Discover more from Liberty’s Highlights
287: Constellation Software, Qualcomm on ARM, Hiring Robots, Cloudflare, Rockefeller, Micronutrients, Agricultural Decoupling, and China's Solar & Coal
"It’s got a kind of retro-futuristic vibe"
Trait Ascription Bias:
We tend to view ourselves as having a fluid personality that adapts to the environment, while viewing others as having fixed personalities.
"I acted unreasonably because I was under pressure. He acted unreasonably because that's just who he is."
👨🏻💼/👴🏻 It’s funny how I always think of John D. Rockefeller as an old man, but he was really young when he built his company. Friend-of-the-show David Senra (🎙📚) just released an episode on Rockefeller, and a lot of what he’s known for was built when he was in his mid-20s to mid-30s.
His accomplishments somehow seem even more impressive with this mental image rather than the “formidable wise old man” that we tend to picture:
🐦 When Twitter announced it was buying Revue, I couldn’t have imagined how little they would do with it, and how little of an impact on Substack this deal would ultimately have ¯\_(ツ)_/¯
🏃♂️👟 I went on my 4th run yesterday. The habit-formation project is going well so far, but it’s too early to say much about it.
After the first run, my shins were sore for 3 days. But I did runs #3 and #4 on back-to-back days and I don’t feel sore at all. The human body can adapt quickly!
My next step is to go get better shoes.
I’ve been running on my everyday New Balance 990v2, which aren’t bad shoes per se, but they’re getting old and I want to go to a specialist store where they’ll measure my feet, watch me run on a treadmill, and recommend something better tailored to me.
I’ve been experimenting with the Strava app to keep track of runs. The light gamification helps. It’s fun to “collect” runs and watch if my pace and total distance improves.
💚 🥃 We’re getting close to 8,500 people in this steamboat (🚢).
I’ve been looking at the price of cruise ships, cruisers, aircraft carriers… If there’s one thing I’ve learned from startups, it’s that you’ve got to plan ahead for growth!
If you’re new here, know that there’s no paywall, but I have bills and need to feed my kids, so all this is only possible thanks to supporters who send a few bucks my way, kind of like the equivalent of buying me a drink (🍺) because they enjoy the stuff I’ve been talking about while we sit around a table at the pub.
Without this support, I’ll have to stop.
If you want to send me a virtual drink, it’s quick and inexpensive (especially on a mobile device with Apple/Google Pay — if you don’t see the options, just make sure you’re signed-in to your Substack account):
Liberty’s Highlights is reader-supported. To support my work, consider becoming a paid subscriber. 🎓
Investing & Business
👴🏻 ‘The tyranny of the long generation’ 🛤
Friend-of-the-show and Extra-Deluxe supporter (💚💚💚💚💚 🥃 ) Byrne Hobart wrote something really interesting in a recent post — it wasn’t even his main point, just an aside while writing about US rail infrastructure, but it’s an interesting insight:
A growing industry has growing headcount, increasing responsibilities, and improving economies of scale, and that's good for career prospects whether you want to rise up the ranks as a manager or work as a specialized individual contributor.
In a shrinking industry, you suffer the tyranny of the long generation, where organizations get more risk-averse as the median employee ages, and start to promote more based on seniority at exactly the time when the people who already work there are accumulating a lot of it.
Byrne has written a piece in 2018 that goes deeper on this topic.
It’ll be interesting to see if the current hiring slowdowns, freezes, and layoffs (depending on the company) that we’re seeing in the tech sector will go on long enough for this kind of effect to be felt inside these companies.
My guess would be ‘no’, because as Nick (🔐) pointed out on Twitter:
The tech layoffs so far don’t indicate demand environment is very weak, more that they temporarily overhired Yet people are talking like software or tech are now disproven ponzis
We’re likely to see an adjustment, but the overall trend is for secular growth to continue — stock prices may have fallen by 50%+ at many of these companies, but the revenues and customers #s are still growing rather fast.
But the idea is still interesting to keep in mind, especially if you’re looking at industries where decline is secular. Formerly effective cultures can lose their magic as they calcify…
✨ Constellation Software CFO Tegus Interview (Part 2)
You can read part 1 of these highlights from an interview the CFO did with Tegus in edition #286.
On bonuses and long-term alignment:
We pay bonuses based on growth and return on invested capital, but there's a large component that gets withheld. We take that cash and we buy shares in the open market in an employee’s name and he or she is restricted from selling the shares for an average of 4 years. We have 6,000 - 7,000 employee shareholders now so we still have the benefit of employees being actual shareholders.
On competition for acquisitions:
We're still not seeing private equity come down to $5-million-revenue-type businesses. Maybe if they're rolling up an industry, they might go that low.
There are, however, companies that try to emulate the CSI model, and we refer them as copycats. Hence, we try to keep a lot of our detailed internal information close to our chest, so it makes it more difficult for them to copy us. But the expectation is the competition from those businesses will increase over time.
