The Future of Big Data is Cognitive Big Data Apps

Volume, Velocity, Variety and Veracity of your data, the 4V challenge, has become untamable.  Wait, yet another big data blog?  No, not really.  In this blog, I would like to propose a cognitive app approach that can transform your big-data problems into big opportunities at a fraction of the cost.

Everyone is talking about big data problems but not many are helping us in understanding big data opportunities.  Let's define a big data opportunity in the context of customers because growing customer base, customer satisfaction and customer loyalty is everyone’s business:

• you have a large, diverse and growing customer base

• your customers are more mobile and social than ever before

• you have engaged with your customers where ever they are: web, mobile, social, local

• you believe that "more data beats better algorithms" and that big data is all data

• you wish to collect all data - call center records, web logs, social media, customer transactions and more so that

• you can understand your customers better and how they speak of and rank you in their social networks

• you can group (segment) your customers to understand their likes and dislikes

• you can offer (recommend) them the right products at the right time and at the right price

• you can preempt customer backlash and prevent them for leaving (churn) to competitors and taking their social network with them (negative network effects)

• all this effort will allow you to forecast sales accurately, run targeted marketing campaigns and cut cost to improve revenues and profitability

• you wish to do all of this without hiring an army of data analysts, consultants and data scientists

• and without buying half-dozen or more tools, getting access to several public / social data sets and integrating it all in your architecture

• and above all, you wish to do it fast and drive changes in real time

• And most importantly, you wish to rinse and repeat this approach for the foreseeable future

There are hardly any enterprise solutions in the market that can address the challenges listed above.  You have no other choice but to build a custom solution by hiring several consultants and striking separate licenses agreements with public and social data vendors to get a combined lens on public and private data.  This approach will be cost prohibitive for most enterprise customers and as "90% of the IT projects go" will be mired with delays, cost overruns and truck load of heartache. 

The advances in technologies like in-memory databases and graph structures as well as democratization of data science concepts can help in addressing the challenges listed above in a meaningful and cost-effective way.  Intelligent big data apps are the need of the hour.  These apps need to be designed and built from scratch keeping the challenges and technologies such as cognitive computing[1] in mind.  These apps will leave the technology paradigms of 1990s like "data needs to be gathered and modeled (caged) before an app is built" in the dumpster and will achieve the flexibility required from all modern apps to adapt as the underlying data structures and data sources change.  These apps can be deployed right off the shelf with minimum customization and consulting because the app logic will not be anchored to the underlying data-schema and will evolve with changing data and behavior.

The enterprise customers will soon be asking for a suite of such cognitive big data apps for all domain functions so that they can put the big data opportunities to work to run their businesses better than their competitors.  Without dynamic cognitive approach in apps, addressing the 4V challenge will be a nightmare and big data will fail to deliver its promise.

Stay tuned for future blogs on this topic including discussions on a pioneering technology approach.

[1] Cognitive computing is the ability to analyze oceans of data in context with related information and expertise.  Cognitive systems learn from how they’re used and adjust their rules and results dynamically.  Google search engine and knowledge graph technology is predicated upon this approach.  

 This blog has benefited from the infinite wisdom and hard work of my former colleagues Ryan Leask and Harish Butani and that of my current colleagues Sethu M., Jens Doerpmund and Vijay Vijayasankar.

Image courtesy of  MemeGenerator

Data Science: Definition and Opportunities

Image courtesy of BBC

My thoughts on what data science is, what skills data scientists have, what are the current issues in the Business Intelligence pipeline, how can machine learning automate a part of the BI chain, why and how data science should be democratized and made available to every one including decision makers (business users), how business analyst should build complex data models and how data scientists should be freed up from the mundane tasks of rinse and repeat ETL before building models that provide input for decision making, how companies can build a business practice around data science. 

Key Premise: big data is all data and the big data apps offer the ability to combine all data (public + private) and expand the horizon to discover more meaningful insights.

Data Science is:

• An art of mining large quantities of data 
• An art of combining disparate data sources and blending public data with corporate data
• Forming hypothesis to solve hard problems
• Building models to solve current problems and provide forecast
• Anticipate future events (based on historical data) and provide correcting actions (finance, banking, travel, operational runtime)
• Automating the processes to reduce time to solve future problems

A Data Scientists has following minimum set of core skills:

• Problem-Solver
• Creative and can form an hypothesis
• Is able to program with large quantities of data
• Can think of bringing data from appropriate data source and can bring and blend data 
• Stats/math/analytics background to build models and write algorithms 
• Can quickly develop domain knowledge to understand key factors which influence the performance of a busies problem

Roles Data Scientists play:

• Problem description 
• Hypothesis formation
• Data assembly, ETL and data integration role
• Model development (pattern recognition or any other model to provide answers) and training
• Data visualization 
• AB Testing 
• Propose solutions and/or new business idea

The balance between human vs. machines:

• Current: humans play a significant role in the process – ETL, joins, models, visualization, machine-learning and repeating and recycling this process as the problem changes
• Tomorrow: A big portion of the food-chain can be automated via machine learning so machines can take over and scientists can free up to build more algorithms/models 
• The process can be automated so repeating/recycling can be cheaper and less time consuming

The Data Science pipeline currently look like:

• From Data to Insights – this entire process requires mundane skills (IT),  specialized skills (data-scientist) and elements of human psychology to present the right information at right time 
• The data needs to be discovered, assembled, semantically enriched and anchored to a business logic – this task can be be automated through machine learning (a set of harmonized tools with AI) to free up scarce resources
• Specialized skills today get addressed by open source technologies such as R and expensive solutions like Matlab and SPSS.
• Very few software solution carefully introduce human interface to make their application consumable without requiring customer training

This pipeline needs complete rethinking:

• Automate mundane tasks that IT gets tagged with 
• Discover data automatically 
• Detach business logic from data models
• Make blending public data with corporate data a second nature
• Free up scientists so that they can build analytics micro-apps for a domain or a sub-domain
• Data Science need not be a niche (specialized category), it should appeal to the masses (democratization of data and brining insights to everyone without needing specialized skills)

Opportunities in Data Science: 

• Understand the value chain (IT + Business Analyst + Data Scientists + Business Users)
• Provide something for everyone  - a single integrated platform (ETL + Data Integration + Predictive modeling + in-memory computing +  storage)  for data-scientist so that they can build standard analytical apps and move away from proprietary models and standardize (helps IT)
• Analytical apps on this platform (think of them as Rapid Deployment Solutions) for business users
• Help business analysts write basic models (churn, segmentation, correlation etc.) without needing advanced skills
• Work with consulting companies so that they can consult and build apps for companies that do not have data scientist on their pay-roll (Mu-Sigma and Opera Solutions)
• Partner with public data provider (to help clients), consulting companies (Rapid Solutions solution), R/Python/ML communities (mind-share and thought-leadership), 
• Donate your predictive models to open-source communities

Tableau IPO: Let The Gold Rush Begin For Enterprise Software IPOs!

