Microchip (MCHP) yesterday reported December quarter (fiscal Q3 2013) results slightly above analysts' consensus and in line with the mid-range of its prior guidance. Normally the March quarter is seasonally down from the December quarter, but in its guidance Microchip predicted sequential revenue growth. As a result in Microchip, which closed at $33.94 before reporting results, has climbed to $36.60 so far today. Microchip's current 52 week low is $28.92, and its 52 week high is $37.50.
Part of the strong revenue results resulted from the acquisition of SMSC. The same acquisition led to charges that hit GAAP profits pretty hard, but excluding those items non-GAAP profits and free cash flow were strong.
Microchip's model involves a focus on microcontrollers and related analog functions (touch screen control, wireless, and power management), with a wide variety of parts available to meet specific customer needs. Record revenue in quarter reflected a broad-based uptick in demand across industries and geographies. Revenues were $416.0 million, up 9% sequentially from $382.3 million and up 26% from $329.2 million in the year-earlier quarter.
Guidance to March quarter revenue of between $420.2 and $432.7 million, despite the usual hit from Chinese Lunar New Year, is based both on a continuation of the underlying trend and on design wins. Quite a number of design wins were announced in 2012; these are now resulting in orders that should ramp through 2013.
Microsoft has been a reliable dividend payer. At today's price the dividend yield is 4.15%.
Normally I use GAAP profits as a baseline, but non-GAAP numbers can be more informative for the long run when GAAP is affected by acquisition charges, as was the case in calendar Q4.
GAAP net income was $10.2 million, up sequentially from negative $21.2 million and down 87% from $77.5 million year-earlier. GAAP EPS (earnings per share) were $0.05, up sequentially from negative $0.11, but down 87% from $0.38 year-earlier.
In contrast non-GAAP net income was $84.5 million, EPS was $0.41, which is an improvement on, but consistent with, prior quarters. Free cash flow was $123.2 million, of which Microchip paid $68.7 million in dividends.
Microchip is still recovering from the cautious buying and weak end demand earlier this year. Inventories were reduced in Q4 and will continue to be reduced through June. On the customer side inventories are believed to be extremely lean, which could also result in increased buying if final demand shows signs of improving with the global economy.
I first invested in Microchip in 2006, based largely on my familiarity with their microcontroller products. It has been a reliable source of dividends and appears to have a first-class management team. I would recommend the stock to almost any class of investor.
Disclaimer: I own Microchip stock. I will not trade MCHP for at least 1 week after this story is published.
See also:
www.microchip.com
My main Microchip analyst conferences page.
My Microchip February 2013 analyst call notes
Showing posts with label earnings. Show all posts
Showing posts with label earnings. Show all posts
Friday, February 8, 2013
Wednesday, January 23, 2013
AMD sure of turnaround in 2013
AMD hit revenue guidance for the final quarter of 2012, but the numbers were still dismal. Revenue was $1.16 billion, down 9% sequentially from $1.27 billion, and down 32% from $1.69 in the year-earlier quarter. Guidance is for Q1 2013 revenue to be down around another 9%. Net income was $473 million in the red on a GAAP basis, and even on a non-GAAP basis was $102 million short of break-even.
Despite that AMD CEO Rory Read were surprisingly upbeat about 2013, predicting the a return to profitability in the second half. Of course we've heard that kind of optimism from AMD before, only to be let down. Are AMD's claims of a turn-around ahead credible?
AMD is currently known for making CPUs that compete with Intel's for personal computers (notebooks and desktops) and servers. In addition AMD makes stand alone graphics chips (GPUs), competing mainly with NVIDIA. AMD has not done well in the server space these last five years, and the PC space has started to shrink, in part because tablets and smartphones have become more popular and mostly use ARM based CPUs, rather than the more capable and power-hungry x86 coded chips made by AMD and Intel.
In 2012, in an effort led by the remarkable vice president of global business units Lisa Su, AMD started to re-target its intellectual property development towards growth sectors. The acquisition of SeaMicro acted as an entry to the dense server space, where AMD's graphics expertise could eventually help with highly-parallel computations, and Opteron technology is a better fit than Intel's server chip designs. In addition, AMD has announced it will use ARM technology when appropriate in this field. Although the complete new system will not be available for some time, Rory reported that Q4 SeaMicro revenue grew.
A second major line of attack is embedded SoC chips. This is a bit of a vague term; as used by AMD, it seems to amount to the non-PC sector. SoC, System on Chip, typically means that the chip is not a stand-alone CPU. In reality, even what we now call CPUs are not stand-alone CPUs: AMD has been a leader in moving critical components that "glue" the CPU to the rest of the system, like memory controllers, onto a single chip. Embedded SoC in this case means customized for a particular application. Rory indicated AMD would be looking only at relatively high-volume applications as margins have been too low in some low-volume systems. Examples of possible embedded AMD chip use would be for advertising displays, casino machines, industrial and medical use.
AMD does not currently break out embedded revenue, but the goal is to raise it to 20% of revenue by the end of the year. No word on whether that is 20% extra revenue or 20% replacement of eroding PC revenue, and Rory made it clear no details would be announced until the OEMs are ready to announce them.
The PC business, of course, is still critical, as is the entry into tablet computing. Rory made a point that AMD engineers are executing well, making their timeline, and in one crucial area are about 6 months ahead of Intel. Along those lines, AMD has demonstrated working Temash and Kabini silicon. These APUs will be quad core SoCs for the tablet and mobile markets. They also already introduced the new Richland A series APU, upgrading a sweet spot in their line.
This morning as I write AMD has popped from its pre-conference and results close of $2.45 up 9% to $2.67. Obviously no one knows if AMD will be able to execute its plan or if, once products are available, they will sell well enough to bring AMD back to profitability. It has the look and feel of a good plan and a big turnaround to me, but I have been wrong about AMD in the past, and the sands of silicon are shifting rapidly and unpredictably. Before getting bullish on AMD, I'd like to see the 2013 products, the revenue, and the profits.
Disclaimer: I have long been long AMD and will not trade the stock for 3 days after the publication of this report.
William P. Meyers
See also:
www.amd.com
My main AMD analyst conferences page.
My AMD Q4 2012 analyst conference notes
Despite that AMD CEO Rory Read were surprisingly upbeat about 2013, predicting the a return to profitability in the second half. Of course we've heard that kind of optimism from AMD before, only to be let down. Are AMD's claims of a turn-around ahead credible?
AMD is currently known for making CPUs that compete with Intel's for personal computers (notebooks and desktops) and servers. In addition AMD makes stand alone graphics chips (GPUs), competing mainly with NVIDIA. AMD has not done well in the server space these last five years, and the PC space has started to shrink, in part because tablets and smartphones have become more popular and mostly use ARM based CPUs, rather than the more capable and power-hungry x86 coded chips made by AMD and Intel.
In 2012, in an effort led by the remarkable vice president of global business units Lisa Su, AMD started to re-target its intellectual property development towards growth sectors. The acquisition of SeaMicro acted as an entry to the dense server space, where AMD's graphics expertise could eventually help with highly-parallel computations, and Opteron technology is a better fit than Intel's server chip designs. In addition, AMD has announced it will use ARM technology when appropriate in this field. Although the complete new system will not be available for some time, Rory reported that Q4 SeaMicro revenue grew.
A second major line of attack is embedded SoC chips. This is a bit of a vague term; as used by AMD, it seems to amount to the non-PC sector. SoC, System on Chip, typically means that the chip is not a stand-alone CPU. In reality, even what we now call CPUs are not stand-alone CPUs: AMD has been a leader in moving critical components that "glue" the CPU to the rest of the system, like memory controllers, onto a single chip. Embedded SoC in this case means customized for a particular application. Rory indicated AMD would be looking only at relatively high-volume applications as margins have been too low in some low-volume systems. Examples of possible embedded AMD chip use would be for advertising displays, casino machines, industrial and medical use.
AMD does not currently break out embedded revenue, but the goal is to raise it to 20% of revenue by the end of the year. No word on whether that is 20% extra revenue or 20% replacement of eroding PC revenue, and Rory made it clear no details would be announced until the OEMs are ready to announce them.
The PC business, of course, is still critical, as is the entry into tablet computing. Rory made a point that AMD engineers are executing well, making their timeline, and in one crucial area are about 6 months ahead of Intel. Along those lines, AMD has demonstrated working Temash and Kabini silicon. These APUs will be quad core SoCs for the tablet and mobile markets. They also already introduced the new Richland A series APU, upgrading a sweet spot in their line.
This morning as I write AMD has popped from its pre-conference and results close of $2.45 up 9% to $2.67. Obviously no one knows if AMD will be able to execute its plan or if, once products are available, they will sell well enough to bring AMD back to profitability. It has the look and feel of a good plan and a big turnaround to me, but I have been wrong about AMD in the past, and the sands of silicon are shifting rapidly and unpredictably. Before getting bullish on AMD, I'd like to see the 2013 products, the revenue, and the profits.
Disclaimer: I have long been long AMD and will not trade the stock for 3 days after the publication of this report.
William P. Meyers
See also:
www.amd.com
My main AMD analyst conferences page.
My AMD Q4 2012 analyst conference notes
Friday, January 18, 2013
TTM Technologies (TTMI) Updates Q4 Guidance
TTM Technologies (TTMI), the largest American manufacturer of printed circuit boards (PCBs), saw a sharp drop in its stock price to $7.37 on Tuesday, January 15 after a story of a downgrade from an analyst at Stifel Nicolaus was circulated.
The company responded by updating its fourth quarter 2012 guidance on Thursday, coinciding with a presentation to investors that had already been scheduled. These results were equal to or better than the guidance TTMI gave when reporting Q3 (See TTMI Q3 2012) . The stock had recovered to $7.98 by market close today.
Q4 revenues are expected to be between $360 and $380 million, with GAAP earnings of $0.07 to $0.14 and non-GAAP earnings of $0.14 to $0.21.
In addition CEO Kenton Alder told investors that the high rate of capital expenditures of 2011 and 2012, which was required to meet high demand for the most advanced technology PCBs, would trend downward in 2013, from about $120 million to closer to $100 million. That will free up cash flow for other uses.
In Q3 2012 TTM's largest customers had been : Apple, Cisco, Ericsson, Huawei, and IBM, which together accounted for 31% of total sales. The largest customer, Apple, accounted for 14% of sales.
There has been much talk of a slowdown in demand for Apple products, which may have caused some analysts to assume TTMI would have a poor quarter, or poor growth in 2013. Mr. Alder pointed out that Apple is a relatively new customer for TTMI, and as such the PCBs made for Apple are for the iPad, not the iPhone. He said there had been no decrease of orders so far for iPad PCBs. He explained that as the newest PCB supplier to Apple, with the newest technology available, TTMI is gaining share from other suppliers of PCBs for Apple.
