Friday, March 30, 2007

Cash Flow of Subscription Businesses

RHT just reported their earnings. Wall Street is starting to understand the power of their subscription business model, but not quite enough yet. When the press release was done at 4:00PM, the stock dove because earnings per share only met analyst estimates. It seems Wall Street is still watching the earnings line way too closely. Of course the stock rallied in after-after hours trading, and will probably be up today because Charlie Peters (the super-CFO) said that cash for for this coming year would be $250-260M. That is well over $1.10 per share of free cash flow on a stock that trades around 24 - a a multiple of about 22-23. On a company where annual revenue rose 44% last year!

A subscription can not be counted as revenue immediately by a company. It has to be spread out over the course of the year (or however long the contract is), with the customer paying up front. This is why it is a great cash flow business. Cash flows in before the expense. In a steady-state company (one that is not growing or contracting), the cash flow would be exactly the same as profit since every quarter a company would book as much revenue and they would report for that quarter. And since expenses would be level, the cash flow would equal the profit.

But RHT is a growing business. If RHT stopped investing in growth and turned to be a steady-state business overnight, the $250-260M cash flow that Charlie predicts would be a very close approximation for profit. But the RHT story is better than that since RHT is actually continuing to invest for growth - more products, new versions of products, more sales, more service, better management visibility, better renewal rates thru the channel, etc. So the top line will continue to grow - and so will the future stream of cash flow (and talk about the stickiness of the subscription with RHT achieving such a high rate of direct renewals). And even with this investment (and corresponding cash needs), the growth of cash flow continues.

Now, I am biased. I worked at JBoss for several years and think the combination is a good one. I own a good number of RHT shares, so I do cheer for great quarterly reports like this one. However, this is the same logic that we used at JBoss to build the business. It is the same logic that people still do not entirely understand about other fast growing, cash flow-based subscription business models where earnings is not all that meaningful of a measure of success. is the other mid-cap that comes to mind here (yes, I invest in them as well).

Sunday, March 11, 2007

What a workout!

The Moorestown Distance crew had an outstanding workout this Saturday. Probably the best one we have ever had - and we are only one week into the season!

The reason we are able to run so well is the ton of long slow distance so many of the guys did this winter. We had over a dozen guys running at least 40 miles per week!

The target was 2 or 3 times one mile - with each one being a faster time. We had several guys set personal records on their second and third miles (even after a hard first mile). The three stooges had a simply awesome workout - starting at 5:20, then dropping under 5:00 for the next two. It was fun to watch everyone cheer them on the last two laps!

Ryan had the breakout performance of the day, and has established himself as a serious runner after a great winter of 50 mile weeks. He will definitely be challenging for one of the very difficult Top 7 spots in the coming cross country season.

Matt also ran a great workout by himself the day before due to a trip this weekend - he is on track for a very nice season. Congrats also to Wylie, Micah, Nate, Ted, Jason, Steve, Brendan, and Andy on a great and fast start to the season. Sorry Alex was not feeling well enough for this one - I'm sure he would have run fast...

Monday, March 5, 2007

Yahoo, Google and Search Advertising

I bought some shares of Yahoo a few months ago. Here's the logic, and it will be interesting to see if it turns out to be true...

Google absolutely kills Yahoo in search marketing. If some company wants to place ads on a search engine for certain key words, Google simply makes it very easy to do. Yahoo's software for placing and managing ads was terrible - especially if you wanted to manage more than a few keywords (like the big advertisers do). Well, Yahoo just released a new version of their ad placement software in February, and the reports are that it is not yet as good as Google, but it is good enough.

This could be a big windfall to advertisers and of course to Yahoo. Yahoo gets plenty of clicks and searches (my new HP PC has Yahoo Search on the bottom menu bar of Vista). Now they can start to capitalize on this with more ad placements. This revenue should drop nearly straight to the bottom line. For someone buying ads - they just want more clicks to their web site and more sales, and typically are willing to pay the incremental cost of those additional clicks. So everyone wins. Well, maybe not Google, as there may be some amount of pricing pressure that starts to enter this market now that there are two places to buy ad words from...

Sunday, March 4, 2007

Bluestone Alumni

Barbara Murnane organized a little Bluestone alumni get-together on Friday night at Prospectors. You could recognize the Bluestone people in spite of how long it had been - we were the ones not wearing cowboy hats... There were probably 25 people or so that filtered in and out.

Tom Stiling noted that the 10th anniversary of going IPO is only 2.5 years away. Charlotte Cobb was not sure if she wanted to return to the rat race again and does not feel guilty about it. Mark Herlich is a storage consultant - doing work in the legal industry. Barbara is working down in Wilmington. Ron Welsh and Al Shaffer are working at Commerce Bank. Tom Styles is at CSC in Mt. Laurel. John Maron is still at Oracle - he and Laura have two kids that are more mature than him. Most of the Oracle folks are still over there he reports, including Erik Bergenholtz who went back after getting highjacked back to HP by Al Smith for a brief time. Greg Pavlik is a rising corporate star at Oracle because he loves flying back and forth to Redwood Shores so much (and he is getting his MBA at Wharton so he can be like Erik). Bill Durant was there wearing his old Bluestone logo shirt. Bruce Keim proved he had moved on with a new logo shirt - with both CA and EMC logos - I guess he is playing the field. Sam Martinelli was there in suit and tie - still at HP. Jason Dichter also made an appearance (sorry not to see his old side-kick Mark Parsonage), as did Dave Isaacson - two old-time Bluestone guys. Dave is still at HP, although hunkered in his basement working from home...

Also on the old Bluestone alumni front, Marlise and I had dinner with Al and Ginny Smith last weekend. Al is up at Princeton Softech - the company is doing very well in spite of hiring him a year ago. There is a pretty big Bluestone alumni club up there - Bruce Kratz, Jay Hiremath, Pete Petersen, Jim Sinisgalli, and a few more - making sure Al does not get into too much trouble...

The JBoss-Bluestone contingent seems to be doing well after the Red Hat acquisition. Friedman, Mazz, Jess, and Shaun Connolly are all still there. Tom Leonard and Joe McGonnell both left and have joined some other JBoss folks at OpenSpan in Atlanta.

As some of you may know, Cappy is the President of MEDicision( Danielle Russella is over there running sales. They went public a couple of months ago - so Cappy is in the quarterly rat race deep! Kevin is still at Baker Capital and doing VC investing stuff. Craig is the CFO of some company I can not recall off the top of my head, but I think they are going IPO as well. Kevin Harris is the CFO at a small public company, I-Many (he lives in Moroestown as well and we run into each other once in a while). Mark Nigro (still the smartest person I ever met) is also in Moorestown and still retired. Joe Krivickas was the CEO of Seque, which got bought by Borland last year. Andre Pino was with him as the head of marketing and is now head of marketing for Acsis. Tony Wasserman is the Director of the Software Management Program at Carnegie Mellon West ( and an open source expert. Dave Hunt and Joe Antonio are still at HP making sure their software acquisitions run just as smoothly as the Bluestone acquisition did. On the old, old Bluestone front, I just heard from Chuck Patrick that he and Christie had their 5th child - a boy, after 4 girls. Strangest of all is Rich Frisbie (not surprising), who is running a trucking company!

While the Bluestone days were great, it was good to see that everyone has moved on and explored new things. But it brought back a lot of very good memories of working with very good people. I was lucky to have been a part of it - thanks everyone!