Friday, January 30, 2009

Maxim and Microchip Report Fourth Quarter 2008

Maxim Integrated Products (MXIM) and Microchip (MCHP) both reported on their fourth quarters yesterday. Both are makers of digital and analog semiconductor chips, and to a certain extent are rivals. However, they serve different markets with different styles, so comparing them may give a good view of how the semiconductor market is evolving.

Microchip is known for its microcontrollers, which are microprocessors combined on a single chip with inputs and outputs designed to control external devices. A typical use might be controlling a consumer appliance or coordinating the systems in an automobile. It makes a wide variety of microcontrollers that are usually sold as standard parts. It also makes some analog devices (capable of creating radio wave forms, for instance) and other special parts.

Maxim makes standard parts that can be incorporated into circuit designs, but more of its business is in making special parts for particular products. These parts may or may not include a microcontroller; they often include both digital and analog circuits on the same chip.

Both companies saw demand dry up in Q4 as manufacturers who use their chips cut back on orders, both because of weak demand from their own customers and because they could save cash by depleting inventories.

Both companies cut back on their own production in order to save cash and to cut their own inventories, but both still believe their own inventories are too high if the economy remains down.

Microchip revenues were $192 million, down 29% sequentially from $270 million and down 24% from $253 million year-earlier.

Maxim revenues were $410.7 million, down 18% sequentially from $501.2 million and down 24% from $540.0 million year-earlier.

One reason that Maxim's revenues were not down as much sequentially as Microchip, but were down the same from year-earlier, had to do with notebook computers. Maxim makes parts for notebook computers, and had made a part for a particular Intel standard design. They lost that part in the latest transition. However, they have new design wins that they believe will enable them to regain some traction in notebooks in 2009, if notebook end demand does not crash even futher.

Both companies had a variety of one time charges and benefits in the quarter. Stripping those out, especially if you look only at cash flows, both were positive. Both sit on large accumulations of cash kept from more prosperous times. Both give investors generous dividends and see no need to cut the dividend at the current level of recession. At this moment's prices, Maxim pays a dividend of 6.22% at $12.45, and Microchip pays a 7.37% at 18.98. You can't get that from a Treasury or CD.

What about the future? Neither firm has good visibility, although it is fair for us to assume that when (or if, for pessimists) the economy revives the demand for their chips will also increase. Both plan on even lower revenues in the March quarter. Maxim believes that it will do well in its communications segment (which does not include parts for cell phones, but for infrastructure) because they are supplying parts for base stations in China, which is committed to continuing its 3G rollouts. They think their computer segment will do poorly as there is a lot of notebook inventory in the distribution channels. They believe cell phone inventories have been depleted (their parts are in high-end phones), so unless consumer demand drops off further, they expect their customers to start restocking soon.

Microchip has more customers, typically using smaller numbers of chips for a particular product. This makes it harder to know what their customers' plans are. Their book to bill ratio was a horrendous 0.7 at year's end, but they have seen a slight uptick in January orders over December. They believe they can return to growth even in a downturn by introducing new products, but their best trick is the flexibility of their expense side. They can cut expenses rapidly, already having done so in 2008. They believe they can remain profitable at almost any level of economic activity.

I own Microchip stock, but not Maxim. I also own competitor Marvell (MRVL). Maxim is on my list to buy at some point, but I have a pretty lengthy list of companies to choose from given their valuations and compared to my ability to generate cash to buy them.

For more detailed coverage of their December quarters, see my Microchip analyst conference summary for Q4 2008, and my Maxim analyst conference summary for Q4 2008.

See also their company sites:

Keep diversified!

Thursday, January 29, 2009

Intuitive Surgical (ISRG) on Pause

The Intuitive Surgical management team reported fourth quarter 2008 results to analysts on Thursday, January 22, 2009. They also talked about the outlook for 2009. Unlike most of the biotechnology companies that sell therapeutic drugs, Intuitive (ISRG) did take a hit in Q4. As the leading maker of surgical robots, earlier this year its stock price was sky high. But hospitals have become more cautious buyers of Intuitive's da Vinci systems, which cost over $1 million each.

