Stratfor’s Strategic Reality
Stratfor is, at the end of 2008, a modestly profitable company. On an accrual basis, January-November, Stratfor shows a profit of $40,522 on an income of $7,445,117.78, or about 0.5%. On a cash basis, Stratfor shows a profit of $527,026 on revenue of $8,934,198 or 5.8% of revenue. If we look only at the post April 22 period, the profits are $830,448 on revenue of $6,012,472 or 13%.
This represents a substantial improvement in the condition of the company since April, 2008 as well as against October, 2005. In addition, the balance sheet shows a significant improvement as outstanding arrears have been dealt with.
Beneath these positive numbers, lurks a significant problem: 30% of Stratfor revenues in 2008, totaling $2,581,509 derived from CIS/GV business. In the post-April period this declined to about $1,506,254 or 25% of revenue derived from CIS/GV, due to declining CIS/GV revenue relative to publishing revenue. The projection of CIS/GV revenue in 2009 is $1,843,486 against revenues of $8,304,486 (currently projected by Don and Jeff), down to 22% of revenue.
This means that Stratfor is not yet a publishing company. To be more precise, it is a publishing company in the sense that it is no longer engaged in selling non-publishing products. It is not a publishing company in that it is still producing and delivering non-publishing products. The sequestration of public policy and elimination of disruptive CIS/GV contracts has helped decrease distractions in products, but still imposes a substantial burden.
For example, NOV, our single largest GV customer, yields $550,000 a year which is about 6% of 2008 revenue. A study done by Darryl O’Connor shows that NOV consumes about 10% of Stratfor production capacity. The disproportionate expenditure is because Stratfor has not optimized its system to fulfill the contract. Rather, we absorb the cost inefficiently in our publishing-focused system. Multiply this by numerous other contracts and we see the cost. At the same time, getting rid of the contract would free up time but not cash, as the staff carrying out the work would still be required for publishing—and for mitigating risk to viability.
The problem of CIS/GV is not only about disruption of the productive process. It also represents a significant revenue issue. Since Stratfor is not selling the CIS/GV product, revenue can only contract. The rate of contraction is only partly under Stratfor’s control. While forecast contraction in 2009 is relatively mild, we can expect accelerating contraction in 2010. This means that over the next two years, growth in publishing revenue will not necessarily equate to growth in Stratfor revenues, since publishing must first replace CIS/GV revenues.
Profitability vs. Viability
One thing would appear to be obvious: publishing is not profitable. This is both true and far more complex than that statement would suggest. We need to drill down to understand the strategic dilemma we have. Stratfor could become profitable at any point it wished in publishing without CIS/GV. It could do this by cutting expenses, and particularly staff, where expenses were at or below income in publishing and it could do this without immediate fall off of revenue. Indeed, it could potentially hold revenue at current levels for an extended period of time by reducing content delivered and increasing productivity. Any cash flow issue could be readily dealt with in this way.
The problem with this solution is the impact on shareholder value and the risk to viability. Prior to April 22, the primary threat to the viability of the company came from cash flow issues. Were Stratfor to simultaneously cut CIS/GV and staff, the threat would come from increased risk to viability. The smaller the staff, the greater the risk that resignations, illness, etc, would move the company to being incapable of delivering product, and therefore to declines in revenue. The precise point at which staff reductions would begin to bleed revenue is unclear. This increases risk as the threat cannot be easily navigated. Nevertheless, that point is out there.
Stratfor currently rests on 12 pure analysts plus me (and I will show later how the number of analysts and quantity of training is a key metric for shareholder value even though it doesn’t directly correlate to revenue). It would be possible to reduce the number of analysts substantially (and proportional number of writers and other ancillary personnel) while holding current revenue. The key to this would be, first, shifting my focus entirely to analysis, possible in a smaller company making up for cut personnel. Second, retaining the remaining analysts indefinitely, as the cost of recruiting and training new analysts would be prohibitive in money and elapsed time.
The greater the cuts, the more dependent the company is on me. The more trained analysts there are, the less I am a threat to the company’s viability. The more analysts there are the less dependent the company is on any one of them, and the more the risk to viability is mitigated. Currently, the loss of a single analyst equals about 8% of capacity. Depending on length of time invested in that analyst, a loss could be many multiples of this. As risk to viability increases, shareholder value decreases until the potential liquid value approaches zero. It is easy to imagine a scenario in which the company has a substantial positive cash flow and is profitable, yet has little or no net worth, when risk to viability is factored in.
