgets a year, depending on the size of cloud deployments, the firm said. Its estimates are based on input from 200 cloud-industry professionals and 70 global companies over the last year.”

Serverless is based on a very different resource management model. The biggest overhead is in the design of the application. Serverless applications are woven or composed from a collection of loosely coupled, lightweight modules or microservices. Each such module is only given resources when triggered by another application module or invoked by an external function. Serverless modules are expected to run for a relatively short time, and are generally limited in how long each invocation is allowed to run. Once the module finishes running, its resources are returned to the serverless platform and made available to other modules that need them. The modules are stateless, meaning that no information is carried over or remembered between invocations. Any information that needs to be persistent across invocations must be explicitly stored in a separate file or data base.

Given the special nature of serverless applications, developers no longer need to plan, allocate or provision module instances. Once a module is invoked, the serverless platform will figure out the resources it requires and automatically provision them. As other modules are invoked, the platform will automatically allocate the required resources, and take them away once they’ve finished running. Developers are only charged for the resources used during the time their modules actually run. If invoked infrequently, or if invocations are spiky, there’s no need to plan for and pay for just-in-case-resources.


Now apps can track you even after you uninstall them

Uninstall tracking exploits a core element of Apple Inc.’s and Google’s mobile operating systems: push notifications. Developers have always been able to use so-called silent push notifications to ping installed apps at regular intervals without alerting the user—to refresh an inbox or social media feed while the app is running in the background, for example. But if the app doesn’t ping the developer back, the app is logged as uninstalled, and the uninstall tracking tools add those changes to the file associated with the given mobile device’s unique advertising ID, details that make it easy to identify just who’s holding the phone and advertise the app to them wherever they go.

Curated Insights 2018.10.19

AMA with Steli Efti

A lot of times, people who are insecure about their product will offer it for free as a way to feel more comfortable, as a way to offer the customer something that’s “fair”. I would argue strongly against that. If you’re inclined to do that, don’t. Instead, ask them for money, tell them it’s completely refundable, and then don’t under any circumstance spend that money. Put it in a separate bank account. It’s not revenue until the customer has stayed for six months and says that they are happy with everything—then you can touch the money.

This has the same effect as giving your product away for free—there’s zero risk for the customer—but by doing this you’ll weed out bad customers and you’ll learn how to get customers to pay you. In the enterprise world, if you’re not putting a price tag on your product, it’s not going to be valued. A lot of times people think I’m going to start by not asking for money and then it’ll organically lead to asking for money. That’s not true. You have to charge enterprise customers, no matter how early it is. If you don’t, a lot of people are going to be friendly and give you pleasant feedback. “Oh, new technology, of course I want to see this!” It’s even going to feel like you’re accomplishing things. But you’ll be wasting your time.

Netflix’s pricing power

Despite steadily increasing the quality of its service for customers, Netflix’s pricing has lagged the growth of that consumer value leading to the build up of a large consumer surplus. That surplus, or the excess consumer value over the price of the service, is an important factor that has driven such a rapid rate of growth for the service. The bigger the surplus, the better the deal for the consumer. But this also results in a sub-optimal return for the shareholder, at least in the short run, which can look like an inferior business model if you don’t look more carefully.

The power of the model is to realize that the consumer surplus represents latent pricing power that can be reallocated via price increases or reinvestment changes towards future profits for shareholders. In Netflix’s case, we believe this is an important lever in managing the rate of its growth and returns. By offering a compelling value proposition to incremental consumers, Netflix drives subscriber growth because it is a fantastic deal at $10/month. The consumer surplus is an investment in Netflix’s rapid growth, an implicit subscriber acquisition expense in the form of foregone revenue and profit, intentionally leveraged to quickly scale so that nearly all traditional media incumbents would be left too far behind when they awoke to the direct to consumer global scale streaming video opportunity. It’s clear at this point that this strategic goal has either been accomplished or nearly has.

Tesla through the lens of Apple

Tesla picks up on Apple’s vertical integration strategy but takes it further. In addition to hardware, software, and retail, Tesla also owns and operates manufacturing facilities as well as a global supercharger network. Vertically integrating battery pack production at its Gigafactory is why Tesla is the only high volume EV manufacturer today. Had Tesla waited for the supply chain to catch up, it wouldn’t have been able to launch and scale the Model 3 for years. In our view, this is a key reason why no auto maker has released a viable competitor to the Model 3 thus far and why no company will be able to do so until 2020 at the earliest.

Tesla has spent more than a decade preparing for this moment and, in our view, has the most compelling EV pipeline of any company. The Tesla Model 3 and Model Y (a crossover SUV) have the potential to catapult EVs into the mainstream, much like the one-two punch from the iPhone and iPad in mobile computing. In the U.S. the Model 3 competes in a price category that has three times the addressable market of the Model S, and the price category where the Model Y is likely to compete has an addressable market eight times larger than the Model X. Scaled globally, if the Model 3 and Model Y are as successful as the S and X in their respective segments, Tesla should be able to generate on the order of $65 billion sustainably, even on a distribution footprint that constrains it from selling in 26 states and imposes severe price penalties on its imports into China—the world’s largest EV market. Follow-on products, such as the pickup, the semi-truck, and the Roadster, will pave the way for at least a decade of rapid growth.

While Tesla’s and Apple’s product strategy and business models share many similarities, their financial pictures could not be further apart. Apple had $9 billion in cash in 2007, while Tesla has $12 billion of long-term debt today. Apple’s gross margins were approaching 40%, while Tesla’s are 14%, and Apple spent 6% of its revenues on capital expenditure compared to Tesla’s 26%.4 In other words, Tesla’s business today is less profitable and more capital intensive than was Apple’s in 2007, a seemingly inferior model made more questionable by its substantial debt load and meager cash flows.

Adobe remains a creative software king

Great software companies have more than one act, and Act 2 for Adobe has centered on analytics and digital marketing initiatives, which are currently housed in the digital experience segment. Adobe’s prowess in creative content has allowed it to nab synergies in the digital marketing space, cross-selling to enterprise chief marketing officers already using Adobe’s software. The product, now dubbed Experience Cloud, operates in a nascent and growing industry, but Adobe’s end-to-end functionality, built internally and through acquisitions such as Omniture, TubeMogul, Magento, and Marketo, has meant it is largely regarded as the leader in the space. As companies look to create omnichannel, targeted ad campaigns, Adobe’s marketing software has become a mission-critical offering for major brands and enterprises. Experience Cloud spans marketing, advertising, and analytics, among other features. It competes with the likes of Salesforce.com (CRM) and Oracle (ORCL), which compete in the broader customer relationship management space, but we think a rising tide can lift multiple boats, with optionality for Adobe to cement itself as a digital experience leader.


Ensemble Capital quarterly call transcript Q4 2018

An important point here is that Trupanion prices its policies based on how much it costs to treat a certain breed of a certain age in a certain zip code. Once Trupanion determines how much it costs to service an average pet based on the previous data points, it adds a 30% margin to calculate the pet’s premium payments.

Each state has its own insurance regulations and Trupanion says its Territory Partners are licensed where they need to be. Technically, Territory Partners do not sell directly to policyholders in the veterinary channel and Trupanion does not pay veterinarians or their staff for referrals. The actual solicitation of the policies is done on Trupanion’s website or over the phone with one of their licensed agents. We also believe Trupanion has increasingly viewed state regulators as partners and it has added to its compliance department in recent years. That said, state insurance regulations are intentionally vague and give regulators a lot of discretion in enforcement. As such, we won’t be surprised if there’s some adverse regulatory news during our investment. But the magnitude of these events and their impact on the long-term success of the business should be kept in context.

We believe that Trupanion customers are by-and-large extremely satisfied with the product – Trupanion consistently produces monthly retention rates above 98.5% and has growing customer referrals. Surveys also show that veterinarians recommend Trupanion more frequently than any other pet insurance offering. We also believe that the company is facilitating a positive ecosystem that creates value for all the parties involved — pet owners, pets, and veterinarians.

Booking has intentionally focused on these areas because hotel reservations are far more profitable than airfare and market fragmentation outside the US makes hotels far more dependent on Booking than those in the US. In the US, the top 10 hotel chains lead the market with many travelers going directly to Hilton.com or Hyatt.com to book a room. While in Europe and Asia, independent hotels dominate, and these hotels need some sort of central “marketplace” on which travelers can find them.

Booking is so dominant that one risk they run is letting their heavy spending on advertising (Google ads or ads on other travel sites such as TripAdvisor) push up the going rate on these auction-based ads. With that in mind, the company strategically reduced their spending on these sorts of ads starting last year in an attempt to reduce market prices and reinvest in driving visitors directly to their website. One casualty of this move was online hotel metasearch site Trivago, which was so dependent on Booking’s ad spend that the company’s strategic shift lead to Trivago’s revenue growth to fall from +70% to a 20% decline over the last year, sending the stock down 80%. Rarely in our memory can we recall a competitive move by one of our holdings so completely debilitating another member of their industry.

