"When appointed, Bartz set about slashing costs and staff – a move that made her instantly unpopular among the long-time “Yahoos” – but was unable to revive the company’s revenues or profits. Since she joined, revenues have fallen more than 25%, and although profits have almost doubled, they are still below the peak seen between 2004 and 2006."

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Yahoo could be sold after Carol Bartz is shown the door | Technology | guardian.co.uk

That’s the other thing value investors always get wrong about tech. You can’t typically slash costs to right the ship. You can cut costs to let an existing cash cow shine through. But to bring a company back to the forefront of the industry, tech doesn’t work the same way as manufacturing, for example. In manufacturing, cutting costs works, because it’s an indicator that the process is more efficient than it was yesterday. You’ve taken expensive, redundant, human processes and replaced them with technology of some sort. And that technology is getting cheaper year over year.

In tech, there are not a lot of costs to cut other than labor. And labor is what gets you your innovation. So cutting costs often sends a signal to your high priced talent to move elsewhere.

The best you can do is redeploy costs elsewhere. If you think about the things that Apple did to return to its dominant position in the industry, they were largely expansionary moves.

They:

  1. Bought NeXT for $385mm

  2. Secured a $150mm investment from Microsoft and secured a 5 year commitment for Microsoft to release Office on the Mac.

  3. Cut product lines to free up cash to plow into development of Mac OS X, the iMac, and the Power Mac G4. While this may be viewed as a cost cutting move, they actually killed a significant licensing revenue stream that hurt them in the short-term.

  4. Grew headcount from 8437 to 8568 employees in 2000.

  5. Cut R&D budgets, but ramped up capital expenditures from $60mm (excluding NeXT) in 1997 to $107mm in 2000. From 1994 to 1996 Apple spent almost $400mm on capex, vs. $420mm from 1997 to 1999. And that includes the impact of asset disposals (selling off things they didn’t want). If you back those out the capex ramped up to over $500mm.

Typically, when a company announces R&D cuts, slashing SG&A, and headcount reductions, value investors get all excited because they can picture the ongoing savings flowing through year over year. But in tech-land, that’s when investors should do a gut-check, assess how strong the competitive moat around the company is, and contemplate running for the hills. Because once that starts happening you can be assured that the future will not be as rosy as the past.