The year 2013 is going to be the year of enterprise software IPOs.  That is not a prediction but well discussed point in Silicon Valley.  Everybody believes that there is a pent-up demand from return hungry investors for the enterprise software IPOs.  Consumer software IPOs have failed to live up to their promise in the last couple of years but the enterprise software IPOs have continued to deliver (examples: WDAY, NOW, SPLK), case-in-point.   

In the last couple of days, two of my favorite companies, Marketo and Tableau have announced plans to go public.  Here are the links to Marketo's S1 and Tableau's S1.  I have had the good fortune to study, evaluate and follow both companies since 2010.  Both the companies have done very well in their respective segments, SaaS marketing automation and on-premise self-serve BI.  They have both exceeded expectations on all fronts (employees, customers, analyst  markets, competitors) after a long hard slog.  

To all my friends, colleagues, investors and readers of this blog, enterprise software is a hard slog, you are in it for a long-haul.  Tableau is a 10-year old company and Marketo is 7 years old (Source:  SEC Filings).

Valuation

Since Tableau ("DATA") has announced its plan to go IPO this year, I decided to put the striped-down version of my due-diligence, performed in early 2011, on my slide-share account.  Back then, I used relative valuation using QlikView ("QLIK") as a close proxy to put a number on Tableau.  I used PE (earnings multiple) and PS (revenue multiple) of QLIK and assessed a market value of $380million based on Tableau's 2010 revenues of $40 million (from their press release in 2011, this number has been revised down to $34million in S1, huh, strange!)

Now, if one were to use QLIK's current revenue multiple of 5.5 (Source: Yahoo Finance), Tableau could be valued between $700million (based on trailing revenue of $128million) and 1.4billion (based on  $256million in expected revenue for 2013 assuming that they grow their revenue YET AGAIN by 100% in 2013.)

I personally don't think that the street should use QLIK as a proxy instead apply Splunk's ("SPLK") lens to value Tableau.  So using SPLK's multiple of ~19.7 (Source: Yahoo Finance), Tableau will be valued at $2.5billion based on their 2012 revenues.  ServiceNow ("NOW") also has a PS multiple of ~19. 

I have strong reasons to believe that street will be valuing Tableau in this range based on a great growth story till this point and amazing opportunities ahead as we are just starting to drill the BigData mountain.  I will not be surprised to see the valuation range from $2.5billion to $5billion. Amazing!

Tableau's S1

I studied Tableau's S1 filing briefly looking for information on valuation and offering on number of shares.  Not much is disclosed there just yet.  It will likely be disclosed in the subsequent filings as they hit the roadshow to assess the demand from the institutional investors.  Just like Workday, Tableau will also have dual class shares (Class A and Class B) with different voting rights.  The Class A will be offered to investors by converting the Class B shares. 

The last internal valuation of employee options priced the stock at ~$15.  To raise $150million, Tableau will at least be putting 10 million shares of Class A on the block.  Now of course, this will change as the demand starts to build up following their road-show.  One thing is certain that the stock will be definitely priced above $15.  Now, how many points above $15, we will find out in the next few months.  

Let the mad rush begin!!!

Apple, SAP & Hewlett-Packard: Not Just Numbers, Company's Vision, Strategy and Goals Also Matter For Investors (Part II)

Part I of this two-part blog offered empirical evidence suggesting that few consistently outperforming technology companies (such as AAPL and GOOG) get valuation treatments that defy conventional wisdom.  Part I ended by introducing an investment approach that was based on three simple rules and suggested that management's effectiveness in articulating its corporate vision and goals and its trustworthiness also plays a critical role in winning investors' sentiment.  Let's put each company through this test in part II of this blog and discuss the outcome.

First up, AAPL:  For AAPL, I can safely conclude that the first two rules are securely in the bag.  Investors understand the company and its hugely popular products.  It has successfully sailed with the wind for the past decade and I might even argue that it brought fresh wind in the sails of tablets and smart phone segments.  But when it comes to applying the third and final rule, i.e.  investing in AAPL for the mid-to-long term, and thus paying a reasonable multiple, investors are certainly hesitating to act.  From investors’ point of view, the investment decision boils down to following two points:

•  AAPL gets fresh lease of life every year when it upgrades its iLine (iPads, iPhones, iPods and Macs) of products;
• But other than this routine, AAPL management is highly secretive about its vision for the future of AAPL.

For AAPL investors, it is challenging to see beyond a one year horizon.  The investors are asking larger questions to AAPL including:  a) what does AAPL want to be in 5 years and where will it be?  b) Will AAPL dominate some market segments as it does today, if so, what is that longer-term strategy?  Until, AAPL addresses these questions and clearly articulates its strategy and the goals tied to its strategy, it will be hard to see why investors would apply SP500 like or higher multiples on AAPL.

Next up, ORCL: For ORCL, I would start by arguing that ORCL is suffering from a credibility problem with the investors.  Investors get ORCL’s enterprise software and hardware business which is attractive and growing at a secular rate.  ORCL has accepted that inorganic growth model (via acquisition) is the way to move its business forward and stay current on the technology innovation front.   Besides all this, its earlier position on cloud technologies (calling it a fad) and then turning into a true cloud believer (with the acquisition of RightNow, Taleo and its own investments) has sent mixed messages to investors. 

