Finance Matters

Archive for April 20th, 2010

Samarth Agrawal was arrested today for stealing high frequency trading (HFT) algorithms from Soc Gen, according to Courthouse News.

In an amazing case that could be bigger than Goldman’s alleged algo-thief Sergey Aleynikov, it looks as though Agrawal tried to steal complex algos from Soc Gen and give them to a competing financial institution.

HFT trading operations are very secretive about their algos. Everyone at a Mankoff Company HFT conference we were at recently jumped when someone mentioned the purpose of one particular algo he had learned of. None of the traders we later asked would give us any other examples of the algos they use.

“It’s proprietary information,” we heard repeatedly.

So it’s a big deal that almost right after he was hired, Agrawal allegedly started stealing documents that recorded the complex algos.

He also might have planned to give the formulas to competing financial institutions. Though his LinkedIn profile says Agraway is still with the firm, the court says he resigned from Soc Gen in November 2009, a month after he allegedly printed out the codes. Then in March, he made or received about 115 calls from six large financial institutions. His contract with Soc Gen had prevented him from working with a competing organization until March.

He was not stealth about stealing the information. Security reportedly cameras caught Agrawal printing out the documents and his computer activity was constantly monitored by Soc Gen, so they knew which documents he had access to.

Then in April, an undercover FBI agent posed as a recruiter and spoke to Agrawal, who told the recruiter “that he had been interviewing with ‘most of the big names’ among New York financial firms.”

Agrawal, 26, is charged with theft of trade secrets, which is punishable by up to 10 years in prison.

We emailed Samarth and hope we will get to hear his side of the story.

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See Also:

• High Frequency Trader: Trading In Mere "Millisconds" Is Like, So Last Century
• Why It Doesn’t Matter If High-Frequency Trading Doesn’t Serve A Societal Purpose
• Why You Don’t Stand A Chance Against The High-Frequency Traders

News about the economy is back above the fold.

In one of his first posts for Yahoo!’s new blog, The Newsroom, former Politico reporter Michael Calderone points us to the Project For Excellence in Journalism’s News Coverage Index, which indicates that the “economic crisis” dominated last week’s news cycle, filling 16% of the multi-platform newshole. The  economy last led the newshole the week of March 29-April 4 at 10%, according to the study.

Pew’s research cites a number of storylines that helped put the economy back on top: economists’ inability to call the end of the recession; the stock market surging past the 11,000 mark for the first time since Sept. 2008; European leaders heading off a credit default in Greece.

Of course Friday’s blockbuster story that the SEC had filed fraud charges against Goldman Sachs didn’t hurt. Stories about the financial sector made up 19% of the economic newshole, the study shows.

But what does it all mean?

Pew says it’s creating “a sometimes confusing diagnosis of the nation’s economic health.”

Take Meredith Vieira’s opening remarks from an April 13 Today Show segment: “Mixed messages: the Dow hits 11,000 for the first time in a year and a half, on the same day experts warn that it is premature to declare the recession over.”

CNBC’s Jim Cramer begged to differ with her: “Things are getting better and it is not a mixed message…We are seeing a resurgence of large American companies—which is what the Dow is made up of. It’s all positive. I’m not going to say it’s a mixed message.” 

And what of all those recent headlines screaming about America’s big economic comeback? It’s hard to tell whether we should we feel excited or cautious.

The other biggest stories last week were the volcano in Iceland, nuclear policy, Tea Parties, and the health care debate. (See chart above.)

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See Also:

• Aha! Fabrice Tourre Has Been BARRED In The UK
• Here Are The Three Key Points Goldman Is Using In Its Defense
• Here’s The Disclosure The SEC Wanted: Would It Really Have Made A Difference?

Apple just blew out the quarter, and guidance is strong, too. Earnings, revenue, and iPhone sales all beat expectations by a mile.

Most impressive: Apple shipped 8.75 million iPhones last quarter, versus expectations around 7 million.

On the company’s earnings call, Apple COO Tim Cook says the company is “shocked” by initial demand for the iPad. He also added, “I’m personally addicted to mine and couldn’t live without it.” (See our live notes below.)

Last quarter’s Mac sales were solid: 2.94 million shipped, versus expectations around 2.7 million. And Apple’s iPod business is still showing signs of life: 10.89 million units shipped vs. 9 million Street consensus.

