Dissecting the Bull

AMD Looks to Trinity for Growth in 2012

2012-01-25T18:38:00.000-08:00

AMD reported a mix of signals from its fourth quarter 2011 at its analyst call yesterday.

AMD makes CPUs and graphics chips, including combined chips called APUs, for PCs, servers, and notebook computers. AMD has long struggled to make a profit in the shadow of its main competitor, Intel, which typically shows earnings that are more that AMD's revenues. For instance for Q4, AMD had $1.7 billion in revenues, while Intel had $13.9 billion in revenues of and $3.4 billion in non-GAAP net income.

Typically AMD has been the more innovative company, for instance introducing 32/64 bit chips, on-chip memory controllers, and on-chip graphics. In every case, however, Intel has used its cash to catch up with R&D, and then for marketing AMD back down to size. In Q4 Intel spent $2.3 billion on R&D, more than AMD received in total revenue.

So is AMD hopeless? Judging from the stock price, and its frequent quarters devoid of earnings the past few years, that is the easy bet. On a non-GAAP basis, excluding mainly a charge for a non-cash write down on AMD's investment in GlobalFoundries and a restructuring charge, AMD reported Q4 net income of $138 million or $0.19 per share. Whether that supports a stock price ending today at $6.73 per share depends on how you see the future.

According to some pundits, this was the year AMD was supposed to be wiped out. Clearly that worst-case scenario is wrong so far. The wipe out was supposed to come largely from a decline of PCs and x86-based chips in favor or smartphones and ARM-processors, combined with the usual pressures from Intel and graphics chip rival NVIDIA. Then there were the Thailand floods, which created a hard disk drive shortage which was supposed to kill what little demand there would be for PCs from old-fashioned worker bees who need something bigger (and faster, and with more storage) than an iPad to actually get work done.

There were some glitches, but on the whole AMD's Fusion strategy, putting a CPU and a high-end graphics processor on the same chip, worked out fairly well this year. AMD is now fabless, and fab partners were not able to produce good yields of the new chips (which cuts into margins) or even sufficient chips to meet demand.

The best news from yesterday's analyst call was that in Q1 the normal seasonal drop-off of demand combined with improved yields put in place in Q4 means AMD will have no supply constraints in the quarter. They should be able to meet demand for Fusion chips for the first time since the chips were introduced.

The new server chips, the 6200 Opteron series, are also selling well, but AMD was reduced to a tiny fraction of the market before the new product introduction. Intel is introducing new server chips in 2012, so it will be interesting to see how end markets respond.

The main opportunity for growth in 2012 with be Trinity chips, the newest design in AMD's Fusion series. Both the CPU component and the graphics component will be upgraded from current A-series chips, while power requirements will be reduced.

According to AMD, its OEM partners really like Trinity, which is already sampling. Trinity can power thin and light notebook designs, Windows 8 tablets, mainstream notebooks and PCs.

Most consumers may not recognize how much better AMD graphics are than Intel graphics, but OEMs have realized that Intel CPUs require expensive add-in graphic cards (from AMD or NVIDIA) to bring them up to snuff, while also increasing power draw. For very high end graphics, for games and for design work or intense computation, graphics cards are still required regardless of CPU. Intel has been working hard to make their graphics competitive, and could conceivably catch up by 2013. At the high end Intel CPUs are considerably faster than AMD CPUs, but they also cost a lot more.

I like to keep diversified and would recommend against anyone taking an outsized position in AMD at this point. Trinity may appeal to OEMs, but the real question is will it appeal to consumers (including business consumers), especially in China and India. If it does, there is still the margin question. AMD margins have historically been lower than Intel's and NVIDIA's, largely because AMD has been forced to compete on price even when its products have been technically superior to its competitors'.

If AMD can differentiate itself from Intel and get a good price point for Trinity chips, then it can make a profit and live to fight the next round. An entire year of strong positive cash flow would make AMD into a different sort of competitor. Intel would still be king, but AMD would have the money to work with and the scale to make it a real competitor rather than a second source.

Disclaimer: I am long AMD. I have no plans to sell my shares until I see how Trinity works out later in 2012. I won't trade AMD for at least a week after this article is published.

See also my AMD Q4 2011 analyst call summary;

http://www.amd.com/

Marvell Technology Group Hones Edge

2012-01-18T16:25:00.000-08:00

Marvell Technology Group (MRVL) was started by a young man, Sehat Sutardja, with a belief that he could make a better chip for controlling disk drives. 16 years later, Marvell dominates the market for hard disk drive controller chips, but now receives about half of its revenue from other market segments.

At the CES this year Marvell showed off some products that again put Marvell on the bleeding edge. I'll come back to those after providing some background for those of you not so familiar with the Marvell story.

For investors the last few year with Marvell have been tough. The stock pays no dividend. After splitting in 2004 and again in 2006, the stock price entered 2007 at well over $20 per share. At the 2008 bottom it hit a low around $4.48. Today it ended sharply up at $15.12 and representing a market capitalization of $8.8 billion.

These stock price gyrations exaggerated Marvell's changes in revenues and net income. Total 2006 (fiscal 2007) revenue was $2.24 billion, with slightly negative net income. Revenues for 2010 (fiscal year 2011, ending January 29) were up to $3.6 billion, with net income hitting $904 million. This fiscal year 2012 revenues are trending towards $3.45 billion, but with just $690 million net income.

A series of problems and even a catastrophe hid Marvell's growing profit potential in 2011. Aside from general global economic turmoil, one major problem was RIM's failure to recapture lost market share with its newer Blackberry smartphone models. This may or may not be temporary. Marvell makes the processors for some Blackberry models. Marvell did not get a slot in the new RIM PlayBook tablet, which sold poorly. It appears that the failures are largely RIM's, and often software related. The Marvell processors, when used, seem to work well.

The catastrophe was flooding in Thailand, which knocked HDD (hard disk drive) factories out of commission, and so the revenue for HDD controller chips will be low for the current quarter. Factories should be mostly back online by February 1 when Marvell's new fiscal year begins.

Meanwhile the main good news has been the rapid ramping of sales of Marvell-processor based smartphones in China. Marvell's chips not only include the processor, but most of the functions needed to run a smartphone (graphics, cellular modem, wi-fi, bluetooth). Thus while brand-happy Chinese are dying (almost literally) to get iPhones, the middle-class masses are buying Android based smartphones that run on a new high-speed, invented-in-China protocol, TD. The ramp in revenue from this in calendar 2012 will be substantial, and the baseline should be noted in the Q4 report due in early March.

Which brings us back to CES (and leaves out Marvell's leading enterprise-grade Wi-Fi and wired internet switch chips). I can only hit highlights, so many products were introduced.

Foremost, Google chose Marvell's ARMADA 1500 HD Media System-on-Chip (SoC) for the next generation of Google TV. While there is no guarantee that Google TV will become a mass market product, it does much to validate the hundreds of millions of dollars Marvell has invested in research and development for ARMADA and related technologies. ARMADA is ARM-based and contains many of the same technologies used with smartphones and tablets. Google has worked closely with NVIDIA, Qualcomm and other ARM-based chip designers; this is a clear sign Marvell is also in the inner circle. The ARMADA chip series has been adopted by OEMs for a wide range of consumer and business appliance applications. See also ARMADA and PXA application processors.

Plug computers are a Marvell invention: inexpensive, small but powerful computers that plug directly into electric sockets and can act as local servers. SMILE plugs are designed to connect a classroom of up to 60 students and complement the One Laptop per Child program and Marvell ARMADA based low cost, low power tablet computers. This is mainly for developing nations, but given funding shortages should be considered by U.S. schools as well.

In storage, much has been said about replacing hard drives with SSDs, and PCs with Flash-based tablets. Change has come slowly. Marvell already leads in SSD controller chips. Now it introduced a chip that attached through PCIe, an existing, faster port than the standard SATA disk port. Everyone agrees this will be popular. Alternately another chip allows for an SSD and hard drive to function together better to lower response times while keeping bulk storage costs low.

Consumer home connectivity and automation were addressed by several products. New models of Avastar wireless chips make it easier for all sorts of devices to connect, including Internet phones and video surveillance. Lighting with LEDs was specifically addressed with new, automation-ready chips. The Smart Energy Platform, a combination of a wireless microcontroller and management software, is aimed at lowering price points for energy-conscious appliances in the home.

Except for Google, OEMs will make their own announcements as branded products become available this year.

I will wait on management's Q4 fiscal 2012 in early March before trying to estimate directionality for the new year. Technology is rapidly evolving. More individual devices mean more information needs to be stored in the cloud, requiring in turn more HDD storage and connectivity. All these trends favor Marvell, but competitors will be gunning for the same revenue and profits.

What do I think would most enhance shareholder value? A dividend. As of last quarter Marvell had 2.4 billion in cash, no debt, and cash flow of $262 million. Marvell has used its cash mainly for stock buy backs, and is likely to continue to do so.

Disclaimer: I am long Marvell. I seldom trade the stock and won't for a week after this article is published.

Keep diversified!

2012 U.S. Economic Outlook

2011-12-31T10:56:00.000-08:00

Of course a wise person will hedge his or her bets ...

In 2011 the U.S. economy took everything that nature and venal politicians could throw at it and still managed to grow overall. It could have been a banner year, but the tsunami in Japan, the politics of Washington, high oil prices due to Libya, the Euro crisis, and finally flooding in Thailand all took a toll.

I think the most likely scenario for the U.S. economy in 2012 is moderately strong growth. I don't think turmoil in Europe will hurt the profits of very many American companies; the worst effects will come from converting the Euro to dollars for multinationals, if they have substantial European sales and the dollar continues to strengthen. Keep in mind that the alarmist view of Europe may not pan out, in which case a rising Euro could have the opposite effect.

2011 was also the year in which almost every professional economist in the U.S. predicted a new recession, which did not happen, despite the best efforts of Congress. Where do they find these guys?

In fact, I would hazard that strong U.S. economic growth is now more likely than another recession, in 2012. Demand is out there: consumer demand for autos and housing, which are big economic drivers, is strong. Credit is a constraining factor, but there is still plenty of stimulus from the Fed and the deficit.

We are clearly in the virtuous cycle where demand leads to more employment and profits, which in turn creates more demand. It might even give bankers and other major capitalists enough confidence to invest in expansion. I'm not advocating going back to bubble days, but there is as much danger in being too cautious as there is in pretending there is no such thing as a risky investment or loan.

That should mean the stock market is heading up, but stocks are bought by by individuals, one decision at a time. Companies with the best track records for generating profits are already attracting investors. It is hard to find an overvalued stock today, although I could name a few. Undervalued stocks are plentiful, just pick a flavor, do thorough research, and avoid the wooden nickels.

Will the bond market fall? It should, but it won't as long as enough people are willing to accept almost no returns on their capital, as long as the capital is preserved and reasonably liquid. Once the bond market starts falling, if the economy is getting strong, watch out. Get out quick, while the getting is still good.

The gold bubble seems to have popped. I never liked gold as an asset (See The Gold Bubble [November 18, 2009]), but enough fools bidding on a Beanie Baby can make it seem valuable, until the auction fever dies. Gold has no intrinsic value. It just sits there, useless. Its price depends on the whims of jewelry consumers and irrational investors.

It would be helpful if the price of petroleum came down, but oil prices are geopolitical, for the most part set where the dictator of Saudi Arabia wants them set.

Inflation is dead in the U.S. for the moment, but high prices for agricultural commodities are giving some state economies a good boost. Wages will remain dead in the water until more unemployed workers are soaked up, so I don't intend to worry about inflation until 2013.

The main fly in the ointment is potential political suicide. Most investors know that the national deficit needs to be brought under control. The best way to do that is to freeze or even reduce federal expenditures, then allow for economic growth to increase tax revenues to the point the budget is balanced, and then start reducing the deficit. Counter-cyclical federal budgets were a major key to U.S. economic success ever since the Great Depression. Deficit spending during booms is as stupid as cutbacks during recessions. In no case does a train wreck in Washington help the situation.

Investors and the nation (and its government) need a long term outlook. It will take years to get to a balanced budget, and perhaps decades to significantly reduce the national debt. That takes planning and discipline. The Communist Party of China could accomplish that. Could we do it? Sure, we could. Will we? Only if long term, public-spirited investors insist on it.

Here's an outside opinion: the U.S. could become the driver of the global economy again in 2012, for the first time since 2006. We are still a big, rich, creative, and occasionally hard-working nation. Our natural direction is up.

Cantel Medical Record Quarter

2011-12-12T14:21:00.000-08:00

Cantel Medical (CMN) had a record fiscal Q1 2012 ending October 31, 2011, driven by organic growth and acquisitions.

Cantel Medical has been a good stock to hold so far in 2011, closing today at $26.91, up 18% from $22.81 a year ago, with a 52 week high of $28.50 and a 52 week low of $19.02. Not a bad showing in this tough market.

Cantel Medical is a smallish company (market capitalization today ended at $483 million) specializing in infection control through sterilization and disposables. Infection control is more cost effective than treatment for infection, which has become a much larger problem because of the evolution of multiple-antibiotic resistant bacteria.

Cantel is not a well-known name, even in hospitals, partly because it operates through named divisions. Minntech makes and markets endoscope and dialysis equipment sterilizers. Crosstex is the disposables business, working mostly in the dental market, but also moving into the general medical market. It makes face masks, sterilization patches, and other single-use items. Mar Cor makes machines to purify water, often for specialized medical needs. A smaller division is Saf-T-Pak, which produces specialty packaging for transporting specimens, and related materials.

For the latest fiscal quarter, Q1, Cantel reported revenue at $93.3 million, up 8% sequentially from $86.0 million, and up 29% from $72.0 million in the year-earlier quarter. GAAP net income was $6.2 million, up 32% sequentially from $4.7 million, and up 24% from $5.0 million year-earlier. GAAP EPS was $0.35, up 30% sequentially from $0.27 and up 21% from $0.29 year-earlier.

The latest acquisition was of Byrne Medical, announced August 2, 2011. Byrne manufactures products that act as replacements in gastrointestinal endoscopy procedures, eliminating the need for sterilization before reuse. The price of $100 million for a company with trailing annual revenues of $38.6 million seemed high on a revenue basis, but trailing annual pre-tax profits were $8.6 million. Cantel expects to increase gross margins in the business, which had a historical growth rate of over 20%. Byrne Medical had a 30% y/y increase in sales to $11.5 million in Q1 and is already accretive to earnings and cash flow.

Cantel has been fueling its growth with acquisitions. As a result, it ended the quarter with $116.5 million in debt, as against a cash balance of $19.6 million. If you, like me, have been burned occasionally by the poor acquisition strategies of other companies, you might not take this as a recommendation. However, for the few years I have followed Cantel they have done very well with acquisitions. They don't pay too much and sometimes acquire a division of a company they want, rather than the whole company. Then they cross-sell the new products with their established sales force. They have made it work well so far.

Meanwhile, the water purification business also keeps growing. The disposables business should ramp up when (or if) the unemployment rate tweaks down. People have been avoiding doctor and dental visits for economic reasons. When they have the dough to head back in for a checkup, the run rate will pick up again, meaning more use of infection prevention disposables.

So, in summary, the overall anti-infection story is a good one. Cantel is a pure infection play, and it has top-notch management. Should you be cautious because the stock is up 18% y/y? My guess is that the stock is currently priced about right for the short term, although the stock could make another run for its 52 week highs, if the overall market firms up. The trailing P/E ratio at the end of today was 22 (per NASDAQ), which is reasonable for a company with a strong track record of growth. In the longer run I expect continuing profit growth will compell a higher stock price. Cantel Medical should be attractive to long-term investors looking for diversification in the healthcare space.

As a kicker, the dividend was recently raised to $0.14 per year, paid semi-annually.

For more details on quarter results, see my Cantel Medical Q4 fiscal 2011 analyst call summary.

Disclosure: I am long Cantel and will not change my position in the next 2 weeks.

Keep Diversified!

Applied Materials See Cycle Bottom

2011-12-09T11:03:00.000-08:00

Applied Materials (AMAT), the semiconductor capital equipment maker, had a very difficult fourth quarter of fiscal 2011 ending October 30th. The stock is trading trading today around $11.20 per share, less than 8 times earnings and not that much above its 52 week low of $9.70 touched on October 4.

Yet revenue for the fiscal year set a record. Applied Materials and other semiconductor equipment makers tend to be very cyclical because demand for new equipment is only strong when semiconductor end use is ramping. It looked like calendar 2011 would continue to be part of a strong up cycle that started in 2010, but global economic turmoil and weak consumer electronics end demand has made chip makers and the foundries that serve fabless chip makers reluctant to increase capacity.

Sales continue because even during slow periods there are advantages to moving to new process technologies that put more transistors on any given area of chip surface. Applied Materials also derives considerable revenue from related services. Its services division contributed $629 million in revenue in the quarter.

Total Q4 revenue was $2.18 billion, down 22% sequentially from $2.79 billion and down 25% from $2.89 billion in the year-earlier quarter. GAAP net income was $456 million, down 4% sequentially from $476 million and down 3% from $468 million year-earlier. GAP EPS (earnings per share) were $0.34, down 6% sequentially from $0.36 and down 3% from $0.35 year-earlier.

Non-GAAP net income was $271 million, down sequentially from $467 million and also down from $476 million year-earlier. EPS $0.21. The vastly lower non-GAAP than GAAP earnings were mostly due to a $203 adjustment to the prior-year's income tax filings.

Despite the poor quarter, cash flow from operations was near $700, or about $425 million excluding the income tax refund. Cash and equivalents were over $7 billion.

The stock pays a dividend of $8 per quarter per share. Management reiterated that they are committed to increasing the dividend, but stock buy backs are the preferred method of returning profits to shareholders. The acquisition of Varian Semiconductor will put a temporary crimp in cash, but is a good long-term move.

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.

Applied Materials management has had decades of experience with these cycles. They expect the first half of their fiscal year 2012 to be difficult. In particular Q1 fiscal 2012 (ending January 30th) guidance was for revenues down sequentially another 5% to 15%. However, they believe they are already past the bottom of the order cycle. Because we are talking about capital equipment, when the order cycle starts trending upward it can be six months before actual revenues start trending back up.

Flash and mobile processor capacity utilization are already high, so any further increase in demand should generate equipment orders. However, RAM capacity is plentiful, so we probably won't see a big uptick in revenues until demand catches up to capacity in that segment, probably later in 2012.

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 provides.

For more details about Q4 results, including questions by analysts, see my Applied Materials Q4 2011 Analyst Call summary.

Disclaimer: I have a long position in Applied Materials (AMAT), with a long term view. I have no plans to change my position anytime soon.

See also: www.appliedmaterials.com

And keep diversified!

NVIDIA Takes Up ARMs

2011-12-05T19:38:00.000-08:00

Back in February I warned that "at $25.48 [per share], you might want to consider that it could take NVIDIA [NVDA] a couple of years of outstanding growth to justify this price."

Maybe it is just the stock market and macroeconomic turmoil, but NVDA closed today at $15.48.
What I think about the pricing of a stock is only loosely linked to what I think of a company. As to engineering and execution, I have long believed NVIDIA is one of the best technology companies in the world. As the long-term leader in computer graphics chips (GPUs), however, it is now at a crossroads where the old rules no longer seem to apply. It is a time of both tremendous opportunity and tremendous danger, which makes predicting future profit streams mainly guesswork.

NVIDIA reported fiscal Q3 results and held its analyst conference call on November 10, 2011. Note the quarter ended October 30, so its not a calendar quarter and chips going into consumer products for the holidays pretty much had to be out the door by the end of the quarter. Q4, ending January 30th, is historically a slower quarter for NVIDIA. Note also that rivals AMD and Intel had quarters ending September 30.

Revenues were $1.07 billion, up 5% sequentially from $1.02 billion and up 26% from $840 million in the year-earlier quarter. Net income was $178.3 million, up 18% sequentially from $151.6 million and up 110% from $84.9 million year-earlier. EPS (earnings per share) were $0.29, up 16% sequentially from $0.25 and up 93% from $0.15 year-earlier.

That is pretty strong growth over the past year. However, from a licensing deal and litigation settlement with Intel, NVIDIA got roughly $60 million in royalties it did not get a year earlier (the royalties run about another 5 years). That had some impact on revenue and a huge impact on net income and EPS. It is real money, but it did not come from chips sales.

At this point NVIDIA has two games going. One is in its classic discrete GPU chips, which are now also used as math and application acceleration co-processors. Its only real rival in that market is AMD.

The other is combining its graphics engine with ARM chip designs for mobile devices. That results in a chip called Tegra. The first version was interesting but did not generate much revenue. Tegra II sold a lot better, and has powered a number of smartphones and tablets. Tegra III, or Kal-El, became available in the quarter, so a few devices are available now and it will be widely available in 2012. NVIDIA management did not break out Tegra revenue for the quarter.

The NVIDIA vision is not just to dominate the smart phone and tablet markets. Future versions of Tegra are supposed to be powerful enough to go into notebooks, desktops, and even servers.

The problem with being in the ARM market is that anyone can license the ARM design. Graphics and cell phone connectivity chips and designs are available as well. NVIDIA seems tight with Google, but any ARM-based design can run the Android software.

Competitors each have some advantages. Apple, of course, is the perceived frontrunner. There is no guarantee that the iPhone is ultimately going to be defeated by Android-based phones or less likely competitors.

When it comes to ARM based chips for tablets and phones, each competitor brings some serious advantages to the court. Qualcomm has far more extensive experience in cell phone chips than NVIDIA does; so does Texas Instruments. Among a host of other contenders, Marvell (MRVL) should be noted, since they generate a lot of cash each quarter and have a lead in China, a much bigger market to fight over than the U.S. market. Then there are the Koreans, and Japanese, and numerous small innovators.

Another problem for NVIDIA is the lack of a x86 CPU chip design. AMD and Intel both are incorporating graphics into their base designs, eliminating the need for NVIDIA's GPU chips for most users. This already appears to be hurting them in the notebook segment. It will take some time and at least a couple of die shrinks before the pure GPU chip dies (except in specialty markets), but that time is coming at a fairly predictable clip.

So far profit margins have been good at the leading edge of smartphone and tablet processors, but at some point pricing could become more competitive.

2012 is likely to be a make or break year for NVIDIA. If they are able to dominate the Android phone market they might become the dominant semiconductor company, a position Intel has had for a couple of decades now. Myself, I am not willing to make that bet, but I'll keep a close watch. However, I do believe NVIDIA's price is now pretty reasonable, everything taken into account.

See also my Q3 NVIDIA analyst call summary.

Disclaimer: I have no position in NVIDIA and will not take a position for at least 2 weeks following the publication date of this article.

Keep Diversified!

SGI Supercomputer Revenue Growth Continues

2011-11-29T19:42:00.000-08:00

Looking for the technology company that reported calendar Q3 2011 revenue that was 58% higher than its Q3 of 2010? That would be Silicon Graphics International (SGI), manufacturer of high-performance technical computers (supercomputers) and high-efficiency server systems for datacenters and cloud computing.

GAAP revenues for fiscal Q1 2012 ending September 30, 2011 were $178.9 million, down 8% sequentially from $195.5 million, but up 58% from $112.9 million in the year-earlier quarter. GAAP net income was negative $2.7 million, improved sequentially from negative $12.1 million and improved from negative $11.2 million year-earlier. EPS (earnings per share) were negative $0.08, improved sequentially from negative $0.39, and also improved from negative $0.37 year-earlier.

While in the red on a GAAP basis, on a non-GAAP basis (mostly eliminating non-cash expenses like stock-based compensation) SGI managed a profit of $2.2 million, or $0.07 per share. SGI has gone through a period of investing to introduce new products, and also expanding its sales force. Profit margins could improve as further ramps in revenue should not require similar ramps in operating expenses.

While not giving guidance by quarter, for fiscal year 2012 (running to June 2012) revenue is expected between $740 and $780 million, up to 24% over fiscal 2011.GAAP EPS is estimated between $0.15 and $0.30. Non-GAAP EPS expected between $0.60 and $0.80.

How are they achieving such stellar growth while other computer makers are lagging? SGI specializes in expensive computers used for scientific research, as well as large systems for cloud computing and Web farms. These are all areas that continue to grow quickly. While there is competition from the likes of IBM, HP, Dell, and Cray, the newest systems introduced by SGI, notably Altix UV, are better at addressing the needs of their markets.

Nor is SGI resting on their laurels. They are introducing computers that run large scale systems running Windows SQL Server. They have improved their compatibility with Hadoop and Red Hat Enterprise Linux. They continue to be a major supplier for Amazon's cloud system. They also have started acquiring small companies that specialize in supercomputer application software. SGI expects that the ability to sell software as well as hardware will be a major advantage for verticals they service, with higher profit margins.

Finally, they ended the latest quarter with $115 million in cash with no debt. They did use $30 million of cash to build inventory in the quarter, but the systems built had been pre-ordered and should be shipping this quarter.

Because of the size of the systems involved, some quarter-to-quarter lumpiness is to be expected.

If you read what scientists are saying about Altix UV, you will realize why management has become very confident in SGI's future. On the analyst call they stated the next big SGI milestone will be $1 billion in annual revenue, which should bring between $1.75 and $2.00 non-GAAP EPS per share.

The recent growth has been in the face of a lot of uncertainty and a poor macroeconomy. Even so, if the doomsayers are right about global slowdown or meltdown scenarios in 2012, that could impact sales. I am more concerned about competition, but it does seem that for now SGI has found a niche where it can outcompete far larger companies.

For more details on calendar Q3 results, see my SGI Q1 fiscal 2012 analyst call summary.

Disclaimer: I am long SGI. I won't change my position for at least one week from today.

The usual risks apply, so keep diversified!

See also: www.sgi.com

Microchip (MCHP) Inventory Correction End May Be Near

2011-11-28T18:54:00.000-08:00

There is no way to describe Q3 2011 as a good quarter for Microchip (MCHP). The maker of microcontroller and analog chips reported revenues of $340.6 million, down 9% sequentially from $374.5 million in Q2 and down 11% from $382.3 million in the year-earlier quarter.

GAAP net income was $79.3 million, down 20% sequentially from $99.3 million and down 24% from $104.7 million year-earlier. GAAP EPS were $0.40, down 18% sequentially from $0.49 and down 26% from $0.54 year-earlier.

Given that and the general stock-market and macroeconomic malaise, the main thing propping up Microchip's stock price (closing today at $33.07) is the dividend, now running at $1.392 per share per year, or 4.3% at today's price.

As to the outlook, Q4 guidance was week, with revenue in the range of flat to down 7% from Q3.

I don't think that Microchip is failing to compete in its market segments. It continues to be the world's leading microcontroller provider. Economic uncertainty caused weakend demand, which in turn caused OEMs to tighten up their inventories.

Then again, the picture could be brighter for Q1 2012. The first quarter is typically seasonally slow for semiconductor chip makers, but within that seasonality Microchip's management, as early as the analyst call on November 3, foresaw an uptick, predicting that "shipment rates in December will be below the consumption rates of our customers."

Here it is important for analysts to note that, unlike most chip manufacturers, Microchip does not recognize revenue when it makes shipments to distributors. Because of the nature of Microchip's business (selling a large number of parts to a large number of OEMs), a lot of sales are through distributors. Microchips recognizes the revenue when the distributors have shipped the chips to end customers.

This means that Microchip tends to see results (reported revenue) of general semiconductor trends, both up and down, a quarter earlier than its peers. While there can be differences in results because of focus and competition for market share, a Microchip revenue downturn is a fair predictor of a sector downturn one quarter later, and the same for upturns.

If this December shapes up to be a good one for electronics sales in the U.S., and if Europe holds together, January may look very different than most investors would have expected until recently. If end sales cause inventory shortages at OEMs, the pace chip sales in Q1 could be strong, compared to the usual range from seasonality.

