Wednesday, December 31, 2008

Red Hat (RHT) Thrives During Recession

Red Hat (RHT), the open source Linux and middleware company, reported a very good quarter (3rd fiscal quarter ending November 30, 2008) on December 22, 2008. I've written extensively on Red Hat (See my Red Hat page) as a company whose time has come. With a 22% revenue increase since the similar quarter last year, it is doing what many other technology companies said they would do during a recession.

The basic tech stock pitch from management in 2008 was "My company's products offer a high return on investment, so if anything a recession will increase our sales as our customers seek to cut costs." As 2008 progressed more and more companies that took this line saw their sales slow or even go into reverse.

Red Hat has a solid base of subscribers who use its Red Hat Enterprise Linux (RHEL). It now has a strong middleware offering in JBoss. It costs a lot less to run a server farm on RHEL than on UNIX or Windows Server operating systems. Not every enterprise is in a position to switch every day, but every year since the 2001 tech crash Red Hat has gained substantial ground. Early investors in Red Hat, including those who bought at IPO prices, got burned, but buying at 2003 or later prices has worked out well for investors.

Guidance for fiscal Q4 ending February 28, 2009 is for only a slight increase in revenue. Fortunately Red Hat is already profitable on a GAAP, non-GAAP, and cash flow basis at this level. Management seems to understand that being a value proposition company, they should keep their own expenses down. General and administrative expense for the quarter was $24.8 million, or 15% of revenues of $165.3 million. R&D expense, while substantial, is somewhat alleviated by the open source nature of the Linux project.

Red Hat offers products that are of proprietary quality (some would argue they are better than products from companies like Microsoft, Oracle, and SAS) at prices that are substantially lower than their rivals. I know, because I have experienced, the foot-dragging nature of institutional technological change. When all you know is Windows, and you have paid for a lot of proprietary software or programming to work with it, switching to Linux is daunting. There are some advantages to Windows programming; Microsoft Visual Studio makes application-level programming relatively easy. But at the enterprise level paying for Windows licenses can really add up. So I see no reason for Red Hat not to continue to get traction in the enterprise market.

A new area for Red Hat is the MRG platform, which has already begun to sell. MRG ("merge") integrates real time, messaging, and grid technologies. Red Hat claims it can run enterprise level computing 100 times faster (though they don't say than what).

For more on Red Hat's Q3 see my summary of the 12/22/2008 Red Hat Analyst Conference.

See also:
open source software

Wednesday, December 17, 2008

Adobe (ADBE) CS4 Failure to Launch?

Adobe (ADBE) at its analyst conference yesterday reported that fiscal Q4 2008 revenues were barely above those of the year-earlier quarter. Profits increased due to cost cutting.

While other segments increased sales year-over-year, flagship Creative Suite 4, or CS4, revenues were down 11% from year-earlier. Management also commented that compared to the launch of CS3, sales were running 20% slower. Management claimed that this was entirely due to the poor external economy. During the question and answer period several analysts asked if CS4 sales might be lagging because it is not a compelling upgrade to CS3. Management insisted that it is the best productivity enhancer since the invention of computer graphics, that everyone loves CS4, they just are slow to upgrade because of the cost.

Management is probably right on this. There really aren't any good alternatives for professional graphics people. People hate the high price of Adobe products, and they hate being squeezed by the upgrade cycle, but they hate being at a professional disadvantage to those who have upgraded even more. If there is any problem for CS4, it is that in a recession a large number of graphics and Web designers will lose their jobs or their clients. With the newspaper industry threatening to disappear in its entirety, and CS4 making the remaining graphics humans so much more productive, it could be that the CS4 client base will shrink permanently.

Future growth may come from the numerous other Adobe web initiatives. This is a company that knows how to innovate and squeeze money out of its customers (I point that out only because so many highly innovative technology companies lately have not been able to figure out how to make their customers pay for innovation). Case to point is video delivery over the Internet. A few years ago this was done mainly through Apple and Microsoft products. Now it is mainly done with Adobe Flash.

I agree with management that when this recession is over, Adobe will do better, but then I could say that of every company in the world right now.

For a full report on the financials, see my Adobe analyst conference summary for fiscal Q4 2008.

I don't own stock in Adobe. I do use Adobe products. I sometimes work for Adobe competitors and in the past have worked on books about Adobe products.

More data:

Tuesday, December 16, 2008

Anesiva's Good Adlea Results

I trashed Anesiva management for not keeping investors informed of its problems with manufacturing Zingo [See Anesiva (ANSV) Drops Zingo].

Yet I felt the market reaction to the discontinuance of Zingo was overdone. Why? Because the majority of the future value of the company was always in the potential of Adlea.

Adlea a simple, long-term painkiller that is dripped into surgical wounds. It appears to have no side affects and keeps pain down for weeks. It allows patients to cut back on their use of morphine. The FDA is reputed to be eager to have a non-addictive, surgical wound specific analgesic on the market.

Adlea has had a lot of clinical trials now, including Phase III trials. Overall it has done well, always showing pain reduction, but in some specific uses or test runs not quite hitting its endpoints. The latest test results [See Anesiva Adlea press release] met the endpoints for total knee replacement surgery.

Adlea's problem now is that they ran through their cash after they got FDA approval for Zingo. So they don't appear to have the cash required to get Adlea to market. They need a partner, because in this market you can't issue new stocks or bonds even if you have a blockbuster winner like Adlea sitting in your lap. Another possibility would be a buyout from a larger pharma company.

Sometimes other companies are willing to let a winner die on the vine, either to prevent competition or to pick it up even cheaper later. There's no telling how this would play out. Normally I'd say Anesiva (ANSV) is worth large multiples of its current market capitalization, but that depends on money coming from somewhere to get Adlea approved and marketed.


My Anesiva page

Keep Diversified!

Friday, December 12, 2008

California Housing Dynamics

At this point I am largely discounting the Great Depression scenario. It is not impossible, but its probability has receded to the extent that I believe it is better to focus my analysis on less grim pictures.

I even doubt the recession will last into 2010. A lot of this has to do with housing.

Right now mortgage rates (standard 30 year rates) are moving towards 4.5% interest. Unless you already own a house, it is foolish to pass by what may be a once-in-a-lifetime opportunity. In California, in some areas, houses can be bought for less than they were priced at before the bubble began in 2002. Even desirable San Francisco neighborhoods are off their peaks. Many new and nearly new homes are available at bargain prices as well.

Why are people not buying, at least not in sufficient numbers yet to prevent price declines? Fear in an auction market. Few people want to buy an asset with a declining trend line. Most people think in straight lines, not in cycles. They don't want to guess at turning points.

We know there will be a turning point, in California and elsewhere. Once housing prices start back up, pent up demand from immigrants, the houseless, and the braver sort of speculators will turn into actual buying. At first this will drive houses to what would be their equilibrium price in a non-auction system, basically somewhere between the cost of building or replacing the house and the rental equivalent.

Getting to the turning point will require stages. We have already completed, or nearly completed, the first stage: a dramatic drop in house sale prices to below their equilibrium value.

With 4.5% mortgages we will get the next tranche of buyers, those who can put rationality ahead of their fears. They are going to get serious bargains. They will worry that houses or interest rates will go lower, but that will be offset by the desire to get into the house they want, before choices get narrowed.