Our whole mantra is customers for life. So we don't want to be seen as gouging our customers or putting a huge hike and driving attrition. Like I said, we own thousands of businesses and they all have their own customer contracts. Those decisions are left to the business units.
Once we acquire a company, we're doing a lot of analysis around pricing to understand whether or not the product is priced correctly and where it should be priced. And in some cases, there might be some price increases put through as a result of that analysis.
On the capital structure:
We've never issued any equity. Rather, we IPO-ed to give liquidity to our PE shareholders and none of those proceeds came to Constellation. We have a $220 million debenture and we have an undrawn $700 million revolver.
They have about $400m of ring-fenced debt tied to specific assets (like the original TSS deal, the recent Allscripts acquisition, etc).
On potential future spin-outs on the Topicus model:
Mark had mentioned at an AGM that he saw the future of Constellation as being many of these spinouts. But how we had talked about it was more about spinning off a vertical and doing it in conjunction with an acquisition.
This is a theoretical example. But let's just say transit, which is one of our largest verticals, had one of their largest competitors become available for sale. We could combine the 2 together, spin it off and have a transit-focused software company.
I don't foresee us spinning off operating groups. I do, however, think that we could spin off verticals in the future, again, in conjunction with an acquisition.
That’s fascinating, and makes a lot of sense.
What they care about is acquisitions, so a spin by itself doesn’t necessarily help with that. And the groups are all big and diversified enough that they would rarely match up with an asset.
But if you spin off *a vertical*, that could be a perfect match for a merger with a big target!
On the challenges (and opportunities) of deploying ever-larger amounts of capital at high ROICs:
I think there is still a lot of room to increase the amount of capital we deploy at high rates of return. We're generating just over $1 billion now. And the reason why I believe we could still deploy more is because of a metric we also track called our coverage ratio.
We have a database, the last time we publicly disclosed its size we said there were 40,000 opportunities in it. And we're constantly adding more. What we do for our coverage ratio metric is we look at the number of businesses that were sold in a given quarter, and for those businesses that are also in our database, we calculate how many of those transactions we were aware of.
And what we're finding is we are not aware of close to 70% of the transactions, even though the company was in our database, and we supposedly had a relationship with the company. And what it showed us is that there's a lot of businesses that are in the database that we don't have relationships with.
We have done a great job -- if you think of the database as a sales funnel -- of adding leads to the funnel. But we haven't had time to fully nurture them and turn them into real relationships. We are focused on how we improve that coverage ratio from, let's say, 30% to something higher.
I don't think it will ever get to 100%, but could it get to 60%? Maybe. And if it does, hopefully, we could deploy twice as much capital
Qualcomm wants to buy a stake in ARM, maybe form an industry consortium to buy the whole thing 🤔
Softbank is working on IPO’ing ARM after the Nvidia deal suffered the death of a thousand cuts, and Qualcomm seems to think that industry players who depend on ARM should form a consortium to buy ownership stakes to help safeguard the strategic asset:
“We’re an interested party in investing,” [said] Cristiano Amon, Qualcomm’s chief executive. “It’s a very important asset and it’s an asset which is going to be essential to the development of our industry.”
He added that Qualcomm, one of Arm’s biggest customers, could join forces with other chipmakers to buy Arm outright if the consortium making the purchase was “big enough.” Such a move could settle concerns over the corporate control of Arm after the upcoming IPO.
I wonder if Nvidia would be part of that consortium? I guess so ¯\_(ツ)_/¯
“You’d need to have many companies participating so they have a net effect that Arm is independent,” he said. [...]
“Arm has won everywhere because of the collective investment of the entire ecosystem, from companies like Apple and Qualcomm and many others, and that’s because it was an independent, open architecture that everybody could invest in,” said [Qualcomm’s CEO]. (Source)
Some politicians in the UK also proposed that the government buy a stake… Everybody wants a piece of ARM now.
It’ll be interesting to see if such a consortium can consort (isn’t that the verb for consortiums?) and make an offer before the IPO.
Why is Cloudflare’s infrastructure so efficient at what it does vs the hyperscalers? ⛅️ vs ☁️☁️☁️
With AWS, what you're typically selling is, they are essentially renting a server to you. Now they virtualize that in various ways, and it's not literally a server, but it is just conceptually, a way of thinking it is I'm renting a server to you. And so if you're running — if you're spinning up an AWS in a region, it's because they are taking — and again, it's not literally this, but it's effectively this, they're taking a box. They have spent a certain amount of the box and they are saying, I'm reserving this for you.
And the problem is that customers aren't actually that good at getting high utilization rates. And so there's a ton of instances out there which are just sitting completely and totally idle. Now AWS has to have that up and running in their model works that way. And so I don't know what their utilization rates are. But the best estimates I've heard are that they're in the teens, right, in terms of what their actual utilization is.
