Friday, May 28, 2010

Picking Up the War Tab

Who will pick up the tab? On the micro scale, everyone has experienced this question, typically at restaurants. In society, when services are given to the poor, the unfortunate, or even those who competently avoid taking responsibility for themselves, either donors pay or taxpayers pay the tab.

Then there is the War. Mostly in Afghanistan these days, but it could flare up any minute in Iraq, Somalia, Iran, Korea, etc. There are direct costs to the occupation of Afghanistan, and then there is the ongoing, bone-crushing cost of maintaining the U.S. military establishment as a whole. There is no doubt that U.S. taxpayers are picking up this tab. But taxpayers are a varied lot, and pay or evade a wide variety of taxes.

Yesterday's vote in the U.S. Senate on special funding for the occupation of Afghanistan illustrates some interesting shifts in the tab-picking-up dynamic. Some Senators in the Democratic Party and some Senators in the Republican Party voted against the funding. The Democratic Party naysayers want a timetable for withdrawal set. The Republican Party Nays had voted against the amendment to attach a withdrawal timetable for the bill. They voted against the bill itself because no provision was made to raise the money for it; it would add to the deficit. So they want the meal, They are worried about who will pay the tab.

American taxpayers have run up an enormous tab. It is called the National Debt. There is interest on the national debt, which itself makes up a big part of the Federal budget each year.

Back when the Dems were the outs and wanted to be voted in, they opposed the war as pointless. Now the leadership of the Dems, including the President, sound exactly like the leadership of the Republicans did just a few years ago. Only the Republicans, given their self-inflating, gun-toting constituency, can't oppose the war openly. There are no votes there. What they can do is point to the way the Democratic Majority is taking out a mortgage on America, at variable interest rates, with no ability to pay if either interest rates go up or the economy cycles back into recessionary mode.

Who will pay the tab? With the Democrats in power, the Republicans are worried that taxes on the "rich" will be raised. After all, you can't squeeze tax dollars out of income-less people living in Obama-villes. The rich already pay a lot of the tax burden, but they also get some pretty good breaks, like not paying taxes on capital gains until the capital is sold, which is typically only when they die. I would rather be rich and pay at higher tax rates, but once you are rich you get used to spending your money like anyone else. Higher taxes for the rich could mean waiting a year before buying a new Bentley, or taking a few days less vacation on the French Riviera, or having to fire one of the maids. That is the kind of irritant that makes rich people put pressure on their politicians.

You know how it goes. "Sure Bob, last year I raised $100,000 for your campaign, but then you raised taxes and now Sally Sue's vacation budget is $250,000 short."

In case you have not noticed, in Democratic majority districts the rich have to pick up two tabs. One is for the presumed winners, the Democrats, and the other is for the Republican Party candidates, to keep their hopes alive and the pressure on the Democrats.

Talk about a quagmire. The Democrats can't get out of Afghanistan without a "victory" because that would make them vulnerable to the Republicans. The Republicans are really, really worried about the future tax burden (and everyone should be), and the smarter ones are beginning to realize that the military part of the military-industrial complex has gotten to big compared to the industrial part. Too much industry has left the U.S.A., leaving a service-based economy that can't pay for the industrial goods we import.

Once I was working as a waiter in a pizza joint and a table of customers ran out on me. The restaurant owner, chewed me out thoroughly, but did not carry out his threat to take the tab out of my miniscule wages. He had to pick up the tab.

When taxes get high, evasion becomes commonplace. Some blame the Greek crisis on that phenomena.

Before dining out, which I seldom due since my wife and I both prefer cooking ourselves, I like to negotiate who is going to pay the tab. I don't like surprise. I especially don't like heavy drinkers who suggest that the tab be split "evenly." The federal deficit and national debt are one big surprise waiting to happen. There is absolutely nothing in our legal codes about who exactly is going to pay that tab.

Wednesday, May 26, 2010

Seeing the Value in Stocks Today

There are a lot of measuring sticks that can be used to value people, goods, services, and investments. Using the wrong measure, even when that measure is used accurately, can lead to poor or even disastrous decisions. I have read a lot of bad financial advice lately, but most of it would not be bad all the time. The ability to match up general guidelines to specific situations is key to investment success.

