The Knowledge Economy Cash Anomaly, Part 3: The exciting conclusion

2012/12/16 by 2 Comments

This is part 3 in a series.  Here are Part 1 and Part 2.

Tax Shields 

The organization of the knowledge economy is inclined towards creating great tax advantages.  Both start-ups and mature companies enjoy huge advantages that the resource economy does not enjoy.  Most investments can be expensed.  The companies grow fast enough that they create huge tax losses, even as they create extraordinary value for the owners.  Once they become mature global companies, their assets can be transferred almost costlessly to whatever jurisdiction offers the most favorable treatment.  Transfer pricing makes it almost impossible for authorities to tell where value was added.  Money generated off-shore can stay off-shore tax free indefinitely.  In contrast, resource economy companies have easily traceable assets, some of which require particular locations and may be quite literally fixed to that location.  Their assets are comparatively easy to tax, whatever form their assets take.

If this is the case, it follows that knowledge economy companies have huge tax shields from their operations.  To have these tax shields add value to the business, the CFO of a company needs a business that is low risk, earns the cost of capital after tax, and does not consume much management attention.  Investing in marketable securities seems like just the ticket.  The gain on securities allows the owners of the company to take advantage of the tax shields that would otherwise go unused.

Here is what we’ve been looking for all along.  A reason why cash is better off in the pocket of the company than in the pocket of the owner.  In addition, all the other reasons why a firm might hold so much cash are still active and valid.  Full use of tax shields would be a driving factor for keeping cash on the balance sheet.  The discount rate for tax shields is low and even if only gets used every few years, it adds to the wealth of the shareholders.  For a founder, cash on the balance sheet capitalizes an otherwise unused tax shield, provides diversification, defends the core business, and enhances the value of R&D investments by its mere presence.

The question for further study would be when we would expect to see these benefits diminish?  Can we empirically test which of these hypotheses are most important in guiding payout policy?

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The Knowledge Economy Cash Anomaly, Part 2

2012/12/16 by 2 Comments

This is a continuation of Part 1.

Option Value of Cash on the Balance Sheet

This theory of the cash anomaly posits that the returns from R&D are high, but also highly uncertain.  Every once and awhile, the R&D of a company will produce a really high value project that requires massive investment and possibly acquisitions to use in combination with the asset.  The problem with R&D as an economic asset is that it is very difficult to sell or even be exploited by organizations other than the organization that developed it.  Unlike discovering oil, it is not clear even after discovery of a project that another firm could develop the project to create economic returns.

Because exploitation relies on unique capabilities inside the firm that are only poorly understood outside the firm, their economic value is harder to forecast.  This violates the costless symmetric  information condition of efficient markets is violated, unlike the projects of old economy companies, where the market has a reasonable expectation that it will understand the value of the project.  This uncertainty introduces huge frictions if projects need to raise new capital. Therefore, if a company has R&D projects, the value of that project stream is greatly enhanced if the company also has a means of financing the projects that does not require subjecting those projects to the friction of market financing.  These frictions are both directly financial in the form of more returns to new investors and intermediaries, and also temporal.  In winner takes all markets, which many technology markets are, temporal costs are huge.

The option value of cash on the balance sheet could be huge, however, we would expect more tech companies to at least on occasion, expend all their cash and perhaps even borrowing capacity when they exercised options if this were the case.  This is common in growing technology companies.  Mature tech companies, rarely, if ever come close to expending their investment capacity.

I’m skeptical of this explanation.  Why does Google need to hold enough cash to buy Yahoo or Facebook in cash, if they are never exercise the option to do so?  When was the last time you heard that a company was undertaking a project with more than a billion dollars of expenditures in year one of the project?  These kinds of companies can make acquisitions with stock, invest over time out of future cash flows, and they even have relatively low cost borrowing capacity should it be required.

Cash Poor at Home

Recently, much has been made of the U.S. companies that are parking cash overseas to avoid the tax when they repatriate it.  Many companies are cash poor in their U.S. entity, but their consolidated balance sheet shows a lot of cash.  This cash can’t be repatriated for distribution without a large tax bill.  This is the worst of all possible worlds from a policy perspective, but it doesn’t seem to afflict tech companies as much as industrial conglomerates.