ORCL has done a poor job of laying out its long-term vision for investors and investors are unhappy because they are unable to see a clear path forward.  Does ORCL want to be like its big brethren IBM and package hardware, software, services and cloud infrastructure together for its customers?  What does ORCL want to be?  What are some of its growth plays?  ORCL has attempted to articulate its vision to investors and analysts but the reduced trustworthiness and the past delays in strategic investments have kept investors skeptical at best.  ORCL needs to win the credibility back from its investors and shy away from sending mixed messages to investors and its own customers.

Next up, HPQ:  I don’t know where to begin with this company.  Let’s start at the very top, the board. HPQ’s board has had major credibility issues for many years now because of the scandals and terrible decisions that have resulted in billions of dollars of losses for investors.  The epic stumbles such as the launch of Palm based tablets/smart phones (and then the immediate pull out), public display of flip-flopping decisions on spin-off for Personal Computer unit and then having three CEOs at the helm of HPQ in less than three years has not pleased investors. 

In addition, HPQ’s core businesses continue to suffer resulting in heavy losses because it has been slow to respond to the shift in technology spending to cloud and mobile technologies.  HPQ’s market cap has dropped by more than 80% since peaking at approximately $120B in 2010.  Investors have little to no confidence in HPQ and are pricing in rapid erosion of its customer base and sales (which is reflected in a low price/sales ratio of 0.23.)

Next up, GOOG:  GOOG has wide range of interests resulting in a large array of investments including the investment in driver-less cars.  Not all the projects GOOG has undertaken in recent years have been positive NPV projects and as a result GOOG’s stock has same P/E multiples as that of SP500.  GOOG wants to be a technology company and all the investments GOOG makes have this common origin.  This is a fact but why investors are not comfortable with it?  Is GOOG not effective at convincing investors that this approach is right and will bear fruits?

Is GOOG going to be a media company, or a mobile company, or a hardware company, or an Internet bandwidth company, or a search company or an enterprise software company or all of the above (i.e. a tech conglomerate)?  Apparently, GOOG’s vision and  roadmap are not very clear to investors which is why GOOG had lackluster performance for the first six months of 2012 prior to Q2’s earnings announcement.  I believe that investors have adopted a wait and watch approach on GOOG which is a mature company now but surrounds itself with a high number of uncertainties.

Next up, IBM:  IBM is securely in the bag using the rules I laid out in Part-I.  By 2015, IBM will generate $20 in non-GAAP EPS - this is IBM’s corporate goal for 2015.  I believe that investors should love the simplicity of IBM’s singular goal.  IBM has done a nicejob in articulating its corporate goal for 2015 including the key growth plays that will drive IBM forward to its goal.  The key growth plays from IBM are emerging markets, Analytics, Cloud and Smart Planet initiatives.  IBM has also articulated that it will pursue higher-margin opportunities (i.e. software) and use share repurchase programs to boost EPS.  IBM’s EPS in 2011 was $13.4 which would have to rise by 50% in 4 years if IBM were to accomplish its goal of producing $20 EPS by 2015.

Both AAPL and IBM are iconic and trusted brands.  IBM has provided a clear vision and a path forward but AAPL has not, therefore I am not surprised to see that both IBM and AAPL received similar Trailing and Forward P/E multiples despite the fact that AAPL’s earnings growth is nothing less than spectacular.

This brings me to the last company I will discuss here, SAP:   Just like IBM, SAP is also securely in the bag.  SAP is a global brand and plans to reach 1 billion people in an attempt to become a household name.  I have found SAP to be a goals driven company and it is taking all the necessary steps (both organic and inorganic growth opportunities) to track towards these goals.  This is similar to IBM’s approach but more clearly spelled out.  Here are the goals that SAP has laid out for 2015 on its corporate website:

Source: SAP' Corporate Website

Additionally, just like IBM, SAP has also clearly articulated its growth strategy and the five market categories it plans to expand into.  These categories are: applications, analytics, mobile, database & technology, and the cloud.  SAP’s management has not sent mixed messages to the market (unlike ORCL) since sharing its vision and goals for the future and is gearing up to ride both the mobile (with Sybase and Syclo acquisitions) and the cloud trends (with SuccessFactor and Ariba acquisitions).  

SAP is not the only company growing its revenues at a double digit rate for more than 10 quarters, but it is logging that performance on a consistent basis and tracking towards its 2015 corporate goals.  Investors are cheering this steady performance and have bid up the stock by more than 35% YTD in 2012, higher than every other stock in the group except AAPL (see the graphics below):

  

Source: Google Finance

Majority of the public companies, if not all, develop a vision, lay out a clear strategy and announce goals to realize that vision.  But some do a better job than others in articulating and sharing this on a regular basis with their investors.  Companies that clearly articulate their vision and strategy to all their constituents including customers, employees, partners and investors earn respect almost instantaneously.  And when these companies publicly track progress against their vision, they benefit tremendously by winning the trust and credibility from each and every constituent (including investors) allowing them to attract top talent, new customers, new partners and new markets to help them grow their business. 

This blog has benefited from the discussions with my friends and colleagues Jens Doerpmund, Ryan Leask and Rajani Aswani on this topic.

Disclaimer:  All numbers are approximate and the underlying analysis is preliminary.  This blog is not intended for offering any investment advice.  SAP is my employer but all the views and opinions expressed here are solely mine.

Apple, SAP & Hewlett-Packard: Not Just Numbers, Company's Vision, Strategy and Goals Also Matter For Investors (Part I)

In this two-part blog, I will share my view points on why investors price certain stocks at higher or lower multiples against market defying conventional wisdom which suggests that higher (lower) growth stocks should fetch higher (lower) multiples than that of the market.  

In part I of this two-part blog, I offer empirical evidence suggesting that few consistently outperforming technology companies get valuation treatments that defy conventional wisdom.  Faster growing companies get lower multiples while slow and steadily growing companies get higher multiples.  

In part II of this blog, I will conclude by suggesting that a clearly articulated long term strategy along with measurable corporate goals play an equally important role together with the company’s financial track record and market beating performance in winning investors' heart (and getting higher multiples.)  