A lot of pundits are saying "stocks are overvalued." Even if true, this statement is so general as to border on useless advice to most investors. Even in a bull market, there are individual stocks that are undervalued; even in a bear market, there are individual stocks that are overvalued. If you want to know if stocks, on average, are overvalued, you need to choose your measuring stick. The most commonly used is the price-to-earnings ratio, abreviated P/E or PE. Generally, low PEs are better, as they indicate more earnings you get for each dollar you spend on a stock.

But PEs don't exist in isolation, whether you are looking at market averages or a PE for an individual stock. Two companies can have stocks that are at differing PEs, but both be of equal intrinsic value. For instance, company A might seem like a twin of company B except that A has a healthy cash balance and B is deeply in debt. So even though they both produce the same earnings (aka net income), we would expect A to be more highly valued, and it would have the higher PE. That does not mean company B is bad, it just takes the debt into account when valuing the stock.

Companies C and D might also be twins, if you just look at their accounting numbers for the latest quarter. But company C is a technology innovator and is growing its revenues and profits, while company D is essentially static. So company C should have a higher PE. If it did not, investors who owned D and looked at C would sell D and buy C until an equilibrium is reached.

There are, of course, other variables that affect a company's PE, including subjective factors.

Now think of stocks in general, or in aggregate. It does not make sense to say something like "between 1932 and 2009 the average stock PE was X" but today the average stock PE is X+ something, so stocks are too high.

To value stocks in general, you would need to know how much cash and debt there is on the balance books of the companies we are aggregating. You need to know whether the bundle of companies is growing revenues and profits. You need to know where you are in an economic cycle, which no one seems to be very sure of. You would need to predict the rate of inflation, and compare stocks to alternative investments like real estate, bonds, cash, and CDs.

You also need to look at how the PE itself is created. I like GAAP numbers because they take everything into account, but someone trying to sell you stock almost always uses prettier non-GAAP numbers. The stated PE is usually reasonably objective (once you choose between GAAP and non-GAAP) because it is based on published reports for the last four quarters. But where the company will be in a year is important to investors, and that is guesswork.

What if PEs for the market at a whole are above some historical average, but in six months, if prices remain the same, they will be below the historical average because profits are ramping?

Profits were horrible in Q1 and Q2 2009. Do we measure a company's worth by its profits in those quarters, or by a backward-looking year that includes those quarters? Certainly we should take those quarters into account, but they should not be allowed too much bias.

In this market, where people feel they were lied to in the last bull market (because they were) and are struggling just to keep their homes, only a few stocks are likely to be truly overvalued at any time. From my point of view hundreds, if not thousands, of stocks are so undervalued that I wish I could buy them all. I would buy the whole companies at today's prices, if I were in that league of investor.

Instead I manage my small portfolio as best I can. It includes some speculative stocks of companies that will leap in value if they can ever get to profitability, like Hansen Medical and Dot Hill. But the core of my holdings are in companies like Marvell Technology Group, Gilead, and Biogen. They have large cash balances, are growing, and yet have low PEs. There are hundreds of stocks that have all these attributes right now. And there are good companies paying higher dividends on their stocks than you can get from CDs or Treasury bonds.

Know what you are doing. Do your own research. And ...

Keep Diversified!

Monday, May 24, 2010

Marvell Profits from R&D

In most of the computer and electronics industry the 3rd and 4th quarters are hot. Then Q1, and Q2 are seasonally down. Not that much is selling; inventory is being built for back-to-school, then for the consumer holiday spree and and-of-year corporate buying. This year so far is trending a bit different for many electronic parts suppliers because of the rapid recovery from the 2009 business panic. Judging from its quarter ending May 1, 2010 (its first fiscal quarter of 2011), Marvell Technology Group (MRVL) is benefitting from more than just industry trends.