(BTW, Congress doesn’t need to capitulate to corporate demands for no tax on foreign earnings.  All it has to do charge the companies income tax on their cost of capital for any overseas investments, then true up when the companies bring cash home.  Particularly if the law slightly over estimated the cost of capital, or ignored the cost of capital on financial assets in the WACC calculation, so that repatriating funds usually triggered a small refund rather than a small bill, you could just sit back and relax and watch them all bring their cash home while still paying tax.)

Distress Costs

The final explanation I’ve heard offered is the idea that since most of the investments of a technology company are in workforce and R&D, the costs of financial distress are huge.  Not only that, but the costs of financial distress can manifest themselves long before bankruptcy is close.  If managers are cutting benefits or tightening R&D activites, and the costs are not properly captured by accounting frameworks.  New talent goes elsewhere, the best old talent leaves, R&D becomes less creative, less real economic capital employed stealthily decreases without the accountants noticing.  However, CFOs are smart, they know this–even if the accountants don’t.  They keep cash on the balance sheet, employee benefits generous, and 10% time meaningful.  This prevents the stealthy erosion of the real assets of the company, by the prospect of distress, which the intelligent and savvy workforce is acutely aware of even if they don’t conduct formal analysis.

But there is one more reason…

In part 3, I will outline how holding cash creates economic value, regardless of and in addition to, all these explanations.  Go to Part 3.

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The Knowledge Economy Cash Anomaly: Part 1

2012/12/09 by 2 Comments

This is part 1 in a three part series about why technology companies hold so much cash on their balance sheets.  Here are Part 2 and Part 3.

The academics disclaim knowledge of a definitive answer as to why companies in the knowledge economy hoard a such a disproportionate amount of cash.   The problem is that the chart below has two branches where our classical understanding would only expect one.

Robotics (Blue) is firmly in the knowledge economy, using very few real assets, but a disproportionate amount of financial assets, to finance the company.

Robotics (Blue) is firmly in the knowledge economy, using very few real assets, but a disproportionate amount of financial assets on the company’s balance sheet–just like software companies.

The Expectation

The companies that form a cluster heading up close to the Y-axis are the traditional economy companies.  They are everything from utilities to content companies to retailers–some of them quite high-tech.  Basically, they have the real assets that they need to their business and a little bit of cash and securities to get them through the shocks of the next couple of months.

This is what financial economists expect companies to look like:  orderly, well managed institutions that collect cash from operations and distribute the operating profits out to shareholders and debt holders.  Since these companies have access to relatively liquid and efficient capital markets, they have no need to hold onto cash.  Good investment projects can simply be financed through issuing new securities or retaining more future earnings.

Tech Companies

Robotics companies and tech companies on the other hand horde massive amounts of cash–spreading out along the X-axis in the chart above.  Many of these companies, already profitable, could forego revenues for over a year.  And, oddly enough, the most profitable and most successful of these companies hold the most financial assets.  Nobody quite understands why companies do this.  The previous discussion, Is a Dollar Worth a Dollar on a Tech Company’s Balance Sheet?, reviewed some of the arguments for and against the value of cash on a company’s balance sheet.

Holding Cash Is Usually Bad

Most investors feel that excess cash in the company is a temptation to value destroying misadventures by management.  Particularly if management has incentives to grow gross profit, management can grow gross profit by deploying the company’s cash in less than profitable ways.  The classic example of this overpriced acquisitions.  Say you were the CEO of HP and you wanted to grow profits.  You might have heard about this company called Autonomy.   So you decide to buy it at market price plus a huge control premium.  Your profits go up, because you have HP + Autonomy’s profits together.  You get a bonus.  But your shareholders get hosed.

If the shareholders wanted to buy Autonomy, they could have owned it without paying the control premium.  Unless these so-called synergies show-up (and synergies are what go up the banker’s chimney after Santa Claus comes down–see I learned something in business school),  there is no reason to pay the control premium.   The control premium just gets pocketed by the previous owners and the bankers with all that value lost to the shareholders of the acquirer–those are your shareholders.

