In The Headlines

Technology Giants Slash Jobs as Tech Buying Habits Change

Intel’s planned layoff of 12,000 adds to a lengthy list of job cuts by Hewlett-Packard, VMware, EMC, IBM, and Microsoft. Intel’s recent announcement about cutting 12,000 jobs is just one more example of an increasingly tough period for tech sector employees. Over the past year, the computer industry has slashed 72,333 jobs, according to job placement firm Challenger, Gray & Christmas. During the first three months of 2016, tech companies sliced 17,002 jobs. That is up a whopping 148% compared to the first three months of 2015, according to the company’s calculations.

VMware VMW and EMC are slimming down as they prepare for their impending acquisition by Dell, which has also been cutting costs. And both HP, Inc. (the PC-and-printer company) and Hewlett-Packard Enterprise (the data center-and-cloud company) continued the job cutting that their parent company started several years ago. Microsoft announced planned layoffs of 7,800 staff last July 2015. IBM is also in what seems to be a semi-permanent job-cutting mode (although its spokespeople emphasize that IBM is also hiring).

Technology companies, which have been around for a few decades, face a particular challenge because businesses are buying hardware and software differently than in the past. A traditional IT provider can no longer count on huge (and profitable) hardware and software upgrades to come every few years like clockwork.

Part of the issue is that more business (and personal) software is sold by subscription, on a per user, per month basis. And, it runs on servers owned and operated by the software provider—by a Salesforce.com, or a NetSuite, or a Workday, for example. In addition, more companies are developing their own software—and perhaps running it— on the shared infrastructure of public clouds like Amazon Web Services or Microsoft Azure. In both cases, that means the software buyer needs less new hardware less often in their own data centers.

And then there is the open-source software situation. Companies running Linux, OpenStack, or other such software do not pay the high license fees prevalent in the age of commercial, proprietary software. And that is why companies like Oracle, Microsoft, and IBM are scrambling to enter this new era while managing declining sales in their older businesses.

Intel has been bitten by the fact that the market for new PCs is in a prolonged slump as more people rely on smart phones and tablets for more tasks. While Intel’s chips power the vast bulk of the world’s PCs and laptops, they are not as dominant in these other devices. Intel has been growing its cloud-computing business—remote servers that customers can access from anywhere—which commands higher profit margins than PC chips, said Angelo Zino, an analyst at S&P Global Market Intelligence. Intel is rumored to be in the running to supply Apple, Inc., with chips for the iPhone 7. “They’ve done an excellent job over the last several years moving the needle away from PCs,” Zino said. “We expect that to continue. In the immediate term, look for more aggressive moves on the cost-cutting side of things.”

Ironically, Andy Grove, who served as Intel’s president, chief executive, and chairman of the board, died March 21. He famously led the company through another major transition, persuading Intel to build microprocessors instead of memory chips, setting the stage for Intel’s success for decades. As Challenger, Gray & Christmas chief executive John Challenger summed it up in a statement: “We will always need technology, but how we interact with it, as well as where and when we interact with it, are changing rapidly.”

Citations

1. http://for.tn/1Slozjv – Fortune
2. http://lat.ms/1SrLcVI – LA Times

GrubHub Aims to Take Over Takeout

In 2004 Matt Maloney and Mike Evans had to build a website of their own just to find out which restaurants in their area would deliver. A dozen years later their online marketplace, GrubHub, handles more than $2.4 billion in food orders per year, making it the leader in a suddenly cutthroat chase for restaurant delivery. DoorDash, a three-year-old San Francisco startup aiming for GrubHub’s throne, just raised $127 million in venture money, 50% more than Maloney and Evans took from investors in five funding rounds combined prior to GrubHub’s 2014 IPO. And Uber, the $60 billion threat to taxi service, just launched UberEats, a food-ordering app that takes advantage of the company’s unprecedented scale with drivers. “This is the most exciting time in this industry, maybe the biggest since the invention of delivery food,” says Maloney, now GrubHub’s 40-year-old CEO.

Pressure from younger startups has not hurt GrubHub’s growth too badly yet. the result of a 2013 merger between GrubHub and rival Seamless, the company leads with 66% average sales growth over the last three years, and 36% annual growth forecast for the next three to five years. And it has grown profitably, with $38 million in net income on $362 million in revenue last year. That is because until now, Maloney avoided building a margin-destroying, labor-intensive delivery network of his own. Instead GrubHub happily takes an average 15% cut of orders on its platform, and lets restaurants figure out the last-mile delivery.