So keep an eye on Microchip's Q4 results and Q1 2011 results. In the meantime, if you are holding MCHP, enjoy the dividends.

Keep in mind that the semiconductor industry, including its microcontroller and analog segments, is very competitive.

Disclaimer: I am long MCHP and have no plans to change my position this year.

See also:

www.microchip.com

Hansen Medical: Slow Magellan Ramp Planned

2011-11-22T18:55:00.000-08:00

Hansen Medical Inc. (HNSN) manufactures catheter based medical robots. It is effectively still a startup company, since it typically loses money each quarter. When it has shown a profit is has been from licensing its technology, not from robot sales. However, this is a well-understood business model. Research and development has to be done upfront. The FDA and other national medical agencies must approve each application of the technology. At the moment one application, electrophysiological exploration, is approved both in the U.S. and Europe. Two other applications have been approved in Europe, but have not yet produced revenue.

The difficulty of guessing the future value of this technology is why (along with overall market volatility) the stock price of Hansen has been all over the map this year. The fifty-two week high was $5.28, the fifty-two week low was $1.24, and the stock was up $0.15 today to close at $2.37. If Hansen continues to burn through its cash, $1.24 might be generous. If it starts selling significantly more surgical robots at a good profit margin, $5.28 will seem like nothing two or three years out.

I expected Hansen to trade higher after the new peripheral vascular surgical system, Magellan, was approved in Europe back in Q3. I expected it would take time to ramp up sales since these robots are big ticket items. The November 2, 2011 analyst call about Q3 results, however, tempered my short term hopes. The first working Magellan had been installed in St. Mary's Hospital in London, but Hansen wanted to take things slowly. One might hope their salespeople would have ten or more sales lined up for Q4, but instead they wanted to do a number of actual surgeries at St. Mary's and study the results.

Based on earlier trials they expect good results, but more data would not only help to drive sales. Experience is something that can be shared. Getting the surgeon's experiences at St. Mary's should help future surgeons and the Hansen employees who train them. That means better outcomes for patients and a better argument for the value of robotic vascular surgery.

Investors, of course, want their results this quarter, not sometime in the vague future.

If Hansen continues to move cautiously it may be a couple of quarters into 2012 before we see significant sales of the new Magellan system. Also Hansen, after an earlier accounting practices muck-up, now only recognizes revenue when doctors are trained and successfully operating a system. So the ramp will probably be in deferred revenue before it hits the actual revenue line.

Nor are the current Sensei robots for electrophysiology likely to come to the rescue. Only two systems were shipped in Q3, although revenue was recognized on five systems. Hansen lost $10.1 million in the quarter on revenue of $5.4 million.

Management seems confident that the new Magellan system will turn the company around. Hansen ended the quarter with $26 million in cash and just $3.6 million in debt. Answering an analyst question about running out of cash, management said they would get another $3 million from their licensing agreement with Philips. That should get Hansen through Q2, the commercial launch in Europe, and FDA approval for Magellan in the U.S. They are considering strategic financing similar to the Philips financing as well as debt or equity financing. They said they were confident of their ability to raise capital. A few days later they raised $10 million selling stock to existing investors.

Market capitalization ended today at $130 million. While that sounds high for a company with a $22 million annual revenue run rate and a history of losses, I know I am not the only person who thinks the future value of this technology is much higher. Earlier this year Philips paid $29 million for non-exclusive rights to use one of Hansen's technologies.

Start up costs for surgical robotics are high, but we are reaching a point when Magellan sales should start pointing us in the right direction. Buying in now has its risks, but so does waiting until later in 2012 when buying in is likely to be much more costly. The price can be very volatile because this tends to be traded in large blocks by aggressive traders.

I have owned Hansen Medical stock since July of 2009, after starting posting Hansen analyst call summaries in February of 2009.

Disclaimer: I am long HNSN. I will not trade in the stock for 1 week following this post.

Onyx Pharmaceuticals (ONXX) Sees New Product Upside

2011-11-21T15:10:00.000-08:00

Onyx Pharmaceuticals (ONXX) was one of the few stocks that were up today, closing up $0.63 to $37.86. Still, it is well beneath it's 52-week high of $45.90.

Management thinks the full year will be non-GAAP EPS positive, based largely on a $160 million payment from Bayer this quarter. Bayer sells Onyx's Nexavar for kidney and liver cancer, splitting the after-costs profits. The $160 million was to buy-out the rights for Nexavar in Japan, which has been ramping up to be a lucrative market because of the high incidence of liver cancer there. This was part of a larger deal to end litigation for a Nexavar-related drug, Regorafenib. Under the settlement Onyx will get 20% royalties if the drug makes it to market.

Regorafenib recently had positive Phase III data for metastatic colorectal cancer. Like Nexavar, it appears it may be a useful therapy for a variety of cancers.

The predicted annual positive non-GAAP results were hard to predict before the deal announcement because in most quarters so far Onyx's own operating expenses have been sufficient to wipe out the receipts from Bayer. For Q1 non-GAAP net loss was $14.2 million, for Q2 net loss was $27.2 million, and for Q3 net loss was $19.5 million. One reason for the net losses is that both Bayer and Onyx have been spending large sums on running Nexavar through a set of clinical trials that have shown it may be effective for other forms of cancer, and to strengthen its role in liver caner. If you subtract out the research and development (R&D) costs, in most quarters Onyx would have shown a profit. Onyx has started recruiting patients for Nexavar Phase III trials for breast cancer and thyroid cancer, and has Phase II trials underway in colorectal and ovarian cancer.

Fortunately Onyx Pharmaceuticals has been able to maintain a high cash balance despite the regular losses, ending Q3 2011 at $530 million. Assuming the $160 million payment is a Q4 event, cash at the end of the year should approach $675 million.

I would not expect Regorafenib revenue until at least 2013, and like any drug it could fail for a currently unknown reason.

Carfilzomib is still the key to Onyx's value in the 2012 to 2015 time frame. Carfilzomib is a proteasome inhibitor that had positive data for relapsed and refractory multiple myeloma in a Phase IIb trial. In fact the data was good enough that it is being submitted to the FDA for approval. At the same time two Phase III trials have been initiated. More detailed data from the Phase IIb trial will be presented at the American Society of Hematology (ASH) Annual Meeting, December 10-13, 2011. While there is an outside possibility carfilzomib will not gain FDA approval, the main question is when it will get approval.

If both Regorafenib and carfilzomib are approved by the FDA, the nature of Onyx's model will change. It should be possible, starting in 2013, to have a vigorous R&D program to continue expanding the indications for Nexavar, carfilzomib and other pipeline candidates without actually throwing the bottom line into the red.

I believe that there is always risk in biotechnology stocks from competition, the need for FDA and other national medical agency approvals, and from failure to execute.

However, with expanded indications for Nexavar, plus likely revenues from carfilzomib and royalties on Regorafenib, in the next few years Onyx should become a highly profitable company. I do not think the current stock price reflects full value.

Disclosure: I am long Onyx Pharmaceutical. I have no plans to sell or buy ONXX in the immediate future.

Keep Diversified!

TTM Technologies (TTMI) Sees E-Reader PCB demand

2011-11-14T19:01:00.000-08:00

TTM Technologies (TTMI) makes PCBs (printed circuit boards) for the communications, industrial, medical, and consumer electronics industries. It owns plants in the U.S. and in China. The U.S. facilities generally do small runs of PCBs for prototypes and specialized, low volume products. Chinese facilities do larger PCB runs for computer and communications equipment, cell phones including smartphones, and more recently tablet computers and e-readers.

Q3 2011 was a no-growth quarter. Revenues were $358.3 million, down 2% sequentially from $366.1 million, and about flat against $356.8 million in the year-earlier quarter. GAAP net income was $24.5 million, up sequentially from negative $20.3 million, but down 16% from $29.1 million year-earlier. Q2 profits were hit by a one-time non-cash accounting charge for writing off some obsolete factory equipment. So, switching to a non-GAAP view of net income, we have: Q3 2011 $31.0 million, Q2 2011 $32.9 million, Q3 2010 $35.0 million.

While growth has been stagnant this year, profits have remained healthy. Annualizing Q3 non-GAAP EPS gives a P/E ratio is about 7.2 at today's closing price of $11.01 per share.

Because TTM has a broad array of end customers and a global presense, to a large extent its fortunes reflect those of the electronics industry as a whole. For that industry Q3 was a slow quarter in a slow year. Everyone is worried about end demand because of the economy. I believe TTM's ability to make a profit in this environment means it is a reliable cash generator. If the electronics industry picks up again in 2012, there is upside potential.

In the Q3 conference call on November 2nd management noted that some orders were pushed out past the end of the quarter. Cash flow from operations was $42.6 million. The cash and equivalents balance ended at $207.7 million. Long term debt ended at $366.7 million. TTM made capital expenditures of $28.3 million, mostly for new high-end manufacturing equipment in China.

It is notable that debt still exceeds cash. The debt was used to build and expand plants in Asia. So far it has been a good use of debt, but it does create some risk if there is an extreme economic slowdown. Paying down debt has been a priority use for cash.

TTM tracks end markets into 5 segments. For the quarter aerospace and defense was below trend. Cell phones were strong, particularly smartphones. Computers and related were weak and are expected to continue to be weak in Q4. The medical and industrial segment was flat. Networking and communciations, which accounted for 38% of revenue, is expected to be soft in Q4. There is also an "other" category, which saw growth because they are producing the PCBs for a new e-reader for an unspecified customer.

The top five customers were: Apple, Cisco, Ericsson, Huawei and ZTE. Only one of them accounted for more than 10% of revenue.

I believe that as the global electronics industry recovers TTM will continue to pay off debt and eventually be better positioned to use cash for buy-backs and dividends.

Disclaimer: I am long TTMI. I have no plan to change my position this quarter.

Keep diversified!

Celgene Q3 shows model strength

2011-11-07T14:53:00.000-08:00

Celgene provides a double dose of growth potential: further growth of its currently approved therapies and a rich pipeline with some therapies closing in on FDA approval and commercialization. Since I last wrote about Celgene on August 2, its stock price has risen from $57.29 to today's close of $64.29. Celgene's 52 week high is $68.25 reached on October 24th.

Consider Celgene's Q3 earnings reported last week. Revenue was $1.22 billion, up 3% sequentially from $1.18 billion and up 41% from $886 million in the year-earlier quarter. GAAP net income was $373.0 million, up 34% sequentially from $279.2 million and up 33% from $281.2 million year-earlier. GAAP EPS were $0.81, 37% sequentially from $0.59 and up 35% from $0.60 year-earlier. Non-GAAP EPS was EPS $1.02.

Most of this rapid growth was based on a single therapy, Revlimid for multiple myeloma (MM) and myelodysplastic syndromes (MDS). Revlimid revenues grew 28% from a year earlier. Expansion is largely international now, with Russia, China and Brazil still ahead. In addition various clinical trials have indicated Revlimid will be beneficial in other types of cancer. Revlimid is in Phase III trials for CLL (chronic lymphocytic leukemia), NHL (non-Hodgkin lymphoma) and prostate cancer.

Thalomid is ancient and had revenues $83 million, down 12% y/y.

VIDAZA for multiple myeloma revenues were $191 million, up 35% y/y. This is despite losing exclusivity in the United States.

The bit new revenue generator is ABRAXANE for breast cancer. Abraxane is also in clinical trials for treating lung, pancreatic, bladder, skin, and ovarian cancers. ABRAXANE revenues were $114 million, up 20% sequentially, that is quarter over quarter; Celgene did not market it a year ago. A Phase III trial comparing it to decarbazine for metastatic melanoma is expecting to read out data in mid 2012. Phase III Pancreatic cancer trial should complete enrollment in Q1 2012. International revenue continues to ramp. For instance, in the quarter Celgene received reimbursement permission for Abraxane in in Greece and the Czech Republic.

Earlier in the pipeline Celgene displays depth-of-field. Of course most pre-clinical drugs don't make it through all the clinical phases and FDA approval; there are likely to be some losers. Celgene's pipeline is so broad and important you could write a book about it.

In Oncology/Hematology we have pomalidomide in Phase III trials for myelofibrosis and nearing the end of Phase II for multiple myeloma. There is Amrubicin, in Phase III for small cell lung cancer. In Phase II we also have ACE-011 for CIA and ABI-008 for prostate cancer. In Phase I we have Tork Inhibitor and ABI-009, both for solid tumors. There are two additional pre-clinical ABI variants for solid tumors.

Apremilast completed enrollment of patients in Phase III trials for psoriasis and psoriatic arthritis, with three more Phase III trials to complete enrollment by year-end. Phase II trial data for ankylosing spondylitis will be presented in November. In inflammation and immunology we also have JNK CC-930, CC-11050 and PDA-001 in Phase II.

Pomalidomide Phase II data for relapsed and refractory myeloma will be presented at ASH in December. The company is conducting a broad clinical program to support global registrations for pomalidomide.

Beyond that Celgene lists over a dozen agents in discovery and pre-clinical phases.
Of course, what will affect Celgene's stock price soonest are the late stage candidates. The first big movers is likely to be expanding the label for Revlimid to first-line (initial) treatment of multiple myeloma. The second would be Abraxane for non-small cell lung cancer, with FDA submission in second half of 2011 and a decision likely in the first half of 2012.

In general it is a very good time to invest in biotechnology, even given the known risks. Celgene is a cash cow that also has unrealized value in its pipeline. Small, risky biotechs aren't commanding the high premiums they used to, which is good because many of their drug candidates don't work out. With the larger biotechs like Celgene if a drug candidate fails it is disappointing and the stock can lose some momentum, but cash flow can be used to buy and develop more candidates. Celgene's cash and equivalents balance ended at $2.58 billion. Cash flow from operations was $602 million. $885 million was spent on share repurchases in the quarter.

Hopefully some time soon Celgene will start paying out a dividend, which is the true gold standard for today's investors.

Keep diversified!

Disclaimer: I am long Celgene. I have no plans to buy or sell Celgene in the next two weeks.

Dendreon Capitulation

2011-11-04T15:47:00.000-07:00

Following the announcement of Q3 results on November 2, 2011, Dendreon (DNDN) stock capitulated. One can only surmise that those who came to the Dendreon game late and hoped to make easy profits, thereby showing their lack of understanding of cancer drug introductions or poor choice in momentum stocks, are now out of the stock. It would be interesting to know who now owns all that stock. Dendreon's 52-week high was $43.96, but it actually hit a post-FDA approval of Provenge for prostate cancer high of $55.43 on May 10, 2010. Its 52-week low was on November 3, at $6.46, with a dead cat bounce today bringing it up to $6.69 at the close. That represents a market capitalization of just under $1 billion.

Q3 results were about what any reasonable person would expect. On August 9, 2011, I guesstimated Q3 revenue at $66 million. It came in at $64.3 million. That included $3 million in non-Provenge royalty payments. Which puts Provenge at $61 million, up 23% from $49.6 million in Q2. Where else would that be a slow ramp?

For those who baled there were two major factors. Revenues were not ramping as quickly as they hoped, and there is a not-unreasonable questioning of where Provenge revenues might peak. In a mere 12 months we have gone from wildly optimistic to deeply pessimistic projections.

What are reasonable projections for Provenge revenues? You have the number of patients covered by the label annually, less those who don't try the therapy. There is no financial reason to not try the therapy since it is covered by Medicaid and Medicare, as well as all major private health insurance plans. The current label constitutes a window through which most prostate cancer patients whose disease progresses will pass, but currently you have to wait for the window. If you a different therapy during the window and wait long enough you can find yourself off label. There is no good reason for a rational patient (or physician) to let that happen. Provenge is very safe and takes only 1 month to administer. It should be the first therapy tried when a patient enters the window. Other therapies can then be tried before waiting to see if Provenge is working, a good strategy given the low percentage of men it provides complete remission for.

33,000 men are expected to die of prostate cancer in 2011, but not all of those go through the Provenge label window because the cancer can become symptomatic before becoming castrate-resistant. I estimate that 15,000 men in the United States will reach the stage of hormone-refractory, non-symptomatic or minimally symptomatic, metastatic prostate cancer each year. This estimate is less that the over 30,000 deaths from prostate cancer each year, since not all men go through the window before dying. Men who knowingly hit this stage usually have already had surgery or radiation therapy plus hormone therapy, but many are not diagnosed until after they have passed the window. Provenge therapy costs about $90,000. If 10,000 men per year try Provenge revenues would be $900 million per year. (There will be 240,890 new prostate cancer cases in the U.S. in 2011 according to the National Cancer Institute, but most men are cured by surgery or radiation or die of something else before their cancers become metastatic.)

I can only conclude that the $61 million for Provenge in Q3, annualized to $244 million, is just the beginning of the ramp. Add to that European patients. Add to that the rest of the world. Add to that the possible expansion of the label. Provenge works by getting immune cells to attack cells presenting PAP (Prostatic Acid Phosphatase). It is present in symptomatic disease and during the hormone dependent phase. It would not be surprising if Dendreon were able to extend the label following clinical trials targeting off label phases.

Guaranteed? Of course not. It may make sense to prescribe Provenge, but that does not mean doctors will universally make that a practice. Competitive therapies may prevail, and we can expect new therapies to come down the pipeline until something really can cure the great majority of metastatic prostate cancers.

Dendreon won't stand still either. In addition to global expansion and Provenge label expansion, we can expect other immunotherapies to be developed. Each cancer type that has an appropriate immune system target should be addressable by this paradigm.

Will this happen over night? Of course not. Management was way overconfident in their projections in early 2011. Now they seem to have received the message and are digging into the task of educating patients and physicians. Q4 will not see much of a revenue ramp, but that is because patients and doctors are not likely to start a complicated, month long procedure during the holidays.

Just guessing, but I would expect Q1 2012 to show a better revenue ramp, probably to between $75 and $80 million. Management won't give guidance, and it is really up to the doctors who deal with prostate cancer. I think as word gets out about successes from Provenge, the process will become demand driven. How long that might take, I am not willing to guess.

In any case Dendreon is a stock for patient investors, as has been keenly demonstrated several times in the last 5 years.

Disclaimer: I am long Dendreon. I won't trade the stock for at least 3 days after this article is posted. I am likely to be a buyer at today's price.

Biogen Idec: Q3 Clues to Value

2011-11-02T09:22:00.000-07:00

When I wrote "Biogen Idec PML Test Approved in Europe, Changing Tysabri Outlook" on March 15, 2011, the price per share of BIIB was $69.56. When I wrote "Biogen Idec, Is there more Value?" on July 11, 2011, it closed at $105.53, having backed off its recent 52 week high of $109.63. Quite a run. It is headed up today after closing at $114.23 yesterday, so at least those wise people who are in the stock market these days think the answer is yes, there is still more value to be had from Biogen.

So, the eternal investor questions: did something change? Does the run up reflect value that was already there back in March? Could this be another momentum run unjustified by fundamentals? Could there be even more value in the stock?

We have had a number of recent data points to inform our views. BG-12, an oral agent for multiple sclerosis (MS), produced Phase III clinical results that should gain marketing approval from the FDA (of course, there is no guarantee of that). Biogen is generally held to sell the most effective MS drugs, but recently Gilenya by Novartis, became the first oral agent on the market.
In addition Daclizumab HYP showed good Phase 2b trial results. Dexpramipexole for Lou Gehrig's (ALS) disease Phase III trial became fully enrolled recently.

Third quarter (Q3) results released on October 28, along with the analyst conference call, demonstrated that current therapies are still ramping revenues. Biogen Idec's two multiple sclerosis (MS) blockbuster drugs are Avonex, with revenues in Q3 of $682 million, up 6% y/y, and Tysabri, with revenues of $277 million, up 26% y/y. Avonex has been around a long time and dominates the market, but its sales had flattened until the PEN was recently introduced, which makes administering it much easier. On June 22 Biogen had announced the EU approved including JCV status as a risk factor for Tysabri, which we presumed would happen in March. The risk of death or severe injury from PML, a result of JCV getting out of control when immune responses are suppressed (immune responses are the cause of MS), had been a big problem for Biogen. Now patients can test to find out if they are infected with JCV or not and with the help of their doctors make appropriate decisions about the risks versus the benefits of Tysabri.

Given all this good news and the big run up in 2011, are we at a just-right stock price? Of course next year's price will depend on how revenues and profits ramp (or don't) in 2012, and what the outlook looks like for 2013.

I will be surprised if Tysabri revenue growth does not accelerate in the second half of 2012 if BG-12 comes online. I am would not sell the stock in the current price band, and believe BIIB is currently a good bet for new money. However, in aside to the usual macroeconomic and stock market risks, all therapies run some risk from new adverse reactions being discovered and from current and future competing products.

At this point Biogen pays no dividend, but is certainly a profitable enough company that it could. It would also show management's confidence in the company's future. They spend a lot on R&D, over $300 million (GAAP) in Q3, and have a lot of cash, $2.9 billion, and a lot of non-GAAP net income, $395 million in Q3. They do use cash for stock buy backs and to acquire promissing pipeline candidates.

Disclaimer: I am long Biogen Idec. I have no plans to buy or sell in the next 3 days, but do sell stocks I feel have become overpriced.

See also http://www.biogenidec.com/

Akamai Grows with Internet

2011-11-01T11:10:00.000-07:00

Akamai Technologies' (AKAM) stock price is $26.43 as I write. Before (Wednesday, October 26, 2011) Akamai's Q3 results announcement and analyst conference call the price ended at $23.77, and its peak the last few days was $28.28 on Friday. Clearly the results and outlooks pleased more traders than they displeased. What can we learn from the results and conference call?

Akamai is best known from the dot.com boom bust era, when it soared in price before it started showing profits. During the last decade its earnings have grown pretty steadily on a year to year basis. Its stock price and P/E ratio has been pretty well-aligned with reality. Today the trailing 12 month P/E is 26. Non-GAAP earnings for Q3 were up 10% y/y, and revenues were up 11%. The P/E is a bit high for this market, but the almost the entire market is undervalued due to fear still triumphing over greed.

Akamai's core business is content delivery, speeding up web page and file delivery from originators to consumers. Increasingly its income and profits are derived from "value-added" businesses, including security for cloud datacenters and DSA (dynamic site acceleration). It is also involved in accelerating the delivery of content to mobile devices.

As the amount of data delivered by the Internet, including cellular networks, grows, so does Akamai, presuming it maintains its large market share in the business. But prices also drop on a per unit basis as volume goes up. Akamai management believes that the delivery of video content is going to drive up volume, revenue and profits. While video data delivery is growing rapidly, it has not yet started to accelerate at rates that would compensate for Akamai's aggressive pricing to its clients.

There is always concern about competition, but mostly competitors have had to compete on price to win customers, making their profit margins thin or non-existent.

Akamai has $1.2 billion in cash and equivalents and generated $116 million in cash flow from operations in the quarter. They invested $47 million in capital expenditures. It is hard to compete with that, as I wrote in Akamai or Limelight? in January of this year.

At this price I am holding my Akamai stock, believing that downside risks are mainly market risks while upside potential is present from both increased video delivery and broader adoption of Akamai's cloud services solutions. Another bright spot is international revenue, which grew 15% y/y. Akamai started in the U.S. and is still expanding its reach to developing economies.

I first bought Akamai for $17.56 per share in September of 2008 when everyone else was panicking. I have both bought and sold shares since then, as P/E ratios have swung rather wildly (the 52 week high was $54.65, 52 weak low was $18.25).

For more detail see my Akamai (AKAM) Q3 2011 conference call summary.

Disclaimer: I am long AKAM, but occasionally trim or expand my position. I don't plan to trade AKAM in the next 3 days.

See also: www.akamai.com

Biogen Idec, Onyx Pharmaceutical score big

2011-10-26T08:31:00.000-07:00

Today two of my biotechnology stocks, Biogen Idec (BIIB) and Onyx Pharmaceuticals (ONXX), are climbing on good results from clinical trials. In Biogen's case results are for daclizumab for multiple sclerosis and for BG-12 for MS as well. Onyx's results are for regorafenib for metastatic colorectal cancer, which is being developed by Bayer, but for which Onyx gets royalties.

This made me think about my now ancient Choosing A Biotech Stock 3 part series. I wrote Part I, the Overview, on September 3, 2007. Was my advice, which I followed, any good?

My hopes were high. I said, "I think some biotechnology stocks are going to be worth a lot more money (better than market returns) in a few years than they are now, and may make me filthy rich if I live to see the long run. I could spread the risk out by buying a lot of different biotechs, or going to a fund. But, well, while I would recommend a fund to anyone too lazy to do their own research, the problem with spreading risk broadly is that you can't get any alpha (profits above typical market) that way."

I already owned Celgene, Dendreon, and Anesiva (which went bankrupt later). I mentioned Gilead Sciences (GILD) and Biogen Idec (BIIB) as being the kinds of companies that I would look at. In Part 2 I took a close look at Gilead. In Part 3 I took a close look at Biogen, but then said that despite their pipeline, "Wow, they have a very strong pipeline (See BIIB pipeline page)," I would buy Gilead first.

Of course after that purchase we had the recession, when most stocks were oversold. I ended up buying Biogen and Onyx as well, and added to each position. The result, so far, has been a mixed bag.

I already owned Celgene, which I first bought in June 2007 for $59.34. I bought more as low as $38.59 in May 2009. As I write it is selling for $66.09.

I first bought Gilead in October 2007 for $42.23. I bought more for $46.55 in February 0f 2010. As I write it is selling for $41.06.

I first bought Biogen in February 2008 for $61.57. I bought more at a low of $46.67 in September of 2008. As I write it is selling for $117.87. Clearly this turned out to be the best investment in the group, so far.

I first bought Onyx in May 2008 for $34.87. My best purchase was for $26.20 in May 2010. As I write it is selling for $39.59.

Clearly Gilead has been the dog of the group, but my selection criteria were pretty good overall. That reminds me, and should remind all of us who are seeking alpha, to keep diversified, even when we have found a sound strategy for investing.

It also reminds me of the importance of patience when doing long-term investing. When a biotechnology company has value in its therapy pipeline, it helps to think in terms of 5 to 10 years, not 5 to 10 days.

Will Thailand Floods Hit Marvell Technology?

2011-10-19T10:08:00.000-07:00

Marvell Technology (MRVL) makes semiconductor chips for hard disk drives (HDDs), cell phones, networking and other devices. Marvell's first product was a chip to control hard drives, and in its first decade it came to dominate that market. This year revenue from chips for hard drives has represented about half of total Marvell revenue.

This week massive flooding in Thailand caused Western Digital manufacturing facilities to be shut down there. Obviously this could hurt demand for Marvell's HDD controller chips, at least temporarily. How much trouble could this be for Marvell's Q3 and Q4 results? (its fiscal Q3 ends October 30th; Q4 ends January 31st)

Western Digital is currently Marvell's largest HDD customer. Earlier this year Western Digital acquired Hitachi's HDD division. Marvell is generally granted to have the best HDD controller chips, so it has been expected to expand its already substantial market share by increasingly supplying chips for Hitachi. It has also been becoming a more important supplier for another big HDD manufacturer, Seagate, which is acquiring Samsung's HDD division. In Q1 2011 Western Digital led global shipment in units, but Seagate led in revenues.

According to Western Digital, two of its Thailand facilities were shut because of flooding. In addition there has been flood damage to the supply chain for the plants. It expects a "significant impact" on its ability to meet demand in the December quarter.

Seagate's Thai factories were not directly affected, but it also expects supply chain problems of unknown magnitude.

While all this is sorted out Marvell will probably lose some October shipments, which may impact Q3 revenue, depending on revenue recognition timing. It is too early to predict how long beyond October the effect could last. In the longer run it is likely just a bump in the road. There is inventory at every stage of the chain. HDD sales have not been robust this year, so the inventory situation is probably not bad. PC manufacturers have inventory on hand, and there have been no reports that the flooding ruined any drives already made or in production. To some extent supplies and production could be shifted to other plants, which should have excess capacity, if not now (gearing up for holiday PC sales), certainly in December and January.