Meanwhile, the employment situation in the real estate industry will improve slightly. Not too many houses are being built, and less are being started, in California right now. Brokers and realtors will get some wind in their sales from the first tranche of buyers, and the most optimistic builders will start making plans just in case their inventories start to sell.

When prices clearly stop going down, a lot of fence sitters will jump in. At first this will absorb inventory rather than raise prices significantly, but again it will result in increased employment in real estate, and maybe even at building supply and furnishings retailers.

We will know we are on to the third tranche of buyers when people start seeing their favorite potential homes picked off by someone else. The word will be out: buy now while interest rates are low, prices are low, and there are a lot of choices.

Then prices will start rising. You know the rest of the cycle. Builders will have lagged with new home starts, so by the time inventory is getting to normal levels they'll be in a panic to start up again. Lots of people will get hired. For a while the porridge will be just right, and then, lessons of the past forgotten, the porridge will get too hot.

It is a great time to move to California. I heard in 2005 people wanted to move here but could believe the housing prices. In some places today, in the central valley, houses are at midwestern prices.

But I am not thinking of getting into speculating in housing. While the leverage advantages are good there, I think stocks are even more undervalued than homes right now. I already own a home, but I don't own anywhere near enough stocks or bonds (but it is a bad time to buy bonds) yet.

Tuesday, December 9, 2008

Novell and Microsoft: Risk Assessment

Open source advocates are unhappy with Novell because of its relationship with Microsoft regarding Linux licenses. Investors in Novell (NOVL) are not terribly happy with its track record these last few years, but the Microsoft relationship is seen as a plus. Should it be?

You can get a good picture of where Novell is financially from my summary of the Novell analyst conference of December 4, 2008. Let's say Novell tends to lose traction here while gaining traction there.

A couple of years ago Novell was a cash play. They had a lot of cash, but were losing money each quarter. Now the bulk of the cash is gone (the one billion that remains is healthy, but not enough to do cash buy backs safely in this climate). So investors need to look at the underlying business.

It isn't that Novell has not been trying hard, even undergoing a fundamental market transformation. The question is, was it the right transformation?

Novell used to be a specialist in local area network (LAN) software. But that was the sort of thing that Microsoft (and Apple, and Linux) could provide as part of the operating system. Novell, of course, featured up their offerings, but the decline in marketability was clear a decade ago and they never really did much about it until maybe 2005 or so.

Novell sold proprietary software, but I guess they could not find a proprietary area where they thought they could compete (or make an acquisition that made financial sense). So they dove into open source software, including Linux itself. Everyone admits their SUSE Linux is good. Novell's clients were happy with it, but the pricing is a problem. Open source software just can't be priced like proprietary software. Red Hat has proven that you can make money selling support expertise on Linux, but it took them over a decade to get to where they are now. There are a lot of Linux versions out there. When you go with a particular brand of Linux you are basically chosing how much support you are going to get.

Microsoft wants its customers who have mixed systems - Linux and Windows - to use Novell SUSE Linux. That makes life easier for Microsoft to support its customers. It also undercuts Red Hat, which is the greatest threat the Microsoft's lofty operating system profits.

Maybe Novell would like to be independent of Microsoft (see my Microsoft Analyst Conferences page), maybe they have some plan for weaning themselves away in the future. At present a big chunk of their revenues come from Microsoft. Three things could jeapardize this. Microsoft could release its own Linux - that would not be a big deal for Microsoft, though it would certainly raise some questions in the Linux community. Or Microsoft could switch partners. Or Microsoft could face a customer rebellion - we'll chose our Linux without your help, thank you.

In any of these scenarios Novell would be off on its own again as far as picking up Linux customers. Not a cheery thought.

Even so, the revenues that were booked for its Open Solutions segment were a mere $36 million in the quarter, of which $33 million was for Linux.

Workgroup revenue, which is the legacy business, was still the main money maker at $92 million for the quarter, down 6% from year-earlier. There are two other segments, Identity and Security Management with revenues of $37 million, and Systems and Resource Management, with revenues of $45 million. Service revenue was $34.6 million.

On the optimistic side, the variety of products is a safety feature, and only the Workgroup and Service segments had declining revenues. The acquisitions of Platespin and Managed Objects should help Novell keep close to the cutting edge in 2009.

I would like to see Novell do well, and am tempted to buy the stock at this price. But after watching it for years, I am not enthusiastic. Without the Microsoft deal Novell would have looked pathetic this last year and would not be a serious Linux contender. With the Microsoft deal, it looks pretty good, but with the dangers I stated above.

Which reminds me to keep diversified.

More data:

My Novell analyst conference summaries page

I own some Red Hat stock and do occasional freelance work for Microsoft. I use Microsoft Vista (which I think is great) for my client OS running on AMD chips and my outsourced web servers run on Linux.

Wednesday, December 3, 2008

Can Marvell Smash the Atom?

Marvell Technology Group (MRVL) stock is way up today partly because investors had been overly pessimistic about its results for the October quarter (its fiscal third quarter of 2009). But the big news is that Marvel is going into the Netbook market. Which means competing with the Intel Atom processor. This is really cool. This is really exciting for investors, consumers, and gadget freaks.

Despite revenues that dropped to $791.0 million from $842.6 million in the 2nd quarter, Marvel kept its Net income high at $71 million and its free cash flow amazingly high at $246 million. For a in-depth summary of the results and what management said see my Marvell Analyst Conference Summary for December 2, 2008.

The Netbook market could be called the sub-notebook PC market. Netbooks don't have the full-powered Intel or AMD Turion processors or graphics capabilities of notebook computers, but they are cheaper. They are designed mainly to run a Web browser and do e-mail. I've seen a lot of false advertising recently, with one ad describing the Intel Atom processor in a netbook as "powerful."

But when you think about building a good Netbook from the ground up, any smart engineer would say, why Microsoft Windows for the operating system, and why Intel Atom for the processor. The only answer is that they are what people are used to. On the other hand consider a netbook not as a smaller PC, but as a larger smart phone. Suddenly there are many hardware and software choices, some of them found in devices like the Apple iPhone or the Blackberry Bold. And what you will find in many of these devices is Marvell semiconductor chips. And non-Microsoft operating systems like Linux.

Normally going up against Microsoft and Intel, even if you have better products, is not a very good business strategy. Intel in particular, in its competition with AMD, has shown a willingness to use heavy-handed tactics to maintain and extend its market share. Even its ability to subsidize advertisements for its products when people open catalogs or Web merchant sites insures that the playing field is not even. Should investors cheer Marvel tilting up against Intel?

The outcome is in doubt, so hedge your bets. But there is good reason to believe Marvell will at least carve out some good profitable market share, aside from their history of consistently entering new fields and turning the fields.

Marvell already has most of the intellectual property in place to build a single chip that can run the entire netbook. Netbook manufacturers will supply the display, case, and connectors; one chip shall rule them all. The cost will be far lower than Intel can compete with profitably. Intel will probably try to differentiate its products by saying they run Windows, but the reality is they don't really run Windows in the sense that a dual-core notebook processor runs Windows.