Maloney is not shy about his disdain for the startups that are, in his view, trying to prove they are not the next Kozmo.com or Webvan, failed food delivery startups from the Dotcom bust. Postmates and DoorDash, two of GrubHub’s biggest competitors, say they are profitable in some of the cities where they operate, but Maloney says they are not telling the truth. “People are going to look around and say, ‘Oh no, I can only do this for 12 months even if I just raised $100 million’ because every incremental transaction is negative,” he says.

Yet even though Silicon Valley fuels startups with shaky economics, Wall Street has turned impatient with Maloney’s efforts to capture more of the $75 billion takeout and delivery industry. GrubHub’s shares are down 50% since their peak a year ago, as investors fret over the company’s slowing growth in a more competitive market. That has pushed Maloney to invest for the first time in what he calls “a nasty business.” Last year GrubHub spent $90 million to acquire three regional delivery companies that already served more than 3,000 restaurants across 15 markets, and attributed $5.5 million in additional investment in the fourth quarter to building out its network of independent driver contractors. “I’m running my delivery-based business with the explicit goal to break even,” Maloney says. “That’s not fun for me, and normally I’d say that’s the dumbest business you could ever be in. Why run a break-even business? That’s a pain in the backside.”

Maloney figures it costs him about $6 to deliver pad Thai or lamb vindaloo to your home (although it could be more in some markets). With an average order size of $28, his company has only two ways to cover that—charge the customer or charge the restaurant. GrubHub is doing both, grabbing an additional 10% from each order and tacking on a customer delivery fee of around $2. That is barely enough to cover the costs in an ideal scenario—and why Maloney thinks DoorDash and Postmates, which have to make those numbers work at a fraction of GrubHub’s scale, have no hope of ever reaching profitability.

Maloney thinks he can reach break-even on deliveries by later this year, while GrubHub’s pure marketplace side continues at its healthy 35% adjusted net operating margins. He is focused on restaurants that do not offer delivery of their own, which is an acute problem outside of big markets like New York City and San Francisco. Adding selection will hopefully drive more customers to the GrubHub app, and encourage them to order more frequently. About 90% of GrubHub’s orders are repeat diners.

RBC Capital Markets analyst Rohit Kulkarni calls that assumption “a big if” and says Wall Street is skeptical that GrubHub has complete control over its cash burn in delivery. But Maloney points to early signs of success. GrubHub launched delivery in 50 markets in 2015, and it is already grossing at a run rate of $200 million a year. Growth in at least four of GrubHub’s ten-plus second-tier markets has accelerated after introducing delivery. “There’s some chicken before the egg, where I have to have the supply ready to drive demand,” Maloney says. “But I have it way easier than anyone else because I’m already running 250,000 orders per day.” As rivals play catch-up, Maloney hopes that his head start matters. However, if it turns out that no one is making any money on delivery, it may not make a difference.

Citations

1. http://onforb.es/245IbQ7 – Forbes
2. http://cnb.cx/1T29Zgw – CNBC

The Good News Is . . .

• The number of Americans filing for unemployment benefits unexpectedly fell, hitting its lowest level since 1973, suggesting the labor market continued to gain momentum despite weak economic growth. Initial claims for state unemployment benefits declined 6,000 to a seasonally adjusted 247,000 for the week ended April 16, according to the Labor Department . Claims for the prior week were unrevised. Jobless claims have now been below 300,000, a threshold associated with healthy labor market conditions, for 59 weeks—the longest stretch since 1973.

• Hasbro, Inc., a leading manufacturer of toys and games, reported earnings of $0.38 per share, an increase of 80.9% over year-earlier earnings of $0.21 per share. The firm’s earnings topped the consensus estimate of analysts by $0.14. The company reported revenues of $831.2 million, an increase of 16.5%. Management attributed the company’s results to strong growth in it Nerf and Play-doh lines, as well as sales of its partner brands related to Star Wars.

