Despite relatively good earnings, GM has much more work to do before it can claim that it is actually turning around

by David Welch

General Motors (GM) looks pretty good these days when you compare its performance to the huge losses reported this week by rivals Ford Motor (F) and DaimlerChrysler’s (DCX) Chrysler Group. But GM’s meager profits and burning cash pile show that the struggling automaker still has a long way to go before management and shareholders can start popping champagne corks.

GM made $529 million in the quarter if you exclude $644 million in special charges, including a big one for the sale of 51% of its GMAC finance arm. That’s a $1.6 billion turnaround from last year. But dig in to the numbers a bit and all but $81 million of that came from a few one-time tax windfalls. “These are baby steps in a long road to recovery,” says Gimme Credit analyst Shelly Lombard. “The quality of earnings was disappointing because most of it came from tax benefits and they are still burning cash.”

The bottom line for GM is that the company still has a very long way to go. The latest results, while much better than last year’s $1.1 billion third-quarter loss, are hardly enough to keep dissident shareholder Kirk Kerkorian from trying to woo shareholders should he decide to launch a proxy fight. Kerkorian was displeased when GM nixed his proposal to form an alliance with Renault-Nissan (NSANY) early this month, prompting his deputy, Jerome B. York, to quit the board that he joined only in February.

Cash Concerns

The arguments on the two sides are this: GM says that its small operating profit is evidence that Chairman and CEO Richard Wagoner Jr.’s turnaround plan is taking hold. Kerkorian’s camp argues that the company still has most of the long-term problems that got the company into its big mess in the first place.

Without a doubt, GM has big problems still to manage. While some new vehicles are generating strong margins, GM still has a lot of older models for sale that don’t drop much to the bottom line. GM also burned through $5 billion in cash in the quarter, including restructuring costs, and can’t yet say when the company will stop the burn. “Relative to where we came from, there is significant improvement,” GM Vice-Chairman and CFO Frederick “Fritz” Henderson said in an interview. “But our starting point was really bad.”

Henderson readily admits that turning GM’s cash flow around is still a big job. Even though GM—which has $20.4 billion in cash—will realize about $6 billion in cost cuts this year, only $2.5 billion of that is in real cash savings. The rest is purely savings on an accounting basis. Even the $448 million tax windfall GM enjoyed in the third quarter did not bring in any cash, Henderson said.

Next year, GM will get the full impact of Wagoner’s $9 billion cost-cutting plan. But $3 billion of that is also noncash.

Plus, GM still hasn’t paid for all of the severance packages and buyout deals that eliminated 35,000 jobs. The company paid $1.9 billion in cash in the third quarter for restructuring costs. Henderson says GM will be paying more separation costs into the first quarter of next year.

Burden of Delphi

Former GM parts unit Delphi will also drain GM’s cash in the future. GM still has contractual obligations to employees of the bankrupt parts maker. It may have to assume up to $7 billion in pension and health-care liabilities that would boost its cash expenses, albeit over many years.

Plus, to get the union to accept a lower wage-and-benefits package so that Delphi can drop costs and GM can possibly sell the company, the automaker may have to subsidize the wages of some of the employees. That could cost GM $400 million in pretax payments next year and $100 million a year after that. That, too, will eat some cash.

That doesn’t mean GM is headed toward bankruptcy, says Lombard. Its $20 billion cash pile is shrinking, but when the sale of 51% of GMAC goes through this quarter, GM should get $10 billion in cash.

Automotive profits still remain elusive, though. GM’s auto business lost $116 million, with the struggling North American business losing $367 million. What’s worse is that even as GM’s revenue per vehicle jumped almost $370 a car from the second quarter, the amount of profit its cars contribute actually fell.

Long Way to Go

Henderson blamed a number of factors, including rising shipping costs and a big jump in prices for raw materials, especially precious metals used in catalytic converters.

Another factor is GM’s model lineup. The new full-size SUVs launched in January pushed up per-vehicle margins because buyers tend to order loaded vehicles with lots of expensive options when new models hit dealerships. But as a new model rolls through its first year on the market, consumers buy less pricey models and their profit power slips.

Even though new models represent 30% of GM’s volume, the older models are under pressure from competition and have a tougher time making stronger profits, Henderson said.