If you have not been following Marvell, you may not know what they already do. They specialize in combining digital and analog circuitry in a single chip. They got started by supplying chips that make hard drives capable of storing more data faster. They now dominate the drive chip industry. They branched out to a number of areas, including chips for printers. They also bought Intel's old XScale cell phone processor division, which I believe the Intel guys are going to be kicking themselves over in about October, 2009. Intel was losing money on the division, Marvell is making money.

Marvell also makes superfast chips for physical and wireless internet connections. They make video chips for DVD players and large screen TVs. Their Sheeva processor, combining technologies from ARM, XScale, and in house, runs super fast on super low amounts of power.

By building a netbook from the bottom up, based on a processor that is ultra-green because it was meant to run cell phones, incorporating all the necessary circuits on a single chip, Marvell will enable netbook manufacturers to sell their products for well under $300. Marvell says $200, then $100 is possible.

Will people mind not being able to run Windows? Some people will, but the Netbooks can't run the really cool Windows stuff, like games and Adobe design products. What Linux enables for netbooks is the ability to do email and Web browsing, plus low-overhead tasks designed for the netbook. The competitive advantage of open-source software running on Linux will really shine on a netbook.

With a Sheeva processor from Marvell running applications much faster than an Atom processor, and consuming far less power, it may be hard to keep the Win-tel team alive in this particular market. AMD's decision to stick to notebooks, where its graphics superiority over Intel gives it an advantage, may be just the right thing to do.

Of course, this is speculation about the future. Marvell is the David in this battle. But I have seen Marvell's slingshot, and I would not want to bet on the Goliath, Intel, in this market, even thought it dominates the field at the moment.

It should be noted that Marvell believes the netbooks based on the Marvell chip will open up the Internet to a new global market of between 1 and 2 billion people. Based on what I know about global income demographics, that sounds about right.

As always, keep diversified.

Monday, November 17, 2008

A Best Case Economic Forecast

What am I doing saying this recession might be shallow and short? After all, I'm known as a doom and gloom kind of analyst. Does a company have a flaw it is hiding? It is my job to find it. I warned investors of the Internet stock bubble back in 1999, I even resisted my wife's plea to buy more California real estate in 2003-2005. I called oil prices a bubble in March this year (See Oil Bubble to Burst, March 11, 2008).

On the happy side, I do sometimes conclude that a particular stock may make more money than other investors think (Stocks covered by William Meyers). So I am doing this rosy economic forecast as an exercise. It is not a prediction.

It is always good to look at history before acting too certain of the trends based on current details. In American history the economy has gone back and forth between expansion and recession dozens of times. While there are non-American historic examples of total economic collapse, they are almost always due to wars, not to peaceful economic activity. So the question is not whether the nation will come out of a recession, but how deep it will be and how long it will last.

The current consensus is: deep and long.

The questions that needs to be asked are: what feeds the downward spiral, what breaks the down trend, and what starts a new upward spiral.

How did we get here? What broke the upward spiral of 2002-2006? What started us down?

It is generally accepted that the stock market was not to blame. We had a typical crisis of over production, concentrated in one sector. This was combined with a price bubble in the same sector, housing. After housing prices peaked and investors started trying to find real home owner types to unload their investments on, it became obvious to increasing numbers of potential homeowners that: 1. houses were not necessarily a good short-term investments and 2. by delaying making a purchase, they could save money.

The downward spiral of house prices corresponded with layoffs in the housing and real-estate industry. The rest of the economy was immune for a while, and if the finance crisis had not hit probably would have pulled us through without a recession. Aggravating the situation, however, was a bout of inflation, notably in the price of gasoline. This summer we saw the credit markets dry up as the bright-greedy-boys were forced to deleverage their bets. All this could have been prevented if Alan Greenspan, as Federal Reserve chair back in 2004, had paid more attention to the real economy and had spent less time kneeling in adoration at the great god Free Markets.

Now we have declining consumer spending, increasing unemployment, and a slowing world economy. The Fed is giving banks extremely-low interest rate loans but the banks are not lowering interest rates to the rest of us. Yesterday the sharks at Citibank even announced they were raising interest rates for their credit card customers.

Let me show you how to get a rosy scenario out of that.

First, Americans are saving more. Don't think of that as someone putting $100 a month into a credit union savings account at 3% interest. Think of it as millions of people who are lowering their credit card balances by $100 to $500 per month, and who are paying 20% a month in interest and fees. At our high end, after only four months a family has $2000 less in credit card debt than they would have had otherwise. Just from that $2000 in "savings" they are now going to save $400 per year in ineterest for the rest of their lives, money that would have gone to CitiGreedyCard. They have effectively given themselves a large raise.

Likewise, suppose a family realizes it now costs less to buy a home, in the long run, than to rent. Instead of buying a McMansion they buy something reasonable, a home built back in the 20th century. They start paying off their new 30 year mortgage. They build equity, remembering the lessons of 2007, and never touch that equity. Pretty soon rents have gone up, but they have that same monthly mortgage payment. Life looks good, and they have more cash to save or spend.

Throw some fuel on the fire: lower gas prices. While they are no lower than a year ago, and so won't really help, at least they are not sucking the blood out of the American consumer like they did for the past year.

The soup is looking good now. The Federal Reserve is trying to pump at least enough credit into the economy to allow people who are credit worthy to get mortgages on the homes they want. Unemployed people are milling around in large numbers, eager to find productive jobs.

As best as I can guestimate, we don't even have excess housing stock, on the whole, in the United States today. Every year many houses are lost to fire and other construction. Every year more immigrants arrive (want to solve the housing crisis in a few months? Let anyone on the immigrant waiting list who has the money to buy a house into the country immediately). The home construction industry has slowed way down lately, so as soon as mortgages can be obtained easily, the glut of new, empty housing should dry up in a few months [except in the Central Valley of California and a few other truly over-built areas].

Given all this, we could still see a thawing in the economy in time for Holiday shopping, although I would expect even a rosy scenario would have a flat period into 2009 before an actual expansion resumes.

Heck, maybe I'm not Mr. Gloom and Doom after all. Maybe I am just being realistic.

In any case, all investments (and not investing, too) carry risks, so ...

Keep diversified.

Tuesday, November 11, 2008

ONYX Positive Surprise for Investors

Onyx Pharmaceuticals delivered investors a nice positive surprise when it reported its third quarter 2008 results at its analyst conference on November 6: better than expected revenue and earnings. Given the minefield the stock market has become lately, it is good to have a stock like Onyx in my portfolio.

Onyx is in a partnership with Bayer to develop and market a cancer therapy, Nexavar. Because Bayer takes in all the revenue and generates much of the expense, what Onyx reports as revenue is their share of the profits, which only turned positive in 2007. Since Onyx has its own operating expenses as well, at first when Bayer started transferring revenues over, Onyx still was recording net losses.

But Nexavar global sales continue to grow at a healthy clip, mainly due to its approval for reimbursement in new nations. In the quarter Bayer's Nexavar revenues were $181 million, up 73% from year earlier. Onyx's share was $40 million, more than doubling the $18 million it got in the year-ago quarter.