Conversely, if the company disgorges the cash, and you and your management team go to the market to raise new debt or equity to finance the purchase of Autonomy, Instagram, or any of another thousand bad acquisitions–the financial market has a chance to tell you that this is a really bad idea.  But if it is a good acquisition, the market will easily provide you with the money.  So all in all, investors tend to discount cash on the balance sheet and reward paying it out where they can reinvest it.  So why would companies hold all this cash?

Concentrated Ownership

Many tech companies are owned or controlled largely by single individuals or small groups.  The company represents a substantial portion–if not substantially all–of the wealth of the these founders.  Since they control the company, they are willing to take steps to decrease the risk to the company that are not economically maximal to diversified shareholders.

Consider this hypothetical:  Google and Apple are locked in winner take all product war for a small market that is worth $2Bn in market capitalization to Google now, but will go entirely to Apple in year unless Google spends $3Bn.  If all of your wealth is in Google and you couldn’t easilty get it out, you might be willing to have Google spend $3Bn to save $2Bn in wealth.  Your loss is now $1Bn instead of $2Bn.  However, if you are a diversified investor and own both Google and Apple, you want Google to let the business go and refund you the $3Bn.  You still have your share of the $2Bn in your portfolio and the chance to invest your share of the $3Bn somewhere else to earn a return.

Founder Payout Diversified Common Shareholder Payout
Spend money to protect Failing Business -1 -1
Do Not Spend Money to Protect Failing Business and Payout Cash -2 +3Bn

Less sinister, the company may just be conducting tax free diversification on behalf of the founder.  The effective corporate tax rate is below the individual tax rate, especially on capital gains.  While this is tax efficient for a founder, it may not be tax efficient for other investors.  The harm is probably not as stark as the example above, but it does raise the question about who the firm is being run for and rubs our Anglo-Saxon sensibilities about the primacy of the shareholders the wrong way.

Defense

The story here is that only Apple or Microsoft would ever even think about entering search knowing that Google has the largest market share, the best technology, and is sitting on $45Bn in cash.  If you want to take search from Google, you are playing a long game and an extremely expensive game.  It will fight hard and it has the resources to do this.  Potential competition is scared off, increasing the ability of the company to earn rents in on its primary operations.   While closely related to concentrated ownership story, this is actually favorable to the common shareholder if this is true.   Services like Siri, Wolfram Alpha, and IBM’s Watson cast some doubt on this story, but perhaps at least in the example of general consumer search it is mostly true.

The defensive effect need not be 100% effective to be worthwhile.  This effect is an extra return on the cash that shows up in operations, not financing, because of accounting rules.   Additionally, the company always has the cash, so there is option value.  In our example, if Bing every really started to rule search, Google could decide not to fight, and either sell or wind down search operations.  They still  have $45Bn to distribute even if the value of operations falls to zero, but the option to fight is inherently valuable.  With the cash to execute this option, it becomes more valuable, or credible.

to be continued…   Next up, option value of IP and distress costs

Jump to Part 2

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Waiting for the relational database of robotics

2012/11/01 by Leave a comment

If I were smarter and technically inclined, I would be working on a generalized solution to the problem of material handling.  Intuitively, it sounds really simple.  The basic task is to move objects in accordance with a larger process from one work or storage point to another.  Humans hate it, it is boring, sometimes dangerous, and doesn’t use much of the human’s ability most of the time.  Even more, it satisfies my test of a great robotics application (the Morris Test?):  By having the robot perform steps in a process can you favorably reorganize the larger process to change its key constraints?

Material Handling Robot at a Solar Cell Plant
Image Credit: Energy.gov

Why does it feel like we’re stuck in the 70’s compared to computing?!  What’s going on?  Material handling is to robotics what databases are to computers.  Certainly material handling is not the only application of robotics, but it is definitely one of the leading business applications of robotics, just like data bases in computing.  The need has all kinds of variation and tons of different degrees of depth and similar sorts of need across a huge variety of industries.  However, unlike the relational database, robotic material handling does not transfer to across industrial verticals.

