Yahoo defections show Marissa Mayer has failed profoundly

The accelerating flight of executive talent makes clear that Marissa Mayer is failing at Yahoo. It’s no longer a turnaround, it’s a rout.The central tenet of modern high-performing organizations is that the company has to attract and retain high performers. Leaving all other considerations aside, any firm that fails on this existential test is likely to be failing across the board.
And, clearly, the accelerating flight of executive talent makes clear that Marissa Mayer is failing at Yahoo. It’s no longer a turnaround, it’s a rout.
Some of the high flyers were bad fits, admittedly, starting with Henrique De Castro back in early 2014, a flub that cost the company $58  million.
Kara Swisher tallies up a list of departures, as well as many back to late 2014, with 15 plus senior members her team, most recently development head Jackie Reses, marketing partnerships head Lisa Licht, and CMO Kathy Savitt. Notably, this last group — all women working very close with her — have all left in the recent past, and in Savitt’s case, at least partially because of estrangement with Mayer. Many others — like Dawn Airy, who headed the European and other international regions for the company — have left because of frustration in the lack of execution in the turnaround plan.
I gave Mayer a B in July 2013 for her first year at the company, but in Aug 2013 suggested her turnaround had better lead to a social platform to unify all the company’s efforts, in Yahoo adopts the New York Yankees’ approach instead of Moneyball:

My sense is that to become a monster in the new world of the mobile web, Mayer has to contrive a social architecture for a broad range of media services, and her competitors in that space are Facebook and Twitter.
Mayer and company have to hope that these competitors give them time to build something really serious and really social.

Well, she hasn’t done that. I’ll leave to one side her obsession over details like the Yahoo logo — which she personally designed with an intern and a few others — and the push to end remote work for at least some categories of workers.
The real question is how long will the board wait before walking Mayer out the door, following the herd of former execs that lost faith in her.Her third quarter numbers missed expectations, and she trimmed her guidance for the year downward. Her new deal with Google for search is no breakthrough, and she’s failed to make something of the 20 or so companies she’s acquired. The opportunity to make Tumblr into a new platform competing with Facebook and Twitter — which has seemed a tantalizing opportunity to me (see How Tumblr Can Make Money And Not Piss Us Off) — has gone nowhere, for example.
The real question is how long will the board wait before walking Mayer out the door, following the herd of former execs that lost faith in her.

Jive promotes Elisa Steele to CEO

Elisa Steele, the former Microsoft and Skype executive who joined Jive in 2013 (see Elisa Steele assumes new role as Jive’s EVP of Strategy and CMO), and who was moved to the position of president ( see Elisa Steele promoted to president of Jive, Tony Zingale retires), has now assumed the post of CEO, and joined the board of directors.

I confess that even from her first role as chief marketing officer at Jive, I predicted she was joining with the intention — on her part and the board’s — to eventually assume the CEO spot, and to replace Tony Zingale, the former CEO. I wrote then:

[…] an appointment like EVP Strategy and CMO looks like a short term test of a candidate for CEO. Tony Zingale, the current CEO of Jive, may be at work on a succession plan. The company went public in early 2012 and then subsequently raised over $12 million in post-IPO venture funds. Most critically, Jive has seen a sharp drop in its stock price since August, when analysts soured on the company after disappointing results since the IPO, and where the company blamed ‘sloppy execution’ in the final stages of major deals as the rationale for poor results. It may be the board wants new leadership for Jive.

And again, when she became president, reporting to an ‘office of the CEO’, I wrote:

My read is that Steele is in charge, and after a perfunctory ‘CEO search’ she’ll be given the CEO title, especially if she can turn the red ink to black.

Note that Jive’s fourth quarter results and 2014 revenue and earnings exceeded expectations — Q4 revenue of $47.7 million, up 21% year-over-year — as announced yesterday. The market didn’t like the results for the year as a whole, with a top line of around $200 million and a loss of 22 to 29 cents per share. The company’s stock fell 12%. But she seems to have stopped the bleeding at Jive. And the next day, she’s CEO.

