Friday, February 24, 2012

Hansen Medical Q4 up on Vascular Surgery Robot Introduction

Hansen Medical Inc. (HNSN) manufactures catheter based medical robots. It is effectively still a startup company, since it typically loses money each quarter. For several years it has marketed its Sensei robot for electrophysiology procedures, which measures electrical activity inside the heart. Meanwhile it has developed its robotic catheter technology for use in vascular (blood vessel) surgery. Last year its Magellan vascular robotic catheter system was approved in Europe. The company hopes it will be approved in the U.S.A. by the FDA some time in the second quarter.

Financial results for Q4 2011 were much better than expected. Six robotic systems were shipped, while revenues were recognized for eight systems. Revenue recognition lags sales due to accounting rules. Of the six systems shipped, four were the Sensei electrophysiology systems and two were the new Magellan systems. One of the vascular robot systems was sold in the U.S., so technically it is a research system rather than a commercial medical system.

Compare that to Q3, when only 2 systems shipped, which is more typical of shipments these last couple of years. There is typically some positive Q4 seasonality since the systems are capital intensive and dependent on hospital budget issues.

Despite the improvement profitability is probably not going to be a 2012 phenomena. With revenue of $6.2 million in the quarter Hansen showed a net loss of negative $9 million.

If and when the FDA approves Magellan for commercial use we are likely to see a good, but slow, ramp of system sales. In Europe Hansen is working closely with surgeons at St. Mary's Hospital in London to get data on surgical procedures and to train more surgeons. Discussions are underway with hospitals both in Europe and the United States to buy and install the robots. Willingness to move to robotic surgery is high given the success of Intuitive Surgical (ISRG) systems. Because Hansen Medical robots are catheter based they target a different set of procedures than the Intuitive systems.

So revenues are likely to be lumpy in 2012, but accelerating in the second half of the year.

One sad note at the February 22nd analyst call concerned the Lynx ablation catheter, which allows for treatment of some heart conditions using the Sensei robot. While procedures are being done in Europe, Hansen has de-prioritized getting FDA approval for the device in the U.S.A. Hansen had a cash balance of $52 million at the end of Q4 and is prioritizing cash use for ramping the Magellan system in Europe and getting commercial approval in the U.S. Given the time and cost requirements for FDA approval, Lynx will have to wait.

Hansen Medical is not a stock for conservative investors. It has astonishing potential, long term, but it is also a long way from financing itself through profits. It should only be bought by investors who know how to manage risk.

Disclaimer: I am long HNSN. I will not trade in the stock for 1 week following this post. I have no position in ISRG and no plans to take any.

Keep diversified!

See also:

Q4 2011 Hansen Medical Analyst Call Summary

Saturday, February 18, 2012

Applied Materials Q1 Boosted by Mobile Demand

Applied Materials (AMAT), the semiconductor capital equipment maker, reported better than expected revenue and earnings Thursday for its first quarter fiscal 2012 ending January 30, 2012. Although the stock traded up after-hours on Thursday, by the end of day Friday it closed at $12.99, down $0.22 or 1.7% from the Thursday close.

Last quarter Applied management stated they believed they were past the bottom of the order cycle, but that revenues were not likely to start increasing until the second half of 2012. The lag is because semiconductor equipment is not made until after it is ordered, and customers sometimes place orders well in advance of their required delivery times.

Prior guidance was that Q1 revenue would be down 5% to 15% sequentially. Q1 Revenue were $2.19 billion, up 0.5% sequentially from $2.18 billion. Despite that revenue was down 18.5% from $2.69 billion in the year-earlier quarter.

The difference between guidance and results was mostly because a couple of large foundries (plants where semiconductor chips are manufactured) placed unexpected orders and took delivery faster than expected on Q4 orders. Most of this unexpected bonus was to fabricate mobile application processors, which are the hearts of tablet computers and smartphones. These processors are becoming more complicated, often adding computer cores as well as peripheral functions. This means die sizes become larger, so more dies must be processed, and more equipment lines installed. The number of units of smartphones and tablets sold globally is also expanding rapidly.

Two other Applied Materials segments, display technology and solar, did poorly as expected and are not believed likely to recover much in 2012.

Which brings us back to the question of where we are in the cycle. To some extent that depends on the global economy. It is also sector-specific, as capacity utilization and end demand growth differ for sectors like RAM, Flash memory, application-specific chips and display technology. Growth comes in two forms: more equipment to pump out more units, and new equipment for chips that work with smaller transistors.

In addition to continued strong demand for mobile-specific devices, PC demand is expected to rebound in 2012 as the hard-drive shortage bottleneck disappears. In addition, Windows 8 could be a driver if it releases as expected this Fall.