It’s no wonder. GM’s U.S. market share is down from 26.6% to 24.5%, according to Autodata. To keep market share up, the company has pushed up incentives to more than $3,400 per vehicle—about $1,100 above what GM spent in the second quarter.

Those kinds of numbers are why Henderson says that GM is “a long way from where we want to get to.” Kerkorian would probably agree. Looking ahead, the question will be whether Wagoner and Henderson can get GM where it needs to be fast enough to keep Kerkorian at bay.

Welch is BusinessWeek’s Detroit bureau chief.

Swindlers have stepped up their effort to fleece millions of dollars from online advertisers who use lucrative marketing networks run by Google and Yahoo, according to a quarterly report to be released on Monday.

The sales referrals generated by clicks on the brief advertising links popularised by the two internet powerhouses are a sham 14.1% of the time, based on information collected from 1,300 online marketers. That’s up from a click fraud rate of 13.7% three months ago, according to Click Forensics, a San Antonio-based consulting service that compiles the index. The statistics jibe with other data asserting advertisers are paying a significant sum to Google, Yahoo and their partner Web sites for phantom shoppers even as more resources are devoted to thwarting scammers.

A recently released survey of 407 online advertisers by market research firm Outsell estimated click fraud cost advertisers $800m last year. Click fraud is a highly sensitive subject for Mountain View, Google and Sunnyvale, Yahoo because it raises doubts about the trustworthiness of the advertising model that drives their profits and stock prices. Google, Yahoo and partner Web sites get paid each time someone clicks on advertising links usually displayed at the top and on the side of Web pages.

Advertisers pay the commission even when the click doesn’t produce a sale — a system that inspired bilking schemes. The motives for click fraud vary. Most often, Web site owners repeatedly click the ads on their own sites to generate money for themselves. In other cases, advertisers target the ads of their rivals to drain their marketing budgets.

As click fraud becomes more prevalent and attracts more media attention, advertisers are becoming more aggressive about demanding refunds and better protection, said Tom Cuthbert, Click Forensics’ president. “Advertisers aren’t satisfied with the status quo,” he said.

“They don’t want to keep losing sleep at night wondering how much money they are losing to click fraud.” Reflecting those concerns, about 900 advertisers have joined Click Forensics’ anti-fraud network during the past three months. Google and Yahoo are better at weeding out click fraud than smaller Web sites, but Click Forensics still concluded both companies are being hard hit.

About 12.8% of the clicks on ads served up by Google and Yahoo are deceptive, up from 12.1% three months ago. Mr Cuthbert said Google and Yahoo may be identifying some of those fraudulent clicks and removing fees from advertisers’ bills. Both companies are tightlipped about how they monitor for click fraud, another factor that has frustrated some advertisers that want more transparency.

Google chief executive Eric Schmidt acknowledged click fraud remains an ongoing headache, but disputed the notion that the problem is becoming more prevalent. “Smart people are trying to break the law, but we have even smarter people trying to prevent it,” Mr Schmidt said during an interview at a conference that concluded Sunday in Idaho. Yahoo CEO Terry Semel declined to discuss the latest data on click fraud, saying he intended to address the issue Tuesday when the company is scheduled to release its second-quarter earnings.

“We will be very proactive about it,” Mr Semel said during the same Idaho conference. Both Google and Yahoo have agreed to settle class-action lawsuits to limit their potential liability for past click fraud. If approved, the two settlements would address any click fraud that occurred amid more than $22bn of ad spending. A two-day court hearing on Google’s offer to pay up to $90m in refunds and attorney fees is scheduled to begin July 24 in an Arkansas court. Yahoo’s proposed settlement, which doesn’t limit how much the company might pay, isn’t scheduled to be reviewed in a Los Angeles federal court until late this year.

Version 1.0 has been running successfully on the Guru Manager Website Development System site for a number of weeks. Complete self contained Wordpress website development system that allows you to change the colors, banner and navigation bar links direct from the home page after login.In addition it includes instant revenue generation by adding Google AdSense (activate or deactivate) so that your website can generate revenue from click-thru.

A major feature is the 24 Banners to choose from, but you can also design and upload your own so long as it is 760 x 180 pixels.

We are already working on additional Google AdSense and multiple language usage, including Podcasting. Feel free to comment and send your wishlist.