Marvell first came to dominate the hard drive semiconductor chip industry, and those chips still account for over half of Marvell's revenue. Marvell engineers lead in combining analog and digital chip functions, so we are seeing market penetration in areas where this is an advantage. So far this has been in wired and wireless networking chips and in cell phones, particularly in smartphones. Marvell makes chips for Wi-Fi and Bluetooth, for the wireless signal that connects to cell towers, and for application processors that give the phones their ability to act like computers. While its entry into this market is relatively recent, it is already a major player.

In Q1 Revenue was $856 million, up 2% sequentially from $842.5 million and up 64% from $521 million in the year-earlier quarter. The mobile and wireless end market accounted for about 22% of revenue, so about $188 million. The segment grew 18% sequentially, and that despite Wi-Fi chips "only" growing 6% sequentially.

What is most likely to happen in the next few quarters is that wired networking and storage chips will do their usual annual ramp based on demand, plus any market share gain. Smartphone revenue will continue its explosive growth as a larger number of phones using Marvell's chips are brought to market. And the ramp will include chips for oPhones in China, which by 2011 should, by themselves, be a major source of revenue for Marvell.

In a normal market, Marvell would have a high PE ratio because of its track record and future prospects. But this is no normal market. It is a fear-driven, better a 0% treasury than a 8% stock market. It's pretty weird. Who knows, maybe the world will end and we will sink into an economic depression. But I have news for you. In that case, U.S. treasuries will be as worthless as stocks, because there will be no way the government can raise enough in taxes to cover interest payments.

I own Marvell stock to my portfolio rules limit. I could be wrong, maybe a competitor or two will best Marvell in some segment of the market, but I believe the most probable outlook is that in a few years everyone will wish they had bought Marvell in 2009 or the spring of 2010.

That's my opinion. You can also get the facts, as management presents them, by reading my Marvell MRVL analyst conference summaries.

And of course see also

Sunday, May 23, 2010

Applied Materials (AMAT) Sees Fab Expansions

Applied Materials (AMAT) had a great 2nd fiscal quarter ending May 1, 2010 as reported in its press release and at its analyst conference on May 19, 2010. However, its new amorphous silicon solar sub-segment has run into troubles, which is what most analysts and news stories focussed on. For detail of what the Applied Materials executives said, see my Applied Materials Q2 2010 analyst conference summary.

Overall revenues were up 24% from fiscal Q1 and 125% from Q2 2009. Year earlier was a bad quarter for Applied. As a capital equipment manufacturer (for the semiconductor industry) new orders nearly dried up, and it lost $0.19 per share. But Q2 2010 showed GAAP EPS of $0.20. That sounds like a growth company that should have a high PE multiplier. Partly there were probably some market share gains, but mainly the quick, recent growth is a result of the macro economic cycle.

There is also a technology cycle, where electronic device makers want to squeeze more intelligence into smaller areas of silicon. In 2009 almost all orders were driven by the need for technology upgrades. Now fabs (as semiconductor factories are known) are needing to expand capacity as well. About 60% of sales in the latest quarter were for capacity expansion rather than replacing old technologies.

AMAT reports four sectors: silicon equipment; display equipment; services; and solar cell production equipment. Most of the growth in the quarter was from the silicon division, but display (panels for TVs and monitors) showed growth too. Services were not hit as hard by the recession, and so saw slower growth.

Solar has two basic parts: equipment for making crystaline cells and equipment for making amorphous, or thin-film, solar panels. The amorphous division is newer and looked promissing two years ago. The crystaline division is profitable and growing, but the thin-film division is in trouble. It is lumpier to begin with. It produced huge sheets of solar cells that are designed to be used by electical utility companies. The factories that make the thin films are capital intensive. One order for a plant was cancelled for lack of financing, while the owners of an existing plant went backrupt. As a result Applied took a $83 million inventory charge. Some investors are demanding that Applied kill this division. I think demand for low-cost solar power will ramp, and improvements in thin-film technology will make this a prized technology in a few years, unless the price of oil drops substantially. But only Applied management has the details available to it to make a good decision for stockholders. Of which I am one, by the way.