The situation is worth watching. If it takes months instead of weeks to get back to full production there could be a substantial impact on Marvell's Q4 results. On the other hand Marvell has been trending to be less reliant on HDD chip sales for its profits. Revenues from its Chinese smartphone chips, which should be ramping in Q3, are probably the best indicator of how well Marvell will fare in 2012.

Disclosure: I am long Marvell Technology (MRVL).

See also: http://www.marvell.com/
My August 18, 2011 Marvell (MRVL) analyst call summary
My May 26, 2011 Marvell (MRVL) analyst call summary
My March 2011 Marvell (MRVL) analyst call summary
Keep diversified!

Onyx Pharmaceuticals Gets $160 million for Nexavar, Plus Regorafenib Royalties

2011-10-12T09:29:00.000-07:00

Onyx Pharmaceuticals (ONXX) today announced it is receiving a major cash infusion at a time when it is transitioning from being a successful biotechnology startup into a major player. The cash, $160 million from Bayer, is for the Japanese rights for Nexavar, a cancer therapy. The deal is in the context of settling litigation about Regorafenib, an analog of Nexavar developed by Bayer. Onyx will receive a 20% royalty on future worldwide sales of Regorafenib.

Nexavar is sold by Bayer. Onyx, which discovered and co-developed the drug, gets a share of the profits after Bayer's expenses. But in most quarters so far Onyx's own operating expenses have been sufficient to wipe out the receipts from Bayer. An important treatment for liver and kidney cancer, sales of Nexavar continue to ramp globally. Liver cancer rates are far higher in Asia than in the West, but Asia is the last area Nexavar has become available, so sales are just beginning to ramp in China and other nations in the region.

Bayer and Onyx have been running Nexavar through a set of clinical trials that have shown it may be effective for other forms of cancer, and to strengthen its role in liver caner. If you subtract out these research and development (R&D) costs, in most quarters Onyx would have shown a profit. Onyx has started recruiting patients for Nexavar Phase III trials for breast cancer and thyroid cancer, and has Phase II trials underway in colorectal and ovarian cancer.

Fortunately Onyx Pharmaceuticals has been able to maintain a high cash balance despite the regular losses, ending Q2 2011 at $550 million. Assuming the $160 million payment is a Q4 event, cash at the end of the year should approach $700 million.

Regorafenib does not yet have its first FDA approval. It is in a Phase III trial for a type of stomach cancer, and will doubtless be tried for a variety of solid cancer types. I would not expect any revenue until 2014, and like any drug it could fail for a currently unknown reason, but the royalties are a great thing to have in Onyx's likely future.

Given the background of success with Nexavar, tempered with losses due to R&D spend, Carfilzomib is still the key to Onyx's value in the 2012 to 2015 time frame. Carfilzomib is a proteasome inhibitor that had positive data for relapsed and refractory multiple myeloma in a Phase IIb trial. In fact the data was good enough that it is being submitted to the FDA for approval. At the same time two Phase III trials have been initiated.

If both Regorafenib and carfilzomib is approved by the FDA the nature of Onyx's model will change. It should be possible, starting in 2013, to have a vigorous R&D program to continue expanding the indications for Nexavar and carfilzomib without actually throwing the bottom line into the red.

Yesterday Onyx ended with a market capitalization of $2.0 billion, at $31.91 per share. As I write the market cap has risen to $2.15 billion, with the stock price at $33.80. I believe that there is always risk in biotechnology stocks from competition, the need for FDA and other national medical agency approvals, and from failure to execute.

Disclosure: I am long Onyx Pharmaceutical. I have no plans to sell or buy ONXX in the immediate future.

Keep Diversified!

See also my notes on the Q2 2011 Onyx Pharmaceuticals analyst call
Onyx Pharmaceuticals home page

Earnings Preview: AMD, AKAM, GILD, BIIB, CELG

2011-10-09T10:48:00.000-07:00

Earnings season is upon us again. Of the stocks I watch most closely (in this case because I own some of each of them), Akamai (AKAM) has scheduled its analyst conference for October 26, and Advanced Micro Devices (AMD) is on October 27. Gilead Sciences (GILD), Celgene (CELG), and Biogen Idec (BIIB) should also report before month's end, but have not yet set dates.

While the information in analyst conferences comes from management, and so can be biased, it is still essential listening for serious investors. At the end sell-side analysts are allowed to ask questions (some micro-caps even let investors ask questions), and on occasion an answer to a question can give important insights into the company. I take notes while I listen and even post them on the web; listen to management for a couple of years and you may be able to tell a lot from the way they answer or evade questions. Going back a few years and checking on how management's predictions worked out can also be illuminating.

Akamai typically is a high P/E stock that has to justify that ratio by showing continuous growth. Many companies have tried to compete with Akamai at accelerated delivery of web content, yet over a decade later Akamai still has incredible market share and has branched out into adjacent businesses like cloud security. Pricing has been an issue lately. Look to see if Akamai's volume of business is growing fast enough to compensate for falling prices. Q3 is a slowish quarter for content delivery, with a big bump coming from e-commerce in Q4, so Q4 guidance is also a key indicator of the health of this business.

AMD already pre-announced, sending the stock price into free-fall. This was as I predicted in AMD at Earnings Crossroad, but worse. The good side of the news is demand for AMD's new server and APU chips is strong. What we want to know from management is how strong is the demand, and how quickly can they gear up chip production to meet the demand.

Biogen Idec (BIIB) guided to low to mid single digit revenue growth over 2011, which for Q3 would run to roughtly $1.2 billion. Tysabri sales over $280 million would be a positive indicator, but the key question is data or FDA approvals for late-pipeline drugs like BG-12 or Daclizumab for multiple sclerosis, which are likely to be announced on other occasions.

Gilead (GILD) is a cash cow that has a low P/E due to patents expiring on some of its anti-viral drugs over the next decade. If management would pay a dividend, the value of the franchise would be more obvious. They are doing a lot of research on new anti-viral compounds that could kick growth into high gear again if approved. Expect something over $2 billion in revenue, $940 million in cash flow from operations. The key issue would be timelines for Endurant and and the "Quad" regimen. Don't expect the stock to budge much in this market until they pay a dividend or announce positive Phase III data for a hepatitis C multi-drug therapy (they are only in Phase II, so it will be a while).

Celgene (CELG) is another cash cow, but with a rapid revenue and profit growth rate (and a higher P/E). Look for Revlimid revenues over $800 million, Vidaza over $165 million or Abraxane, their newest drug, revenues breaking though $100 million in the quarter. Celgene has a pipeline of potential drugs that is so extensive it would take several articles just to go over them. See Celgene drug pipeline for a list. Unless they mostly strike out, anyone who does not buy Celgene at today's price will wish they had in five years, but long-term investors are hard to find in this market.

Disclaimer: I am long in all of these stocks.

Cantel Medical Keeps Growing

2011-09-28T14:13:00.000-07:00

Cantel Medical has been a good stock to hold so far in 2011, closing today at $21.28, up 30% from $16.38 a year ago, with a 52 week high of $28.29 and a 52 week low of $15.57. Not a bad showing in this tough market. Cantel is not a household word, so I thought I'd fill in my readers on what they do and why they might want to own a piece of this company.

Cantel Medical is a smallish company (market capitalization today ended at $366 million). Cantel specializes in infection control through sterilization and disposables. I know that infection control is more cost effective than treatment, and is becoming a much larger problem because of the evolution of multiple-antibiotic resistant bacteria. I watched Cantel for a while, then bought stock a couple of times when I thought the valuation was good.

Cantel is not a well-known name, even in hospitals, partly because it operates through named divisions. Minntech makes and markets endoscope and dialysis equipment sterilizers. Crosstex is the disposables business, working mostly in the dental market, but also moving into the general medical market. It makes face masks, sterilization patches, and other single-use items. Mar Cor makes machines to purify water, often for specialized medical needs. A smaller division is Saf-T-Pak, which produces specialty packaging for transporting specimens, and related materials.

When there are infectious disease scares Cantel gets bursts of extra revenue, so in evaluating the stock you might want to both zero-out such bursts to get a real trend line, and also figure that over time those bursts do add up.

Also, while Cantel does develop products and grows by increasing sales organically, they also grow by acquisition. If you, like me, have been burned occasionally by the poor acquisition strategies of other companies, you might not take this as a recommendation. However, for the few years I have followed Cantel they have done very well with acquisitions. They don't pay too much and they usually acquire a division of a company they want, rather than the whole company. Then they cross-sell the new products with their established sales force.

The latest acquisition was of Byrne Medical, announced August 2, 2011. Byrne manufactures products that act as replacements in gastrointestinal endoscopy procedures, eliminating the need for sterilization before reuse. The price of $100 million for a company with trailing annual revenues of $38.6 million seems high on a revenue basis, but trailing annual pre-tax profits were $8.6 million. Cantel expects to increase gross margins in the business, which has a historical growth rate of over 20%. The business is expected to be accretive over fiscal year 2012 ending July 31, 2012.

Since Cantel is already in the endoscopy business, cross-selling is a given. The combined endoscopy businesses will have 80 sales and marketing personnel. Acquiring Byrne is the largest transaction in Cantel's history. Even before the combination Cantel's recent endoscope sterilizer equipment sales had been ramping rapidly. The newer sterilization machines are called reprocessors; they do helpful things like inventory management that the aging machines can't do.

Meanwhile, the water purification business just keeps growing. Also the disposables business should ramp up when (of if) the unemployment rate tweaks down. People have been avoiding doctor and dental visits for economic reasons; when they have the dough to head back in for a checkup, the run rate will pick up again.

So, in summary, the overall anti-infection story is a good one. Cantel is a pure infection play, and it has top-notch management. Should you be cautious because the stock is up 33% y/y? My guess is that even in the short term the stock could make another run for its 52 week highs, if the overall market firms up. The trailing P/E ratio at the end of today was 18 (per NASDAQ), which is still reasonable for a company with a strong growth track record. Today's ending price seems fair to me and attractive for long-term investors looking for diversification in the healthcare space.

For more details on last quarter's results, see my Cantel Medical Q3 fiscal 2011 analyst call summary.

Disclosure: I am long Cantel, and have no plans to buy or sell in the next 2 weeks.

Red Hat at Billion Dollar Run Rate

2011-09-22T18:54:00.000-07:00

Red Hat (RHT) is poised to become the first open source software company with a billion dollar per year revenue run rate. Yesterday Red Hat released fiscal Q2 (ending August 31) revenue of $281 million, up 28% from the year-earlier quarter.

The alleged slowdown of the American and global economies has had little effect on Red Hat. This may partly be from the dollar store effect: Red Hat Enterprise Linux, or RHEL, is a much less expensive operating system than its main rivals, UNIX and Windows Server, yet is roughly as capable. Management, however, attributed the revenue growth to an expanded sales force and an expanded line of products to sell. The main products sold in addition to RHEL, are JBoss, their middleware product, and RHEV, their virtualization product. Also, as major customers expand their datacenters, they pay more for the number of copies of software necessary to operate the new hardware.

RHT is a great example of the power of patience, and of the importance of avoiding buying anything in a bubble. Founded in 1993, and going public in 1999, it was caught up in the Internet Bubble, almost immediately reaching a share price of over $100 (implying a market capitalization of over $20 billion) despite being unprofitable and not even generating very much revenue at the time. After the bubble burst you could buy RHT for less than $4 per share.

Despite the crazy pricing swings of the stock, the underlying company kept at its mission of providing an enterprise-quality version of Linux. As years passed revenue grew, and even profits began to accumulate. The last time you could buy RHT cheap was around November 2008, when it was around $10 per share. Today it closed at $41.52.

Right now it is a good stock to hold, but the price-to-earnings (P/E) ratio could scare off many potential investors. At a time when many technology stocks showing revenue growth are trading at P/E's under 20 or even under 15, Red Hat has a (non-GAAP) trailing P/E of 70 and 1 year forward P/E of 54. That is partially justified by the rapid rate of growth; the danger would be if the rate of growth slowed.

I believe Red Hat software offers a tremendous value proposition for enterprises. While revenues are dwarfed by Microsoft Windows Server revenues ($5.9 billion in Q1 alone), and many companies have already converted from UNIX to Linux, the fact that Red Hat has such a small portion of the $50 billion annual server operating system market leaves plenty of room for growth. RHEL also competes with free Linux distributions. Given the staffing it takes to run a free Linux at the enterprise level, TCO can be cheaper when businesses pay for RHEL and the support services that go with it.

I expect Red Hat will continue to do well as a company. Since its product is software, it has high margins and earnings tend to grow faster than revenues. For Q2, GAAP earnings grew 67% over the year-earlier quarter, but it was an exceptional quarter.

Disclaimer: I don't own Red Hat and have no intention to buy or sell it in the next 3 days.

See also:

Red Hat home page
Red Hat investor relations page
My main Red Hat page
My notes on the Red Hat Q2 analyst conference

AMD at the Earnings Crossroads

2011-09-19T14:23:00.000-07:00

AMD (Advanced Micro Devices) has only two competitors in its niche: Intel (INTC) for CPUs (computer processing chips) that run x86 software and NVIDIA (NVDA) for GPUs (graphics processing chips). How much market share it takes in the PC chip market, and what margins it receives on the chips it does sell, determines its levels of revenue and profit or loss.

Historically, while AMD has been innovative, it has come in a far second against Intel and NVIDIA. In the last two years it has lost ground to Intel and gained ground from NVIDIA. The picture has been complicated further by the emergence of ARM architecture based processors as the preferred basis for smaller mobile devices like smartphones and tablet computers.

After years of development (usually corresponding to quarterly earnings losses) this year AMD is selling chips that combine a CPU and a GPU. Intel, also, has appended graphics to its new line of CPUs, but their chips are remarkably inferior, incapable of running the current Windows graphics standard, DirectX 11. As a result AMD has been selling all the Fusion chips it has been able to make.

Why then, the lack of excitement and lack of upward momentum in AMD stock? Today AMD closed at $6.92, well off its 52-week high of $9.58 and with an astonishingly low P/E ratio of 6.4, the kind you would expect from a declining industry stock.

For the moment the most visible cutting edge technology is in smartphones and Apple and Android based small tablets. That pretty much sums up tech investor thinking about AMD: that a tidal wave of 7 inch screens are going to replace PCs, including both notebook computers and desktops that can run 60 inch displays.

Let's say you have discovered the limits of small screen computing and think there is still life left in the larger form factors. How should AMD be priced then?

First—even if the economy lags, even if consumers are careful with their holiday electronics purchases, even if the economies of India and China don't grow quite as fast in 2011 as they did in 2010—in Q3 and more so in Q4 AMD will get a significant boost in profits from its new Bulldozer CPUs for the server market. They began shipping in quantity earlier this month, with most of the early allotment going directly into the supercomputer market, where they will replace, or fill empty slots in, the prior generations of AMD Opteron processors. Profit margins are better for server chips than for PC chips. AMD has lost a lot of market share to Intel in server chips these last five years. The new chips should help regain market share. They have a different architecture than the Intel chips, and hence are very cost effective at certain workloads. Bulldozer is not a conquer-the-world chip, but it will keep AMD in the most profitable part of the server CPU game.

On the down side, there are so many rumors about yields (% of good processors on a die) being poor for the Fusion chips, that I think it is fair we can treat the rumors as true. At the next AMD analyst conference there should be a question about that. At the Q2 conference the closest answer we got was that margins were good on the Fusion chips. If both are true, and AMD was right about 2nd half margin improvements, then what we have is upside potential. Yields usually improve over time; if margins are already good, they should be great when yields improve. The problem was doubtless forging the CPU and GPU on the same die; traditionally these chip types used different silicon technologies. Bulldozer yields are rumored to be good, but then these server chips don't have a GPU component.

For now I would take Q3 guidance as a fair range. The economy might push revenues down, but yield improvements could push margins up. Guidance was for Q3 revenue to increase 8 to 12% sequentially. Note that because of holiday demand, Q3 is typically the strongest quarter for AMD.

The numbers, when reported, give us hard data, but the technology trends rule long-term value. I think AMD (and for that matter Intel) are over-discounted. I think both will be taking market share in the tablet market in 2012 and 2013. I think the PC market will stay healthier than most pundits predict. Consumers and businesses who skipped a desktop or notebook upgrade to buy a tablet and smartphone will get back on the upgrade cycle.

The combination of full-powered GPUs and CPUs on a single chip may be more revolutionary than the smartphone. Essentially, we are introducing desktop (or even notebook) parallel supercomputing. We are just beginning to see software applications that utilize either a CPU plus separate GPU or the new Fusion chips. So watch for companies like Microsoft, Adobe, and Autodesk, as well as lesser-known companies and startups, to take advantage of this new paradigm.

Disclosure: I am long AMD.

Dendreon Restructuring Call

2011-09-08T16:57:00.000-07:00

Mitchell H. Gold, MD, Dendreon's CEO, led a analyst conference call to discuss restructuring plans. This follows the month-earlier announcement that Provenge sales were ramping slower than expected.

About 500 employees are being laid off, out of about 2000. Restructuring costs are estimated at $21 million, including $5 million in non-cash stock-based compensation.. Savings from restructuring are estimated at $120 million per year. Most of these employees were in training to be ready to meet the (previously expected) demand ramp. Presumably if demand accelerated again they would have to be rehired, and the savings would not accrue.

For most mid to long term investors the key question is long term demand. Revenues for August were reported at $22 million, up 16% from July, which would put July around $19 million. Given a similar $3 million ramp in September, Q3 income would be $66 million, but management stood by its refusal to guide on revenue other than to say that it expects it to ramp slowly quarter by quarter in the immediate future. $66 million is up 32% sequentially from $50 million in Q2, which would be tremendous had expectations not been raised so high earlier in the year.

Approval of Provenge in Europe was painted as a 2013 event, so no revenue help there is likely until 2014.

Analysts' questions went every which way at management's statement that $500 million in annual revenues, or $125 million per quarter, would get Dendreon to cash-flow break even (but not to GAAP profits). They also believe they have enough cash to reach that point. They had $674 million in cash at the end of next quarter, and $600 million on August 31. Cash use should decline now that the 3 Provenge facilities have been certified by the FDA.

Aside from restructuring, the major effort is in sales. The good news is that the reported time for reimbursement for Provenge has dropped to around 30 days, from prior reports of 60 days or more. That means medical organizations with cash flow issues could treat twice as many patients with the same amount of capital. Also, a concerted effort to make sure prescribers understand the Provenge label and reimbursement availability has been made and is ongoing. We will see if this all has an affect if management keeps reporting revenues on a monthly basis.

Management still believes that the $90,000 per patient price is not an obstacle, and that other prostate cancer drugs will not prevent Provenge from being prescribed within its label, since it is very safe, with almost no side effects, and the course of therapy is much quicker than for most cancer drugs.

There seems to be little fodder for short term momentum plays up or down right now. A lot of risk has been incorporated into the current stock price. A slow revenue ramp with flattening in 2012 would probably keep the price in a range. A faster ramp and better evidence that end demand really can ramp well above $500 million per year would justify a higher stock price, maybe substantially higher, but that could take several quarters to see.

Disclaimer: I have been long Dendreon since 2005, but buy and sell according to my analysis of prospects versus the market capitalization. I added Dendreon shares in August 2011 and last sold shares in April of 2010. I have no plans to buy or sell Dendreon in the near term.

See also: Dendreon Press Releases

HP, Dead or Just Resting?

2011-09-06T18:58:00.000-07:00

HP, as the Hewlett Packard Company likes to be known, (NYSE: HPQ), is on its last legs, if you judge it by its stock price. It is selling for less than six times earnings. It has become a symbol of technological failure lately, mainly because of the failure of its tablet computer offering and its lack of presence in the smartphone market. Also, it announced it wanted to sell or spin off its personal computer (PC) business, but apparently no one with that kind of bucks wants to buy the division.

But suppose the pundits and investors arranging for a funeral are reading the symptoms wrong. In that case it possible this is a buying opportunity for those who get an accurate view of the situation. After all, a PE under 6 means trailing earnings are about 17% of the stock price. That strikes me, on the surface, as a much better deal than 2% annual returns on risky long term loans to the United States government.

The most solid evidence that things are not so bad are actual GAAP results from fiscal Q3 2011, as reported on August 18, 2011. True, revenue was up only 1% y/y, and while GAAP net earnings were $1.9 billion, up 9% y/y, non-GAAP net earnings were $2.3 billion, down 11.4% y/y.

A company with $1.9 billion in GAAP earnings in a quarter is not on death's doorstep. So the low stock price must be based on opinions about something more fundamental than mere profits: technology trends.

I have been around long enough to see a lot of companies go out of business, especially in the PC space. I know it can happen. Margins are brutal when differentiation from competitors is difficult. That is why IBM turned over its PC business to Lenovo. On the other hand, Lenovo has done quite well since then, so maybe IBM's strategy was not so brilliant.

The main theory is that tablets and smartphones are going to eat PCs, just like PCs ate up minicomputers back in the 1980s. To buy that argument you have to include servers in the PC category, because what PCs ate up was dumb terminals. Servers, based on technology similar to PCs, are what actually killed minicomputers.

Digging deep into history, recall that PDAs were going to replace PCs. Instead MP3 players replaced PDAs, because more people wanted to listen to music than wanted to carry around a tiny crippled business tool. HP was a leader in PDAs, and a failure in MP3 players, yet it did not die from the experience.

HP has several segments; the future does not look the same for each segment. The printer segment does not seem to be disappearing. The business hardware segment, excluding PCs, includes servers, enterprise-level storage, and other datacenter components like switches, routers, and the software needed to enable and manage racks of equipment. Because people are increasingly relying on mobile information, these datacenters, aka the cloud, continue to expand. Competition with IBM, Dell, Cisco, Oracle and many other companies is fierce, but so far HP has competed rather well. Services for enterprise computing are also a major source of revenue and profit.

So if the consumer PC division is seen as a weakness, the worst case scenario should be that it gets spun off. Stockholders get the enterprise and printer gravy in one tray and the consumer business in another.

If HP is making a mistake, it is not seeing the further possibilities of the PC business (with PC broadly defined). Every few years since the PC was born it has been declared to have all the computational power it needs. I have made that mistake myself. These days the new AMD A-series chips can run a pretty good game without the need for a discrete graphics card. They can put HD video on a big screen. The end of innovation must be near, except for smartphones. And tablets.

If you think PC innovation is coming to an end, you have not talked to the visionaries at Microsoft, or AMD, or even at Intel. Amazing things are just beginning to be computationally possible. A good example is the Kinect device for Xbox 360 games. There is no reason similar technology can't be attached to PCs running 60 inch displays. In fact, hackers are doing that already, with Microsoft even offering a software development kit (SDK) to help.

Yes, you will be able to wave your hand in the air, talk a bit, and do everything from altering an accounting spreadsheet to running a tractor to manipulating DNA from the comfort of your chair.

You are going to want the latest smartphone when you are on the road. But in your den or office, you are going to want a PC with a big screen, input devices more intuitive than touchscreens, and a hairy advanced processing unit to make it all work in real time.

If Leo Apotheker is too dull to see the potential of HP's PC division, it is still going to be profitable for the foreseeable future, even if it is just a commodity manufacturer of innovation spun elsewhere. A spin off suits me fine. Wish I would run it, wish I could own it. In addition I would get shares of the enterprise segment, a gold mine in itself.

Wait, I can own a piece of it. That is the great thing about stocks, you don't have to buy the whole company all at once.

Disclaimer: As I write this I own no HPQ, but it is on my wish list to buy. I do own AMD stock. I do occasional subcontracted work for Microsoft. I also own stock an HP competitor, SGI, that specializes in technical computing.

Marvell Ramping TD Smartphone Revenue

2011-08-28T15:58:00.000-07:00

Marvell Technology (MRVL) makes semiconductor chips for hard disk drives, cell phones, networking and other devices. They have long dominated the HDD market, but have struggled in the smartphone market. In their second quarter of fiscal 2011 (Q2), ending July 30th, we probably saw an inflection point for smartphones based on Marvell chips. This space should be closely watched in Q3 and Q4.

Marvell's stock price is still at bargain levels, at about 10x non-GAAP trailing earnings. Partly this is due to macroeconomic fears affecting the entire market, but more particularly Marvell fell off a recent 52-week high of $21.89 on January 18 due to poor results in Q4 of 2010 and Q1 of 2011, when revenues fell to $802 million, which was down 6% y/y. A few weeks ago it hit $11.94; Friday it closed at $12.89.

That period of weakness was partly due to slower than expected sales of chips for hard drives (HDD) and networking, but most visibly was due to slow sales of chips for RIM's Blackberries. Given that Marvell execs have talked for years about conquering the smartphone market as they once conquered the HDD market, this led many analysts to conclude that Marvell was simply out of the race to provide CPUs for smartphones.

The smartphone chip market is certainly extremely competitive, perhaps the most competitive semiconductor segment today. Marvell has been competing in the U.S. against the likes of Qualcomm (leader in CDMA technology), nVIDIA, Texas Instruments, Samsung, and Apple, which makes its own ARM-based phone CPUs. They have spent years and vast sums of money on R&D, essentially subsiding smartphone chip development with profits from their HDD chips. In the U.S. smartphone market, except for being in a couple of BlackBerry designs and sometimes supplying non-CPU chips for phones (for Bluetooth and Wi-Fi), they have been an also-ran.

Meanwhile, Marvell produced the only one-chip solution for the Chinese communication standard called TD-SCDMA. China Mobile, the largest Chinese wireless company (600 million customers), invested vast sums to develop a TD-SCDMA network, now in place in most Chinese cities. Marvell has worked closely with Chinese companies on this project, bringing about 1000 engineers to the table. Also called OPhones, these smartphones run software on top of Android. Marvell is now referring to them as TD phones. The first generation of TD phones, released in 2010, were expensive and did not sell in large numbers. Essentially they tested the system.

Q2 2011 was when TD smartphones first shipped in sufficient numbers to be meaningful for Marvell investors. Over 20 models are available from manufacturers like ZTE, Motorola, Huawei, and Samsung. TD smartphone revenue roughly doubled in Q2, causing Marvell's wireless segment revenues to increase 18% in the quarter. For Q3 double digit revenue growth for TD smartphone chips is the expectation. Marvell is also sampling solutions for the LTE smartphone market in China. Again, expect fierce competition, but Marvell should win a share of Chinese LTE slots in 2012.

Meanwhile HDD revenue may be sluggish due to the slow PC growth rate, but it generates a lot of cash. Cash flow from operations in Q2 was $263 million. Free cash flow was $235 million. Cash and equivalents balance ended at $2.40 billion, up sequentially from $2.27 billion. Marvell repurchased $136 million, or 9 million shares, in the quarter and has authorized $1.5 billion for further repurchases.

The best cure for the low stock price, to my ears, was hearing that one use for cash could be starting to pay dividends. Compare Marvell's PE ratio to a semiconductor company like Microchip (MCHP) that does pay dividends, and you can see that semiconductor investors are more interested in dividends than they were a few years ago. However, it would be a big change for Marvell, so don't count on it.

Disclaimer: I am a long-term investor in Marvell stock

See also:

http://www.marvell.com/

My August 18, 2011 Marvell (MRVL) analyst call summary

My May 26, 2011 Marvell (MRVL) analyst call summary

My March 2011 Marvell (MRVL) analyst call summary

Keep diversified!

SGI Sees Revenue Growth in 2012

2011-08-22T19:36:00.000-07:00

Silicon Graphics International (SGI) sells data processing systems with a focus on technical computing. Their high-end systems are used to solve some of the toughest computational problems encountered by government and industry. They also provide datacenter equipment for cloud computing to companies like Amazon.

The new SGI is basically a combination of the old Rackable Systems, which specialized in datacenter server systems, and the old, bankrupt SGI, which specialized in high-performance science computing. I had my doubts when the two companies merged, but the new company turned out to be better at executing than either of the old companies.