The risk to viability at this moment is no longer cash flow. The risk to viability is that in dealing with the CIS/GV drawdown, we must reduce staff to protect cash flow. We would otherwise be confronted either with a return to cash flow risk or increase our risk to viability. The CIS/GV issue is a gun pointed at our head that must be our first focus.
April 22: Strategic Repositioning
In this context, it is instructive to consider the cuts introduced on April 22. The cuts introduced on April 22 were designed to achieve two strategic goals. The first was to bring expenses into line with revenue. The second was to protect the productive mechanism of Stratfor, mitigating the risk to viability. The method of imposing these cuts is important to understand. From October 2005-April 2008, Stratfor was managed under the principle of “calculated risk.” It was understood that Stratfor’s viability was constantly at risk and that no risk free solutions were available. A series of calculated risks, shaped by the main threat to viability—cash flow—were undertaken, focusing not on cost controls but on cash generation.
In calculated risk the assumptions were:
(1) that agility was the key
(2) that failures would occur but be mitigated by rapid shifts of direction.
On April 22, Stratfor shifted from a strategy of calculated risk to a strategy of “assured outcomes,” where the goal was the diametrical opposite of pre-April 22 principles. Here the goal was to know precisely what revenue existed and cut costs to within that revenue level—but without threatening Stratfor’s viability on the production side.
The key was to develop a cash flow model with sufficient predictive value that it would allow some precision in cutting costs. Without that model, the risks of cuts would be too high to permit. The following sequence was undertaken:
- We identified a high probability cash flow model for publishing. Fortunately, Stratfor had developed a highly predictable sales model, in which the publishing income pivoted narrowly around quarterly sales of $1,313,000.
- We identified and added to this pool the CIS/GV revenue that had a singular characteristic: the client had a history of reliable and timely payments. This step was necessary as cutting costs to the publishing only model threatened viability, and Stratfor had contractual obligations to clients.
Other clients were retained, but costs had to be cut to fit within the first two categories.
This required cuts of about $200k a month. This was achieved by:
- Cutting executives and all those associated with CIS/SRM/GV sales. This generated over half the savings.
- Cutting the monitoring system that had been developed for NOV and used to serve publishing.
- Severe controls over all other expenditures, particularly travel associated with CIS sales.
What was not cut was analytic staff, although minimal cuts were permitted to writers, graphics or production personnel. It should also be understood that only one overseas placement involved in intelligence gathering was cut (Arturo Sanchez in Mexico). The cuts came from executive, sales, monitoring and travel, and cutting the DC office. The cuts brought Stratfor into cash flow positive by July, and with the OSIS payment, dealt with arrears by September.
The single most important fact of the cuts is that it did not increase the risk to the company’s viability on the production side. Stratfor had achieved assured outcomes, managing the cash flow threat, without increasing risks to production.
However, the retention of CIS/GV was built into this model, including increased pressure on production to service these contracts without the support systems. The model followed from October 2005—use CIS/GV to subsidize the development of publishing--was not substantially modified with this exception. Without sales support, CIS/GV could not grow. It could only decline and the expectation is that it will decline over the next two years. Thus, the first challenge of publishing is to replace the revenue lost from CIS/GV. It is only after that revenue amount is replaced that Stratfor will increase its own revenue. That is the first and current challenge of Stratfor.
Facing the Immediate Challenge Squarely
It must be remembered that CIS/GV is not free money. Therefore, we have the choice of eliminating CIS/GV or structuring ourselves to fulfill contracts efficiently and to build a sales force to justify the restructuring with more contracts. Or we must eliminate these contracts without reducing cash flow. In other words, we must balance revenue growth in publishing to match CIS/GV drawdown. Unfortunately, that alone would leave us running to stay in the same place. Simply doing this will not bring us closer to full viability and liquid value.
We currently forecast CIS/GV revenue in 2009 at $1,762,585, down from $2,581,509 by $818,924. There are some complexities in this number (public policy caps, the amount of run rate already reduced and compensated for) however a rule of thumb should be that we need to increase revenue at a rate of $68,000 a month from where it is currently running—but that leaves a substantial amount of diffusing labor in place. The real goal must be a monthly increase in revenue from publishing of $214,000 a month—to simply hold our place and focus down. Granted, we can likely have as our goal 2010 for termination of CIS/GV, but that still leaves us this goal: increase of $68,000 a month in 2009, increase of an additional $146,000 a month in 2010, simply to stay where we are.