Apple CEO Steve Jobs took the opportunity to tease new products in the company’s earnings release. “We’ve launched our revolutionary new iPad and users are loving it, and we have several more extraordinary products in the pipeline for this year,” Jobs said in a canned quote.

Apple shares traded up 7% in after-hours trading.

Key Stats:

• Revenue: $13.5 billion vs. $12.06 billion consensus. $13.25 billion high Street estimate, $11.0-$11.4 guidance. Anything above $12.5 billion would be solid.
• EPS: $3.33 vs. $2.44 consensus, $2.72 high Street estimate, $2.06 to $2.18 guidance, $2.95 “real” guidance (based on Apple’s historic outperformance of its guidance). Anything above $2.50 would be solid.
• iPhone units: 8.75 million vs. 6.8 million Street consensus, 7-8 million implied by Jobs during iPhone 4.0 keynote in early April. Anything above 8 million would be impressive. Anything below 7 million would be disappointing.
• Mac units: 2.94 million vs. 2.7 million Street consensus, 2.8 million to 2.9 million implied by NPD data, says Piper Jaffray’s Gene Munster. Anything above 3 million would be impressive.
• iPod units: 10.89 million vs. 9 million Street consensus, 9 million to 10 million implied by NPD data, says Munster. Anything above 9 million is fine for this slowly dying line. Above 10 million would be impressive.
• June qtr. revenue guidance: $13 billion to $13.4 billion vs. Typical “comically conservative” guidance expected. Could swing widely depending on iPhone 4.0 launch targets (June vs. July) and possibly iPad supply/demand. Munster expects $12.37 billion, well below the Street’s $12.94 billion consensus. Anything approaching $12.75 billion midpoint would be considered strong.
• June qtr. EPS guidance: $2.28 to $2.39 vs. Typical “comically conservative” guidance expected. Could swing widely based on iPhone. Munster expects $2.33 midpoint, well below Street’s $2.69 consensus. Anything approaching $2.70 would be considered strong.

LIVE Conference Call notes: (Paraphrased unless in quotation marks.)

4:54 Waiting for call to begin at 5 p.m. ET.

5:00 Just thinking, Apple’s strong revenue guidance suggests the new iPhone will launch in June, not July. Right?

5:02 Call begins. Standard disclaimers. Steve Jobs not announced to be on the call. (He’s not expected to be there.)

5:03 Peter Oppenheimer gives introductory remarks. Thrilled to report March quarter results that exceeded expectations. Reporting best non-holiday quarter revenue and earnings ever, highest iPhone quarter ever, new record for Mac sales in March quarter.

5:04 Oppenheimer is reading stats from the release. IDC says PC market grew 24% during March quarter, but Mac sales up 33%. Began and ended quarter with 3-4 weeks of Mac channel inventory.

5:05 Sold 10.9 million iPods, iPod touch units grew 63% year-over-year. Overall iPod revenue growth of 12%. Over 70% of U.S. market share for MP3 players.

5:06 $1.1 billion in sales for the iTunes store thanks to music, App sales. Well over 4 billion App downloads to date. Very excited to have launched the iBookstore, plus more than 3,500 apps for iPad. Ended quarter with 4-6 weeks of iPod channel inventory.

5:06 Thrilled to sell 8.75 million iPhones, an all-time high. Grew sales about 3X the rate of the market. iPhone ASP about $600.

5:08 Excited about iPhone OS 4. Turning to iPad, extremely pleased with sales results over past couple of weeks. On track to begin shipping 3G version around April 30, 9 more countries at end of May.

5:09 $1.68 billion in retail revenue, a 22% increase. 606,000 Macs sold in stores. Increase of 38%. About half Macs sold were to customers who’ve never owned a Mac before. 286 stores. With avg 284 stores open, Avg. rev per store was $5.9 million. On track to open 40-50 new stores in total during fiscal 2010.

5:11 Why stronger than expected margins? Stronger product mix including iPhone and accessories. Lower cost. Fixed costs.

5:11 Cash totals $41.7 billion at end of quarter, an increase of $1.9 billion.

5:12 Looking ahead to June quarter, expect revs between $13b-13.4b, vs. $9.7b last year. Expecting margins to decrease. Expect about 25% of GM decline to be driven by iPad sales. Very aggressive with pricing and delivering tremendous value, want to capitalize on first mover advantage. The other factors: Stronger US dollar, Mac portable transition, education buying season beginning, and a future product transition. (Oooooooh.)

5:13 Thrilled with record March quarter results, etc.