It is important to keep in mind that most of Applied's revenue and profits come from equipment for making semiconductor chips, and this segment looks to be in a strong growth cycle that should last through at least 2012. There is pent up demand. Many fabless companies like NVIDIA and Marvell are wishing more capacity were available. Demand is highly likely to ramp even more in calendar Q3 and Q4 this year. So AMAT is going to be making and shipping equipment as fast as they can until they catch up with the demand backlog.

Applied Materials has a lot of cash ($3.6 billion) a huge order backlog ($2.99 billion) and pays a dividend. While it is not without its risks, I consider it a safe, solid performer, but not a get-rich-quick stock. Right now, like many stocks, it is pretty obviously undervalued compared to investments like bonds and CDs. It closed Friday at $12.72 per share. Using Q2 GAAP earnings, that equates to a PE ratio of 15.9. Using non-GAAP EPS of $0.22, that makes the PE 14.5 per share. Which is to say earnings are around 6.7%, while dividends work out to 1.9% per year.

See also Applied Materials and its Fiscal Q2 2010 press release.

For my analyst conference summaries from earlier quarters, see Applied Materials analyst conference summaries.

Tuesday, May 11, 2010

Dendreon Provenge Approval After Math

I am, of course, happy that the FDA approved Provenge for the treatment of metastatic, castrate-resistent prostate cancer [See Dendreon Provenge approval Press release]. If Provenge extends some lives, or saves some lives, that is all to the good. Better, Dendreon now has a lot of money to pursue further immunotherapy research. We don't know if the human immune system can be precisely directed to destroy cancer cells, but it is certainly worth further study.

But what my readers want to know is, what is Dendreon stock worth now? If you bought it at $5 a share, should you hold it forever, or sell all or some of it if it goes over $57 again (as it did before the most recent Greece-inspired market meltdown)?

It all depends on your investment time frame and risk management style. No one really know how much profit, exactly, Provenge will generate over the years. No one knows how much money Dendreon will eventually sink into other immunotherapy candidates, or whether any of them will show results even as good as Provenge's. No one knows how successful the competition will be. Anyone can look at the facts and make estimates. Try it yourself.

I've met a number of investors that bought Dendreon for over $40 a share, basically because their brokers or financial advisors told them they should. They did fine. Certainly some people in this class booked a nice profit already, others became long term investors and fretted when the stock fell back down to $42.

I've sold some Dendreon stock, but then I bought the shares I sold in the $5 a share range, and I now have as much Dendreon as I am allowed under my portfolio rules. In ten years I may look back and wish I had sunk every penny I had in Dendreon; then again I may wish I had sold the lot at $55.

Look at a five-year chart of Dendreon prices and you'll see that at any time up until 2009, with the exception of a spike in the spring of 2007, you could have picked up Dendreon stock mostly in the range of abut $4 to $6 per share. If you think your stock broker, financial advisor, or analyst is smart for getting you into Dendreon in 2010, you might want to ask, why not back when?

The clinical data is not really any different, though there is more of it. Provenge is not a cure, on average it only extends the lives of patients a few months. But there is not much you can do for prostate cancer in the category Provenge was being tried on, and the results were statistically significant in the first Phase III trial. The FDA could have saved us all a lot of trouble by approving Provenge back then.

For over a year Dendreon's management had been saying the data is solid and the FDA had in effect agreed to approve the data if they couldn't poke a hole in it. Approval should not have been as large of a stock event as it was. You can argue it either way: approval was priced in, so the stock has gone too high now. Or approval was not priced in, so now the price is right, or close to right.

That is not the way to think about it. The past is past. Start with a basic analysis today. How many patients will get Provenge? That depends on how much capability there is to make Provenge, which is not really a drug, but a trick played with blood. Eventually capability can be built to meet demand. Likely there will be a lot of off-label use by doctors who don't think it is smart to wait until the prostate cancer has become metastatic or castrate-resistant. So pick a number, then multiply it by the price of therapy. Subtract cost of goods sold, then Dendreon's operating expenses, which have historically been gold-plated. That leaves your estimate of annual earnings. Pick a P/E multiplier you like and get your target stock price and market capitalization.