After taking into account Onyx operating expenses, it reported a GAAP net income of $12.2 million or $0.21 per share. For those of you who like non-GAAP numbers, the net income was $16.6 million or $0.29 per share. The main difference between GAAP and non-GAAP was stock-based compensation. This requires no cash from the company, but GAAP requires it to be valued and taken as an expense.

As I have written in earlier columns, Onyx has chosen to try to maximize long-term rather than short term profits. This has meant a high R&D spend on proving Nexavar's efficacy and safety in the two indications for which it is already approved, liver cancer and kidney (renal) cancer. They also have been spending on clinical trials for other forms of cancer, notably lung cancer, colorectal cancer, and ovarian cancer.

While Onyx's stock price popped up a bit on the news, it is still very reasonably priced because of the gloom on Wall Street. At this moment it is trading for exactly $30 per share. That is off a 1 year low of $21.66 but off the 1 year high of $61.18.

All biotechnology and pharmaceutical stocks are risky (as Anesiva showed yesterday) so ...

Keep diversified!

More data:

My Onyx (ONXX) analyst conference summaries page
Onyx Pharmaceuticals

Anesiva (ANSV) Drops Zingo

Just a couple of weeks ago I was optimistic about Anesiva and the rollout of Zingo, a quick-acting pain killing system for children getting IV punctures. I was able to verify that several hospitals were using the treatment and that patient response was good.

Yesterday, buried in a press announcement about Adlea, an Anesiva's analgesic under development, Anesiva said they would discontinue Zingo. Here's what they said:

"Anesiva has determined that it will cease further commitments to support Zingo commercialization as a result of continued manufacturing challenges and the need to recall product in the field due to a potential non-safety related shelf life issue from a lot of unreleased product. Anesiva plans to seek a device-oriented partner for this asset. The company will also seek to license rights to the underlying drug delivery technology to third parties for use with other medications."

Well, sometimes things go wrong, that is why my investment motto is "keep diversified." However, sometimes management is not being entirely honest with investors or analysts (and there are cases where they have even tried lying to the FDA).

On May 8, 2008 management said that manufacturing and packaging issues were resolved [See my Anesiva (ANSV) Analyst Conference Summary for Q2 2008] . As far as I know, yesterday was the first time the issue was raised since that time.

Anesiva stock is virtually worthless today, but that might be a mistake. Adlea is also a promissing therapy. However, now I don't trust management. They should have kept investors informed of problems as they happened. True, that might have knocked the stock price down earlier, but at least people would be investing, or selling, based on good information and management might have kept investors' trust.

Zingo, too, should be worth something in the hands of competent managers. Now it can be bought for a song, or maybe its competitors will just arrange for it to die.

Now more than ever ...

Keep diversified. And be more cautious about development stage drug companies, even if they have an FDA approval for a therapy.

more data:


Sunday, November 9, 2008

Rackable Systems Has Ice Cube Orders

Rackable Systems (RACK) has been talking about its ICE Cube containerized datacenter systems for over a year now. At their analyst conference on November 3, 2008, they announced that an indefinite amount of ICE Cubes will ship in Q4. My take is that if the orders are not cancelled, and if they ship early enough in Q4, Rackable may report revenues from the orders in Q4. This is great news for Rackable investors (which includes me).

We knew from the pre-announcement that Q3 results would be bad, and they were. Revenues were $65.3 million, down 14% sequentially from $76.0 million and down 25% from $87.2 million year-earlier.

On the other hand, even though net income was negative, it improved significantly due to tighter cost controls. Net income was a loss of $6.0 million, a sequential improvement on Q2 loss of $27.9 million, but worse than essentially $0 results year-earlier. EPS was negative $0.20, compared to negative $0.95 in Q2, and $0.00 year-earlier.

Rackable still has a lot of cash and equivalents, ended at $184.6 million, down sequentially from $198.1 million. Most of the reduction, according to management, was to produce the ICE Cube units that will ship this quarter.

Rackable was not able to sell its RapidScale storage division, so that will be written off as a loss. Instead it is partnering with NetApp for storage. You may recall how RapidScale was once lauded as a division that was going to give Rackable a competitive edge and good profit margins once it ramped up. Well, that does not mean closing it down now is not the right thing to do.

The NetApp partnership might work out to be more than it appears. Management says the NetApp people are introducing them to potential new clients. Since NetApp is probably confronted with occasional losses against vendors like HP and Dell that can provide both servers and storage, working with Rackable could prevent them from losing from sales. It is conceivable that the partnership could be quite beneficial for both parties, but I would not bet on it until I saw some actual revenues coming in. Rackable expects the NetApp partnership to start generating revenue in 2009.

They continue to lead with their high-quality, computationally intense, energy efficient technology. Their newest technology is called CloudRack. Obviously they are targeting the cloud computing market.

Rackable's stock is in the dumps, but then again they have not turned in a profitable quarter in some time. They have enough cash to survive a downturn, but so do their principal competitors. So Rackable, while promising, has to be rated as a risky tech stock.

For details on what management said on November 3, see my Summary of the Rackable Systems analyst conference for Q3 2008.

Keep Diversified!


Rackable Systems

Friday, November 7, 2008

Maxim (MXIM) Sees Weak Q4

Maxim Integrated Products (MXIM) had some accounting issues these last couple of years that have now been cleaned up, so it is a good time to take a close look at this leading analog semiconductor chip maker.

Revenues held steady in Q3. At $501.2 million, they were flat sequentially from $501.3 million and down 4% from $524.1 million year-earlier.

Guidance for Q4, based on what management saw in October, is to revenues of $410 to $440 million, which would be quite a slump.

Fortunately Maxim has good profit margins, which should leave it profitable even if revenue erosion is that bad. In Q3 GAAP net income was $67.6 million, or $0.21 per share. Non-GAAP EPS was $0.35. Cash flow from operations was an astonishing $157.1 million.

How can Maxim be so profitable in the highly competitive semiconductor market? They keep on top of markets where they have a competitive advantage and abandon markets where they don't. They are in diverse end markets: by percent of full revenues: 28% computer, 28% consumer, 24% industrial, and 20% communications. Within these markets they focus on areas like power management and integration of multiple functions on a single chip.

Also in contrast to many chip technology companies, Maxim pays a hefty dividend, $0.80 per year per share at present. This allows you to have some of your profits without having to sell stock, which is nice in this undervalued, illiquid market.

For a fuller report on Maxim's results, see my Summary of Maxim (MXIM) Q3 Analyst Conference.

Keep in mind that while Maxim is pretty solid, all investments involve risks, so ...

Keep diversified.

More data:

Thursday, November 6, 2008

Akamai (AKAM) Grows Through Recession

Akamai accelerates content delivery over the Internet. This is particularly important to companies that sell merchandise, but it is also important for companies that generate revenue from advertisements. Akamai's revenue growth rate has slowed, but it is still growing despite the economic turmoil that has knocked down revenues at many technology companies.

Akamai reported revenue for the quarter ending September 30, 2008 (Q3) at $197.3 million, up 2% sequentially from $194.0 million and up 22% from $161.2 million year-earlier.

GAAP net income was $33.4 million, down 3% sequentially from $34.3 million but up 36% from $24.6 million year-earlier. GAAP EPS (earnings per share) were $0.18.