Ctrip and Booking have essentially declared a truce with Booking owning a large stake (with the right to buy more) of Ctrip. In essence, their agreement funnels Chinese travelers using Ctrip to travel outside of China to Booking.com while many non-Chinese travelers traveling to China via Booking.com are routed to Ctrip. Why have they made this deal? Well, in the words of Ctrips CEO Jane Sun, “Booking.com is a global brand and in hotels, they are just so far ahead of anybody else. I think it will be very difficult for anybody to come close to them.”

How Netflix expanded to 190 countries in 7 years

Taken together, the elements of Netflix’s expansion strategy constitute a new approach that I call exponential globalization. It’s a carefully orchestrated cycle of expansion, executed at increasing speed, to an increasing number of countries and customers. The approach has helped the company expand far more quickly than competitors. Going forward, Netflix will face increasing competition not only from other global players such as Amazon Prime but also from new entrants and regional or local players. In that regard, it will have to continue to expand its blending of global and regional content.


Did Uber steal Google’s intellectual property? | The New Yorker

Indeed, even if the criminal investigation and the arbitration against Levandowski come to naught, in many ways Waymo and Google have already prevailed. “The people at Google got what they wanted,” one of the lawyers who represented Uber told me. “They got Anthony fired, they distracted Uber and slowed its progress for an entire year, and they let everyone know that if you leave with some of their stuff they can screw with you so bad that everyone will think you’re toxic.”

Porsche IPO could value carmaker as high as $81 billion, CFO says

Porsche is Volkswagen’s crown jewel and closely connected with its history. The companies were separate until Volkswagen acquired the Porsche brand in 2012 in the aftermath of a failed takeover attempt by the the descendants of Ferdinand Porsche. The family, which was forced to sell the maker of the 911 sports car after financing collapsed on the deal, still controls a majority of Volkswagen’s common stock and would need to sign off on any deal to spin off Porsche.

Ferrari’s listing in 2015 not only showed the supercar maker’s own value, but also exposed weaknesses at parent Fiat Chrysler Automobiles NV’s mass-market operations, Meschke said. Fiat was able to address these more specifically after the spin off, he said. While it’s been a windfall for the Italian-American auto maker, the strategy isn’t infallible. Aston Martin, another luxury sports-car maker that is seeking a Ferrari-like multiple, has slumped more than 20 percent since its London debut this month.

Points International poised for 72% reward

PCOM operates in the loyalty industry with an unfair advantage in airline loyalty programs. They work with: 7/10 largest airlines in North America; 2/10 largest airlines in Europe; 2/10 largest airlines in AMEA (Emirates was onboarded this year).

Little/no real competition except internal systems developed by airlines.

PCOM is typically the 2nd largest buyer of loyalty points after the banks. The loyalty industry is a large and growing.

In addition, PCOM has developed a software/technology layer that provides common functionality to all three businesses. This technology layer is what the company calls “Loyalty Commerce Platform”. In the last 5 years PCOM has invested heavily into developing this platform which now enables client onboarding in as little as 3 weeks. It also provides operating leverage as the system manages many of the functions previously managed by people.

It takes years of working with multi-billion-dollar brands to get access to their customer base. This represents a level of stickiness that cannot be built quickly with venture capital money. It is also resistant to disruptive technology.

Schadenfreude: reposting a 2011 post on Sears

My view: owning Sears as a property play is a demonstration of the arrogance and breathtaking naivete of much that passes on Wall Street. Sears Holdings has over 300 thousand employees. I don’t know how you successfully liquidate a business integrated with that many lives. I don’t know of anyone who has ever successfully liquidated a business with that many employees.** I am not sure it can be done and it certainly can’t be done by someone with my skill-set (highly analytical, ability to spy value or value traps but no people management skill and not much tact).

The idea that Sears was going to be managed/liquidated by a bunch of hedge fund guys (people like me) well – that was comical.

Just to stress the point for my fund manager friends who read accounts and have my skills (but like me are often disconnected from the businesses they invest in) I will state the obvious. The employees are living breathing people and as you pull the business apart the way you treat those people and how they think about you (and behave towards you) are critical to any value you extract in liquidation. Someone has to look these people in the eye and tell them they don’t have a job. And someone has to pick-and-choose which people to fire and which to retain. And they have to do this without destroying much of the value extracted along the way. They have to liquidate the firm in such a way that the value accrues to the liquidators and not to the people who are being screwed.

Curated Insights 2018.10.12

“[The whole tech bubble] is very interesting, because the stock is not the company and the company is not the stock. So as I watched the stock fall from $113 to $6 I was also watching all of our internal business metrics: number of customers, profit per unit, defects, everything you can imagine. Every single thing about the business was getting better, and fast. So as the stock price was going the wrong way, everything inside the company was going the right way. We didn’t need to go back to the capital markets because we didn’t need more money. The only reason a financial bust makes it really hard is to raise money. So we just needed to progress.”

“Everything I have ever done has started small. Amazon started with a couple of people. Blue Origin started with five people and the budget was very small. Now the budget approaches a billion dollars. Amazon was literally ten people, today it’s half a million. For me it’s like yesterday I was driving packages to the post office myself and hoping one day we could afford a forklift. For me, I’ve seen small things get big and it’s part of this ‘day one’ mentality. I like treating things as if they’re small; Amazon is a large company but I want it to have the heart and spirit of a small one.”

“I believe in the power of wandering. All of my best decisions in business and in life have been made with heart, intuition and guts. Not analysis. When you can make a decision with analysis you should do so. But it turns out in life your most important decisions are always made with instinct, intuition, taste and heart.”

“AWS completely reinvented the way companies buy computation. Then a business miracle happened. This never happens. This is the greatest piece of business luck in the history of business as far as I know. We faced no like-minded competition for seven years. It’s unbelievable. When you pioneer if you’re lucky you get a two year head start. Nobody gets a seven year head start. We had this incredible runway.”

“We are so inventive that whatever regulations are promulgated or however it works, that will not stop us from serving customers. Under all regulatory frameworks I can imagine, customers are still going to want low prices, they are still going to want fast delivery, they are still going to want big selection. It is really important that politicians and others need to understand the value big companies bring and not demonise or vilify big companies. The reason is simple. There are certain things only big companies can do. Nobody in their garage is going to build an all carbon-fiber fuel efficient Boeing 787. It’s not going to happen. You need Boeing to do that. This world would be really bad without Boeing, Apple, Samsung and so on.”

How big can Amazon get?

What business is Amazon most similar to? Definitely not Wal-Mart. Amazon’s model is much, much closer to Costco’s model. How does Costco’s model differ from Wal-Mart’s model?

Costco does not try to be a leading general retailer in specific towns, counties, states, the nation as a whole, etc. What Costco does is focus on getting a very big share of each customer’s wallet. Costco also focuses on achieving low costs for the items it does sell by concentrating its buying power on specific products and therefore being one of the biggest volume purchasers of say “Original” flavor Eggo waffles. It sells these waffles in bulk, offers them in one flavor (Wal-Mart might offer five different flavors of that same product) and thereby gets its customer the lowest price.

There’s two functions that Costco performs where it might be creating value, gaining a competitive advantage, etc. One is supply side. Costco may get lower costs for the limited selection it offers. In some things it does. In others, it doesn’t. The toughest category for Costco to compete in is in fresh food. I shop at Costco and at other supermarkets in the area. The very large format supermarkets built by companies like HEB (here in Texas) can certainly match or beat Costco, Wal-Mart, and Amazon (online and via Whole Foods stores) when it comes to quality, selection, and price for certain fresh items. But, what can Costco do that HEB can’t? It can have greater product breadth (offering lots of non-food items) and it can make far, far, far more profit per customer.

Now, an interesting question to ask is what SHOULD determine the market value per customer. Not what does. But, what should? In other words, if we had to do a really, really long-term discounted cash flow calculation – what variables would matter most? If two companies both have 10 million customers which company should be valued higher and why? Two variables matter. One: Annual profit per customer. Two: Retention rate. Basically, we’re talking about a DCF here. If Company A and Company B both have 10 million customers and both make $150 per customer the company that should have a higher earnings multiple (P/E or P/FCF) should be the one with the higher retention rate.

What Spotify can learn from Tencent Music

Tencent Music is no small player: As the music arm of Chinese digital media giant Tencent, its four apps have several hundred million monthly active users, $1.3 billion in revenue for the first half of 2018, and roughly 75 percent market share in China’s rapidly growing music streaming market. Unlike Spotify and Apple Music, however, almost none of its users pay for the service, and those who do are mostly not paying in the form of a streaming subscription.

