The 3D IMAX presentation of How To Train Your Dragon closed today at my nearest 3D IMAX, but the film's run upon the (merely) wide screen continues. (I saw it twice in IMAX 3D. When 3D TV becomes common, people will want to fly on a dragon in 3D and will buy this in droves.) DreamWorks – discussed earlier as a way to make money on <$20 amusements – reported at the end of April that Dragon had taken in a worldwide box office of $375m. The return of Dragon to the #1 spot on the charts the week after Kick Ass launched suggested good staying power, and I have no doubt it will do well on video once that occurs.
The DWA report was a penny ahead of expectations, but was clobbered because its lumpy revenue (it only does so many major films a year) left it with less q/q earnings. I think that as DWA matures and expands its ongoing franchise revenues, it'll continue to make good money in a market that'll only get bigger.
Thursday, May 6, 2010
Adobe Flash Delays ARM Notebooks
Adobe's delayed release schedule for its Flash plug-in targeting Lenovo's new ARM-based mini-notebook is causing delays in Lenovo's release of ARM-powered notebook hardware, according to ARM's marketing VP Ian Drew.
Apple's decision not to allow Adobe to sit between users and content on Apple's ultraportable platforms seems quite rational. Imagine Apple waiting on Adobe to launch a phone based on a custom Apple chip for which Adobe doesn't prioritize optimization. Hmm. I'll just stick to imagining the phone with the Apple chip.
To think about Apple products suffering from third parties not bothering to dedicate optimization resources is s0 1996.
UPDATE: Opera's Philip Grønvold has weighed in on the HTML v. Flash debate, saying that "Flash as a video container makes very little sense for CPU, WiFi battery usage et cetera – you can cook an egg on [devices] once you start running Flash on them and there's a reason for that." Opera will continue to support Flash, "But at Opera we say that the future of the web is open web standards and Flash is not an open web standards technology." So it's good news for Lenovo: in a couple of years, Lenovo will be able to sell whatever ARM-based or other alternative hardware it wants, without worrying whether Adobe sees fit to optimize Flash adequately for users. In the meantime, though, it's nice to be Apple ....
Apple's decision not to allow Adobe to sit between users and content on Apple's ultraportable platforms seems quite rational. Imagine Apple waiting on Adobe to launch a phone based on a custom Apple chip for which Adobe doesn't prioritize optimization. Hmm. I'll just stick to imagining the phone with the Apple chip.
To think about Apple products suffering from third parties not bothering to dedicate optimization resources is s0 1996.
UPDATE: Opera's Philip Grønvold has weighed in on the HTML v. Flash debate, saying that "Flash as a video container makes very little sense for CPU, WiFi battery usage et cetera – you can cook an egg on [devices] once you start running Flash on them and there's a reason for that." Opera will continue to support Flash, "But at Opera we say that the future of the web is open web standards and Flash is not an open web standards technology." So it's good news for Lenovo: in a couple of years, Lenovo will be able to sell whatever ARM-based or other alternative hardware it wants, without worrying whether Adobe sees fit to optimize Flash adequately for users. In the meantime, though, it's nice to be Apple ....
Iced Tea Report: Barnaby's
When the Jaded Consumer was first conceived, it was to discuss the things we're offered to consume. Lest I be criticized as a never-happy customer, allow me to take a moment to present a recent lunch at Barnaby's:
The iced tea has been refilled (A-: it was allowed to go empty). It came with a lemon slice in the tea (plus for a lemon, minus that I can't squeeze it into the tea without fishing in the tea first; a B+). It was served with a tea spoon. (A+: this means I can sweeten it with provided sugar, and begin drinking without further need to attract a waiter. Unfortunately, I did have to ask for sugar, since the last diner consumed it all at my table, a trick I in turn pulled on the next customer. They could be better about ensuring tables are restocked between customers. I withhold the "no sugar" grade of D because there was sugar on every table, including the next one, and I didn't even have to reach for it because the waiter swiftly remedied my problem the moment I mentioned it, without one of those oh-so-annoying trips to the back, where they tell a bus-boy to fix it, and he forgets because he's fixing something else and his tip-out share isn't enough for him to care about service. Swift and complete remedies are almost as good as initial perfection.) The iced tea came with enough ice to make it gooood and cold, but not too much to allow stirring of sugar: A+. Overall Tea Report grade: A.
