Podcast Blurbs [Larry Summers, Levered restaurant franchisees, Books vs. podcasts, Cramer on MongoDB]

Freakonomics Radio (9/28/17; Why Larry Summers is the Economist Everyone Hates to Love)

Larry Summers:

(On infrastructure)

“I think we’ve completely mismanaged infrastructure investment in the United States.  It’s nuts that when interest rates are lower than they’ve been at any time in the last 50 years that we’re also investing less net of depreciation…it’s nuts that we have a regulatory apparatus that means that it took far longer to repair a single exit of the Oakland Bay Bridge than it did to build the entire Oakland Bay Bridge two generations ago.  There’s a small bridge across the Charles River that I’m looking at outside my office.  It’s about 300 feet long.  It was under repair with a lane of traffic closed for 5 years.  Julius Caesar built a bridge over the span of the Rhine that was 9x as long in 9 days.  So, both on the quantity of expenditure and on the efficiency of the expenditure and the streamlining of the effort, there’s plenty of room for improvement.”

(On tax repatriation)

“We have $2.5 sitting abroad.  Indulge me if you will in an analogy.  Suppose you ran a library.  Suppose you had a lot of overdue books from your library.  You might decide to give the library amnesty so that people would bring the books home.  You might decide to say that there will never be an amnesty and people better bring the books back because otherwise the fines are going to mount.  But only an idiot would put a sign on the library door saying ‘No amnesty now, thinking about one next month.’  And yet, what have we done as a country?  We’ve said to all those businesses with $2.5tn abroad that if you bring it home right now, you’ll have to pay 35% tax, but we’re talking about and thinking about and planning maybe we’ll have some kind of tax reform where that will come down.”

(On cost disease)

“…the Consumer Price Index for all products are set to be 100 in 1983.  Well, if you look at the CPI for television sets, it’s now about 6.  If you look at the CPI for a day in the hospital room or a year in a college, it’s about 600.  In other words, since 1983, the relative price of this relative measure of education and healthcare as opposed to the TV set has changed by a factor of 100.  That’s got a number of consequences.  One is, since government is more involved in buying education and healthcare than it is in buying TVs, there’s going to be upward pressure on the size of government relative to the rest of the economy.  Another is because there’s been far greater productivity growth in the production of TV sets than in the production of government goods, a larger fraction of the workforce is going to find itself working in the areas where there’s less productivity growth, like education and healthcare…if workers become much more productive doing some things and their wage has to be the same in all sectors, then there’s going to be a tendency for the price in the areas in which labor is not becoming productive, to rise.  And that’s why it costs more to go to the theater relative to when I was a child, that’s why tuition in colleges has risen, that’s why the cost of mental health counseling has risen.”

Grant’s Podcast (10/11/17; Hamburger Helper)

John Hamburger (President of the Restaurant Finance Monitor):

“I’ve been following franchisees since the early ’80s, I actually was a franchisee back in the early ’80s.  Restaurants used to get financed one by one, unit by unit, and you’d buy the land, you’d buy the building, you’d equip it, and you had to finance each of those transactions so you’d have a real estate loan and you’d have an equipment loan.  And it took a long time and it was expensive and you thought really carefully about building restaurants.  Today, the way the deal works is that there is a huge net lease market out there that likes to own restaurant real estate.  So, franchisees over the last 5 to 10 years have decided that they can build more stores, own more stores, buy more stores if they don’t have their capital tied up in real estate.  So franchisees, just like the franchisors, have adopted this quasi asset light model where the real estate in a lot of these franchise restaurant locations are owned by an investor.  And that’s okay, it’s just that when you own real estate, you own it and can borrow against it.  When you lease real estate, the rents go up every year and so over time, it cuts down on the operating margins of the franchisees.

What does it all mean?  It’s allowed franchisees to get bigger.  So you look at Yum Brands or Burger King, they’re relying on fewer and fewer franchisees to operate their system and where risk might possibly come in is that you’ve got fewer and fewer franchisees operating these restaurant around these countries.  I’ve heard Restaurant Brands tell Burger King they’d like to have as few as 50 franchisees in the country.  Well, you take 50 franchisees, you lever them up, it’s not like it was 10-20 years ago where in Burger King you had 600 franchisees and the majority of them owned their own real estate.  It’s a very levered system, the way it’s currently configured. […]

What’s interesting about Carrols (Burger King franchisee), it’s a typical franchisee in the restaurant space, it’s a larger franchisee, it’s ranked around #4 in the country in terms of size, they’re doing a lot of what the large franchisees have done over the last 5 years.  They’ve been able to borrow, they’ve been able to acquire other franchisees and build up their base of restaurants…but other franchisees have grown as well by buying up other franchise restaurants…how do they do that?  They borrow and then they sell their real estate and lease it back, that’s how all of this stuff gets financed and it adds a lot of leverage to the franchisees.

The largest owner of [this real estate] are a number of REITs focused on the restaurant business, there’s Realty Income, there’s Spirit Realty.  There’s also individuals, real estate developers, trusts, and one of the reasons they like owning this kind of real estate generally these leases are triple net, which means taxes, maintenance, and the insurance of those properties are taken care of by the tenant, so the rental income becomes an annuity to the owner, and this is a huge investment area in the US.

If I go back to the ’80s and ’90s, capital in the restaurant business came from the public markets.  We had a run of IPOs in the 1980s and 1990s, that’s where most of the growth capital came from.  Today, you have private equity funds instead of public investors driving the restaurant business.  The public markets have changed where smaller companies…have been unable to go public.  I think the last IPO in the restaurant business was 2015.”