For details on Tuesday's events, see my summary of the Q4 2008 Intuitive Surgical analyst conference. Here I'll concentrate on key take aways.

Revenues of $231.5 million were only down 2% from the third quarter, and were up 22% from year-earlier. The problem for Intuitive's stock price is that investors became use to hypergrowth. It peaked at $357.98 per share in 2008. Today you can buy it at around $104.

Buying opportunity? I don't own the stock, but I'm thinking about buying. It has been obvious for several years that this would be a great company, but its IPO price was rich and it never became reasonable until now. It was last at $100 back in 2006.

Revenues are about evenly split between sales of the actual surgical robots and combined services and accessories (used once, then discarded). Services and disposables revenue will continue to grow as more systems are sold and hospitals use units for more surgeries. The types of procedures surgeons are doing with the robots are increasing. There is a whole sub-industry out there of teaching doctors to use the robots and perfecting various operations with them.

Feedback is that surgeons and hospitals are eager to have these robots. So the hold up is the economy. 85 new systems were sold in the quarter, bringing the installed base to 1111. 30 of the sales were outside the U.S.

The biggest short term concern would be that orders were delayed in December. Are those sales going to go through in Q1? When will hospitals feel confident enough to cause Intuitive to go back to unit growth? No one really knows. Guidance is for system sales to be flat in 2009 compared to 2008. They expect total revenues to be up about 15% in 2009, based on increased services and disposables revenue.

If the economy does not pick up, then a lot less systems may be sold. But given that the machines help hospitals make profits, and many surgeons are excited to have them, if I had to guess I'd say if the economy comes off its low, Intuitive will go back into growth mode as hospitals release funds.

Long term, this is a great stock. Short term, I'd say the middle of the road is slow growth. GAAP earnings were $51 million in the quarter, so say $200 million for 2009. At today's market capitalization of $4 billion, that gives a price to earnings ratio of 20. You can get an even better ratio if you use non-GAAP numbers.

Friday, January 23, 2009

AMD on the Ropes

When you go up against Goliath, you had better not make mistakes. The biggest David and Goliath story in the semiconductor chip industry in this decade has been AMD and Intel. Right now AMD is badly battered by the giant Intel, partly because AMD stumbled in introducing quad core microprocessors.

AMD reported fourth quarter 2008 results at its analyst conference yesterday, and they were a disaster. Even when you strip out special or non-cash items, AMD lost a lot of money on its basic operations producing microprocessors and graphics processors.

For details on what happened in the quarter and what management thinks of the first quarter of 2009, see my AMD analyst conference summary for q4 2008.

AMD made its biggest mistake, or double mistake, when it and Intel were transitioning from dual core to quad core chips. Much of today's problems stem from that era. Intel, which had been rapidly losing market share in the high-margin server chip market, decided to kluge together two dual core chips, each a separate piece of silicon. AMD insisted on the more elegant solution of actually putting all four cores for the Opteron on the same silicon chip. Then it ran into design and production problems, delaying its quad core introduction. Intel, with its dominant market share and huge cash flow, had no competition in quad-core chips for about a year. That was enough to regain most of the market share it had lost and to using pricing to keep AMD at bay even after quad core Opterons were finally introduced.

AMD also acquired graphic chip maker ATI, which was a smart move in itself, but they paid way too high of a premium for the acquisition and were saddled with debt that was unsupportable given ATI's marginal profitability.

AMD has always been behind Intel in what is called process technology. AMD's superior chip designs are typically made using larger silicon features than Intel's, which means Intel can put more transistors on any given size of chip.

The fourth quarter of 2008 should have been a magic moment for AMD. The new version of its quad core Opteron processor is at the same process technology, 45 nm, as Intel's current competitors. It is a very competitive chip. AMD also has very competitive desktop Phenom processors and notebook Turion processors. Some people even admit that it is ahead of NVIDIA in graphic chip technology for the first time since ATI was acquired.

But demand for computers fell across the board in the last quarter of 2008 due to the banking crisis. Instead of making a profit, gaining market share, and preparing for the next round of competition, AMD was badly hurt. Intel has a huge inventory of unsold processors, so they will probably be dumping them on the market. And Intel has huge cash reserves, so they can better develop new technology while making little profit during the downturn.