To help me illustrate my view points, I assembled a small group of traditional tech companies including Apple (Ticker: AAPL), Oracle (Ticker: ORCL), Hewlett-Packard (Ticker: HPQ), Microsoft (Ticker: MSFT), IBM (Ticker: IBM), SAP (Ticker: SAP), and Google (Ticker: GOOG).  I selected S&P 500 (SP500) as the market.  

As of Oct 19, SP500’s Trailing P/E and estimates for Forward P/E were 17 and 13.8 respectively (see the side table.)  AAPL’s 52-weeks return of 50.5% has markedly outpaced the same period return of 9.95% for SP500.  In addition, AAPL’s earnings growth has substantively outpaced that of SP 500 for five straight years (see the side chart). So I started to wonder why AAPL’s Trailing and Forward PE multiples of 14.3 and 11.4 trail that of S&P 500 (see the table below).  Is there a crisis looming for AAPL that could be bigger in magnitude and impact than those faced by the financial markets including the never-ending debt crisis in Europe, a worsening slowdown in China and an already unraveling fiscal cliff in the US.  So, why are investors not pricing AAPL using the multiples of SP500 at the minimum?

Consider SAP:  In a peer group comprising of  four enterprise software tech companies - SAP, IBM, ORCL and MSFT, SAP has the highest Trailing P/E and the highest Price/Sales ratio (see the table below).  SAP’s Forward P/E of 19.7 is 9 points higher than that of ORCL, 11 points higher than that of MSFT and 8 points higher than that of IBM.  In addition, SAP’s Forward and Trailing P/E multiples are also higher than that of SP500!  So, why investors are willing to price SAP stock at higher multiples than the others in its peer group including the SP500.  Interestingly, SAP’s multiples are also higher than that of AAPL.  

Finally, let’s drop HPQ into the mix:  HPQ’s TTM revenue was $61.9 per share (see the table above).  Its stock is trading at a meager P/S multiple of .2x and has a Forward P/E multiple of just 4.  This is not hard to explain as there is no love left between HPQ and its investors who have suffered heavy losses in HPQ which has dropped almost 50% just this year alone.  In addition, at such lower multiples, investors are definitely pricing in a catastrophic scenario.

Source: Morning Star and Yahoo Finance

For all these companies, I assembled last 5 years income statements and I reviewed their revenue growth rates (see the side table).  Nothing jumped out that could have suggested why AAPL should have lower multiples than the SP500, GOOG or  SAP.  Clearly, there is something else at play which traditional valuation approach is not explaining.

Investors’ actions in HPQ, AAPL, SAP and its peers can be justified by applying following three simple rules of investment: 

1. invest in companies you know, understand and believe;
2.  invest in companies which are going to persist, pursue positive NPV projects and successfully sail with the wind (market trends); &
3. invest in companies for mid-long term.

 Investors closely scrutinize, more than one would desire, the company management’s effectiveness in articulating its future and corporate goals and the trustworthiness.  This is where the “believe” part in the first rule comes in.  In part II of this blog, I will apply this set of principles to few companies in this group and discuss the outcome.

This blog has benefited from the discussions with my friends and colleagues Jens Doerpmund, Ryan Leask and Rajani Aswani on this topic.

Disclaimer:  All numbers are approximate and the underlying analysis is preliminary.  This blog is not intended for offering any investment advice.  SAP is my employer but all the views and opinions expressed here are solely mine.

Preparing for Workday (WDAY)’s IPO: Betting on the Future

My esteemed colleague Ryan Leask (LinkedIn Profile) and I have co-authored this three-part blog offering our insights on Workday's IPO.

This is part 3 in our blog on Workday’s IPO.  Part 1 looked at Workday vs. Salesforce.  Part 2 looked at Workday vs. SFSF, TLEO, NOW and CRM

 To try and summarize all of the analysis from the first and second blog posts:

• Workday’s revenue numbers and growth are fantastic.
• But their costs are extremely high.  While we understand the focus on “growth now, profits later”, the costs are still pretty extreme. 
• In comparison to a few other companies, we did find that SuccessFactors operations had a somewhat similar cost structure to Workday, so they aren’t alone in their high costs. 
• In general, Workday’s costs and profit margins are heading in the right direction as they grow, so if we give them the benefit of the doubt that they continue in this direction in the future, they should be able to get more in line with other SaaS companies.
• We would not expect profitability in the next several years (Workday states as such in the S-1)

So the purpose of this blog is not to reiterate Workday’s numbers, but is instead to offer our own conclusions from staring at this data for a while and working in this industry.

Prior to going into the S-1 details, we thought Workday would be a slam dunk, and our only concern was the overall macro environment they are IPO’ing into.  However, looking at their surprisingly high costs, we think it is going to take quite some time before Workday becomes profitable, and we think these costs indicate Workday might be betting the house on moving itself outside of the HCM domain. Workday did mention this as a risk in their S-1, in that they don’t have proven success outside of the HCM domain yet, and only 10% of their customers (i.e. around 30 customers) have adopted their financial module.  Looking at these numbers, we think this point may have been understated in the S-1.

In this sense, Workday’s IPO feels a lot more like a late-stage VC round than an IPO to us.  It seems they are almost looking for money to try and find product-market fit for their new Finance product line.  If they had chosen to sit back and ride their HCM business harder instead of investing into the finance area,  the figures we’re seeing would be a lot more attractive.

But, it looks to us like they are really betting big to make longer term investments (which we are a big fan of).  A prime example of this is their dual-class structure of its common share.  We love this tactical move which allows Workday to build a great company and not get dragged into a bitter take-over fight (cough, Oracle-PeopleSoft, cough).

Going into its IPO, Salesforce had multiples of 11.6 and 6.3 on TTM and FTM revenues respectively.  It went on to return more than 900% over the next 8 years!  Workday has TTM and FTM multiples of 31 and 14 going into IPO, so it is hard to believe that it will yield a return similar to Salesforce, and we’re anticipating returns more like those SuccessFactors and Taleo produced (at least over the next several years).  In hindsight, Salesforce’s IPO was a steal.