He also said TTMI makes the PCB for the Amazon Kindle Fire. Because it is a global company with a broad array of customers, TTMI is not particularly vulnerable to reduced demand from any particular client.
He also said that networking sector orders picked up in the quarter, but he was not yet ready to say this was a trend.
According to NASDAQ, of institutional (sell-side) analysts covering TTMI, 2 rate it as a Strong Buy, 1 as a Buy, and 4 as a hold.
Disclaimer: I own TTMI and will not trade the stock for 3 days after the publication of this report.
William P. Meyers
See also:
TTM Technologies investor relations
My main TTMI analyst conferences page.
Go to TTMI Q4 call notes to bookmark for February 5, 2013 analyst call
The company responded by updating its fourth quarter 2012 guidance on Thursday, coinciding with a presentation to investors that had already been scheduled. These results were equal to or better than the guidance TTMI gave when reporting Q3 (See TTMI Q3 2012) . The stock had recovered to $7.98 by market close today.
Q4 revenues are expected to be between $360 and $380 million, with GAAP earnings of $0.07 to $0.14 and non-GAAP earnings of $0.14 to $0.21.
In addition CEO Kenton Alder told investors that the high rate of capital expenditures of 2011 and 2012, which was required to meet high demand for the most advanced technology PCBs, would trend downward in 2013, from about $120 million to closer to $100 million. That will free up cash flow for other uses.
In Q3 2012 TTM's largest customers had been : Apple, Cisco, Ericsson, Huawei, and IBM, which together accounted for 31% of total sales. The largest customer, Apple, accounted for 14% of sales.
There has been much talk of a slowdown in demand for Apple products, which may have caused some analysts to assume TTMI would have a poor quarter, or poor growth in 2013. Mr. Alder pointed out that Apple is a relatively new customer for TTMI, and as such the PCBs made for Apple are for the iPad, not the iPhone. He said there had been no decrease of orders so far for iPad PCBs. He explained that as the newest PCB supplier to Apple, with the newest technology available, TTMI is gaining share from other suppliers of PCBs for Apple.
He also said TTMI makes the PCB for the Amazon Kindle Fire. Because it is a global company with a broad array of customers, TTMI is not particularly vulnerable to reduced demand from any particular client.
He also said that networking sector orders picked up in the quarter, but he was not yet ready to say this was a trend.
According to NASDAQ, of institutional (sell-side) analysts covering TTMI, 2 rate it as a Strong Buy, 1 as a Buy, and 4 as a hold.
Disclaimer: I own TTMI and will not trade the stock for 3 days after the publication of this report.
William P. Meyers
See also:
TTM Technologies investor relations
My main TTMI analyst conferences page.
Go to TTMI Q4 call notes to bookmark for February 5, 2013 analyst call
Tuesday, January 15, 2013
SGI Q2 Deals Slip from Fiscal Cliff
SGI (Silicon Graphics International) today announced preliminary December 2012 (fiscal Q2 2013) results that exceeded earnings guidance while falling short of revenue guidance.
Based in Fremont, California, SGI manufactures supercomputers that are used in science research, Internet-based businesses, security, and other computation-intensive businesses. Revenues for the quarter were near $171 million, well below guidance of $180 to $195 million. CEO Jorge Titinger attributed the shortfall to three large deals with government agencies that normally would have closed in the quarter. In total the deals represented $15 million in revenue, and two of the three have closed since the quarter ended. The delays were due to agency concerns about their budgets due to the fiscal cliff standoff.
Despite the revenue shortfall, profits came in above prior guidance. This was due to better management, including closer attention to profit margins on individual supercomputer sales. On a GAAP basis net income is expected to be between break even and $1 million, or zero to $0.03 per share. On a non-GAAP basis net income is between $3 million and $4 million, for $0.07 to $0.10 earnings per share (EPS).
SGI ended the quarter with $128 million in cash, up $17 million in the quarter. Titinger and the new management team have started requiring deposits and milestone payments on the more expensive supercomputer systems, resulting in better cash flow.
It a presentation to investors, Titinger emphasized SGI's expertise in Big Data and Scale-Up Computing, as well as innovative storage solutions for massive amounts of data that need to be available for analysis. He talked about how SGI computers can do complex security checks for credit cards in real time (as they happen), something that used to take days to do.
As a sweetener SGI will used $15 million of its cash to buy back shares.
SGI stock ended the day at $10.87, up $0.34 for the day or 3.2%. That gave SGI a market capitalization of $360 million.
Disclaimer: I own SGI stock and will not trade the stock for 3 days after the publication of this report.
Based in Fremont, California, SGI manufactures supercomputers that are used in science research, Internet-based businesses, security, and other computation-intensive businesses. Revenues for the quarter were near $171 million, well below guidance of $180 to $195 million. CEO Jorge Titinger attributed the shortfall to three large deals with government agencies that normally would have closed in the quarter. In total the deals represented $15 million in revenue, and two of the three have closed since the quarter ended. The delays were due to agency concerns about their budgets due to the fiscal cliff standoff.
Despite the revenue shortfall, profits came in above prior guidance. This was due to better management, including closer attention to profit margins on individual supercomputer sales. On a GAAP basis net income is expected to be between break even and $1 million, or zero to $0.03 per share. On a non-GAAP basis net income is between $3 million and $4 million, for $0.07 to $0.10 earnings per share (EPS).
SGI ended the quarter with $128 million in cash, up $17 million in the quarter. Titinger and the new management team have started requiring deposits and milestone payments on the more expensive supercomputer systems, resulting in better cash flow.
It a presentation to investors, Titinger emphasized SGI's expertise in Big Data and Scale-Up Computing, as well as innovative storage solutions for massive amounts of data that need to be available for analysis. He talked about how SGI computers can do complex security checks for credit cards in real time (as they happen), something that used to take days to do.
As a sweetener SGI will used $15 million of its cash to buy back shares.
SGI stock ended the day at $10.87, up $0.34 for the day or 3.2%. That gave SGI a market capitalization of $360 million.
Disclaimer: I own SGI stock and will not trade the stock for 3 days after the publication of this report.
Wednesday, December 5, 2012
Dot Hill Hopes for 2013
Dot Hill (HILL) stock has been one of the worst performers in my portfolio lately. It is trading today at $0.88 per share, versus a 52 week high of $1.65 and 52 week low of $0.72. I have been invested in HILL for years, but more so than for most of my portfolio it has been a stock I have traded in, rather than just holding.
Dot Hill is a specialty data storage (SAN) solution equipment manufacturer, with many companies rebranding and selling its products, and HP as its by-far single largest customer. Looking at the past few years, management has continually indicated that prosperity (solid profits) is just around the corner, 2 or 3 quarters out, but the profits never have materialized. Hence credibility is low, and so is the stock price.
But maybe this time for sure. HILL is rolling out new products and has a number of new customers, some announced and some yet to be announced. The recent numbers look bad, however, because each customer requires some customization of the stock product. This increases R&D expense, which can only be recaptured in later years if product sales ramp and if gross and operating margins allow for it.
How could 2013 be different than 2012? Let's use Q3 2012 as a baseline. Revenues were $48.2 million, up 1% sequentially from $47.8 million, and up slightly from $48.1 million in the year-earlier quarter. GAAP net income was negative $3.0 million, improved sequentially from negative $5.0 million, and much improved from negative $12.2 million year-earlier. GAAP EPS (earnings per share) was negative $0.05, up sequentially from negative $0.09, and also up from negative $0.22 year-earlier.
Market capitalization is about $49 million, despite cash holding of $40 million, with just $2 million in debt, at the end of Q3.
Two new storage systems are sampling in Q4, the 4000 series and 5000 series. These newer systems will allow Dot Hill to serve a broader section of the market. Currently Hill's systems are used mainly for small businesses and the value end of the enterprise market.
The AssuredSAN 4000 series works with 8Gb Fibre Channel and 6Gb SAS (serial attached storage), the same as the 3000 series, but has optimized features adding extra speed for video streaming and broadcast, HPC (high performance computing), and post-production work.
The AssuredSAN Pro 5000 series works with 8 Gb Fibre Channel or 10 GbiSCSI and adds automated tiered storage software, thin provisioning, SSD acceleraton and other high-end features.
An important aspect of both new products should be improved margins, coinciding with the mid-market end use. Both build on top of the successful AssuredSAN 3000 series, which is a leader in the low-end market. The new 4000 and 5000 series are meant to be both feature and price competitive, so there is reason to hope for strong sales as 2013 progresses.
While there is a fear of investing in the hard disk drive (HDD) market right now, it is important to note that Dot Hill products are used in corporate datacenters and for cloud computing and big data. The use of smartphones and tablets is causing the need for rapid storage build out for the Internet, and the move to video is creating huge data storage demand.
Can Hill and its partners compete successfully in this market? Based on the past five years of experience, the answer would be just barely. But Hill was a train wreck when it got dumped by its biggest (then) client, Sun Microsystems. It has remained standing while a number of competitors were absorbed into larger companies. While it competes with EMC, it has an alliance with HP and a large number of smaller OEMs and value-added retailers. Dependence on HP has decreased. Autodesk is among the list of important new customers. Feedback on the new products has been very positive.
Right now HILL is more of a bottom-fishing play than anything else. To see the stock back at the $4 to $5 range management will have to deliver both improved revenues and improved margins. The possibility of achieving that makes it is a stock that is worth watching in 2013.
Disclaimer: I am long Dot Hill. I won't make HILL trades for 1 week after publishing this article. I do not have positions in any of the other companies mentioned.
See also: www.dothill.com
Dot Hill is a specialty data storage (SAN) solution equipment manufacturer, with many companies rebranding and selling its products, and HP as its by-far single largest customer. Looking at the past few years, management has continually indicated that prosperity (solid profits) is just around the corner, 2 or 3 quarters out, but the profits never have materialized. Hence credibility is low, and so is the stock price.
But maybe this time for sure. HILL is rolling out new products and has a number of new customers, some announced and some yet to be announced. The recent numbers look bad, however, because each customer requires some customization of the stock product. This increases R&D expense, which can only be recaptured in later years if product sales ramp and if gross and operating margins allow for it.
How could 2013 be different than 2012? Let's use Q3 2012 as a baseline. Revenues were $48.2 million, up 1% sequentially from $47.8 million, and up slightly from $48.1 million in the year-earlier quarter. GAAP net income was negative $3.0 million, improved sequentially from negative $5.0 million, and much improved from negative $12.2 million year-earlier. GAAP EPS (earnings per share) was negative $0.05, up sequentially from negative $0.09, and also up from negative $0.22 year-earlier.
Market capitalization is about $49 million, despite cash holding of $40 million, with just $2 million in debt, at the end of Q3.