Its SEC filing shows that 70 percent of revenue is from the 4.2 percent of its overall users who pay to give virtual gifts to other users (and music stars) who sing karaoke or live stream a concert and/or who paid for access to premium tools for karaoke; the other 30 percent is the combination of streaming subscriptions, music downloads, and ad revenue.

Tencent Music has an advantage in creating social music experiences because it is part of the same company that owns the country’s leading social apps and is integrated into them. It has been able to build off the social graph of WeChat and QQ rather than building a siloed social network for music. Even Spotify’s main corporate rivals, Apple Music and Amazon Music, aren’t attached to leading social platforms.


Traffic acquisition costs

In other words the two companies have an agreement that Apple is paid in proportion to the actual query volume generated. This would extend the relationship from one of granting access for a number of users or devices to revenue sharing based on usage or consumption. Effectively Apple would have “equity” in Google search sharing in the growth as well as decline in search volume.

The idea that Apple receives $1B/month of pure profit from Google may come as a shock. It would amount to 20% of Apple’s net income and be an even bigger transfer of value out of Google. The shock comes from considering the previously antagonistic relationship between the companies.

The remarkable story here is how Apple has come to be such a good partner. Both Microsoft and Google now distribute a significant portion of their products through Apple. Apple is also a partner for enterprises such as Salesforce, IBM, and Cisco. In many ways Apple is the quintessential platform company: providing a collaborative environment for competitors as much as for agnostic third parties.

Shares of pet insurer Trupanion are overvalued

Much of the Trupanion excitement is based on the low 1% penetration rate and the fact that it’s the only pet-insurance pure play. Bradley Safalow, who runs PAA Research, an independent investment research firm, disputes the lofty expectations. Bulls extrapolate from industry data that say about two million pets out of 184 million in North America are insured now. Safalow says that ignores a key factor—the income levels of pet owners. Because Trupanion’s policies cost about $600 to $1,500 annually and don’t cover wellness visits, he estimates that, in the case of dogs, which represent 85% of the pet market, a more realistic target customer would be owners who earn $85,000 or more a year. Based on that benchmark, Safalow estimates insurance penetration—of those most likely to buy it—at about 6% already for dogs.

The requests for rate increases would indicate that premiums aren’t keeping up with claims; that the policy risks are worse than the company expected; and that the profitability of its book of business is relatively weak. APIC’s ratio of losses and loss-adjustment expense to premiums earned have risen steadily over the past four years to 75.6% in the first quarter of this year from 68.9% for all of 2014, according to state filings. The loss ratio is total losses incurred in claims plus costs to administer the claims (loss adjustment expense) divided by premiums earned.

Bob Iger’s bets are paying off big time for Disney

Iger thinks he knows how to coax consumers who already pay for one streaming service to either add another or switch to Disney’s. “We’re going to do something different,” he says. “We’re going to give audiences choice.” There are thousands of barely watched movies on Netflix, and Iger figures that people don’t like to pay for what they don’t use. So families can buy only a Disney stream, which will offer Pixar, Marvel, Lucas, Disney-branded programming. Sports lovers can opt just for an ESPN stream. Hulu, of which Disney will own a 60% stake after it buys Fox (and perhaps more if it can persuade Comcast to sell its share), will beef up ABC’s content with Fox Searchlight and FX and other Fox assets. “To fight [Amazon and Netflix], you’ve got to put a lot of product on the table,” says Murdoch. “You take what Disney’s got in sports, in family, in general entertainment—they can put together a pretty great offer.”

Having a leader who is willing to insulate key creative people from the vicissitudes of business has helped Disney successfully incorporate its prominent acquisitions. They have not been Disneyfied. Marvel movies are not all of a sudden family friendly (at least not by Disney standards). Pixar movies have not been required to add princesses. Most of the people who ran the companies before Disney bought them still run them (with the exception of John Lasseter, who was ousted in June in the wake of #MeToo). “I’ve been watching him with his people and with Fox people; he’s clearly got great leadership qualities,” says Murdoch.”He listens very carefully and he decides something and it’s done. People respect that.”


Can anyone bury BlackRock?

Today the Aladdin platform supports more than $18 trillion, making it one of the largest portfolio operating systems in the industry. BlackRock says Aladdin technology has been adopted in some form by 210 institutional clients globally, including asset owners such as CalSTRS and even direct competitors like Vanguard.

“Not only does it provide risk transparency, but it also provides an ability to model trades, to capture trades, to structure portfolios, to manage portfolio compliance — all of the operating components of the workflow,” Goldstein says. “It’s a comprehensive, singular enterprise platform versus a model where you’re piecing together a lot of things and trying to figure out how to interface them.”

In a market that’s traditionally been very fragmented, BlackRock’s ability to offer an integrated, multipurpose platform has proven a strong selling point for prospective clients — even when it’s up against competitors that perform specific functions better.

How to break up a credit ratings oligopoly

This is not to say Kroll’s firm, Kroll Bond Rating Agency, hasn’t been successful. It grew gross fees by 49 percent annualized between 2012 and the end of 2017 on the back of growing institutional demand for alternative investments. Since 2011 it has rated 11,920 transactions, representing $785 billion and 1,500 issuers. Still, KBRA and other competitors, including Lisbon-based ARC Ratings and Morningstar Credit Ratings, that have entered the sector in the last decade have barely made a dent in the market share of the big three.

The upstarts are facing more than just deeply entrenched competition, although that is striking: S&P, Moody’s, and Fitch control more than 90 percent of the market combined. A host of other complex factors have combined to make it nearly impossible to dislodge the big three — and to address the central conflict of interest baked into the ratings agency business model.


Elon Musk, Google and the battle for the future of transportation

We think a similar analogy is likely with AV/EV — the most economically well-off people will still care about comfort, features, and identity that the AV/EV they ride and arrive in imparts on them. If Waymo can deliver a premium experience at a better price and higher utility than their current solution (i.e. driving themselves in their own cars or Ubers/taxis) with cost economics that yield a strong profit margin/ROIC at scale (1/2-1/3 the pricing of Uber at 1/10 the cost), it will have built an offering that will be set to be the leading AV service and create tremendous value for shareholders despite the early capital intensity. Estimates of the value of this Transportation as a Service (TaaS) or Mobility as a Service (MaaS) go from hundreds of billions on up based on Morgan Stanley’s estimate of 11 billion miles (3B in the US) driven globally and forecasted to double over the next decade.

Eventually, if Waymo is successful at taking the strong lead via network effects in AV and converting enough consumers to use its premium service (achieving a cultural and regulatory tipping point), it could decide to open up its service’s usage across other auto “hardware” partners as they demonstrate their ability to deliver a certain level of quality experience and scale globally, enabling a broader application of its service to lower tiers of the market with lower capital intensity (akin to Apple’s 2nd hand iPhone market, which broadens its user base for services offerings).


Network effect: How Shopify is the platform powering the DTC brand revolution

“The 21st-century brand is the direct-to-consumer brand,” said Jeff Weiser, chief marketing officer at Shopify. “A couple of things have enabled the rise of the DTC, which is the ability to outsource the supply chain.” For Weiser, who described himself as “loving” anything to do with DTC, what Shopify does is power all of that ability — from selling to payments to marketing. “We run the gamut of a retail operating system.” The company has admittedly benefited from a DTC boom: Starting with small businesses run from people’s kitchens, then going upmarket to giant Fortune 500 companies, Weiser said that DTC’s “graduation” into giant juggernauts themselves has made a huge difference. Shopify powers hundreds of those companies, from Allbirds to mattress brand Leesa to Chubbies.

Just as Google and Facebook are core to anyone marketing online, Shopify is becoming the same to those who sell directly online. Like any platform, Shopify is building an ecosystem of developers, startups and ad agencies. The company has 2,500 apps through its own app store. The company can, like the Apple App Store, add apps into its ecosystem that merchants can then purchase.


Why the Elastic IPO is so important

Elastic’s open source products are downloaded voluminously, with over 350M downloads of its open source software to date. As a result, sales engages with customers who are already users and highly familiar with the products. This leads to shorter sales cycles and higher sales conversions. Additionally, awareness and engaged prospects are generated by popular open source projects, such as Elasticsearch and others from Elastic, obviating the need for top-of-funnel and mid-funnel marketing spend. Elastic still spent a healthy 49% of revenue on Sales & Marketing in FY ’18 (year ending Jan ’18) but this was down from 60% the prior year, and the implied efficiency on Elastic’s Sales & Marketing spend is extremely high, enabling the 79% top-line growth the company has enjoyed. Finally, Elastic shows how disruptive an open source model can be to competition. There are already large incumbents in the search, analytics, IT Ops and security markets, but, while the incumbents start with sales people trying to get into accounts, Elastic is rapidly gaining share through adoption of its open source by practitioners.