What this IPO comes down to for us, is that you have to decide for yourself whether Workday is going to nail the Finance market like they did HCM… or not.  If yes, it’s a great buy.  If not, they are going to continue plowing through the cash the HCM business generates for a lot longer.  It certainly feels like Workday is carrying more risk than we would have first thought, but it is a great company with great historical growth and even better prospects for the future growth.  Perhaps the timing of this IPO is more a reflection of the uncertainty at the macro level, as this might possibly be their last chance for a while if the fiscal cliff kicks in?

Disclaimer: All numbers are approximate.  We are not offering any investment advice and all the analysis we have performed to support our blogs is preliminary.

Preparing for Workday (WDAY)’s IPO: Workday vs. SuccessFactors, Taleo, ServiceNow and Salesforce.com

My esteemed colleague Ryan Leask (LinkedIn Profile) and I have co-authored this three-part blog offering our insights on Workday's IPO.

This is part 2 in our blog on Workday’s IPO.  Part 1 looked at Workday vs. Salesforce.  And the third and final part provides an overall summary.

To quickly recap the first blog in our three-part series, we discovered WDAY’s cost structure was significantly higher than we anticipated when we looked at their S-1.  In a quest to understand this, we looked at Workday (Ticker: WDAY) against SalesForce.com (Ticker: CRM), and discovered some major differences in their business models.  As a result, in this blog, we wanted to take some other sample companies to compare to WDAY, in the hopes of finding a company that might show some more similarities.

As a point of note, we will continue to leave the CRM figures in the information presented here for comparison purposes.  Our sample of new companies are SuccessFactors (Ticker: SFSF) and Taleo (Ticker: TLEO), both HCM SaaS companies (perhaps our best candidates for comparison), as well as ServiceNow (Ticker: NOW) (although they are in a different space, they are an cloud based enterprise software company which also IPO’d in 2012, so we thought it could just be an interesting comparison point).  And as a disclaimer, note that these comparisons are not precise.  For example, WDAY is going to IPO about 9 months after the last full year of data is available, so their IPO price as an example, may be more based on this year’s results rather than last year's. With that said, we are just looking for generalities and trends, so an imprecise comparison is still ok.  So let’s jump right in.

We assembled the following table by pulling the data from each company’s S-1 to provide a perspective on WDAY’s valuation: 

WDAY is attempting to raise more capital than anyone else did, and they are asking a 31x multiple on TTM revenues.  This is by far the highest in this set, but when compared on FTM, it’s 14x multiple is a bit closer to what we would expect to see (albeit still rather high).  So it does not appear WDAY is a bargain buy like CRM was (at 6x FTM multiple).

Here also is the same figure from the first blog, extended for our new comparison companies, showing some key metrics of the last fiscal year of information before the IPO:

Some quick eyeballing of the numbers tells us that WDAY:

• has lot more employees than any other company before going IPO;
• does way more consulting services business than the comparisons;
• has a lot less customers than the comparisons, except for Taleo who very similar numbers;
• generates MUCH more revenue per customer than their peer group.  Even if we exclude the services revenue from WDAY, they are around $272k per customer, which is remarkably higher than any of the comparison group; and
• spends massively more on R&D cost (as a percent of its revenue) than the others.

So let’s look at a few of these metrics in more detail (note: “Year 3” in this charts represents the last full year of earnings before their IPO, “Year 2” represents the year before that, etc).

First up is revenue growth.  After all, investors love growth companies and the “multiples” game hinges on future growth.  The charts below show growth rates of our companies, with revenues in $m on the primary Y-axis, and YoY growth rates on the secondary Y-axis.

 Nothing significant jumps out here, as all the companies in our universe had strong growth before going IPO except TLEO (who also had the second lowest revenue of the group too, so this is not an issue with growth rates on large numbers).   WDAY enjoys some of the strongest growth rates, which is all the more impressive given they also have the largest revenue numbers of the comparison group too.  Net net, WDAY is looking very strong in terms of revenue growth.

Second up is the cost of revenues (the cost to earn a dollar of revenue):  Investors over the years have come to accept that the cloud business is a different beast where it takes years to become profitable, but it’s still important to keep the cost of sales in-check.

Most companies generally show signs of getting economies of scale as the company grows.  The notable points in this chart are how much more efficient CRM is compared to the rest, as well the fact that WDAY has yet to reach an efficient model.  So while there is some issues with how high WDAY’s cost of revenues are, we can try and give them the benefit of the doubt that this will come down over the next few years as it is at least trending in the right direction.

Next up is the operating expense and margins:   Investors would like to see a stable cost-structure expanding in sync with growth in revenues.  Anything out of whack will raise concerns.

As expected, the SaaS companies here, and perhaps more generally any startup focusing on growth, have operating expenses greater than revenues.  Interestingly, both SFSF and WDAY seem to have extremely high cost structures.  We were glad to find some company for WDAY on this, as we were really beginning to wonder where these guys are spending so much money.  In fact, at least WDAY has consistently been getting the ratio headed in the right direction, unlike SFSF whose Year 3 figures actually started increasing again relative to Year 2.  Again, WDAY is not at the point of having reached economies of scale, so we have to give them the benefit of the doubt that they will get there as things are heading in the right direction.

All right, last up are net profit margins:  We are expecting to see losses from startups in their growth phase as they put every dollar earned back into the company, focusing on building a great company for a long haul.  But we want to look for the size of the losses and overall directionality too.

Another very similar pattern to operating expenses.  WDAY is suffering the heaviest losses of the group, but they are shrinking relative to the size of revenues (but increasing in absolute terms).  We would have liked to have seen losses also shrinking in absolute terms too though.  WDAY should eventually have profits heading in the right direction once their recurring subscription revenues are a little larger, along with the economies of scale benefits as they start getting more customers.  Again, WDAY has found a friend in SFSF, showing that the scale of their losses is not unprecedented.

These comparisons don’t really paint the best picture for WDAY.   Not only are they asking the highest multiples off of revenue, but their cost structure is one of the highest of the comparison companies, and a very large chunk of their revenue is coming from services not license revenue (which has much lower margins).  However, in terms of directionality, everything does look promising for WDAY in the future. We will try and summarize our overall conclusions in our third and final blog post of the series.