To make it all easy we have provided powerful illustrated Flash Tutorials for each element to show you how easy it is to create your website with this Theme.

Please visit the GuruManager Theme v1.1 Homepage at http://www.xaprio.com/Products/GuruManager/

Microsoft Corp. picked two well-respected technical minds to fill the void from founder Bill Gates’ pending departure in two years, but it also identified a next tier of leaders charged with reinventing the software giant to compete against younger, agile rivals.Grabbing headlines in Thursday’s announcements were Ray Ozzie, 50, who assumes the company’s top technical mantle as chief software architect, and Craig Mundie, 56, who takes over some of Gates’ role as long-term visionary.

But Microsoft also tapped a next tier of technical talent in J Allard, Steven Sinofsky and Bob Muglia — executives in their 30s and 40s — to play a larger role in shaping the company’s future business and technology strategy.

Analysts said all three have won the respect of Microsoft’s rank-and-file programmers with deep technical knowledge and an understanding that technology improvements cannot come at the expense of delays to new products, a problem that has plagued the company’s mainstay Windows division.

“They have really good technical minds and really good experiences about what kind of decisions you have to make in order to ship a product,” said Rob Horwitz, an analyst at independent research firm Directions on Microsoft.

“Those are the guys with their feet on the ground and not as much pie in the sky.”

An ability to ship new products in a timely manner seems all the more important in light of investor perceptions that Microsoft has been outmaneuvered by aggressive and more agile competitors like Google Inc. and Yahoo Inc.

“Microsoft is at a crucial inflection point,” said Jupiter Research analyst Joe Wilcox. “The technologists are important for the company’s future.

The decision by Gates to step back from Microsoft in two years follows longtime Windows guru Jim Allchin’s plan to retire after Windows Vista ships in 2007, representing a changing of the guard at the Redmond, Washington-based company.

“The world has had a tendency to focus a disproportionate amount of attention on me. In reality, Microsoft has always had an unbelievable strong depth and breadth of technical talent,” Gates said at a news conference on Thursday.

WHO’S NEXT

Sinofsky, 40, earned his stripes as the head of product development for the Microsoft Office business software team, gaining a reputation as a tough taskmaster with an ability to meet targeted release dates.

Earlier this year, he took on the role of leading the team of developers creating the next version of Windows after Vista. Sinofsky’s responsibilities include integrating the operating system with a set of Windows Live Web-based services.

Allard, 37, gained prominence with a note he sent to Microsoft leaders about the looming importance of the Internet, which became the basis for the company’s change of strategy to embrace the Internet in the mid 1990s.

An avid video game player, Allard now oversees the engineering and design of the Xbox game console. He pushed Microsoft into online gaming well before rivals Sony Corp. and Nintendo Co. Ltd.

Muglia, 46, has the longest track record of the three at Microsoft, having joined the company in 1988. As the senior vice president of Microsoft’s server and tools business, Muglia needs to keep outside developers happy with its tools and technology professionals using its servers.

All three executives were already considered stars in the company, but analysts said granting them more say over strategy and keeping them happy and motivated is a smart move.

The first public baby steps of the effort to create a new framework for PHP application deployment are now live for all to see. The effort may well prove to put PHP on the same level as J2EE and .NET for application server deployments.

Version 0.1.1 of the framework is now available for download as a preview, and it has already racked up 15,000 downloads during its first weekend of existence.

Last October, Zend Technologies, one of the lead backers of PHP, announced the PHP Collaboration Project. One of the goals of the project is to build a PHP Web application development and deployment environment, now known as the Zend Framework.

The first public preview release introduces a number of framework components that will enable an enterprise-class PHP application deployment.

Zend_Search_Lucene adds the Apache Lucene search engine’s capabilities to PHP and allows PHP-driven sites to take advantage of new search capabilities. The binary file format used is claimed to be fully compatible with Apache’s Java version of Lucene.

Web Services are also a key focus of the framework. According to the Zend Framework Web site, the project is working on engaging more API vendors directly to make PHP the premier platform for consuming Web services.

PHP 5, which first debuted in 2004, introduced new XML capabilities to PHP. Those capabilities are being expanded in the framework with the Zend_XmlRpc module.