The database industry was like this before the relational database.  Back in before the 80’s, every industry and often specific companies had their own database structure.  The organization was hierarchical and specific to the company or industry (i.e. arbitrary from a programmer’s perspective).   In order to build code or run queries it required elaborate local knowledge of how the data was arranged.  This prevented the transfer of technology between industries and made it difficult to build large software companies since work was largely non-transferable between clients.  The relational database changed all this.  It made it possible to transfer code and innovations between industries, allowed the deployment of programmers across industry lines, and built large dedicated software companies who were not system integrators.

All of the big industrial robotics manufacturers have a stake in material handling for manufacturing applications.  Additionally, there are many systems that we do not call robots by convention, such as optical sorting lines, which truly are robots in this space.  Beyond those solutions, several of the emerging manufacturers have stakes in material handling.  For example, Kiva Systems (Amazon), Seegrid, and Adept all have material handling solutions.  These manufacturers have solutions that serve what is essentially a single industrial niche.  If your environment or the need is different than the original application you’re out of luck.  Unfortunately, robotics manufacturers are not service businesses, a single vertical focus is a bad thing.

My initial take on this problem is that there are three problems that are closely related that all need to get solved jointly.  However, there may be value in solving the problems individually even before we realize the full benefit of the integrated solution.

First, is the problem of sensing, processing, and reacting to the environment to recognize the correct material and move it to the correct place.  My personal take is that this problem is close to solved as a stand alone problem, but that there is still some issues in integration with current solutions to the other problems.

Second, is the problem of interfacing with the larger process.  Robots that are unsupervised are notoriously difficult to synchronize with the larger processes.  I believe teleoperation in medical and field robotics is popular, not because autonomy cannot be programmed to complete the task at hand, but because the autonomy cannot be synchronized with the larger process.  This may have to do more with irrational flesh sacks running the larger process than any fault of the machine, but nonetheless, in integrated processes synchronization is key.  Note that the main differentiation between the robotic material handling systems discussed above is the method that they use to communicate with the larger process.

Third, we have not solved the mechanical generalization issue.  This will be the tough.  There are some things that require a forklift and some things that you cannot get a forklift too.  A forklift operator can get out and walk, but humanoid robots are not the answer.  Beyond revulsion with robotic anthropomorphism, there is no way that the human water bag is optimally configured for just about anything, let alone moving stuff around.  I was pretty unhappy carrying half my body weight in the Army, but for a machine that just pathetic.  Even if this problem could be generalized into a few basic types, that would go allowing the first two kinds of solutions to control the hardware.  The market as much as engineering may help solve this problem.  It will take deep pocketed speculators and market organizers to get this to happen though.

I don’t have a brilliant technical idea.  Further, this market probably will not have the same degree of network effects that power the database market (however there will be more winners).  That said, it seems like this problem has to be able to be generalized in a way that has previously eluded us.   When it does, hallelujah, we will finally have a piece of robotics technology infrastructure that will serve widespread adoption of a host of robotic applications.   The Jetsons will finally start to look backward!

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Do you know anyone thinking about the future of aviation?

2012/10/29 by Leave a comment

If you do, please make an introduction for me.

I’ve been thinking a lot about the future of aviation lately.  I’m trying to write a major piece for Patrick Egan at sUAS News and also thinking about this for reasons related to my business.  I’m not sure that we in the unmanned aviation community have done enough to think about what the future of the aviation industry is like.  Clayton Christensen’s Seeing What’s Next has a great discussion of disruption in aviation, but even though it was written in 2004, it makes nary a mention of unmanned aircraft.  Steve Morris at MLB Company also was kind enough to have lunch with me last week and talk about what he sees coming.

Photo Credit: DARPA / DTIC.mil

Hypothesized Developments in Aviation from Unmanned Aircraft:

-Aircraft building, particularly on the low end will approach a commodity industry more analogous to PCs or cellphones than current aircraft building paradigms.

-Unmanned aircraft companies (both builders and operators) are going to look more like software or networking companies than they are going to look like industrial companies, this has implications for both human resource practices and the capital structure of the companies.

-Scheduling, routing, and planning will be done according to the new paradigm.  Currently in aviation, everything is optimized around getting the most out of any particular flight hour or unit of plane time.  Unmanned flips this on its head and allows for the aircraft to be treated like other tools that wait on the main job.  Don’t know when you’ll need the plane up?  That’s okay, we’ll park it in the sky (maybe doing a lower value mission) until you need it.  Want to go from point A to B?  Great we’ll take you there, directly, when you want to go.  We will not worry about crew duty cycles, hubs, or returning the plane to its home base.