I recently reviewed the company’s rapid rethinking of its product strategy, and especially the introduction of what the company is referring to as ‘workstyle’ tools (see Jive breaks out of the ‘social collaboration’ platform model with new ‘workstyle’ apps), with the introduction of Jive Daily in a week from today on iOS app store and Google Play. Later in the year we will see Jive Chime and Jive People roll out. This is the adoption of the architecture of deep-and-narrow work technology, and a move away from the pre-mobile ‘social collaboration’ model.

In related news, Ofer Ben-David was been named EVP of engineering at Jive in December, leaving Vmware where he led 1000 folks as VP of engineering. Formerly he held senior research and engineering roles at HP and Check Point.

Jive is making a serious turnaround, and its Steele and her team that are driving that change.

Microsoft’s Surface numbers detract from Office 365 and Azure success

Microsoft posted quarterly results, and there were some surprises. Earnings were $4.54 billion (54 cents a share) on revenue of $23.2 billion. The company took a larger than expected hit of 11 cents a share in Nokia restructuring charges.

The company is spinning a story of Surface success, with over $900 million in Surface sales, but since the company has basically doubled the price of the Surface 3 over earlier, discounted versions, and is only reporting the gross margin of hardware sale — and not actual costs — we can’t really judge profitability of the Surface.  (Hat tip to Ben Thompson for looking at the 10-Q). Presumably is it was madly profitable they would show the profits. And given the higher price point, this is only a million Surface 3 tablets sold. So we’ll have to keep tracking these numbers to see if they are actually making any money, but I doubt it.

But Office 365 posted strong growth of 25%, adding 7 million users, and Azure revenues more than doubled. This is the sweet spot for Microsoft, a productivity and cloud leader.

And imagine how much better the numbers were if the boat anchor hardware costs were gone. From the 10-Q:

Computing and Gaming Hardware gross margin increased $274 million or 134%, due to higher revenue, offset in part by a $770 million or 64% increase in cost of revenue. Xbox Platform cost of revenue increased $623 million or 139%, due mainly to higher volumes of consoles sold and higher costs associated with Xbox One. Surface cost of revenue increased $157 million or 23%, due mainly to a higher cost per device sold, driven by Surface Pro 3.

I wonder how long Microsoft is going to down this road?

Microsoft results point to the future, one that is all business

Microsoft posted its quarterly results yesterday, and in shows a company in a continued trajectory toward the business market, and a rapidly declining consumer side.

The strong showing of enterprise products and services — which grew 10% to $11.2 billion — managed to overcome the poor showing of devices and consumer software, which only grew 4% to $7.46 billion. Net income of $5.24 billion, up from $4.47 billion last year.

The buzz that Microsoft might announce a successor to Steve Ballmer, the CEO who has announced his near-term departure (see Microsoft’s Ballmer stepping down in next 12 months), but that turned out to be wishful thinking. The discussion of various candidates continues, with the same old names being reported: Alan Mulally of Ford, Paul Maritz, a former Microsofty now at Pivotal, Stephen Elop, now at Nokia but soon to become part of the pending merger, and Tony Bates, now at Microsoft but the former CEO Skype.

Ballmer — as I have said many times in recent months — continues with the same old story, that Microsoft will ultimately prevail in the consumer push it is making into companion devices (smartphones, tablets), gaming, and search. I predicted that the company will send tens of billions before coming to its senses, and finally focusing on being the leading enterprise software company. And they continue down that rat hole. Here’s Ballmer:

Our devices and services transformation is progressing and we are launching a wide range of compelling products and experiences this fall for both business and consumers. Our new commercial services will help us continue to outgrow the enterprise market, and we are seeing lots of consumer excitement for Xbox One, Surface 2 and Surface Pro 2, and the full spectrum of Windows 8.1 and Windows Phone devices.

Well, he’s half right.