• Casino operator Boyd Gaming Corp has agreed to buy Cannery Casino Resorts LLC, in a deal valued at $240 million. One of Cannery Casino Resorts’ two Las Vegas locations would give Boyd a strong foothold in the fast-growing north area of the city, which is emerging as a hub for technology start-ups, attracting affluent professionals with money to gamble. Founded in 1975, Boyd Gaming has grown into an owner and operator of 22 casino and hotel properties in eight states. Boyd’s portfolio includes three casinos in downtown Las Vegas and six properties in greater Las Vegas. Consolidation activity in the casino industry has recently gained momentum.

Citations

1. http://1.usa.gov/1U7iwnt – US Dept. of Labor
2. http://cnb.cx/1gct3xa – CNBC
3. http://bit.ly/1rpmxbV – Hasbro, Inc.
4. http://reut.rs/1NDvUZG – Reuters

Planning Tips

Guidelines for Evaluating an Exchange Traded Fund (ETF)

Low-cost investing is in vogue, which has driven an explosion in exchange-traded funds (ETFs). These investments track an index or commodity and trade like a stock. Further, these funds are passive rather than managed, which means they are also cheaper to run. For price-conscious investors, ETFs should be part of a balanced investment portfolio. But not all of them are created equal: from the fees they charge to the underlying investments they are comprised of. Below are some guidelines for evaluating an ETF. Be sure to consult with your financial advisor before making any investment to be sure it is appropriate for your situation.

Determine your investment goals first – Before you can compare other aspects of ETFs, you have to know what you want to invest in and why. Just like with stocks and mutual funds, options abound, making it tough to narrow it down if you do not know what you are looking to achieve. If you are a risk-averse investor and are seeking a way to get stock exposure, then you may want to look at more stable stock-focused ETFs that invest in large-cap companies. For risk-seeking investors, there are more exotic ETFs that could give them a higher return. Without understanding what the aim of the investment is, you can quickly get overwhelmed by the number of different ETFs on the market.

ETFs may use similar names that stand for very different investments – Similar-sounding ETFs can have very different investment strategies. Specifically, their underlying indices can use different weighting methodologies and select stocks based on various factors. For example, there are a number of ETFs with the S&P 500 appellation, but these ETFs are not all the same. The largest S&P 500 ETF options, like the SPDR S&P 500 ETF, track an index that weights holdings by market capitalization, so the largest companies have the largest position. There is also an equal-weight S&P 500 ETF, the Guggenheim S&P Equal Weight ETF, which equally weights each of its holdings regardless of asset size. Additionally, the PowerShares S&P 500 Low Volatility Portfolio tracks S&P 500 stocks that exhibit the lowest volatility. The different investment methodologies can cause these ETFs to vary in their performance.

Pay attention to fees – One reason people opt for ETFs is because of the low costs associated with them. However, while ETFs are generally cheaper than other fund investments, some ETFs can be quite pricey. Investors need to pay attention to the ETF’s operating expense ratio and trading commissions when comparing ETFs. According to the Wall Street Journal, the average expense ratio on an ETF is 0.44%. ETFs that invest in narrowly-focused indices, risky industries, regions, or investments can cost more than the average. While investors can purchase ETFs from all sorts of brokers, some are going to charge a commission for purchasing the ETF. That cost can be eliminated by going with brokers who don’t charge a fee when you purchase shares or sell them. Also, be aware of the fine print. Some of the time those free trades may not be so free.

Ensure the ETF invests in what it says it does – The whole idea behind ETFs is to track a specific index—whether it is a basket of large cap stocks or a bond index. ETFs that track the S&P 500 or the NASDAQ are the old stalwarts of the industry, but newer ETFs are getting creative when it comes to following an index. When considering an ETF, you need to know what index it tracks and what assets comprise the ETF. If it is indexing something that is not very well-known, it should give you pause.

Make sure the ETF has staying power – When it comes to choosing an ETF, you also must be mindful of its level of assets, which is a clue to an ETF’s staying power. After all, if the ETF does not have a lot of interest, it will lack the profitability that makes it worthwhile to keep the fund operational. A good rule of thumb is to go with an ETF that has at least $10 million in assets. The ETF should have a good trading volume also, to prevent big price moves if there is a substantial buy or sell.

Citations

1. http://bit.ly/1Nopinm – ETFdb.com
2. http://yhoo.it/1WhV6vL – Yahoo! Finance
3. http://bit.ly/1Qt9jyP – Investopedia
4. http://bit.ly/1SBKbxy – UnderstandETFs.org
5. http://bit.ly/26kPSUw – Zacks.com