5:14 Q&A to begin. Gene Munster is on the line.

5:15 iPad cannibalization on other lines? None yet. Why step down in March? Base quarter compared to, announced new iMac and new Mac mini. Compare point was to month we announced two new products. Can’t really judge the Mac business on a month by month basis. Internal expectation was that comps would come down through the quarter.

5:17 iPad mix 3G vs. wifi? Too early to tell. Need to be selling both models side by side before we’re able to know what the mix will be.

5:18 Thrilled with performance of our business. In coming up with that, several points into the guidance, including sequentially lower ASPs, other costs listed above. And lower iTunes, lower accessory. Expect to see sequential increase in Mac unit sales, because of edu season and new MacBook Pros. For iPod, sequential decline. For iPhone, don’t really know because we don’t have a comp with same distribution. For iPad, thrilled with customer response.

5:20 Why iPhone so good? Channel inventory essentially flat. Geos, some staggering growth rates. Asia Pac, iPhone units grew 474% year-over-year. Japan 183%. Europe 133%. Incredible demand. Some led by adding 8 carriers in some key countries, Vodafone in UK, some others in key countries in Asia. Widespread and just generally terrific results. China has been interesting. If you look at greater China, iPhone were up over 9X year-over-year. (Including Hong Kong and Taiwan.) Revenue through first half of fiscal year, revenue from greater China was almost $1.3 billion. Up over 200% year-over-year.

5:22 Data points from success of the App Store? Higher ASP apps from the iPad? Thrilled with App Store and customers are loving it.

5:25 Sorry, got disconnected. Now back. Pressure on components? DRAM market is constrained. NAND and others generally in balance. Other components expect to decline consistent with historical trends.

5:25 iAd profit vs. breakeven? Putting our toes in the water, so don’t expect much from us this calendar year. We think that we will learn a lot and build a foundation for the future. Where is AT&T with its network improvement plans? Tim Cook: I think they continue to work very hard, and we look forward to continued improvement. Made big strides and I think it will continue.

5:27 Update us on your thinking about incremental distribution for the iPhone? Three main countries where Apple has contractual exclusive: US, Germany, and Spain. Some smaller countries where we have exclusive or co-exclusive. Over the past year, have moved a number of markets from exclusive to non-exclusive. Have seen unit share, market share improve. Don’t mean to say that formula will always work. We think very carefully about each of these are country level to figure out what’s in best interest.

5:30 iPad DRAMATICALLY lower margin than the rest of the company? Or just higher volume than expected? When we priced iPad, we priced it very aggressively to deliver tremendous value to customers. We think the market size for the iPad is very large. As we’ve done with other products, you can see we have a good track record of riding down the cost curves, or at least that’s been our experience with other products.

5:34 Plans for additional store openings in China this year? Very excited for China. Revenue up 2x year-over-year. Opening two stores in Shanghai this summer. Targeting 25 by end of calendar 2011.

5:35 Roughly 58,000 iPhones per operator. How do you drive those up on a per-operator basis? Not a very meaningful number because variance between one particular carrier that does a few million, others do very small numbers. Things we do to drive overall iPhone demand is to focus on product innovation. Software, new hardware and new products, additional carriers and geographic expansion, which we’ll continue to do, and great marketing. Apple has been a little more aggressive with patent suits, how should we think about legal expenses? We certainly have factored that into guidance, results, etc.

5:37 Learned any lessons as to how international markets have ramped up? I think the key thing is that the smartphone category is a great market to be in. Great growth rates, Apple outgrew the market by 3X. Those numbers even better outside the US than inside.

5:40 Apple TV market is tiny. We continue to think there’s something interesting there and continue to invest in it.

5:40 iAds significant source of potential incremental earnings? Don’t expect much this year.

5:42 To me it’s a no brainer that someone would buy an iPad instead of a netbook. I can’t think of a single thing the netbook does well. “I’m already personally addicted to mine and couldn’t live without it.”

5:43 Why do you think iPad is huge independent market? If a product category were to exist between notebook and smartphone, would need to do some things better. (Repeating Steve Jobs keynote talking points.)

5:46 Katy Huberty wants to know when iPhone service plans are coming down in price. Tim Cook says Apple does everything it can to get best deal possible for consumer. When we dropped subsidized price to $99 last year, we were actually surprised that the mix to the 3GS was very very high, and as you know that one starts at $199. I think it’s important — the price is important of the device, but there’s other things people want, like an extremely innovative product.