Disclaimer: All numbers are approximate.  We are not offering any investment advice and all the analysis we have performed to support our blogs is preliminary.

Preparing for Workday (WDAY)’s IPO: Workday vs. Salesforce.com

My esteemed colleague Ryan Leask (LinkedIn Profile) and I have co-authored this three-part blog offering our insights on Workday's IPO.  

This is part 1 in our blog on Workday’s IPO.  Part 2 looks at how Workday compares to SFSF, TLEO, NOW and CRM.  And the third and final part provides an overall summary.

Workday (Ticker: WDAY), a cloud based provider of HCM and other enterprise software, is going to IPO tomorrow.  As in typical Silicon Valley fashion, not that many people are discussing it because it’s not a consumer software company.  But for us in the enterprise software world, this is absolutely one to watch!

We’ve known Workday has been on a tear for a while, so as we looked through their S-1, their growth didn’t come as a big surprise to us.  That’s not to belittle their accomplishments. It was an amazing feat by all accounts, and they achieved it all right through the heart of the Great Recession. Spectacular performance!  However, the thing that caught us a little off-guard was their expenses. We wanted to take a deeper look at their numbers, and compare it to other cloud enterprise companies to see how their figures stacked up.

Of course, our analysis began with comparing Workday to Salesforce.com (Ticker: CRM).  If you invested in CRM on opening day and held it all the way till date, you would be sitting pretty on a 900% ROI over ~9 years.  Not too shabby.  So how does Workday compare?

The figure below highlights a few key metrics. The WDAY figures are for their year ending Jan 31, 2012 from their S-1.  The CRM column represents the data in Salesforce.com’s S-1 document, however, since CRM was only ~5 years old when it IPO’d in 2004, and WDAY is already 7 years old, we added an extra set of figures for CRM at their 7 year mark too (CRM@7), and use this as the comparison point for this blog.

You can see by all accounts, WDAY is significantly trailing CRM@7 years.  WDAY’s revenues are 43% of CRM@7’s revenues (134m vs. 310m), yet Workday’s costs are 73% of CRM@7’s (213m vs. 290m).  That’s a big discrepancy.  Where are these costs coming from?

Well, Workday had 1096 employees to CRM@7’s 1304 (i.e. Workday had 84% of CRM@7’s number of employees to produce 43% of their revenue, yet still incur 73% of their costs).  That means WDAY saw $122k rev per employee vs. CRM@7’s $238k rev per employee, so nearly a 2x favor to CRM@7.

So it’s clear, WDAY is operating with a different model to CRM.  This led us to take two follow-up steps:

1. Compare WDAY to some other companies, to see if we could find any other similarities. This will be the second part of our blog.
2. Analyze “why” WDAY’s figures are so different to CRM’s. Yes, there is the HCM vs. CRM difference, but prior to going through the S-1, we would not have expected to see big differences between the companies. 

The rest of this blog post will address our theory on the second question of “why” the two company’s figures are so different.  So here we offer our some of our thoughts on this:

1.  WDAY is Selling to Large Enterprises
• Workday has only 326 customers after 7 years.  CRM@7 by contrast had over 20,000 customers around the same time.  So yes CRM@7 had 2.3x WDAY’s revenue, but they also had 63x the customers.
• WDAY’s Rev/Customers amounted to $412k.  CRM@7’s Rev/Customers was $15k.  Clearly, WDAY is selling much more to larger companies than CRM did.
• WDAY does a lot more services business as well, but even if you exclude it (34% of rev), it would still give you a figure of $272k/customer… so way higher license rev per customer than CRM.
• WDAY over the years had made news of big account wins (Flextronics & Chiquita come to mind), so we knew they were successful in LE’s. However, we assumed they were also getting a lot more traction in the SME space too, which appears not to be the case.
• As per WDAY’s S-1, the figure of 326 customers does exclude SME’s which were bought in from a reseller. But given we didn’t see any explanation of the figures in any more detail, we would assume that the number of SME’s & the revenue they bring in is not material.
• Selling basically exclusively to large companies also explains why WDAY’s services figures are so high, at 34% of revs.  This is higher than we would have expected/liked to have seen from a SaaS company.
• WDAY mentions customization as a risk: Workday’s customers often want customization (but they don’t support adding custom fields or functions), and big companies always want customization (in our experience).  However, one point that doesn’t add up about this: what are all the services for if Workday doesn’t allow customization?  It would be very interesting to know what the average implementation project time is for Workday customers – we’re guessing it might be a lot higher than other SaaS products.
• Another consequence of selling to the big guys is that you will definitely end up with longer sales cycles.  Yes, Sales & Marketing costs are still 52% of Rev’s, but this is in line with other SaaS companies.  Given that they kept this in-line despite the longer sales cycles, this makes the S&M figure seem more impressive.
2. Investing For the Future
• Workday did state in their S-1 that they are trying to expand out from HCM now into Finance. This is definitely going to require a serious commitment in R&D.  Clearly its early stages for them, with only 10% of their customer base (roughly 30 customers) having adopted their finance component so far.
• The R&D costs for WDAY were $62m vs. $23m for CRM at their 7 year mark. That means CRM produced 2.3x WDAY’s Rev, while spending only about 0.37x of the R&D cost.
• However, we aren’t convinced that just one module (Finance) would be sufficient to account for this R&D.  Our best guess is that there is something else in the works too, and Workday is trying to get to a full ERM/ERP suite sooner rather than later.  We could be wrong of course, and maybe it’s the extra effort of trying to support analytics, mobility, etc that CRM didn’t have to deal with when it was  seven years old… but still, R&D is an extremely high number.  We are going to anticipate a positive surprise in the near future because of the higher R&D expenses.
• A secondary aspect that we suspect might account for the extra costs is Workday’s focus on international expansion.  Both HCM & Finance are going to require a lot more regional changes than say the CRM (i.e. different country laws, etc) module.  Workday already supports 21 languages vs. we counted that the CRM only supports 16 languages today, so they are clearly taking international markets seriously.

We won’t draw any more conclusions in this blog.  Instead we will put WDAY against other similar SaaS companies, and then summarize our overall perspective in the third and final blog post.