Those are great results (for more details see my Akamai (AKAM) analyst conference summary for Q3 2008). When it comes down to it, almost no one wants to save a little money in a downturn by making the response time of their Web site climb, which would lose customers and revenues.

For the fourth quarter, management guided to revenue of $202 to $210 million. This includes $4 to $5 million revenue from the Acerno acquisition. Q4 is usually a strong one for Akamai. They are expecting some impact from the economic softening, with advertisement dollars weak and Internet sales not climbing as fast as in the past few years.

83 new customers were signed in the quarter, and Akamai's newer value-added services contributed significantly to revenue and to the ability to get new customers.

Akamai is also getting more directly into the advertisement business with its Advertising Decisions Solutions segment. Acerno was bought to help with that. Once Acerno is integrated with Akamai, expect revenue from this segment to grow through 2009 and beyond.

Akamai still seems to be able to stay ahead of competitors in the Internet acceleration arena. Since Akamai is profitable and many of its competitors are not, it is possible there will be consolidation to Akamai's benefit if the recession lasts in 2009. Also Akamai's customers are mostly profitable at this point. Competitors have tended to pick up newer companies that are not yet making profits.

On the other hand, I don't think Akamai would be immune to a severe recession. At some point it would lose enough customers to impact net income substantially.

Fortunately, Akamai generates a lot of cash compared to revenues. Cash from operations in the quarter was an amazing $93 million, an amazing 47% of revenue.

Akamai also had plenty of cash on its balance sheets, $789 million at the end of the quarter.

A year ago if you wanted to buy Akamai stock you would have paid dearly for it. Today, like most stocks, it is a bargain. I own some Akamai stock, so consider that I may be biased.

There is risk everywhere, but there is opportunity in quite a few places too, so

Keep diversified.

More data:
My main Akamai analyst conferences page
More Technology Stock Analyst Conference Summaries

Tuesday, November 4, 2008

TTM Technologies (TTMI) Okay Despite Economy

TTM Technologies (TTMI) reported $169.0 in revenues for the third quarter of 2008. It is interesting to see which companies are being impacted by the economic turmoil. Many technology company management teams, earlier in the year, took the line that they enabled their customers to save money, and so could grow even during a recession. Q3 earnings reports tests that theory, and in some cases it has turned out to be right, as with Akamai, and in others wrong, as with Rackable Systems.

TTM Technologies makes printed circuit boards (PCBs). These used to be pretty mundane, essentially pieces of plastic with holes drilled in it to receive component wires, with copper foil lines running between the electronics. But today's high-end components are so small and require so many connections that PCBs themselves have become high technology. Holes must be precision drilled with lasers, and the boards tend to many alternating conductive and non-conductive layers.

Usually truly mass production of PCBs is done in Taiwan, China, or some other low-cost Asian nation. TTM Technologies can do prototyping of boards before the mass production run, and runs of boards that are at the cutting edge of technology. Examples are networking equipment, electronic testing equipment, medical devices, and aerospace devices.

TTM's revenues were down 3% from Q2, but up 4% from Q3 2007. Probably they were impacted by the economy and would have shown sequential growth in a normal environment. GAAP net income was $9.5 million, just above flat compared to Q2 but up 15% from the year-earlier quarter.

TTM gets better profit margins on its high-end products than on lower-end and mass production products. During the quarter the mix of products shifted to the high-end, so they were able to do pretty well.

Despite that guidance for Q4 was down to $156 million to $164 million in revenues, with EPS between $0.14 and $0.19. If there is a drastic reduction in economic activity, TTM will feel it.

For a full report on TTMI's Q3 see my TTM analyst conference summary for Q3 2008.

On a cash basis results were even better, with EBITDA (earnings before interest, taxes, depreciation and amortization) of $22.2 million.

TTM Technologies ended the quarter with $135 million in cash, enough to get through a downturn. It also has been looking to acquire an Asian PCB manufacturer to do high-volume, low cost runs, so cash could go to that if the right match is found.

TTMI stock is trading today at around $6.80 per share, giving it a market capitalization of about $290 million. Using GAAP net income for the quarter, it has a current P/E ratio of under 8. In any stock market but today's that would be a tremendous buy.

I own TTMI stock, which I picked up earlier this year. You can find more information at my main TTMI page.

Like all stocks TTMI carries risks and uncertainties, so keep diversified!

More data:

TTM Technologies
PCBs (printed circuit boards) at Wikipedia

Monday, October 27, 2008

Biogen Idec (BIIB) Growth Accelerating

Biogen Idec just keeps growing revenues and profits. At a time when the entire stock market is melting down, smart people can make money (in the long run) by buying almost anything, but there is a lot of insurance in buying cash rich, rapidly growing companies like Biogen.

Biogen has a lot of cash (and marketable securities), over $2 billion at the end of Q3. Its non-GAAP (cash) net income was $288 million in Q3.

Aside from truly apocalyptic scenarios, I see no reason why profits should not continue to grow rapidly for the foreseeable future. 3rd quarter revenues were up 10% from the second quarter and up 38% from Q3 in 2007. GAAP net income was sequentially flat, but up 73% from $119 million last year, with GAAP EPS at $0.70.

For details of Biogen's Q3, see my Biogen Idec Analyst Conference Summary, Q3 2008.

There are three mostly-independent components to Biogen Idec's future growth. Its main revenue generators include two drugs for Multiple Sclerosis (MS), Avonex ($573 million Q3 sales) and Tysabri ($173 million Q3 sales). Avonex is the older drug, approved and marketed in the U.S., Europe, and many other countries. Tysabri, the newer, even more effective drug, is still in the global approval process. When MS patients switch to a new drug, they switch often switch to Tysabri. In terms of revenue, however, the main component at present is international expansion. It will take years for Tysabri to be approved and for sale in all the world's major markets. MS is a life-long disease at present; you can't stop taking your therapies without it starting to progress, though Tysabri seems to actually cause the disease to regress in many cases.

The second revenue and profit building leg is expanded indications for existing drugs. Rituxan, which had sales of $299 million in the quarter, has been approved for Non-Hodgkin's Lymphoma (NHL) and is in Phase III for Chronic Lymphocytic Leukemia (CLL). Tysabri is in a Phase I trial for multiple myeloma and was recently approved for treatment of Crohn's Disease.

The third leg is the pipeline, which is impressive. There are drugs in every stage of development from pre-clinical to Phase III, and Biogen has the cash to buy rights to promising therapies as well. There are five novel compounds in late stage (Phase III) registrational trials (BG-12, Lumiliximab, Galiximab, Lixivaptan, Adentri).

For those who don't following biotech batting averages, only a relatively few of the drugs that are tried in Phase I trials eventually get good Phase III results and are profitably brought to market. As with any other biotechnology or pharmaceutical company, BIIB will see drugs that don't live up to their early promise. That said, BIIB has a rather exceptional record in actually developing drugs that help patients enough to become revenue blockbusters. Some of BIIBs pipeline candidates will be approved and turn into profit engines in the future.

Every company's stock is risky. Drug candidates can fail, and even successful drugs can be driven off the market by rivals. BIIB should be bought only as part of a portfolio that makes sense to you.