My advice is, sell if the stock price gets above 25% of your estimate. Buy more if it goes more than 25% below your estimate. Re-figure your estimate at least every quarter, and certainly every time you are considering buying or selling. If your broker or financial analyst are capable of that, get them to do it for you. Don't let them just rehash Wall Street analysis that is designed to churn stocks and generate commissions.

And if you make some money, and want to make more, look for other biotechnology companies still looking for their first FDA approvals. Be careful; always consider price.

You can also learn a lot from history. See my Dendreon page for what this situation looked like in the past, when every major Wall Street biotechnology analyst was saying Provenge would never get approved.

Dendreon has issued a lot of shares (diluting mine!) based on investor optimism about Provenge. In return they had about $528 million in cash at the end of Q1. For the latest financials, check out the Dendreon Q1 2010 press release.

William P. Meyers

Monday, May 10, 2010

TTM Technologies (TTMI) Sees PCB Demand

A sequential (and annual) revenue decrease at TTM Technologies (TTMI) for the first quarter of 2010 masks some very positive trends for the company. Despite the revenue decrease, profits were up. In addition TTM has combined with Meadville Holdings to create a formidable world-class PCB (printed circuit board) operation.

For detailed results and discussion from the May 6 conference, see my TTM Technologies Q1 2010 analyst conference summary.

The PCB industry in the U.S. has been contracting, so why should investors be there at all? The key here is that in many cases today's PCB is not your father's PCB. As the size of semiconductor chips has shrunk, PCB technology has changed. More interconnections between components need to be crammed into shrinking surface areas. This means high-end PCBs have multiple layers. The myriad tiny connections on a board must be rock-solid reliable or the finished product won't work. Holes must be drilled precisely by laser.

So PCB work that used to be done in the U.S. has gone in two directions. One direction is overseas, where volume work can be done more cheaply. Much of the work that remains in the U.S. involves high technology, which in turn requires capital investments that mom & pop PCB makers can't afford anymore. Most of the shakeout in 2008 and 2009 has been among the smaller players.

Even so, TTM management decided they needed to run a tighter operation. Between Q1 2009 and Q1 2010 revenues decreased 7%. But net income increased 221% (of course, the high percentage is partly a reflection of the minimal profits in Q1 2009). Even the $0.10 a share of GAAP EPS of Q1 2010 reflects the costs of closing plants in the U.S. Non-GAAP EPS was a healthier $0.19.

When TTM closed some plants, it tried to keep the profitable customers and drop the low-margin customers, with some evident success.

Demand is now expanding. The March book-to-bill ratio jumped to 1.12. So the plants that remain in operation in the U.S. should run closer to capacity, which means better profit margins ahead.

By revenue, the acquired Meadville is actually the larger company. Based in Hong Kong with plants in China, it has benefitted from the booming Chinese economy in 2009. But the important thing is how the two parts fit together.

U.S. companies, during the design stage, like to have their PCBs made near at hand, in the U.S. They like to have engineering support from PCB specialists. But if they are making a high volume product, in particular consumer product, they want to do their production for sale in a lower cost facility, typically in Asia. So a company might do its prototypes and low volume production (which happens with many defense and industrial products) with TTM, but then need to transition to an Asian supplier.

Now TTM can assist customers from start to finish. From the first prototype to the last board created for sale before a new model changeover, companies can work with the trusted team at TTM. According to management, most suitable customers are ready to make this transition. Of course the Asian plants should retain the customers they already have as well. TTM will also be able to bring high level engineering skills and production processes to the plants in China.

The transition will take some time, partly because it must wait for customers to bring in new designs, and partly because the Asian plants need more capacity. Plans are underway to fit more production machinery into the current plants, so we could see capacity begin to expand in Q3, and more fully in the beginning of 2011.

In addition to the usual risks, I would see the main risk for investors as the level of debt in the new TTM. Meadville brought debt with it. It was at a level that Meadville was paying down out of profits, so it should not be a problem to continue to pay down. However, if there were to be a second macroeconomic dip too soon, it is possible the debt could become a problem.

I am a long term investor in TTMI, so do further research before making your investment decision.

And keep diversified!