Two new storage systems are sampling in Q4, the 4000 series and 5000 series. These newer systems will allow Dot Hill to serve a broader section of the market. Currently Hill's systems are used mainly for small businesses and the value end of the enterprise market.
The AssuredSAN 4000 series works with 8Gb Fibre Channel and 6Gb SAS (serial attached storage), the same as the 3000 series, but has optimized features adding extra speed for video streaming and broadcast, HPC (high performance computing), and post-production work.
The AssuredSAN Pro 5000 series works with 8 Gb Fibre Channel or 10 GbiSCSI and adds automated tiered storage software, thin provisioning, SSD acceleraton and other high-end features.
An important aspect of both new products should be improved margins, coinciding with the mid-market end use. Both build on top of the successful AssuredSAN 3000 series, which is a leader in the low-end market. The new 4000 and 5000 series are meant to be both feature and price competitive, so there is reason to hope for strong sales as 2013 progresses.
While there is a fear of investing in the hard disk drive (HDD) market right now, it is important to note that Dot Hill products are used in corporate datacenters and for cloud computing and big data. The use of smartphones and tablets is causing the need for rapid storage build out for the Internet, and the move to video is creating huge data storage demand.
Can Hill and its partners compete successfully in this market? Based on the past five years of experience, the answer would be just barely. But Hill was a train wreck when it got dumped by its biggest (then) client, Sun Microsystems. It has remained standing while a number of competitors were absorbed into larger companies. While it competes with EMC, it has an alliance with HP and a large number of smaller OEMs and value-added retailers. Dependence on HP has decreased. Autodesk is among the list of important new customers. Feedback on the new products has been very positive.
Right now HILL is more of a bottom-fishing play than anything else. To see the stock back at the $4 to $5 range management will have to deliver both improved revenues and improved margins. The possibility of achieving that makes it is a stock that is worth watching in 2013.
Disclaimer: I am long Dot Hill. I won't make HILL trades for 1 week after publishing this article. I do not have positions in any of the other companies mentioned.
See also: www.dothill.com
Monday, December 3, 2012
Gilead Sciences Pipeline Value
Gilead Sciences (GILD), has had a good year so far. On January 3, 2012 it opened at $41.46. Today it closed at 74.61, fairly near its 52-week high of $76.28. So up 84% this year. I used to write about Gilead more often during the years 2007 to 2011, arguing that it was undervalued. After finally getting a solid run up, is it time to bail out, hold, or buy more?
The forward-looking story is now largely about curing Hepatitis C, but first the latest backward-looking numbers.
In Q3 revenue was $2.43 billion, up 1% sequentially from $2.41 billion and up 14% from $2.12 billion in the year-earlier quarter. GAAP net income was $675.5 million, down 5% sequentially from $711.6 million, and down 9% from $741.1 million year-earlier. GAAP earnings per share (EPS) were $0.85, down 7% sequentially from $0.91 and down 10% from $0.95 year-earlier. Non-GAAP net income was $788.9 million, up 3% sequentially $767.3 million, and down 1% from $795.2 million year-earlier.
Profits did not keep pace with revenue growth because of costs from the Pharmasset acquisition from earlier in the year and a significant increase in R&D expense. Gilead is currently rolling out its newest HIV drugs like Stribild, which is helping revenue, but the R&D is not so much for HIV. The new R&D research is focused on hepatitis and oncology.
Why the emphasis on hep c? While Gilead Sciences has branched out into treatments for cardiovascular diseases, its primary expertise in in anti-viral drugs, particularly for HIV infections. Because of the effectiveness of its single-tablet, multi-drug combinations, Gilead dominates that market. Gilead also markets Viread for Hepatitis B. The past generation of Hepatitis C therapies have limited effectiveness, have a number of side effects, and cannot be administered orally.
Before the Pharmasset acquisition Gilead had four hepatitis drugs in phase II trials, and three in phase I, and said they would likely be made into a successful combination therapy. Pharmasset added Phase III candidate PSI-7977 (now Sofosbuvir), Phase II candidate Mericitabine, and Phase II candidate PSI-938, all for hep C. Pharmasset also brought candidates for HIV and hepatitis B treatment.
The latest set of results is for Sofosbuvir. The Phase 3 POSITRON study showed a response rate of 78% for hepatitis C (HCV) genotypes 2 and 3 when Sofosbuvir was combined with Ribavirin. It is notable that this is an all-oral regimen which does not include the using old standard, interferon. In tracking HCV note that a drug combination that works well with a particular genotype may not work with others. After 12 weeks of therapy and then an addition twelve weeks to see if the virus returned, HCV was not detected in 78% of patients. For those who are keeping track, Sofosbuvir used to be GS-7977.
Better still were the results from Sofosbuvir combined with GS-5885 and Ribavirin for genotype 1 HCV patients. Following 12 weeks of therapy and then 4 weeks without therapy, the response rate was 100%. Used with just ribavirin, Sofosbuvir had mixed results ranging from 84% for genotype 1 patients with no prior treatment down to only 10% response for genotype 1 patients who had not responded to prior treatments. For genotype 2 and 3 mixes, the range of responses was 60% to 68%.
Note that 100% cure rate is not necessary for FDA approval. As long as a combination can be found that does well with previously-untreated patients or that helps patients who were not helped by current therapies that include interferon, with about a 40% cure rate, the drugs could fulfill an unmet medical need.
At the same time it is a race, since other companies are also trying to break into the all-oral hepatitis market. It is a huge market. An estimated 150 million people world-wide have chronic hepatitis C, with the U.S. figure likely somewhere between 3 and 6 million (many people have undiagnosed HCV). For a less positive spin on the overall competition in hepatitis, I try Lessons from the Liver Meeting at Seeking Alpha.
Using the standard trailing 12-month ratio, Gilead's current P/E is 23.3. That is up quite a bit from earlier in the year. Conservative investors may want to wait until Gilead has actual FDA approval for a hepatitis C before extrapolating their chickens. As usual, the problem is by that time the stock may be priced even higher.
I don't think the current market has even priced in the true future value of Gilead's current drugs, much less the potential of a Sofosbuvir cocktail. In my particular case I feel comfortable with looking to the continued appreciation of my current holdings. I might still buy if the hep C data keeps getting better without a corresponding rise in the stock price. I have portfolio rules that restrict any stock to a maximum percentage of the entire portfolio, and could be forced to sell some if the stock rises too rapidly in price, though that seems unlikely at present.
Even with a great growth potential Gilead has, there are the usual risks from competition, macroeconomics, failure to receive FDA approval, etc.
Keep Diversified!
Disclaimer: I am a long-term investor in Gilead Sciences. I will not trade in the stock for a week from today.
See also:
my Gilead Sciences Q3 2012 analyst call summary
www.gilead.com
The forward-looking story is now largely about curing Hepatitis C, but first the latest backward-looking numbers.
In Q3 revenue was $2.43 billion, up 1% sequentially from $2.41 billion and up 14% from $2.12 billion in the year-earlier quarter. GAAP net income was $675.5 million, down 5% sequentially from $711.6 million, and down 9% from $741.1 million year-earlier. GAAP earnings per share (EPS) were $0.85, down 7% sequentially from $0.91 and down 10% from $0.95 year-earlier. Non-GAAP net income was $788.9 million, up 3% sequentially $767.3 million, and down 1% from $795.2 million year-earlier.
Profits did not keep pace with revenue growth because of costs from the Pharmasset acquisition from earlier in the year and a significant increase in R&D expense. Gilead is currently rolling out its newest HIV drugs like Stribild, which is helping revenue, but the R&D is not so much for HIV. The new R&D research is focused on hepatitis and oncology.
Why the emphasis on hep c? While Gilead Sciences has branched out into treatments for cardiovascular diseases, its primary expertise in in anti-viral drugs, particularly for HIV infections. Because of the effectiveness of its single-tablet, multi-drug combinations, Gilead dominates that market. Gilead also markets Viread for Hepatitis B. The past generation of Hepatitis C therapies have limited effectiveness, have a number of side effects, and cannot be administered orally.
Before the Pharmasset acquisition Gilead had four hepatitis drugs in phase II trials, and three in phase I, and said they would likely be made into a successful combination therapy. Pharmasset added Phase III candidate PSI-7977 (now Sofosbuvir), Phase II candidate Mericitabine, and Phase II candidate PSI-938, all for hep C. Pharmasset also brought candidates for HIV and hepatitis B treatment.
The latest set of results is for Sofosbuvir. The Phase 3 POSITRON study showed a response rate of 78% for hepatitis C (HCV) genotypes 2 and 3 when Sofosbuvir was combined with Ribavirin. It is notable that this is an all-oral regimen which does not include the using old standard, interferon. In tracking HCV note that a drug combination that works well with a particular genotype may not work with others. After 12 weeks of therapy and then an addition twelve weeks to see if the virus returned, HCV was not detected in 78% of patients. For those who are keeping track, Sofosbuvir used to be GS-7977.
Better still were the results from Sofosbuvir combined with GS-5885 and Ribavirin for genotype 1 HCV patients. Following 12 weeks of therapy and then 4 weeks without therapy, the response rate was 100%. Used with just ribavirin, Sofosbuvir had mixed results ranging from 84% for genotype 1 patients with no prior treatment down to only 10% response for genotype 1 patients who had not responded to prior treatments. For genotype 2 and 3 mixes, the range of responses was 60% to 68%.
Note that 100% cure rate is not necessary for FDA approval. As long as a combination can be found that does well with previously-untreated patients or that helps patients who were not helped by current therapies that include interferon, with about a 40% cure rate, the drugs could fulfill an unmet medical need.
At the same time it is a race, since other companies are also trying to break into the all-oral hepatitis market. It is a huge market. An estimated 150 million people world-wide have chronic hepatitis C, with the U.S. figure likely somewhere between 3 and 6 million (many people have undiagnosed HCV). For a less positive spin on the overall competition in hepatitis, I try Lessons from the Liver Meeting at Seeking Alpha.
Using the standard trailing 12-month ratio, Gilead's current P/E is 23.3. That is up quite a bit from earlier in the year. Conservative investors may want to wait until Gilead has actual FDA approval for a hepatitis C before extrapolating their chickens. As usual, the problem is by that time the stock may be priced even higher.
I don't think the current market has even priced in the true future value of Gilead's current drugs, much less the potential of a Sofosbuvir cocktail. In my particular case I feel comfortable with looking to the continued appreciation of my current holdings. I might still buy if the hep C data keeps getting better without a corresponding rise in the stock price. I have portfolio rules that restrict any stock to a maximum percentage of the entire portfolio, and could be forced to sell some if the stock rises too rapidly in price, though that seems unlikely at present.
Even with a great growth potential Gilead has, there are the usual risks from competition, macroeconomics, failure to receive FDA approval, etc.
Keep Diversified!
Disclaimer: I am a long-term investor in Gilead Sciences. I will not trade in the stock for a week from today.