Sooner or later, Microsoft will have a leader that will spin out or shut down the consumer side of the business, and use that company’s considerable resources toward becoming the leading enterprise software company. Instead of playing an endless game of catch up with Google and Apple, they can turn their attention to Salesforce, Oracle, IBM, and SAP. But they will have to stop tinkering with tablets and copying Google Glass, and double down on tools for a new world of work, or they may find that Apple and Google will be displacing them.

Apple announced this week that the company was making its suite of office productivity tools free for new hardware buyers, taking direct aim for Microsoft’s dominant position with Microsoft Office (see Apple moves to edge out Microsoft Office and Google Drive). Google Apps has been a thorn in Microsoft’s side for years. And Microsoft still doesn’t have Office on the iPad. Time is running out. And if they lose with Office, they may wind up losing it all.

SugarCRM raises $40M and shows 30% growth

SugarCRM, the open source CRM company, announced 15 consecutive quarters of growth, and posting a 30% year-over-year increase in revenue. In related news, the company has announced the completion of a $40 million equity investment by Goldman Sachs.
SugarCRM recently previewed Sugar 7,  its next release, at the company’s annual SugarCon user conference, and in recent months the company has released a new HTML5-based mobile spp, and new fully private cloud instance, for companies who are skittish about multi-tenant security.
I can’t help but contrast the growth of companies like SugarCRM, Salesforce, and Amazon, that embraced the promise of cloud computing early, the recent spate of bad news from Cisco (see Cisco announces 4,000 to be laid off, and no mention of collaboration), Microsoft (see Microsoft sees worst stock drop since 2000: Welcome to the post-PC era), IBM (IBM’s future in doubt, according to Credit Suisse), and most recently, HP. This week Meg Whitman shuffled the executive ranks and posted disappointing numbers, but unsurprising to anyone connecting the dots in this industry.
At the most fundamental level, the larger and older companies have been caught wrong-footed by a tectonic change in the industry. The speed at which foreground and background computing scale is changing blindsided these dinosaurs like a climate-busting meteor. The rise of smartphones and tablets is hollowing out the PC business (foreground computing scale explosion in our proximal, “mobile” devices), and at the same time the shift to cloud computing is destroying the vanity server business that all the oldsters are fight over.
HP’s numbers, for example, were down in almost all areas — personal computers, printers, servers, data storage and networking — which sounds like a litany of woes as opposed to exciting lines of business. HP announced a partnership with Google called SMB in a Box in June, selling Android tablets integrated with Google Apps for Business and other HP software and hardware integrations (see Microsoft hedges its bets on Office 365 and Surface). But that’s a small initiative in the midst of other crumbling business lines.
“Revenue growth across the company has been very weak,” said Toni Sacconaghi, a Sanford C. Bernstein analyst, and HP’s stock is one of the lowest valued stocks in large American companies, and this  “appears to reflect a permanently declining business.”
Just as buoyant cloud players like SugarCRM rise, so it seems that the leaden and slow-footed players — those that believed the enterprise architecture of PC/Server/Data Center was going to last another decade — are surely and swiftly falling.
I believe that many of these companies — especially Microsoft (see Microsoft will rise from the ashes of Windows and Surface failures) and IBM — have the software chops to transition the new architecture, one based on proximal foreground computing (so-called “mobile”) and background cloud computing, and social throughout. HP, though, is a long shot at best, like Cisco.