Elastic controls the code to it open source projects. The committers are all employed by the company. Contributions may come from the community but committers are the last line of defense. This is in contrast to open source projects such as Linux and Hadoop, where non profit foundations made up of many commercial actors with different agendas tend to govern updates to the software. The biggest risk to any open source project is getting forked and losing control of the roadmap, and its difficult for a company to build a sustainable high margin business supporting a community-governed open source project as a result. Elastic, and other companies who more tightly control the open source projects they’ve popularized, have full visibility to roadmaps and are therefore able to build commercial software that complements and extends the open source. This isn’t a guarantee of success. The viability of any open source company rests with the engagement of its open source community, but if Elastic continues to manage this well, their franchise should continue to grow in value for for foreseeable future.


Elastic closed 94% up in first day of trading on NYSE, raised $252M at a $2.5B valuation in its IPO

“When you hail a ride home from work with Uber, Elastic helps power the systems that locate nearby riders and drivers. When you shop online at Walgreens, Elastic helps power finding the right products to add to your cart. When you look for a partner on Tinder, Elastic helps power the algorithms that guide you to a match. When you search across Adobe’s millions of assets, Elastic helps power finding the right photo, font, or color palette to complete your project,” the company noted in its IPO prospectus.

“As Sprint operates its nationwide network of mobile subscribers, Elastic helps power the logging of billions of events per day to track and manage website performance issues and network outages. As SoftBank monitors the usage of thousands of servers across its entire IT environment, Elastic helps power the processing of terabytes of daily data in real time. When Indiana University welcomes a new student class, Elastic helps power the cybersecurity operations protecting thousands of devices and critical data across collaborating universities in the BigTen Security Operations Center. All of this is search.”

The Big Hack: How China used a tiny chip to infiltrate U.S. companies

One government official says China’s goal was long-term access to high-value corporate secrets and sensitive government networks. No consumer data is known to have been stolen.

With more than 900 customers in 100 countries by 2015, Supermicro offered inroads to a bountiful collection of sensitive targets. “Think of Supermicro as the Microsoft of the hardware world,” says a former U.S. intelligence official who’s studied Supermicro and its business model. “Attacking Supermicro motherboards is like attacking Windows. It’s like attacking the whole world.”

Since the implants were small, the amount of code they contained was small as well. But they were capable of doing two very important things: telling the device to communicate with one of several anonymous computers elsewhere on the internet that were loaded with more complex code; and preparing the device’s operating system to accept this new code. The illicit chips could do all this because they were connected to the baseboard management controller, a kind of superchip that administrators use to remotely log in to problematic servers, giving them access to the most sensitive code even on machines that have crashed or are turned off.

Can anyone catch America in plastics?

Ethane, once converted to ethylene through “cracking” is the principal input into production of polyethylene. Simply put, ethane is turned into plastic. Polyethylene is manufactured in greater quantities than any other compound. U.S. ethane production has more than doubled in the past decade, to 1.5 Million Barrels per Day (MMB/D).

The result is that ethane trade flows are shifting, and the U.S. is becoming a more important supplier of plastics. The Shale Revolution draws attention for the growth in fossil fuels — crude oil and natural gas, where the U.S. leads the world. But we’re even more dominant in NGLs, contributing one-third of global production. The impact of NGLs and consequent growth in America’s petrochemical industry receives far less attention, although it’s another huge success story.


Amazon’s wage will change how U.S. thinks about work

If $15 an hour becomes the new standard for entry-level wages in corporate America, its impact may be felt most broadly among middle-class workers. Average hourly earnings for non-managerial workers in the U.S. were $22.73 an hour in August. The historically low level of jobless claims and unemployment, combined with $15 an hour becoming an anchor in people’s minds, could make someone people earning around that $22 mark feel more secure in their jobs. Instead of worrying about losing their job and being on the unemployment rolls for a while, or only being able to find last-ditch work that pays $9 or $10 an hour, the “floor” may be seen as a $15 an hour job.

That creates a whole new set of options for middle-class households. In 2017, the real median household income in the U.S. was $61,372, which is roughly what two earners with full-time jobs making $15 an hour would make. A $15-an-hour floor might embolden some workers to quit their jobs to move to another city even without a job offer there. It might let some workers switch to part-time to focus more time on education, gaining new skills or child care.

Circle of competence

It’s not the size of your circle of competence that matters, but rather how accurate your assessment of it is. There are some investors who are capable of figuring out incredibly complex investments. Others are really good at a wide variety of investments types, allowing them to take advantage of a broad set of opportunities. Don’t try to keep up with the Joneses. Figure out what feels comfortable, and do that. If you are not quite sure whether something is within your circle of competence or not – that in and of itself is an indicator that it’s better to pass. After all, to quote Seth Klarman’s letter to his investors shortly after the Financial Crisis of 2008, “Nowhere does it say that investors should strive to make every last dollar of potential profit; consideration of risk must never take a backseat to return.”


Lessons from Howard Marks’ new nook: “Mastering the Market Cycle – Getting the Odds on Your Side”

… you can prepare; you can’t predict. The thing that caused the bubble to burst was the insubstantiality of mortgage-backed securities, especially subprime. If you read the memos, you won’t find a word about it. We didn’t predict that. We didn’t even know about it. It was occurring in an odd corner of the securities market. Most of us didn’t know about it, but it is what brought the house down and we had no idea. But we were prepared because we simply knew that we were on dangerous ground, and that required cautious preparation.


Market timing is hard

People use data to justify market timing. But it’s hindsight bias, right? If you know ahead of time when the biggest peaks and troughs were through history, you can make any strategy look good. So Antti and his co-authors made a more realistic and testable market timing strategy. And here’s the key difference — instead of having all hundred years of history, Antti’s strategy used only the information that was available at the time. So, say for example it’s 1996, early tech bubble. We know after the fact that the U.S. stock market would get even more expensive for a few years before it crashed. But in 1996 you wouldn’t actually know that. So by doing their study this way, Antti could get a more realistic test of value-based market timing.

The interesting and troubling result was when we did this market timing analysis the bottom line was very disappointing. It was not just underwhelming, it basically showed in the last 50-60 years, in our lifetimes, you didn’t make any money using this information.

The Decision Matrix: How to prioritize what matters

I invested some of that time meeting with the people making these decisions once a week. I wanted to know what types of decisions they made, how they thought about them, and how the results were going. We tracked old decisions as well, so they could see their judgment improving (or not).

Consequential decisions are a different beast. Reversible and consequential decisions are my favorite. These decisions trick you into thinking they are one big important decision. In reality, reversible and consequential decisions are the perfect decisions to run experiments and gather information. The team or individual would decide experiments we were going to run, the results that would indicate we were on the right path, and who would be responsible for execution. They’d present these findings.

Consequential and irreversible decisions are the ones that you really need to focus on. All of the time I saved from using this matrix didn’t allow me to sip drinks on the beach. Rather, I invested it in the most important decisions, the ones I couldn’t justify delegating. I also had another rule that proved helpful: unless the decision needed to be made on the spot, as some operational decisions do, I would take a 30-minute walk first.

Risk management

Once you frame risk as avoiding regret, the questions becomes, “Who cares what’s hard but I can recover from? Because that’s not what I’m worried about. I’m worried about, ‘What will I regret?’”

So risk management comes down to serially avoiding decisions that can’t easily be reversed, whose downsides will demolish you and prevent recovery.

Actual risk management is understanding that even if you do everything you can to avoid regrets, you are at best dealing with odds, and all reasonable odds are less than 100. So there is a measurable chance you’ll be disappointed, no matter how hard you’ll try or how smart you are. The biggest risk – the biggest regret – happens when you ignore that reality.

Carl Richards got this right, and it’s a humbling but accurate view of the world: “Risk is what’s left over when you think you’ve thought of everything.”


The most important survival skill for the next 50 years isn’t what you think

Even if there is a new job, and even if you get support from the government to kind of retrain yourself, you need a lot of mental flexibility to manage these transitions. Teenagers or 20-somethings, they are quite good with change. But beyond a certain age—when you get to 40, 50—change is stressful. And a weapon you will have [is] the psychological flexibility to go through this transition at age 30, and 40, and 50, and 60. The most important investment that people can make is not to learn a particular skill—”I’ll learn how to code computers,” or “I will learn Chinese,” or something like that. No, the most important investment is really in building this more flexible mind or personality.