The main risk that remains in BIIB (though I think it has already led to a discount in the stock price) is from the known adverse event associated with Tysabri, PML (Progressive Multifocal Leukoencephalopathy). This was a little-known disease until HIV infections became widespread, resulting in a large pool of people with suppressed immune systems. It is an opportunistic infection, rare even in immune-suppressed patients. There have been several PML cases in patients being treated with Tysabri. Doctors are warned to watch for PML symptoms when they prescribe Tysabri. PML can be deadly.

You might think that would kill sales of Tysabri, but it has not, because doctors and patients, or enough of them, are looking at the bigger picture. MS is an auto-immune disorder. Stopping it involves keying down the immune system. With the choice being between watching MS symptoms progress and taking a drug that stops the progression, most patients are going to want to take the drug. PML is a risk, but a small one, and if detected in time can be survivable. It is sad to have to make choices like that, but when you know you have MS, and what its progress will be if untreated, it is still the best choice for most people.

I hope you have some cash to buy stocks during this giant Wall Street Geniuses' fire sale, but in any case ...

Keep diversified.

More data:

Biogen Idec home page

Tuesday, October 21, 2008

Gilead (GILD) Thrives Despite Downturn

Investors who own good, or even great, companies right now are often feeling bad about their investments because stock prices are low even for these companies. As far as I can tell, while some low stock prices are needed to factor in the troubles of the economy, in the case of great companies this is purely due to liquidity issues. People who know they own valuable stocks that should be kept because of their current value and future potential are being "forced" to sell them to maintain their own liquidity. Also, money flows into the stock market on a comparison basis; it will tend to flow into the (perceived) best bargains of the moment.

Gilead Sciences (GILD) showed it is a great company for shareholders when it reported on its third quarter on October 16, 2008. It is one of the most successful biotechnology companies because it developed and sells great antiviral products that target HIV infections and hepatitis. These drugs are not dispensable; people who need them buy them even in economic downturns. In addition, Gilead's drugs continue to replace competitors' drugs in these spaces.

Q3 revenues tell the story pretty well. They were $1.37 billion, up up 7% sequentially from $1.28 billion in Q2 and up 29% from $1.06 billion year-earlier. Earnings per share (EPS) were $0.52, up 13% sequentially from $0.46 and up 24% from $0.42 year-earlier.

There is no need to worry about liquidity at Gilead. They are sitting on top of $3.26 billion in cash and equivalents. Operating cash flows were $555 million for the quarter.

See my Gilead (GILD) analyst conference summary for Q3 2008 for more details.

Fortunately, I am not overextended and am gradually adding to my portfolio. It almost feels like stealing. After years of watching hedge fund managers tell the world what hot shots they were when all they were doing was leveraging credit into ordinary investments, picking their pockets while they are down feels pretty good. You can almost correlate how much of a stock was owned by hedge funds by viewing its price percentage decline this last year.

I own Gilead as part of a long term strategy. My one suggested change for management would be that they start paying a dividend. I prefer that over stock-buy backs. Dividends allow me to choose to diversify, or to take income, without having to sell stocks and pay capital gains.

Biogen Idec reported some very impressive results today. You can get a good picture of the current state of the company at me Biogen Idec (BIIB) analyst conference summary for Q3 2008.

More data:

Sunday, October 19, 2008

AMD Breaks New Microprocessor Ground

AMD is feisty. Despite the brutal monopoly tactics used by rival Intel (illegal kickbacks to customers; using the cash accumulated by earlier monopoly pricing to try to drive AMD out of the market; etc.), AMD is not only still in the game, it presents a growing strategic threat to Intel and a growing opportunity for eveyone else in the computer industry.

In the third quarter of 2008 AMD made progress on four major fronts. It showed a degree of creativity and flexibility that we have not seen from Intel since the 1980s. While Intel, which "owns" about 80% of the global microprocessor market, continues to have enormous advantages, it is AMD that is leading. Even if you just bought a PC with an Intel processor, its main advances over processors from 5 years ago - combined 32 and 64 bit capability, multiple processors on a single piece of silicon, and lower energy use - were all invented at AMD and then reluctantly introduced by Intel.

You can read some of this history in articles listed at my main AMD page for investors. I'm going to focus this blog entry on recent stategic developments.

One place AMD has consistently lagged Intel is process technology, which is the technology of creating semiconductor chips with ever smaller surface features. Each new generation allows more gates and hence capacity to be fit on the same size of silicon (or you can put your old design on a smaller piece of silicon, which costs less). It is very, very costly to develop each new generation, both in terms of R&D expense and then in creating the equipment that the new fab (semiconductor factories are called fabs) needs to make the improved chips. Intel made so much money from its microprocessor technology that it was able to keep well ahead of everyone else in the industry, often having as much as a two year lead time. For makers of chips requiring less transistors, this was not a big problem, unless they competed directly with Intel for a particular product.

AMD met this challenge by doing more with less; their processor designs were significantly better than Intels from about 2000 until 2006. But if AMD could be at the same level of process technology at the same time as Intel, it would be in a better position to press its design advantage. During the last decade AMD, working with IBM, has created very sophisticated fabs in Germany, and it has narrowed Intel's lead time. But it is still 6 months to a year or more behind Intel, and Intel has the money to drive the research and investment to keep that lead or even extend it. AMD is now shipping chips using 45 nm technology, but Intel started shipping theirs at the beginning of 2008.

In the past decade many major semiconductor players have emerged that don't have their own fabs. These fabless companies, like NVIDIA and Marvell, have done very well. But the independent foundries that produce chips for them have not been able to keep up with AMD in process technology, much less Intel. You might think that independent equipment makers like Applied Materials and KLA Tencor, would focus on getting ahead of Intel, but most chip makers don't have to put but a fraction of number of gates on a chip as AMD or Intel do, so the economic incentives are not there.

AMD's new stategy is to start allowing other companies to use its foundries when they need the advantage of cutting-edge chip manufacturing. As this happens research and development costs can be spread out over a larger number chip makers. With IBM, AMD and others working together it is possible that the AMD coalition could catch up with the Intel axis in process technology over the next few years.

To accomplish this strategy AMD brought in new investors, basically the nation of Abu Dhabi. AMD is contributing its fabs and some of its intellectual property to the Foundry Company, but Abu Dhabi will be the majority owners, in return for a multi-billion dollar cash infusion. In addition to continuing to expand the AMD plants in Dresden, Germany, AMD will break ground on a new plant in New York State. At a time when most new foundries are being built in places like Malasia and China, you might wonder why New York State. Well, what some people believe is the most sophisticated chip factory in the world, one of IBM's fabs, is in New York. These factories are mainly run by robots. There is no need for a lot of low-paid laborers doing hand work.

Except for the cash infusion, we won't see the results of this strategic turn until 2010 and beyond. But there are the three other fronts I spoke of: graphics, servers, and profits.