See also:
my Gilead Sciences Q3 2012 analyst call summary
www.gilead.com
Thursday, June 7, 2012
Cantel Medical Posts Q3 Earnings up 58%
Cantel Medical (CMN) specializes in disinfection equipment for dental offices and medical centers. Its products range from face masks to complex endoscope sterilization machines. Fiscal Q3 earnings announced this morning were $0.30, up 11% sequentially from $0.27 and up 58% from $0.19 year-earlier. The stock popped up above $24 following the news. This follows on a 52-week low of $12.68 and high of $25.55.
Cantel has been growing through a strategy of making relatively small, strategic acquisitions while also introducing new products based on its own research and development. In 2011 it made three acquisitions. That added some debt, now near $100 million. The acquisitions have gone well, with cost reductions combining with higher sales levels. Gross margins rose 6% from year earlier to 43.8%.
Fiscal Q3 2012 revenue was $97.2 million, down slightly sequentially from $97.3 million, but up 18% from $82.6 million year-earlier. Net income was $8.2 million, up 12% sequentially from $7.3 million and up 64% from $5.0 million year-earlier. Clearly profits are growing faster than revenues. However, management expects margins growth to flatten out, so future earnings growth will be based on increased revenues.
Most of the revenue comes from four major components: endoscopy at $38.6 million, water purification at $26.0 million, healthcare disposables at$19.3 million, and dialysis at $8.9 million. The sterilization of endoscopes, and sales of supplies for endoscopic procedures, saw revenues rise 41% y/y. With an aging population in the U.S., endoscopic procedures tend to ramp at a pretty steady rate.
One are the company admits it can do better in is international sales. Those only account for 10% of sales at present. Cantel plans to hire more sales personnel in Europe, Asia, and South America this year, mainly to sell endoscopy products.
Another area of future expansion is the healthcare disposables segment, which mainly manufactures disposable face masks for infection control, including some with innovative designs. Originally coming out of the dental sector, these masks are beginning to penetrate medical and veterinary sectors.
Cantel Medical pays a small dividend, under 0.5% per year. Given its rapid growth plans, I believe cash flows will continue to be used to pay down debt or to make further acquisitions. The cash balance at the end of the quarter was $25 million. Cash flow in the quarter was $13 million. It would take less than two years for Cantel to pay off its debts if all cash flow went to that purpose. Given today's low interest rates, it seems like a better strategy to make acquisitions, if they turn out as good as the ones made in 2011.
As a technology and biotechnology investor, it is an obscure data point that most impresses me. Research and development expenses were only $2.2 million in the quarter. Compare that to how much it costs to take a new drug through clinical trials, or design a new semiconductor chip, and you will see why I like Cantel's profit model so much.
Disclaimer: I have owned Cantel Medical since December, 2009. I will not trade the stock for a week from today.
See also my Q3 2012 Cantel Medical notes
Cantel has been growing through a strategy of making relatively small, strategic acquisitions while also introducing new products based on its own research and development. In 2011 it made three acquisitions. That added some debt, now near $100 million. The acquisitions have gone well, with cost reductions combining with higher sales levels. Gross margins rose 6% from year earlier to 43.8%.
Fiscal Q3 2012 revenue was $97.2 million, down slightly sequentially from $97.3 million, but up 18% from $82.6 million year-earlier. Net income was $8.2 million, up 12% sequentially from $7.3 million and up 64% from $5.0 million year-earlier. Clearly profits are growing faster than revenues. However, management expects margins growth to flatten out, so future earnings growth will be based on increased revenues.
Most of the revenue comes from four major components: endoscopy at $38.6 million, water purification at $26.0 million, healthcare disposables at$19.3 million, and dialysis at $8.9 million. The sterilization of endoscopes, and sales of supplies for endoscopic procedures, saw revenues rise 41% y/y. With an aging population in the U.S., endoscopic procedures tend to ramp at a pretty steady rate.
One are the company admits it can do better in is international sales. Those only account for 10% of sales at present. Cantel plans to hire more sales personnel in Europe, Asia, and South America this year, mainly to sell endoscopy products.
Another area of future expansion is the healthcare disposables segment, which mainly manufactures disposable face masks for infection control, including some with innovative designs. Originally coming out of the dental sector, these masks are beginning to penetrate medical and veterinary sectors.
Cantel Medical pays a small dividend, under 0.5% per year. Given its rapid growth plans, I believe cash flows will continue to be used to pay down debt or to make further acquisitions. The cash balance at the end of the quarter was $25 million. Cash flow in the quarter was $13 million. It would take less than two years for Cantel to pay off its debts if all cash flow went to that purpose. Given today's low interest rates, it seems like a better strategy to make acquisitions, if they turn out as good as the ones made in 2011.
As a technology and biotechnology investor, it is an obscure data point that most impresses me. Research and development expenses were only $2.2 million in the quarter. Compare that to how much it costs to take a new drug through clinical trials, or design a new semiconductor chip, and you will see why I like Cantel's profit model so much.
Disclaimer: I have owned Cantel Medical since December, 2009. I will not trade the stock for a week from today.
See also my Q3 2012 Cantel Medical notes
Thursday, May 10, 2012
Dot Hill Reports Q1 Bounce
Dot Hill (HILL) is up today after reporting considerably better than expected Q1 revenues. Despite that, with expected revenues of over $200 million in 2012, its market capitalization is around $74 million. Is Dot Hill an overlooked prize, or is the market right about its value?
Dot hill manufactures data storage arrays for the low-end of the enterprise market, selling to OEMs that typically rebrand the devices. A few years ago Sun was their main customer, but Sun dropped them, leading to a crisis. HP is now their main customer. Management has been building an impressive list of other customers, reducing reliance on HP.
Revenues were $54.7 million, up 16% sequentially from $47.0 million and up 11% from $49.2 million in the year-earlier quarter. Usually Q1 sees a seasonal revenue drop from Q4, so these are impressive numbers. Part of the revenue, I am guessing in the range of about $4 to $5 million, came from orders from a particular customer that provides storage solutions to the telecom market. Management mentioned this could happen when they gave Q1 guidance in March, but they clearly hedged a bit.
The year over year comparison was the first good one turned in since NetApp was dropped as a client in 2010. I believe the prior negative year/year comparisons had been depressing the stock price, despite the compelling reasons for ditching NetApp.
GAAP net income was negative $1.8 million, up sequentially from negative $6.6 million, but worse than the negative $1.3 million of the year-earlier quarter. EPS was negative $0.03, up sequentially from negative $0.12, but down a penny from negative $0.02 year-earlier.
Even if we look at non-GAAP numbers, which drop out non-cash accounting charges, while HILL got into the black it was just barely: net income was $1.9 million. EPS was $0.03.
Guidance is that Q2 will be off Q1, with revenues between $48 and $52 million and non-GAAP EPS close enough to zero that it could be a plus or minus.
That is the past, what about the future? Technology companies can't dwell in the past, as RIMM, among so many others, have demonstrated. During the crisis (losing Sun during the recession) management started making smart moves about the future of the storage market. They are competing against giants, but they sometimes cooperate with giants like HP. Their storage products have actually received quite a bit of acclaim in the industry.
Some of the Q1 revenue growth came from new clients signed in 2011. Hill was able to win these customers because they produce very reliable storage technology at a reasonable cost and work hard for their clients. Autodesk and Concurrent Computer were cited as OEMs signed in 2011 that are seeing sales ramps. Official announcements of newer customers should be coming out as 2012 progresses.
Dot Hill has mainly served the entry-level enterprise storage market. Part of their success has been from adding higher level features to entry-level designs. New storage arrays that have mid-level enterprise features should be released in the second half of the year. OEMs are already excited about them, but a significant revenue ramp of the new products is probably a q4 and 2013 story.
On the whole Dot Hill management was upbeat, particularly about the second half of 2012. With the ramping of lines at newer OEM customers, Dot Hill should be able to enter an era of sustained profitability. Given that the company is debt free and holds $41 million in cash, there is a lot of upside potential if management can execute according to plan. In terms of share prices, I would be delighted, but not overly surprised, to see shares in the $3 to $5 range by mid 2013. I am also surprised, given their patent portfolio, that Dot Hill has not been a takeover target. Of course the usual risks apply, but I think all the risk is priced in at current levels.
Disclaimer: I am long Dot Hill. I won't make HILL trades for 1 week after publishing this article. I do not have positions in any of the other companies mentioned.
See also: www.dothill.com
My Q1 2012 Dot Hill analyst call notes
Dot hill manufactures data storage arrays for the low-end of the enterprise market, selling to OEMs that typically rebrand the devices. A few years ago Sun was their main customer, but Sun dropped them, leading to a crisis. HP is now their main customer. Management has been building an impressive list of other customers, reducing reliance on HP.
Revenues were $54.7 million, up 16% sequentially from $47.0 million and up 11% from $49.2 million in the year-earlier quarter. Usually Q1 sees a seasonal revenue drop from Q4, so these are impressive numbers. Part of the revenue, I am guessing in the range of about $4 to $5 million, came from orders from a particular customer that provides storage solutions to the telecom market. Management mentioned this could happen when they gave Q1 guidance in March, but they clearly hedged a bit.
The year over year comparison was the first good one turned in since NetApp was dropped as a client in 2010. I believe the prior negative year/year comparisons had been depressing the stock price, despite the compelling reasons for ditching NetApp.
GAAP net income was negative $1.8 million, up sequentially from negative $6.6 million, but worse than the negative $1.3 million of the year-earlier quarter. EPS was negative $0.03, up sequentially from negative $0.12, but down a penny from negative $0.02 year-earlier.
Even if we look at non-GAAP numbers, which drop out non-cash accounting charges, while HILL got into the black it was just barely: net income was $1.9 million. EPS was $0.03.
Guidance is that Q2 will be off Q1, with revenues between $48 and $52 million and non-GAAP EPS close enough to zero that it could be a plus or minus.
That is the past, what about the future? Technology companies can't dwell in the past, as RIMM, among so many others, have demonstrated. During the crisis (losing Sun during the recession) management started making smart moves about the future of the storage market. They are competing against giants, but they sometimes cooperate with giants like HP. Their storage products have actually received quite a bit of acclaim in the industry.
Some of the Q1 revenue growth came from new clients signed in 2011. Hill was able to win these customers because they produce very reliable storage technology at a reasonable cost and work hard for their clients. Autodesk and Concurrent Computer were cited as OEMs signed in 2011 that are seeing sales ramps. Official announcements of newer customers should be coming out as 2012 progresses.
Dot Hill has mainly served the entry-level enterprise storage market. Part of their success has been from adding higher level features to entry-level designs. New storage arrays that have mid-level enterprise features should be released in the second half of the year. OEMs are already excited about them, but a significant revenue ramp of the new products is probably a q4 and 2013 story.