The better you know yourself, the more protected you are from all these algorithms trying to manipulate you. If we go back to the example of the YouTube videos. If you know “I have this weakness, I tend to hate this group of people,” or “I have a bit obsession to the way my hair looks,” then you can be a little more protected from these kinds of manipulations. Like with alcoholics or smokers, the first step is to just recognize, “Yes, I have this bad habit and I need to be more careful about it.”

And this is very dangerous because instead of trying to find real solutions to the new problems we face, people are engaged in this nostalgic exercise. If it fails—and it’s bound to fail—they’ll never acknowledge it. They’ll just blame somebody: “We couldn’t realize this dream because of either external enemies or internal traitors.” And then this is a very dangerous mess.

The other danger, the opposite one, is, “Well, the future will basically take care of itself. We just need to develop better technology and it will create a kind of paradise on earth.” Which doesn’t take into account all of the dystopian and problematic ways in which technology can influence our lives.

Earnings Call Digest 2017.11

Facebook (Q3 2017 Results) – Earnings Call Transcript

Our community continues to grow, now with nearly 2.1 billion people using Facebook every month and nearly 1.4 billion people using it daily. Instagram also hit a big milestone this quarter, now with 500 million daily actives.

The reason I’m talking about this on our earnings call is that I’ve directed our teams to invest so much in security on top of the other investments we’re making that it will significantly impact our profitability going forward, and I wanted our investors to hear that directly from me. I believe this will make our society stronger, and in doing so will be good for all of us over the long term. But I want to be clear about what our priority is. Protecting our community is more important than maximizing our profits.

Over the next three years, the biggest trend in our products will be the growth of video. This goes both for sharing, where we’ve seen Stories in Instagram and Status in WhatsApp grow very quickly, each with more than 300 million daily actives, and also for consuming video content.

In messaging, today already more than 20 million businesses are communicating with customers through Messenger. Now we’re starting to test business features that make it easier for people to make the same kinds of connections with businesses through WhatsApp.

We’re now using machine learning in most of our integrity work to keep our community safe. When Hurricane Maria hit Puerto Rico, we used AI to look at satellite imagery and identify where people might live and need connectivity and other resources. Progress in AI can unlock a lot of opportunities.

Facebook has over 6 million active advertisers, and we recently announced that Instagram has over 2 million advertisers. The vast majority of these are small and medium-sized businesses, which are a major source of innovation and create more than half of all new jobs globally. These businesses often have small ad budgets, so the ability to reach people more effectively is really valuable to them.

Video is exploding, and mobile video advertising is a big opportunity. Until recently, ads were only eligible for Ad Breaks if they also ran in News Feed. But in Q3, we gave advertisers the option to run ads in videos alone. We’re seeing good early results, with more than 70% of Ad Breaks up to 15 seconds in length on Facebook and Audience Network viewed to completion, most with the sound on.

I would say not all time spent is created equal. That’s why I tried to stress up front that time spent is not a goal by itself here. What we really want to go for is time well spent. And what the research that we found shows is that when you’re actually engaging with people and having meaningful connections, that’s time well spent, and that’s the thing that we want to focus on.

I do think your point is right that not all kinds of content can be supported by ads, no matter how effective we make that. That said, the current model that we have for at least getting some of the lighthouse content onto the platform is to pay up front. And what we would like to transition that more to over time and what an increasing amount of the content is, is revenue shares for ads shown in the videos. And as we do better and better on the monetization there, that will support people with higher production costs and doing more premium production and bringing their content to the platform. And we’ve certainly found on the Internet and YouTube and in other places that there are whole industries around creators with different cost structures than traditional Hollywood folks who can produce very informative and engaging content that a lot of people like and enjoy and that builds communities and that helps people connect together in a way that definitely can be supported by this ad model.


Apple (Q4 2017 Results) – Earnings Call Transcript

Turning to Services. Revenue reached an all-time quarterly record of $8.5 billion in the September quarter. A few quarters ago, we established a goal of doubling our fiscal 2016 services revenue of $24 billion by the year 2020, and we are well on our way to meeting that goal. In fiscal 2017, we reached $30 billion, making our Services business already the size of a Fortune 100 company.

The reason I’m so excited about AR is I view that it amplifies human performance instead of isolates humans. And so as you know, it’s the mix of the virtual and the physical world and so it should be a help for humanity, not an isolation kind of thing for humanity…Apple is the only company that could have brought this because it requires both hardware and software integration, and it requires sort of making a lot of – or giving the operating system update to many people at once. And the software team worked really hard to make that go back several versions of iPhone so that we sort of have hundreds of millions of enabled devices overnight.

But in terms of price elasticity, I think it’s important to remember that a large number of people pay for the phone by month. And so if you were to go out on just the U.S., since that tends to be more of the focus of this call, you look at the U.S. carriers, I think you would find you could buy an iPhone X for $33 a month. And so if you think about that, that’s a few coffees a week. It’s let’s say less than a coffee a day at one of these nice coffee places…In terms of the way we price, we price to sort of the value that we’re providing. We’re not trying to charge the highest price we could get or anything like that. We’re just trying to price it for what we’re delivering.


Alibaba Group (Q2 2018 Results) – Earnings Call Transcript

In the 18 years since Alibaba was founded, China’s per capita GDP grew by a compounded annual rate of 14%. By comparison, the per capita GDP of the United States grew 3% during the same period. We all understand the magic of compounding. When you compound at 14% rate over 18 years, which is the life of Alibaba, the average Chinese citizen is 10 times better off today than in 1999 with per capita GDP growing from $870 to $8,100.

Today, China’s per capita GDP is still only 1/7 of the per capita GDP of the United States. Based on the track record of sustained income growth over the past years as well as on the backbone of a modern Internet infrastructure and productivity gains from technology, I’m very optimistic that China will continue to experience real income growth for years to come. This will translate into a rising middle class characterized by ever-increasing and higher-quality consumption. And this long-term secular trend bodes well for Alibaba.

Our cloud computing business continues to defy gravity. Revenue increased by 99% year-over-year. We continue to multiply our product portfolio, including the introduction of a new relational database and a state-of-the-art server developed in-house that serve the needs of large enterprise customers.

Mobile MAUs on our China retail marketplaces reached 549 million in September, an increase of 20 million over June quarter. Annual active consumers on our China retail marketplace reached 488 million, a net add of 22 million from the 12 months period ended June.

And the key thing is that the data-driven logistic network, actually we are – Cainiao is not going to be a logistic company and we are not interested into building another logistics company. Instead, we will work with a lot of logistic companies, delivery companies to build a network across the world.


Live Nation Entertainment (Q3 2017 Results) – Earnings Call Transcript

Our concerts business is our flywheel, attracting over 30 million fans to shows globally in the quarter, which then drove record results in our onsite ticketing and advertising business. Through October, we have sold 80 million tickets for concerts in 2017, up 20% year-on-year. Digging deeper into concerts, strong global demand for concerts through the third quarter drove a 16% increase in attendance to 65 million of fans at our 20,000 shows in 40 countries.

With the success of the concert flywheel, we’re promoting more shows for more fans, more effectively pricing and selling tickets and delivering a better experience than ever. As a result, we will spend over $5 billion producing concerts this year, making Live Nation far and away the largest financial partner to musicians.

With over 1,000 sponsors across our onsite and online platform, Live Nation is a global leader in music sponsorship, providing brands with opportunities to reach our core audience.

There is no artist that’s dying to put tickets on a secondary platform as a solution. That isn’t how they build their brands with their fans. What they want to do is figure out how to price it right and then make sure their fans actually have a shot to buy the ticket, not deliver it to the on-sale, have the scalper buy it, and their fan in Boston ends up paying 3 times the price.

We think Fan Verified and then you add on presence from the digital perspective are a real important combination for these artists of the future, who now believe they have some shot at controlling and delivering to their fans the price point at the exact price they want. And so, we think this is a pivotal product – suite of products that we’ve developed in Ticketmaster. It’s under a new division within Ticketmaster called Artist Master where we have a new leadership team waking up every day, making sure that we can deliver artist products, so the artists can deliver their tickets to their fans at better pricing and at the price they want.


Tesla (Q3 2017 Results) – Earnings Call Transcript

In fact, there’s 10,000 unique parts, so to be more accurate, there’re tens of thousands of processes necessary to produce the car. We will move as fast as the least competent and least lucky elements of that mixture. So while the vast majority are going incredibly well, there are some problem areas.

The primary production constraint really, by far, is in battery module assembly. So a little bit of a deep dive on that. There are four zones to module manufacturing it goes through four major production zones. The zones three and four are in good shape, zones one and two are not. Zone two in particular, we had a subcontractor, a systems integration subcontractor, that unfortunately really dropped the ball, and we did not realize the degree to which the ball was dropped until quite recently, and this is a very complex manufacturing area. We had to rewrite all of the software from scratch, and redo many of the mechanical and electrical elements of zone two of module production.