Disclaimer: All numbers are approximate.  We are not offering any investment advice and all the analysis we have performed to support our blogs is preliminary.

If You are a R Developer, Then You Must Try SAP HANA for Free.

This is a guest blog from Alvaro Tejada Galindo, my colleague and fellow R and SAP HANA enthusiast.  I am thankful to Alvaro for coming and posting on "AllThingsBusinessAnalytics".

Are you an R developers? Have ever heard of SAP HANA? Would you like to test SAP HANA for free?

SAP HANA is an In-Memory Database Technology allowing developers to analyze big data in real-time.

Processes that took hours now take seconds due to SAP HANA's power to keep everything on RAM memory.

As announced in SAP Sapphire Now event in Orlando, Florida, SAP HANA is free for developers. You just need to download and install both the SAP HANA Client and the SAP HANA Studio, and create an SAP HANA Server on the Amazon Web Services as described in the following document:

Get your own SAP HANA DB server on Amazon Web Services - http://scn.sap.com/docs/DOC-28294

Why should this interest you? Easy...SAP HANA is an agent of change bringing speed to its limits and it can also be integrated with R as described in the following blog:

When SAP HANA met R - First kiss - http://scn.sap.com/community/developer-center/hana/blog/2012/05/21/when-sap-hana-met-r--first-kiss

Want to know more about SAP HANA? Read everything you need here: http://developers.sap.com

You're convinced but don't want to pay for the Amazon Web Services? No problem. Just leave a comment including your name, company and email. We will reach you and send you an Amazon Gift Card so you can get started. Of course, your feedback would be greatly appreciated. Of course, we only a limited set of gift cards, so be quick or be out.

Author Alvaro Tejada Galindo, mostly known as "Blag" is a Development Expert working for the Technology Innovation and Developer Experience team in SAP Labs.  He can be contacted at a.tejada.galindo@sap.com.

Alvaro's background in his own words: I used to be an ABAP Consultant for 11 years. I worked in implementations on Peru and Canada. I’m also a die hard developer using R, Python, Ruby, PHP, Flex and many more languages. Now, I work for SAP Labs and my main roles are evangelize SAP technologies by writing blogs, articles, helping people on the forums, attending SAP events, besides many other “Developer engagement” activities.

I maintain a blog called “Blag’s bag of rants” at blagrants.blogspot.com

Why Delta's Foray into the Crude Refining Business is a BAD Move?

When my mentor/guide and company president Sanjay Poonen threw this open challenge on Twitter:

Sanjay Poonen ‏ @spoonen

For all u MBAs, what do u think of Delta buying an oil refinery for $150M (formerly $1B) for top-grade jet fuel. Would Michael Porter frown?

how could I have passed on this challenge PLUS I have been lately descending deep into the technology roots (most of my blogs are technical with lots of code snippets for all intentional purposes - AllThingsR.)  So I decided to spend some time sleuthing and analyzing hard facts before replying to @spoonen, and (may be) counter @gkm1 (George Mathew's) arguments.  This way I get back into analyzing business topics for some time.  (After all, A in MBA stands for analysis right? Masters in Business Analytics?)

The original news on WSJ covering Delta decision to buy a refinery from ConocoPhillips is here.

I spent quite sometime researching so I can educate myself on this deal.  I started with a prior belief that this is a BAD deal.  After all, the crude refining business is a boom and bust business, has razor thin margins and is notoriously competitive.  Here is a quote from Bloomberg supporting my argument: "Refiners in the northeastern U.S. are struggling to turn a profit because of the narrow margin between the cost of imported crude and fuel prices." (Source: Bloomberg)

Moreover, not a single new refinery has sprung up in the US for at least 35 years (Source) because no one wants to invest in this business.  In addition, ConocoPhillips, had idled this refinery for few months now and Sunoco, another refiner in that area, is in the process of shutting down two more refineries in that region. (Source: Bloomberg)  "Sunoco...said its refining businesses has been losing $1 million dollars a day for three years running." (Source)

So why is Delta buying this refinery? Vertical integration, fuel hedging, cost-savings, political, EPS improvements etc?  Actually all of the above.

Delta's planes burned 3.9B gallons of jet fuel last year.  At an avg. 2011 price of $2.86 per gallon, Delta spent $11.8B, which is 40% of its operating expenses. (Source: NYTimes)  If the cost of jet fuel was 40% of your company's operating expense, you will also be thinking about taking such dramatic decisions but may not execute on it if it is outside your realm, but Delta did.

Delta will pay $150M in cash (it has $3B in cash on its balance sheet, so there is no liquidity issue) and will invest another $100M in retooling this refinery.  Also you should note that PA government is chipping in with additional $30M (Thank you tax payers!).  Retooling is required for reason self-evident in this table (Mainly to crank-up the jet-fuel production):

Now, looking at this table why would anyone believe that Delta can earn $300M every year from this. Also remember, Delta is not bringing down its fuel cost from ~$12B by a whole lot, it is merely trying to save few cents on the dollar. A little bit of shift in the numbers above and Delta will be in red trouble.

Delta said that this is a good deal for the investors, really?  Valero had margins of less than 3% in its last quarter and it is a pure play refinery company. Can Delta beat Valero on margins?  I have my serious doubts.  This could be a gain but just for the Delta's management as it attempts to boost EPS in the near-term.

Also, can you believe that Delta can really retool the refinery and produce more jet-fuel than it is possible? The bio-chemistry doesn't support it.  From one barrel of crude, only 19.5 gallons of gasoline and 4.1 gallons of  jet-fuel can be produced.  How is Delta going to produce more jet-fuel per barrel of crude?

Also, FYI, this refinery can only process light sweet crude (with low sulfur) not that heavy Saudi oil that has high sulfur and is gaining more prominence due to global oil issues. (Source: ConocoPhillips)

Net net, this is a bad move, Delta will burn itself and get out in a year or two.  And when they sell, it will be a fire, sale since many other refineries in that area are already struggling to make a profit as I mentioned above. Delta's thinking that future of refineries is brighter is quite puzzling for me.