Outside the tea, I can assure you (1) that the chicken salad was a huuge salad and its grilled chicken both generous in supply and unbelievably tender to the point of competing for best-in-town status (in Houston, Land of Food, this says something), (2) that the burgers were too big for my girls to eat (even though sharing a burger), and (3) that you can't visit without ordering the pink-smoked chicken, which is falling-off-the-bone tender and has excellent hardwood flavor and a tasty sauce. You don't go home hungry from Barnaby's.
Houston has several locations, and the decor (winged dog bones, dogs painted on walls painted as cloudy skies, dog houses in the sky) proves Barnaby's founder loved his dearly departed sheepdog. By the time you are finished eating, you will too.
The iced tea has been refilled (A-: it was allowed to go empty). It came with a lemon slice in the tea (plus for a lemon, minus that I can't squeeze it into the tea without fishing in the tea first; a B+). It was served with a tea spoon. (A+: this means I can sweeten it with provided sugar, and begin drinking without further need to attract a waiter. Unfortunately, I did have to ask for sugar, since the last diner consumed it all at my table, a trick I in turn pulled on the next customer. They could be better about ensuring tables are restocked between customers. I withhold the "no sugar" grade of D because there was sugar on every table, including the next one, and I didn't even have to reach for it because the waiter swiftly remedied my problem the moment I mentioned it, without one of those oh-so-annoying trips to the back, where they tell a bus-boy to fix it, and he forgets because he's fixing something else and his tip-out share isn't enough for him to care about service. Swift and complete remedies are almost as good as initial perfection.) The iced tea came with enough ice to make it gooood and cold, but not too much to allow stirring of sugar: A+. Overall Tea Report grade: A.Outside the tea, I can assure you (1) that the chicken salad was a huuge salad and its grilled chicken both generous in supply and unbelievably tender to the point of competing for best-in-town status (in Houston, Land of Food, this says something), (2) that the burgers were too big for my girls to eat (even though sharing a burger), and (3) that you can't visit without ordering the pink-smoked chicken, which is falling-off-the-bone tender and has excellent hardwood flavor and a tasty sauce. You don't go home hungry from Barnaby's.
Houston has several locations, and the decor (winged dog bones, dogs painted on walls painted as cloudy skies, dog houses in the sky) proves Barnaby's founder loved his dearly departed sheepdog. By the time you are finished eating, you will too.
Scribd to go HTML5, Abandon Flash
Adobe's Flash has taken another beating at the hands of standards: online document sharing site Scribd is going HTML5. Scribd's co-founder and Chief Technological Officer could not make the company's position more clear that the switch is based on technical and not merely political reasoning: "We are scrapping three years of Flash development and betting the company on HTML5 because we believe HTML5 is a dramatically better reading experience than Flash. Now any document can become a web page." (For clarity in parsing those links, the Jared Friedman quote is from Schonfeld's article at TechCrunch.)
Scribd joins Google (YouTube HTML5 beta here), Apple, Microsoft (which moved from merely sending video to iPhones in H.264 to declaring "The future of the web is HTML5"), Virgin America, and a variety of other content providers in leveraging new standards to provide a full-featured alternative to historically buggy and insecure proprietary plug-ins like Flash.
Apple is still winning the Flash chicken.
Scribd joins Google (YouTube HTML5 beta here), Apple, Microsoft (which moved from merely sending video to iPhones in H.264 to declaring "The future of the web is HTML5"), Virgin America, and a variety of other content providers in leveraging new standards to provide a full-featured alternative to historically buggy and insecure proprietary plug-ins like Flash.
Apple is still winning the Flash chicken.
