Experiential model. . . follow the money . . myths . . .1st wave software service ASP move (capital was free, money poured into the initial setup, long time for the recurring revenue), 2nd wave - permission based financing strategy, very little capital goes in initially to get to the first customers because you can launch the service quite quickly compared to the enterprise model. What used to take 18 months to get "Golden master" with the ASP model takes much less time (6-9 months). CSF Unit economics - prove to land customer is less than than that of what they get back from the customer in the life of the customer. Another myth is that it takes longer to get to profitability. Exit - last 2 -3 quarters, highly visible companies are showing much higher P/E ratios such as Salesforce.com. Here to stay over the next decade.
Economic model based around subscriptions based on a smooth revenue streaming. Strong lifetime revenue. Scale benefits as the company grows. Enables you to compete with the big players very quickly. On demand allows you to play at a very different set of rules.
"Democratization of software"
Love-in not lock-in - really allow people to feel that they are not locked in. . . keeps the vendor honest. Only promise what you have.
Sales model -- free trial, as you use the service, you enter the first tier of pricing. Leak in from the bottom up. Expense-able not approvable business model.
Low upfront costs web 1.0.
Web 2.0 value prop. quite different . . The ability to road test the solution first before they actually have to commit - alignment with the vendors - real asset of this model. Actually get access to a community of users input and it shows up as value. Upgrades are seamless. Allows for much more rapid innovation 2 week release cycle. Most SAS companies have labeled their releases as Fall 06 or Winter 06 - speed of innovation follows a release cycle of 3-4 times a year.
"Power in the cloud" - new value by being part of a community. Creating brand new business opportunities that could only be created in the new cloud. Ability to see when the customer is having problems in aggregate and solve it before it has a larger impact. With traditional software they had no idea how they were using it and neither did the vendor - in SAS gives a dashboard to both sides - usage based feedback -- big metric of success.
Focus NOT on the core - sweet areas of a company -- G2000 customer require more integration compared to SMB customer. Start in the mid tier market space. Emergence of open standards integration can be easily done.
SMB market traditionally very fragmented.
White space. . enterprise mash up space - central easy to use resource, new buyers are looking at new ecosystems IBM, ADP.
'democratization of software'
Sunday, February 19, 2006
XBRL v other open specs
XBRL is uniquely positioned compared to other open specifications. It is optimized for the exchange of historical, archival business reporting data. It models data that is hierarchically arranged for drill-down and reported along dimensions of time, entiry and scenario (or context). And, it is independent of specifc industry, regulatory regime or level of detail.
Key themes distinguish XBRL from other standards in the financial arena:
- Reports, as distinct from transactions. A purchase order, or, more precisely, the sending and acceptance of a purchase order, is a transaction, transactions are the purpose of a whole host of standards from IFX, OFX, ebXML, ACORD and others.
- Performance data, as distinct from market data. market data tends to be ephemeral and real-time, with pricing being always crucial; performance data is archival and records the history of busness operations and their results. XBRL is about performance data.
- Entities as distinct from investment instruments. Equities are financial instruments whose underlying value is based on public company entities; an entity is the business itself. XBRL represent detail about entities - not only publicly traded companies, but any business or non-profit entity. Equities and other financial instruments are the subject matter of MDDL, FpML and others.
- Reporting metadata, as distinct from reporting metadata. Metadata - data about data - is, for the most part, data abouta document. XBRL defines how the individual numbers and facts inside the financial statements and similar documents relate to one another.
XBRL and business performance reporting - makes a distinction between financial information reporting of a set of data and supporting text, versus the data in individual financial transactions. XBRL is focused on providing a rich, detailed, comprehensive standard for representing data used in business reporting.
Sunday, February 12, 2006
Yet Again, SEC Pushes
Yet Again, SEC Pushes For The Adoption Of XBRL
The program is “an important initiative, and I think we have pursued it appropriately,” SEC Chief Information Officer Corey Booth said in remarks at the XBRL-US National Conference in San Jose on Jan. 18. “I must admit, though, I had hoped that we would have more filers in the first nine months of the program.” In a further sign that XBRL isn’t yet setting the world on fire, the conference itself drew only slightly more than 200 attendees (see box at right for complete speech and related resources).