-Large airports will loose their centrality to the system–this is not to say they will experience a decline in traffic, but rather, they will not be the key limits on a network-like system of small airfields and ad hoc landing or operating sites (think more like a heliport than an airport).

Predicted Market Effects:

-Differentiation and customization will likely become the norm in unmanned aircraft operations.  Most airlines are pretty undifferentiated, but when the business customer is going to tie their ERP system to their aerial service provider’s dispatch system and automatically task aerial missions based on orders, sustained relationships and differentiated services are going to be much more meaningful.

-Data gathering / reconnaissance is likely to switch almost entirely to unmanned systems after the FAA changes the rules.

-Air Cargo is going to be significantly changed, mostly at the interface between trucking and air, with more work being done by air and less by trucking.

-In the long run personalized aviation, whether that is passenger aviation or other types of aviation consumption is going to be the big development.  Aircraft of today are like mainframes of the 70’s.  Only anointed experts who get to go into the restricted area can operate these machines.  Unmanned aircraft are going to be like PC’s, so cheap and easy to use that anyone can have one.  The possibilities here are quite remarkable.  Data collection, aerial work, cargo, and passenger transport are likely to feel the effects of this shift.

-Long haul, passenger, mass transportation will be the last segment to be effected.  The first segments to be effected will be small, light-weight, short duration applications.

So what else?  

I don’t really have a clear idea of how this effects incumbents.  It will definitely be change.  On the one hand, I think that the big guys at the top of the market will be fine.  I don’t expect Boeing or the airlines to disappear.  On the other hand, I don’t think that axis will have the control over aviation that they do today.  They will be more like bus companies and builders in the large automotive industry.

The cult of the pilot will be diminished (as it already is in military aviation) and air travel will continue to be democratized.  I believe that we are witnessing something akin to the introduction of the automobile.  Prior to the automobile, mechanized transportation had been too expensive and hard to use for anyone that was not an expert.  Prior to aerial automation, aircraft were too expensive and hard to use for anyone but an expert.  That’s changing, if we can hurry up the FAA, we have an amazing industrial explosion ahead of us.

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Is a dollar worth a dollar on a tech company’s balance sheet?

2012/08/21 by 1 Comment

Previously, dear reader, you and I have discovered that robotics companies are firmly entrenched in the knowledge economy and their assets look like other knowledge economy companies’s assets.  Robotics companies only hold only a limited amount of real assets but lots of financial assets.

As a related question, what is the value of the cash (and financial assets) on the balance sheet to investors?  There might be several issues with holding so much cash.  Particularly, money in a company should be employed making more money, ‘earning or returning’ as the saying goes.   Are there valid reasons to hold so much cash?  And if so, how should we value the cash that knowledge economy companies hold?

Cash Is King! (Or at least a founding father)

Bottom line up-front:  Valuations are always wrong.  What’s interesting is how they are wrong.  Assuming a dollar is worth a dollar is as good a rule as any, but is almost always wrong.  Nobody is really sure which way (too much or too little) it is wrong.  Below, is an elaboration of some of the issues with valuing cash which may come into play when valuing particular companies.  (And you thought that at least cash of all things had a fixed value  —  don’t we all wish!)

There are various criticisms of excess cash on the balance sheet, below are some of the most common.

1)  Holding the extra cash reduces returns, i.e. to buy into the business you have to buy a pile of cash beyond what is ‘necessary’ to run the business.  Further, the rate of return on cash has been essentially zero and certainly below inflation lately, so holding the portfolio the stock represents of a highly profitable business, plus cash must necessarily produce a lower expected return than just the business.

2)  Because of agency problems, management may be incentivized to use the cash to reduce volatility or ‘save’ the business if it falls on hard times, even if the investors could get a markedly higher rate of return in the market.  From an investor’s point of view this would be systematically wasting money.  Employees, customers, management, and trading partners might have a very different view.