Wednesday, May 5, 2010
1Q2010: ACAS Still Making Money
ACAS' streak of increasing NAV continued through the just-announced results of the 1Q2010 quarter, in which it reported a fair-value of net assets totaling $8.98 per share, up from $8.29 at the end of 2009. Net operating income of $49 million (largely the result of portfolio companies' results flowing to ACAS' bottom line due to consolidation of balance sheets) brought ACAS to a NOI of $0.17 per share, while net earnings of $187 million resulted in $0.65 per share in net earnings.
ACAS' net earnings aren't leading it to a dividend any time soon, though – something the Jaded Consumer regards as good news for those who want ACAS to reinvest the money management has on-hand. This is because realized portfolio losses were $107 million, even as ACAS booked $367 million in unrealized gains. Because BDCs' dividend-payment requirements are driven by taxable income, it is the realized income (and not the FAS-157-compliant changes in holdings' values that the SEC requires be reported as "income") that will determine ACAS' future dividends. As ACAS builds a backlog of realized losses (anyone have a number?), it will be able to absorb future income without being forced into coughing up its valuable cash in the form of dividends. When the losses are completely consumed, ACAS will get some attention for suddenly having a big dividend, but that's for down the road.
ACAS closed the quarter with $820 million in unrestricted cash. Because of the April issuance, ACAS will have some dilution; however, the $1.2 billion of unrestricted cash on-hand at the end of April places it in an interesting position to conduct financial engineering and to acquire distressed opportunities available in the marketplace. If, as the Jaded Consumer expects, the issuance frees ACAS to bring ECAS out of default of its debt covenants, ACAS could show a FAS-157-compliant "fair value" of ECAS that's substantially better than its last-reported values, resulting in a net gain to NAV in the same manner that ACAS expected to achieve when it bought ECAS from the public market by issuing ACAS shares below NAV. ACAS will, at the same time, be retiring debt. What's the impact of ECAS' current discount to NAV? ECAS' fair value increased $50m over the quarter (less $15m in currency net depreciation) to $0.3B, which is $0.5B less than its $0.8B NAV. The market environment in which ACAS' NAV improves is a plausible environment in which to expect ECAS' NAV to improve, and we've seen ACAS' NAV on the march for several quarters now. The ECAS valuation upside isn't limited to the $0.5B of NAV discount, but the 5/8 discount applied to future NAV improvement as well.
A hypothetical exercise: a company has NAV of $400 but has a fair value of $150 because it is in technical default of debt covenants on $200 of debt, which causes its "fair value" to be discounted to 3/8 its non-defaulted value. The company contains $600 in assets, but has $200 in debt, which is why its NAV is $400. If the company pays its debt with cash on-hand so that it has $400 in assets and zero debt, it will perforce be free of any breach of a debt covenant, because the debt will be retired and its obligation discharged. The "fair value" would cease having a defaulted-debt discount to NAV, and "fair value" would again approach the $400 NAV. Movement from fair value of $150 to fair value of $400 was achieved simply because the company was sufficiently liquid. An illiquid company might have continued to fail to met debt covenants, and defaulted not only on covenants but payments, and might have ended up in bankruptcy court where its failing businesses could have been sold off to meet the demands of unpaid creditors. Liquidity beats mere value. Because ACAS is liquid – to the tune of $1.2B – ACAS can explore financial engineering unavailable to illiquid competitors.
Cash from realizations – not issuance, but events like debt repayments and equity exits – produced $163 million in cash. ACAS expects more cash realizations in connection with the Mirion IPO later in 2010. ACAS invested $84 million in new investments over the quarter, so the company is clearly not dead in the water and unable to make quality investments.