On the whole Dot Hill management was upbeat, particularly about the second half of 2012. With the ramping of lines at newer OEM customers, Dot Hill should be able to enter an era of sustained profitability. Given that the company is debt free and holds $41 million in cash, there is a lot of upside potential if management can execute according to plan. In terms of share prices, I would be delighted, but not overly surprised, to see shares in the $3 to $5 range by mid 2013. I am also surprised, given their patent portfolio, that Dot Hill has not been a takeover target. Of course the usual risks apply, but I think all the risk is priced in at current levels.
Disclaimer: I am long Dot Hill. I won't make HILL trades for 1 week after publishing this article. I do not have positions in any of the other companies mentioned.
See also: www.dothill.com
My Q1 2012 Dot Hill analyst call notes
Sunday, April 29, 2012
Gilead Sciences Looks for Hepatitis C Cure
When I last wrote about Gilead Sciences (GILD), on July 26, 2011, I said "A convergence of factors is driving Gilead profits higher. This trend should accelerate in 2012 and continue through at least 2015." [See Gilead Sciences Readies Pipeline]. Gilead stock that day closed at $42.16. Last Friday April 27, GILD closed at $52.16, following the announcement of Q1 results after market close on Thursday.
The forward-looking story is now largely about curing Hepatitis C, but first the backward-looking numbers.
In Q1 revenue was $2.28 billion, up 4% sequentially from $2.20 billion and up 18% from $1.93 billion in the year-earlier quarter. GAAP net income was $442.0 million, down 34% sequentially from $665.1 million and down 32% from $651.1 million year-earlier. GAAP earnings per share (EPS) were $0.57, down 34% sequentially from $0.87 and down 29% from $0.80 year-earlier.
The poor GAAP profit showing relative to revenue was mainly related to the acquisition of Pharmasset, closing on January 17, for $11 billion. Pharmasset held important therapies for hepatitis C that Gilead wanted to add to its own hep C pipeline. Non-GAAP EPS was $0.91, up from $0.87 year-earlier.
Why the emphasis on hep c? While Gilead Sciences has branched out into treatments for cardiovascular diseases, its primary expertise in in anti-viral drugs, particularly for HIV infections, which lead to AIDS if untreated. Because of the effectiveness of its single-tablet, multi-drug combinations, Gilead dominates that market. Gilead also markets Viread for Hepatitis B. The past generation of Hepatitis C therapies have limited effectiveness, have a number of side effects, and cannot be administered orally.
Before the Pharmasset acquisition Gilead had four hepatitis drugs in phase II trials, and three in phase I, and said they would likely be made into a successful combination therapy. Pharmasset added Phase III candidate PSI-7977 (now GS7977), Phase II candidate Mericitabine, and Phase II candidate PSI-938, all for hep C. Pharmasset also brought candidates for HIV and hepatitis B treatment.
Thursday Gilead executives reviewed recent hep C data and clarified their strategy. The GS-7977 plus ribavirin hepatitis C (HCV) genotype 1 Phase 2 study showed no detectible virus after 12 weeks of treatment, but at end of treatment the majority of patients relapsed. GS-7977 plus BMS-790052 (owned by Bristol Myer) showed high hepatitis C cure rates: >90% for genotype 2/3 and 100% for genotype 1.
Based on those and other results, Gilead is designing Phase III studies that could be fully enrolled by the end of May. Several paths are available to get therapies to market, but they need to talk more to regulators before the final trials are initiated. They would clearly prefer an all-Gilead single tablet regimen that cures most hep C, so working with Bristol Myer would be a fall back position. Given the number of drugs Gilead owns and could combine with 7977, it is a good, but not certain, bet that something will work.
At the same time it is a race, since other companies are also trying to break into the all-oral hepatitis market. It is a huge market. An estimated 150 million people have chronic hepatitis C, with the U.S. figure likely somewhere between 3 and 6 million (many people have undiagnosed hep c).
It is too early, I think, to put a number on the value of a hep c cure, but note that Gilead paid $11 billion for Pharmasset. They went through most of their cash and borrowed some $5.5 billion to do it. Gilead annual cash flow runs around $2 billion.
The main risk here is that a competitor (or multiple competitors) will also create an all-oral hepatitis c therapy, and might even gain FDA approval first. Even so, it is a big market and I don't think Gilead's present price reflects much of this opportunity.
Even with a great growth and value combo like Gilead, there are the usual risks from competition, macroeconomics, failure to execute, etc. See SEC filings for a complete set of risks.
And Keep Diversified!
Disclaimer: I am a long-term investor in Gilead Sciences. I will not trade in the stock for a week from today.
See also:
my Gilead Sciences Q1 2012 analyst call summary
www.gilead.com
The forward-looking story is now largely about curing Hepatitis C, but first the backward-looking numbers.
In Q1 revenue was $2.28 billion, up 4% sequentially from $2.20 billion and up 18% from $1.93 billion in the year-earlier quarter. GAAP net income was $442.0 million, down 34% sequentially from $665.1 million and down 32% from $651.1 million year-earlier. GAAP earnings per share (EPS) were $0.57, down 34% sequentially from $0.87 and down 29% from $0.80 year-earlier.
The poor GAAP profit showing relative to revenue was mainly related to the acquisition of Pharmasset, closing on January 17, for $11 billion. Pharmasset held important therapies for hepatitis C that Gilead wanted to add to its own hep C pipeline. Non-GAAP EPS was $0.91, up from $0.87 year-earlier.
Why the emphasis on hep c? While Gilead Sciences has branched out into treatments for cardiovascular diseases, its primary expertise in in anti-viral drugs, particularly for HIV infections, which lead to AIDS if untreated. Because of the effectiveness of its single-tablet, multi-drug combinations, Gilead dominates that market. Gilead also markets Viread for Hepatitis B. The past generation of Hepatitis C therapies have limited effectiveness, have a number of side effects, and cannot be administered orally.
Before the Pharmasset acquisition Gilead had four hepatitis drugs in phase II trials, and three in phase I, and said they would likely be made into a successful combination therapy. Pharmasset added Phase III candidate PSI-7977 (now GS7977), Phase II candidate Mericitabine, and Phase II candidate PSI-938, all for hep C. Pharmasset also brought candidates for HIV and hepatitis B treatment.
Thursday Gilead executives reviewed recent hep C data and clarified their strategy. The GS-7977 plus ribavirin hepatitis C (HCV) genotype 1 Phase 2 study showed no detectible virus after 12 weeks of treatment, but at end of treatment the majority of patients relapsed. GS-7977 plus BMS-790052 (owned by Bristol Myer) showed high hepatitis C cure rates: >90% for genotype 2/3 and 100% for genotype 1.
Based on those and other results, Gilead is designing Phase III studies that could be fully enrolled by the end of May. Several paths are available to get therapies to market, but they need to talk more to regulators before the final trials are initiated. They would clearly prefer an all-Gilead single tablet regimen that cures most hep C, so working with Bristol Myer would be a fall back position. Given the number of drugs Gilead owns and could combine with 7977, it is a good, but not certain, bet that something will work.
At the same time it is a race, since other companies are also trying to break into the all-oral hepatitis market. It is a huge market. An estimated 150 million people have chronic hepatitis C, with the U.S. figure likely somewhere between 3 and 6 million (many people have undiagnosed hep c).
It is too early, I think, to put a number on the value of a hep c cure, but note that Gilead paid $11 billion for Pharmasset. They went through most of their cash and borrowed some $5.5 billion to do it. Gilead annual cash flow runs around $2 billion.
The main risk here is that a competitor (or multiple competitors) will also create an all-oral hepatitis c therapy, and might even gain FDA approval first. Even so, it is a big market and I don't think Gilead's present price reflects much of this opportunity.
Even with a great growth and value combo like Gilead, there are the usual risks from competition, macroeconomics, failure to execute, etc. See SEC filings for a complete set of risks.
And Keep Diversified!
Disclaimer: I am a long-term investor in Gilead Sciences. I will not trade in the stock for a week from today.
See also:
my Gilead Sciences Q1 2012 analyst call summary
www.gilead.com
Thursday, April 19, 2012
AMD Guides to Strong 2012
Executives were positive on AMD's prospects for the rest of 2012 at the first quarter analyst call today.
The numbers for Q1 were towards the top of AMD's previous guidance, and contrasted well with arch-rival Intel's report. Because of the acquisition of SeaMicro and a deal to exit ownership and certain contracts with GlobalFoundries, GAAP and non-GAAP net income and EPS results were vastly different.
Revenue was $1.59 billion, down 6% sequentially from $1.69 billion and down 2% from $1.61 billion in the year-earlier quarter. Prior guidance had been for Q1 revenue to be down sequentially from 5% to 11%. Graphics chips (GPUs) were the main reason for the better-than-normal seasonality.
GAAP net income was negative $590 million, down sequentially from negative $177 million, and well down from positive $510 million year-earlier. That is a big hole, but included a roughly $700 million charge related to GlobalFoundries. In addition the year-earlier number included a $492 million gain in an equity position, also in Global Foundries.
GAAP EPS (earnings per share) were negative $0.80, down sequentially from negative $0.24, and down from positive $0.71 year-earlier.
I prefer GAAP numbers as a baseline, but in this case non-GAAP numbers give a clearer picture of reality, and of what we are likely to see going forward. Non-GAAP net income was $92 million, down sequentially from $138 million but up from year-earlier $56 million. EPS was $0.12. Adjusted EBITDA was $215 million.
Those are not great profits, but 2012 is likely to be a year of ramping, despite ongoing intense competition from Intel and NVIDIA. Because of improved 32 nm and 28 nm yields (AMDs new process technology, but behind Intel's 22 nm), supply constraints are unlikely.
The key take away is that computer makers, especially notebook computer makers, have signed up for a record number of designs using next generation AMD APUs. These have the combination manufacturers are looking for: great graphics, strong CPU performance, and low energy use, at a great price point. OEMs will be able to sell thin and light "ultrathin" computers at mainstream prices, whereas the Intel design (ultrabooks) will be in a higher price category. Trinity AMD APUs will be the upgrade for Llano for mainstream notebooks, and Brazos 2.0 will upgrade Brazos for economy notebooks.
In servers AMD is less competitive, but the technology acquired with SeaMicro should help in gaining share late in 2013. Gaining market share with Opteron chips will be a gradual process.
Both AMD and Intel, and in fact the entire Windows computer ecosystem, are highly likely to be helped by the introduction of Windows 8 later this year, exact date not yet announced.
Guidance for Q2 is for sequential growth from zero to 6%. Even at the low end of the range that is considerably better than the typical Q2 seasonal decline of 4%. The real proof of whether AMD has become a tech tiger again will be in Q3. If Trinity based notebooks are a hit for back to school sales, then 2012 will be a very good year for AMD and its investors.