The transformation of SGI is about technology, sales, and profit margins. In last Thursday's report on fiscal Q4 2011 (ending June 24) we saw record revenues for the typically slow Q4. Revenues were $195.5 million, up 36% sequentially from $143.7 million and up 92% from $101.6 million year-earlier. While GAAP net income was negative $12.1 million, non-GAAP net income was $3.9 million. Of course I would prefer to see GAAP net income in the black too. In this case the difference is largely due to non-cash operating expenses, restructuring, and software revenue recognition rules (because the computer systems have software bundled with the hardware). As a check on the merits of GAAP vs. non-GAAP, the cash balance was up $9.4 million in the quarter.

SGI is debt-free and had a cash and equivalents balance of $143 million at quarter's end. They can fund a strong R&D effort and could make acquisitions if needed.

The new Altix UV supercomputer line has no real direct competitors. It has a memory and processor model that make it very attractive to high-end technical users. Because of that profit margins are good. The rackable systems for server farms and cloud computing continue to offer innovative designs, but margins have been improved there as well.

The company is now truly international, which is important when your key products are supercomputers. Service revenue is also a key factor in the new, profitable business model.

In response to questions from analysts management went into some detail, and speculation, about technologies they are developing. They are working with Microsoft to expand the capabilities of SQL Server. They believe that for certain types of computing they will be able to deliver performance equivalent to Oracle's Exadata systems at about one-third of Oracle's current price. Considering how successful Exadata has been, both in terms of compute ability and revenue generation, that could be highly significant in 2012.

Analysts also speculated that with budgets thin, SGI might have difficulty selling its computers to government agencies. However, SGI has little or no exposure to state and local governments in the U.S. Federal agencies still seem eager to decrease their other costs by upgrading their compute capabilities. For industry, the total cost of the design process is decreased by buying more computational power.

While not giving guidance by quarter, for fiscal year 2012 (running to June 2012) revenue is expected between $740 and $780 million, up to 24% over fiscal 2011.GAAP EPS is estimated between $0.15 and $0.30. Non-GAAP EPS expected between $0.60 and $0.80.

For more details on quarter results, see my SGI Q4 fiscal 2011 analyst call summary.

Disclaimer: I am long SGI.

The usual risks apply, so keep diversified.

See also: http://www.sgi.com/

Onyx Pharmaceuticals Readies Carfilzomib

2011-08-17T14:12:00.000-07:00

I learned about the Biotech Disappointment Curve from watching Onyx Pharmaceuticals. I started following Onyx (Nasdaq: ONXX) in 2005 and first bought stock in 2008. Often new biotechs run up large market capitalizations when they have their first positive Phase II or Phase III data in. After FDA approval, however, investors sometimes start looking at a company differently. They want to see market caps based on earnings, not on future expectations. We recently saw the down side of this curve again when Dendreon announced that its ramp of Provenge had slowed in Q2 [See Dendreon Provenge Demand Questioned].

In the case of Onyx, if you look at the stock price going back a decade, the stock in 2002 was under $7 per share. The 2003 ramp was impressive, with a peak of over $48 in April of 2004. Nexavar (sorafenib) data for advanced kidney cancer was positive, and in December of 2005 the FDA approved the therapy. Then came the show-me-the-money slump, as it takes a while for a sales force to actual get traction for a cancer therapy. At the bottom of the slump, in late 2006, you could buy the stock for under $11 per share. Then in 2007 there was another ramp when Nexavar was getting approved for liver cancer. From 2008 until present Onyx stock has mainly stayed in a broad range around $30 per share.

Another factor is that Nexavar is sold by Bayer. Onyx gets a share of the profits after Bayer's expenses. But in most quarters Onyx's own operating expenses have been sufficient to wipe out the receipts from Bayer.

Bayer and Onyx have been running Nexavar through a set of clinical trials that have shown it may be effective for other forms of cancer, and to strengthen its role in liver caner. If you subtract out the research and development (R&D) costs, in most quarters Onyx would have shown a profit. Onyx has started recruiting patients for Nexavar Phase III clinical trials for breast cancer and thyroid cancer, and has Phase II trials underway in colorectal and ovarian cancer.

Fortunately Onyx Pharmaceuticals has been able to maintain a high cash balance despite the losses, end Q2 2011 at $550 million.

Given the background of success with Nexavar, tempered with losses due to R&D spend, Carfilzomib is the key to Onyx's future value. Carfilzomib is a proteasome inhibitor that had positive data for relapsed and refractory multiple myeloma in a Phase IIb trial. In fact the data was good enough that it is being submitted to the FDA for approval. At the same time two Phase III trials have been initiated.

If carfilzomib is approved by the FDA, either based on current data or after Phase III results, the nature of Onyx's model will change. Again, there is likely to be a phase of investor euphoria followed by disappointment at the time needed to ramp a new cancer therapy. It should be possible, starting in 2013, to have a vigorous R&D program to continue expanding the use of Nexavar and carfilzomib without actually throwing the bottom line into the red. If profitability comes earlier, so much the better.

Even should carfilzomib and new indications for nexavar fail, Onyx could show profits by cutting back on R&D and because it has a long ramp ahead for Nexavar for liver cancer in Asia, where the majority of global liver cancer cases occur.

Today Onyx ended with a market capitalization of $2.1 billion, at $33.52 per share. I believe that there is always risk in biotechnology stocks from competition, the need for FDA and other national medical agency approvals, and from failure to execute. However, I am a long term investor in Onyx Pharmaceutical based on the potential of Nexavar and carfilzomib. I have no plans to sell or buy ONXX in the immediate future.

Keep Diversified!

See also my notes on the Q2 2011 Onyx Pharmaceuticals analyst call.

TTM Technologies (TTMI) Expands to Meet Demand

2011-08-11T11:33:00.000-07:00

TTM Technologies (TTMI) makes PCBs (printed circuit boards) for the communications, industrial, medical, and consumer electronics industries. It is a U.S. corporation, but in 2010 bought a Chinese PCB manufacturer. The U.S. facilieis generally do small runs of PCBs for prototypes and specialized, low volume products. Chinese facilities largely do larger PCB runs for computer and communications equipment, cell phones including smartphones, and more recently tablet computers.

TTM is a value plus growth proposition, but let's start with the caveats. The Chinese segment, formerly Meadville, had borrowed substantial amounts of money to buy capital equipment to serve the rapidly expanding market. TTM took over those debts. As of the latest quarter reported, long term debt was $432.3 million. On the other hand the cash and equivalents balance was $235.9 million, giving net debt of about $196 million. Cash flow from operations was $67 million, but capital equipment is still being purchased to meet demand (and replace obsolete equipment). Capital expense was $44 million. So it will take some time to pay off the debt, which fortunately carries a low interest rate.

Given the debt, a serious slowdown in demand for PCBs would set back TTM, but with so much cash on hand they should be able to get through a slow period better than most businesses, including much of their PCB competitors.

On the positive side TTM has a great model within its industry. It is one of the largest players in the world. It also specializes in the very highest end PCB technologies, the ones needed to create ever-smaller, more powerful devices. This involves, for instance, drilling holes for component connections with lasers, from computer-generated designs. Increasingly prototypes will be engineered and tested in the U.S. When production runs are large, they can be done in China. Clients like this model, and TTM is likely to pick up more clients over time.

While there are a few big players at the global scale, much of the PCB competition in the U.S. consists of much smaller businesses that can't afford to buy the capital equipment necessary to make high tech PCBs. One notable competitor at the high end in the U.S. is DDi Corporation.
In the last year, one of little growth in the U.S. economy, TTM revenues for Q2 2011were $366.1 million, up 18% from $310.2 million in the year-earlier quarter. Non-GAAP EPS was $0.40 per share. When you analyse TTM be sure to note that revenues are somewhat seasonal.
Aside from the recent general stock market turmoil, TTM had a stock price drop based on a one-time non-cash charge of $48.1 million for obsolete equipment. Also, management honestly does not know what the effect of the current macroeconomic uncertainty will be on end demand. However, if demand slacks they can stop adding capital equipment, so they have plenty of a cash flow cushion in that scenario.

I have been observing TTM's management for years now. They appear to be honest, smart, and hard-working. I take notes on their analyst conference calls, which you can find at TTM Technologies analyst call summaries. If you go back to 2008 you can see how they managed their way through the last recession.

Keep diversified!

Dot Hill Continues Comeback

2011-08-09T15:09:00.000-07:00

Dot Hill (nasdaq: HILL) is a botique designer and manufacturer of data storage equipment, most of which is resold by OEMs like HP, Lenovo, and Samsung. For background on the Dot Hill story see my Dot Hill Summary page, and for the latest results, see my Dot Hill Q2 2011 analyst conference call summary.

Dot Hill had a slightly better than expected Q2, with $53.2 million, up 12% versus comparable Q2 2010 revenues excluding NetApp. Dropping the NetApp relationship has proven to be a good idea, as new customers and improved margins have more than compensated. Non-GAAP net income was $0.4 million (EPS $0.01) compared to at EPS loss of $0.06 in Q2 2010.

Dot Hill's products are getting traction because they offer mid and high range enterprise storage features at relatively low prices. Margins are improving partly more Dot Hill storage management software is being sold along with the hardware.

Dot Hill has struggled to get on a solid footing, but now that it has done that, their are several interesting possibilities ahead. If any or all work out, revenues and profits should ramp materially. The data storage industry has been consolidating. One of Dot Hill's rivals was recently bought by NetApp, which means some OEM's now are being sourced by a competitor. Dot Hill has been in talks with multiple OEMs about switching. However, this is not news, as the situation was the same three months ago. There is no guarantee that Dot Hill will pick up one or more clients from this transition. However, if it does, that would go a long way to building new revenues and profits.

Dot Hill has a large number of patents related to storage technologies and has hired an outside contractor to investige monetizing them.

Finally, the storage management software is still a new opportunity. Feedback for customers should allow for enhancements and better bundling of with hardware. Software revenues have far higher margins than hardware revenues, so that could be quite a shot in the arm to profits.

Downside risks include the usual competition, unusual events, failure to execute, and overspending.

Dot Hill is certainly worth keeping an eye on if you are intested in the booming storage space [disclaimer: I own Dot Hill stock].

See also dothill.com

Keep Diversified!

Dendreon Provenge Demand Questioned

2011-08-08T08:07:00.000-07:00

The price of Dendreon stock plunged after hours on August 3, 2011 after the company announced that revenues from its new prostate cancer treatment Provenge would be considerably less than expected during the remainder of 2011.

Prior to the release of Q2 results and the Dendreon Q2 2011 analyst conference call the main concern about Dendreon had been its ability to bring Provenge capacity online [See Dendreon Ramps up Provenge Production, July 15, 2011]. Provenge is not a drug. It is a tweaking of the patient's own blood cells to generate an immune reaction to prostate cancer cells.
Dendreon management went over the situation with analysts both in their presentation and in the question and answer session. Clearly analysts were suspicious of Dendreon's explanation for the situation.

The issue (per management) was reimbursement. There had been earlier questions about whether private insurers and Medicare would pay the $90,000 or so Dendreon charges for Provenge. That question was settled by a July 30 government ruling that as long as the prescription was "on label," reimbursement would be made. Note that was after the the second quarter ended. Rather than resolve the issue, that positive development bifurcated to two new ones. One was doctor ignorance of the new situation, the other was cash flow issues.
The claim that doctors who treat prostate cancer remain ignorant of the availability of reimbursement for Provenge strained credulity. Even before the FDA approved the therapy investors money was spent at a mad rate, typically over $100 million a quarter, to prepare to manufacture, sell, and administer Provenge. It is hard to believe that Dendreon's pretty good sized sales force could not dial up a bunch of doctors and say, "Did you hear the good news? Medicare will reimburse for Provenge as long as it is used according to the label." I assume this massive muckup should not take too long to straighten out.

The cash flow problem arises because most doctors (urologists and oncologists, in this case) were not set up to handle a situation that turned out to have novel economics. Dendreon is no more expensive than most high-end cancer therapies. However, the entire process is done in about four weeks. Most chemotherapies and newer drug-based therapies take place over a longer period of time, so the payments are broken up over a period of months.

With Dendreon, the doctor's office has to pay $90,000 to Dendreon in one month, then wait maybe two months for Medicare reimbursement. An oncologist with ten patients meeting the criteria for Provenge (asymptomatic or minimally symptomatic metastatic hormone refractory prostate cancer) would have to front $900,000 to treat all ten patients immediately. So, no surprise with hind site, many decided to treat one or two patients, then wait for reimbursement for them before treating another patient or two.

Of course Dendreon has huge cash resources, so anticipating this problem might have been able to work something out, like giving 60 days credit. Sixty days, however, is enough time to through revenues into the next quarter, causing missed predictions of mounting revenue.
So the real question analysts and investors are asking is whether this is just a delay in the revenue ramp, or whether the cash flow issue is just a cover for less demand than has been assumed in the past.

Some of the demand-is-less than expected scenarios are credible; management says they are not seeing them so far. The main threat is competition. Because of the narrowness of the label, men are only in the Provenge treatment zone for a period of time. After that they progress to symptomatic cancer, and they are off label and ineligible for reimbursement. So if a doctor and patient choose another therapy, even if just for cash flow reasons, even if that therapy fails, then the patient will have progressed beyond the Provenge label.

How will it really work? Assuming the cash flow and reimbursement ignorance issues are resolved, it is a question of who has the better sales force. Provenge has some great selling points, mainly its low toxicity. But it is more complicated to administer. Management talked about making the logistics of it easier for clinics, so they are aware of that issue, too.
My guess is that Provenge will ramp and eventually meet earlier expectations. In the meantime, however, visibility will be poor for investors. Management lost a lot of trust in the recent fiasco. The stock price will stay low until we have a quarter where revenues prove demand.
Key to further growth of Dendreon is extension of the label. There is no scientific reason I know of that Dendreon should not be helpful both earlier and later in the progression of prostate cancer. In theory all men whose disease progresses pass through the current label, but catching them earlier should lead to more good outcomes, and hence give the therapy a lift against any competition. Also, of course, getting approved in Europe and the rest of the globe should lead to a major ramp in revenue.

You can see all of my notes on Dendreon as well as links to other important data at my Dendreon main page.

This is yet another real-world proof that in addition to known risks, their are potential unknown risks, so keep diversified!

See also: Provenge Press Releases

Dendreon, Hansen Medical, Onyx Conference Calls

2011-08-04T08:58:00.000-07:00

Yesterday I posted summaries for three analyst conferences reporting Q2 results. The most dramatic result was the swoon in Dendreon's stock price. It is a busy day, so all I can do right now is provide links to my summaries:

Dendreon (DNDN) Q2 2011 analyst conference call summary

Onyx Pharmaceutical (ONXX) Q2 2011 analyst conference call summary

Hansen Medical (HNSN) Q2 2011 analyst conference call summary

Plenty of Stimulus

2011-08-02T14:48:00.000-07:00

I do not like the details of the debt ceiling deal signed into law by President Barack Obama today. I'll mention my reasons later. What I want to point out to investors and decision makers is that there is still plentiful stimulus in the new economic plan. Let's call it the new Two Year Plan.

The federal government, for the remainder of 2011 and 2012, is still going to create a lot of debt, which strangely is the same as creating a lot of money. Tax revenues will still be less than expenditures by over 2 trillion dollars in the next two years, unless the economy starts growing a lot faster.

Note that the Federal Reserve is keeping the interest rates it charges member banks near zero. That, in a normal recession, would be very stimulating in and of itself.

So why is the economy not growing faster?

People want simple, one variable solutions [we need more government spending, or we need less government spending, or deregulation, or ...] but in fact we are looking at a complex, multiple-variable problem.

If all those variables could be wrapped into one, I would say they relate to lack of confidence. There are many indicators of lack of confidence. One is the historically low price-to-earnings ratio in the stock market versus the historically low interest rates in the bond market. It is pretty easy to make 2 to 10 times as much return on your capital (or savings, if you prefer to think like a consumer) in the stock market today as in the bond market. Take fear out of the equation and funds would flow from bonds to stocks. Stocks would go up, and interest paid on bonds would climb as well. All investors would feel wealthier (except maybe those who were heavily in long-term bonds), and would spend more freely. That would help revive the consumer segment of the economy.

But that is easier said than done. The bond holders are the same people, in their tens of millions, who sold their stocks in 2008, at the bottom of the market, and effectively traded them for bonds. They are a fearful lot, easily stampeded.

We see a lack of confidence in bank lending practices. We see it in deferred purchasing of houses. The demand for housing is huge; interest rates and house prices are both low. But fear holds people pack.

The fear is not irrational, it is simply not analyzed. Bad things happened to a lot of people starting in 2007. Everyone who has a job today knows someone, maybe many people, who lost their jobs, homes, and even families. Almost everyone wants to minimize risk, even if that means substantially diminishing long-term opportunities (like buying houses and stocks cheap).

Sadly, the business men and women of America are hiding with the frightened steers rather than boldly leading us out of the recession. Every CEO wants the other CEOs to hire first, increasing demand, so that it will be safer to hire. Some even continue to lay off employees when they are running profitable companies, like Cisco's John Chambers, because they are not able to inspire investors with visions of future profits. Once a proud leader, John has become a harried, frightened little rabbit of a CEO.

U.S. executives, and their political mouth pieces, complain about taxes and regulations and high labor costs in the U.S. What, business was supposed to be easy? I agree that there are unnecessary regulations, but they are not what is stopping business expansion. Second rate CEOs are stopping business expansion. We still have some hard-charging leaders who can build up businesses (look at the biotechnology sector), but most contemporary CEO's are too effete to get their hands dirty doing real work.

The fact is the business climate in the U.S. and internationally is quite good now. Is anyone besides me embarrassed that a bunch of Communists in China are kicking our collective, free-market behinds? Do we want to have to admit that all our post-World War II free-market individualist posturing was not based on our outstanding individual capabilities, but on the fact that in World War II all of our competitors factories were bombed out of commission? China, at the end of World War II, had an economy they would have been ashamed of in the Middle Ages. They did not get to where they are now by slacking and refusing to deal with challenges.

What don't I like about the debt ceiling deal? I don't like the bloated military and homeland security budget, which we simply cannot afford. But mainly I don't like the fact that they could have come to the exact same decision a month ago. Congress and President Obama, Republicans and Tea Party and Democrats, basically killed economic expansion in the month of July.

The President, Congress, and other national leaders need to focus on restoring confidence. We need to reassure people that have jobs that they will keep them, and those that are looking that their search will end soon. We need for people to feel they can buy a home or replace some old appliance. We need to show the old American can-do business spirit of innovation. We also need to cooperate with each other to find solutions. We need to expand the pie, not fight over the crumbs.

There is plenty of stimulus. There is plenty of money being created. It needs to go into productive uses, not into the federal bond market.

Celgene Pipeline Value

2011-08-02T10:04:00.000-07:00

My nomination for most undervalued stock in the biotechnology segment: Celgene (CELG). Celgene provides a double dose of growth potential: further growth of its currently approved therapies and a rich pipeline with some therapies closing in on FDA approval and commercialization.

Consider Celgene's Q2 earnings reported last week. Revenue was $1.18 billion, up 4% sequentially from $1.13 billion, and up 38% from $852.7 million in the year-earlier quarter. GAAP Net income was $279.2 million, up 9% sequentially from $255.6 million and up 80% from $155.4 million year-earlier. GAAP EPS (earnings per share) were $0.59, up 9% sequentially from $0.54 and up 79% from $0.33 year-earlier. Non-GAAP EPS was $0.89 per share.

Most of this rapid growth was based on a single therapy, Revlimid for multiple myeloma (MM) and myelodysplastic syndromes (MDS). The rate of growth fluctuates, but expansion is largely international now, with Russia, China and Brazil still ahead. In addition various clinical trials have indicated Revlimid will be beneficial in other types of cancer. Revlimid is in Phase III trials for CLL (chronic lymphocytic leukemia), NHL (non-Hodgkin lymphoma) and prostate cancer.

Based on that alone, one might expect Celgene's stock price to be 30 to 50 times earnings per share. As I write you can buy Celgene for $58.12 per share. Even using the lower, GAAP number ($0.59 x 4 quarters = $2.36 per year), the PE ratio right now is under 25 times earnings. Non-GAAP EPS ($0.89 x 4 = $3.56) reads out at a 16.3 ratio.

But Revlimid, and other already-approved therapies Vidaza, Abraxane, and Thalomid, are just part of the story. Thalomid is ancient and has declining revenues, but Abraxane for breast cancer is ramping. Abraxane is also in clinical trials for treating lung, pancreatic, bladder, skin, and ovarian cancers. Vidaza for multiple myeloma grew revenues 23% y/y, and has a lot of room to grow with global launches.

Earlier in the pipeline Celgene displays depth-of-field. Of course most pre-clinical drugs don't make it through all the clinical phases and FDA approval; there will be some losers. Celgene's pipeline is so broad and important you could write a book about it.

In Oncology/Hematology we have pomalidomide in Phase III trials for myelofibrosis and nearing the end of Phase II for multiple myeloma. There is Amrubicin, in Phase III for small cell lung cancer. In Phase II we also have ACE-011 for CIA and ABI-008 for prostate cancer. In Phase I we have Tork Inhibitor and ABI-009, both for solid tumors. There are two additional pre-clinical ABI variants for solid tumors.

In inflammation and immunology we have Apremilast in Phase III and JNK CC-930, CC-11050 and PDA-001, as well as more Apremilast indications, in Phase II.

Beyond that Celgene lists over a dozen agents in discovery and pre-clinical phases.
Of course, what will affect Celgene's stock price soonest are the late stage candidates. The first big movers is likely to be expanding the label for Revlimid to first-line (initial) treatment of multiple myeloma. The second would be Abraxane for non-small cell lung cancer, with FDA submission in second half of 2011 and a decision likely in the first half of 2012.

In general it is a very good time to invest in biotechnology, even given the known risks. Gilead, Celgene, and Biogen Idec are cash cows that also have unrealized value in their pipelines. Small, risky biotechs aren't commanding the high premiums they used to, which is good because many of their drug candidates don't work out. With the larger biotechs when a drug candidate fails, it is disappointing and the stock can lose some momentum, but cash flow can be used to buy and develop more candidates, or buy back stock, or even (hopefully some time soon) start paying out a dividend, which is the true gold standard for value-conscious investors.

See also www.celgene.com

Keep diversified!

Akamai in Value Range Again

2011-08-01T18:23:00.000-07:00

Akamai (AKAM), the internet content acceleration company, has been showing downward momentum since a peak at . It plunged after its Q2 earnings announcement on Wednesay. So why did I add to my Akamai position today?

Akamai has always been a good company. Its stock price, however, has been subjected to fits of mania and depression practically since its IPO in 1999, during the peak of the Bubble. When the recession hit in 2008 all the air went out and I was able to buy Akamai at bargain basement rates [$17.56/share]. Then the excitement returned, pushing Akamai up to valuations that just did not make sense considering where most other technology stock prices were. It was at $54 per share in December of 2010. I had sold part of my stake [at $44.80, nowhere near perfect, but not bad] by then. You might argue that I should have sold it all, but I tend to be as cautious selling stocks as I am buying them.

What is going on? Akamai has been growing revenues and profits. The question is, how fast can we expect growth to be in the future. Wednesday management said that Internet traffic this spring did not grow as fast as they expected, so they don't want to project as much growth for the rest of 2011 as they had in the past. [See my notes on the Akamai Q2 conference call for numbers and details]

I think the downward momentum has gone too far. That does not mean the stock price can't go lower, but it means I believe buying the stock at today's price is a good long-term investment. It might even be a good short term investment.

There are good, growing, well-managed technology stocks out there that have cheaper valuations (by P/E, etc.) than Akamai, but then I own several of them too. Akamai brings diversification to my portfolio. I believe I understand what Akamai does, how it makes it money, and what the competition is [See my extensive Akamai writings].

Internet traffic will continue to grow, and it will continue to become more complicated. Companies that depend on the internet need help with content delivery acceleration, with serving the fractured mobile device market, and with security. Akamai has managed to stay ahead of the competition for over a decade now. A slow quarter for internet traffic growth does not signal the end of Akamai. To me it signals a buying opportunity.

Do your research, think for yourself, and keep diversified!

See also Akamai Investor page

Gilead Sciences Readies Pipeline Value

2011-07-27T10:41:00.000-07:00

Gilead Sciences (GILD) is an enourmously profitable company with a cheap stock price, as measured by its Price to Earnings (P/E) ratio. Yesterday Gilead released in second quarter (Q2) 2011 results and held its analyst conference.

A convergence of factors is driving Gilead profits higher. This trend should accelerate in 2012 and continue through at least 2015.

Gilead dominates the anti-retroviral, HIV drugs market in the U.S, where its market share has grown to 70.4%. Its global market share is not as high, but continues to ramp. Gilead AIDS drugs (Atripla, Truvada and Viread) brought in $1.76 billion in the quarter, up 11% y/y. Gilead's therapies are popular because they combine several drugs in a single pill, which makes for good patient compliance.

You might think that in a highly competitive field, with over 70% market share, there would be little upside left. A couple of factors show that thinking is wrong. Recent trials have shown the benefit of starting those infected with HIV much earlier than is currently the case, and that therapy reduces the risk of infection for partners by 96%. The percentage of Americans who are infected and who are already taking Gilead anti-retroviral drugs is estimated to be only 42%. Globally, as nations modernize and become wealthier, the demand for the best HIV therapies is also expanding.

In addition, in 2012 Gilead should be bringing to new combination pills to market, pending FDA approval. Endurant for HIV single tablet regimen of Truvada plus Rilpivirine is likely to get FDA approval in August. The Quad regimen data from two Phase III trials will be released in Q3 2011. In the likely case the data is positive, we should see Quad for sale in the second half of 2012. While some patients may shift from one Gilead pill to another, most the likely course is that Quad and Atripla will continue to take share away from older, non-Gilead therapies.

Branching out from anti-virals, Gilead has made progress with Letairis for pulmonary arterial hypertension, which generated $74 million in revenue. Ranexa for chronic angina hit $86 million in the quarter.

The coming pipeline of Gilead non-HIV drugs is so large that I can only give an overview here and refer you to the conference slide show (see link below). There are even more HIV therapies at stages of the pipeline, including two stand parts of the Quad, Elvitegravir and Cobicistat. There are four hepatitis drugs in phase II, and three in phase I, which will likely be made into a combination therapy for hepatitis C. There are six drugs, mostly in Phase II, with cardiovascular, respiratory and oncology targets.

Gilead had an astonishing free cash flow in the quarter of $943 million. I'd like to see a dividend, but I agree that at this point the stock is so undervalued that buy-backs make a lot of sense. Gilead spent $724 million in buy backs in the quarter. Yet it ended with a cash balance of $5.5 billion. Gilead is in a great position to acquire and develop more drug candidates.

Short of a Black Swan type disaster, I see Gilead as being a much, much larger company by 2020. That is why I own Gilead stock and may continue to acquire it (in a balanced fashion).

But even with a great growth and value combo like Gilead Sciences, there are the usual risks from competition, macroeconomics, failure to execute, etc. See SEC filings for a complete set of risks.

And Keep Diversified!

http://www.gilead.com/

AMD Key Question

2011-07-24T14:02:00.000-07:00

AMD had a big jump in stock prices Friday, after reporting Q2 results after the market closed on Thursday. Q2 was not a stellar quarter, but AMD reported that its Fusion line of processors that combine a CPU and a GPU on single chip are ramping nicely. OEMs like them and consumers like them, so the demand is there. Intel, AMD's far larger rival, cannot match them. So it predicted a much better Q3.

If good time were more obviously ahead AMD's stock price would be far higher. Assuming AMD continues to release new Fusion projects, as well as its high-end CPU Bulldozer chips, on schedule, we still can't assume AMD will pick up appreciable market share from Intel.