Why not try to squeeze more customers onto the same hardware to get utilization up?
They don't really care because they're paying for that server and they're getting paid for the server. And it makes sense that they've built in the models and it all effectively works. [...]
What we sell is different. We're not selling you a server. We're selling you the promise that your application is going to run when you need it to run in a way which is efficient, as fast as possible. And there's a trade-off for that [...]
And so at some level, Cloudflare is just a giant scheduling engine.
By selling the services, rather than specific capacity (ie. a server with this much CPU and RAM and storage — AWS also has lots of services, but EC2 instances are still the best-seller by far), they can squeeze more customers on the same hardware.
Because they have so many tiers of customers, even when demand spikes, they can always find some capacity, and in the worst case, make free users wait a bit longer to make space for paying users.
It's almost one layer abstracted up.
There are some things that we then can't do. But if you buy into that platform, then we can have a much, much, much higher performance, much, much, much higher availability, much higher reliability, higher scalability and a much lower cost because instead of being in the teens in terms of utilization, we're in the 75% range in terms of utilization. And that's just a much more efficient spend of on whatever it is we do.
🦾🤖 Robots in 🇺🇸 🤖🤖🤖🤖🤖
Orders for workplace robots in the U.S. increased by a record 40% during the first quarter compared with the same period in 2021, according to the Association for Advancing Automation, the robotics industry’s trade group. Robot orders, worth $1.6 billion, climbed 22% in 2021, following years of stagnant or declining order volumes, the group said. (Source)
The auto industry has been a long-time user of robots, but other industries are increasingly robotizin’:
“While auto makers and manufacturers of auto components accounted for 71% of robot orders in 2016, their share declined to 42% in 2021”
Part of it is probably because the auto industry has been hit by supply chain issues since 2020, but you can see from the graph above that absolute numbers have been going up rapidly too.
Robots are becoming easier to use, so smaller and less sophisticated companies can now take advantage, Fast-rising wages and difficulty finding labor certainly will increase the rate of adoption too.
h/t friend-of-the-show and OG supporter Nick Ellis (💚 🥃 🎩)
Science & Technology
Interview: Dr. Rhonda Patrick, on Micronutrients for Health & Longevity
This was great. There’s so much, I don’t even know how to summarize it. A good sign is certainly that I will change some things about my diet and supplements…
It’s a long one, so you may want the audio-only podcast version here:
🚜 Global decoupling of agricultural land and food production 🌾👩🌾
Using ever more land to feed humans isn’t a benign activity, so being able to do more with less has great positive externalities.
Hopefully over time we keep increasing agricultural productivity and further decouple — I’d also love to see meat production not require the factory farming of animals anymore and use vastly more land and resources (we still need a good name for “lab-grown meat”).
🇨🇳☀️ China is set to add 108 gigawatts of solar in 2022 (but coal is bouncing back…)
The nation is set to add 108 gigawatts of solar power to the grid this year, up from 54.88 gigawatts in 2021, state-owned CCTV reported on Monday, citing the National Energy Administration. There are 121 gigawatts of solar projects currently under construction, the NEA said.
China currently has the world’s largest renewable power fleet with 323 gigawatts of solar and 338 gigawatts of wind. President Xi Jinping is aiming for 1,200 gigawatts combined by 2030, but rapid deployment means the country is likely to reach the target years early.
The pace is kinda bonkers. But they’re still building lots of coal plants too, reversing the trend that bottomed in 2019…
China started building coal-fired power plants last year that will generate a total of 33 gigawatts of electricity, the most since 2016 and almost three times more than the rest of the world plans to add
The Arts & History
Boucle Infinie by Rémi Gallego
I’ve been listening to this album while writing this edition. I discovered it about a year ago, and it has grown on me since:
It’s got a kind of retro-futuristic vibe — maybe the Bladerunner artwork has something to do with it.
It has synthwave foundations, but with nice electric guitar solos dripping in reverb, some piano, vocals on one track… It’s nice music to work to because it’s not too distracting, but it’s got enough meat on the bone to not get boring.
Some context on the artist:
Rémi Gallego is an award-winning music producer from France, internationally renowned for his electronic-metal hybrid project The Algorithm. Since 2010, he has composed and produced for numerous video games, such as Hacknet, Hell Is Other Demons and The Last Spell, produced music for TV channel ESPN, in addition to releasing his own works with The Algorithm and Boucle Infinie.
He wrote this about this specific project:
This EP drifts from IDM to post-rock, and use retro sounds as a mean to carry specific atmospheres. It's a very personal EP that mixes melancholic textures, melodies of hope, and heavy guitars with retro synthesizers. It's a nostalgic, dreamy voyage into my deepest self.
I haven’t heard the stuff he published under his other aliases yet, but I plan to check them out. Everything is here if you want to follow along.