Happy Analyzing!

Big Data, R and SAP HANA: Analyze 200 Million Data Points and Later Visualize in HTML5 Using D3 - Part III

Mash-up Airlines Performance Data with Historical Weather Data to Pinpoint Weather Related Delays

For this exercise, I combined following four separate blogs that I did on BigData, R and SAP HANA.  Historical airlines and weather data were used for the underlying analysis. The aggregated output of this analysis was outputted in JSON which was visualized in HTML5, D3 and Google Maps.  The previous blogs on this series are:

1. Big Data, R and HANA: Analyze 200 Million Data Points and Later Visualize in HTML5 Using D3 - Part II
2. Big Data, R and HANA: Analyze 200 Million Data Points and Later Visualize Using Google Maps
3. Getting Historical Weather Data in R and SAP HANA 
4. Tracking SFO Airport's Performance Using R, HANA and D3

In this blog, I wanted to mash-up disparate data sources in R and HANA by combining airlines data with weather data to understand the reasons behind the airport/airlines delay.  Why weather - because weather is one of the commonly cited reasons in the airlines industry for flight delays.  Fortunately, the airlines data breaks up the delay by weather, security, late aircraft etc., so weather related delays can be isolated and then the actual weather data can be mashed-up to validate the airlines' claims.  However, I will not be doing this here, I will just be displaying the mashed-up data.

I have intentionally focused on the three bay-area airports and have used last 4 years of historical data to visualize the airport's performance using a HTML5 calendar built from scratch using D3.js.  One can use all 20 years of data and for all the airports to extend this example.  I had downloaded historical weather data for the same 2005-2008 period for SFO and SJC airports as shown in my previous blog (For some strange reasons, there is no weather data for OAK, huh?).  Here is how the final result will look like in HTML5:

Click here to interact with the live example.  Hover over any cell in the live example and a tool tip with comprehensive analytics will show the break down of the performance delay for the selected cell including weather data and correct icons* - result of a mash-up.  Choose a different airport from the drop-down to change the performance calendar. 

* Weather icons are properties of Weather Underground.

As anticipated, SFO airport had more red on the calendar than SJC and OAK.  SJC definitely is the best performing airport in the bay-area.  Contrary to my expectation, weather didn't cause as much havoc on SFO as one would expect, strange?

Creating a mash-up in R for these two data-sets was super easy and a CSV output was produced to work with HTML5/D3.  Here is the R code and if it not clear from all my previous blogs: I just love data.table package.

###########################################################################################  

# Percent delayed flights from three bay area airports, a break up of the flights delay by various reasons, mash-up with weather data

###########################################################################################  

baa.hp.daily.flights <- baa.hp[,list( TotalFlights=length(DepDelay), CancelledFlights=sum(Cancelled, na.rm=TRUE)), 

                             by=list(Year, Month, DayofMonth, Origin)]

setkey(baa.hp.daily.flights,Year, Month, DayofMonth, Origin)

baa.hp.daily.flights.delayed <- baa.hp[DepDelay>15,

                                     list(DelayedFlights=length(DepDelay), 

                                      WeatherDelayed=length(WeatherDelay[WeatherDelay>0]),

                                      AvgDelayMins=round(sum(DepDelay, na.rm=TRUE)/length(DepDelay), digits=2),

                                      CarrierCaused=round(sum(CarrierDelay, na.rm=TRUE)/sum(DepDelay, na.rm=TRUE), digits=2),

                                      WeatherCaused=round(sum(WeatherDelay, na.rm=TRUE)/sum(DepDelay, na.rm=TRUE), digits=2),

                                      NASCaused=round(sum(NASDelay, na.rm=TRUE)/sum(DepDelay, na.rm=TRUE), digits=2),

                                      SecurityCaused=round(sum(SecurityDelay, na.rm=TRUE)/sum(DepDelay, na.rm=TRUE), digits=2),

                                      LateAircraftCaused=round(sum(LateAircraftDelay, na.rm=TRUE)/sum(DepDelay, na.rm=TRUE), digits=2)), by=list(Year, Month, DayofMonth, Origin)]

setkey(baa.hp.daily.flights.delayed, Year, Month, DayofMonth, Origin)

# Merge two data-tables

baa.hp.daily.flights.summary <- baa.hp.daily.flights.delayed[baa.hp.daily.flights,list(Airport=Origin,

                           TotalFlights, CancelledFlights, DelayedFlights, WeatherDelayed, 

                           PercentDelayedFlights=round(DelayedFlights/(TotalFlights-CancelledFlights), digits=2),

                           AvgDelayMins, CarrierCaused, WeatherCaused, NASCaused, SecurityCaused, LateAircraftCaused)]

setkey(baa.hp.daily.flights.summary, Year, Month, DayofMonth, Airport)

# Merge with weather data

baa.hp.daily.flights.summary.weather <-baa.weather[baa.hp.daily.flights.summary]

baa.hp.daily.flights.summary.weather$Date <- as.Date(paste(baa.hp.daily.flights.summary.weather$Year, 

                                                           baa.hp.daily.flights.summary.weather$Month, 

                                                           baa.hp.daily.flights.summary.weather$DayofMonth, 

                                                           sep="-"),"%Y-%m-%d")

# remove few columns

baa.hp.daily.flights.summary.weather <- baa.hp.daily.flights.summary.weather[, 

            which(!(colnames(baa.hp.daily.flights.summary.weather) %in% c("Year", "Month", "DayofMonth", "Origin"))), with=FALSE]

#Write the output in both JSON and CSV file formats

objs <- baa.hp.daily.flights.summary.weather[, getRowWiseJson(.SD), by=list(Airport)]

# You have now (Airportcode, JSONString), Once again, you need to attach them together.

row.json <- apply(objs, 1, function(x) paste('{\"AirportCode\":"', x[1], '","Data\":', x[2], '}', sep=""))

json.st <- paste('[', paste(row.json, collapse=', '), ']')

writeLines(json.st, "baa-2005-2008.summary.json")                 

write.csv(baa.hp.daily.flights.summary.weather, "baa-2005-2008.summary.csv", row.names=FALSE)

Happy Coding!