3)  Holding lots of cash is said to signal that the company does not have profitable investment opportunities commensurate with the cash that it is generating and the company’s growth may slow in the future.  Further, holding lots of cash signals that you don’t know, or are ignoring, the traditional Anglo-Saxon business administration.  English speaking investors generally expect management to maximize monetary returns over the forecasting horizon and put shareholder interests ahead of all others.

Some countervailing points that you will often hear are along the following lines. 

A)  Although holding cash reduces returns, for a volatile security like a fast growing knowledge economy company, having cash on the balance sheet dramatically reduces volatility.  If investors want more exposure to the underlying business for the same initial investment, lever-up.  Since we are talking about cash holdings, buying on margin is almost a perfect antidote to management’s lackadaisical cash management policies if you feel that way.  [But seriously, who is their right mind thinks you need to lever-up when buying tech stocks?]

B)  Although management might ‘burn’ cash saving a failing business, which would be better redistributed to investors, more likely, they are going to have the flexibility to engage in acquisitions and new ventures without having to deal with the whims of the security markets.  [Has anyone seen a rational market lately?  Please let me know.]

Or has anyone read the Wall Street Journal?  Tech companies are routinely attacked for having their fixed life fund investors exit—Groupon and Facebook each got front page hatchet jobs over the past two days with nary a mention that these funds had been planning to sell now for, oh say, 8-10 years!  Talk about journalistic malpractice.  Would you want to go to the public markets in that environment?  I sure wouldn’t.  If I was management, I’d say that if investors are that irrational, I’ll keep the cash and do what they should have done with the money.

C)  Finally, although cash on hand may sometimes signal that the companies are running out of investment opportunities, it certainly signals to would be competitors that the said company is in a position to stick around for a long time and bitterly contest any erosion of their market position.  This may greatly enhance the value of the underlying business asset.

D)  This is a successful tech company.  It is run by the founders, for the founders (i.e. management).  If you don’t want the privilege of investing and taking whatever returns the founders deign to give, please step aside and allow the next investor to purchase stock.  But this isn’t really a justification.  Founders are investors too, especially once the company goes public, with theoretically the same motivations as other investors since their stake is highly liquid.

Further research on technology companies and their cash management policies should address the following issues:

I)     Are there structural reasons beyond the creation of new businesses and defense of existing businesses for technology/knowledge companies to hold lots of cash?  It does not occur to me that there is anything about a maturing knowledge business that seems to require massive amounts of cash.  Law firms and accounting firms do not seem to hold too much cash, but they are also typically private and can make much more drastic changes than public companies.

II)   Are there frictions between the interests of various classes of investors?  Particularly when there is a founder controlled/managed company, cash on the balance sheet is probably as good to them from a control perspective as cash in the bank and better from a tax perspective.  Should investment banks or others creating the classes of stock have new mechanisms to deal with this?

III)  What are the true limits on investment opportunities?  My firsthand observation has been that the greatest constraint on growth of robotics companies is management attention.  It may be that most technology companies have massively profitable investment opportunities, but management attention is engaged on current projects and hiring into the management circle is not that easy.  What is the needed resource to change this?  How can cash be used to obtain this resource?  Can it?  Is passion required?

IV)  Are there ways that management could resolve some of the market frictions that require them to hold lots of cash?  The public markets seem to mercilessly abuse tech companies—no they don’t look like utilities, but the highs and lows that they are pushed to seems unjustified—there just doesn’t seem to be enough new information about their future prospects to justify either one.  Can management take steps to make access to public markets, particularly debt markets more reliable?  Could banks make money by providing massive, typically undrawn, lines of credit that would provide much of the same protections to management?

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Where are the Ops Companies?

2012/07/08 by Leave a comment

Really where are they?  Given how many companies are  building some form of robot it seems like there should be some proportionally greater number of companies out there forming to implement, service, and operate these robots.  Where are they?

Frank Tobe isn’t finding a lot of them forming in his start-up list.  Even the RIA seems to have fewer integrators than suppliers.  AUVSI has many more Lockheeds and Insitus than VT Services.  One could make a case that this is characteristic of the peculiar industries that we’re looking at.  The robotic counter example is perhaps the ROV industry which routinely provides the ROV as a packaged service to the off-shore oil and gas industry.  But most consumer robotics are still selling to early adopters.  Our consumer customers are all people who want tech for tech’s sake, not to mainstream customers that are just looking to solve a problem.