Moreover, ACAS is working to improve its margins. The debt refinancing agreement ACAS has commenced calls for interest rates of LIBOR+5.5%, plus another 1% until the principal balance falls below $1Bn. This compares quite favorably to ACAS' current debt burden, which has grown from 9.9% to 10.3%. (The one-year LIBOR rate, the highest rate listed in the prior link, is cheap compared to ACAS' current rates even after adding 5.5-6.5%. Refinancing will apparently improve ACAS' spread by hundreds of basis points.) Freeing itself from default rates of interest will improve ACAS' margins by lowering the cost of the money it's lending to portfolio companies. Turning cash into both decreased principal and decreased interest rates will help ACAS' margins in the immediate term by lowering both the principal and the interest rate on conclusion of the refinancing. The press release makes apparent that hold-out lenders will have the deal shoved down their throats by a court if they don't agree out-of-court. Bankruptcy court is good for a solvent debtor in the United States, particularly when the debtor has nearly all his lenders onboard with his refinancing plan.
I think the future looks good for ACAS. NOI will benefit from the refinancing transaction, because it will allow ACAS to realize better spreads. I'm dying to learn about ACAS' new investments, but honestly I think the best returns ACAS will be getting in the immediate term will be from financial engineering designed to restore value to ECAS. Over the long term, however, I think fire-sale acquisitions may be the key to ACAS' upside. Improvement of earnings will continue through spread expansion and the improvement of the overall performance of portfolio companies as the economy improves (portfolio companies' operating income flows to ACAS' bottom line because it is required to consolidate with its own accounting the results of its wholly-owned and mostly-owned subsidiaries, just as Berkshire Hathaway books revenue earned by GEICO and Dairy Queen), and the better ACAS is doing without thinking about exits, the more opportunity ACAS will have to reap the benefits of being a patient investor without pressure to flip holdings.
I'm optimistic about ACAS and don't expect the pullback to last. Succeeding rounds of good news – whether in the form of refinancing press releases or quarterly reports showing improvements in NAV – will eventually drive ACAS back toward its historical NAV premium.
ACAS' net earnings aren't leading it to a dividend any time soon, though – something the Jaded Consumer regards as good news for those who want ACAS to reinvest the money management has on-hand. This is because realized portfolio losses were $107 million, even as ACAS booked $367 million in unrealized gains. Because BDCs' dividend-payment requirements are driven by taxable income, it is the realized income (and not the FAS-157-compliant changes in holdings' values that the SEC requires be reported as "income") that will determine ACAS' future dividends. As ACAS builds a backlog of realized losses (anyone have a number?), it will be able to absorb future income without being forced into coughing up its valuable cash in the form of dividends. When the losses are completely consumed, ACAS will get some attention for suddenly having a big dividend, but that's for down the road.
ACAS closed the quarter with $820 million in unrestricted cash. Because of the April issuance, ACAS will have some dilution; however, the $1.2 billion of unrestricted cash on-hand at the end of April places it in an interesting position to conduct financial engineering and to acquire distressed opportunities available in the marketplace. If, as the Jaded Consumer expects, the issuance frees ACAS to bring ECAS out of default of its debt covenants, ACAS could show a FAS-157-compliant "fair value" of ECAS that's substantially better than its last-reported values, resulting in a net gain to NAV in the same manner that ACAS expected to achieve when it bought ECAS from the public market by issuing ACAS shares below NAV. ACAS will, at the same time, be retiring debt. What's the impact of ECAS' current discount to NAV? ECAS' fair value increased $50m over the quarter (less $15m in currency net depreciation) to $0.3B, which is $0.5B less than its $0.8B NAV. The market environment in which ACAS' NAV improves is a plausible environment in which to expect ECAS' NAV to improve, and we've seen ACAS' NAV on the march for several quarters now. The ECAS valuation upside isn't limited to the $0.5B of NAV discount, but the 5/8 discount applied to future NAV improvement as well.
A hypothetical exercise: a company has NAV of $400 but has a fair value of $150 because it is in technical default of debt covenants on $200 of debt, which causes its "fair value" to be discounted to 3/8 its non-defaulted value. The company contains $600 in assets, but has $200 in debt, which is why its NAV is $400. If the company pays its debt with cash on-hand so that it has $400 in assets and zero debt, it will perforce be free of any breach of a debt covenant, because the debt will be retired and its obligation discharged. The "fair value" would cease having a defaulted-debt discount to NAV, and "fair value" would again approach the $400 NAV. Movement from fair value of $150 to fair value of $400 was achieved simply because the company was sufficiently liquid. An illiquid company might have continued to fail to met debt covenants, and defaulted not only on covenants but payments, and might have ended up in bankruptcy court where its failing businesses could have been sold off to meet the demands of unpaid creditors. Liquidity beats mere value. Because ACAS is liquid – to the tune of $1.2B – ACAS can explore financial engineering unavailable to illiquid competitors.