Waking Up (10/6/17; The “After On” Interview)

Sam Harris:

“The numbers [of people who listen to the Waking Up podcast] are really surprising and don’t argue for the health of books, frankly.  A very successful book in hard cover, you are generally very happy to sell 100,000 books in hard cover over the course of the first year before it goes to paperback.  That is very likely going to hit the best-seller list, maybe if you’re a diet book you need to sell more than that, but if you sold 10,000 your first week, you almost certainly have a best seller.  And in the best case, you could sell 200,000 or 300,000 books in hardcover, and that’s a newsworthy achievement.  And there’s the 1/100th of 1% that sell millions of copies.  So, with a book I could reasonably expect to reach 100,000 people in a year and maybe some hundreds of thousands over the course of a decade.  So, all my books together now have sold, I’m pretty sure I haven’t reached 2 million people with those books.  Somewhere between 1 million and 2 million.

But with my podcast, I reach that many people in a day.  And these are long form interviews and sometimes standalone, just me talking about what I think is important to talk about for an hour or two, but often I’m speaking with a very smart guest and we can go very deep on any topic we care about.  And this is not like going on CNN and speaking for 6 minutes in attempted sound bites and you’re gone.  People are really listening in depth. […]

It’s a big commitment to write a book.  Once it’s written, you hand it in to your publisher and it takes 11 months for them to publish it.  Increasingly, that makes less and less sense.  Both the time it takes to do it and the time it takes to publish it don’t compare favorably with podcasting.  In defense of writing, there are certain things that are best done in written form.  Nothing I said has really application to [novels], reading novels is still an experience you want to have, but what I’m doing in non-fiction, that’s primarily argument driven, there are other formats through which to get the argument out.  I still plan to write books because I still love to read books and taking the time to really say something as well as you can effects everything else you do, it effects the stuff you can say extemporaneously in a conversation such as this as well.  So, I still value the process of writing and taking the time to think carefully about things.”

Mad Money w/ Jim Cramer (10/25/17)

Jim Cramer:

“At the heart of every software application there’s a database.  You need to have a system to organize, store, and process your files or none of this stuff works.  So, for software developers, a lot of thought goes into picking the right database and with the rise mobile, social, cloud, datacenter, and IoT, a lot hinges on getting that choice right.  For the longest time, there were just two types.  You had relational databases that are basically unchanged since the 1970s, so developers need to spend a lot of time making sure modern software interacts properly with these rigid database structures from decades ago.  They simply were not designed for the demands of modern software and they certainly weren’t designed for cloud.

Since the turn of the century, though, we’ve seen the rise of non-relational databases which tried to address these shortcomings.  But the problem is that so much runs on old school relational databases, these new non-relational ones are only worth using in a small number of cases.  Then you have non-relational databases that have become more popular recently and are widely used for big data and online applications…basically, they’re more flexible than the traditional model.

On the other hand, MongoDB does something different.  The guys who created this company got frustrated by the available database options on the market, so they built their own platforms designed for developers by developers.  The company has its own offering that they believe combines the best of both relational and non-relational databases. They use a document-based architecture that’s more flexible, easier to scale, more reliable, giving developers the ability to manage their data in a more natural way so they can more rapidly build, deploy, and maintain the software they’re working on.  It works in any environment – the cloud, on premise, or even as some kind of hybrid which has become so popular – but more important, you can use it for a broad range of applications.

To get the word out, MongoDB offers a free, stripped down version of their database platform.  You can just download it right off the website. That makes it easier for software developers to play around with the thing, if they decide they want advanced features, they can pay for any upgrade…The free version has been downloaded more than 10mn times just in the last year.  Then they sign you up for a subscription and you start paying for the enterprise version or the cloud-based version.  So far, MongoDB has more than 4,300 customers in 85 countries including some really well-known names, they’ve got Barclays, ADP, Morgan Stanley, Astrazenca, Genentech, and bunch of government agencies […]

How’s it work?  Let’s use the example of Barclays.  Like most financials, Barclays has invested a ton of money going digital in recent years.  But the rigid nature of old school database technology made it really hard for them to add new online features that customers could use.  And as more customers embrace mobile banking, the cost of running the mainframe kept rising, so Barclays brought in MongoDB in 2012 and it gave them significant performance improvements and a resilient system and major cost savings and the company’s in-house software developers have a much easier time developing features for digital banking.

How about the numbers?  Well, MongoDB’s revenue growth has slowed a tad so far in 2017 but it’s still very rapid, up 51% y/y and that’s not much a deceleration from 55% in 2016.  The customer base is growing like a weed.  At the end of July, they had 4,300 customers, up from 3,200 in January and 1,700 at the beginning of 2016.  And a total of 1,900 of these users come from MongoDB’s cloud offering even though it only came out in the summer of last year.  The company has 71% gross margins, which have improved steadily over the last couple of years.  But like many newly minted tech IPOs, MongoDB is not yet profitable…the key here is annual recurring revenue (ARR) because remember they use a SaaS business model and then the contribution margin…in 2015, customers who signed up that year generated $11.5mn in ARR but they racked up $24.3mn in associated costs, meaning the contribution margin was negative.  By 2016 though, that same group of customers who signed up in 2015 generated $12.8mn in RR but costs only came in at $5.2mn, makes sense these guys had already been signed up, giving MDB a 59% contribution margin.  2017, it’s risen to 60%.  Basically, as time goes on, customers become more and more lucrative because the real expense is signing them up.

Now there’s really just one thing that concerns me other than lack of profitability.  Mongo competes with some real titans of the industry, I’m talking IBM, Microsoft, Oracle, AWS, Google Cloud, Azure for more modern databases.

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