Disclaimer: I am long AMD. I won't make any changes for at least a week after this article is published.
See also my AMD Q1 2012 analyst call summary;
The numbers for Q1 were towards the top of AMD's previous guidance, and contrasted well with arch-rival Intel's report. Because of the acquisition of SeaMicro and a deal to exit ownership and certain contracts with GlobalFoundries, GAAP and non-GAAP net income and EPS results were vastly different.
Revenue was $1.59 billion, down 6% sequentially from $1.69 billion and down 2% from $1.61 billion in the year-earlier quarter. Prior guidance had been for Q1 revenue to be down sequentially from 5% to 11%. Graphics chips (GPUs) were the main reason for the better-than-normal seasonality.
GAAP net income was negative $590 million, down sequentially from negative $177 million, and well down from positive $510 million year-earlier. That is a big hole, but included a roughly $700 million charge related to GlobalFoundries. In addition the year-earlier number included a $492 million gain in an equity position, also in Global Foundries.
GAAP EPS (earnings per share) were negative $0.80, down sequentially from negative $0.24, and down from positive $0.71 year-earlier.
I prefer GAAP numbers as a baseline, but in this case non-GAAP numbers give a clearer picture of reality, and of what we are likely to see going forward. Non-GAAP net income was $92 million, down sequentially from $138 million but up from year-earlier $56 million. EPS was $0.12. Adjusted EBITDA was $215 million.
Those are not great profits, but 2012 is likely to be a year of ramping, despite ongoing intense competition from Intel and NVIDIA. Because of improved 32 nm and 28 nm yields (AMDs new process technology, but behind Intel's 22 nm), supply constraints are unlikely.
The key take away is that computer makers, especially notebook computer makers, have signed up for a record number of designs using next generation AMD APUs. These have the combination manufacturers are looking for: great graphics, strong CPU performance, and low energy use, at a great price point. OEMs will be able to sell thin and light "ultrathin" computers at mainstream prices, whereas the Intel design (ultrabooks) will be in a higher price category. Trinity AMD APUs will be the upgrade for Llano for mainstream notebooks, and Brazos 2.0 will upgrade Brazos for economy notebooks.
In servers AMD is less competitive, but the technology acquired with SeaMicro should help in gaining share late in 2013. Gaining market share with Opteron chips will be a gradual process.
Both AMD and Intel, and in fact the entire Windows computer ecosystem, are highly likely to be helped by the introduction of Windows 8 later this year, exact date not yet announced.
Guidance for Q2 is for sequential growth from zero to 6%. Even at the low end of the range that is considerably better than the typical Q2 seasonal decline of 4%. The real proof of whether AMD has become a tech tiger again will be in Q3. If Trinity based notebooks are a hit for back to school sales, then 2012 will be a very good year for AMD and its investors.
Disclaimer: I am long AMD. I won't make any changes for at least a week after this article is published.
See also my AMD Q1 2012 analyst call summary;
Friday, March 30, 2012
Red Hat Tipping Point?
Red Hat (RHT), in the year 2000, was going to be another Microsoft. Its open source software, would, in a few years, replace the overpriced, proprietary software known as Windows.
Come Wednesday, when Red Hat reported its fiscal Q4 2012 results (for the quarter ending February 29) and held its analyst call, Red Hat GAAP net income came in at $36 million. Up 7.5% from Q4 2010, to be sure, but dwarfed by Microsoft's Q4 GAAP net income of $6.62 billion.
So Red Hat is still not the next Microsoft. Aside from that, the specialist in open source software is doing very well. Fiscal 2012 marked the first time Red Hat, and the first time a primarily open source software company, showed over $1 billion in annual revenue.
Revenue for the quarter was $297.0 million, up 2% sequentially from $290.0 million and up 21% from $244.8 million year-earlier.
GAAP net income was $36.0 million, down 6% sequentially from $38.2 million but up 7.5% from $33.5 million year-earlier. GAAP EPS (diluted earnings per share) were $0.18, down 5% sequentially from $0.19, but up 6% from $0.17 year-earlier. Non-GAAP net income was $57.2 million, for EPS of $0.29.
A 21% annual revenue ramp rate amounts to explosive growth in this slow-growth environment. Red Hat Enterprise Linux (RHEL) substantially reduces the cost of doing business and has proven itself for more than a decade it critical business environments. For enterprise data centers, switching to Red Hat is an easy decision to make. Along with Linux most companies are going to want RHEV for virtualization of servers and JBOSS middleware for applications.
Where Linux has not caught on is the corporate or home desktop. For practical purposes Red Hat no longer tries to compete in that space.
Note that net income and EPS did not ramp as quickly as revenue. Normally that might be a warning sign, but it is likely to reverse itself at a later point. Red Hat bought a storage software company last fall and has devoted a lot of R&D to getting the product ready and certified for sale. They are also in the midst of a rapid international expansion. There is a lag between setting up an office in a new nation and seeing significant revenues.
It is certainly possible that Red Hat has finally reached a tipping point where it will become the standard provider of operating systems for servers in datacenters and the cloud. In that scenario growth could even accelerate in the next few years.
Still, it would seem that Red Hat at its present price is for the boldest of investors. Currently Red Hat's P/E ratio is 80, compared to 12 for Microsoft and 17 for Apple. Keep in mind that the revenue growth rate for 2011 may not be a good predictor of future growth rates.
Disclaimer: I do not hold a position in Red Hat, or any other company mentioned in this article, though I have in the past. I won't trade Red Hat for at least one week after the publication of this article.
For more detail on Q4 results, see my notes on the Red Hat Q4 fiscal 2012 analyst call.
Keep diversified!
Come Wednesday, when Red Hat reported its fiscal Q4 2012 results (for the quarter ending February 29) and held its analyst call, Red Hat GAAP net income came in at $36 million. Up 7.5% from Q4 2010, to be sure, but dwarfed by Microsoft's Q4 GAAP net income of $6.62 billion.
So Red Hat is still not the next Microsoft. Aside from that, the specialist in open source software is doing very well. Fiscal 2012 marked the first time Red Hat, and the first time a primarily open source software company, showed over $1 billion in annual revenue.
Revenue for the quarter was $297.0 million, up 2% sequentially from $290.0 million and up 21% from $244.8 million year-earlier.
GAAP net income was $36.0 million, down 6% sequentially from $38.2 million but up 7.5% from $33.5 million year-earlier. GAAP EPS (diluted earnings per share) were $0.18, down 5% sequentially from $0.19, but up 6% from $0.17 year-earlier. Non-GAAP net income was $57.2 million, for EPS of $0.29.
A 21% annual revenue ramp rate amounts to explosive growth in this slow-growth environment. Red Hat Enterprise Linux (RHEL) substantially reduces the cost of doing business and has proven itself for more than a decade it critical business environments. For enterprise data centers, switching to Red Hat is an easy decision to make. Along with Linux most companies are going to want RHEV for virtualization of servers and JBOSS middleware for applications.
Where Linux has not caught on is the corporate or home desktop. For practical purposes Red Hat no longer tries to compete in that space.
Note that net income and EPS did not ramp as quickly as revenue. Normally that might be a warning sign, but it is likely to reverse itself at a later point. Red Hat bought a storage software company last fall and has devoted a lot of R&D to getting the product ready and certified for sale. They are also in the midst of a rapid international expansion. There is a lag between setting up an office in a new nation and seeing significant revenues.
It is certainly possible that Red Hat has finally reached a tipping point where it will become the standard provider of operating systems for servers in datacenters and the cloud. In that scenario growth could even accelerate in the next few years.
Still, it would seem that Red Hat at its present price is for the boldest of investors. Currently Red Hat's P/E ratio is 80, compared to 12 for Microsoft and 17 for Apple. Keep in mind that the revenue growth rate for 2011 may not be a good predictor of future growth rates.
Disclaimer: I do not hold a position in Red Hat, or any other company mentioned in this article, though I have in the past. I won't trade Red Hat for at least one week after the publication of this article.
For more detail on Q4 results, see my notes on the Red Hat Q4 fiscal 2012 analyst call.
Keep diversified!
Tuesday, March 20, 2012
Adobe Waiting for CS6
Adobe (ADBE) yesterday reported a Q1, 2012 with only a slight increase in revenue over Q1 2011, with a decline in earnings per share (EPS). I use Adobe as a proxy for the computer software industry, but in this case special factors may have contributed to the poor showing, so the industry as a whole may do better in Q1. Adobe's fiscal Q1 2012 ended March 2, 2012, so it is a frontrunner to firms that report on a regular calendar basis (Q1's ending on March 31).
GAAP revenue was $1.045 billion, down 10% sequentially from $1.152 billion but up 2% from $1.027 billion year-earlier. Net income was $185.2 million, up 7% sequentially from $173.7 million but down 21% from $234.6 million year-earlier. Earnings per share (EPS) were $0.37, up 6% sequentially from $0.35 and down 20% from $0.46 year-earlier.
At the analyst conference call management claimed the poor showing was because of customers beginning to anticipate the future release of Creative Suite 6 (CS6). Creative Suite comes in a variety of flavors incorporating a number of Adobe software products such as the well-known Photoshop and Acrobat. Because the web is transitioning to include mobile devices and a new standard, HTML5, the products for web developers (including page layout, photo, animation, and video editing) are also changing rapidly.
Because of cost issues, developers sometimes do not upgrade to each new version. This was particularly true during the recession. If is possible that management is right in believing that the number of changes has become so great that CS6 will be a must-do upgrade even for customers that have CS5.5 or CS5, much less earlier versions.
The problem for web designers is that the design standards of 3 years ago, where they could count on a (well-designed) site appearing the same to viewers no matter which browser or operating system they used. Now every mobile device has a different screen size and many device users prefer apps, using a mobile web browser only as a last resort. What designers have had to do since the iPhone introduction is either write multiple web pages (one for desktop/notebook screens and one for each mobile device) or include programming on a single page that reformats that page for various screen configurations. Plus they
Given the endless complaining I have heard from fellow designers and programmers, I expect CS6 will be a big hit if it actually delivers the ability to design once and deploy, with minimal changes, to an assortment of devices. On the other hand if they think CS6 fails in that regard, they will probably cherry pick and only upgrade the Adobe software that work well for them.
The lower profits on flat revenues is attributable to up front investment in marketing and readying CS6 for deployment.
A number of pundits declared Adobe dead when Apple refused to support Flash animation on iPhones. So far Adobe is coping well with the new environment. It is the nature of IT things to see rapid die-offs and new growth.
Another area Adobe seems to be doing well in is helping its customers with dealing with another complex area, Internet advertising. A well-designed web page that does not generate ad revenue is not a good ROI. In January Adobe closed its acquisition of Efficient Frontier, which should help keep Adobe in the forefront of this area.