See also the TTM Technologies site

Sunday, May 9, 2010

Dot Hill Scrambles for Profits

Dot Hill (symbol: HILL) disappointed me with their Q1, 2010 results, but the analyst conference on May 6, 2010 reminded me that the data storage manufacturing company is about investing for future profits. So it still fits with my core strategy.

It was not that horrible of a quarter, it is just that, unlike my chip companies MCHP and AMD, revenues did not show a big sequential ramp. They were down 4% from Q4, which is still better than the usual seasonal downturn.

Revenues were $60.0 million, down 4% sequentially from $62.6, but up 11% from $53.9 million in Q1 2009.

GAAP net income was negative $6.4 million, a sequential drop from negative $5.0 million, and also worse than negative $3.3 million year-earlier. GAAP EPS was negative $0.12, down sequentially from negative $0.11, and down from negative $0.07 year-earlier.

The question investors, current and potential, have is: how is Dot Hill going to make a profit?

To understand how that might happen, you need to understand why HILL is not making a profit now. It makes data storage systems for businesses. These are typically standalone arrays of hard disks that attach to a network. This is a low margin business; it is fairly well-understood, there is plenty of competition, and it is hard to differentiate your products without raising your costs and cutting into your already slim margins. HILL acts as a supplier to OEMs, the main ones being HP and NetApp. It used to supply Sun, but even before Sun was absorbed by Oracle (the Blob of technology companies), Sun bought its own storage supply company and discontinued HILL.

If gross margins [revenues less the actual costs of making the goods] are low, a company can become profitable by keeping its operating (administrative and R&D) costs low while ramping up the volume of sales.

The other strategy is to increase gross margins by changing the nature of your product. Dot Hill management is determined to do both. Cost cutting is well-understood, so I will focus on how they plan to increase margins.

Data storage systems need to be managed, and while some management capabilities need to be built into the hardware, the management software can be sold separately. Software has much higher gross margins than hardware (but beware that software development costs go into the operating costs).

Since Dot Hill is already selling hardware, if it can get the end customers to buy its software packages as well, its hardware prices remain competitive, but it generates some high-margin revenues. In addition to its internal development efforts, HILL bought Cloverleaf Communications in January. The software is now for sale. It even works with non-Dot Hill products.

So when the report on the June quarter, the most important indicator will be attach rates. How much software revenue have they been able to attach to the hardware revenue? Of course it takes time to get this sort of program going, but management should be able to give an indicator of the trend for the June quarter.

Dot Hill is also introducing its 3000 series, which they say brings many features that in the past were only available on much more expensive storage systems. Customers have the choise of implementing the features or not; they pay to implement them. Hopefully the HP and NetApp salespeople will be pushing the customers to choose to pay to implement a full feature set.

HILL is working hard to be less dependent on HP and NetApp. By the end of Q1 they had doubled the number of small resellers they work with to 118. In Q4 the total HP + NetApp share of revenues was 84%, but in Q1 it declined to 80%. Because of the nature of the business, profit margins are better when HILL sells through smaller resellers. That is an encouraging trend.

Other major OEMs are negotiating with Dot Hill to become resellers of the 3000 system. This is a mixed blessing. It should be good in the long run if a third major OEM joins the team. But in the short run it means another ramp in R&D spending to ensure compatibility and the specific feature set the OEM will mandate. Which would mean more delays in getting to profitability.

Dot Hill is a risky stock because demand could soften, or OEMs could drop out or demand even lower margins. That would be ugly for a company that is already bleeding money.

On the other hand the up side potential is pretty good, and the stock is dirt cheap (it closed Friday at $1.38, giving it a market capitalization of $75 million). Dot Hill has a relatively clean balance sheet with about $50 million in cash on hand.

I own Dot Hill stock. For more detailed Q1 data see my Dot Hill Q1 2010 analyst conference summary.

See also Dot Hill

And Keep Diversified!

Friday, May 7, 2010

Hansen Medical Q1: Disaster or Opportunity?