Despite the various incentives, few companies have expressed enthusiasm for XBRL other than printers, software firms and investor-relations outfits that stand to reap some business benefit from the technology. For the rest of Corporate America, “it’s a little hard to see the carrot for them,” says Jack Ciesielski, owner of investment research firm R.G. Associates and publisher of the Analyst’s Accouning Observer. “This is something that is supposed to aid financial analysis and it probably will make it a lot easier for the SEC to do financial analysis. It’s probably got a low priority in companies” (see related article, "So Far, XBRL Participants Are Those Who Stand To Benefit," in box at right).
“There is definitely a learning curve and some time investment required,” in reporting in XBRL for the first time, notes Michelle Savage, vice president of investor relations services for PR Newswire and chair of the XBRL-U.S. Adoption Working Group. Still, Savage says, “once companies have the first quarter under their belts, it gets a lot easier.”
Booth also cited the issue of a lack of demand from the investor community. While “not every retail investor or Wall Street analyst needs to understand the intricacies of XBRL in order to make use of it,” he acknowledged, “We are still are not seeing the kind of demand pull that would truly catalyze the market, and in turn make more companies interested in solving the supply-side issues.”
Copenhafer says a “viable alternative” to mandating XBRL might be for the SEC to give companies a template, “rather than having companies go through the difficult process” of constructing a complete XBRL document. He notes that a similar method was adopted by the FDIC, which requires member banks to report numbers in their call reports in XBRL using a template.
Contacts Companies interested in participating in the test group should contact the following individuals at the SEC: Related Coverage Rules, Guidance Related Resources
n hopes of stepping up its effort to get companies to file their financial reports using interactive data, the Securities and Exchange Commission is sweetening the pot for companies that volunteer to be part of a test group with a plan to offer expedited reviews of registration statements and annual reports. RELATED RESOURCES 
View SEC Details Regarding XBRL Incentives (Jan. 11)Related Speech By SEC CIO R. Corey Booth (Jan. 18)Related Speech By Chairman Christopher Cox (Jan. 18)
Jeffrey Naumann, SEC Office Of The Chief AccountantBrigitte Lippmann, SEC Division Of Corporation Finance
So Far, XBRL Participants Are Those Who Stand To Benefit (May 2005)Tagged Data May Help SEC, But Will It Help You? (Aug. 2004)SEC Proposes Rule On Voluntary XBRL Reporting (Sept. 2004)
Read The Proposed SEC Rule On XBRL Related Concept Release On The Use Of Tagged Data SEC FAQ About The XBRL Voluntary Filing Program
The move comes roughly nine months after the April 2005 SEC launch of a voluntary filing program under which corporate or mutual fund registrants can file their financial information with the Commission in XBRL—short for extensible business reporting language—a computer language that makes financial data interactive. Since the launch of the initiative, the SEC has only received 22 XBRL filings from nine companies. SEC officials admit that the response isn’t quite what they had hoped.
 Booth |
In announcing the new incentive, the Commission said it wants test group participants that will use the commercial and industrial, banking, insurance, or investment management industry classifications in XBRL. The staff expects to establish the group by some time in February.
Companies that participate in the test will have to file their reports in XBRL format for at least one year and provide feedback on their experiences, including the costs and benefits associated with reporting in the interactive data format. In return, volunteers will get expedited reviews of securities registration statements. Well-known seasoned issuer volunteers will find out whether the SEC will review their Form 10-K within 30 days after filing and the SEC staff will provide any comments on that filing within 45 to 60 days of filing.
Where's The Carrot?
Right now, more than 15,000 companies submit more than 700,000 filings annually through the SEC’s EDGAR system, nearly all of them filed in ASCII text or HTML. But the SEC has been pushing for the adoption of XBRL, citing potential benefits of tagged data such as greater transparency of financial information, reduced costs for investors and analysts, and possibly, broader analyst coverage of companies.
Getting filings in a machine-readable format would enable the SEC to review annual filings and develop ways of flagging troublesome companies more quickly, making it easier for the agency to meet one of its mandates under Sarbanes-Oxley: Section 408 of the Act requires the SEC to review the filings of all registrants at least once every three years. The information in SEC reports submitted in XBRL could also be made instantly searchable by both analysts and investors.
 Ciesielski |
The latest incentives “will probably help” the SEC attract more issuers, says Dave Copenhafer, director of EDGAR Services at financial printing giant Bowne. Bowne was the first company to file its earnings releases in XBRL under the SEC pilot program. “We’ve had several expressions of interest that came about solely as result of SEC’s comments. Whether they translate into action, we’ll have to see.”