Today Adobe closed down $1.35 to $33.16. Its price to earnings ration was 29.5, which is pretty steep even if you buy the back-with-CS6 story. Adobe's lack of faith in its own future is shown by it's failure to pay a dividend. On the other hand it generated $314 million in free cash flow and ended with a cash balance of $2.8 billion.
CS6 is scheduled for release in late Q2, so probably in May. We will get a little bit of revenue feedback when Q2 results are announced in June.
Disclaimer: I don't have a position in Adobe. I do use some Adobe software, and I am long in a variety of technology stocks that might have relationships with Adobe.
GAAP revenue was $1.045 billion, down 10% sequentially from $1.152 billion but up 2% from $1.027 billion year-earlier. Net income was $185.2 million, up 7% sequentially from $173.7 million but down 21% from $234.6 million year-earlier. Earnings per share (EPS) were $0.37, up 6% sequentially from $0.35 and down 20% from $0.46 year-earlier.
At the analyst conference call management claimed the poor showing was because of customers beginning to anticipate the future release of Creative Suite 6 (CS6). Creative Suite comes in a variety of flavors incorporating a number of Adobe software products such as the well-known Photoshop and Acrobat. Because the web is transitioning to include mobile devices and a new standard, HTML5, the products for web developers (including page layout, photo, animation, and video editing) are also changing rapidly.
Because of cost issues, developers sometimes do not upgrade to each new version. This was particularly true during the recession. If is possible that management is right in believing that the number of changes has become so great that CS6 will be a must-do upgrade even for customers that have CS5.5 or CS5, much less earlier versions.
The problem for web designers is that the design standards of 3 years ago, where they could count on a (well-designed) site appearing the same to viewers no matter which browser or operating system they used. Now every mobile device has a different screen size and many device users prefer apps, using a mobile web browser only as a last resort. What designers have had to do since the iPhone introduction is either write multiple web pages (one for desktop/notebook screens and one for each mobile device) or include programming on a single page that reformats that page for various screen configurations. Plus they
Given the endless complaining I have heard from fellow designers and programmers, I expect CS6 will be a big hit if it actually delivers the ability to design once and deploy, with minimal changes, to an assortment of devices. On the other hand if they think CS6 fails in that regard, they will probably cherry pick and only upgrade the Adobe software that work well for them.
The lower profits on flat revenues is attributable to up front investment in marketing and readying CS6 for deployment.
A number of pundits declared Adobe dead when Apple refused to support Flash animation on iPhones. So far Adobe is coping well with the new environment. It is the nature of IT things to see rapid die-offs and new growth.
Another area Adobe seems to be doing well in is helping its customers with dealing with another complex area, Internet advertising. A well-designed web page that does not generate ad revenue is not a good ROI. In January Adobe closed its acquisition of Efficient Frontier, which should help keep Adobe in the forefront of this area.
Today Adobe closed down $1.35 to $33.16. Its price to earnings ration was 29.5, which is pretty steep even if you buy the back-with-CS6 story. Adobe's lack of faith in its own future is shown by it's failure to pay a dividend. On the other hand it generated $314 million in free cash flow and ended with a cash balance of $2.8 billion.
CS6 is scheduled for release in late Q2, so probably in May. We will get a little bit of revenue feedback when Q2 results are announced in June.
Disclaimer: I don't have a position in Adobe. I do use some Adobe software, and I am long in a variety of technology stocks that might have relationships with Adobe.
Thursday, March 15, 2012
Dot Hill Expects New OEM Customers in 2012
Dot Hill (HILL) is up today after reporting a poor fourth quarter 2012 yesterday. Q4 results were in line with revised guidance given in February. Today's stock price upside came from new customer sign-ups that management hopes will provide both higher revenues and better margins in 2012.
Dot hill manufactures data storage arrays for the low-end of the enterprise market, selling to OEMs that typically rebrand the devices. A few years ago Sun was their main customer, but Sun dropped them, leading to a crisis. HP is now their main customer. While they are happy with the HP relationship, which was extended for five years last year, management has been building an impressive list of other customers, reducing reliance on HP.
Revenue in Q4 was $47.0 million, down 2% sequentially from $48.1 million and down 28% from $65.4 million year-earlier. Part of the y/y decline resulted from the purposeful ditching of NetApp as a client because NetApp would not allow Dot Hill workable margins.
HP represented 67.5% of revenue in Q4. In Q1 2011, after NetApp dropped out, HP accounted for 76% of revenue. Partly there was a drop in revenue from HP, but mainly their share shrank because Hill's sales to smaller, Tier 2 OEMs grew 40% y/y.
Q4 revenue was also hurt by the Thailand flooding and resulting shortage of disk drives. Hill did not raise its prices in Q4, but did raise prices in February largely because of the higher prices of disks due to the shortage. They estimated they could have generated another $4 million in revenue in Q4 if not for the disk shortages. Q1 also has seen supply shortages, but drives are generally available except for the highest-capacity, newest technology drives. The disk supply issue should be over by Q3.
Autodesk and Concurrent Computer were cited as OEMs signed in 2011 that are seeing sales ramps. Official announcements of newer customers should be coming out as the year progresses.
Finally, new storage arrays that have mid-level enterprise features should be released in the second half of the year. OEMs are already excited about them, but a significant revenue ramp of the new products is probably a 2013 story.
Earnings were disappointing. GAAP net income was negative $6.6 million, non-GAAP net income was negative $1.6 million, but some of the charges were non-cash. Cash flow from operations was positive by $1.1 million.
On the whole Dot Hill management was upbeat, particularly about the second half of 2012. The hope would be that with no disasters, a reasonably healthy global economy, and the ramping of lines at newer OEM customers, Dot Hill will be able to enter an era of sustained profitability. Given that the company is debt free and holds $46 million in cash, and that its market capitalization today is just $82.6 million, Dot Hill is highly speculative, but has a lot of upside potential if management can execute according to plan.
Disclaimer: I am long Dot Hill, and sometimes actively trade in the stock. I won't make HILL trades for 1 week after publishing this article. I do not have positions in any of the other companies mentioned.
Dot hill manufactures data storage arrays for the low-end of the enterprise market, selling to OEMs that typically rebrand the devices. A few years ago Sun was their main customer, but Sun dropped them, leading to a crisis. HP is now their main customer. While they are happy with the HP relationship, which was extended for five years last year, management has been building an impressive list of other customers, reducing reliance on HP.
Revenue in Q4 was $47.0 million, down 2% sequentially from $48.1 million and down 28% from $65.4 million year-earlier. Part of the y/y decline resulted from the purposeful ditching of NetApp as a client because NetApp would not allow Dot Hill workable margins.
HP represented 67.5% of revenue in Q4. In Q1 2011, after NetApp dropped out, HP accounted for 76% of revenue. Partly there was a drop in revenue from HP, but mainly their share shrank because Hill's sales to smaller, Tier 2 OEMs grew 40% y/y.
Q4 revenue was also hurt by the Thailand flooding and resulting shortage of disk drives. Hill did not raise its prices in Q4, but did raise prices in February largely because of the higher prices of disks due to the shortage. They estimated they could have generated another $4 million in revenue in Q4 if not for the disk shortages. Q1 also has seen supply shortages, but drives are generally available except for the highest-capacity, newest technology drives. The disk supply issue should be over by Q3.
Autodesk and Concurrent Computer were cited as OEMs signed in 2011 that are seeing sales ramps. Official announcements of newer customers should be coming out as the year progresses.
Finally, new storage arrays that have mid-level enterprise features should be released in the second half of the year. OEMs are already excited about them, but a significant revenue ramp of the new products is probably a 2013 story.
Earnings were disappointing. GAAP net income was negative $6.6 million, non-GAAP net income was negative $1.6 million, but some of the charges were non-cash. Cash flow from operations was positive by $1.1 million.
On the whole Dot Hill management was upbeat, particularly about the second half of 2012. The hope would be that with no disasters, a reasonably healthy global economy, and the ramping of lines at newer OEM customers, Dot Hill will be able to enter an era of sustained profitability. Given that the company is debt free and holds $46 million in cash, and that its market capitalization today is just $82.6 million, Dot Hill is highly speculative, but has a lot of upside potential if management can execute according to plan.
Disclaimer: I am long Dot Hill, and sometimes actively trade in the stock. I won't make HILL trades for 1 week after publishing this article. I do not have positions in any of the other companies mentioned.
Saturday, February 18, 2012
Applied Materials Q1 Boosted by Mobile Demand
Applied Materials (AMAT), the semiconductor capital equipment maker, reported better than expected revenue and earnings Thursday for its first quarter fiscal 2012 ending January 30, 2012. Although the stock traded up after-hours on Thursday, by the end of day Friday it closed at $12.99, down $0.22 or 1.7% from the Thursday close.
Last quarter Applied management stated they believed they were past the bottom of the order cycle, but that revenues were not likely to start increasing until the second half of 2012. The lag is because semiconductor equipment is not made until after it is ordered, and customers sometimes place orders well in advance of their required delivery times.
Prior guidance was that Q1 revenue would be down 5% to 15% sequentially. Q1 Revenue were $2.19 billion, up 0.5% sequentially from $2.18 billion. Despite that revenue was down 18.5% from $2.69 billion in the year-earlier quarter.
The difference between guidance and results was mostly because a couple of large foundries (plants where semiconductor chips are manufactured) placed unexpected orders and took delivery faster than expected on Q4 orders. Most of this unexpected bonus was to fabricate mobile application processors, which are the hearts of tablet computers and smartphones. These processors are becoming more complicated, often adding computer cores as well as peripheral functions. This means die sizes become larger, so more dies must be processed, and more equipment lines installed. The number of units of smartphones and tablets sold globally is also expanding rapidly.
Two other Applied Materials segments, display technology and solar, did poorly as expected and are not believed likely to recover much in 2012.
Which brings us back to the question of where we are in the cycle. To some extent that depends on the global economy. It is also sector-specific, as capacity utilization and end demand growth differ for sectors like RAM, Flash memory, application-specific chips and display technology. Growth comes in two forms: more equipment to pump out more units, and new equipment for chips that work with smaller transistors.
In addition to continued strong demand for mobile-specific devices, PC demand is expected to rebound in 2012 as the hard-drive shortage bottleneck disappears. In addition, Windows 8 could be a driver if it releases as expected this Fall.
While we are probably now past the bottom of the order cycle for semiconductor production equipment, the exact nature and extent of the ramp remains to be seen. Guidance for Q2 is for revenues to be up sequentially between 5% and 15%. We are far enough into Q2, and enough shipments were ordered back in Q1 or even Q4, that investors can probably count on that.
Since (at Friday's closing price) Applied pays a dividend of 2.42% ($0.08 per quarter), I see Applied Materials as one of the safest technology stocks to invest in. Earnings in Q1 were $0.09 GAAP, $0.19 non-GAAP, so even in a slow quarter there was plenty of cash generated to cover the dividend. Despite using $4.2 billion to acquire Varian in the quarter, Applied's cash balance ended near $3 billion.