Intel's law breaking, monopolistic practices days might be behind it, but it still has oodles of money it can throw at problems. It's problems are multiplying, to be sure, but it has a mountain of cash and a cascade of cash flow, unlike AMD.

An analyst at the Q&A part of the Thursday conference asked if Intel is going to lower its prices to compete with AMD Fusion. Let me quote my own summary of AMD's Q2 2011 conference, which is probably not an exact quote of the question and response:

Q. In the past when AMD has done well, we have seen price aggression from Intel. What are you seeing now?

A. It has always been a competitive market. The strength of our products will bring our plans to fruition.

In other words, not so much price aggression so far, but AMD is aware of the potential problem.

I believe Intel is somewhat constrained in its ability to lower prices. This is because investors are worried about Intel. Intel has about 80% of the market. To significantly lower prices on 80% of the market to keep AMD from gaining a percentage point here or there would cause Intel margins to drop, endangering the very cash flow that is such a competitive advantage. Also, the share AMD can take is limited by its production capabilities, which are very limited compared to Intel's.

Instead, Intel will rely on its marketing muscle. It will spend more on advertising, expecially the kind of "Intel inside" deals that convince retailers to promote computers with Intel CPU's instead of those with AMD Fusion chips. Intel will also keep trying to play catch up in the graphics arena. Intel is an entire generation behind AMD (and NVIDIA) in graphics technology, but they have been doing a good job in catching up, including by licensing technology from NVIDIA.

So again we have a situation where AMD has a window of opportunity, which should last until about the end of 2012. AMD will still be ahead in graphics and in integrating graphics with general cpu technology at the end of 2012, but going into the year 2013 Intel's combined GPU+CPU chips are likely to be good enough.

To really compound investor value AMD has to do great in 2012, generating enough money to keep up R&D and start exerting some advertising muscle of its own.

As far as the stock price goes, the Fusion chips are nice, but the real question is whether AMD will be able to pick up share in the server market with its upcoming Bulldozer based offerings. We won't begin to see if that is happening until we get results from Q4 2011 in January of 2012.

I own AMD stock, and I am cautiously optimistic, but I know how hard it is to compete with Intel's marketing machine, no matter how good AMD's chips may be.

See also amd.com

And my AMD summary page

Keep diversified!

Biotechnology High Risk Watch List

2011-07-19T08:58:00.000-07:00

Yesterday I made up a new list of high-risk biotechnology stocks to watch and consider for investment.

The list is overdue. I did reasonably well with my first set of high-risk stocks, which included both information technology and biotechs. Anesiva (ANSV) bombed, went to zero, but I more than made up for that with Dendreon (DNDN), Dot Hill (HILL), Biogen Idec (BIIB) and Hansen Medical (HNSN).

My strategy is to sift through high risk stocks with high returns potential, based on my knowledge of science, technology, and business practicalities. Then I create a bundle, so that if one or more stocks tank, I can take that in stride. Say I choose 5 stocks and invest $1000 in each. A typical outcome might be that one tanks (Anesiva), one goes wild (Dendreon) and returns 10 for 1, and 3 do okay, lets say breaking even. My $5,000 has become $13,000. Typically my time horizon for the process is 3 years. In biotech in particular you need patience because of the long time needed to test therapies, get FDA approval, and bring them to market. In the case of Dendreon I had to wait 5 years to 10x my money.

I also balance risk by not having all my money in high-risk bundles. I typically have a number of medium and lower risk positions in my portfolio. At this point, for instance, I still retain some Dendreon stock, but I would classify it as medium, rather than high, risk. Of course even my low risk stocks take beatings at times, as in 2008 and last week with Microchip (MCHP).

The new list is currently:

I may add to or delete from the list as I go along. At this point I have not bought any of these stocks. I have not done any deep research on them. Typically before I buy a stock I do at least one analyst conference summary on the stock, so I have a baseline. Typically I nibble; having nibbled, I redouble my research efforts.

Anyway, here are the (high risk!) stocks for my possible new bundle, in no particular order:

KERX, Keryx Biopharmaceuticals
AEZS, AEterna Zentaris
ONTY, Oncothyreon
RNN, Rexahn Pharmaceuticals
RXII, RXi Pharmaceuticals
MITI, Micromet
INO, Inovio
DSCI, Derma Sciences

The list started somewhat longer, but I already eliminated a number of companies for a variety of reasons. Mostly it is companies with Phase II or Phase III products that have not yet generated significant income. Much of the risk is from the possibility that trial outcomes will be insufficient to gain FDA approval.

Of course you can watch this blog for my thoughts on these stocks as I do my research.

Keep diversified!

Dendreon Ramping Up Provenge Production

2011-07-15T09:56:00.000-07:00

For years Dendreon was the Cheshire Cat of biotechnology companies. Its stock price zoomed up and down depending on results of trials and rulings of the FDA on the efficacy of its first therapy, Provenge for prostate cancer. For about a year now the cat has seen flesh added to its bones and paying patients receive Provenge treatments and facilities for those treatments have been built, certified by the FDA, and come online.

In the last 52 weeks Dendreon's price has been relatively stable (compared to pre-2010), the a low of $30.15 and high of $43.96, with the price as I write at $38.92. It its peak, after FDA approval for Provenge, it hit an auction-market frenzy driven level of $55.43 on May 3, 2010.

Dendreon is probably still a couple of quarters away from showing its first profits. On August 3, 2011, it will report on the second quarter, but keep in mind Q2 was one of limited production facilities and high costs as new facilities are built and certified. I would expect revenues between $30 and $40 million (they give annual guidance, not by quarter) and about $100 million for operating expenses, so another red ink quarter. The ball to watch, however, is Q4 2011. That should finally give us a realistic picture of gross margins and operating margins.

Capacity rollout is encouraging; management is executing well. The Los Angeles facility, with 36 workstations, was approved by the FDA on June 29, 2011. Workstations take patient's blood and tweek its immune components to attack prostate cancer cells. The original New Jersey facility with 12 workstations generated $25 million per quarter in revenues. 36 additional workstations in New Jersey were approved on March 10. It should be noted that approval of workstations does not mean they immediately begin operating at full capacity.

However, at $25 million for 12 stations, 48 means $100 million in revenue and approved equipment in New Jersey and LA together could generate roughly $175 million per quarter. I suspect that if extra shifts are worked and the machines have little down time, the figures could be higher. At the same time their is the other constraint: patient demand. Doctors can't just write a Provenge subscription. They need to work with certified infusion centers, which Dendreon has been hustling to set up.

There is another facility under construction in Atlanta. Dendreon is estimating Q4 revenues in the $200 million ballpark. All three facilities should be operating, but by no means will all the workstations be operating at the $200 million mark.

Beyond that, Dendreon is seeking approval for Provenge in Europe. After that, the rest of the world.

It will be interesting to see if Provenge is as effective in the field as it was in clinical trials. That could have a big impact on how it will compete with other therapies.

Finally, and why that $55 per share spike was not all that unreasonable, if a bit premature, Dendreon is a platform company. In other words, Provenge is hopefully just the first of a series of active immunotherapies against various forms of cancer. The down side of that is that a lot of money will continue to go into R&D. The upside is that any further success of the platform really would make Dendreon into a gold mine for its stockholders.

I have been covering Dendreon since 2006. As usual I will write up a summary of Dendreon for Q2 2011 after the conference on August 3, 2011. You can see all of my notes on Dendreon as well as links to other important data at my Dendreon main page.

Looking for the next Dendreon? You might want to check out my Hansen Medical page.

But in addition to known risks, their are potential unknown risks, so keep diversified!

Biogen Idec (BIIB) Valuation Thoughts

2011-07-11T18:27:00.000-07:00

When I wrote "Biogen Idec PML Test Approved in Europe, Changing Tysabri Outlook" on March 15, 2011, the price per share of BIIB was $69.56. Today it closed at $105.53, having backed off its recent 52 week high of $109.63. Quite a run. So, the eternal investor questions: did something change? Does the run up reflect value that was already there back in March? Could this be another momentum run unjustified by fundamentals? Could there be even more value in the stock?

Biogen Idec's two multiple sclerosis (MS) blockbuster drugs are Avonex, with revenues in Q4 2010 of $654 million, and Tysabri, with revenues of $242 million. Also Rituxan generated $258 million. As I wrote earlier, most investors and analysts expect Tysabri revenues to rise now that patients can be pre-tested for JCV. Trailing earnings are $4.35 per share, so the current price/earnings (PE) ratio, while not real high, does anticipate solid earnings growth. This is despite competition from new MS therapies, notably Gilenya by Novartis, which is the first oral treatment for the disease, but which was not as effective as Tysabri in clinical trials.

I have always argued that there is undiscovered value in the earlier stages of the Biogen Idec pipeline, but that situation is little changed since March. With 8 indications in Phase III trials, chances are that several new therapies will be approved over the next couple of years. However, Biogen does plan to narrow the scope of its development program, eliminating oncology and cardiovascular candidates to focus on immunology. This should reduce costs in the short run.

On June 7 Biogen announced the EU had approved its Avonex PEN, which is a single-use injection device which will make taking the drug more convenient for MS patients. Nice, but not responsible for a $40 stock run-up.

On June 22 Biogen announced the EU approved including JCV status as a risk factor for Tysabri, which we presumed would happen in March.

On July 3, after the run-up, Biogen announced some nice science research on the role of death receptor-6 (DR6) in MS. Nice, but probably ten years away from adding to revenues, if it should work out.

It is fair to conclude that the price of BIIB had been low because of fears about Tysabri revenue being permanently stalled by the JCV complication. Those fears stopped being justified as we learned more about JCV and its detection. It is remarkable how a rising stock price can make fear evaporate.

So are we at a just-right stock price? Of course next year's price will depend on how revenues and profits ramp (or don't) in 2011, and what the outlook looks like for 2013.

During 2010, when Tysabri was still under suspicion, Biogen grew total revenues grew to $4.72 billion from $4.38 billion in 2009. That is just 7.7% annual growth. But earnings per share grew 17.6%. In the latest reported quarter, Q1, revenue grew 9% y/y.

I will be surprised if Tysabri revenue growth does not accelerate. I am fine holding the stock in the current price band, but I would want to see actual revenue and profit acceleration before feeling a higher band is a safe bet.

At this point Biogen pays no dividend, but is certainly a profitable enough company that it could. It would also show management's confidence in the company's future.

Hansen Medical: Run Up Spurs Valuation Thoughts

2011-07-08T15:55:00.000-07:00

I wrote on February 9, 2011: "Hansen Medical (HNSN) may be about to reach an inflection point. In fact, given the recent announcement of Philips paying $30 million to license just one part of Hansen's technology, we may be past the inflection point."

Last week "Piper Jaffray upgraded its stock-investment rating on Hansen Medical Inc. to overweight from neutral, saying its endovascular robot–pending 510k clearance–provides needed clinical solutions and will find a receptive audience in vascular surgeons." [ Wall Street Journal blog, June 30, 2011]

It is difficult to put an exact value on Hansen stock. Today Hansen closed at $4.59 per share, giving the company a market capitalization of $250.4 million. On February 9 it closed at $2.07. You could by it for $1.26 per share in early December 2010. Has it run up too much since December? Have there been new developments that justify today's price? Do future developments mean it could keep booming?

I believe the current price does not yet take into account information that has been available for several months now. It only reflects that Piper Jaffray called the undiscovered value of the company to a broader array of investors.

Hansen Medical has a technology platform. Repeat: technology platform. Its Sensei systems allow surgeons to control robotic catheters. There are a lot of kinds of surgery these could be used for, but each type of surgery requires some specialization of the catheter or its control system, as well as clinical trials proving safety and effectiveness, and FDA approval (EMA approval in Europe, etc.).

Hansen has been selling it Sensei systems with Artisan catheters to perform electrophysiology, the measurement of the nerve activity of the heart. The systems have been selling at a rate of a few per quarter, and cost more to make at that level of production than they sell for. They have shipped at least 100 systems to date. In addition, money raised from investors is spent on R&D for new applications, and of course on overhead. So Hansen has been losing money.

Now Hansen has received a large payment from Philips for one of its technologies: $23 million so far, with more to come. This should mean that the new and upcoming applications can be paid from existing cash and cash flow. In addition to electrophysiology, Hansen has permission in Europe to sell it Lynx ablation catheter. That allows surgeons to destroy nerve tissue to cure atrial fibrillation. It is a fair guess that FDA approval for U.S. use will come some time this year.

The first really big application is coming up to: vascular surgery catheters. Ultimately there will be a range of these, but the first approvals in Europe and the U.S. should come this year.

After that, anything goes. Hansen should be able to apply it robotic catheters to a wide variety of surgeries. There could end up being several in every hospital in the world.

Of course the usual risks apply. Hansen could screw up. Or a competitor could emerge. Or the FDA could delay approvals for longer than expected. Or patients could die or be injured if the system fails in unseen ways. In other words, this is not a sure thing. Keep diversified.

I still think Hansen should be worth over $10 a share based on present information, and up approval of the vascular robotic system by either the FDA or EMA, should head up from there.

I have owned Hansen stock since July of 2009, after starting posting Hansen analyst call summaries in February of 2009. I may be excited today and may not be seeing all sources of risks. Despite a relatively small investment in Hansen Medical it has shot up so much it may violate my portfolio rules (caps on % of portfolio in a single stock) so I may sell portions of my current stake if the price keeps running up.

See also:

Hansen Medical main page
my other Hansen Medical articles and conference summaries

Oracle (ORCL) Sun Shines

2011-06-24T09:31:00.000-07:00

Yesterday Oracle (ORCL) issued stunningly good results for its 4th fiscal quarter (Q4) 2011 ending May 31st. The price of the stock promptly took a major dive in after-hours trading, and is still down substantially as I write.

Usually when this sort of thing happens, a good report followed by a price fall, it is because either: (1) investors expectations were even higher or (2) guidance for the next quarter is below analyst expectations.

This time the issue is something far more specific: the revenue derived from a specific segment, computer hardware, that was acquired with Sun Microsystems last year. Before reading my commentary below, you might want to first familiarize yourself with Oracle quarter results with my notes on Oracle Q4 2011 Analyst Call.

Despite an overall increase in Oracle revenues of 13% from year earlier, hardware systems product revenues were $1.16 billion, down from $1.23 billion in the year-earlier quarter. That raised some flags with some analysts. Which mostly shows these guys have too many stocks to cover, or were hired for their connections, not their analytic ability. Oracle management explained their strategy before, and they explained it again during the question and answer session.

I'm with management on this one: Sun was poorly run from a business perspective, and Oracle is not obligated to repeat Sun's business mistakes. Rather than looking at specific products, Oracle looked at the overall Sun problem: low margins. Fortunately, those low margins were not all of a kind.

Oracle decided to stop selling low margin computer hardware products whenever possible, with the exception of those that margins could be raised over time. So a year later, they are selling slightly less product, but making far more profits on it. Not only that, but they are gearing up to sell a lot more product, in particular their Exadata and Exalogic lines. What is there not to like about that?

Oracle is a rapidly growing, undervalued technology stock. We are not in a tech bubble. A gold bubble, yes. A bond bubble, yes. Idiots are holding bonds at this point. Bonds are trash, in most cases not bringing in enough returns to keep even with inflation. Their principal is just as much at risk as it would be if invested (wisely) in quality stocks.

I don't own Oracle stock at this point, but with the price drop and a bright future, I could buy ORCL in my next buying round. The competition is mainly small cap tech and biotech stocks that may grow even faster, and yet are also cheap right now. [See what I own at William Meyers current stock portfolio]

One aspect of the situation not mentioned was Oracle's current war with HP over Intel Itanium based computers. I don't see much downside for Oracle here. Oracle software can run on many types of hardware. Itanium was always a bad idea, and Oracle should not be obligated to support two different Intel chip architectures.

Red Hat (RHT) Shows Resilience

2011-06-23T10:46:00.000-07:00

I listened to the Red Hat (RHT) analyst conference call on fiscal Q1 ending May 28th, 2011, yesterday. My detailed summary is at Red Hat Q1 2012 analyst call.

I recently read about the increased resilience of modern software, with Microsoft as the example. That matches my own experience. It has been years (maybe even a decade) since I have seen the Windows operating system itself crash on my computers. Occasionally I see application programs crash (especially older ones), but always the solution is to just restart them. That is resilience.

Red Hat is showing resilience for its investors. While the price to earnings ration is high, lately revenues and profits have been ramping fast enough to justify the hopes that high PEs are based on. It is still small potatoes when you compare its revenues and profits to Microsoft, or Apple, or even Google or Facebook. Long ago it was priced as the next Microsoft. Now Red Had Enterprise Linux and its brothers-in-arms JBoss and RHEV virtualization are a highly respected solution for servers, datacenters, and the cloud. It is nice to see a business software paradigm based on high quality with low prices. It is a huge benefit to the American economy.

I don't currently own Red Hat, but I bought some when it was near bottom during the late recession, so I did real well with it.

See also http://www.redhat.com/

Adobe (ADBE) Analyst Conference Call Summary Available

2011-06-22T09:39:00.000-07:00

I have posted my summary of the Adobe Q2 fiscal 2011 analyst conference call.

Lots of interesting stuff happening at Adobe, reflecting the rapid evolution of Internet and cellular delivery of information. HTML 5 is a space to watch.

AMD Fusion Upside

2011-06-03T10:04:00.000-07:00

AMD (Advanced Micro Devices) recently revealed that it has been unable to meet the demand for its first Fusion processors. They call these APUs, for Advanced Processing Units, to indicate that each chip includes both a CPU and a GPU (graphics processing unit). Introduced in late 2010, the first APU variety was designed to bring low cost, high quality graphic capabilities to inexpensive notebook computers. Computer makers (HP, Lenovo, Sony, etc.) embraced these first Fusion chips as a big improvement on the Atom chip from Intel, famous for underwhelming netbooks (sub-standard but very portable notebooks).

Does that mean the sun is finally rising on AMD investors (that includes me)? Intel remains not only holding most market share, but dominating the most profitable segments of the market, including chips for server computers. On the other hand Intel has its own problems, pressed from below by ARM architecture based chips in smartphones and tablets, while failing to be able to deliver the graphic quality consumers now expect. To make a workable business or consumer computer manufacturers need to add an AMD Radeon or NVIDIA GPU to the system.

Intel itself is not exactly the darling of Wall Street anymore. Today Intel is trading at 10 times last year's non-GAAP earnings per share. No tech bubble there. AMD is trading at 8.5 times last year's EPS. Intel is wading in cash; AMD has a substantial amount of debt. If you wanted to buy a computer processor manufacturing company, Intel would be the more obvious choice.

To break out of its trading range AMD, at the very least, would have to start generating substantially more earnings than it has lately. What are the chances of that, when the sector itself appears to be in trouble, and Intel has a tradition of crushing AMD whenever Intel's market share starts to slip?

It really does come down to Fusion. Intel is scared of Fusion, so it is using considerable resources to catch up in graphics technology. Intel is now paying NVIDIA to use its intellectual property, which probably includes graphics designs. That should start to show up in Intel chips in 2012. My guesstimate is that by 2013 Intel will have closed the graphics gap. So AMD's future profits, and the value of its stock, highly depends on how much market share it can pick up in 2011 and 2012, and at what kind of profit margins.

It came as a surprise to me, and probably to everyone, that AMD became supply-constrained in Q1. I think the problem is that the first Fusion chips were on the 40 nm process, which is where most graphics chips are at this year. Both NVIDIA and AMD reported supply constraints at 40 nm in early 2010. AMD failed to anticipate demand for its new chips, and so did not book enough capacity in advance. AMD now contracts for fabrication of its chips, whereas Intel has its own fabs. On the April 21 AMD analyst call for Q1 2011, AMD executives talked about insuring future fabrication capacity, so that must be about the Fusion shortfall.

Right now AMD is about to launch its second round of Fusion processors, which will be more powerful, but also will require more power. So they will be for higher-end notebooks and for desktop CPUs. The will be on the more-advanced 33 nm process. That may have its own issues, but it won't run into the 40 nm roadblock. Later this year AMD will also introduce its Bulldozer CPUs, which are not part of Fusion (they don't have graphics processing on the die).

The upside for AMD investors depends on continued support from manufacturers (HP, Dell, Lenovo, etc.) and from retailers like Best Buy. The near-universal sentiment now is that consumers get more for their money with AMD based computer systems, particularly when it comes to graphics capabilities. Thus AMD should pick up market share this year in the sub-$1000 categories of notebook and desktop computers.

One commonly told story is that consumers are moving to tablets, so sales of PCs and notebook computers are about to come to a grinding halt. The actual evidence for that is scant. In the U.S., prior to the introduction of tablet computers (they've been around for nearly a decade, but did not become popular until Apple marketed a more attractive, if less powerful, version), everyone pretty much had at least one computer, either a desktop or a notebook, maybe a netbook. Most moderate to heavy users had a PC at work and a desktop and either a notebook or netbook for personal use. As the new thing, tablets are going to sell, and with budgets tight, they are going to cause purchases of notebooks and desktops to be delayed. But most tablet computer users have found they are not really a replacement for their more powerful cousins. So, the question becomes: what do they upgrade next? Are they going to get an even newer tablet, or are they going to refresh the old desktop or notebook computer?

You know what the gadget guys will have. A good, reliable, high-performance desktop, a good notebook computer for working away from home, a tablet to be cool and consume video, and a smartphone.

AMD is not going to compete in the smartphone space, but their Fusion chips are beginning to appear in Windows-based tablets. Their stand-alone graphics chips are now used by Apple for its desktop computers.

Also, this is a global market. The same low-cost high-graphics capability that appeals to U.S. consumers will appeal even more to first-time PC buyers in India, China, Brazil, and developing countries.

A recovery of market share in the server GPU market would also benefit AMD, but I'll leave that topic to a later story.

Any reasonable investor not already holding AMD should probably take a show-me the market share and EPS gains attitude. On the other hand, there is a good chance that 2011 will be a year when those of us who already hold AMD will see the upside of Fusion. Maybe as early as the report on Q2, if production was ramped for the new Fusion products.

Marvell Technology Sees Higher Q2

2011-05-30T10:57:00.000-07:00

Marvell Technology (MRVL) makes semiconductor chips for hard disk drives, cell phones, networking and telecommunications. Recently the going has been rough for Marvell stockholders, as reflected in its stock price. After a high of $22.87 in April 2010, the stock hit a 52-week low at $13.87. After the Marvell analyst conference call, on Friday the stock jumped 11%, from the Thursday May 26 close of $14.56 to the Friday close of $16.17. So is that it for Marvell, or are we starting a new ramp?

Marvell's management described the results for Q1 fiscal 2012 ending April 30, 2011 as a low point in their cycle. Partly this was the usual seasonality as consumer end products build in Q2s and Q3s. But it also reflected poor sales to RIM for Blackberry models, a slow growth rate in the hard disk drive market, and slow new product ramps. In each case Marvell makes one or more mixed digital and analog chips for the end products.

Revenue for Q1 was $802.4 million, down 11% sequentially from $900.5 million and also down 6% from $855.6 million in the year-earlier quarter. Revenue was at the very low end of guidance. I think the stock had been shorted on the theory they would actually miss guidance, and they did miss Street estimates.

However, Marvell reported that things are already picking up in Q2 and the long-promised Marvell Inflection Point may finally make an appearance in Q3. Q2 revenues are now expected between $870 to $910 million, with non-GAAP EPS of about $0.37, which would support a stock price far higher than Friday's close.

The change in fortunes has several factors. Marvell is leading (or certainly one of the top 2 leaders) in the Solid State Drive market, which is ramping pretty nicely as prices drop and people see the advantages of SSDs. It is also a leader in chips for high-end networks. In the smartphone market we know the competition is intense, but Marvell providing the core chips for the Chinese TD-SCDMA standard based OPhone market. While OPhones started to be available in 2010, they are expected to ramp quickly as 2011 progresses. We are talking potentially 600 million OPhone customers, which makes the fight over American market share seem like a global side show.

Marvell is also sampling solutions for the LTE smartphone market. Again, expect fierce competition, but Marvell should win a share of slots in 2012.

I own Marvell stock and understand the risk of competing against the talented people at other semiconductor companies.

Applied Materials Rocks Q2

2011-05-28T08:01:00.000-07:00

Applied Materials, the semiconductor capital equipment maker, reported stronger than expected revenues and earnings for its second quarter of fiscal 2011 ending May1. The stock traded down on Friday based on management's cautious guidance for the remainder of 2011.

Prior guidance had been for Q2 sequentially flat to up 5% from Q1 revenues of $2.69 billion, with non-GAAP EPS of $0.34 to $0.38. Instead revenues came in at $2.86 billion, up 7% sequentially from $2.69 billion, and up 25% from $2.30 billion in the year-earlier quarter. Non-GAAP EPS was at the high end of guidance, $0.38.

Prior guidance on full fiscal 2011 revenues was over $11 billion and non-GAAP EPS was over $1.50. Management now said that is the high end of a range that depends on demand in Q3 and Q4.

The dividend is now 8 cents per quarter, 32 cents per year. There is a lot of room for growth given EPS, but acquiring Varian Semiconductor will eat up much of Applied's $4.6 billion cash and investment balance. Once Varian is digested the dividend could start growing again. At Friday's closing stock price the current dividend is a healthy 2.35%.

Within the semiconductor equipment and servicing industry Applied Materials serves a variety of segments. Variations in the demand cycles in segments and sub-segments account both for the stellar quarter and for the cautious guidance. The solar power division set a record, but revenues exceeded new orders as there are questions about end demand in Europe. Orders exceeded sales in the largest segment, silicon semiconductor manufacturing equipment, but the orders are mostly in new process modes (40 nm and under), driven by mobile end market demand. Large panel display capacity is plentiful, so most orders are to make small panels for smartphones and tablets.

My own view is that there is mainly upside. The Varian Semiconductor acquisition will make Applied very close to a full service provider for foundries. Despite uneveness, 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 solutions Applied Materials provides.

For more details about Q2 results, including questions by analysts, see my Applied Materials Q2 2011 Analyst Call summary.

I own Applied Materials (AMAT) stock. See also the Applied Materials web site.

NVIDIA Explains Smartphone and GPU Strategies

2011-05-14T10:33:00.000-07:00

The NVIDIA (NVDA) analyst call on Thursday was characterized by a relatively short presentation and long question and answer session. Analysts pressed a variety of concerns while management explained their view of the technology space and their strategy for increasing revenue and profits. [See also call details at Nvidia Q1 fiscal 2012 analyst call news summary.]

The explaining was necessary because revenues were $962.0 million, up 8.5% sequentially from $886.4 million, but down 4% from $1.002 billion in the year-earlier quarter. GAAP net income was $135.2 million, down 21% sequentially from $171.7 million, and down 2% from $137.6 million year-earlier. GAAP EPS (earnings per share) were $0.22, down 24% sequentially from $0.29, and down 4% from $0.23 year-earlier. Those numbers include a $40 million payment from Intel for intellectual property (really, to keep NVIDIA a strong ally against AMD); take that out, and the y/y comparisons look worse, while Q1 last year was nothing to shout about either.

So what are the issues? NVIDIA is exiting the motherboard chip set business, which originally became necessary because of a dispute with Intel. AMD has cut heavily into NVIDIA's former dominance in the discrete GPU (graphics) chip and card business. NVIDIA's supercomputer graphics business actually shrank a bit, though management argued it would expand down the road.

That leaves the savior of the moment, Tegra, a chip that runs cell phones and tablets. The newest one is Tegra 2, which everyone admits is a big improvement over the original Tegra. Tegra chips generated $122 million in the quarter, which is a lot of money, until you compare it with losses from the humble chip set business, or the bulk of NVIDIA's revenue, or smartphone chip revenue of some competitors.