The ramp curve is a step exponential, so it means like as you alleviate a constraint, the production suddenly jumps to a much higher number. And so, although it looks a little staggered if you sort of zoom out, that production ramp is exponential with week over week increases.

There’s vastly more automation with Model 3. Now the tricky thing is that when one automation doesn’t work, it’s really harder to make up for it with men and labor. So with S or X, because a lot less that was automated, we could scale up labor hours and achieve a high level of production. With Model 3, it tends to be either the machine works or it doesn’t or it’s limping along and we get short quite severely on output.

I think that we will be able to achieve full autonomy with the current hardware. The question is, it’s not just full autonomy, but full autonomy with what level of reliability, and what will be acceptable to regulators. But I feel quite confident that we can achieve human level – approximately human level autonomy with the current computing hardware. Now regulators may require some significant margin above human capability in order for a full autonomy to be engaged. They may say, it needs to be 50% safer, 100% safer, 1000% safer, I don’t know. I’m not sure they know either.



Qualcomm (Q4 2017 Results) – Earnings Call Transcript

We are very excited about the increased momentum in 5G around the world. We are leading the industry and are accelerating the commercial launch of 5G across millimeter wave and sub-6 gigahertz in early 2019. We recently announced the world’s first 5G data connection achieved on the Snapdragon X50 modem chip set, and our leading 5G 3GPP standards development, ongoing prototype efforts and are supporting global 5G new radio trials.

Gigabit LTE is the first step in network operator’s transition to 5G, and there are now 41 operators in 24 countries supporting Gigabit LTE. We have demonstrated download speeds of greater than 1 gigabits using our X20 LTE modem in the U.S. with both Ericsson and Verizon, as well as Nokia and T-Mobile. Most leading device-makers are rapidly adopting Gigabit LTE into their device portfolios.

In the premium tier, our gigabit-enabled Snapdragon 835 now has more than 120 designs launched and in development, including recent flagship devices like the Samsung Galaxy Note 8, Pixel 2 and Pixel 2 XL, LG V30, and the Xiaomi Mi MIX 2. We have also introduced new high-tier and mid-tier Snapdragon products to further expand our competitive position in China across all tiers.


Trupanion (Q3 2017 Results) – Earnings Call Transcript

Lifetime value of a pet grew to $701 in the quarter, reflecting improvements in retention and in optimizing our cost-plus pricing strategy by subcategory. As lifetime value increases, we are able to increase our allowable tax spend and invest more aggressively in testing of new acquisition initiatives, with a goal of understanding whether they can meet our internal rate of return targets over time.

Total enrolled subscription pets increased 15% year-over-year to approximately 359,000 pets as of September 30. Monthly average revenue per pet for the quarter was $52.95, an increase of 9% year-over-year. Average monthly retention was 98.61%, consistent with the prior year period.

We want to be cash flow positive. The other guardrails are internal rate of return. And for any significant investments that we’re making, we are targeting internal rates of return of greater than 30% and hopefully, closer to 40%. When we’re doing some different testing or some long-term initiatives, maybe they’re a little bit lower, but on a blended basis, we want to be over 30%, internal rate of return closer to 40%. So those are probably the guardrails that we’re using. When I talk about how much more we’ve learned, it’s really driven around increasing the velocity of hospitals in our same-store sales initiatives. And order of magnitude may be we’ll invest an additional $2 million or $3 million next year than we otherwise would have anticipated. So definitely inside of our guardrails, but long term and foundational.

Well, the biggest opportunity, this is the overall market. I mean, we’re still in a very low underpenetrated market. And I’ll be saying this for the next 5 years. If you look at the number of pets that have some form of medical insurance, we’re over 1%, but we’re still under 2%. We want to try to grow the category growth. When we think about how to do that, it’s all around veterinarian first and making it normal and key. We have historically been growing the company by adding stores. Over the next few years, we feel it will become important for us to work on the same-store sales.

So as a reminder, our goal is to eliminate a slow cumbersome reimbursement model, where a pet owner fills out a bunch of paperwork and puts it in the mailbox and wait for 2 to 3 weeks to see if they are going to get paid. We think the problem we’re solving for pet owners is making it easier for them to budget for if and when their pet become sick or injured. And part of solving that problem is being able to pay hospitals directly at the time of invoice. Part of that solution is being able to integrate with practice management software in a way that makes the process very quickly. Our goal is to pay these invoices in under 5 minutes from the time those created. We like the results that we’re getting. But we want to speed up the velocity of the – number of places that we’re rolling it out now that we’re better at it. And we’re still in relatively early days to learn how to speed up the velocity, now that we like the results we get on a per hospital basis.


Tucows (Q3 2017 Results) – Earnings Call Transcript

The General Data Protection Regulation, or GDPR is a piece of legislation passed by the European Union to enforce tougher more consistent guidelines on organizations that operate across the region and particularly, global Internet companies and deals with customer data and product deployments. These guidelines impact the millions of domain names that we have registered to European end-users. So, we need to comply along with everyone else by May 25, 2018. This will require a significant investment in engineering. However, its work that needs to be done by everyone across our industry and across many industries and it plays to our engineering strengths. Also, other governments are starting to the EU’s lead and pass their own legislation. So, while the work will cause some pain in the short-term if we do it well better and faster than others, it could create some opportunities in the future.

This deal gives us access to the Otono eSIM platform. eSIM allows mobile users to choose and switch between networks without needing to insert and activate traditional SIM cards. In coming quarters, eSIM should allow Ting to support high-profile smartwatches and other exciting new connected devices. In coming years, eSIM should allow Ting customers to move seamlessly between networks on almost any device imaginable.


Chegg (Q3 2017 Results) – Earnings Call Transcript

In just four years the results have been dramatic, which Chegg now serving nearly ten million visitors in a month according to ComScore and we expect to have around four million paying customers in 2017. Further, we expect to have more Chegg Services subscribers than textbook customers for the first time in our history. Our Chegg Services revenue has grown from just $25 million in 2012 to what we expect will be over $180 million in 2017.

And given our new adjusted EBITDA guidance today, we will go from a company who was losing $16 million in adjusted EBITDA right before our IPO, to a company that is now forecasting nearly $45 million in adjusted EBITDA for 2017. This turnaround has helped us go from a company using over $100 million in cash each year to support a slow growth textbook business to a high growth, high margin learning company that now produces free cash flow. It’s been a successful transition and we feel like we’re just getting started.

As powerful as Chegg Study is already, we believe the service will become even more relevant to an increasing TAM, as we continue to expand its content and capability. To that end, we recently announced the acquisition of Cogeon, developer of the app Math 42, an adaptive A.I.-driven Math application, which has been downloaded over 2 million time. Math is the universal need and unfortunately a universal problem as 64% of U.S. students are not prepared for college level math, and over 40% of U.S. students take at least one remedial math course.

Even though students look to A.I.-driven tools to help augment their learning, we know that one-on-one human help will continue to be critical in the learning process, which is why we continue to invest in Chegg Tutors. In the third quarter, we saw the time students spent on the site increase, with an average student now spending 188 minutes in tutoring sessions throughout the semester in key subjects like computer science, calculus, statistics, finance and accounting.

The magic of what we are building is the ability to have access to millions of millions of millions of students and their records and their history, all the data about them it’s in our proprietary student graph, and then the ability to do matching based on that uniquely done by how we are capable of doing it versus others. So, we met with all the players in the space. Obviously, everybody would like access to this Chegg audience, but we believe what working on is going to be special and unique and has the opportunity to be huge.

So, we don’t see a reason with such high gross profit margins to change the price. But we do know we have significant pricing power, given the fact of not only the test results which you can just look at the usage. We have record usage in terms of how often they use it, how many pages they consume, what they use for the number of questions that they’re asking, the number of the subjects that they’re asking it in. I mean Chegg Study has become a beast, and we just — what we want to do is be able to grow as big as we can and invest in as much as we can and continue to increase the TAM. So we don’t have to think about pricing at this point, but we do know we have pricing power.

We actually believe and we try to say this on the last couple of calls which is the more we invest in the product, the more content, the more formats that we deliver that content, the more subjects, the greater the Q&A that we add. That the TAM is probably two to three times the size just in the U.S. alone about original number we gave out. And that’s because, it will cover the other 50% of subjects that we don’t cover. And it will go deeper in the subjects that we do cover. So we want wide at first now we’re going deeper. So we’re freshmen all the way through the seniors on key majors and that was not a year ago, the plan.


Workiva (Q3 2017 Results) – Earnings Call Transcript

…our ability to integrate Wdesk with more than 100 cloud, SaaS, and on-premise applications including Oracle ERP Cloud has expanded our TAM to $16.2 billion.