RSS is part of the mix thanks to Zend_Feed, which consumes and discovers RSS and Atom feed data. AJAX-enabled applications will benefit from the Json module, which enables conversions of PHP structures into the AJAX-friendly format.

E-mail is also addressed with the Mail and Mime module, which creates and sends e-mail, as well as includes support for attachments. The PDF module gives the framework the ability to generate PDFs on the fly without the need for additionally compiled PHP extensions, as is typically the case for PHP deployments.

The InputFilter module will make it clear to Zend Framework users to invoke input validation schemes to ensure that end-user data is filtered and validated.

At least one Linux distribution has already included the framework as a download.

Gentoo Linux, which just recently launched a new milestone release, now includes the Zend Framework in its Portage package repository for Gentoo users to download into their distributions.

The framework is still far from complete, though.

“There is a lot of work still to do, but after having already seen four applications build with the framework, it is clear that it already includes some very cool and useful modules,” Zend co-founder Andi Gutmans wrote in a blog post.

It’s an interesting time to be a PHP developer, to be sure. There are three versions of PHP in various stages of active use and development, and Yahoo has recently launched an effort to court PHP developers.

Supercomputer vendor Linux Networx announced this week a new lineup of storage solutions, while also revealing that it is no longer developing its Xilo scalable clustered storage system.

Linux Networx has classified its new storage solutions under three tiers: Value, Ultimate and Premium Performance.

At press time specifications were only made available to internetnews.com for two models. The Linux Networx ST2822 and the ST6998 Storage Systems are geared specifically for supercomputer users, where storage, according to Linux Networx, is added typically as an afterthought.

The ST2822 has support for up to 122 SATA (define) drives with a sustained throughput capability of 485 MB/s.

The ST6998 Storage System, on the other end. can handle up to 224 Fibre Channel drives with sustained throughput of 1600 MB/s.

The new storage solutions will integrate with Linux Networx recently launched midrange LS-1 and LS/X systems, as well as Linux Networx Advanced Technology clusters.

“We are not trying to compete with traditional storage vendors that serve the enterprise market,” Anne Vincenti, Linux Networx director of storage, told internetnews.com.

“Our storage solutions are specifically designed to support the needs of supercomputing users who want to completely optimize their supercomputing investment through tightly integrated, optimized supercomputing-specific storage alternatives.”

As opposed to other vendors’ solutions in the HPC space, Linux Networx is not currently deploying its supercomputing storage solution with InfiniBand (define).

InfiniBand is also increasingly becoming popular as an HPC storage and enterprise storage interconnect.

Vincenti explained that Linux Networx’s integrated offerings for ultimate and premium performance delivers parallel file systems over 4Gb and 2Gb Fibre Channel.

At some point in the future, Vincenti said, the technology may embrace Infiniband.

The Value Performance offerings are available with Gigabit Ethernet or Fibre Channel attach.

The new storage solutions will not be using Linux Networx Xilo clustered file storage system, which was originally announced in November 2004.

According to Vincenti, Xilo is no longer in active development.

Instead, Linux Networx is taking advantage of an OEM agreement it signed in December to use IBM’s General Parallel File System, or GPFS.

“Linux Networx has determined that we can deliver more robust solutions more quickly by integrating Linux Networx GPFS with two performance hardware options,” Vincenti said.

The Linux supercomputing company is coming off a “super” 2005, claiming that it finished the year with a 300 percent booking backlog over 2004 and adding new customers such as BMW, DaimlerChryseler, Audi, Glaxo SmithKline and Motorola, among others.

It also recently notched its biggest order ever.

Earlier this month, Linux Networx also announced that the Department of Defense had placed the “largest single order for Linux Supercomputers in the company’s history” with a five supercomputer order.

Linux leadership in China is up for discussion again.

Novell is claiming again that it is the Linux leader in China. This time the data comes from China-based analyst firm CCID Consulting, which reported that Novell holds a 25.1 percent revenue share of the China Linux market.

In August, Novell cited data from IDC, which gave Novell a 32.9 percent market share.

Novell spokesperson Bruce Lowry commented that different analyst houses have different methodologies and different info sources, which can produce different outcomes.

