Portfolio Report for 2009

The numbers are in, and for a change my strategy of doing a lot of research on the future value of technologies paid off. Many investors had a great year in 2009, whatever strategy they used, but I was smart or lucky enough to beat the market averages.

I added only three new stocks in 2009: Cantel Medical, CMN (on December 9), Hansen Medical, HNSN (on July 8), and Petsmart, PETM on (October 8); they did not affect the outcome much. I sold out of only one, Red Hat, RHT (on September 8), which was up significantly. Here is how the stocks I held for the entire year did (links are too my Analyst Conference Summaries for the stocks):

		December 31, 2008 price	December 31, 2009 price
AKAM	Akamai	15.09	25.34
AMAT	Applied Materials	10.13	13.94
AMD	AMD	2.16	9.68
ANSV	Anesiva	0.35	0.17
BIIB	Biogen-Idec	47.63	53.50
CELG	Celgene	55.28	55.68
DNDN	Dendreon	4.58	26.28
GILD	Gilead	51.14	43.27
HILL	Dot Hill	0.80	1.90
MCHP	Microchip	19.53	29.05
MRVL	Marvell Technologies	6.67	20.75
ONXX	Onyx Pharmaceuticals	34.16	29.34
SGI	Silicon Graphics International (was RACK)	3.94	7.01
TTMI	TTM Technologies	5.21	11.53

Keep in mind that the calendar year is artificial. Some of the 2009 losers have gained since I bought them, and some winners are down overall.

My big loser in 2009 was Anesiva, which has a promising therapy but ran out of money to develop it. Gilead was a loser, too, despite steadily increasing profits and ending with a very low P/E ratio. Onyx was the only other loser, and I accumulated more in 2009.

Biggest winners included Dendreon, which reported data for Provenge that should mean FDA approval of the prostate cancer therapy in 2010; it was up 473%. AMD rose 348% as renewed global computer sales combined with a settlement with Intel to give it a boost. Marvell was up 211% as it cut costs while demand ramped for its new generations of semiconductor chips for storage and communications. Dot Hill was up 137% as its storage device technology revenues ramped up during tough times.

Given my mix, my portfolio gained 107% for the year.

Some people do very well as momentum investors, but I think in the long run the market is about profits, not investor psychology. There have been years when my investment ideas seemed foolish, but 2009 was not one of them. Also note that my main use of cash for investment in 2008 and 2009 was paying down the mortgage on my home.

Happy New Year! (And Keep Diversified!)

Red Hat (RHT) analyst conference summary

Red Hat

RHT

conference date: December 22, 2009 @ 2:00 PM Pacific Time

for quarter ending: November 30, 2009 (3rd quarter fiscal 2010)

[at the time this is written] See also "I Sell Red Hat"

Forward-looking statements

Overview: Another excellent quarter for revenue for the commercial Linux leader, but earnings continue to lag.

Basic data (GAAP) :

Revenue was $194.3 million, up 4% sequentially from $183.6 million, and up 18% from $165.3 million year-earlier.

Net income was $16.4 million, down 43% sequentially from $28.9 million, and down 32% from $24.3 million year-earlier.

EPS (diluted earnings per share were) were $0.08, down 47% sequentially from $0.15, and down 33% from $0.12 year-earlier.

Guidance:

Assuming stable currency exchange rates: Q4 revenue $191 to $193 million. Services and training expected down $2 to $3 million due to holidays. 23.8% non-GAAP operating margin. Non-GAAP EPS $0.15 to $0.16 per share. Cash flow expected up.

Conference Highlights:

Subscription revenue was $164.4 million, up 21% y/y. Training and services revenue was $29.9 million, flat y/y.

Towards the end of the quarter RHEV virtualization software was released. Interest is strong among established customers. Cloud initiative is attracting clients.