On the surface of things, according to GAAP (generally accepted accounting principles), Hansen Medical (HNSN) had a disaster in Q1 2010. The maker of Sensi Robotic Catheter Systems recognized revenue on only one system in the quarter. GAAP revenues were $2.7 million, down 62% sequentially from $7.2 million, and down 64% from $7.5 million in the year-earlier quarter.
GAAP net income was negative $3.8 million, up sequentially from negative $11.7 million, and also up from $14.1 million year-earlier. GAAP EPS (earnings per share) were negative $0.10, up sequentially from negative $0.31 and up from negative $0.56 year-earlier.

On the other hand, Hansen shipped 7 systems in the quarter, towards the end of the quarter. The system they recognized revenue on had been shipped in the past. Last year they had to adjust their accounting and started recognizing revenue only when a system was fully installed in a hospital and doctors had completed their training on the systems. This is a new company, in terms of actually having FDA permission to sell. As of March 31, 2010, Hansen had shipped 88 systems, but only recognized revenue of 70 of them.

Another measure of how Sensei is being accepted by surgeons is sales of Artisan Control Catheters. Basically, this part of the system is disposable and costs around $1650. Revenue was recognized on 637 catheters, up sequentially from 539 in Q4 2009.

Investing in Hansen is risky; be careful of price points as this is still a money-losing startup company. On the positive side there are a lot of potential medical uses for Sensei systems, on the negative side each use seems to require some re-engineering of the system, and FDA approval, so a lot of money can be sunk into R&D or administration. Partnerships with Philips Healthcare and Siemens Healthcare should help within a couple of years, but until Hansen shows consistent profits the stock will remain vulnerable to sell-offs, and they may keep issuing more to get the cash needed for operations. In Q1 they sold 16.1 million shares for $29.8 million.

I own Hansen Medical stock, but consider it to be one of the riskiest stocks in my portfolio. That is the nature of biotechnology. It takes a lot of R&D and then customer development to get a new technology rolling. On the other hand, as more uses for the Sensei system come online (like vascular surgery), it is possible to see a day when every hospital has one or more Senseis. In that case the company will be a major player and make a lot of investors rich.

For a more detailed report, see my Hansen Medical Analyst Conference Summary, Q1 2010.

And of course check out the Hensen Medical site.

And keep diversified!

Thursday, May 6, 2010

SGI Treads Out Losses, Readies Altix UV

SGI (Silicon Graphics International) is the result of the combination of the old Silicon Graphics with Rackable. Neither company was known for its profitability, so one has to wonder about the management culture of the new company.

For the quarter ending March 26, 2010 SGI reported GAAP revenues of $107.8 million, up 15% sequentially from $94.1 million and up 143% from $44.4 million in the year-earlier quarter. GAAP net income was negative $20.2 million, improved sequentially from negative $23.0 million but worse than the $13.4 million loss year-earlier. EPS (earnings per share) was negative $0.67, improved sequentially from negative $0.77, but worse than year-earlier negative $0.45.

Much of both the revenue and loss increases from year earlier came simply from combining the two companies.

SGI, like many technology companies, now reports non-GAAP revenues that are different from its GAAP revenues. We are used to non-GAAP profits, but why revenues? GAAP now requires that when a package sold includes hardware, software, and support, that some of the revenue needs to be deferred until the software and support are used.

So SGI's non-GAAP numbers largely reflect just reporting the way people expect from past experience. Non-GAAP revenues were $128.9 million, net income negative $10.8 million, EPS negative $0.46.

Losing another $11 million in the quarter does not exactly endear SGI to investors at a time when many electronic technology companies have emerged from the recession and are rapidly ramping profits.

SGI's strategy has involved spending a lot of money updating its outdated computer systems. While it sells a variety of products, it is placing a lot of hope in the Altix UV. This is a supercomputer that scales from single-scientist size up to being the fastest in the world.

The supercomputer market is a specialty market where SGI competes with Cray, IBM, Dell, and a host of other companies. No matter how good Altix UV is, the big question is how well SGI's sales force will execute, and what is the profit margin. For some companies supercomputers are more about bragging rights than profits. SGI can't afford to be that way. They say they have pre-sold a number of Altix UVs. That is good, but what I want to see as an investor is gross profit margins good enough to also cover SGI's operating costs.

