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MISSION:INTANGIBLE, the blog of the Intangible Asset Finance Society, offers critical comments on intangible asset, corporate reputation, and finance; supplemented by quantitative reputation metrics. Intangible assets include business processes, patents, trademarks; reputations for ethics and integrity; quality, safety, sustainability, security, and resilience; and comprise 70% of the average company's value. MISSION:INTANGIBLE is a registered trademark of the Intangible Asset Finance Society.

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Fusion-IO: Abandon all hope

C. HUYGENS - Wednesday, November 06, 2013
There are heroes, and there are zeros. The Consensiv 50, calculated monthly, comprise the former. In the 27-member Computers and Peripherals sector, Fusion-IO (FIO) is the latter.

Fusion-IO, a 2011 IPO darling and the employer of Apple co-founder Steve Wozniak, and one of the picks for the RepuStars Variety Corporate Reputation Composite Equity Index (REPUVAR) this year, has been imploding for most of 2013. Early in the year, the company admitted that it was relying heavily on just two customers: Facebook and Apple. They accounted for about 50% of revenues, and both companies said they had plenty of flash storage and would buy less in the future.

The exit of the two cofounders David Flynn (CEO) and Rick White (CMO) this spring was just answered by the resignation of Dennis Wolf, the CFO. During all this c-suite drama, the firm's Reputational Premium has been on a downward trend. The awful spike in the Consensus Trend, where a value in excess of 7% is considered worrisome, helps explain why its reputational health is dismal.

For more background on the Consensiv reputation controls that underpin the rankings, click here. To view the November 2013 reputational value league table at CFO.com, click here.

Apple v Google: Great expectations chapter 3

C. HUYGENS - Wednesday, September 18, 2013
What can Huygens add to the conversation that has not already been said? With no further ado, the reputation statistics from Steel City Re for Apple (AAPL) and Google (GOOG). Looking at the vital signs, the two giants weighing in at $429 billion and $245 billion respectively, are surprisingly similar if one is willing to ignore ROE.

The funny thing is that investors are unlikely to ignore that metric, and Apple's is rock bottom for its peer group of 17 companies in the computer processing hardware sector.  Google, on the other hand, is just below average among the 130 members of its peer group.

The key metric in this mix is the current RVM volatility (Consensus Trend). For both, this measure is also at rock bottom among peers with absolute measurements near 1%. These data suggest that stakeholders are getting comfortable with their expectations of both firms and, as a group, are generally in agreement (hence, consensus). Google is the newly crowned prince; Apple's halo is now tarnished and reputational value has been surrendered. Lots of it. Prices for both should now stabilize provided that Apple doesn't end up surprising everyone with a new new thing based on the M7 chip that is being tested in the iPhone 5S.

Apple: Forward guidance needed

C. HUYGENS - Thursday, September 12, 2013
"Spare the rod, spoil the child," advises the behavioral dictum. Reputation controls expert Jonathan Salem Baskin believes the same holds for Apple Inc.'s (AAPL) stakeholders.

Writing in Forbes, the moderator of the Society's Mission Intangible Monthly Briefings and Managing Director of Consensiv notes that "…analysts of all stripes are opining that the company is long overdue for a big success. They’re wrong," he asserts. "It needs to give us a failure. Something spectacularly bad could be just what it needs."

The reputational value metrics from Steel City Re shown below paint an unattractive picture. It appears that in November of 2012, Apple Inc. fell off its pedestal and shed an enormous amount of reputational value (Reputation Premium) dropping from the 100th percentile of its peer group to around the 67th percentile. However, since then it has regained ground as stakeholders talked themselves into, again, unrealistic expectations.

Not so the investors. Consistent with prior observations of RVM volatility reported by Consensiv, the company's RVM volatility spike of 8% (Consensus Trend) in November was followed by market value turbulence. (RVM is a non-financial measure of reputational value). But even investors began to feel optimistic over the summer giving the stock price a boost from what was already a dismal performance for the year.

After years of having a coherent view of Apple and expectations of infallibility, all evidenced by a dangerously low Consensus Benchmark, stakeholders who forgot that real companies blunder from time to time are having doubts. But fears are still being masked by hopes, so disappointment hurts even more. Ergo, a very recent RVM volatility spike of hope and fear that was followed by more market value loss reflecting further disappointment. Read the full story here.

Dell: Anyone's guess

C. HUYGENS - Thursday, August 01, 2013
Huygens believes that like Billy Beane and Nate Silver, he can predict the future with the aid of mathematical algorithms. Billy Beane, as popularized by the book and movie Money Ball, identified variables to the consternation of coaches everywhere that helped him better identify promising baseball players. Nate Silver, as popularized by the most recent election, identifies variables to the consternation of pollsters everywhere that help him better identify election outcomes.