“The incentives change the dynamic of why companies will participate,” Copenhafer continues. “Before, the firms that filed were primarily technology companies of one sort or another that, for internal reasons wanted to understand [XBRL].” However, he said, “that doesn’t change the fact that it’s still difficult to get a set of corporate financials properly structured into an XBRL instance document. And the investment in resources to prepare an XBRL filing is still substantial… It’s not like turning a Word document into an html document.”
 Savage |
Booth at the SEC also acknowledged that major hurdles to broad adoption exist. For one, he said, preparers still need to “get comfortable with the technological aspects and the accounting aspects of the standard.”
“The preparation of XBRL statements is still perceived to be difficult and I believe there is also reality behind that perception,” noted Booth, who said the SEC’s examination of the filings received so far “suggests that there is still a lot of room for technical judgment and interpretation in how to apply the taxonomies to a particular situation.”
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Toes In The Water
Another challenge to widespread adoption “has to do with the core XBRL technology itself,” and a question about how to get more effort behind evolving and refining the taxonomies. For example, Booth said rendering XBRL documents in human-readable format remains a challenge. In addition, validation standards can differ from product to product, which can raise questions about “whether your XBRL document is truly ‘kosher’.”
Savage and others offer other reasons for companies’ slowness in embracing XBRL. “Complying with Sarbanes-Oxley and making process changes has been consuming people for the last couple of years. It’s been a huge undertaking and a real tax on public companies,” Savage says. “That’s been a big factor in people saying, ‘It’s not critical, it’s a voluntary program’.”
Another hurdle, Savage says, is a common misperception about XBRL. “The name itself sounds like a technology change that finance departments, preparers and IR departments have to undertake, when it really isn’t. It’s a business process change,” she says. “One thing we’re (the XBRL adoption group) doing is looking at the positioning of XBRL to make sure the message we’re conveying is that this is a process change that will change the way companies report information.”
In his remarks, Booth offered one suggestion that might make the task less daunting. He suggested that participants in the voluntary filing program file just their main financial reports in XBRL at first, and begin providing XBRL footnotes “a quarter or two later.” SEC rules require participants to file the main financial statements in XBRL format, but they aren’t required to file the notes in XBRL.
“Maybe this kind of simpler, walk-before-you-run approach would induce more companies to stick their toes in the water,” Booth said. And eventually, companies may not have a choice—some expect the SEC to make XBRL filing mandatory sometime in the future.
 Copenhafer |
However, Booth’s remarks indicated that such an approach was unlikely. Noting that the SEC tried a similar “fill-in-the-blank approach” when it introduced the Financial Data Schedule, which captured key financial figures in tagged format as an addendum to company filings, he said, “It didn’t really catch on, and we discontinued it. The fact is that the universe of SEC registrants is extremely diverse, and we need to account for that.”
Friday, February 10, 2006
Greed versus Fear
U.S. Equity Research “Dog Days”
In the U.S. capital markets, common wisdom suggests that public companies are struggling more than ever to attract capital they deserve - that more than 1,200 of the 6,000 companies listed on U.S. exchanges get no coverage from security analysts, and coverage is anemic for another 1,000, with only one or two “Street” analysts providing research. Research indicates that over 50% of the companies that trade on NASDAQ and some 20% of those listed on the New York Stock Exchange get little or no equity research coverage.
“’Consensus estimate’ may be from one analyst .. More than half the 8,416 public companies have no analyst coverage” Ashwani Kaul, chief spokesman for Reuters Estimates
One might assert that these numbers alone are sufficient to merit some rethinking in how corporate investor relations interface with their investor constituency.
Perhaps not. So let’s follow the money. As a “Wall Street orphan,” a company may now seriously consider taking a draconian step and revert to a private company structure in the hope of resurrecting one day in the public markets. Oftentimes, its stock price may stagnate for a protracted length of time or, worse still; enter a death spiral leaving in its place a “shell company”. The burden of Sarbanes-Oxley , now well publicized, is sometimes cited as one reason for companies now considering the delisting route as well as a reasonable explanation for staying private longer. It’s also clear that while Sarbanes-Oxley related costs may be less for a smaller company, they are unlikely to decline proportionately with a company’s revenues. The net effect of this is that small companies are disproportionately affected by compliance costs.
