Friday, September 30, 2005

Why did JDS slip in its 10K after close on Friday?

JDSU filed its 10K for fiscal year ended June 30th after the market closed today( do not ask me why it was filed 34 minutes after market close on a Friday). So what is the big deal? Perhaps some of the disclosure in the 10K! Lets see where to begin- I will just quote the original text:

"Based upon the evaluation of internal controls as of June 30th , 2005, we have determined we have material weaknesses in our system of internal control over financial reporting"

" Material weakness in the control environment due to an insufficient number of qualified resources with the required proficiency to apply the Company's accounting policies in accordance with U.S generally accepted accounting principles. This material weakness resulted in adjustments to several significant accounts. The accounts most affected include foreign currency translation, restructuring accruals and investments"

"A material weakness in information and communication due to insufficient processes and controls in the identification, capture and timely communication of financially significant information between certain parts of the organization and the finance department that precludes finance from accounting for transactions in a complete, appropriate and timely manner. This material weakness resulted in adjustments to several significant accounts. The accounts most affected include inventory and stock-based compensation."

"A material weakness in control activities associated with complex and non-routine transactions and estimation processes, due to inadequate documentation and review of accounting procedures and analyses. This material weakness resulted in adjustments to several significant accounts. The areas most affected include revenue, investments and the statement of cash flows."

And then they have this to say about their new products "Many of our newer products, such as ROADMs, optical switches, and high speed transponders are encountering significant yield, performance and delivery problems"

I agree that JDS is trying to right the ship with all the divestitures and re-orgs and the acquisition of Acterna but all that has too much risk associated with them and all these material weaknesses do not help the cause. And the margin problems with new products certainly will not help. Diligent investors always keep an eye on organic growth and what the original business does after a large acquisition (which more times than not are usually done to hide underperforming businesses), unless JDS improves its original business the Acterna acquisition will only take the company so far.

All these are very serious lapses of financial control and are an area for concern for real investors, but do not tell that to the momentum crowd that has driven this stock in last few weeks to valuations that are hard to imagine in this day and age. Even with lofty expectations and nice sizeable jump in operating margins due to the Acterna acquisition the valuation on this stock is way above anything you can expect in terms of growth.

Perhaps I am too old fashioned or perhaps people are too giddy on optics again.

Thursday, September 22, 2005

Katrina the great sandbox of excuse for companies?

COMS reported solid quarter with nice ramp in the new 5500 switch and VoIP where as the acquired security business was inline with expectations. I commented on COMS acquisition of TPTI (for $430M in cash) and it seems like buying growth has not worked so far. During the quarter Americas grew nice 8% sequentially, gross margins improved also, and guidance was slightly ahead of expectations. I expect other enterprise networking companies to see similar trends, especially FDRY and CSCO.

What was surprising to hear on the call was that management called Katrina "the great sandbox of excuse for companies"? Did I hear that correctly? Tell that to AA or X, or various other companies that are seeing higher cost of goods due to Katrina. Katrina might not have affected COMS during the past quarter because of timing of Katrina was at the end of COMS fiscal quarter. But surely there will be companies that are negatively impacted by Katrina and now Rita, just as there are companies like SGR that benefit from these events. It will be upto investors to see behind the veil of Katrina or Rita and make sure managements are not hiding the real issues.

Tuesday, September 13, 2005

How Accenture is trying to change the equation

ACN announced that it will be hiring 4,200 more employee for its Chennai facility in India over time. Company currently employs over 15K in India out of total 115K. India is the 2nd largest geography for ACN behind United States, UK has about 11K employees. If we assume Indian cost/employee is about 30% (or saving of 70%) of that of all the other employees (yes this is overly general assumption) then the 13% workforce in India is helping reduce ACN employee costs by about 9%. Now more realisitic scenario on cost saving is somewhere in 50%-30% range, given that the attrition rate in India is about 20% (compared to 18% avg globally) and wage pressure in India continues to go up, then that 13% of ACN workforce can only afford to given ACN 6.5% cost savings at the high end and and 4% on the low end of cost savings. Clearly moving as many heads over to India is clearly the best strategy for ACN and its U.S. peers since that number has a greater impact on costs then does cost saving/employee. The wage pressure has less impact as the total number of employees is still small in India. ACN is changing its cost equation as fast as it can, others will follow. But for a while INFY, SAY, WIT, CTSH all have some advantage in the cost equation.

Thursday, September 08, 2005

Market resarch getting outsourced

Someone sent me a news story that highlighted a report by New York-based Katzenbach Partners. Report said that India-based IT outsourcing companies are much better positioned to serve clients than their US counterparts. The researchers added that Indian outsourcers could one day unseat US giants such as EDS, UIS and ACN.

I don't know how detailed the report is and what kind of primary research these guys have conducted. But any one with basic economic knowledge could have figured out the conclusion. You have a basic differences in cost which US giants can not compensate for even with setting up shops in lower-wage countries, like India, China, or Philippines, as their high-margin overhead remains in US dollars. I believe the differentiation is in the level of service, or perceived service, which continues to narrow.

The research also throws up some interesting facts. Eighty percent of all outsourcing deals fail in the end. Once the initial excitement of the first two years wears off, the performance of the contract in the third and fourth years becomes crucial. The researchers say that while IT companies pull their best staff off a contract in the third and fourth years and re-assign them, Indian companies are better positioned to handle the transformation and train the new team of workers. Where is Ross Perot when you need him?

It's also feasible that one day research like this will be outsourced, did they mention that in the report?