We continue to gain market share in the SEC compliance market, where Wdesk is considered a best practice. We’re also seeing more demand for Wdesk from foreign private issues that use IFRS taxonomy because they’ll be required to submit their SEC filings with XBRL tagging starting December 15.

We finished Q3 with 2,991 customers, a net increase of 295 customers from Q3 of 2016, and a net increase of 83 customers from Q2 2017. Our subscription support revenue retention rate excluding add-ons was 96.5% for the month of September 2017, compared with 96.1% in June 2017, and 95% in September 2016. Customers being acquired or ceasing to file SEC reports, accounted for a majority of the revenue attrition, consistent with our experience to date. With add-ons, our subscription support revenue retention rate was 108.6% for the month of September 2017, compared with 106% in June 2017, and 108.7% in September 2016. Increased subscription revenue on non-SEC use cases from existing customers continues to be the primary driver of our add-on revenue retention rate.

 

Curated Insights 2017.11.19

Winners and losers In the patent wars between Amazon, Google, Facebook, Apple, and Microsoft

Google: The full stack AI company

A startup might achieve a breakthrough in an AI vertical, but reaching hundreds of millions of users could take years. The same breakthrough in Google’s hands could be “turned on” for a billion users overnight. Users benefit immediately, while Google’s products become sticker and more valuable.

Google is already seeing a similar benefit. While competitors are using off the shelf processors for deep learning, Google’s TPU provides higher throughout, reduced latency and, perhaps most importantly, reduced power consumption. Because data center construction is Google’s largest capital spending line item and power its highest operating cost, the TPU meaningfully reduces both Google’s capex and opex.

Google’s AI efforts have built a fully integrated company that spans algorithms, data, hardware, and cloud services. This approach helps funnel the world-class AI of Google’s consumer products to its enterprise offerings, providing Google Cloud with a competitive edge. Bringing chip design in-house increases Google’s AI moat by improving performance, lowering latency, and reducing cost. Perhaps most critically, vertical integration enhances its organizational agility: Google can steer all parts of its organization to bring a new product or service to market. Consequently, Google’s AI will be at the forefront of the innovation for years to come.


How Facebook figures out everyone you’ve ever met

Shadow contact information has been a known feature of Facebook for a few years now. But most users remain unaware of its reach and power. Because shadow-profile connections happen inside Facebook’s algorithmic black box, people can’t see how deep the data-mining of their lives truly is, until an uncanny recommendation pops up.

Facebook doesn’t like, and doesn’t use, the term “shadow profiles.” It doesn’t like the term because it sounds like Facebook creates hidden profiles for people who haven’t joined the network, which Facebook says it doesn’t do. The existence of shadow contact information came to light in 2013 after Facebook admitted it had discovered and fixed “a bug.” The bug was that when a user downloaded their Facebook file, it included not just their friends’ visible contact information, but also their friends’ shadow contact information.

It’s what the sociologist danah boyd calls “networked privacy”: All the people who know you and who choose to share their contacts with Facebook are making it easier for Facebook to make connections you may not want it to make. Shadow profile data powers Facebook’s effort to connect as many people as possible, in as many ways as possible. The company’s ability to perceive the threads connecting its billion-plus users around the globe led it to announce last year that it’s not six degrees that separate one person from another—it’s just three and a half.

“Mobile phone numbers are even better than social security numbers for identifying people,” said security technologist Bruce Schneier by email. “People give them out all the time, and they’re strongly linked to identity.”


Will Amazon disrupt healthcare?

Amazon is exceptional at developing formulas to increase efficiency and decrease waste — two vital elements sorely lacking in the current healthcare paradigm.

Baby boomers may be tethered to their in-person interactions with physicians and pharmacists, but millennials are not. They are Amazon’s target audience.

Amazon has several key advantages in a world of personalized medicine — loads of storage space because of its AWS business, sophisticated predictive algorithms, and long-standing, data-rich relationships with millions of “patients”.


How Netflix works: the (hugely simplified) complex stuff that happens every time you hit Play

Netflix estimates that it uses around 700 microservices to control each of the many parts of what makes up the entire Netflix service…And that’s the tip of the iceberg. Netflix engineers can make changes to any part of the application and can introduce new changes rapidly while ensuring that nothing else in the entire service breaks down.

Turns out that Netflix and Amazon’s partnership turned out to be a huge win-win situation for both companies. Netflix turned out to be AWS’s most advanced customers, pushing all of their capabilities to the maximum and constantly innovating upon how they can use the different servers AWS provided for various purposes — to run microservices, to store movies, to handle internet traffic — to their own leverage. AWS in turn improved their systems to allow Netflix to take massive loads on their servers, as well as make their use of different AWS products more flexible, and used the expertise gained to serve the needs of thousands of other corporate customers. AWS proudly touts Netflix as it’s top customer, and Netflix can rapidly improve their services and yet keep it stable because of AWS.


People watch Netflix unabashedly at work (and in public toilets, too)

About 67% of people now watch movies and TV shows in public, according to an online survey it commissioned of 37,000 adults around the world. The most popular public places to stream are on planes, buses, or commuting, the survey found. But 26% of respondents also said they’ve binged shows and movies at work. People in the US were more likely to stream from the office, while users around the world were more likely to stream during their commutes.

For Netflix, mobile still makes up a small chunk of overall viewing. Netflix said it was about 10% as of 2016. But the company also said half of its users stream from a smartphone during any given month. Its audience is now around 110 million subscribers worldwide.


Will traditional auto makers steal the future from Tesla?

Even if electric cars take off in the early to mid-2020s when their cost is likely to be comparable to gas- and diesel-powered vehicles, Garschina thinks the major global auto makers will still dominate the business. Credit Suisse auto analyst Daniel Schwarz recently wrote that auto makers would emerge as winners from simpler, less capital-intensive production of electric vehicles over the next 10 years.

Investors might not be giving the auto industry credit for manufacturing skills honed over decades. As Tesla has found, mass-producing automobiles isn’t easy; the company continues to lose money and grapple with production woes. “The more we learn about new technologies, the clearer it becomes that the key auto makers won’t be disrupted overnight,” says Arndt Ellinghorst, a European auto analyst with Evercore ISI.

Morgan Stanley has estimated that it could take $2.7 trillion of infrastructure investment by 2040 to support a global electric fleet, including 473 million home chargers and seven million super-charging stations. It’s unclear where all that money will come from. The additional need for electricity would be equivalent to current U.S. demand.


These hot restaurants aren’t on maps, only in apps

Virtual restaurants, with their low overhead, are allowing restaurateurs to shift away from the capital-intensive model that kills 60% of new restaurants in their first five years toward something decidedly more techy.

By far the biggest company in the app-driven food-on-demand space is Grubhub. It is so invested in virtual restaurants that two years ago it lent one of its own customers, Green Summit Group, $1 million to expand. Green Summit, which launched in 2013, has kitchens throughout New York City, Todd Millman, its co-founder, says. There might be up to 10 different “restaurants” In a single kitchen. Though they appear on Grubhub as separate establishments, each with a distinct cuisine, all the food might be prepared in the same kitchen by the same staff.

In San Jose, Grubhub competitor DoorDash has built out its own kitchen space. There is one tenant so far, a pizzeria called the Star. (More are on the way, DoorDash says.) To save on rent, DoorDash built the facility in a disused portion of the Santa Clara County Fairgrounds. One month in, the Star’s savings have been notable, says Ben Seabury, chief operating officer of the 1100 Group, which owns the virtual restaurant. Typically, 30 cents of every dollar that comes into one of his restaurants goes to labor, says Mr. Seabury. But without waiters, bartenders and dishwashers, that cost is just 10 cents on the dollar—and even less when demand is high.

Virtual restaurants tap into a larger trend: Americans’ increasing aversion to cooking for themselves. For the first time ever in 2016, Americans spent more at eating and drinking establishments than on groceries, according to U.S. Census data. The food-delivery market is a small slice of that sector: It is only $30 billion in 2017, but Morgan Stanley estimates it could balloon to $220 billion within a few years.

 

Digitizing cash transactions could become quite profitable

Turning financial data into an asset is an early stage opportunity. On a global basis, more than 80% of transactions still occur in cash. Indeed, companies and, at some point, consumers have yet to digitize more than 1.4 trillion transactions per year, roughly equivalent to the number of Google searches per year. Our research indicates that the information associated with digital cash transactions could generate approximately $100 billion of revenue per year.

While we believe that disrupting and digitizing cash transactions represents a large “fintech” opportunity, the benefits are unlikely to accrue to the traditional financial services industry, as it lacks the requisite innovation agility, cost structure, and technical abilities to access and exploit it. Instead, innovative technology companies like Amazon, Google, Facebook, and Tencent that already are transforming big data into big revenue, probably will capitalize on this opportunity.