To compound this particularly U.S. epidemic of stymied capital, these Wall Street orphans pay relatively more for capital from new investors or from their institutional lenders. Wharton School research finds these orphans pay roughly 140 basis points, or 1.4 percentage points, more for their new money per year than those that have a recognized Street following. Put another way, on a $100 million capital issuance, the markets extract $1.4 million each year from companies with little or no cover compared to those that do – a not so incidental cost of doing business for a “Wall Street orphan.” While it is true that analyst coverage is only one of the factors tied to cost of capital, data does show that of those 10% of companies with good, credible coverage from 5-6 analysts, the cost of capital is significantly less.
With uncertainty about the use of trading soft dollars (a means of paying brokerage firms for their services through trade commission revenue) for traditional marketing services, it is unlikely any attractive economic model for equity research will emerge anytime soon. And, at least over the last 5 years, the trend has shown no sign of a reversal. Given the new restrictions on sell side research, and the way that it is now perceived within the markets overall, the demand for investment banking led equity research from the buy side has dissipated. This leaves open the challenge of creating an alternative commercially viable model for equity research. The situation is further exacerbated by the fact that there are now more companies globally seeking a public issue on a U.S. exchange, all competing for coverage.
Know that the lion's share of sell-side research is stale. EPS estimates are a commodity, price targets are for retail and many if not all of the big houses outsource model creation to companies like EvalueServe in India. So if you can outsource it, it must be a commodity. No? With the only thing of value in today's capital market today is the connections an analyst has to the company. However, as one IR Director told me recently Reg FD limits much of the stuff they learn and can disseminate. What remains special and untouchable is industry overview reports; they are really the last piece of value left for identifying firm and market forces; so that a professional can determine what he should be looking for and generally what catalysts will make an equity move. Analysts used to have insight . . today, they have hindsight.
A report by Booz Allen titled Saving Sell Side Research highlights key threats to those who lack the vision and adaptability to change with the market - massively declining research spend due to competitive forces, more robust performance measurement metrics, and a squeezing of the middle (being neither a high-quality, focused boutique nor a global behemoth with the resources to deliver a superior global product). This report outlines three specific prescriptives to the sell side, assuming a rational business case can be made for keeping research at all:- Delivery Model Streamlining (more efficient resource allocation, "rationalize" compensation, increase outsourcing)
- Offering Redesign (expand coverage of small/mid caps, add expert networks, quality models, performance metrics, add a degree of client exclusivity)
- Differentiated Service Levels and Pricing (calibrating levels for small, mid-size and large firms, hedge funds, etc.)
An emerging global financial data standard, called eXtensible Business Reporting Language (XBRL), is pushing ahead to help alleviate the issue of accurately communicating company financials with the potential to do much more than help analysts and the regulators.
The concept is simple. Think about the adoption of barcodes or Universal Product Codes (UPC) for products, and the deployment of RFID (radio frequency identification devices) tags embedded with barcodes in the supply chain and retail environments. Now think about how the same industry gained massive value through more accurate tracking of goods leading to fewer errors, lower inventories and even better-stocked shelves, which lead to lower costs, satisfied customers and higher revenues. Making error rates and inefficiencies - and their financial impact visible and therefore correctable was the fundamental commercial potential of barcoding. Now, think of XBRL in financial reporting as the ability to “barcode” the individual financial concepts (such as Operating Profit, Interest Expense, etc.) so that they can be picked up in a consistent and accurate manner downstream from the preparers of financial data.
According to comments made recently (Jan 2006) by the SEC Chairman, the inefficiencies in the flow of financial data from source to consumer accounts for an error rate approaching at least 28% - a not so inconsequential number when you realize how much capital moves in real time based on these numbers. So, how does XBRL make a difference? By adding context information to financial data, XBRL brings about a raft of efficiencies that put more control back in the hands of the company – the IRO, the CFO, the Treasury and the CEO and gives the end consumer (analysts, media journalists, professional and retail investors, etc) access to a robust, reliable, and noise-free pipeline of information from which they can develop their earnings forecast models in a fraction of the time.