NVIDIA claims they are going to take market share in the discrete graphics chips for notebook computers segment. Their only real competitor, AMD, says the same thing. But the good thing about discrete GPU chip competition is there are just those two players. The competition between them is intense, but at least it is somewhat predictable.

In smartphones and tablet computers, however, almost everyone is licensing the core processor design from ARM and adding graphics, Wi-Fi, and cellular modems as best they can. The competition is multifold. Qualcomm was the pack leader two years ago, and still outsells NVIDIA heavily. TI is very competive and believes it now is closer to the heart of Google (maker of the Android smartphone operating system) than NVIDIA, 2010's sweetheart. Apple makes its own ARM based processor for the iPhone and iPad. If they all disappeared there would be Marvell, which dominates the hard drive chip sector and has slots in a number of phones, including the new OPhones in China. There are other players in Korea, Japan, and China. Then there are the non-ARM entries, mainly for tablets but eventually for smartphones, from AMD and Intel.

And anyone can license the intellectual property to make a smartphone chip. In other words, there could be more players in 2012, not less.

Which is too many players. Consolidation will take place, probaby around 2013 when smartphones have completed replacing the bulk of not-so-smart cell phones. While the competition so far has been on technology, with points for speed, usability, and low-power consumption, at some point price will become an important issue. Profit margins will be squeezed.

I certainly believe NVIDIA is as competitive as any of the other companies I named. But there are going to be losers. There will have to be losers. It is next to impossible to predict who they will be.

Given that, investors might want to think about going lower down the food chain, to the companies that make semiconductor manufacturing equipment like Applied Materials or printed circuit boards for smartphones like TTM Technologies.

Of the companies named above, I currently own stock in Applied Materials, TTM Technologies, Marvell, and AMD. In the past I owned stock in NVIDIA.

See also NVIDIA

Keep diversified!

Cisco Systems Rearranges Itself

2011-05-13T18:22:00.000-07:00

Cisco Systems CEO John Chambers, once a hero to tech sector investors, now has serious credibility problems. During the recession, as Cisco struggled along with most other companies, he promissed that investments made during that period would result in a rapid growth of the company post-recession. He repeatedly stated that the growth in data transfers on the Internet, driven largely by the increase in collaboration and video content, would drive a rapid growth in sales of Cisco's routers and switches. In addition, Cisco would enter new areas, "market adjacencies," that would further power revenue and profit growth.

It sounded reasonable. Cisco, led by Chambers, had done it before. It could still happen, but the horizon keeps receding.

Reporting fiscal Q3 (ending April 30) results at the analyst conference call Wednesday, Chambers did not sound as confident as in the past. GAAP EPS of $0.33 was down 11% from year-earlier; non-GAAP EPS of $0.42 was flat y/y. He admitted to problems, but his description of rearanging the management structure of Cisco was not very confincing.

Ethernet switches are a lagging performer. Switch revenue was down 9% from year earlier. That was a year in which the economy expanded, and many companies did very well turning datacenters into "cloud" stuff.

Government ("public sector") purchases were weak. Tax increases, anyone? Without tax revenue, governments are constrained in how much they can buy from companies like Cisco. More money might end up in consumer pockets, but consumers don't by industrial strength 10 gigabyte switches. There is a lot of competition in switches. With Cisco trying to scoop up datacenter server spots from HP, it looks like HP did a better job scooping up switch spots from Cisco. Another example of ruinous competition.

More generally, there are always two tides running at cross currents in the technology sector. If Internet usage doubles, but switch technology improves so that the cost per unit of bandwidth halves, the overall switch manufacturing sector will stand in place. We have certainly seen this with PCs. You just don't need that expensive of a PC anymore to send an email, or even to watch HD video.

I don't own Cisco stock despite following the company for years. I've considered buying, but have always been attracted to companies with lower P/E ratios or higher growth rates. Now might actually be a good time to buy Cisco. Despite its troubles it had $1.8 billion in GAAP net income in the quarter. It had $43.4 billion in cash at the end of the quarter. The stock price is reasonable, if you believe Cisco can continue to compete.

In the past I watched people who buy enterprise switches and routers buy Cisco equipment as the safe, can't get fired for that decision alternative. Now things are more up in the air. Cisco may not be able to get the default victor pricing premium.

Keep it factual for a while, John. Don't be promising investors utopias you can't deliver. Focus on introducing great products, focus on engineering, focus on sales. Even that may not be enough to maintain Cisco's position in this highly competitive neighborhood, but it will do a lot for Cisco's credibility.

For more details on the call, see my Cisco Q3 2011 Analyst Call News Summary.

See also http://www.cisco.com/

TTM Technologies (TTMI) Grows with Smartphones, Tablets

2011-05-11T09:39:00.000-07:00

TTM Technologies (TTMI) makes the printed circuit boards (PCBs) that are the backbones of electronic devices; it is the largest PCB manufacturer based in the United States. Last year it acquired a Hong Kong based company with multiple manufacturing facilities in China. Most U.S. PCB manufacturing is now for prototypes and relatively small runs for low-volume end products. By designing and prototyping in the U.S. and doing full-scale runs in China, TTM has created a lot of utility for U.S. based technology companies. It has been running at near capacity, while continuing to expand capacity.

One of the main drivers of increased capacity is tablet computing devices, following the leading edge created by smartphones. This is not just a matter of increased volume. All the electronics have been shrunk, meaning the PCBs themselves involve a higher level of technology than they did a decade ago. This has been good for TTM since many smaller players have been unable to invest in the newest technologies, and TTM gets better profit margins on the higher-technology boards.

With the Chinese acquisition TTM's business has become somewhat more seasonal. The U.S. business was (and still will be) affected by summer vacations and December holidays. Since it is mainly about prototyping and low volume runs for medical, industrial, and aerospace devices, it was not much affected by the Q3 bulge seen in many consumer oriented electronics companies. In China, however, there is a slowdown during the Lunar New Year, and since much of the work is for consumer smartphones, computers, and tablets, there will by Q3 bulges.

Last Thursday, reporting for Q1 2011 ending March 31, 2011, results were solid once seasonality is accounted for. Revenues were $342.8 million, down 8% sequentially from $373.4 million, but up 148% from $138.2 million year-earlier. GAAP Net income was $29.1 million, down 20% sequentially from $36.5 million, but up by a factor of 6 from $4.5 million year-earlier. GAAP EPS (earnings per share) were $0.33, down 20% sequentially from $0.41, but up 230% from $0.10 year-earlier.

Guidance was for Q2 revenue between $350 and $370 million. GAAP EPS $0.28 to $0.37; non-GAAP EPS $0.36 to $0.45.

TTM has a strong cash position at $202 million, and is rapidly paying off its $321 million debt. It is also investing in more equipment in China to keep up with the pace of producing PCBs for iPhones, iPads, and other smartphones and

I own TTM stock, and believe it was a good strategic acquisition for my portfolio (I bought it cheap during the recession). I did not want to try to pick a winner among Apple, Google & partners, etc., for the smartphone/tablet computer revolution. But companies like Applied Materials (AMAD) and TTM provide the infrastructure for the revolution, no matter who wins what market share. There are some exceptions, of course, and plenty of competition in the PCB and semiconductor capital equipment spaces, but so far the strategy has worked pretty well.

For more details on TTM's recent performance, see my TTM Technologies Q1 2011 analyst call summary. One notable fact from management answering analyst questions was that labor costs, per hour, have increased 18% recently. This does not put much pressure on TTM margins, since the factories are highly automated. It does indicate that China is moving to a internal-consumption economy. The rich there are buying all the iPhones Apple can supply, and for middle management and the the working class there are now OPhone type smartphones available at a far lower cost.

See also TTM Technologies

Dot Hill Does Well By HP, Looks For More Partners

2011-05-10T10:15:00.000-07:00

Dot Hill (Nasdaq: HILL), a data storage equipment manufacturer, had a very interesting analyst call reporting Q1 2011 results last Thursday. Until December NetApp had been Dot Hill's second largest customer. But profit margins for that particular relationship for Dot Hill were negative, and negotitions with NetApp were not fruitfull. So Dot Hill dropped NetApp.

The result was a pretty steep drop in revenue to $49.2 million, down 25% sequentially from $65.4 million in Q4, and down 18% from $60.0 million year-earlier. Q1 is typically the slowest quarter for Dot Hill. However, the profit hit was much less. GAAP Net income was negative $1.2 million, down sequentially from $0.3 million, but up from negative $6.4 million year-earlier. Non-GAAP net income was $0.1 million for EPS of $0.00, better than I expected.

HP, which buys storage arrays from Dot Hill and resells them under its own brand, was responsible for 76% of Hill's revenues in the quarter. Sales to HP grew 20% y/y. But Dot Hill knows the danger of manufacturing mainly for one customer. They used to make equipment almost exclusively for Sun Microsystems. That business disappeared several years ago.

In fact Hill already supplies to several other major players including Lenovo and Samsung. But in none of these cases is it the exclusive storage supplier. It also sells through a large number of smaller systems integrators, but in the quarter that only amounted to $1.2 million in revenue.

There are three relatively large opportunies for Dot Hill going forward, aside from just selling more through HP. LSI's storage division Engenio is being acquired by NetApp. Some of LSI's Engenio clients are NetApp competitors. Some have begun discussions with Hill about switching to Hill as a first or second source. The second opportunity is selling more software with its hardware solutions, which brings higher profit margins. The third is the industry is consolidating, and Hill is an attractive acquisition candidate, although no discussions have been announced.

Q2 is looking better than Q1, partly due to orders late in Q1 that did not ship until Q2. Revenues for Q2 are projected at between $49 and $53 million, with non-GAAP net income and EPS expected in the vicinity of break-even. When Hill takes on new major OEM clients it does customization for them, which incurs increased engineering costs.

It is notable that GAAP gross margins increased from 13.5% year-earlier to 24.6% in Q1. This was partly from dropping NetApp, partly from a higher-margin mix in the rest of the business, and partly from increasing sales of storage management software.

For a greater level of detail see my Dot Hill Q1 2011 analyst call summary.

I own Dot Hill stock.

See also www.dothill.com

Hansen Medical Ships Just 2 Sensei Systems in Q1

2011-05-09T13:10:00.000-07:00

Hansen Medical, maker of robotic controlled catheters for surgery, showed one-time GAAP net income for its first quarter of 2011, reporting results to the analyst conference call on May 4th.

A $23 million sale of intellectual property to Philips medical division was the cause of the profit. Hansen (HNSN) is still essentially in start up mode, losing money each quarter while further developing its Sensei systems for catheter based surgery.

In the quarter Hansen shipped only two new Sensei systems, but it recognized revenue on five systems. Hansen only recognizes revenues on a system when it has been installed, surgeons have been trained, and the system is in actual use. At the end of the quarter there wree 13 systems that had been shipped but not booked for revenue.

Two systems is a slow pace, but shipments have been slow lately. Since each procedure requires a new catheter, it is notable that 693 catheters were shipped in the quarter, up 4% from Q4 and 9% from year-earlier. Most catheters are used for electrophysiology (EP) measurements, until recently the only use approved by the FDA and EMA. However, sale of Lynx catheters for ablation (purposeful destruction of neurons to correct irregular heartbeats) have begun in Europe. I would expect more Sensei systems to sell this year than in 2010 now that ablation can be performed as well as EP.

Management mentioned that one system had already been shipped to a U.S. destination in Q2, and the U.S. sales force has been restructured.

The Philips payment left Hansen with $45 million in cash at the end of the quarter. With the new vascular surgery robots likely (but not certain) to be approved by the FDA and EMA this year, this is plenty of cash to keep the company running until unit sales ramp up, which should lower costs on a per robot basis and allow for sustained profitability.

See my Hansen Medical Q1 2011 analyst conference call summary for a greater level of detail.

I own Hansen Medical stock.

Keep diversified.

See also: Hansen Medical home page

Onyx Pharmaceuticals Sees Future Growth

2011-05-08T14:13:00.000-07:00

Onyx Pharmaceuticals (ONXX) reported its first quarter (Q1) 2011 results and held its analyst call on Wednesday.

I like companies that invest in the future with healthy R&D spending, but usually a biotechnology company won't spend more than 100% of its revenue on operating expenses, unless it is in startup mode.

Onyx has had revenues from its liver and kidney cancer drug Nexavar for several years now. Bayer actually distributes Nexavar; Onyx revenues are from Bayer, so there is no cost of goods sold. Revenues were $67.1 million, down 4% sequentially from $70.0 million but up 7% from $62.9 million year-earlier.

But operating expense were $108.5 million. R&D was bad enough, at $62.5 million, but they spent $34.5 million on selling, general, and administrative expenses. Since Bayer does their selling, that seems like a lot. It appears they (management) are paying themselves in advance for carfilzomib.

Carfilzomib is an admittedly promising drug for multiple myeloma, but it has not been approved by the FDA yet. Onyx has a lot of cash (not generated by Nexavar, but put in by investors), so there is little to make management act frugal. Management, being management, thinks it is their cash.

On the plus side, because Onyx keeps failing the profitability test, the stock is cheap (but not dirt cheap), on the assumption (be careful here) that carfilzomib will become a profit-generating multiple myeloma blockbuster.

Another plus is ramping Nexavar sales in Asia, where there is a much higher incidence of liver cancer than in Europe and America. With some care, Onyx could have been managed to profitability in each of the four trailing quarters. The stock price would be higher, and I suspect the carfilzomib story would not be any different.

Thankfully I am a long term investor. Right now long-term means at least two years. But keep in mind we have a pattern developing. What should happen is that combined carfilzomib and nexavar sales in 2012 should be doable with less operating expense than we are seeing in 2012. Then the stock will start pricing at actual profitability, not the cautious prices that are fair when you show losses and FDA approval is still in question. What could happen, instead, is that management will find new indications for the drugs and spend all revenues on clinical trials for new indications, or even pick up the spending pace on other drugs in the pipeline. Managing to more losses.

A biotechnology company can grow quickly and profitably. Hopefully soon the FDA will approve carfilzomib and Onyx will shift to that ideal.

Another reminder to myself and all of you to: keep diversified.

For more insight see my Onyx (ONXX) Q1 2011 analyst call summary.

See also Onyx Pharmaceuticals

SGI Beats Expectations with fast start to 2011

2011-05-07T16:31:00.000-07:00

SGI (Silicon Graphics International) got of to its fastest start ever in Q1 of 2011. Revenues were $143.7 million , down 19% sequentially from $177.5 million, but up 33% from $107.8 million in the year-earlier quarter. Because SGI's computer systems are large ticket items, and many of its customers are government agencies, the slide from Q4 to Q1 is not unusual. The real trend to watch was the 33% uptick from Q1 2010.

The Altix UV supercomputer line introduced in 2010 continues to sell well. Recent initiatives are helping, notably UV systems running the Windows operating system and SQL Server. The storage side of the business did well. The two largest customers of SGI are Amazon.com and the U.S. government.

SGI is the result of the acquisition of the old SGI, Silicon Graphics, by Rackable Systems, which specialized in racked server systems designed for power savings. In the analyst conference call on May 3rd, management said exactly what I had been hoping for when the companies merged. The old Silicon Graphics made great computers, but never showed any concern for returns for shareholders, and finally went bankrupt in 2009.

The new SGI retained the tradition of making great computers for technical computing, but has been keeping costs down with an eye on making profits for stockholders. This is great!

For details see my summary, SGI Q1 2011 Analyst Conference. Note this was actualy fiscal Q3 for SGI.

See also Silicon Graphics International

Disclaimer: I own SGI stock.

Keep diversified!

Dendreon On Plan for Q1, full 2011

2011-05-03T08:56:00.000-07:00

Yesterday Dendreon held its analyst conference call and released its Q1 2011 results. The key take away is that everything is going according to plan. For a company that spent years in the wilderness wondering if they would ever get FDA approval of Provenge active immunotherapy for prostate cancer, making and staying on plan seems to be an obsession.

Dendreon is a long way from profitability as it ramps up its Provenge system. The GAAP net loss for the quarter was $111.8 million, or $0.77 per share on revenue of $28 million.

Provenge is a process in which a prostate cancer patient's blood is activated to get the immune system to attack the cancer. Some blood is withdrawn at a clinic, flown to the New Jersey manufacturing facility, treated at a workstation, and then flown back to be infused in the patient. The initial launch was done with just 12 workstations. In Q1 the FDA approved an additional 36 workstations for New Jersey, but the ramp up did not come until near the end of the quarter. In April, however, more of the machines were working, so the revenue run rate grew to $15 million for the month. On average in Q2 Dendreon expects to run 24 machines.

The new machines can take on a higher flow of patients, which in turn means allowing more doctors and clinics to provide the therapy. Two additional manufacturing facilities, near Los Angeles and Atlanta, hope to be approved by the FDA this summer and fall.

Guidance remains that for full 2011 revenue will run $350 to $400 million. Half that will come in Q4, if workstations in all 3 facilities are available. My read on that is not that $200 million per quarter is the top run rate. All machines will not be online at the beginning of Q4 and their will be room for higher run rates as the machines are made more efficient and run multiple shifts per day.

Apparently men with (the appropriate stage of) prostate cancer want to try Provenge, which has few side effects.

Global expansion will take years, but Dendreon is already spending money to get ready for a European launch. A global trial of Provenge will also get underway this year.

See my Dendreon Analyst Call for Q1 2011 notes more detail.

See also: Dendreon

And keep diversified!

Analyst Call Summaries: Akamai, Celgene

2011-04-29T07:10:00.000-07:00

Lots of thoughts on both the economy and individual stocks, but I'm really busy so for now let me just point out that I posted two summaries of analyst conference calls to openicon.com this week:

Akamai Analyst Conference Call April 27, 2011 for Q1

Celgene Analyst Conference Call April 28, 2011 for Q1

Akamai showed the danger of owning stocks with high P/E ratios; just not growing super fast was a disappointment for some. Celgene is solid and has a great pipeline; revenues and profits should accelerate in the 2012.

More insights soon, keep diversified!

Hansen Medical strategy

2011-04-25T14:05:00.000-07:00

Kevin asked why Hansen Medical (HNSN) entered the EP (electrophysiology) market first, and not the vascular market, since, the vascular opportunity is more than 10 times the size of the EP market. (See Hansen Readies Vascular Robots, April 11, 2011)

It's a good question, but with Hansen ending April 19, when Kevin asked, at $3.19, and today ending at $3.48, (up 9% in less than a week) hopefully Kevin bought without waiting for my answer.

I was not covering Hansen when the decision was made, but in a general way it matches the strategy often used by biotechnology companies that need FDA approval for their new drugs or medical devices. Management has to consider development costs and likelihood of a success (defined as an FDA approval to market). The first approval always involves a close FDA look at safety issues. These are relative to specific disease indications. A cold remedy has to be perfectly safe. A cure for an aggressive, malignant cancer that has serious side effects can sometimes get approval if it offers enough life extension to a subset of patients.

Going for vascular surgery for a first approval would have added the risk of surgery to the risk of having a new machine. The important thing for Hansen was to get the basic concept of a catheter robot approved. Since manual catheter EP is fairly safe as invasive procedures go, there was a good chance the only difference with robotic catheters would be more precise control of the catheter. Which is what happened.

Having a validated the Sensei surgical robot, Hansen gained experience in the field by having relatively large numbers of doctors perform EP procedures with Artisan catheters. In something as new as a robot for surgery, there is always room for improvement.

Each type of surgery needs FDA approval, and the tools at the end of the catheter would vary with the type of surgery. With the EP approval Hansen Medical received approval of the basic idea of a robot controlled catheter. When the FDA and EMA (in Europe) look at newer indications, they won't be worried about the basic Sensei system. They will worry mainly about whether there is benefit to doctors and patients from the new surgical procedure.

In addition, Hansen has proven its visualization technology. That has allowed it to raise a lot of cash by licensing that technology. All in all, in retrospect it looks very sensible. Hansen still has to increase its annual robot sales by a factor of about 10 to become profitable, but the technology is proven. If the FDA and EMA approve vascular surgeries, we could see quite a ramp in 2012. For long term investors like myself (I only started buying the stock in 2009), it is not even a vascular story. It is a platform story, with the ramp not being just robots and catheters sold, but whole new types of surgery approved by the FDA at intervals. I like platform stories.

See also:
Hansen Medical
Hansen Medical analysis at Openicon

Intuitive Surgical Sees International Expansion

2011-04-20T10:00:00.000-07:00

My key take from yesterday's Intuitive Surgical (ISRG) Q1 2011 results release and analyst conference call was that the U.S. market for da Vinci surgical robots is no longer the main growth arena. While use of the robots in the U.S. will continue to expand as the FDA approves new types of surgeries to be conducted, and that will drive accessory sales, there are only so many hospitals in the U.S., and many already have at least one robot; a few have as many as six.

That is not true internationally. There is a vast space available for growth as foreign medical regulatory agencies approve the robots and national health services (other insurers) allow for reimbursements.

Q1 is typically a seasonally down quarter as hospitals finish up their capital spending budgets in Q4. The pattern held for Q1 2011. Revenues were $388.1 million, down slightly sequentially from $389.3 million, but up 18% from $328.6 million in the year-earlier quarter.

Net income was $104.1 million, down 14% sequentially from $121.2 million, but up 22% from $85.3 million year-earlier. EPS (earnings per share) were $2.59.

System sales, including upgrades to newer versions of da Vinci, were 120, with 31 sold outside the U.S. and 89 in the U.S.

Research and development continues. The FDA approved a fuorescent imaging system addition to the system. A proposal for vessel sealing surgery has been submitted to the FDA. A surgical stapler remains in late-stage development, as does Single-Site surgery.

For a complete summary, see my notes on the Intuitive Surgical Q1 2011 analyst call.

See also the Intuitive Surgical web site.

Analyst Calls this week: Intuitive Surgical, Gilead, Biogen, AMD

2011-04-18T12:26:00.000-07:00

Earnings season begins in earnest for me this week. As usual I will be listening to analyst conference calls. All serious investors should, but then again that is time consuming. I take notes and post them on the web for my own and others references. Here are this week's calls and links for my summaries. The pages are up, so you can click on the links, bookmark the pages, and come back when the summaries are ready, often a few minutes after the conference ends, but sometimes up to a day later due to my work load.

Intuitive Surgical (ISRG) analyst call, Tuesday, April 19, 2011 at 1:30 PM

Gilead Sciences (GILD) analyst call, Wednesday, April 20, 2011 at 2:30 PM

Biogen Idec (BIIB) analyst call, Thursday, April 21, 2011 at 1:30 PM

AMD (AMD) analyst call, Thursday, April 21, 2011 at 2:00 PM

I currently have positions in Gilead, Biogen and AMD, but not in Intuitive Surgical.

Hansen Medical Readies Robotic Vascular Catheters

2011-04-11T14:36:00.000-07:00

Recently I was asked for an update on Hansen Medical (HNSN), which I last wrote about on February 9, in Hansen Medical: Upgrade Due. Since then the stock rose from $2.07 to a high of $3.00, then retreated a bit to end at $2.76 today. During this period there was no substantial news, just investors digesting the $30 million royalty payment from Philips and the possible commercialization of Hansen's vascular catheter system.

Today some investors sold on the news that Hansen submitted a 510(k) application to the FDA for the vacular robotic system, which is a pre-market notification [See Hansen Medical Submits Vascular 501(k)]. The 501(k) is a good thing, it has to be done, but the real news will be when (or if) the new system gets FDA approval. In Europe it will need EMA approval. The submission of the application was expected; it does not change any equation.

In theory the flexible robotic catheter system (Sensei) developed by Hansen should have many medical applications, but since each one needs regulatory agency approval, and R&D for modifications to the system, it can seem like slow going. The only approved U.S. application for Sensei is with an electrophysiology mapping Artisan catheter. These systems have received some praise, but have not been on the front burner for hospitals with restricted capital equipment budgets. Sales actually slowed in 2009 and 2010.

The natural growth in this area should also be accelerated by the approval of the Lynx Robotic Ablation catheter in Europe last December. Ablation is the purposeful destruction of selected nerves in the heart, used to correct erratic heartbeats. This should make the system more attractive than when it only is capable of doing measurements.

With Sensei system sales at just 2 or 3 per quarter lately, the only thing I see that could cause a serious upward stock movement before the approval of the vascular surgery system is an uptick in system sales for the current electrophysiology/ablation robots.

Those with patience will see a good long term opportunity here. The electrophysiology system is getting increased usage where they are already installed. The vascular system has been demonstrated to work well, with 20 procedures performed under clinical test conditions. Once approved, surgeon will still need to be trained to use it. The hope would be that some time in 2012 a critical mass of doctors skilled in the use of robotic catheter systems will emerge. Then hospitals will find it easier to approve system purchases. Selling more robots per quarter should allow Hansen Medical to generate better margins and cash. Then other applications can be developed. If that happens (and things could go wrong, or be delayed) then Hansen could start rewarding investors the way Intuitive Surgical did during its ramping period.

I own Hansen Medical stock. Keep the risks as well as the opportunities in mind ... and keep diversified!

ECB Good, Federal Reserve Bad

2011-04-07T08:12:00.000-07:00

Today the European Central Bank (ECB) announced it was raising its interest rates from 1% to 1.25%. Given that the European economy, particularly the economies of Greece, Italy, Spain, Portugal, and Ireland, are supposed to be in poor shape, that may seem like a dramatic tightening of the screws. It is not. Interest rates are still very low in Europe. Any shortage of credit, or of takers, is not due to interest rates being too high. 1.25% should provide good support to further economic expansion.

In contrast in the United States of America the Federal Reserve Board (the Fed) recently left its benchmark interest rate at zero. That is right, 0%. I admit I would like to borrow some money at 0% interest, but the Fed alone lends to its member banks. The same people who charge you 15% to 35% interest on credit cards. This unprecedented low American interest rate did not make much sense even during the Panic of 2008. 0.25% or 0.5% would have been just as supportive to the economy and the banking system.

We are now in a pretty ordinary recession, except the prices of certain commodities have spiked due to global demand and limited supplies. The Fed's public argument is that the low rates are because a lot of Americans are out of work. One thing I know, the Fed does not care about the type of Americans who are out of work, unless they are banking CEOs. They are keeping interest rates low for the benefit of the banks, of the federal government (it keeps interest on the national debt low), and for large corporations that can currently borrow vast sums of money at huge rates. In my role as analyst I have not seen much corporate borrowing used for industrial or work force expansion. It is typically used to buy back stocks or mergers.

The dangers of these unprecedented low interest rates are so clear that even a few Fed board members have pointed them out. They can lead both to inflation and to more asset bubbles. We certainly already have a gold and silver bubble. Bubbles were the problem in the first place. New bubbles do not a sound economy make.

Meanwhile, ordinary savers are suffering from low interest rates. Retired people are having to eat their principle because they are getting almost no interest from CDs and bonds. The Fed says there is no inflation, but if your main discretionary expenses are gas and food, there is a lot of inflation. Other recessions were not met with such low rates.

Since 1952 the Fed had set interest rates below 2% for only a few brief periods, before 2008. [See Federal Reserve rate history] Given that the Fed should manage for the long term (not acting like Wall Street traders who can't see beyond the current quarter), the Fed's rate should already be at 2%.

Given that (at least in free market theory) private loan rates should be set by supply and demand, that should not budge rates for housing. Anyway, low interest rates have failed to provide an incentive for people to buy homes. Homes are seen as a bad investment; people want easy money, not assets that are taxed yearly (with real estate taxes) and need to be repaired regularly.

The Fed are cowards. They don't want to tick off Wall Street or Congress (Republicans want low rates for their business friends, Democrats because they don't understand economics). 2% is very supportive of economic expansion. If we had already gotten there gradually (or were near there like the ECB is now), then further gradual adjustments could be made, up or down, depending on the genuine need for credit for economic expansion, or on the danger of inflation.

If I were the President (fat chance) I'd fire the bums on the Federal Reserve and hire some people who can actually do the job.