5:48 Accessory portfolio is good for us. Lots of iPhone accessories work on the iPad. Developer community is rallying around it. Let’s give it a little time; presumably some great things will happen there.

5:49 Was retail driven by new store openings? Or something else going on? Average increase of revenue per store up. Mac did incredibly well, up 38%. Same store Mac sales up 20%+. Think store will be great place to look at and buy iPads. Very confident in retail stores. Average store up 8%. If you annualize it, that’s incredibly high.

5:51 For future earnings releases, iPad will be a line item on revenue summary, like the iPhone. Apple won’t bury it in iTunes like it does with Apple TV.

5:52 We are not focused on trying to make a lot of money on the App Store, have run it a bit over breakeven, just want to over tremendous value to customers. Europe seems to be doing well. Halo effect from iPhone there? Tend to not break it down by country.

5:53 How shocked in terms of customer penetration? Any iPad buyers completely new to Apple? Numbers right now are so preliminary that we don’t read a lot into those.

5:55 No evidence we’re losing market share in education. Now entered the education buying season. Looking forward to competing.

5:56 Call over.

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See Also:

• Don’t Buy An iPhone Until June
• Here’s Apple’s Next iPhone
• CHART OF THE DAY: Apple’s REAL Earnings Expectations

For the Good of the NYC Venture Scene I’d like to see…

…some chunky IPOs of NYC born-and-bred companies. Everyday Health, Gilt Group, TheLadders and others in or approaching the $100 million revenue club. NYC has spawned some great companies; it is time for the world to see them on stage and get to participate in their future growth.

…Foursquare to sell out (to Yahoo, Google, I don’t care) for $100 million-plus. What a huge success story to put in the bank for the NYC venture ecosystem when exits of this magnitude are few and far between.

…some successful NYC-based serial entrepreneurs with $5 million of spare change to get super active in the angel investor ecosystem. Smart angels finance smart ideas, create jobs and lay the foundation for subsequent funding rounds. Silicon Valley/SF has probably 20x the number of “scale” super-angels as NYC. More of these people will help turbocharge the creation of a vibrant, self-sustaining NYC venture community.

…the NYC area schools to get serious about entrepreneurship. Foster a culture of entrepreneurship within the Engineering and Computer Science programs. Get professors out into the real world, not of research but of commerce and creativity. Turn professors into feeders of great talent into NYC-based start-ups. Look at Stanford. They do it right. A little benchmarking and emulation wouldn’t hurt.

…more early-stage funds started in NYC. You can count the number of early-stage firms in this town practically on two hands. Not enough capital, not enough mentoring, not enough cross-fertilization. The early-stage ecosystem is developing with firms working together more and more, but we are in the first inning of a nine inning game. Greater collaboration. Greater communication. More capital required.

…tax policy support, not restrict, investment in early-stage businesses. Also, policies and programs need to be better communicated in order that start-ups can avail themselves of the benefits. Navigating NYC is neither easy nor cheap, and it is an impediment to starting a company here. Given its natural resources, e.g., home to seven of the largest industries on the planet, NYC should be a magnet for start-ups. Smart policy changes can help.

…a more vibrant hacker culture, where a few people, an Amazon account and some pizza and beer money can get a prototype built in a matter of weeks. It still feels like this town has a fear of failure. We need to embrace failing the right way as a badge of honor and praise pivoting into something more relevant and powerful as a natural part of the entrepreneur’s evolution.

…general adoption of clean, non-participating preferred term sheets with commercially reasonable protective provisions. The West Coast has had this right for quite some time, and NYC is getting there. But we need to fully get there in order to attract the smartest entrepreneurs and the best deals.

…less chest bumping and rhetoric and more results. There is a lot to be proud of, but until we see a spate of successful scale exits lingering doubts will remain. Put up or shut up. NYC will indeed put up; of that I am highly confident. But in the meantime, let’s just do good work, stay humble and kick ass.

(This guest post previously appeared at the author’s blog)

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See Also:

• Sample Sale Aggregator MyNines Closing On $750,000 Funding Round
• The Small Pool Of Smart VCs In New York Has Expanded
• Where Are NYC’s Startups and Who Is Funding Them?

This video is very useful. It has a proper pronunciation of Eyjafjallajökull right at the beginning, and then it has some clips of news anchors trying to pronounce that, which is predictably hilarious. Two birds with one stone. (via Donald Sensing)

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