Huygens has identified variables embedded in the Steel City Re reputational metrics and the Consensiv expression of same, the reputation scores, to better identify equity opportunities. RepuStars (Ticker:REPUVAR) and RepuSPX, reported each week on this blog, are additional expressions of those metrics which were first developed to better identify reputation risk and have since enabled reputation risk underwriting by Steel City Re. Unfortunately, one of the outputs of all these algorithms is the conclusion that there is nothing conclusive. As unsatisfying as that may seem, to Huygens, it is both wonderfully refreshing and yet another affirmation of Godel's Theorem.

Turning to today's non-prediction, the cyclic volatility of the Current RVM volatility metric, what Consensiv lucidly describes as the Consensus Trend, indicates that there is no consensus -- no clear agreement on what the future holds for Dell. The measure is ranked at the 78th percentile relative to the 19 peers in the computer hardware sector which is yet a further increase over the historic ranking of the 50th percentile. The value has been bouncing between 6 and 9% over the past few months. Change is clearly coming. Furthermore, stakeholders are signaling that whatever happens, it will increase Dells' value as reflected in the reputation ranking that's reached the 89th percentile -- what Consensiv helpfully describes as the Reputation Premium.

This is a movie that will be a nail biter to the bitter end.

Apple: Unspoiled barrel

C. HUYGENS - Monday, April 22, 2013
Legendary investor Warren Buffett advises to be fearful when others are greedy, and be greedy when others are fearful. For as Anatole France noted, "If fifty million people say a foolish thing, it is still a foolish thing." Then again, they could be right.

One way to hedge the risk of betting with the wrong team is to separate the people into those who may know more, and those who don't. The Steel City Reputational Value Metrics have established a good track record of flushing out the know-nothings, as evidence by the long-term returns of RepuStars, the reputation-linked index calculated by S&P/Dow Jones Indices (Ticker:REPUVAR).

Apple, Inc. (AAPL) is a great case in point. As a result of shareholder activity, equity value has plummeted. But do equity investors really know what is going on, or are they doing a foolish thing? The key summary measures based on the Steel City Re metrics and calculated by Consensiv, reputation value quality and reputation value independence, suggest that the non-investor stakeholders are confident in their expectations of the firm.

The more detailed metrics from Steel City Re give insight into those expectations. The company's reputation rank (CRR) relative to its peers in the 22-member computer processing and hardware sector is at the 95th percentile. The volatility of it reputational value metric, RVM, a non-financial measure of reputational value, is at the opposite end of the spectrum at the 5th percentile with a current value of under .5%. The company's stakeholders are exceedingly confidendent that there is a great deal of reputational value in this company. By a variety of other measures of the company's economic performance relative to its reputational metrics, it is -- as they say on Wall Street -- heavily oversold. Ah, but the year is only 30% through, and by the same metrics that indicate Apple's upside, the S&P500 is probably in a bubble. Stay tuned.

Dell: Great expectations

C. HUYGENS - Thursday, April 18, 2013
These are interesting times for Dell and its diversity of stakeholders as three different groups fight to take control back from the public. The founder, Michael Dell, is offering $13.65. He's the ultimate insider with the best information, and low balling the value was a great strategy when he was the only game in town. Enter Blackstone at $14.25 and Carl Icahn at around $15.

The Steel City Re reputational metrics provide an interesting angle to this story. For one thing, all this attention was bound to drive up the CRR, a measure of relative reputational ranking, to the 76th percentile whereas only weeks ago, it was in the lowest quartile. Sudden movements of this magnitude are reflected the the Current RVM volatility which is approaching 8% -- a value of concern in that 7% is the threshold above which the relative risk of a major loss in market capitalization exceeds 1.0. Return on equity is now almost at the median for the 22-member computer processing hardware sector -- odds are now against that value remaining that high for long.

Microsoft: The big yawn

C. HUYGENS - Friday, April 12, 2013
While Apple (AAPL) has given its shareholders, and more broadly its stakeholders, an exhilarating roller coaster ride,  Microsoft (MSFT) has been plodding along. Its not exciting anyone. Its not really disappointing anyone. Its just lumbering along. Which is great for a utility or an oil company or even a giant pharmaceutical, but its not the sort of thing technology companies are supposed to do.

Jonathan Salem Baskin, who moderates the Society's Mission Intangible Monthly Briefing, wrote this week in Forbes magazine, "Can Microsoft maintain its holding pattern going forward? Again, there’s no crime in being consistently unremarkable, and Microsoft makes money hand over fist. But its reputation — the intangible value it gets from its stakeholders — seems stuck in the mud. And if there’s one thing I’ve learned over the years, it’s that reputations aren’t static, they’re earned anew every day. Performing down to expectations isn’t a value-add strategy, and it leaves open the room for other businesses to grab the reputation high ground, or market conditions to ultimately pass you by."