Cash from realizations – not issuance, but events like debt repayments and equity exits – produced $163 million in cash. ACAS expects more cash realizations in connection with the Mirion IPO later in 2010. ACAS invested $84 million in new investments over the quarter, so the company is clearly not dead in the water and unable to make quality investments.
Moreover, ACAS is working to improve its margins. The debt refinancing agreement ACAS has commenced calls for interest rates of LIBOR+5.5%, plus another 1% until the principal balance falls below $1Bn. This compares quite favorably to ACAS' current debt burden, which has grown from 9.9% to 10.3%. (The one-year LIBOR rate, the highest rate listed in the prior link, is cheap compared to ACAS' current rates even after adding 5.5-6.5%. Refinancing will apparently improve ACAS' spread by hundreds of basis points.) Freeing itself from default rates of interest will improve ACAS' margins by lowering the cost of the money it's lending to portfolio companies. Turning cash into both decreased principal and decreased interest rates will help ACAS' margins in the immediate term by lowering both the principal and the interest rate on conclusion of the refinancing. The press release makes apparent that hold-out lenders will have the deal shoved down their throats by a court if they don't agree out-of-court. Bankruptcy court is good for a solvent debtor in the United States, particularly when the debtor has nearly all his lenders onboard with his refinancing plan.
I think the future looks good for ACAS. NOI will benefit from the refinancing transaction, because it will allow ACAS to realize better spreads. I'm dying to learn about ACAS' new investments, but honestly I think the best returns ACAS will be getting in the immediate term will be from financial engineering designed to restore value to ECAS. Over the long term, however, I think fire-sale acquisitions may be the key to ACAS' upside. Improvement of earnings will continue through spread expansion and the improvement of the overall performance of portfolio companies as the economy improves (portfolio companies' operating income flows to ACAS' bottom line because it is required to consolidate with its own accounting the results of its wholly-owned and mostly-owned subsidiaries, just as Berkshire Hathaway books revenue earned by GEICO and Dairy Queen), and the better ACAS is doing without thinking about exits, the more opportunity ACAS will have to reap the benefits of being a patient investor without pressure to flip holdings.
I'm optimistic about ACAS and don't expect the pullback to last. Succeeding rounds of good news – whether in the form of refinancing press releases or quarterly reports showing improvements in NAV – will eventually drive ACAS back toward its historical NAV premium.
Monday, May 3, 2010
Paulson and Goldman Getting the Shaft in the Media
I recently read an online report of comments made by Warren Buffett about Goldman's fortunes in the aftermath of the recent SEC complaint. Ignoring the theory that the SEC's effort against Goldman is directly linked to Goldman's lobbying efforts and their diametric opposition to the views of SEC brass and the White House, I was frankly shocked at the number of people who, reading nothing but the New York Times (that prominent purveyor of truth), decided that Buffett was lying to enhance his investment potential. This, in the face of the fact that Buffett makes more money while Goldman is in trouble because it impairs its freedom to call Buffett's high-paying Goldman preferred shares. In other words, the truth appeared to be that Buffett, in defending Goldman, was speaking against his pecuniary interest.
But who cares about the truth when there's an old meme to flog?
In the interest of advancing the quest for truth, I thought it worth posting a link to the other side of the story – Paulson's response to the SEC allegations. Since it's Goldman and not Paulson being threatened by the SEC, Paulson's reply comes in the form of a letter to investors. Still, I thought Paulson's reply was interesting.