Microsoft takes $900M write-down on Surface, but Office 365 looks strong

Microsoft’s late entry into the post-pc tablet business has whipsawed them hard, with the company taking a $900 million dollar write-down on Surface. And, as I suggested recently (see Microsoft reorganizes and this time it’s for all the marbles and Microsoft will rise from the ashes of Windows and Surface failures), Microsoft spokespersons will continue to toe the company line, saying that Microsoft is committed to Surface and will continue to push hard on it.
You have to realize that this is a miscalculation of how many Surfaces Microsoft thought it could sell, not the cost of making them. It’s astonishing that they could be this far off in their guesswork, but the company Kool-Aid has been the hypothetical attractiveness of “good ole” Windows on a tablet. And they spent years struggling to bring that to market and now have smashed face first into a world firmly dominated by iOS and Android devices.
Xbox hardware revenues were also down, but Windows Phone revenue was up $222 million, although that includes sales of Windows Phone licenses and patent licensing. So that could be mostly a reflection of Android phone sales paying licensing fees.
The bright spot in Microsoft’s number is Office 365, which has risen to a $1.5 billion run rate, and the business division as a whole — including Office applications — rose 14% to $7.21 billion, although that included revenue from a deferred upgrade offer. Server and enterprise tools grew 9%, as well.
So, all proceeding as I outlined in Microsoft will rise from the ashes of Windows and Surface failures. Microsoft is destined to be the new IBM, who walked away from its PC hardware business, and is now shopping its vanity server business around. The future for Microsoft is the enterprise, based on offerings like Office 365, Yammer, Sharepoint, Exchange, Office, and Skype. They have lost the consumer war, but the executives at the top of the company are going to throw billions away before they admit it.

Investing in Amazon: The cloud won’t make you rich overnight

Amazon published “disappointing” earnings this week, and the market responded, slashing up to 12 percent off the company’s value. It’s a market that’s preoccupied with fast returns, and so Amazon’s investments in data centers and cloud computing don’t necessarily translate to short-term profits. In other words, the company’s ups and downs highlight contradictions between companies investing to support long-term objectives and running a business to ensure analyst-pleasing growth each quarter.

Amazon has been here before. A BusinessWeek cover story from 2006 captured widely shared sentiment regarding the company’s then-recent foray into building data centers; about Elastic Compute Cloud, the piece found that “Eleven of 27 analysts who follow the company have underperform or sell ratings on the stock — a stunning vote of no confidence.” In September 2011, Forbes painted a different picture, noting, “Amazon shares have defied gravity, jumping 55% year-to-year.”

Those analysts were wrong in 2006. And they’re probably wrong this week. Amazon is not in a high-margin business, where profits come easily. Amazon is dominant in business areas where profits come from achieving massive volumes of extremely low-margin sales. Books, consumer electronics, data center compute cycles: None come close to the 30–40 percent profit margins Apple enjoys.

Nevertheless, Amazon continues to invest in data centers — and to reduce prices — in order to retain its position as the dominant provider of public cloud infrastructure. All of these investments position the company for future growth, with data centers being fundamental to Amazon’s existing cloud business. But all of them hit the bottom line in the latest earnings report, and that has clearly spooked investors once again.

Writing for Forbes before Amazon’s earnings report, CFA Institute‘s Robert Stammers asked whether Amazon’s valuation might boil down to a “cloud bubble,” in which hype and investor exuberance artificially inflate perceived value. Stammers goes on to ask, “Is the cloud a profit opportunity for investors or a product opportunity for companies” (my emphasis). This may be the heart of the problem. Investors are looking for a return that is either large or predictable, and ideally both. Figures such as the $3.2 billion spent by CenturyLink to acquire Savvis make the cloud infrastructure space look like one in which large sums can be made. Maybe they can, but hardware and operations also cost a lot to procure, deploy and maintain. Investors used to software, where profit margins can be 90 percent or more, struggle to adapt.

As Henry Blodget argues at Business Insider, Amazon’s long-term approach to building a business should be welcomed. It is, however, difficult to align with the market’s obsession with short-term growth. Buying into Amazon, or competitors such as Rackspace and CenturyLink, is certainly not a bad idea. You’re not likely to lose money (note: GigaOM Pro is not offering investment advice here). But you’re also not going to see significant returns in the short term.

One of the biggest advantages of cloud computing — for a user — is that providers are able to scale resources in line with demand. But for the user to get that experience, the cloud infrastructure providers (Amazon, Rackspace, etc.) have to spend. Machines have to be bought and maintained in massive data centers, so that they are ready when demand arrives. That spending is expensive, risky and recurring. Amazon has a slight advantage over its rivals because of its scale, and because it can subsidize activities with revenue from other areas of the business. But it still has to upset Wall Street by investing.

Question of the week

Are analysts and commentators right to be criticizing Amazon’s results this week?