The Steel City Re Reputational Value Metrics, described further in the book, Reputation, Stock Price and You, are measures of reputational value and ranking. The former is represented by the RVM and is expressed in Gerken Units; the latter is expressed in percentile units. To Mr. Baskin's point, the one-year historical RVM volatility is only in the 10th percentile of the peer group, and while the current RVM volatility is above the group median, the company's ranking, the CRR, has actually drifted downward slightly over the trailing twelve months from aroun the 77th percentile to the 72nd percentile. On the bright side, indicators of change show expectations of some transition with a greater than even probability. Still, given that this was a year Microsoft was expected to "wow" the market, the silence associated with the company's reputational volatility is deafening.

Apple: Core disagreement

C. HUYGENS - Thursday, February 28, 2013
Apple Inc. is a firm that has sought to communicate a singular message through every channel. Whether the message was sent by the marketing department, investor relations, or the product team, the content was the same: Apple is an innovative company producing the coolest products on the plan.

It so happens that even with such clarity, stakeholders can get confused when it comes down to the details. Consider this post, a few weeks ago, labeled "contrarian." (1) Tim Cook is an innovator on the supply-chain side despite his stuffy reputation, (2) Apple Inc. (NASDAQ:AAPL) has the potential to "become a massive mobile-payment provider," (3) it still has the "best selection of apps of any mobile operating system," and most notably, (4) it predicts that "Apple’s sales in China are only beginning their upward arc."

Now fast forward to this week's shareholder meeting where investors are battling over Apple's use of cash and are expressing their unhappiness with executive compensation plans. The company is under pressure to return more of its cash hoard to investors after David Einhorn’s Greenlight Capital Inc. persuaded a judge to block a vote on whether to limit creation of preferred shares. According to Bloomberg, "Einhorn has used the lawsuit to drum up support among fellow investors to get Apple to return some of its $137.1 billion in cash and investments back to shareholders. The push comes as Apple’s stock has declined 36 percent from a record in September on concern that growth is slowing." The Financial Times reported that "at least a third of Apple’s shareholders have declined to back the company’s executive pay at its annual meeting, after chief executive Tim Cook was given a 51 per cent increase in his basic salary last year and other members of the management team were given big equity awards."

Wait. There's a contrarian view. Calpers, the largest US pension fund, disagrees with Einhorn. According the the Financial Times, Anne Simpson, head of corporate governance for Calpers, said that shareholder support for Apple’s proposed changes reflected a fundamental difference in approach between activists and long term shareholders. “Do you throw a brick through the window, or do you walk smartly up to the front door and ring the doorbell?” One of Einhorn's own investors took issue, too. In a letter to the founder of Greenlight Capital, the Nathan Cummings Foundation said: “By threatening to disenfranchise Apple shareholders, Greenlight Capital has acted in a manner that is not consistent with our understanding of Greenlight Capital’s own orientation and investment philosophy.”

There is ample anecdotal evidence that Apple's stakeholders are confused. What say the measures of reputation, which are nothing more than an indication of the economic consequences of stakeholder expectations. As provided by Steel City Re, the measures show, well, confusion.  Call it lack of consensus. RVM is a non-financial measure of reputational value, and its volatility is an indicator of alignment. Apple's current RVM volatility is up from the 33rd percentile among its peer group, its historical value, to the 48th percentile with recent spikes as high as 8% after running lows of sub 2%.  Stakeholders are surprised. They're not used to dealing with an unclear picture from Apple, and the cost of that confusion is the equity investors are fleeing.  In local parlance, Apple's reputational value premium, while still at the 86th percentile of its peer group, is no longer at the 100th percentile. The company is losing reputational value, which, as described in great detail in Reputation, Stock Price, and You, rarely goes unnoticed.

Dell: It tolls for whom?

C. HUYGENS - Sunday, January 27, 2013
Dell's endgame is nigh. The innovative business model that produced high quality low cost computers, and a service package to boot, has been overcome by events. Others are making computers better, faster and cheaper even as the market for PC's is being eroded by more powerful mobile solutions and remote storage.

Jonathan Salem Baskin, moderator of the Society's Mission Intangible Monthly Briefings, writes this for Forbes magazine (Jan 26):

Dell has suffered and languished for years. We all watched the long, slow slog, and at numerous points along the way the leaders of the business could have realized that things weren’t just ‘tough this quarter’ but ‘evidence of a deeper ill,’ and then done something about it. The company didn’t teleport to this point in time. I wonder if Dell failed to understand its reputation — the ongoing narrative of business performance, which has a closer connection to things like operating costs, profit margins, and how those qualities are valued by external stakeholders — and therefore missed its obligation to manage it? If so, it’s not fixable with marketing or financial legerdemain.