There was an $8.8 million charge for litigation settlement in GAAP numbers. Non-GAAP operating income was $46.1 million, up 20% y/y; operating margin 23.7%, up 50 basis points y/y. Non-GAAP net income was $33.5 million (down from $36.9 million year-earlier), for EPS of $0.18.

Operating cash flow was $54.1 million, down from $59.1 million year-earlier. Accounts receivable increased $24 million y/y due to record billings in the quarter. Total cash, equivalents and investments ended at $959 million, up $47 million sequentially. $52.3 million was spent repurchasing stock.

Bookings were particularly strong in North America.

Cost of revenues was $29.6 million, leaving $164.7 million in GAAP gross profit. Operating expense of $145.0 million consisted of: sales and marketing $71.5 million (up $13 million y/y), R&D $36.8 million, general and administrative $26.1 million, and the $8.8 million litigation settlement. Leaving $19.8 million income from operations. Interest and other income was $5.5 million. Income tax provision was $8.8 million. Some of the expense increase was due to the October Red Had summit.

Linux is now 18 years old. Red Hat remains the number one contributor to the kernel.

All of the largest 25 deals that were up for renewal did renew, at a total value of 120% of last-year's value. 14 deals in the quarter were for over $1 million. 8 deals included JBoss.

Deferred revenue was up 23% y/y to $619 million. Average deal length was 22 months.

Q&A:

Economy effects? We are beginning to see some recovery in certain markets, like the financial sector. Does not think this is generally a year-end budget flush, instead there are indications of optimism from COOs.

JBoss? Continues to grow at a faster pace than the main business. The pipeline looks strong.

Lower earnings on higher revenues? Exchange rate pushed operating expenses up in quarter; Red Hat summit expense; launch of RHEV expenses. We continue to invest in the future, including hiring new employees.

Implication that a lot of billing was right at the end of the quarter? The quarter was similar to most other quarters, 20/20/60 linearity. This is why we don't forecast cash flow by quarter. There was a 21% increase in unleveraged quarterly cash flow y/y.

Goal is to find another 100 basis points (1%) in operating margin each year.

We are growing because of an ASP benefit as we add products, we are picking up market share from other Linux providers, and server shipments are improving.

Geographic? Strong Americas performance. Asia Pacific and Europe are solid. This quarter Americas is picking up more quickly than EMEA.

RHEL AP is not just for the largest customers, it is useful to smaller customers as well.

Earlier in the year we invested a lot in sales training globally, which has had a positive effect.

Red Hat Investor Relations Page

OpenIcon Red Hat main page

Oracle Analyst Conference report

Oracle (ORCL)

Note: I do not own any Oracle stock as of the date of this entry - William P. Meyers

conference date: December 17, 2009 @ 2:00 PM Pacific Time
for quarter ending: November 30, 2009 (2nd quarter fiscal 2010)

Overview: Strong sequential revenue growth with strong earnings.

Basic data (GAAP) :

Revenues were $5.86 billion, 16% sequentially from $5.05 billion and up 4% from $5.61 billion year-earlier.

Net income was $1.46 billion, up 30% sequentially from $1.12 billion and up 12% from $1.30 billion year-earlier.

EPS (earnings per share) were $0.29, up 32% sequentially from were $0.22 and up 16% from $0.25 year-earlier.

Guidance:

Excludes Sun acquisition.

Pipelines are strong, but assuming conservative close rates, 3rd quarter fiscal 2010. Revenue up 4 to 7% y/y at current exchange rates. Non-GAAP EPS $0.36 to $0.38 at current exchange rates. GAAP $0.26 to $0.28. 28% non-GAAP tax rate assumed.

Conference Highlights:

Exceeded high end of prior guidance. Software new license revenue was up 2% y/y to $1.7 billion (but down 5% in constant currency). Software updates and support revenue was up 14% y/y to $3.3 billion. GAAP operating margin was 37%, up from 35% year-earlier. This was the highest operating margin in Oracle history.