Companies with the ability to develop deep and dynamic insights into consumer purchasing behavior will be in the best position to capitalize on this $100 billion revenue opportunity. Square, Tencent, Facebook, Amazon, and Alibaba are building the most precise consumer profiles, enabling them to offer value added services like capital loans and insurance either now or in the not-to-distant future. We believe these companies are building significant moats, or barriers to entry, with “value loops” generating more data from their consumers and building products that take increasing share in the marketplace.


Hasbro sets its sights on Mattel

Hasbro has held up relatively well. Chief Executive Brian Goldner has forged close ties to Hollywood, where the company is producing movies and is a favored partner for creating toys tied to films. In recent years, Hasbro won the coveted license for Walt Disney Co.’s Disney Princess characters and has long made toys tied to the media company’s “Star Wars” franchise. Hasbro is also more advanced in telling stories and creating content around its large brands, including a string of feature-length films for its Transformers franchise and more-recent launches like a My Little Pony movie.

Both Hasbro and Mattel were stung by the Toys “R” Us bankruptcy, which threw a major sales channel into turmoil and prompted them to stall deliveries to the retailer, but Mattel’s problems run deeper. The new regime laid out a plan that would keep the company in turnaround mode for a few more years as it tries to fix problems that it blamed on past management. Those included a proliferation of new toys with little staying power that heaped additional costs and complexity onto Mattel’s supply network.

A bigger concern was that a tie-up could trigger change-of-control clauses in the numerous licensing agreements with the likes of Disney, Nickelodeon and others.

Free games fuel $370 billion stock rally – and fears of a crash

In free-to-play games, 2% of players typically generate around 50% of revenue, according to consultancy Yokozuna Data. High-rollers often spend at least $500 per month. Today, the industry generates $100 billion in revenue with about 70 percent coming from in-game goods and services, according to Goldman Sachs Group Inc.

The industry is exploring dark territory. Last month, an Activision Blizzard Inc. patent surfaced which described how machine learning could be used to entice players to spend more. For example, a player could be paired with a teammate who owns a special paid item, and then encourage the player to buy it too.


It’s amazingly cheap to acquire a fleet of Airbus jets

Bill Franke’s airlines are generally fast-growing and profitable, in part because of low expenses and using the latest fuel-efficient jets. All three have exclusively adopted the A320 jet family for cost reasons too, as it makes it easy to swap flight crews and maintenance is less complicated.

Instead of buying jets outright, Frontier, Wizz and Volaris use sale-and-leasebacks. This makes financial sense. One industry observer says the cost of lease finance might be half that of funding an aircraft with equity because of the flood of cheap capital, much of it Chinese. By avoiding ownership, airlines also sidestep residual value risk. If a plane’s value falls, that’s the leasing company’s problem, not Franke’s.


Bob Lutz: Everyone will have 5 years to get their car off the road or sell it for scrap

We don’t need public acceptance of autonomous vehicles at first. All we need is acceptance by the big fleets: Uber, Lyft, FedEx, UPS, the U.S. Postal Service, utility companies, delivery services. Amazon will probably buy a slew of them. These fleet owners will account for several million vehicles a year. Every few months they will order 100,000 low-end modules, 100,000 medium and 100,000 high-end. The low-cost provider that delivers the specification will get the business.

These transportation companies will be able to order modules of various sizes — short ones, medium ones, long ones, even pickup modules. But the performance will be the same for all because nobody will be passing anybody else on the highway. That is the death knell for companies such as BMW, Mercedes-Benz and Audi. That kind of performance is not going to count anymore.

Car dealers will continue to exist as a fringe business for people who want personalized modules or who buy reproduction vintage Ferraris or reproduction Formula 3 cars. Automotive sport — using the cars for fun — will survive, just not on public highways. And like racehorse breeders, there will be manufacturers of race cars and sports cars and off-road vehicles. But it will be a cottage industry. The era of the human-driven automobile, its repair facilities, its dealerships, the media surrounding it — all will be gone in 20 years.


Sean Stannard-Stockton interview: Shifting competitive landscapes

Today, if you log-on to Amazon and type in what you’re looking for – not a brand name, but a type of product – the #1 ranked item, regardless of brand, is likely to have thousands of reviews. If those reviews are say 4 or 4 ½ stars or better – with reviews from thousands of people, most consumers will happily purchase the item, no matter what the brand is. In this case, Amazon has effectively not just become a logistics provider, not just made shipping easy, not just benefitted from network effects, but it has inserted its own brand into the purchasing behavior – and so the consumer says, ”I trust Amazon and Amazon’s reviews so much that I don’t need to spend time searching or depending on a brand name, I can simply purchase the product no matter what its brand is.”

 

U.S. to dominate oil markets after biggest boom in world history

By 2025, the growth in American oil production will equal that achieved by Saudi Arabia at the height of its expansion, and increases in natural gas will surpass those of the former Soviet Union, the agency said in its annual World Energy Outlook. The boom will turn the U.S., still among the biggest oil importers, into a net exporter of fossil fuels.

Reflecting the expected flood of supply, the agency cut its forecasts for oil prices to $83 a barrel for 2025 from $101 previously, and to $111 for 2040 from $125 before.

 

I always used that as a metaphor for businesses. The customers pour in the Tender Vittles and in the U.S., when you had a union, they would fight and spill the whole bowl of Tender Vittles. In the end, no one could eat anymore. I looked at U.A.W. “It’s insane, they’re going to kill their company.” Sure enough, they damn near did. General Motors was almost bankrupt. In Germany, the unions have representatives on the board of the company. Yes, they say, “The first thing” — that this bowl of Tender Vittles — “we have to make sure that the bowl is there. We can fight all we want, but don’t spill the bowl.” You don’t destroy your company. That was not the attitude of Anglo-Saxon unions, either in England or the U.S.


Countries with the most farmland

The USDA now estimates that there is 15%-20% more farmland on earth than we expected. That’s 250 to 350 million more hectacres! With this addition, the USDA estimates there’s 1.87 Billion acres of farmland on earth.

In terms of total net cropland, this new study declares India as number 1.

 

 

Electric cars’ green image blackens beneath the bonnet

The Earth’s ozone hole is shrinking and is the smallest it has been since 1988

Warmer-than-usual weather conditions in the stratosphere are to thank for the shrinkage since 2016, as the warmer air helped fend off chemicals like chlorine and bromine that eat away at the ozone layer, scientists said. But the hole’s overall reduction can be traced to global efforts since the mid-1980s to ban the emission of ozone-depleting chemicals.

In June, scientists identified a possible threat to the recovery, believing dichloromethane — an industrial chemical with the power to destroy ozone — doubled in the atmosphere over the past 10 years. If its concentrations keep growing, it could delay the Antarctic ozone layer’s return to normal by up to 30 years, according to the study published in the journal Nature Communications.


How much is the Great Barrier Reef worth? Economists just figured it out

It came up with a value of A$56 billion ($43 billion) based on an asset supporting tens of thousands of jobs and which contributes A$6.4 billion to the economy. “Valuing nature in monetary terms can effectively inform policy settings and help industry, government, the scientific community and the wider public understand the contribution of the environment, or in this case the Great Barrier Reef, to the economy and society,’’ the Deloitte report said. “The tight and unforgiving deadline the Great Barrier Reef is up against necessitates an understanding of its true value to know what kind of policy action is required in response.’’


Why do we love pets? An expert explains.

In his latest book, Bradshaw argues that our fascination with pets is not because they’re useful, nor even because they’re cute, and certainly not because they’ll make us live longer. Instead, he writes, pet-keeping is an intrinsic part of human nature, one rooted deeply in our own species’ evolution.

People with animals, or as simply described as having a friendly dog with them, instantly become more trustworthy in the eyes of the person who’s encountering that person or having that person described to them.

The idea that simply getting a pet is going to make you happy and de-stress you is not going to work if you don’t do the homework about what the animal needs.

Both dogs and cats are carnivores — the cat is a very strict carnivore. The idea that we can continue to essentially farm the world in a way that provides enough meat for dogs and cats to eat, let alone humans, is probably not sustainable. Whether it will be possible for people to continue to keep these animals, or what kinds of substitutes they find if it does become impossible, I think is going to be fascinating, if somewhat painful for the people involved.

 

Why $450 Million for this painting isn’t crazy

Would 7.5 million people a year pay an average of 9 euros to visit the Louvre if La Gioconda, as the painting is sometimes called, weren’t there? If just a million of them passed on it, the museum would lose the entire amount paid for “Salvator Mundi” over 50 years.

It’s difficult to imagine anyone hoping to make much of a profit on a resale after paying such an outrageous price. But building a museum’s pitch for visitors around it could be a way to make economic sense out of the deal.