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Strategies & Market Trends : Gorilla and King Portfolio Candidates
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To: Uncle Frank who started this subject8/10/2002 11:02:34 PM
From: Mike Buckley  Read Replies (2) of 54805
 
Frank,

I owe you an apology. (I bet that got your attention, huh! :)

A long time ago you consistently said you would never invest in an unprofitable company. You also mentioned several times that ITWO was not profitable. Each time you mentioned it, I reminded you that net of one-time exclusions, it was profitable.

That was a long time ago, before I was focusing on free cash flow. In reaction to a discussion taking place at the Fool's thread, I decided to look up ITWO's and MANU's free cash flow over the last half dozen years. It's really unbelievable for me to realize that though ITWO scaled their busines to achieve about a billion dollars in revenue for two years in a row, they never generated any free cash flow (operating cash flow less options-related tax benefits less capex). And despite that everyone is raving about how Manugistics in the last three years has been taking away ITWO's market share and doubling its revenue in the process, the more sales it has the worse its free cash flow gets.

Between the two companies -- the top two SCM vendors -- they haven't generated a dime of free cash flow between them during the last six years. This means the SCM space has not been able to generate a Gorilla. If nothing else, Gorillas are profitable. If the top two vendors in a product category can't generate free cash flow after going through a tornado, there are no profits. Lacking profits, SCM ain't a Gorilla Game and there's no Gorilla.

--Mike Buckley
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