“We don’t believe we’ve lost market share,” Lowry told internetnews.com. “In fact, we’ve improved in the CCID Consulting rankings. I’m told that in their last ranking (not sure of timing), we barely cracked the top five of Linux players in China.”

Novell’s success in China has come on the heels of its new research and development center, new support facility and the launch of the openSUSE.org.cn site.

OpenSUSE is Novell’s open Linux development effort and is currently on the verge of its 10.1 release.

“We certainly see China as a country of opportunity for the full range of Novell’s offerings, whether Linux, identity management or resource management,” Lowry said. “We’ve definitely made a strong commitment in China.”

Not to be outdone, Red Hat is also claiming strong growth in China.

“We have strong alliances with education, government and private enterprise and have spent a great deal of care establishing a strong relationship with the Chinese market,” Leigh Cantrell Day, Red Hat director of global corporate communications, told internetnews.com.

“Fedora launched in China back in November and has been downloaded by hundreds of thousands of users. We continue to have great success with the adoption of Red Hat Enterprise Linux.”

Asian-based Linux distributions should not be counted out, either. Debian-based Sun Wah Linux claimed last October the largest Linux desktop rollout in China.

Sun Wah’s CEO Alex Banh last year told internetnews.com that his goal was to be the leading distribution in China.

Turbolinux is also a player to be reckoned with as well. In a recent press release, Turbolinux cited 2004 IDC data that reportedly give them a nearly 25 percent market share of the Chinese desktop OS market. In April, they signed China’s biggest bank representing over 100 million customers.

Turbolinux has also recently obtained “high-tech innovation funding” from the Chinese government and expanded availability of Linux in southwest China’s Sichuan Province.

Then there’s the Oracle-backed Asianux effort, which debuted in August, though it’s currently unclear as to how widespread its deployment has been to date.

Online auction company eBay Inc said it expects the number of Asia-Pacific users trading on its site to eventually outstrip that for the U.S. and Europe as Internet penetration grows, but it also predicts imminent competition.

More than 30 million of the company’s 181 million registered users worldwide are in the Asia-Pacific region, chief executive Meg Whitman said on Thursday.

“These are still small markets but as Internet usage and broadband penetration increase we see these markets growing bigger than our top markets currently,” she said.

And in markets like India, the company has seen a rise in high-value transactions and encouraging growth in smaller towns.

“Asia-Pacific is the fastest growing user region with markets like India, China and Korea leading the pack as Internet and broadband penetration rise,” Whitman told reporters.

“But we do foresee competition, as e-commerce is a growth area and we see a lot of venture capital money coming,” she said.

Rediff.com, the Times Group’s indiatimes.com, and New Delhi Television’s ndtv.com are among India’s biggest e-commerce sites, and there has been a string of investments recently in online travel sites.

California-based eBay bought Indian online auction company baazee.com in 2004 for about $50 million. eBay India, the wholly-owned subsidiary, has 2 million users.

“India is still a small fraction of our global revenues, but in 5, 10, 15 years we hope India will be among our top markets,” Whitman said.

PRAYER WHEELS

India has nearly 39 million Internet users, according to industry estimates, just a fraction of its billion-plus population, and equal to less than half its mobile phone user base of more than 81 million. Credit card holders number just 15 million.

About 45-50 percent of eBay India’s current turnover comes from the top six cities, but smaller towns are also driving growth due to a lack of modern retailing, said Gautam Thakar, country manager of eBay India.

“I was stunned to learn that jewelry is sold every five minutes on the site — and this is diamond jewelry,” he said. Ethnic products like bell anklets, Tibetan prayer wheels and hookah water-pipes have also found buyers, he said.

On eBay India, a mobile handset sells every seven minutes, a digital camera sells every 46 minutes, and a car or motorcycle sells every nine hours. The western state of Maharashtra, India’s richest state, makes up 28 percent of its users.

Whitman defended the company’s conservative earnings estimate for 2006, which has raised concerns that its growth is slowing as it matures.

“We have a record of meeting our estimates, and we’ve had a remarkable Q4, so we wanted to give Wall Street an estimate that we’re comfortable with,” she said.

eBay has forecast revenue will grow to between $5.7 billion and $5.9 billion in 2006, which is at the lower end of Wall Street expectations. The average revenue estimate is $5.9 billion, according to Reuters Estimates.