“Zero Defect” Financial Data
With the rapidity of information flow in today’s capital markets, it is becoming more important than ever for the investor relations function to pay special attention to the Street – dealing directly with the needs of brokers, broker networks, equity research companies, analysts and other groups of stakeholders. In this highly fluid and dynamic environment, a top priority of the IRO function is to continuously build differential information in ways that persuade the “investor” that adding this company to their investment portfolio is better than adding some other company. Put simply, building a compelling value proposition for a “buy and hold” decision. It is more important now than ever before for the IRO to be in the driving seat. IROs need to be able to push information out as directly, as accurately and as rapidly as possible to a targeted audience of existing investors, potential investors as well as key stakeholders and analysts.
Added to this mix are two other trends, the impact of Regulation Fair Disclosure (Reg FD) and the rise of alternative investment funds. On the first point, there is some justification for the outcry that Reg FD has resulted in less exact details of disclosed company numbers. Some go as far as to explain the volatility of stock performance with the reduction in information flow through the analyst community with less one-to-one contacts taking place. Reg FD has been used as a disincentive for companies to do anything more than the bare minimum with corporate earnings deteriorating with the rise in pro forma reporting. On the latter point, the rise of alternate investment funds (such as hedge funds) and greatly increased application of more sophisticated algorithmic trading models that look deeper into the financials points to a direction of automated trading that is fraught with inherent risks without the provision of a “zero defect” data stream. XBRL ensures a “zero defect” data stream – there is no conversion of data, manual or systematic, to help the data to be processed by different types of consumers and their corresponding systems.
In summary, we have companies disclosing less information as a result of Reg D, fewer analysts funded to cover companies and help them get Street exposure and large funds with major overhangs in search of the right investment. XBRL makes the argument for easier and faster access to company financials alleviating the information asymmetry caused by some of the inefficiencies in the market and regulatory rulings.
Moving away from “one size fits all”
There is clearly a well established and growing multi-billion dollar market for the consumption of high quality financial data as demonstrated by firms such as CompuStat, FactSet, Bloomberg, Thompson Financial, Reuters and others. Each of these data aggregators differentiates itself against its peers by trying to get access to corporate information as fast as it is disseminated to the SEC and from the wire distribution companies, adding value to the data by bundling it with their key search words, filters, analytics, productivity tools and research news so that they gain a higher market share of the data consumers in the industry. Each of these product vendors provides some unique value to its customer base and serves a very valuable function in the efficient operation of today’s capital markets.
Over the years, each of these data aggregators has developed, their own “prism” of public company based on some analysis of key information that may be more characteristic of a specific industry sector. So, for instance, one vendor may have a list of 500 financial data points they generally look at and report based on “as reported” company information. In addition, by industry sector, they may drill down further to track specific industry information – peer comparisons. So, in practical terms, data aggregators parse the data from the companies to fit their data structures. Analysts, Street journalists and other data consumers then use this data to drive their revenue model – justifying a price to earnings and a stock price either above or below the current price – leading to a bullish (buy, hold) call or a more cautionary recommendation.
The downside of this approach is that there is always room for approximation and data interpretation since information is lost in the passage from the IRO to analyst via data intermediary. So, companies send a “round hole” in, and without their control or knowledge -- a “square peg” gets out to the investors. A data integrity issue is perpetuated -- one that can only be remedied by placing more control of the original data into the hands of the publishers of the data – the companies themselves. Enter, a flexible tagging system that takes account of the uniqueness of financial reporting – XBRL.
One standard: Many uses
IROs from all public companies should be encouraged by the validation of XBRL in the market (see www.xbrl.org/showcase/ ) and efforts by the SEC to persuade companies to adopt XBRL for external reporting. Although the SEC has not mandated XBRL filing at present, it is a strong advocate of adoption not only to help its own analysis but to greatly improve the efficiency of US capital markets overall.. Advocates of XBRL believe that 2006 will be the turning point in terms of headway in both the public and private sector.
Issuers from large companies can help overcome accuracy and efficiency hurdles that slow or impact hedge fund assessment of their performance. Issuers from smaller companies that struggle to get sell side coverage can use the SEC’s voluntary filing program to get noticed. Corporates that find that their unique attractions are getting buried in a sea of standardized infomediary data can make themselves stand out.
With the maturation of XBRL, both from a standards point of view and from tool and consulting vendors that support its widespread usage, the risks associated with successful deployment using XBRL have been mitigated and it behooves all companies to adopt XBRL by committing to the SECs Voluntary Filing Program assisted by experts in the methodology, tools and techniques.
An edited version of this blog was published on the NIRI Virtual Chapter Newsletter.
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