Data: ECB interest rate press release April 7, 2011

AMD Llano APUs Shipping

2011-04-04T17:55:00.000-07:00

In a analyst call today AMD mentioned that Llano APUs (Advanced Processing Units) are now "shipping for revenue," and should be appearing in computer systems later in this quarter (by June). This means that samples went out some time ago, sample systems were built, and the various computer makers are now moving to volume production.

Llano is interesting because it is outside the Bobcat and Bulldozer core paradigm most associated with AMD's Fusion program. Like the chips based on Bobcat and Bulldozer CPU cores, Llano also integrates a pretty high-end graphics processor (GPU) on the chip. However, Llano uses an updated Athlon (K-10) core. For most computer users that will make for a mean machine. Intel, AMD's bigger rival, is behind AMD in graphics technology. For most users graphics is now the bottleneck. Games and video need strong graphics processing, as does almost any content creation work. Llano-based computers should be very fast, very good with graphics, and very inexpensive.

For AMD investors the good news is that the profit margins on Llano chips are going to be better than those of older AMD chips. In effect, as older non-Fusion chips are phased out, everyone gets upgraded graphics computing ability. Gamers and other high-end users will still want to add a discrete high-end graphics card, but your everyday computer will have very good graphics capability without the expense of the separate card. In return the chip will be somewhat more expensive, and show a better profit margin. The impact on Q2 2011 will probably not be great. The computer industry is fairly seasonal. In Q3 there will be the usual seasonal ramp in production, getting ready for back-to-school and holiday shopping. OEMs will have Llano-based computer production in full tilt by then. Last-year's computers will be on fire sale.

Keep in mind that this puts what would have been, a decade earlier, a personal supercomputer on everyone's computer. These new PCs will have way, way more computing power than tablet computers based on ARM chips. Software makers are going to be able to do amazing things once they can count on APUs with parallel processing capabilities that can be used for many applications besides graphics. Many of these applications will make big computer screens even more desirable. Portability is great, but there is still a lot of future in big screens tied to truly capable computing machines.

Of course, rival Intel has a lot of marketing muscle. But the graphics capabilities of its new chips are seriously deficient, not even able to run the DX 11 graphics standard of Windows 7. That means for a good video or gaming experience anyone buying an Intel-based machine will also have to buy a graphics card based on AMD or NVIDIA graphics processors. Most consumers may not understand that, but the big OEMs do, and some of the sales people at Best Buy seem to understand that as well. Interestingly, Apple is currently building machines with Intel CPUs and AMD graphics chips, but I would not be surprised if Apple introduces Fusion based machines some time in 2012. Once the graphics leader, Apple can't afford to fall to far behind Windows in this race.

See also:

My main amd page

http://www.amd.com/

AMD Llano demostrated [October 19, 2010]

Dendreon Provenge Medicare Prostate Cancer Payment Decision

2011-03-30T17:52:00.000-07:00

Good news for prostate cancer patients: Medicare will pay for Provenge therapy. For now they will only guarantee payment for prostate cancer that has reached the metastatic stage that does not respond to anti-androgen therapy (hormone refractory) and is still minimally symptomatic (not yet causing significant pain). Since prostate cancer is common in elderly men, many of those needing Provenge are on Medicare. Most private insurance companies also cover Provenge. The therapy, which sensitizes the patient's immune system to the cancer, has few side effects and has been shown to be effective for some men. Dendreon is expanding its capacity for providing the therapy; currently there is a waiting list. Some doctors and patients have worried that Medicare might decide against reimbursing the cost of the therapy. For more information see: Dendreon Press Release on Medicare Coverage for Provenge New York Time article: Medicare Says it will Pay for Expensive Prostate Drug Centers for Medicare Services (CMS) Proposed Provenge Decision For investors, check out my Dendreon for Investors page, which has links to analysis and dozens of articles on Dendreon and Provenge.

Oracle, Adobe, Red Hat Show Software Leverage

2011-03-28T10:14:00.000-07:00

In theory the software business model is an attractive one. Write a piece of software. Once released, the production cost of each new copy is new zero. Sell enough copies to cover your R&D cost and your operating overhead, and you break even. After that you (and your stockholders) get rich, since each copy costs you nothing. Compare that to hardware based technology, where there (usually) is nowhere near as much profit leverage. Oracle (ORCL) , Adobe (ADBE) and Red Hat (RHT) all showcased the strength of this model when they announced their latest quarter results. Oracle reported fiscal Q3 ending February 28, 2011 on March 23. Partly because of its acquisition of Sun, revenues were up 37% y/y to $8.76 billion and net income was up 78% to $2.12 billion. [See Oracle analyst call Q3 2011] Adobe reported fiscal Q1 ending March 4, 2011 on March 22. Revenues were up 20% y/y to $1.03 billion. Net income was up 84% to $234.6 million. [See Adobe analyst call Q1 2011] Red Hat reported fiscal Q4 ending February 28, 2011 on March 23. Revenues were up 25% y/y to $244.8 million. Net income was $33.5 million, up 43% y/y. [See Red Hat analyst call Q4 2011] Note that for all three companies, profits (net income) were up on a larger percentage basis than revenues. That is the software model: once costs are covered, incremental sales have very high profit margins. Of course, if it were that simple, everyone would start a software company. Software sales are very competitive. Each of these three companies is the market leader in its domain: Oracle with database and business intelligence; Adobe with content generation; Red Hat with enterprise-grade Linux. Fail to make sales and you can lose money, or just scrape by. Naturally hardware companies are very interested in selling more of their own software with their machines, as the higher margins help the bottom line. IBM and HP, for instance, sell software and services, not just computers. One interesting play would be the small storage company Dot Hill. It has adding storage management software to its offerings, which should have a positive effect on its margins in 2011 and beyond. [See also my Dot Hill analysis page] I don't own any of the above mentioned stocks except Dot Hill, although I have owned Red Hat in the past. There are many issues to consider before buying a software stock, including its trailing and future-looking price-to-earnings ratios. So keep diversified!

Itanium Near Death

2011-03-23T14:36:00.000-07:00

Itanium processors, decreed Intel back in 1998, were the next big thing. The question was how to deal with the 32 bit to 64 bit data path transition, which had already been made by some high-end competitors like Sun and IBM. Itanium would be the high end, while consumers and small businesses could make due for another decade with 32 bit Intel based machines.

AMD (then Advanced Micro Devices) saw an opportunity and introduced x86 chips that could run either 32 bit or 64 bit software, or both. The idea was popular partly because it was far easier for software developers to upgrade x86 code from 32 to 64 bits than to create the new, Itanium code, which had a different instruction set.

Intel had to follow AMD's lead and introduce 64 bit, non-Itanium upgrades to its chips. In addition, the original Itaniums, introduced in 2001, were not very competitive with the IBM and Sun chips. Most businesses that wanted a 64 bit transition opted to go with the lower cost AMD or Intel chips.

Intel nevertheless continued to develop Itanium chips, with HP as their main partner. The market for them was miniscule. Software developers put little effort into Itanium. Red Hat dropped Itanium software development in 2009. Microsoft announced it would phase out Itanium in 2010.

Today Oracle announced it would no longer support Itanium. Oracle dominates enterprise business and database software stacks. At the high end, it now owns the former Sun franchise, and it also runs on the new SGI high-end computers, as well as the more everyday x86 chips from AMD and Intel.

That leaves Intel working with its original partner HP. They are both big companies, but they are drifting away from reaching critical mass with Itanium. Intel is likely to drop Itanium, which means HP will have to stick to commodity CPU chips or look for another partner, perhaps IBM.

The only significant winner I see from this inevitable death of Itanium is SGI. They once made machines based on Itanium, but their new supercomputers, the Altix UV series are popular because, while they run on standard CPUs, they are very effectively glued together by SGI technology. While SGI is a small company compared to HP and IBM, if they can catch even a modest percentage of the customers that need to replace aging Itanium-based computers, they will get a very significant boost. [note: I own SGI and AMD stock at the time this is written]

See also:

www.sgi.com
http://www.hp.com/
Intel Itanium processors
http://www.oracle.com/
http://www.amd.com/

Adobe Creative Suite 5 and 6 plans; Q1 call

2011-03-22T15:14:00.000-07:00

I have posted my usual notes for the Adobe Q1 2011 Analyst Call which took place today.

Aside from record revenues, to me the most interesting bit was that soon an update to Adobe Creative Suite 5 (CS5) will be released. The main point is to make it easier to address the growing Babylon of computer devices out there. Once you just needed Acrobat and the ability to create Web pages. Now you need to be able to publish using mobile applications, and it seems every cell phone and tablet computer is different. Adobe hopes to keep the write once, read anywhere dream alive. Of course, it will cost you. In addition to CS5, they are now recommending the extra expense of their new Digital Publishing Suite. No big deal for publishing empires, but tough on lone wolves like me.

CS6 will come out some time in 2012. Adobe will be encouraging customers to change over to a subscription based system on a world wide basis. In other words, pay every month, get updates as Adobe is able to issue them.

See also: www.adobe.com

Biogen Idec PML Test Approved in Europe, Changing Tysabri Outlook

2011-03-15T19:18:00.000-07:00

For all the publicity about multiple sclerosis drug Tysabri, investors tend to forget that the real breadwinner so far for Biogen Idec continues to be Avonex, also for multiple sclerosis (MS). Avonex revenues in Q4 2010 were $654 million; Tysabri revenues were $242 million.

Tysabri is the more effective drug, but it has been held back by the risk of PML, progressive multifocal leukoencephalopathy. This is in turn caused by JCV, a virus often quietly, apparently harmlessly residing in human brains. MS is an immune disorder; its treatments involve dialing down the immune system. In about 1 in 1000 patients, JCV wakes up, and instead of being taken care of by the immune system, causes serious damage or even death.

As a result, despite its effectiveness many patients and doctors have only used Tysabri as a last resort.

Now that score should change. The new test will let physicians know which MS patients have JCV and which don't. Presumably, those that don't have JCV could take Tysabri without fear. It is believed that about one-half of potential patients in the U.S. and Europe have JCV, although it is more common in cultures with poor sewage systems.

Those who have JCV can still take Tysabri, but would be closely monitored. So far PML incidents have occurred in patients taking Tysabri for a period longer than 1 year.

New MS therapies are also being developed or marketed, notably Gilenya by Novartis, which is the first oral treatment for the disease, but which was not as effective as Tysabri in clinical trials.
Meanwhile, Biogen is narrowing the scope of its development program, eliminating oncology and cardiovascular candidates to focus on immunology. This should reduce costs in the short run.

Since the quarter ended Fampyra for mobility for MS patients was rejected by the European Medicines Agency (EMA), but Biogen is appealing the decision. Fampyra is approved in the United States. The FDA also approved Rituxan as a maintenance treatment for advanced follicular lymphoma. In the quarter Rituxan generated $258 million.

Because Tysabri can now be "risk stratified," Biogen has stopped enrolling patients in the long-term Surpass trial, which is designed to show off its superior efficacy.

Going forward, Biogen has a lot riding on the questions of whether doctors and patients can put the PML scare behind them, and on whether they will prefer an easy to administer oral drug to the more effective, but harder to administer Tysabri.

See also http://www.biogenidec.com/

Cantel Medical (CMN) Growth Spurt

2011-03-11T17:27:00.000-08:00

Cantel Medical has been a good stock to hold in 2010 and so far in 2011, recently crossing the line to over $25 per share after showing a 52 week low of $13.39. Cantel is not a household word, so I thought I'd fill in my readers on what they do and why they might want to own a piece of this company.

The biotechnology stocks I own are mostly drug plays, with one surgical robotics play. Cantel Medical is a smallish company (market capitalization today ended at $440 million). Cantel specializes in infection control through sterilization and disposables. I know that infection control is more cost effective than treatment, and is becoming a much larger problem because of the evolution of multiple-antibiotic resistant bacteria. I watched Cantel for a while, then bought stock a couple of times when I thought the valuation was good.

Cantel is not a well-known name, even in hospitals, partly because it operates through named divisions. Minntech makes and markets endoscope and dialysis equipment sterilizers. Crosstex is the disposables business, working mostly in the dental market, but also moving into the general medical market. It makes face masks, sterilization patches, and other single-use items. Mar Cor makes machines to purify water, often for specialized medical needs. A smaller division is Saf-T-Pak, which produces specialty packaging for transporting specimens, and related materials.

When there are infectious disease scares Cantel gets bursts of extra revenue, so in evaluating the stock you might want to both zero-out such bursts to get a real trend line, and also figure that over time those bursts do add up.

Also, while Cantel does develop products and grows by increasing sales organically, they also grow by acquisition. If you, like me, have been burned by poor acquisition strategies of other companies, you might not take this as a recommendation. However, for the few years I have followed Cantel they have done very well with acquisitions. They don't pay to much and they usually acquire a division of a company they want, rather than the whole company. Then they cross-sell the new products with their established sales force. They have made it work.

As to the latest bump, management attributes that mainly to strong endoscope sterilizer equipment sales. The newer machines are called reprocessors; they do helpful things like inventory management that the aging machines can't do. For some reason their are a lot of aging endoscope reprocessors out there, particularly in VA hospitals, and 2011 seems to be the year they have a capital equipment budget for new machines. This burst will probably slow down later in 2011, but will stay above 2010 levels.

The water purification business just keeps growing. Also the disposables business should ramp up as the unemployment rate tweaks down this year. People have been avoiding doctor and dental visits for economic reasons; when they have the dough to head back in for a checkup, the run rate will pick up again.

So, in summary, the overall anti-infection story is a good one. Cantel is a pure infection play, and it has top-notch management. Should you be cautious because the stock has already had a good run lately? Sure, but the trailing P/E ratio at the end of today was 22.6 (per NASDAQ), which is still reasonable for a company with a strong growth track record. Today's ending price seems fair to me and attractive for long-term investors looking for diversification in the healthcare space. You might want to note that the company has more debt than cash, as debt was used to make recent acquisitions, but cash generation can make quick work of the debt.

For more details on quarter results, see my Cantel Medical Q2 fiscal 2011 analyst call summary.

Marvell Technology: What Inflection Point?

2011-03-08T17:17:00.000-08:00

Marvell Technology (MRVL) makes semiconductor chips for hard disk drives, cell phones, networking and telecommunications. Although for the most part Marvell has had a brilliant run since it was founded in 1995, recently the going has been rough, as reflected in its stock price. After a 52-week high of $22.87 last April, the stock closed at $15.81 yesterday, then bounced back a bit today. The release of quarter results on Thursday (the 3rd) and the analyst conference call caused a big sell off Friday, to $16.13, after closing Thursday at $18.22.

Should Marvell be abandoned, or is this a buying opportunity?

First, keep in mind that Marvell has a fiscal year that ends on January 30th. Their Q4s are typically seasonally slower than their Q3s because shipments of chips going into devices sold over the holidays typically are made in Q3. Q1 fiscal 2012 will end at the end of April; Q2 at the end of July; Q3 at the end of October.

On the other hand, a technology company with rapidly ramping revenues can sometimes overcome seasonal declines. Marvell has lined up two sequential q/q declines. In Q2 revenues were $896.5 million; in Q3 $959.3 million; in Q4 $900.5 million; and for Q1 guidance is for $800 to $850 million. That is worse than normal seasonality.

Last year Marvell CEO Sehat Sutardja, at the Marvell March 4, 2010 analyst conference call, predicted that Marvell would reach an "upward inflection point" within the next twelve months. We seem to be in a downward deflection point instead. Now Mr. Sutardja is saying that revenues (and profits) will ramp again in the second half of this year (more precisely, the second half of fiscal 2012). Should we discount his prediction, given he made it before and reality proved him wrong?

Let's look at why the prior inflection point prediction went awry. The hard drive market was not as robust as expected, mainly because global PC sales did not grow much in 2010. Marvell already has more than half of the market for the controller and other chips in hard drives, and in the latest quarter those still accounted for almost half of Marvell's revenue. Even with new products ramping up, the decline in hard drive chip revenue put a big dent in projections. Marvell is competitive in controllers for solid state drives too, but is not dominant there.

The other problem was Research in Motion (RIM), although Sehat did not mention them by name, everyone knew which customer he was talking about. It isn't that RIM (maker of Blackberry phones) is itself in trouble, despite competition from Apple and Android-based devices. Marvell makes chips for only a couple of RIM models. For those models there was an inventory issue, not with too much inventory, but with a change that results in Marvell holding inventory for RIM. The main issue is that in many developing nations RIM is moving 2.5G phones, and Marvell does not have a chip for 2.5G. However, Marvell should have such a chip later this year.

So two major sources of revenue Marvell counted on were down in Q4 and will continue to be down in Q1. But the big issue, the lack of an inflection point, has to do with OPhones in China. These phones sold slowly late in 2010. Sehat believes that is mainly a matter of introducing them and prices that were too high on the original models. During 2011 a number of Marvell based OPhones will be introduced in China at far more attractive prices, yet which maintain Marvell's own profit margins.

Hence, still an upward inflection point. I don't blame potential Marvell investors to take a wait and see approach. The problem (with not buying at today's stock price) is that Marvell, even in these "bad" quarters, is generating a lot of cash. The low price/earnings ratio for the stock reflects the "show me" attitude about OPhones. If you wait for the revenue ramp to be in the rear-view mirror, the stock is going to be a lot more expensive.

So watch for OPhone news out of China. Maybe consumers there will want iPhones or other alternatives instead. But if hundreds of millions buy the new Marvell-based OPhones, Sehat and crew are going to look a lot more far-sighted than they do right now.

I own Marvell stock and understand the risk of competing against the talented people at Qualcomm, NVIDIA, Apple, etc. Right now I would not sell my Marvell stock for less than $30 per share. Come this fall, depending on the OPhone ramp, I may need to change my estimate of its value.

See also:

http://www.marvell.com/

My March 2011 Marvell (MRVL) analyst call summary

Applied Materials: Value, Growth, and Tablets

2011-03-02T13:04:00.000-08:00

Applied Materials (AMAT), the semiconductor capital equipment maker, reported stronger than expected revenues and earnings for its first quarter of fiscal 2011 ending January 31, 2011. Revenue growth was up 45% year over year. Yet its PE (price/earnings) ratio is far lower than most technology stocks with similar growth records.

Trying to place a bet on tablet computers or smart phones? You can bet on the brands like Apple, Motorola, and Samsung. Or you can bet on the companies that supply the chips to make the tablets work, for instance, Qualcomm, TI, NVIDIA, Marvell and others. These are all pretty well known companies, but who really knows who consumers will be in love with in 2 years? Who knows whose chips two years from now will be winning the majority of slots in the new machines?

One thing you can pretty much count on: the constituent parts for tablet computers will be manufactured by someone. When it comes to actually making the silicon, Applied Materials is the dominant supplier of the necessary equipment.

In 2008 and 2009 Applied Materials had a rough time. No new capacity was needed; even shrinks (to smaller transistor sizes) were put off as long as possible. But because the company was well managed and had plenty of cash, it navigated successfully through the recession.

In 2010 Applied came roaring back as fabrication companies started making up for lost time.

Are people going to be satisfied with the computational or memory powers of 2010 style tablets and smart phones? No. The ARM processors are (so far) no match for the silicon from AMD or Intel that is available in a desktop or notebook computer. People may want portability, but they still want highly capable, fast machines. That means cramming more transistors onto chips, and using new technologies that keep voltage and power requirements down. In turn, to achieve that, the fabs need new machines capable of imprinting silicon with ever smaller patterns.

As reported in the Applied Materials February 24, 2011 analyst conference call, different aspects of the industry are at different points in their supply demand cycle. Fortunately overall the cycle is heading up. Display equipment sales will likely be weak in 2011, in part because tablet and smart phone displays are so much smaller than monitor and TV displays. But demand for most major types of silicon chips is headed up, as is demand for the equipment used to make crystalline silicon solar cells.

With $0.38 per share GAAP earnings in Q1 and about the same expected in Q2, it is fair to guess that fiscal 2011 earning will indeed hit at least $1.50 per share, which is AMAT's guidance.

While growth in 2011 won't be as strong as in 2010, I still see Applied's PE rising eventually to about 20. That would put it at $30 per share and still give it a 5% earnings return. As I write this you can buy the stock for just $16.36 per share. Note too that Applied has plenty of cash and pays a $0.28 annual dividend. I'd like to see that dividend raised to something more like a third of earnings, but other than that I think Applied Materials is a great company for stock holders.

See also: www.appliedmaterials.com

Dendreon (DNDN) Q4 results and call

2011-03-01T15:42:00.000-08:00

Dendreon Q4 2010 analyst call summary, my notes from today's conference.

In short, the Provenge rollout is going as planned. This month the FDA should approve the addition of new Provenge work stations to the Dendreon New Jersey facility. When those stations come online capacity will be up fourfold. That ramp should occur in Q2. The current run rate is under $30 million per quarter, so the new run rate potential would be $120 million per quarter.

The buildout at Atlanta and Los Angeles is on schedule for going online later in the year. The quarter run rate when all systems are go should be about $360 million per quarter, or $1.3 billion per year.

There is no shortage of patients. There is a waiting list. New doctors and medical centers are being signed up, so as the machines become available their should be patients getting prescriptions for them.

Prostate cancer patients have some of their blood removed, then processed to tell their immune system to attack the cancer. The therapy is called Provenge; it is not a drug per se.

The biotechnology company is also setting up clinical trials to see if the general process will work for other types of cancer.

See also http://www.dendreon.com/

Hansen Medical, Onyx Pharmaceuticals Report Q4

2011-02-24T06:00:00.000-08:00

On the Biotechnology front:

Yesterday medical robot maker Hansen Medical (HNSN) reported its Q4 2010 results. See my Hansen Medical Q4 2010 analyst call summary.

Also Onyx Pharmaceuticals (ONXX) held its call. See Onyx Pharmaceutical Q4 2010 analyst call summary.

Neither company was profitable for the quarter. Onyx is investing its Nexavar profits in more clinical trials for Nexavar and in bringing carfilzomib for multiple myeloma to market. Hansen, after the quarter ended, received a large royalty payment from Philips which should fund its development of its experimental robotic catheter for vascular procedures. Hansen hopes the new vascular robots will receive approval this year. If that happens this $2 stock could be a $20 stock by the end of 2012.

I own both stocks.

See also the company home pages:

Hansen Medical
Onyx Pharmaceuticals

Random Walks versus Purposeful Forays

2011-02-21T11:29:00.000-08:00

The March 2011 Scientific American includes "Financial Flimflam" by Michael Shermer, subtitled "why economic experts' predictions fail". But it is not so much about economic predictions as about the theory that index funds are a better investment than managed funds. He claims the market average return in 2010 was 2.5% higher than the average of the ten largest managed funds.

Index funds, of course, have their own perils. A lot of people bailed out of their index funds some time in 2008 or early in 2009, as a sort of stop-loss measure. Then they missed the market runnups in later 2009 and in 2010. Thus gutting their retirements.

Since I do my own research and make my own investment decisions, and also get paid to do specific research and analysis by a fund manager, I think it is fair to wonder if I might be better off just buying into an index fund like so many other people and institutions.

Lately I have had an extraordinary rate of return because my portfolio contains only 15 stocks, and those include 3 with extraordinary returns of late: TTM, the Printed Circuit Board manufacturer; Dot Hill, a storage company, and Dendreon, the maker of Provenge for prostate cancer. In the past I have had other stocks hitting extraordinary returns, but because I have tried a number of risky, turn-around, small cap situations, I have also lost all the money I invested in 3 stocks over the past decade. There have also been times when my stocks lagged the market. Partly this is because since I typically play Nasdaq 100, or smaller, stocks, so they typically go down more in down markets, but up more in up markets.

I agree that if you are paying someone to manage your portfolio, they need to beat the market enough to pay their management fees and then some. Otherwise you could do better by creating your own index fund. It is not hard, you could for example buy equal amounts of the Dow 30 and the Nasdaq 100 or S&P 500 or any other known set of stocks.

Still, there are people like Warren Buffet who had very long runs of better than average returns. That is not just luck.

Large managed funds have trouble beating the market partly because they are the market. Their individual stock positions are so large that their creating or leaving a position, or even trimming, moves stock prices. They also tend to be in a relatively large number of stocks, which again dilutes their performance back towards the market average.

To beat the market it really helps to play on a small enough scale that your buys and sells don't affect the stock price substantially.

It also helps to see the curve. Here I mean seeing more than the statistics we all tend to rely on, revenue growth and earnings growth and margins and cash. You need to see future value where others are missing it. You also need to be very serious about weighing risk. Truth be told, I thought Dendreon was riskier than Anesiva, but Anesiva went down with my investment, while Dendreon took me up by a factor of ten. If both had sunk, I would be writing a far gloomier story today. Interestingly, in addition to stocks with high risk levels, I always keep stocks with good potential for returns and relatively lower risk. Some of those stocks have performed badly for me, but none went out of business.

I basically doubled my money in the stock market during a period of time when the market went basically no where. I balanced my risks and made my mistakes, and have been better at avoiding mistakes lately. In retrospect, or course, I could have put every penny I had into Dendreon, but that did not look wise at the time. Backtesting is interesting, but you have to go with what you know in reality, at the time of investment.

On the other hand I do an enormous amount of research, considering the size of my portfolio. I don't just invest in biotechnology stocks; I study biology text books and journal articles. I don't just invest in computer technology, I do my best to keep up with the breadth of its developments. Also, I try to think like an owner of the companies I invest in. I like companies that invest wisely in the future and run a tight ship.

Frankly, unless you enjoy doing research, you are better off in an index fund. But if you are willing to do your homework (and it really is a lot of homework), you have a good chance of beating an index fund if you are an astute individual investor.

You should check out the Scientific American article because it has some other information, especially about investor psychology. I love this bit: "Being deeply knowledgeable on one subject narrows focus and increases confidence but also blurs the value of dissenting views and transforms data collection into belief confirmation."

Above all, a smart investor looks most closely at the data that challenges current beliefs.

If you aren't familiar with it, see the Random Walk Hypothesis at Wikipedia.

Keep Diversified!

NVIDIA Price Counts on Tegra Ramp

2011-02-17T11:45:00.000-08:00

(original title: NVIDIA: Counting Chickens Before They Hatch)

As an analyst and investor, one of the main things I do is count chickens before they hatch. Today graphics chip specialist NVIDIA has a high price-to-earnings ratio (non-GAAP 62x trailing, 26x leading), indicating some investors are counting on a lot more chicken profits in the future than they have been seeing lately. Is this a smart assumption?

NVIDIA will have a profit boost for the next six years from its licensing deal with Intel. For the most recent quarter ending January 30, 2011 it booked $57 million for the litigation settlement portion of the deal (booked as a negative operating expense, not revenue). For each quarter it will book about $60 million in royalties.

Other than that, the last couple of years have been hard on NVIDIA. Q4 fiscal 2011 (the most recently reported quarter) revenues were $886.4 million, down 10% from $982.5 million in the year-earlier quarter. That does not sound like a high-growth company that deserves high PEs on its stock price. [for a fuller report on Q4, see NVIDIA Q4 fiscal 2011 analyst conference call summary]

What speculators are speculating on is a chip called Tegra. The first version was interesting but did not generate much revenue. The second version is available now in a few tablet and smart phone devices. It produced little revenue in Q4, but is supposed to contribute substantially to Q1. Therefore, instead of a normally seasonally down Q1, guidance is for a 6% to 8% sequential revenue ramp. That is impressive, if it happens.

In addition, the third version of Tegra, called Kal-El for now, is already sampling and is supposed to be in devices for sale for holiday 2011 shopping. Reviews of Tegra 2 are generally positive.

The NVIDIA vision is not just to dominate the smart phone and tablet markets. Future versions of Tegra are supposed to be powerful enough to go into notebooks, desktops, and ever servers.