How Stratfor Publishing Makes Money Now
Stratfor publishing has demonstrated that it can make money and that it can increase the amount of money it makes. Since second quarter 2007, Stratfor consistently made $1,313,000 a quarter, plus or minus about 1.5 percent. In third quarter 2008, this revenue rose to just below $1,600,000. In fourth quarter 2008, it will rise to just above this amount. On average we have seen an increase of about $100,000. We need to understand how we make money in publishing in the first place, and how we increased it in the last six months.
Marketing
Stratfor publishing revenue rests on a simple marketing system. Stratfor differentiates itself from other products in the area of foreign policy by excellence and timeliness. This is demonstrated to the market by a system of free mail outs to opt-in members built up over the years. It is noteworthy that Stratfor began with free daily mail outs to a list of 17 people. The daily Global Intelligence Update was intended to demonstrate our capabilities and be viral. Its first purpose was to advertise consulting services but it morphed in 1999 into generating eyeballs for our website and then revenue.
Since 1999 the Global Intelligence Update has become a weekly product. Two are now produced each week. One focuses on geopolitics, the other on terrorism and counterintelligence. In addition, during a crisis, Stratfor mails out Red Alerts to its opt-in list, designed to call attention to its services and entice people to purchase memberships for the full service.
The Weekly mail outs are substantial effort. Each is about five single spaced pages mailed 50 times a year. That means that each is, over the year, the equivalent of a full length book.
The free Weeklies serve a number of purposes:
- They build the free list, which currently stands at about 130,000. In November it grew by about 7,500 members. Since September I it has grown by about 30,000 members.
- They provide the list to which Stratfor campaigns, converting free list members into paid list members.
- They, along with a group of other products designed to attract the media, generate attention in the media, driving walk-up sales as well as new free members and trial memberships.
- They are widely republished on blogs and in other media, drawing more attention to Stratfor.
The use of the Weeklies to build free membership represents a significant level of effort from available task without significant exogenous costs. Therefore, it is in keeping with the strategy of controlling cash flow while building revenue.
Pricing
Price and terms of sales vary. Individual memberships range from $19.95 a month to $349 for a year to $595 for a three year membership. Currently, the most popular price is $199 for 15 months, accounting for about 60 percent of sales overall.
(attach matrix of possible prices and terms).
Institutional memberships range in price from $1500 for a five seat license to $470,000 for a 9,000 user, one year license, roughly $50 a seat.
The $349 price was derived in 2005 based on a triangulation of the prices of what reader surveys identified as the three periodicals almost all read: the New York Times, the Wall Street Journal and the Economist. At that time prices ranged for non-promotional annual rates from $200-$550. We selected $349 as a triangulated price and a price from which we could comfortably discount to $199.
Publishing Sales
Stratfor has maintained increasingly detailed records of sales since 2006. They are addressed in terms of sales rather than in terms of booked revenues or as accrual. Accrual is not fully relevant to the issues being dealt with here. Given the terms of almost all publishing sales, the distinction between booked revenue and sale is not sufficiently significant to render analysis misleading.
Total Publishing Sales, 2006-2008
2006 $ / 2006 % / 2007 $ / 2007% / 2008 $ / 2008%Total Sales / $4.454 m / $5.058 m / $6.327
Individual / $3.011 m / 67.6% / $4.012 m / 79.3% / $4.470 / 70.6%
Institutional / $1.443 m / 32.4% / $1.046 m / 20.7% / $1.856 / 29.4%
Total publishing sales grew by 13.6% in 2007 and by 25% in 2008.
Individual sales grew by 33.2% in 2007 and by 11.4% in 2008. Sales increased by $1 million in 2007, but only by $810,000 (456,000) in 2008.
Institutional sales fell by 27.5% in 2007 and grew by 77 percent in 2008. This curve is accounted for by the OSIS purchase of a two year contract in 2006, no sale in 2007 and by a sale plus a $175,000 adjustment in 2008.
Accelerating growth overall is built around the OSIS contract. Were we to remove that from the 2008 numbers, sales would have been $5.867 million, or 16% growth. This is not to regard OSIS as a contingent event. It is likely the most secure revenue Stratfor has. Rather, we should divide the $750,000 initial sale between 2006-2007 to see the growth curve more clearly. If we did that, 2006 would be $4.079m, 2007 would be $5.433m and $6.327—growth of 33% and 16%.
Either way, we saw a deceleration of sales in 2008 and most striking was the deceleration in the growth of individual sales, which needs to be analyzed more carefully.
2006 / 2007 / 2008New Sales / $1.519 / $2.254 / $2.838
Renewals / $1.675 / $2.143 / $1.997
New sales grew in 2007 by 48% and in 2008 by 25% in 2008. Renewals grew by 27.9% in 2007 but fell by 6.8% in 2008.