The reputational value metrics provided by Steel City Re affirm the above in stark quantitative terms. The company's reputational value vital signs, top left bar chart, show below median measures with decreasing volatility, a depressed CRR (measure of relative rank) at the 14th percentile, below median ROE, and an indication of expected change that is only a further exacerbation of ongoing negative trends. RVM (a measure of reputational value) volatility no longer follows sector or market concerns. The company's reputation is now wholly driven by expectations concerning its viability, not its profitability or renewed market engagement. The metrics are those of a company whose business model has evaporated - a failure of strategy at the highest managerial levels.

Hewlett-Packard: Come again?

C. HUYGENS - Monday, November 26, 2012
As you recall, HP announced last Tuesday losses tied to alleged fraud at Autonomy. Huygens opined that Steel City Re’s Reputational Value Metrics prior to Hewlett-Packard’s announcement of the $8.8 billion charge indicated that stakeholders were immune to further surprise. That interpretation was good, but not good enough.

Last week, HPQ’s reputational ranking was at the 33rd percentile and its forecast stability was the highest among 22 peers. That's a poor showing for what was once the icon of Silicon Valley, but its been a bad year. After all, in addition to the boardroom personnel shenanigans, H-P this past August took an $8 billion writedown on the 2008 EDS acquisition representing more than half the $14 billion purchase price. Likewise, H-P is believed to have written down most if not all of the value of its 2010 acquisition of Palm for $1.2 billion.

Back in September, the Motley Fool explained why HP’s reputation—based on expectations of innovation--was on a downward spiral.

-Lack of invention/innovation: Well we can say that HP has not lived up to its tag line-invent. HPQ has filed 1 patent a week on an average last year as compared to 44 filed by International Business Machines (NYSE: IBM) and 88 filed by Samsung…(I)f patent filing is taken as a sign of innovation power for the company, then HPQ has miles to travel before it is in par with its competitors.
-Lack of competing factor: The last CEO of the company Leo Apotheker made an announcement in the public which led to a huge negative impact on its business.… In such a situation instead of taking a hasty decision of separating the PC business from its umbrella brand, HPQ should have worked more on how to improve its operating margin and bring down its overhead costs in this segment.
-Technological Pace: HPQ - the pioneer of the mobile device, is … unable to keep up the momentum in the mobility space. HPQ launched its Touchpad in July 2011 – a ray of hope. But as a shock to many, they removed the Touchpad within 45 days itself - reflecting non competence in this arena.
-Over reliance on webOS: WebOS lacked that appeal to the consumer sector…and which caused the failure of its Touchpad.

And then there were the governance matters:

-Fragile / Inconsistent top management: One of the signs that the company is going down the drain is when we see that the top management is fragile or changing regularly. This is quite visible in HPQ where the CEOs have changed many a times with the likes of Carly Fiorina, Mark Hurd, Leo Apotheker and now Meg Whitman.
-Maligning its own reputation: HPQ is quite famous in the imaging and printing group – one of its major sources of earnings. HPQ was busted a few months back for putting less and less ink into its Printer cartridges. … In their attempt to earn pennies they lost the trust factor of many of their precious loyal customers.

With the latest metrics now available, Huygens interpretation of last week's numbers was only partly right. The vital signs (top right graph, below) show rock-bottom historical volatility of RV, a non-financial measure of reputational value, meaning, as The Fool explained, every stakeholder had good reasons to not expect much from HP. Current volatility, however, has jumped from the 10th percentile to the 52nd percentile, meaning, HPQ is now "average" among firms in this highly risky technology sector. It could have been a greater shock, but, as the metric show, it simply wasn't. The RVM volatility time series, (top left graph, below), shows last week's spike raising current volatility to a level only slightly above the median for the whole sector. HPQ's CRR, a measure of relative reputational ranking, dropped over the week from the 33rd percentile to the 10th percentile. ROE remained at bottom, and the forecast stability dropped from 1.0--the most stable--to the the 29th percentile and clearly not the worst in this sector. Forward looking measures, (right column, bottom two rows) are signalling further reputational value deterioration. (For a deeper understanding of the metrics, read: Reputation Stock Price and You: Why the market rewards some companies and punishes others).

Yes, when everyone expects you to fall, it's hard to elicit any startle responses. It is even harder to surprise anyone with a fall when you are already on the floor. And yet, mathematicians have long suggested that there must be some practical application for imaginary numbers. Now, Pippin?


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