Non-GAAP results: operating income was $2.9 billion, up 9% y/y. Net income was $2.0 billion up 12% y/y. EPS were $0.39, up 15% y/y. Operating margin was 49%, up from 46.2% year-earlier.

Expects the Sun acquisition to clear with the European Commission in January.

Took market share from SAP "in every region around the world."

Exadata continues to be a "red-hot product."

Suns machines run Oracle databases "faster than IBM's fastest computer. We expect Sun to rapidly improve both its market share and margins once this merger closes." Oracle plans to avoid using Sun for the low-margin, high volume market. Will deliver "private cloud" complete solutions.

Stock holders of January 19, 2010 will receive a $0.05 per share dividend on February 9, 2010.

Cash, equivalents, and marketable securities balance ended at $20.78 billion. Debt in notes payable was $13.75 billion. 11.6 million shares of stock were repurchased for $253 million.

Operating expenses were $3.68 billion, composed of: Sales and Marketing $1.13 billion; product support expense $264 million; cost of services $832 million; research and development $708 million; general and administrative $183 million; amortization $436 million; acquisition related $10 million, and restructuring $114 million. Leaving operating income of $2.18 billion. Interest expense was $188 million. Non-operating income $33 million. Income tax provision $565 million.

Q&A:

Database business growth drivers? People had been putting off decisions, now some of that is starting to come back. 11g work with ISVs is kicking in as well.

Linearity? Typical linearity, not back-end loaded. But current quarter started off in better shape. Europe is lagging by about two quarters.

Guidance looks better than anticipated, does this mean there is a meaningful recovery in spending? We are seeing customers back buying, broadly. But it may be due to our strong products and sales teams. We also see the environment improving.

Are close rates improving? We did better than the close rates we expected. The economy is uneven, so we are continuing to use a very low close rates for guidance. Pipeline is very good, especially with Exadata.

Vertical standouts? Communications had a good quarter. Financial services pipeline is improving. Retail is coming back.

How big could Exadata business be? We think it will be huge, billions of dollars a year. How long it takes to get there remains to be seen. We want to group our industry standard components into machines like Exadata for transaction processing and data warehousing. Customers then don't have to do system integration. We want to apply the same strategy to operating systems, middleware, etc. We think that is what the computer business is going to look like for large customers going forward.

When we have acquired Sun all of you are going to have to redo all of your models.

Fusion products are SOA, so they can be bought individually and integrated easily.

List of my analyst conference summaries

My Oracle page

I Buy Cantel Medical (CMN)

Today I bought an initial bit of Cantel Medical, ticker CMN. This was something of a lightning decision, compared to my usual research and long-term observation before buying a stock. Yesterday, while researching it, I thought the company's focus on infection control was interesting, and I saw that it would report quarter results today. The quarter ending October 31, 2009 results were better than expected. I could have bought it cheaper yesterday, but I think the price is still very attractive today.

Cantel Medical can be thought of as a conglomerate where the separate units each are engaged in some technology or service related to infection control. Its Minntech division makes sterile disposables for dialysis and other medical procedures.

Crosstex provides sterile disposable sundries for dentistry and medical use. Mar Cor Purification makes systems for ultra-pure water for medical use, including for biotechnology research and production. Saf-T-Pak specializes in packaging that is sterile or that is used to transport biohazards.

Cantel Medical reported a particularly good quarter for both revenues and profits, partly due to a surge in demand for masks for flu season. However, while this sweetener will probably back off next quarter, I see a growing demand for infection prevention technologies. With many species and strains of antibiotic-resistant bacteria becoming increasingly common, the best way to protect patients is to use sterile disposables. With the globalization of the economy viral diseases spread very rapidly. Again, the best procedure is to protect people with sterile disposables.

See the Cantel Medical fiscal Q1 2010 results for the press release.

Normally I like to know more about a company before I plunge in, but having bought a small amount of stock, now I will watch Cantel closely and report back in this blog.