Before you pay a premium for all them chickens, you might want to think about all the other chickens that will be on the market. NVIDIA's Tegra CPU unit is based on the ARM architecture, which anyone can license. The NVDA advantage is in graphics, but there are a number of companies that license graphics capabilities that were designed specifically to work with ARM. NVIDIA's were designed to work with the 8086 architecture of Intel and AMD.

Competitors each have some advantages. Apple, of course, is the perceived frontrunner. There is no guarantee that the iPhone is ultimately going to be defeated by Android-based phones or less likely competitors.

When it comes to ARM based chips for tablets and phones, each competitor brings some serious advantages to the court. Qualcomm has far more extensive experience in cell phones than NVIDIA does; so does TI. Intel and AMD want to get into the game. AMD gained a lot of market share against NVIDIA in discrete graphics cards for computers during 2009 and 2010; their fusion chips offer some extreme advantages, especially for tablet computing. Among a host of other contenders, Marvell (MRVL) should be noted, since they generate a lot of cash each quarter and have a lead in China, a much bigger market to fight over than the U.S. market. Then there are the Koreans, and Japanese, and numerous small innovators.
None of the other contenders have PE ratios as high as NVIDIA's. I have owned NVIDIA stock in the past, and if it had a low PE I might scoop up those chickens right now. I have always admired NVIDIA's technological skills, and the Tegra 3 is promissing. I don't see how it can be all that much better than competitors, however. Everyone has promissing designs, everyone is hustling to squeeze usability out of the same limitations of silicon.

I have done well recently with some hatchlings at Dot Hill, Dendreon, and TTM. On the other hand, I like to keep in mind Anesiva, where I correctly predicted its Zingo product would hatch (get FDA approval), only to watch it die a horrible death and then take the entire company into bankruptcy with it. The secret is to see them chickens before momentum investors drive up the stock prices. If you bought NVDA a year ago at $8.65 per share, congratulations. If you are thinking about buying it today at $25.48, you might want to consider that it could take NVIDIA a couple of years of outstanding growth to justify this price.

Akamai, Limelight Compared

2011-02-15T11:43:00.000-08:00

Akamai Technologies' (AKAM) stock price plunged late last week after fourth quarter (Q4) earnings were released. Limelight Networks (LLNW) stock price jumped today after Q4 2010 earnings were released yesterday. That would seem to indicate that Limelight is the better stock deal.

Both companies compete at helping other companies deliver content over the Internet. In addition to the basic service of accelerating the delivery of web pages, both are involved in cloud computing solutions and ad services. Akamai offers other value-added solutions like security.

Akamai is the much larger company, with Q4 revenues of $284.7 million; Limelight revenue was $55.2 million; those were records for both companies. Disclosure: I own some Akamai, but not Limelight, so for me the question might be, should I buy Limelight in addition to, or in place of Akamai? The stock movements would indicate Limelight, the smaller company, is moving in fast on Akamai's business.

Profits however, are mainly an Akamai story. Its Q4 GAAP net income was $52.5 million; non-GAAP net income was $76.5 million; EBITDA was $129.2 million; cash from operations was $110.4 million. So Akamai profits, by any measure, are near or above Limelight revenues. Limelight had a GAAP net loss of $6.3 million, non-GAAP net income of $1.5 million, and EBITDA of $8.1 million.

Using the measure that makes Limelight look best by comparison, EBITDA, let's look at the stock value. As I write Akamai is selling for $42.46 per share, giving it a market cap of $7.74 billion. Limelight is selling for $8.27 per share, giving it a market cap of $820 million. Taking market cap divided by annualized EBITDA, Akamai is at a ratio of 59.9. Limelight is at a ratio of 101.2.

The results are worse for Limelight if you look at other P/E type ratios (and if you use the conservative GAAP P/E, Limelight looks like a black hole).

I would argue that both Akamai and Limelight are overpriced stocks based on comparing the stock price to various earnings per share measures. Usually when stocks have high P/Es they have explosive growth rates that justify those stats. How does growth look?

Using Q4 2010 to Q4 2011 comparisons, Limelight had revenue growth of 64%; Akamai's growth was 19%, considerably slower. Limelight went from GAAP net loss of $9.7 million to a net loss of $6.3 million, not really that great on such a large revenue boost. Akamai GAAP net income was up 31% y/y.

All in all, the sector (there are a few other players besides Akamai and Limelight), while it may be a favorite of investment funds, has a lot of risk built into it right now. The sector is growing quickly, and is likely to accelerate along with the Internet. On the other hand much of that growth is already priced in. Limelight is growing revenue faster that Akamai, but Akamai has made it clear its interest is in profitable revenue. Limelight apparently is willing to pick up any revenue at all, but that gives it low margins, not what you want to see with a high-priced stock.

I reduced my Akamai holdings as it ran up in 2010. The stock I have now I bought for $17.56 per share in September of 2008 when everyone else was panicking.

From my conservative, value-oriented investing perspective, there are a lot better technology stock plays available now than either Akamai or Limelight. Because I already hold Akamai, and think it will justify its current price pretty well during the course of 2011, I am holding on to what I have. But I would not have a strong argument with anyone saying sell these stocks right now and buy stocks with good growth prospects and lower PEs.

Note that both companies are good companies with great management and technologies. My objection is not to the companies, but to the stock prices relative to proven profits.

See also: http://www.sgi.com ; http://www.limelightnetworks.com/

Hansen Medical: Upgrade Due

2011-02-09T10:09:00.000-08:00

Hansen Medical (HNSN) may be about to reach an inflection point. In fact, given the recent announcement of Philips paying $30 million to license just one part of Hansen's technology, we may be past the inflection point. While I have owned Hansen stock since July of 2009, after starting posting Hansen analyst call summaries in February of 2009, my analysis in late 2010 failed to take into account all of Hansen's future potential.

It is easy, in retrospect, to see the downward slope in expectations for Hansen. Back in say 2007 Hansen was the Next Big Thing in robotic medicine, on the same path to providing early investors with riches as Intuitive Surgical. HNSN traded above $30 per share. Then it became apparent that it would take some time to ramp up sales of its Sensei robotic catheter systems, which were approved only to make electrophysiology measurements. With the recession causing investors to shun risks, and system sales actually declining, you could (and I did) pick up shares for under $1.50.

While research and development (R&D) continued on new applications, you could say that the real value was in the future, when Sensei would have multiple purposes in hospitals. Yet sales continued to slump. For Q3 2010 only 3 Sensei systems were shipped to customers. GAAP net loss was over $12 million on revenues of just $3.5 million. My comment on Sensei systems was "Apparently until they can used in more procedures, hospitals are not that interested in them." Some hope smoldered with the idea that a company like GE Healthcare or Philips might acquire the company, given its miniscule valuation.

But now higher powers have validated the future potential of Hansen technology. The deal with Philips in no way gives away any technology needed to continue developing Hansen's own Sensei systems.

Hansen Medical is scheduled to report Q4 2010 results on February 23rd. Without a doubt the analyst conference will emphasize the Philips deal and the potential to start selling Sensei systems equipped for vascular surgery some time in 2011. Whether they shipped zero or ten Sensei systems in Q4, the real value is mainly in technology waiting to be commercialized. Hansen is still, fundamentally, in startup mode.

However, before jumping in, even at today's astonishingly low stock price ($2.07 as I write), keep in mind that the FDA (and the equivalents in Europe and elsewhere) must not just approve the new vascular application for Sensei Artisan catheters. It must approve use procedure by procedure. Once it is approved for one vascular procedure it can be approved more easily for others, but it is still a long, hard road ahead.

But if the road is uphill, at least the view from the top should be really, really nice. The potential vascular catheter robotics market is big, bit enough that, yes, it isn't all that wild to think of Hansen as a potential to be the next ISRG.

See also:
Hansen Medical main page
my other Hansen Medical articles and conference summaries

Paint SGI Black: Stock Surge

2011-02-03T10:22:00.000-08:00

Silicon Graphics International (SGI) has had a rough time the last few years. It is basically a combination of the old Rackable Systems, which specialized in datacenter server systems, and the old, bankrupt SGI, which specialized in high-performance science computing. The release of results for the fiscal 2nd quarter of 2011, which ended December 24, 2010, showed that management has done what it takes to forge two losers into a winner. After years of losses SGI reported GAAP earnings of $0.12 per share and non-GAAP earnings of $0.44 per share. Right now the stock is up 24% over yesterday's close.

With governments now being the main purchasers of SGI computers, Q2 was an exceptional quarter, and the quarter ending in March will see a substantial sequential decline in revenue. However, the overall trends in 2011 should be up.

The transformation of SGI is about technology, sales, and profit margins. If you look at my earlier critiques of SGI & Rackable, neither company's gross margins were high enough to allow them to book profits after operating expenses. For a while Rackable had done well, selling superior, low-energy racked server systems, but then bigger companies started undercutting them based on price. The old SGI, on the other hand, was famous for spending too much on R&D and perks, so managed to lose money on cutting-edge tech.

Now we are seeing the difference between good management and bad. The new Altix UV supercomputer line has no real direct competitors. It has a memory and processor model that make it very attractive to high-end technical users. Because of that profit margins are good. The rackable systems for server farms and cloud computing continue to offer innovative designs, but margins have been improved there as well.

The company is now truly international, which is important when your key product is supercomputers. Service revenue is also a key factor in the new, profitable business model.

How high can SGI fly? It is really difficult to tell. In 2010 it was largely a Linux story, but now Altix UV it is certified for Microsoft's high end products, so revenues from that segment should ramp in 2011. SGI's management believes it can address a $3 billion annual market; revenues in the quarter were just $186 million, so there should be plenty of room to grow.

It is notable that SGI came through the transition with $111 million in cash and no debt.

For more details on quarter results, see my SGI Q2 fiscal 2011 analyst call summary.

See also: www.sgi.com

Celgene Reports Q4 Results, answers analyst questions

2011-01-27T12:47:00.000-08:00

I just posted my summary of the Celgene analyst call and results for Q4 2011.

Celgene just acquired Abraxis and has a large number of clinical trials underway. It looks to me like it could double its revenues again by 2015. Great for a long-term investor, but there is always the risk that drug candidates will fail to be approved.

Gilead Sciences, Tamiflu, and Antivirals

2011-01-26T09:55:00.000-08:00

Gilead Sciences (GILD) is an enourmously profitable company with a cheap stock price, as measured by its Price to Earnings (P/E) ratio. Yesterday Gilead released in fourth quarter (Q4) 2010 results and held its analyst conference.

Gilead is best known for selling anti-HIV drugs and for Tamiflu for flu, which is sold by Roche. Last year there was a major flu scare, resulting in Q4 2009 royalties including Tamiflu of were $228.0 million. This year royalty revenues were $68.4 million. That is actually up from Q4 2008 royalties of $40.4 million.

Analysts mostly saw 2009 royalty revenues as a one-time event in 2009, but making up for a y/y drop of about $160 million is quite a feat. For the therapies Gilead sells directly, Q4 2010 revenues were up 7% y/y to $1.93 billion versus $1.80 billion. Antiviral product sales were up 5% y/y to $1.7 billion.

Overall revenues were down 2% y/y, but on a very difficult comparison.

How were profits on $2.00 billion in revenues? GAAP net income was $626.4 million. Non-GAAP net income (excluding stock-based compensation and one-time expenses) was $779.3 million. Cash flow from operations was $775 million.

Mostly affecting the stock today was Gilead's stock buy-back plans. In Q4 $614 million was used to repurchase stock. The remaining pre-authorized $2 billion should be used during 2011, and another $2 billion was authorized. Buying back stock has helped keep up earnings per share, which rose, on a non-GAAP basis, to $0.95, up from $0.93 year-earlier despite the lower revenues and non-GAAP net income.

Gilead will be rolling out a number of new therapies over the next few years for HIV and Hepatitis C. In addition, new health guidelines are for physicians to start patients on retrovirals sooner after infection with HIV. This makes for a tremendous pool of new patient adds in the next three years, given that Gilead has a 68.5% share of this market.

Like all major drug inovators, Gilead has had some some potential products that have failed to achieve results. Developing drugs is expensive, and most drug candidates fail to gain FDA approval. You just figure that in as a cost of doing business, spread out over the successful drugs. All drug patents expire eventually, meaning price drops as generics become available, but again that is as it should be, as it spurs companies to continue to search for better drugs. Gilead's upcoming "quad" single pill therapy for HIV is an example of working for continuous improvement instead of sitting still.

Given all that, at some point Wall Street is going to realize that Gilead's PE ratio is too low. In my mind even now it should not be lower than 20. If it rose to 20 tomorrow, from today's 11, the price would run up to $71.35 per share from (as I write) $39.26. Nevertheless, there are risks, including the whims of other investors, so keep diversified!

See also:

my Gilead Sciences Q4 2010 analyst call summary
www.gilead.com

AMD: Fusion Without Dirk Meyer?

2011-01-21T09:43:00.000-08:00

I admire Dirk Meyer, who recently resigned (under pressure) from computer chip maker AMD (Advanced Micro Devices). I also admire Hector Ruiz, his predecessor as CEO. But both men apparently had their flaws as AMD's leaders, and if you want to value AMD stock appropriately, you should understand the dynamics of the situation.

Dirk only served as head of AMD for about two and one-half years (he was promoted in July 2008). They were very eventful years. Notably, AMD became a fabless company by spinning off its foundries to GlobalFoundries, and the first models of the Fusion line of combined CPU/GPUs on a chip (APU, for Advanced Processing Unit) were released.

The problem is that the Fusion concept was in place when AMD bought graphics chip maker ATI back in 2006. Note it is now 2011. It took AMD five years to put a graphics processor on the same chip with a CPU.

That was simply too long. Rival Intel, a much larger company, brought out an admittedly inferior set of chips combining CPUs with GPUs this month. But that is probably good enough, since Intel can heavily out-advertise AMD.

Imagine, now, that the first Fusion chips had come out in the summer of 2010. It would be a whole new ball game. Intel would try to stall their OEM partners, but it would be a hard sell because they would have to get OEMs and consumers to accept an inferior product late. A six month lead in the computer industry can be an enormous advantage, as AMD showed by bringing out DX-11 capable discrete GPUs about six months ahead of rival NVIDIA, which had been the dominant discrete GPU company, until then.

While no one would say getting out a new line of chips is an easy task, the blame for the delay really has to be taken by Dirk Meyer. This is the second time in the last decade this has happened. Mid-decade AMD had a temporary advantage over Intel in the server market with its Opteron chip. Dirk was then chief operating officer, and when Opteron went from single to dual core, there were serious delays. Those delays enabled Intel to introduce new products and beat back the Opteron challenge. AMD has never been able to regain the market lead in server chips, although its newest 12-core processors are much better than Intel's at certain tasks.

But what investors really want to know is, what is next? Yesterday's call (see my AMD Q4 2010 analyst conference call summary for details) demonstrated that the board of AMD is looking for faster execution on plans to bring out new, specialized processors that can better compete with Intel in certain markets. The typical press view, and Wall Street sell-side analyst view, is that it is about AMD pursuing the tablet computer market. That would be only one small facet of it.

The new Fusion chips run the new DX 11 graphics standard. The Intel chips can only run DX-10 (it is fair to say Sandy Bridge is instantly obsolete). But Intel just made a deal with NVIDIA that doubtless allows it to import their DX-11 designs. How long will it take Intel to move that to silicon? Probably not that long.

Which means AMD has to execute faster. As the smaller, underfunded company, it has to stay ahead technologically and offer a good value proposition to OEMs and end consumers. AMD needs to deliver on the promise of Fusion and perhaps APU's that incorporate other special functions. Maybe even cell phone technologies.

It is a big task, and it needs a leader who can speed up the ball game without causing any fumbles. As we saw in the last decades, fumbling when up against Intel amounts to losing the game.

Dirk Meyer would be a superhero if he had gotten Fusion into consumer laptops in time to make them the mass-market choice for the 2010 holiday season. Instead the products are going to start ramping in Q1, which is a slow sales quarter, and have to sell against the confusion Intel is trying to create in comparing the two technologies. It is going to be a hard sell.

See also:
AMD main page
AMD Fusion
my other AMD articles and conference summaries

Nokia N8: CPU, GPU Roles Shift

2011-01-12T16:38:00.000-08:00

Most days I check Anandtech because the staff there does an excellent job of reviewing new computers, smartphones, and peripherals. By excellent I mean they actually give details about the software and chips used in the devices, and also run benchmarks. Today the only chip stocks I own are AMD and Marvell (MRVL), but my customers own (far larger) positions in other technology companies, so I follow the industry as best I can. Today's review of the Nokia N8 smartphone should be of particular interest to technology investors since it illustrates a fundamental shift in computing technology.

The N8 is "the first Nokia phone to have a discrete GPU." GPU is Graphics Processor Unit, as opposed to the more general purpose CPU, Computer Processing Unit. Smartphones are now expected to have excellent displays, which is hard to achieve without a GPU assist. But for years now AMD and NVIDIA (the rival makers of high-end GPUs for personal computers) have been talking about how computer work loads are starting to shift from being CPU-bound to GPU-bound. This is not just because of the need to have large, detailed, rapidly changing displays for gamers. It is because many ordinary computing tasks can be done faster if they are broken into parallel processes that accelerate results.

The Anandtech N8 article is the first time I have heard someone say the transition has already been made in an actual device (aside from professional video content creation machines). "You see, pretty muhc everything in the N8 runs around the BCM2727 media processor. I would hazard a calculated guess that appart from lightweight low-level OS functions and interfacing with the baseband and other radios, there isn't much else for the CPU to do on the N8."

I think that in effect the Broadcom (BRCM) GPU is acting as a DSP (digital signal processor) in addition to doing graphics processing, leaving the CPU little to do. Note that the 2727 (like AMD's new combo CPU/GPU chips) can output 720p HD video through an HDMI port.

NVIDIA has tried to place itself at the center of the GPU revolution, but it's anybody's game. There are two fronts right now: graphics for notebooks/PCs and graphics for cell phones/tablets. The graphics for smartphones can't display games on big screens at a high frame rate (which smooths the action) yet. But in 5 years, maybe sooner, they should be able to do that. The big differentiator is that anything that runs on batteries has to do its graphics work with minimal watts, but a machine plugged into the electric grid can do a lot more a lot faster, using a lot more watts (say, 200 watts versus 1 watt). NVIDIA's strategy is to keep rolling with its high end discrete graphics units while rolling out mobile combined CPU/GPU chips based on the ARM architecture. These would integrate its current offerings that work with ARM, but with the GPU on a separate chip.

AMD's strategy is called Fusion, which combines CPU and GPU on a chip based on the 8086 architecture.

Intel's strategy is to advertise, and hope that the reviewers dependent on its advertising revenue do a good job not mentioning that its current generation of combined CPU/GPU chips, code named Sandy Bridge, are instantly obsolete because they are a generation behind both NVIDIA and AMD in graphics capacity (ask for DX11 capable computers, and you have eliminated Intel, which had trouble implementing the now ancient DX10 standard) and in low-power consumption. Also, Intel is using its vast resources to get back into the ARM-based architecture. They sold their ARM mobile chip unit to Marvell Technologies a few years back. Marvell has since become one of the bigger players in ARM devices, most notably with its chips inside some Blackberry devices and the XBox 360 Kinect.

Then of course, in addition to Broadcom, we have Qualcomm, Apple, TI, Samsung, etc., scrambling to combine graphics and CPUs into single chips or small chip sets to power smartphones and tablet computers.

Software programming is changing too. Want a job? Show you can recode older non-parallel software for parallel processing on GPUs. Lots of shortages in that department.

For investors, you might want to buy a piece of every company in the race. I am certainly not certain who will emerge a winner. On the other hand, there are no pure plays here. A victory in smartphones would add very little to Intel's fortunes, or Samsung's, but it is essential to Qualcomm. Broadcom itself has a diverse set of chip products that cover Ethernet, set-top boxes, and Wi-Fi, among others.

See full Anantech Nokia N8 Review

Dot Hill Exceeds Q4 Guidance

2011-01-10T10:09:00.000-08:00

The price of Dot Hill stock is soaring today (up $0.46 per share to $2.35, or 24.3% as I write) after preliminary Q4 results were released that exceeded prior guidance. See my Dot Hill Q3 analyst conference call report for Q3 results and Q4 prior guidance.

Dot Hill has been trying to rebuild its data storage hardware business for years, following the demise of its relationship with it former major client, Sun. Its products are mainly sold to OEMs that relabel them or incorporate them into larger systems. Its main client is HP, but it has won a swarm of smaller OEMs and system integrators in the past 3 years. Margins, however, were a problem. Hill's second largest client, NetApp, refused to negotiate prices that allowed Hill to make a profit, so that relationship was terminated as of December 1.

Anticipation of a decline of revenues due to the NetApp termination has been a major reason for Hill's low stock price. Instead, in even with 2 final months of NetApp included in the quarter, revenues increased from $62 million in Q3 to about $65 million in Q4. Keep in mind that for enterprise data storage systems Q4 is typically the best season. Even so, Hill's new line of data storage products must be selling extremely well to hit $65 million with NetApp out of the picture.

And those sales have higher profit margins, allowing Non-GAAP earnings per share to be in the range of $0.02 to $0.04. After years in the red, this is great news for Dot Hill.

Profit margins should continue to expand in 2011 because Hill should be selling an increasing amount of software along with its hardware offerings. Software, in this case storage management software, carries much better profit margins than the hardware.

Q1, 2011, will be a bit tougher. It will be the first full quarter without NetApp revenues, and it is traditionally a seasonally weak quarter. Dot Hill has a new relationship with Lenovo which should ramp in 2011, but apparently that won't affect Q1 much.

Good work and thanks to the entire crew at Dot Hill!

See also Dothill.com

Provenge Prostate Cancer European Availability Planned

2011-01-07T07:02:00.000-08:00

All fifteen Medicare regions and 80% of private payers have now approved Provenge (sipuleucel-T) for (asymptomatic or minimally symptomatic metastatic hormone refractory) prostate cancer for reimbursement. Expects to increase capacity by a factor of ten in 2011; should have 450 infuser sights by the end of the year; already hired 100 sales people.

$48 million total Provenge revenue in 2010, with about $25 million in Q4. $350 to $400 million revenue expected in full 2011, with about half of that coming in Q4. $280 million cash balance at the end of the year. GAAP loss of $310 million to $350 million for 2011; non-gAAP loss of $230 to $270 million.

Europe will be the first target for further Provenge approval. Believes addressable market would be about the same size as in the United States. There is a major unmet medical need there. After meeting with the European regulatory agency (EMA), IMPACT and other data already available should be sufficient to get European regulatory approval. Will engage a contact manufacturing organization for initial Provenge supply in Europe. Will also use this for trials for earlier-stage prostate cancer. But will concurrently build a Dendreon facility in Germany in 2011.

EMA decision would be possible in 2013. Reimbursement must be achieved nation by nation, and there are challenges. But as overall survival is the gold standard for European payers, and overall costs are actually reasonable for Provenge. Cancer therapy prices are largely similar in Europe to the U.S.

$125 million will be spent in 2011 to support American and European expansion, with about half attributed to capital expense and half to operating expense. Will require more capital for the European expansion.

ACI (autologous cellular immunotherapy) platform now includes an investigational product Nuvenge (DN24-02) for invasive bladder cancer. This is a highly immuno-responsive. Will be a randomized Phase II study for patients with HER2+ invasive transitional cell carcinoma of the bladder following cystectomy. Patients with advanced cancer have few good treatment options at present. Endpoint would be overall survival.

Q&A

Plans are for one plant in Europe? It is not necessarily our expectation that we would only ever have one. If reimbursements are approved, we could build more plants.

The European, or global, study would not be to support the regulatory filing. It would be to provide evidence of the efficacy of Provenge for earlier stages of prostate cancer.

Trajectory for expanding infusion centers? Started with 50, finished with slightly more. 450 should be available in Q4. The launch centers had been in previous clinical trials, many in very small clinics. Some of the new centers are much larger in terms of numbers of patients. First additional capacity should come on line in New Jersey, corresponding to about a third of the new centers also starting up.

Europe, maximum capacity for German facility? Seen as very similar to the Los Angeles and Atlanta facilities in design and capacity. Because population density is higher, the center could serve all of the EU countries.

The Contract Manufacturing Facility in Europe would support the new study there. The new Dendreon facility should be ready around the time of approval.

Any message change on prostate cancer since Provenge approval? We are in a golden era now for prostate cancer. Good data sets are coming out for drugs for the chemo-sensative prostate cancers.

Still 2000 patients for 2010? That was for middle of the year, which would be in July 2011.

New Jersey expansion should come online some time in March, but new clinics are already ready to go when that capacity does come online.

How will you raise money, equity or debt? Looking at the alternatives, no decision yet.

CMOs capable of making provenge? Yes, we used 2 CMOs in the U.S. before we began manufacturing our own.

See the accompanying press release: Dendreon Announces Plans to Seek Marketing Authorization for PROVENGE in Europe

2010 Economic Analysis & Forecast

2011-01-01T14:21:00.000-08:00

For once I am basically in agreement with most mainstream economists on what is ahead in 2011.

We are still in the virtuous cycle ramp that follows an economic downturn. Most of the differences between economists are about the strength of the ramp and what particular sectors will lead and lag the economy as a whole. Wild cards include possible actions by the Federal government, the Federal Reserve, and bankers in China and Europe. Double wild cards include natural catastrophes and military incidents.

Leading the trend both globally and in the United States will be manufacturing. This could be more than a bounce-back in the U.S. because it is an increasingly attractive place to do manufacturing now that wages are closer to the global norm. People forget that losing factories to China has not destroyed as many jobs in the past century as advances in information technology and automation have destroyed. I expect increased demand in the U.S. and globally for U.S. products, and the beginnings of a round of capital investment in new and expanded U.S. manufacturing facilities.

Lagging the trend will be the housing and general construction market, which in turn creates demand for wood products, metals, and etc. However, there is very, very little new housing stock in existence right now, in a nation that typically adds over 3 million people each year. Also, a lot of people are overcrowded. College and high school graduates from the past few years are dying to get a job and move away from mom & pop. Even if people who gain employment enter the housing rental market (instead of buying houses), this will make landlords happy and more willing to buy up existing housing stocks. I don't expect a price boom in 2011, but building new houses (and apartments) is going to start looking attractive in some specific markets as the year goes on. If banks gain confidence, we could get back to a normal balance between buyers and sellers by the end of the year. However, predicting timing is difficult because the decisions are driven by diverse buyers' mental states.

Bonds should fall (resulting in higher interest rates), but that is dependent on Fed action and risk assessments by bond holders. The stock market should rise because return on investment, at least in the next few years, should be a lot better than investments in bonds or real estate. In the stock market, however, it will be more important to look for companies with long-term growth prospects, rather than just growth due to bouncing back from the recession.

The national debt is going to grow by leaps and bounds because even strong economic growth won't generate enough tax revenue to cover the spendthrift ways of the Democratic Party and Republican Party. The 2011 budget is already shot and 2012 is an election year, so expect the new Congress of 2013 to contend with a tidal wave of debt.

Jobs should be more plentiful in 2011, but employers will still be able to pick the best workers and offer relatively low wages. This is good (for the economy, not for the unemployed) because low-productivity workers are a drag on businesses. Good workers help generate the profits that are needed to expand, and which eventually force companies to hire and try to train less reliable workers. The unemployment rate should drop by a percent or two, but will remain brutally high for the least employable citizens.

The Federal Reserve should have already raised interest rates to the 2% level, but I expect them to keep rates near 0% for the entire year, because they have a proven record of irresponsibility and incompetence. Or perhaps I should say they are competent at serving their fellow bankers, but not at their mission of maintaining relatively even economic growth. Why say rates should rise even with continuing high unemployment? Because any rate under 4% will support economic growth, and having to raise rates rapidly later on will lead to bad decision making or even panic.

People at every level are looking for opportunities, and 2012 will be a good year for many.