Breakout of numbers by type of sale did not begin until September 2007, so no definitive answer for the deceleration of new sales or the decline in renewals is possible. However, a reasonable hypothesis for the decline in renewals is possible, namely accelerating sales of multi-year subscriptions in 2007 which caused renewal rates in 2007 to decline. If this were the case, then we would expect resumption of renewal growth in 2009.
In fact, we do have a forecast for renewals in 2009 of $2.062 million, slightly above the $1.997 million for 2008. However, excluded from this number are the new annuals subscriptions that were booked in December and will be booked in January and February, but which will be renewed in October, November and December 2009. That will likely raise the renewal rate by at least $400,000, bringing us to a 20%+ growth rate.
What cannot be ignored, however, is that the rate of growth of new, individual subscriptions declined between 2007 and 2008. While it grew at a healthy 25% this was almost half the 2007 growth rate. It points to fragility in Stratfor’s growth rates using current methods of selling that cannot be ignored.
Dashboard Performance
The following summaries show publishing sales for the past five quarters, which is the period during which we tracked sales by these categories. During this period, the average quarterly revenue was $1.314m for the first three quarters, rising to about $1.6million the second two, an increase of roughly $95,000 a month. Note that this table does not include all institutional upsells. Where this is most relevant is in first quarter 2008, where February should include a $175,000 upsell to OSIS, bringing the quarterly total to $1,274,000. OSIS is excluded in Institutional sales as well.
Sales by Dashboard Category and Month(right side?)
RENEWALS / Sep-07 / Oct-07 / Nov-07 / Dec-07 / Jan-08 / Feb-08 / Mar-08 / Apr-08 / May-08 / Jun-08 / Jul-08 / Aug-08 / Sep-08 / Oct-08 / Nov-08 / Dec-08Institutional / 153 / 56 / 116 / 28 / 38 / 102 / 54 / 54 / 66 / 49 / 76 / 99 / 192 / 67 / 35 / 57
Individual Annual / 116 / 116 / 136 / 122 / 93 / 122 / 102 / 106 / 228 / 155 / 168 / 158 / 127 / 110 / 148 / 134
Total Renewals / 269 / 173 / 252 / 150 / 131 / 224 / 156 / 160 / 294 / 204 / 244 / 258 / 320 / 177 / 183 / 192
NEW SALES
Free List / 31 / 31 / 48 / 113 / 65 / 34 / 97 / 110 / 65 / 61 / 64 / 86 / 87 / 182 / 94 / 58
Paid List / 167 / 105 / 147 / 127 / 17 / 9 / 171 / 67 / 44 / 49 / 41 / 50 / 54 / 76 / 109 / 114
Walk-Up / 27 / 31 / 34 / 33 / 81 / 65 / 42 / 32 / 33 / 33 / 49 / 116 / 60 / 59 / 64 / 48
Partners / 15 / 8 / 5 / 4 / 4 / 4 / 18 / 25 / 19 / 46 / 34 / 42 / 28 / 64 / 75 / 40
Re-Charges / 24 / 25 / 28 / 19 / 26 / 22 / 22 / 25 / 27 / 26 / 28 / 32 / 30 / 42 / 41 / 35
Institutional / 22 / 10 / 15 / 15 / 14 / 4 / 2 / 12 / 83 / 13 / 7 / 25 / 11 / 5 / 9 / 6
Total New Sales / 286 / 210 / 278 / 311 / 208 / 137 / 353 / 270 / 272 / 228 / 222 / 351 / 270 / 430 / 392 / 300
All Sales / 555 / 382 / 530 / 461 / 339 / 361 / 509 / 430 / 567 / 432 / 467 / 608 / 589 / 607 / 575 / 492
Minus Refunds / -41 / -19 / -64 / -18 / -40 / -33 / -37 / -32 / -38 / -35 / -21 / -26 / -24 / -24 / -32 / -28
Net Sales / 514 / 363 / 467 / 443 / 299 / 328 / 472 / 398 / 529 / 396 / 446 / 582 / 565 / 583 / 543 / 464
Quarterly / 1273 / 1099 / 1323 / 1593 / 1590
There is clearly a break point in August, 2008, when monthly sales move consistently about the $500,000 mark and remain there. The Third Quarter of 2008 also breaks with the pattern that had maintained itself for the previous five quarters of sales pivoting around the $1,313,000 mark. We can therefore view the first three quarters presented here as representing one dynamic, and the last two as representing another, clearly driven by the strategic shift of April 2008 as it took hold.