Think about other complex goods in our economy.  Computers have a vast cottage industry associated with servicing and maintaining them which is probably as big or bigger than the software industry proper.  All vehicle industries whether air, ground, or sea have vastly more businesses in the business of selling the services than engaged in construction of the vehicles–even if constructors do manage to capture a large share of the total revenues of the industry.

I think our industry has a problem.  I’ve talked to people at the oil and gas majors and heard straight out that robotics companies are producing robots which have a business case to be used several applications, but they will never be used until a credible organization to is there to provide the robot as a service.   It is a bit of chicken and egg, but I think this applies as you go down the chain, not just in large capital projects.

When doing sampling or reconnaissance, customers want actionable data not a fleet of robots or new employees.  I know from experience that infantry brigade commanders love having drone imagery of the battlefield, but don’t want to worry about having to support the drone unit, they just want to see the battle.  This is equally true in forestry, agriculture, infrastructure, and minerals.

Do I really want to own a cleaning robot? No, I would much rather have a business that comes to my house every week and keeps the place clean whether that business uses humans, robots, or both.

Even in medicine, if I were a hospital operator I’d love to be able to push the risk of owning the robot back onto someone else.  If I can pay per procedure and not worry about utilization, maintenance, or obsolescence–I’m much more game to adopt something new.

To date, our industry has done a relatively poor job of making robotics accessible to people and organizations who aren’t willing to organize around robotics and develop organizational competence in robotics.  Providing robotics as a service could greatly expand the number of potential customers.  I think when we see these businesses start cropping up, we will know that our industry is no longer in its infancy.

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Hiring Ads: Sign of strength in job market or weakness of informal networks?

2012/07/08 by Leave a comment

There is an interesting post on hiring ads over at Global Robotics Innovation Park.  The post sources its data from Wanted Analytics’s post on hiring advertising for robotics.  The post headline is that robotics related hiring ads are up 29%.  This is good news, but I’m not sure that it is that significant a statement on the health of our industry.  It is more a statement on the health of our industry’s customers and the macro-economy at large.

If you look at the trend and the details that they report, it seems that most of these jobs are at users of robotics in manufacturing or medical hubs–not places with lots of robotics builders.  The need for a physician/urologist with robotics experience sounds a lot like hospitals are trying to keep those sweet new DaVinci Sis fully utilized.  A lot of the other jobs sound like manufacturing is finally finding its feet again.  Don’t get me wrong, this is all good for robotics, but it doesn’t mean that our industry is growing relative to the economy at large.  Take a look at the job posting numbers for robotics qualifications.

Job Postings for Robotics:

Wanted Analytics also has a similar post on the state of hiring for lean six sigma engineers with a headline about 28% growth.  The trend of the two graphs is almost identical.  This suggests to me that both the headlines should really be about the macro-economy and what that means for hiring.

Job Postings for Lean Six Sigma:

I think the takeaway from this jobs post is that as our industry continues to insert robotics into more areas of people’s lives, that the changes will not be in tech hubs where robots are designed and built.  Rather, the changes will be where the users live.  Our impact, for good or ill will be where our systems get used.  Adoption and sales are going to be driven by the challenges that our customers face.  As an industry we need to start addressing the challenges of the robotics workforce to remove that impediment to adoption.  ReThink Robotics is on the right track trying to reduce the hurdles to operating a robot.  Still, our society will probably require a lot of system operators and maintainers if more work is to be done by robotic systems.  The education system is unlikely to meet this challenge with out partners, I hope that our industry can be such a partner.

Filed under Commentary, Economics

What cluster does a company with HQ in Boston but more offices in Silicon Valley belong to?

2012/07/04 by 1 Comment

I’ve got more comprehensive data on public robotics companies due to some updates suggested over at hizook.  However, I’m at a loss as to how to classify Brooks Automation and Cognex.  They both make automation components for various kinds of industrial applications and they both have corporate HQ outside of Boston with two offices each (probably the legacy of acquisitions) in Silicon Valley.