In short, Pauson's willingness to take the short side of a subprime mortgage CDO didn't confer on Paulson the power to stuff it with specially-selected garbage. The buyer had previously bought the same securities in other packagings and knew full well what it was buying. Moreover, the asset manager that DID have the power to pick what was being used to structure the investment actually reviewed the investments, picked some, rejected some, then sent the whole off to a rating agency which then exercised its own judgment in rating the investments. Paulson wasn't pushing crack on naïve children, he was selling cigarettes to adults under a sign (that he himself had erected) that read "Cigarettes Are Bad For Your Health. $3/Pack." The buyers were sophisticated investors who, looking at the available information, decided Paulson was wrong and they were willing to take him to the cleaners over it. The only problem with the transaction was, in truth, that Paulson was right.
Buffett probably has it right: Goldman and Paulson aren't the bad guys in the subprime implosion. They saw a market and didn't do anything to poison it, they simply played it. In Paulson's case, he played it while openly criticizing the investment thesis of those playing the long side of the subprime bet. The irony? The SEC's claims aren't about a CDO but an artificial CDO created to offer products to buyers after the real investments had all been sold. The derivative was based on real investments, but needed a counterparty to take the risk on the side opposite the buyer. Paulson's position as the counterparty wasn't secret, and the buyers knew they were buying something no longer available on the market. The buyers were so hungry for subprime investments that they were willing to pay a premium to Goldman to home-brew a substitute.
Paulson's fund is now such a large owner of ACAS that he must report as an insider.
But who cares about the truth when there's an old meme to flog?
In the interest of advancing the quest for truth, I thought it worth posting a link to the other side of the story – Paulson's response to the SEC allegations. Since it's Goldman and not Paulson being threatened by the SEC, Paulson's reply comes in the form of a letter to investors. Still, I thought Paulson's reply was interesting.
In short, Pauson's willingness to take the short side of a subprime mortgage CDO didn't confer on Paulson the power to stuff it with specially-selected garbage. The buyer had previously bought the same securities in other packagings and knew full well what it was buying. Moreover, the asset manager that DID have the power to pick what was being used to structure the investment actually reviewed the investments, picked some, rejected some, then sent the whole off to a rating agency which then exercised its own judgment in rating the investments. Paulson wasn't pushing crack on naïve children, he was selling cigarettes to adults under a sign (that he himself had erected) that read "Cigarettes Are Bad For Your Health. $3/Pack." The buyers were sophisticated investors who, looking at the available information, decided Paulson was wrong and they were willing to take him to the cleaners over it. The only problem with the transaction was, in truth, that Paulson was right.
Buffett probably has it right: Goldman and Paulson aren't the bad guys in the subprime implosion. They saw a market and didn't do anything to poison it, they simply played it. In Paulson's case, he played it while openly criticizing the investment thesis of those playing the long side of the subprime bet. The irony? The SEC's claims aren't about a CDO but an artificial CDO created to offer products to buyers after the real investments had all been sold. The derivative was based on real investments, but needed a counterparty to take the risk on the side opposite the buyer. Paulson's position as the counterparty wasn't secret, and the buyers knew they were buying something no longer available on the market. The buyers were so hungry for subprime investments that they were willing to pay a premium to Goldman to home-brew a substitute.
Paulson's fund is now such a large owner of ACAS that he must report as an insider.
Sunday, May 2, 2010
Flash In The Pan
The escalating Apple vs Adobe exchange on Flash (vs migration to open standards like HTML5) and the adequacy of open-standards alternatives has another data point:
[I]n the past four quarters, the H.264 format went from 31 percent of all videos to 66 percent, and is now the largest format by far. Meanwhile, Flash [encodings] represent only 26 percent of all videos. That is down from a combined [Flash encoding] total of 69 percent four quarters ago. So the native Flash codecs and H.264 have completely flipped in terms of market shareGiven what Apple has demonstrated is possible using open standards and modern browsers, the need for proprietary plug-ins to deliver content or interfaces to customers or other users seems solidly on the decline.
Erick Schonfield of TechCrunch, quoted by Philip Elmer-DeWitt in "Apple vs. Adobe: Is Flash Dying?"
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