So is AMD finished? By no means. The spin off of their manufacturing operations to The Foundry Company has been well publicized and should be completed in February. At that point the core of AMD will be a design and sales company. AMD's much smaller team of engineers has consistently out-designed Intel for a decade now; maybe they can keep up the heat.

AMD will emerge from its spin off with a substantial amount of cash and somewhat decreased debt. That leaves it vulnerable, of course, to Intel's "aggressive" sales tactics (illegal, according to some nations) and ability to flood the market with cheap processors.

So visibility is practically non-existent here. If the economy turns around before Intel is able to introduce 32 nm based chips, AMD might be able to gain crucial high-margin market share in servers. But once Intel starts selling 32 nm chips, AMD will be at a disadvantage again, for a while, no matter how good their chip designs are.

I still own some AMD stock. It has been the worst performing stock in my portfolio. It is a reminder that even geniuses can lose money for you.

So keep diversified.

More data:

Thursday, January 22, 2009

2009 Investment Plan

Today earnings seasons starts for me, with reports and analyst conferences scheduled for AMD and Intuitive Surgical. This column will be mainly comments on company reports and forecasts for the next couple of months. Before that starts I want to get this column in on my investment strategy.

Like most investors I took a bath in 2008, but for me it was not too bad. I wasted my youth writing vampire novels that did not sell, so I only recently grew up and became an investor. My main asset is my house. It still has a mortgage, but I have been diligently paying it off for years now, and that has been my best investment. I have a fair amount of cash in CDs, which is a necessity because I work freelance and my wife's PeacefulJewelry business has irregular cash flow too.

But I own some stocks and in 2008 I bought more. Almost all the stocks I own have lost value (if I had to sell them at today's auction rate) since I bought them, the notable exception being biotechnology stocks like Gilead and Biogen. But I believe that the current auction market on stocks has vastly underpriced good companies.

So in 2009 I intend, when I have cash to spare, to continue to buy stocks at bargain prices as long as they last. It is tempting to buy real estate too, at these prices and interest rates, but that is a bigger commitment.

I see no reason to buy bonds at these high prices. I think the risk that the U.S. Government won't be able to pay its obligations has become roughly equivalent to the risk of a serious depression. It is a small risk, so I also don't see bond prices going any higher. So with bonds you won't make money from dividends, and you won't make money on the pricing either.

The next time stocks are high and bonds are low (because interest rates are high) I plan to make a foray into bonds. After that I will maintain a balanced portfolio of stocks and bonds.

If you follow this blog, you know what I like in a stock: good technology, good management, and a commitment to bringing in the cash. I might acquire more of the stocks I have, I'll probably add a few new ones in 2009. I won't add too many because doing good research for a large portfolio is time-consuming.

What is right for me may not be right for you. Every stock is different, just like every real-estate indvestment is different. Often general advice turns out to be bad advice for a specific investment.

Spend less than you make (personal financial tipping point 1), and you really can't go wrong.

And keep diversified!

Thursday, January 15, 2009

Rackable Systems Sells ICE Cubes

The bad news from Rackable Systems (RACK) is that the fourth quarter of 2008 was slow. That should not be a surprise to anyone, given the overall economic panic we saw in Q4 2008.

While we are waiting for the economy to get its footing again, in the technology stock arena it is important to look at what companies will have to offer in the future. One thing RACK has is the ICE Cube system. This system has been available for sale for most of 2008. Rackable shipped to ICE Cubes in the quarter, but won't recognize revenue for them until fiscal 2009.

I had hoped more of these containerized server farms would sell during the quarter. On the other hand, a report that none sold in the quarter would not be surprising. Having two in the field is great, it will make more sales easier. Few companies want to be the first to but a new product when it is mission critical.

Rackable reported prelimary results for the full year, so fourth quarter results need to subtract the knowns from earlier in the year. Full year revenue is expected between $245 million and $250 million. Q3 revenue was $65 million, Q2 was $76 million, and Q1 was $68 million.

So Q4 revenue was between $36 and $41 million.

That is pretty bad. Even with a backlog and deferred product revenue of $20 million, that is pretty bad.

Which brings us back to Rackable's cash balance. The year-ending balance is expected between $175 and $185 million.