At a loss as to how to classify them, I’ve made a new category for them on my charts.  If you have thoughts about how to get good acquisition data–especially as a lot robotics companies can be acquired in a transaction that is ‘immaterial’ to a 10-K/Q for public company–I’d love to hear them.

And here is the raw data.  Not all market caps were taken on the same day.

Filed under Clusters, Economics, Finance, Public Companies Tagged with , , , , , , , , , , , , , ,

Surprise! Robotics Companies Are NOT Capital Intensive

2012/07/01 by 2 Comments

Please allow me to blow your mind and overturn the common sense notion that robotics companies are capital intensive.  Comparing profitable, public, U.S. based robotics companies to a diverse basket of prominent public companies shows that robotics companies do not require a lot equipment and property to make successful businesses.

In fact, robotics companies have the least property plant and equipment of any of the companies I selected for comparison–which deliberately included such tech giants as a chip maker, an operating system maker, and a search engine giant.  Looking at capital expenditure and depreciation, the robotics companies are again among the leanest of the companies on the list.

The only companies that had such low numbers for CAPEX and depreciation had their assets tied up in very long term investments like real estate and aircraft manufacturing facilities.  Also, most of the robotics companies are still growing and may have their capital expenditures boosted as a percentage of revenues by their anticipated growth.  Take a look at the trend line.

Now what people may mean when they say that robotics is ‘capital intensive’ is that the marginal cost of goods sold for a robotics company is greater than $0/per unit that consumer web applications have–but if that’s what they mean they should come out and say it and not be sloppy in their reasoning.

Angels, VCs, and other investors are you paying attention?  Big plays are going to be made on relatively small bets.

As a Percentage of Revenue
Ticker

Company

 PPE Depreciation

CAPEX

Robotics

IRBT

iRobot

6.81%

2.42%

3.05%

ISRG

Intuitive Surgical

11.31%

1.68%

6.79%

AVAV

Aerovironment

7.24%

2.76%

4.61%

CGNX

Cognex

9.86%

1.72%

2.43%

Robotics Median

8.55%

2.07%

3.83%

Robotics Average

8.80%

2.14%

4.22%
Diversified

GOOG

Google

25.33%

3.68%

9.07%

MSFT

Microsoft

11.67%

3.95%

3.37%

T

AT&T

84.50%

14.50%

15.87%

INTC

Intel

43.75%

9.52%

19.93%

XOM

ExxonMobil

45.96%

3.34%

6.63%

BA

Boeing

13.55%

2.12%

2.36%

D

Dominion Resources

206.34%

8.96%

25.40%

AA

Alcoa

77.82%

5.94%

5.16%

DIS

Disney

38.99%

4.50%

7.32%

HD

Home Depot

34.54%

2.39%

1.65%

Diversified Median

41.37%

4.23%

6.98%

Diversified Average

58.25%

5.89%

9.68%

Some notes on the analysis:

-Data comes from the companies last 10-K filing.  Some companies include different things in revenue (where possible I tried to exclude revenue from a financing arm), in deprecation (some include amortization of intangible assets), and capital expenditure (Intuitive, for example, includes the acquisition of intangible assets).

-I wanted to look at a diverse basket of public companies and tried to pick companies that might be similar in some ways to robotics companies but whose earnings would not be unduly influenced by robotic related income.  For example, I excluded offshore oil field services companies because they were too close to being robotics companies, but still not pure enough to get a good view of the diversified company.  I did include Disney (which does anamatronics), Boeing (which has a UAV making subsidiary), and Google (which has a robotic car division) because I thought the revenues contributed to the these companies by robotics related activities had no material impact on the financial metrics.  However, their tangential involvement in robotics speaks to their similarity to robotics businesses.

-Future analysis should look at some other places where capital use can be buried.  For example, Cost of Goods Sold can hide capital that is employed on the companies behalf further up the supply chain.  It is possible that current assets like inventory may also need to be higher for robotics companies.  Also, we should compare total assets and liabilities to the revenue generated to similarly sized public companies to see if there is a substantial difference.

Filed under Economics, Finance, Public Companies Tagged with , , , , , , , ,

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