Despite unevenness, we are still in a global economic ramp with billions of consumers set to acquire smartphones in the next 3 years (600 million in China alone). Everyone wants devices that do more with less power, and the only way to get that is with new semiconductor manufacturing capabilities. It does not matter who wins the smartphone race; everyone needs the kind of semiconductor manufacturing solutions Applied Materials (and its competitors) provide.
I am also excited about Applied's acquisition of Varian, but I'll save that for a different article.
For more details about Q1 results, including questions by analysts, see my Applied Materials Q1 2012 Analyst Call summary.
Disclaimer: I have a long position in Applied Materials (AMAT), with a long term view. I will not trade in AMAT for at least 7 days after this article is published.
And keep diversified!
Last quarter Applied management stated they believed they were past the bottom of the order cycle, but that revenues were not likely to start increasing until the second half of 2012. The lag is because semiconductor equipment is not made until after it is ordered, and customers sometimes place orders well in advance of their required delivery times.
Prior guidance was that Q1 revenue would be down 5% to 15% sequentially. Q1 Revenue were $2.19 billion, up 0.5% sequentially from $2.18 billion. Despite that revenue was down 18.5% from $2.69 billion in the year-earlier quarter.
The difference between guidance and results was mostly because a couple of large foundries (plants where semiconductor chips are manufactured) placed unexpected orders and took delivery faster than expected on Q4 orders. Most of this unexpected bonus was to fabricate mobile application processors, which are the hearts of tablet computers and smartphones. These processors are becoming more complicated, often adding computer cores as well as peripheral functions. This means die sizes become larger, so more dies must be processed, and more equipment lines installed. The number of units of smartphones and tablets sold globally is also expanding rapidly.
Two other Applied Materials segments, display technology and solar, did poorly as expected and are not believed likely to recover much in 2012.
Which brings us back to the question of where we are in the cycle. To some extent that depends on the global economy. It is also sector-specific, as capacity utilization and end demand growth differ for sectors like RAM, Flash memory, application-specific chips and display technology. Growth comes in two forms: more equipment to pump out more units, and new equipment for chips that work with smaller transistors.
In addition to continued strong demand for mobile-specific devices, PC demand is expected to rebound in 2012 as the hard-drive shortage bottleneck disappears. In addition, Windows 8 could be a driver if it releases as expected this Fall.
While we are probably now past the bottom of the order cycle for semiconductor production equipment, the exact nature and extent of the ramp remains to be seen. Guidance for Q2 is for revenues to be up sequentially between 5% and 15%. We are far enough into Q2, and enough shipments were ordered back in Q1 or even Q4, that investors can probably count on that.
Since (at Friday's closing price) Applied pays a dividend of 2.42% ($0.08 per quarter), I see Applied Materials as one of the safest technology stocks to invest in. Earnings in Q1 were $0.09 GAAP, $0.19 non-GAAP, so even in a slow quarter there was plenty of cash generated to cover the dividend. Despite using $4.2 billion to acquire Varian in the quarter, Applied's cash balance ended near $3 billion.
Despite unevenness, we are still in a global economic ramp with billions of consumers set to acquire smartphones in the next 3 years (600 million in China alone). Everyone wants devices that do more with less power, and the only way to get that is with new semiconductor manufacturing capabilities. It does not matter who wins the smartphone race; everyone needs the kind of semiconductor manufacturing solutions Applied Materials (and its competitors) provide.
I am also excited about Applied's acquisition of Varian, but I'll save that for a different article.
For more details about Q1 results, including questions by analysts, see my Applied Materials Q1 2012 Analyst Call summary.
Disclaimer: I have a long position in Applied Materials (AMAT), with a long term view. I will not trade in AMAT for at least 7 days after this article is published.
And keep diversified!
Wednesday, February 8, 2012
SGI Challenged by Analysts
Today Silicon Graphics International (SGI) stock plunged over 20% following yesterday's release of December 2011 (fiscal Q2 2012) numbers. A group of analysts on the investor conference call challenged statements by SGI management and tried to pin down details on why profits were lower on higher revenues.
SGI manufactures what are still sometimes called supercomputers: high capability computer systems for datacenters, scientific research, and high performance business uses. Amazon.com is the largest single client by revenue. The U.S. government, in aggregate, is an over 10% customer.
Revenues for fiscal Q2 were $195.2 million, up 9% sequentially from $178.9 million and up 10% from $177.5 million in the year-earlier quarter. Bookings were even stronger in the quarter, partly due to the newest marvel, the ICE X HPC platform, which booked $90 million.
Costs, however, were up enough to reduce GAAP EPS to negative $0.07 per share. Non-GAAP EPS was positive $0.04, but that represents non-GAAP net income of just $2.3 million on $195 million of revenue, or about 1%.
What analysts wanted to understand was exactly why SGI has gone back to the old SGI way of making great products and generating revenues while losing investors' money. Also, if it can be fixed, exactly how that fix would take place. If you have followed SGI you know the current version was created when Rackable bought the old, bankrupt SGI. Rackable itself had been consistently losing money, but had a lot of cash and bought SGI for essentially nothing.
Even before the analyst question segment began the new temporary CEO, Ron Verdoorn, gave a number of reasons for the earnings shortfall. The three main ones were fixed costs in Europe that are too high, forex exchange rates issues, and the transition to new product lines. Success in selling the rackable line of server systems, which have lower margins than other lines, also led to lower overall margins.
The Europe problem would appear to be fixable by either cutting costs in Europe or selling more product while keeping costs level. SGI has lost money in Europe for over 2 years, hoping the sell more option would work out. Now restructuring is planned, but as usual that will create short term costs before generating long term savings.
I was surprised that management did not try to divert analysts in another direction. Research and development expense was up almost $3 million from the December quarter of 2010. I consider that a form of reinvestment. If ICE X alone generated $90 million in orders, that would certainly rationalize the $5 million increase in sales and marketing expense.
An even bigger bite out of revenue came from cost of revenue, which would be cost of goods sold for the hardware, but includes cost of providing services, too. That was up almost $18 million from the year-earlier quarter. Maybe SGI is pricing its products and services too low, but there could be a time lag effect as new systems are developed, manufactured, and sold before revenue is recognized.
Inventories were listed as worth $117.6 million, which is an astonishing increase of $36.6 million from $81.0 million year-earlier. I doubt those inventories consist of unsold or unsellable supercomputers. They should represent orders in hand and a reasonable estimate of pipeline demand.
If that is true, maybe management's statement that things will look a lot better in the second half of calendar 2012 is believable. Of course such estimates always assume no Japanese earthquakes, Thai floods, or Euro collapse issues, which were bad assumptions in 2011. Despite all of the problems of 2011, SGI made a big impression on the computer world with its new products, generating record revenue.
Analysts are right to challenge management's statements and assumptions. Most investors would like to see a lot more of that on investor conference calls. It is tough on management, but I feel I knew a lot more about SGI's real situation by the time the call was over.
I remain optimistic about SGI, but consider it one of my risky investments, with a limited place in my portfolio until it can demonstrate consistent higher profit margins.
Disclaimer: I am long SGI. I will not initiate any changes in my position for the next 2 weeks.
Keep diversified!
SGI manufactures what are still sometimes called supercomputers: high capability computer systems for datacenters, scientific research, and high performance business uses. Amazon.com is the largest single client by revenue. The U.S. government, in aggregate, is an over 10% customer.
Revenues for fiscal Q2 were $195.2 million, up 9% sequentially from $178.9 million and up 10% from $177.5 million in the year-earlier quarter. Bookings were even stronger in the quarter, partly due to the newest marvel, the ICE X HPC platform, which booked $90 million.
Costs, however, were up enough to reduce GAAP EPS to negative $0.07 per share. Non-GAAP EPS was positive $0.04, but that represents non-GAAP net income of just $2.3 million on $195 million of revenue, or about 1%.
What analysts wanted to understand was exactly why SGI has gone back to the old SGI way of making great products and generating revenues while losing investors' money. Also, if it can be fixed, exactly how that fix would take place. If you have followed SGI you know the current version was created when Rackable bought the old, bankrupt SGI. Rackable itself had been consistently losing money, but had a lot of cash and bought SGI for essentially nothing.
Even before the analyst question segment began the new temporary CEO, Ron Verdoorn, gave a number of reasons for the earnings shortfall. The three main ones were fixed costs in Europe that are too high, forex exchange rates issues, and the transition to new product lines. Success in selling the rackable line of server systems, which have lower margins than other lines, also led to lower overall margins.
The Europe problem would appear to be fixable by either cutting costs in Europe or selling more product while keeping costs level. SGI has lost money in Europe for over 2 years, hoping the sell more option would work out. Now restructuring is planned, but as usual that will create short term costs before generating long term savings.
I was surprised that management did not try to divert analysts in another direction. Research and development expense was up almost $3 million from the December quarter of 2010. I consider that a form of reinvestment. If ICE X alone generated $90 million in orders, that would certainly rationalize the $5 million increase in sales and marketing expense.
An even bigger bite out of revenue came from cost of revenue, which would be cost of goods sold for the hardware, but includes cost of providing services, too. That was up almost $18 million from the year-earlier quarter. Maybe SGI is pricing its products and services too low, but there could be a time lag effect as new systems are developed, manufactured, and sold before revenue is recognized.
Inventories were listed as worth $117.6 million, which is an astonishing increase of $36.6 million from $81.0 million year-earlier. I doubt those inventories consist of unsold or unsellable supercomputers. They should represent orders in hand and a reasonable estimate of pipeline demand.
If that is true, maybe management's statement that things will look a lot better in the second half of calendar 2012 is believable. Of course such estimates always assume no Japanese earthquakes, Thai floods, or Euro collapse issues, which were bad assumptions in 2011. Despite all of the problems of 2011, SGI made a big impression on the computer world with its new products, generating record revenue.
Analysts are right to challenge management's statements and assumptions. Most investors would like to see a lot more of that on investor conference calls. It is tough on management, but I feel I knew a lot more about SGI's real situation by the time the call was over.
I remain optimistic about SGI, but consider it one of my risky investments, with a limited place in my portfolio until it can demonstrate consistent higher profit margins.
Disclaimer: I am long SGI. I will not initiate any changes in my position for the next 2 weeks.
Keep diversified!
Monday, December 12, 2011
Cantel Medical Record Quarter
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!
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!
Friday, December 9, 2011
Applied Materials See Cycle Bottom
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!
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!
Monday, November 7, 2011
Celgene Q3 shows model strength
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.
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.
Tuesday, November 1, 2011
Akamai Grows with Internet
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
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
Thursday, September 22, 2011
Red Hat at Billion Dollar Run Rate
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
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
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