With Rackable's market capitalization at this moment is $122 million, (with stock price of $4.08 per share), you might think RACK is a bargain. I own Rackable stock and for years have watched as one development after another has stiffled the potential for growth and profitability. The energy-efficient data center space has become more crowded over the years.

So the downside risk is considerable. Rackable needs to sell a lot more ICE Cubes and a lot more server farms if it is going to compete with Sun, Dell, HP, IBM and a host of smaller competitors.

Balancing that pessimistic note is the potential for a big upside. In addition to the ICE Cubes, Rackable apparently has orders for its new CloudRack and MobiRack solutions. So maybe 2009 will be a better year than the economic forecasts and 4th quarter results indicate.

Always best to: Keep Diversified

See also my main Rackable Systems page

Wednesday, January 14, 2009

Celgene Projects Continued Growth

Celgene (CELG), a biotechnology company specializing in drugs for blood cancers such as multiple myeloma, on January 12, 2009 updated investors on its progress and guidance for 2009. In 2008 revenues grew 58% to $2.23 billion, and are expected to grow another 20% in 2009. Profits (net income) for 2008 was about $1.55 per share.

The key to growth in 2008 and 2009 is the drug Revlimid, which grew revenues 71% from the prior year to $1.32 billion. Revlimid is still being introduced on a global scale, so it has room for more growth. Celgene is also hoping that Revlimid, which is primarily for multiple myeloma, will be approved for more indications, such as solid tumors, as trial data comes in.

It also expects VIDAZA sales to double in 2009 to about $400 million.

Some investors were disappointed that revenue growth is expected to slow to 20% in 2009, up from the astounding 58% of 2008. However, it should be noted that sales increases in new drugs come in waves after indications get FDA (or foreign) approval. Also Celgene's base of sales is much larger, so 20% is still quite impressive.

As with all drugs, Celgene's pharmaceuticals carry some risks for investors as well as patients. Each drug is subject to competition, including pricing pressures. Each drug may turn out to have previously undetected adverse affects on patients. Governments may change the rates of reimbursement that are allowed.

Still, given those risks, Celgene has turned out to be a relatively stable bet in this years remarkably declining stock market. Its 52 week high was $77.39, and it is selling right now at $48.70. But in the mean time a lot of the risk has been taken out because of increased earnings causing its price-to-earnings ratio to decline (NASDAQ gives it a PE of 34 and a forward PE of 17).

We will know more after the analyst conference and report of Q4 results later in January. As usual I will be writing a summary of the results and conference that you can find at my main Celgene page.

I own some Celgene stock.

Keep diversified!

Celgene January 12, 2009 press release
Q3 2008 Celgene analyst conference summary

Friday, January 9, 2009

Hansen Medical (HNSN) Coverage Begins

I am now covering Hansen Medical (HNSN) at this blog and at OpenIcon. That means that I plan to write a summary of Hansen's quarterly analyst conferences. Hansen announced preliminary results for its fourth quarter (Q4) of 2008 today, but that gives no where near the insight of the full presentation to analysts that should take place later this month.

Hansen makes robotic catheters. That interests me because it combines my interest in robotics (and machine intelligence) with with my interest in biotechnology. Also, I am going to start covering Intuitive Surgical (ISRG) [See also my Intuitive Surgical analyst conferences page], which has a great business model and has made some investors very happy. I don't own stock in either Intuitive or Hansen, but if their prices remain in the bargain basement and I like what I learn from further scrutiny, I am likely to pick them up at some point this year. That won't effect the stock price either way because I currently play with very small sums of money.

Hansen's rapid growth did not continue in Q4, but they did not do badly either. They shipped 11 Sensei systems and revenues will be above $7 million. Given the financial turmoil in Q4, I think anything above zero shipments should give investors confidence in the long-term prospects of the company. Hansen's main difficulty is that it is losing money while trying to grow. At some point if margins do not improve on increased sales, money is going to have to come from outside. If it comes through a stock sale, that will hurt current investors. Borrowing money, if it is even possible, involves its own risks.

I'll know a lot more and hope to share my first Hansen Medical analyst conference summary with you soon.

Keep diversified!