While we are probably now past the bottom of the order cycle for semiconductor production equipment, the exact nature and extent of the ramp remains to be seen. Guidance for Q2 is for revenues to be up sequentially between 5% and 15%. We are far enough into Q2, and enough shipments were ordered back in Q1 or even Q4, that investors can probably count on that.

Since (at Friday's closing price) Applied pays a dividend of 2.42% ($0.08 per quarter), I see Applied Materials as one of the safest technology stocks to invest in. Earnings in Q1 were $0.09 GAAP, $0.19 non-GAAP, so even in a slow quarter there was plenty of cash generated to cover the dividend. Despite using $4.2 billion to acquire Varian in the quarter, Applied's cash balance ended near $3 billion.

Despite unevenness, we are still in a global economic ramp with billions of consumers set to acquire smartphones in the next 3 years (600 million in China alone). Everyone wants devices that do more with less power, and the only way to get that is with new semiconductor manufacturing capabilities. It does not matter who wins the smartphone race; everyone needs the kind of semiconductor manufacturing solutions Applied Materials (and its competitors) provide.

I am also excited about Applied's acquisition of Varian, but I'll save that for a different article.

For more details about Q1 results, including questions by analysts, see my Applied Materials Q1 2012 Analyst Call summary.

Disclaimer: I have a long position in Applied Materials (AMAT), with a long term view. I will not trade in AMAT for at least 7 days after this article is published.

And keep diversified!

Wednesday, February 8, 2012

SGI Challenged by Analysts

Today Silicon Graphics International (SGI) stock plunged over 20% following yesterday's release of December 2011 (fiscal Q2 2012) numbers. A group of analysts on the investor conference call challenged statements by SGI management and tried to pin down details on why profits were lower on higher revenues.

SGI manufactures what are still sometimes called supercomputers: high capability computer systems for datacenters, scientific research, and high performance business uses. is the largest single client by revenue. The U.S. government, in aggregate, is an over 10% customer.

Revenues for fiscal Q2 were $195.2 million, up 9% sequentially from $178.9 million and up 10% from $177.5 million in the year-earlier quarter. Bookings were even stronger in the quarter, partly due to the newest marvel, the ICE X HPC platform, which booked $90 million.

Costs, however, were up enough to reduce GAAP EPS to negative $0.07 per share. Non-GAAP EPS was positive $0.04, but that represents non-GAAP net income of just $2.3 million on $195 million of revenue, or about 1%.

What analysts wanted to understand was exactly why SGI has gone back to the old SGI way of making great products and generating revenues while losing investors' money. Also, if it can be fixed, exactly how that fix would take place. If you have followed SGI you know the current version was created when Rackable bought the old, bankrupt SGI. Rackable itself had been consistently losing money, but had a lot of cash and bought SGI for essentially nothing.

Even before the analyst question segment began the new temporary CEO, Ron Verdoorn, gave a number of reasons for the earnings shortfall. The three main ones were fixed costs in Europe that are too high, forex exchange rates issues, and the transition to new product lines. Success in selling the rackable line of server systems, which have lower margins than other lines, also led to lower overall margins.

The Europe problem would appear to be fixable by either cutting costs in Europe or selling more product while keeping costs level. SGI has lost money in Europe for over 2 years, hoping the sell more option would work out. Now restructuring is planned, but as usual that will create short term costs before generating long term savings.

I was surprised that management did not try to divert analysts in another direction. Research and development expense was up almost $3 million from the December quarter of 2010. I consider that a form of reinvestment. If ICE X alone generated $90 million in orders, that would certainly rationalize the $5 million increase in sales and marketing expense.

An even bigger bite out of revenue came from cost of revenue, which would be cost of goods sold for the hardware, but includes cost of providing services, too. That was up almost $18 million from the year-earlier quarter. Maybe SGI is pricing its products and services too low, but there could be a time lag effect as new systems are developed, manufactured, and sold before revenue is recognized.

Inventories were listed as worth $117.6 million, which is an astonishing increase of $36.6 million from $81.0 million year-earlier. I doubt those inventories consist of unsold or unsellable supercomputers. They should represent orders in hand and a reasonable estimate of pipeline demand.

If that is true, maybe management's statement that things will look a lot better in the second half of calendar 2012 is believable. Of course such estimates always assume no Japanese earthquakes, Thai floods, or Euro collapse issues, which were bad assumptions in 2011. Despite all of the problems of 2011, SGI made a big impression on the computer world with its new products, generating record revenue.

Analysts are right to challenge management's statements and assumptions. Most investors would like to see a lot more of that on investor conference calls. It is tough on management, but I feel I knew a lot more about SGI's real situation by the time the call was over.

I remain optimistic about SGI, but consider it one of my risky investments, with a limited place in my portfolio until it can demonstrate consistent higher profit margins.

Disclaimer: I am long SGI. I will not initiate any changes in my position for the next 2 weeks.

Keep diversified!