AMD aquired NVIDIA rival ATI for about $5 billion back in 2006, just in time to see ATI lose much of its share of the graphics chip market (at about the same time re-designed Intel microprocessor chips caught up with AMD's and Intel lowered prices to make all microprocessor sales unprofitable). I want to repeat what I've said many times, I think the NVIDIA team may be the smartest guys in the tech world. Still, they are AMD rivals in graphics. Recently ATI (now an AMD division) stole a march on NVIDIA with a new line of chips and graphics cards that became very popular very quickly with game enthusiasts this summer. All NVIDIA could do was lower the prices on their own chips while they rushed back to the drawing board (okay, these guys never leave the drawing board, they sleep on the drawing board, but you know what I mean).

NVIDIA still owns the graphics card market, but in Q3 AMDs graphics division revenue jumped to $385 million from $285 million in Q2, a 55% increase in 3 months. More important, AMD/ATI has two advantages over NVIDIA that might come into play in the next 2 years and allow them to eat further into NVIDIA market dominance. AMD leads NVIDIA in process technology, precisely because NVIDIA does not have its own fabs. And AMD can integrate its processor (CPU) development with its graphics development, which NVIDIA can't. This is also a three way race because Intel has long made low-end graphics chips and is trying to upgrade that division in response to the AMD threat. All this will be very good for consumers, who are already seeing inexpensive video cards that are targetted at gamers but that can easily handle high definition video and that can be used as super computers those of us who like to crunch numbers.

In server chips, so important to the Internet world, AMD is shipping its first 45 nm Opterons. Depending on what they are used for, they can be seen as better or worse than Intel's current server chips. AMD chips use less power and are better at math and sending information to and from memory. Intel chips are better at heating your building (actually, they are quite good, having finally incorporate much of the Opteron circa 2002 design improvements). The same advantage you see in Opteron server chips will soon become available in Phenom chips for desktop computers. AMD already has great notebook computer chips, the Puma series.

And for the final strategic advance, we have: profits. While still working towards GAAP and even non-GAAP net income, in Q3 2008 AMD showed operating profits. Much of the industry was concerned that if AMD continued to lose money it would be forced into bankrupcy, and Intel would go back to its high-prices and low performance everyone came to expect in the 1999s. By lowering costs, including by making the Dresden fabs highly efficient, and raising sales, AMD would have been back in the game even without the Abu Dhabi deal.

I own AMD stock and two computers containing AMD processors. I also own stock in Marvell. In the past I owned NVIDIA stock, but do not at present.

See also

Tuesday, October 14, 2008

Rackable Systems (RACK) Hit by Economy

Rackable Systems issued a press release yesterday (October 13, 2008) stating customer purchases slowed down in September. This should not be a surprise; we will be hearing a lot of such statements in the coming weeks. In theory, since this is a known issue, stock prices have already tanked enough to more than compensate for it. Instead, just as Rackable (RACK) has had a major price hit today, we will probably see more individual hits corresponding with September quarter earnings announcements going forward.

Rackable released quite a bit of good news along with the bad, and it bears looking at. They signed up 25 new customers in the quarter. Their customers are all large corporations that need energy efficient, powerful, and managable datacenters, so 25 is a very good number. New generations of products are available for Q4. This is on top of the deals with IBM and NetApp from earlier in the year.

Opportunities and dangers abound for Rackable. As the leader in designing energy-efficient large scale server systems, it must compete with much larger players like IBM, Dell, HP and Sun, who have all been improving the energy efficiency of their systems. Rackable has plenty of cash on its balance sheets, almost $200 million at the end of Q2, and it is highly focussed on its niche. Its annual sales guidance is now $275 to $300 million, scaled back from above $350 million. It has been losing money on a GAAP basis but stayed in the break-even range on a cash basis. All in all, with a market capitalization today of $224 million, it seems undervalued even by current market standards.

I am a long term investor in Rackable Systems.

For more details, see

My Rackable Systems (RACK) analyst conference summary for Q2 2008
Rackable Systems press release of October 12, 2008

Monday, October 13, 2008

Strange Securities Auctions

This column already has several essays about economic, and investment, issues created when prices are set by auctions. The recent financial meltdown has given many real world examples of this, but they are difficult to explain to people who are not familiar with stock and bond pricing, much less derivative pricing. So I have made up an imaginary example that encapsulates, in a dramatic way, a particular type of auction malfunction (if by malfunction we mean pricing that veers from free market ideals).

I'll walk you through the example, then relate that imaginary experience to selected current economic and financial events caused by the lack of liquidity in the markets.

You hear about an auction and it sounds like you might want some of items in it, if the prices are right. The auctioneers will take only cash, so you put together what you have, say $55. You get stuck in traffic, so you arrive late. Outside people are already boasting of what great bargains they won. You hurry in.

The auctioneer, "the next item is a bundle of $1 bills, 100 of them." You think it is a strange item to auction: it is clearly worth $100 [assume these are not bills of value to collectors, or counterfeits, just ordinary $1 bills]. No one makes an offer at first, because everyone says assumes that it will be bid up to just short of $100, so bidding is a waste of time. But the tension builds and you decide why not, and open at $10. At that point the bidding goes quickly up to $29, then stalls. You offer $30. No one else bids against you. You win the $100. You pay $30 for the $100 and have $70 at the end. Meanwhile the auction has ended.

How could that happen (aside from the fact no one would auction off actual money like that)? Everyone else had run out of money. The next richest bidder in the room only had $29. It is your lucky day.

Translating this imaginary excursion closer to reality, now suppose that the item you bid $30 on and won was a mortgage bond worth $100. It really is worth $100, because the mortgage backing the bond is sound and will pay $100 over time. You win the auction not because the bond is worth $30, but because there is not enough cash to efficiently price the auction. Free market ideals have broken down.

Lately, almost no one has wanted to participate in auctions of at least two types of securities, mortgage-related bonds derivative securities and auction-rate securities.

There are two basic reasons there has been little bidding for weeks now: fear and lack of cash to bid with. The kind of institutions that can play this sort of game were all suddenly short of cash, and wanting to auction off what they could for cash, rather than using their precious cash to buy more securities. But no one else knows how to price the securities. For instance, it is difficult to find out which particular houses correspond to which particular mortgage bonds; linking the houses to derivatives is even more complex. So it is not exactly like buying a bag of $1 bills, if you just start buying a bunch of bags without looking in them. It is like buying an unopened bag of $1 bills and moths. It might have $100 of usable bills in it, or it might be all moths, or anywhere in between.

This is a problem for the government bail-out program; is the government going to look in each bag before it uses taxpayer money to buy it, or is it going to guess about the value of huge groups of bags using sampling techniques.

In free market theory prices are supposed to emerge in an efficient manner and result in efficient allocations of resources. Putting aside that there may be (in fact, are) problems with free market economics even when pricing of commodities is efficient, in the real world the conditions necessary for efficient pricing often don't exist.

For an auction to price items efficiently, there need to be a reasonable number of bidders and a reasonable number of items to bid on. If anyone has the power to set prices, prices will be set by that person, not by the market.

Even when there are reasonable numbers of buyers and sellers, because of human nature, prices can get out of whack, as in both bubbles and Depressions. The housing market is an auction market. Two years ago there were relatively few houses compared to bidders, resulting in unrealistic, high pricing. Now the same houses are in abundance compared to bidders, so in many cases sales are either not made (because in effect the people auctioning off their houses have set a minimum bid that no one will meet) or made at well below the real value of the house. The actual cost of construction being a good surrogate for real value for new homes, and that cost adjusted for inflation and physical deterioration being a good surrogate for used homes.