With Rackable's leftover cash of $154 million still available at end-of-quarter, today's SGI market capitalization, $250 million, could make it a tech bargain. But only if SGI's management finds a profitable model.

For more details see my SGI fiscal Q3 2010 analyst conference summary.

I am a long-term holder of SGI stock, from investing in Rackable. It has been one of my worst performing stocks. Fortunately I followed that sage advice:

Keep diversified!

See also:

Wednesday, May 5, 2010

Celgene Advances on Revlimid, Vidaza Sales

Celgene's Q1 2010 was one to celebrate, with revenue of $791.3 million, up 4% sequentially from $761.0 million, and up 37% from $576.2 million in the year-earlier quarter. Net income was $234.4 million, down 11% sequentially from $254.2 million, but up 44% from $162.9 million. EPS (earnings per share) were $0.50, down 7% sequentially from $0.54, but up 43% from $0.35 year-earlier.

Results were better than expected, so guidance for the full year 2010 was increased to revenues of $3.3 to $3.4 billion with non-GAAP EPS between $2.60 and $2.65.

Revlimid revenues were $530 million, up 46% from year-earlier. The drug is well accepted as a multiple myeloma therapy. As patients live longer as a result of therapy, duration of therapy is increasing.

Vidaza, which is a newer drug, is still ramping its international sales. At $120 million in revenue, sales were up 60% from year-earlier. A fly in the ointment is the British public health system's contention that Vidaza's price is too high. Probably either the decision will be reversed, or Celgene will lower the price, and British patients can get the same care that is available in the U.S and most of Europe.

The Celgene research and development effort is a rather substantial, with enough drug candidates in the pipeline to assure revenue growth for years to come. With so many therapies in trials, there are bound to be some winners and some losers.

For a more detailed report, see my Celgene Q1 2010 analyst conference summary.

I own some Celgene stock. On the whole Celgene looks undervalued to me, especially for long-term investors. Celgene is subject to the usual risks from competition, failed drug trials, and unforseen adverse reactions.

So keep diversified!

Monday, May 3, 2010

Akamai Q1 Upside Surprise

Akamai (AKAM) had a kickass first quarter of 2010. Q1 is usually a down quarter for the Internet delivery acceleration company because there is a fall off advertising. Making sure that ads get delivered efficiently along with the other content of web pages is a major task for Akamai. Also many sell-side (brokerage house) analysts did not like Akamai's lowering of its prices to attract more volume in 2009.

But revenue was $240.0 million in Q1, up 1% sequentially from $238.3 million, and up 14% from $210.4 million in Q1 of 2009. Net income was $40.9 million, up 2% sequentially from $40.1 million, and up 10% from $37.1 million year-earlier. GAAP EPS (earnings per share) were $0.22, up 5% sequentially from $0.21, and up 10% from $0.20 year-earlier.

In other words, by helping its customers with lower prices, Akamai helped itself.

Although I like GAAP numbers because they are usually conservative, in Akamai's case the cash position is better than normal compared to GAAP. Cash from operations was $87.8 million, compared to net income of $40.9 million. Of course AKAM continues to invest heavily in iteslf: capital expenses in the quarter were $35.1. My guess is this is very well-deployed capital. Most of it pays for servers that are expanding Akamai's global reach. 78% of revenues are still from the U.S.

In its startup period Akamia lost money, accumulating NOLs (net offsetting losses). It has been using the NOLs these last few years to lower its tax rate. The NOLs run out this year, so its cash tax rate will go up. I'd rather make profits and pay taxes than accumulate losses.

There are a lot of companies trying to compete with Akamai, so it does not constitute a risk-free investment. So far, however, no company has come close to being able to match Akamai at Internet content delivery. While I would not describe Akamai's current stock price as cheap, it is likely to seem so later as Internet video delivery picks up steam, to Akamai's benefit.

See also my Akamai Q1 2010 analyst conference summary for April 28, 2010.

I have been a long-term Akamai investor since January 2008. My own business includes technology consulting and buy-side analysis.

See also
Akamai at Wikipedia
NASDAQ Akamai summary page