Marvell Technology (MRVL) Blows Past Competitors

Even non-engineers can appreciate the engineering of Marvell Technology Group (MRVL). After making a number of technological break-throughs in 2008 and earlier in 2009, revenues are ramping very quickly as products containing their semiconductor chip systems are being built.

For an overview of Marvell technology, see Marvell Under the Hood. For my past analyst conference summaries, see Marvell Analyst Conference Summaries.

Revenue for the quarter ending October 31, 2009 was $803.1 million, up 25% sequentially from $640.6 million and up 2% from $791.0 million year-earlier.

Net income of was $201.6 million, up 245% sequentially from $58.5 million and up 183% from $70.9 million.

EPS (earnings per share) were $0.31, up 244% sequentially from $0.09 and up 181% from $0.11 year-earlier.

Cash and equivalents ended at $1.46 billion. Cash flow from operations wa $203.5 million. $196 million free cash flow. Inventories rose to $239 million to deal with areas of tight supply. Long term liabilities are $174.3 million.

Non-GAAP, which excludes $34.4 million in stock-based compensation, $26.5 million amortization, $1.9 million restructuring, but adds back in the $32.6 million tax benefit: net income $231.8 million. EPS $0.35.

Guidance for fourth fiscal quarter 2010 was $802 to $850 million in revenues. Networking and storage sequential growth, with normal seasonal slowdown of wireless. 58.5% non-GAAP gross margin. $235 million non-GAAP operating expenses. $254 million operating profit. Other income $1.5 million. Tax $12 million. 670 million diluted shares. $0.33 to $0.39 non-GAAP EPS. $150 million free-cash flow. GAAP EPS about $0.09 less than non-GAAP.

Analyst Questions and Answers (summary):

Hard drive market dynamics? First quarter 2010 should continue to be helped by low cost of PCs. Our hard drive customers are optimistic.

Gross margin improvement and mix? We don't provide gross margin by end-market segments. Mobile and wireless end markets experienced very good growth, and your margin estimates for that segment may be off.

China Mobile processor market size? PXA920 is very specific, high volume, high performance for standards of China market. It is state-of-the art smart phone solution, but also cost effective enough for the mass market. Our aspiration is higher than any number anyone is throwing out yet.

Sustainability of gross margins? Semiconductor business gross margins should be on high end as prices go down, to offset other expenses. This is a fundamental shift. The numbers we have are fair numbers and we plan to maintain them as long as we can, and best-in-class semiconductor companies will need to achieve this range.

Are your customers in hard drives adding to inventories? We are on a consignment basis, so they do not need to build inventories of our chips. Full feature PCs, even laptops, are now under $500, which is building demand, especially in emerging economies.

Dividends? We do not believe we are out of the economic downturn, so it is too soon to talk about distribution of cash. Our bias is to have more cash than we need in order to not be at the mercy of banks.

China business going forward? We are optimistic about our work for China Mobile; we have been working with them for 2 years. PDS/CDMA 3G is the pride of China. We believe it will be the main technology in China going forward, so we expect a very strong second half of next year.

Visibility is much improved. Inventory is leaner. We have had some shortages and longer lead times, so customers are giving us more visibility.

O-phone success detail? PXA920 will be used by many OEM cell phone makers for the China market; not all of them will be O-phones. The main chip is the most highly developed ever, but we also have the chip set solutions (power, wi-fi, etc.) that go with this. Revenues will start to ramp in the second half of next year; not contributing yet.

Bluetooth Wi-Fi combo part growth? We are very happy with traction with this device is finally taking off. The ramp now is the first generation device, a second generation is in design now. Any device requiring Bluetooth and WiFi is a potential market.

Reviewed how integration of systems on a chip help everyone, including the OEMs and end customers, while lowering everyone's costs despite increasing Marvell's gross margin.

ARMADA initial end markets? Across the board. Chips range from low end to high end. The run on all the ARM software in the market. So the market is any consumer device from HDTV decoders to picture frames to Internet portals like netbooks to automotive display consoles.