The Federal Reserve has been tasked with making sure their are neither too many nor too few dollars in circulation. When there are too many dollars, they are used freely to create inflation and asset bubbles. When there are too few dollars, people are forced to sell assets at less than their real values. Free market theories pretend that the only real value is the selling price, and it a very real sense that is true. But when selling prices depend on the whim of the Federal Reserve, you might want to ask yourself: what really is true, and what is bull?

Friday, October 10, 2008

America For Sale

This week we are seeing the largest turnover in the ownership of American corporations since the Great Depression.

We know who the people (and institutions) that are selling undervalued stocks are. They are people who are panicking, and people who have no choice because the stocks they are selling are their only source of cash to pay their debts on losses in mortgage-related securities.

But who is buying? Every sale requires a buyer. I don't have the best vantage point, but it sure looks to me like it is mainly petroleum cash coming into the market. I don't mean commodities investors fleeing the popping oil bubble (which I first wrote about back in Oil Bubble to Burst, on March 11, 2008). I mean the actual oil producers, mainly Arab nations, that have accumulated vast amounts of dollars (and Euros) that had not yet been invested.

Back in the 1980's we worried that the Japanese would end up owning the United States. They bought into U.S corporations, but mainly they bought land and buildings. In the short run they created a mini-bubble and got hurt, but those that kept their American real estate did well long-term.

Do I care that Arabs are going to own substantial portions of America's economy? No, it is part of the global economy. Only a few decades ago U.S. corporations owned much of Arabian oil production. The Arabs are not just lucky to have a lot of oil. They have worked hard, for decades, to develop their production capacity and their financial knowledge. They know the oil will run out eventually, so they are investing much of their returns, rather than spending them (not that they don't have plenty to spend, too).

Americans, as a whole, have been way too busy spending money and way too careless about making it. I think most Americans work reasonably hard, they just don't worry about the future enough to be bothered to save or invest. Some of us save, but we are more than balanced by the spendthrifts.

Today it looks like the future belongs to the Arabs, and maybe the Indians and Chinese. These United States of America are probably good for a comeback, but only if we create an economy that is not dependent on giving credit to spendthrifts to keep going.

Monday, October 6, 2008

Dendreon (DNDN) Provenge Interim Results

I previously said that if Dendreon missed the mark with its interim results for Provenge for late stage prostate cancer, I would not wait around for the final results. However, it appears that the interim results were quite positive, even though they did not make the predesignated FDA cutoff. Dendreon management explained why, with Provenge resulting in a 20% reduction of deaths, it is highly likely that when final results come in they will meet or exceed the 22% threshold needed for final approval. But this does mean more waiting for Dendreon as the final study won't be completed until mid-2009. Also, the company will continue to burn crucial cash during this final clinical stretch, leaving it weaker even if it gets final approval.

The Dendreon Provenge press release gave the basic information passed on from the independent data committee, so I'll focus on what management said in today's analyst conference.

In past Phase III trials Provenge showed more benefit over time than in the short run. This makes sense since its mode of action is to create an immune response to the prostate cancer. At this point in the prior studies the death risk reduction rate was 22%, and if that had been replicated in the current study, there was an agreement with the FDA that the trial could be stopped and approval quickly granted. However, the death reduction rate in the current study was 20%. That is not an unusual statistical fluctuation in a trial with this number of patients.

So on the whole, the interim results confirm the Dendreon story. In the past trials, when patients were looked at longer term, the death rate benefit (relative to placebo) increased to 33%.

But according to their agreement with the FDA, Dendreon does not need even that 33% reduction for approval. They only need a 22% reduction. That means that even if the trend of doing slightly worse than the earlier studies continues, the death risk reduction rate should come in around 29%, a very nice safetry margin above the 22% target.

Of course, a few adverse reactions (so far Provenge has proven extemely safe) or statistical fluctuations on the down side could still cause the study to fail. Also, I don't think the guarantee from the FDA is absolute. They will look at all the data and won't approve Provenge unless they feel it is safe and effective.

While it would have been nice to start getting this therapy out to prostate cancer victims quickly, it certainly now seems very hopeful that Dendreon will get the data needed to approve Provenge some time in 2008.

I own Dendreon stock and have owned it for years. You can read my Dendreon historical commentary and analyst conference summaries for more background.

Every thing in life involves upside and downside risks, so stay calm and ...

Stay diversified.

Tuesday, September 30, 2008

AMD Shanghai Opterons Could Restore Profitability

Microprocessor and graphics processor chip maker AMD let slip that its new Shanghai version of the Opteron processor is actually ahead of schedule for production. Samples are available now for testing and it may begin appearing on servers as early as Q4 of this year.

AMD was doing well in its efforts to become a true rival to Intel until the Barcelona version of Opteron ran into problems. It came out over a year late. It had some merits: the four core version had all four cores on a single chip. Intel's four-core Xeon server processor actually was two two-core chips packaged together, which resulted in a variety of performance issues.

The Shanghai Opterons will also have four cores, but they will be on a 45nm process enabling them to have larger internal memories (caches) and other acclerators that were not present in the Barcelona versions, which were done with a 65nm process.

In looking at Q3 2008 results, which will be released October 16, we will be seeing the results of revenues from the current generation of Opteron processors. This generation has its merits, and may have sold well into energy conscious server customers. But if there is a surpise bump it will be from the recently reinvigorated ATI graphics unit, which came out with highly acclaimed products that may have sold very well in Q3. Notebook CPU and graphics chips, which were once a weakness for AMD, also should be showing a strengthening trend.

So if Q3 was better than expected, and Shanghai starts shipping in Q4, and the economy does not melt down, AMD investors will have something to cheer about for the first time since 2005. Given the almost vanishingly low current market capitalization for AMD, that might generate quite a pop.

Then again, I am a long-term investor in AMD, so this analysis could just be wishful thinking.

For more data see my AMD page and

For the technical news article on Shanghai see AMD says new 'Shanghai' chip is ready to go by Brooke Crothers at CNET.

Its always best to ...

Keep diversified!

Monday, September 29, 2008

Republican Politicians Crash Wall Street

In an amazing display of stupidity, Republicans in the House of Representatives purposefully sabotaged the American economy in a vote that took place a few minutes ago.

With the stock markets crashing, there are no remaining stores of value in the U.S. economy. It is truly amazing: companies that are highly profitable can be bought for a pittance today. But by making certain that the credit markets remain frozen, by playing political chicken in order to (they think) save their sorry seats in the November elections, those Representatives (and there were Democrats who voted against the plan as well) have probably insured that business and consumer spending will now go into a rapid decline. That should make once-profitable companies unprofitable. At this point I am buying only stocks in companies that have large cash reserves.

Instead of a reasonable fix and a mild recession, the most likely scenario is now a Depression, probably on a world-wide scale, possibly worse than the Great Depression.

If you don't bailout the boat, you sink, and everyone goes down, not just those too lazy to lend a hend with the bailout.

Of course I am hoping that some other plan to avert a depression is quickly brought forward. A depression not only takes an economic toll, it brings up the possibility that people will start following mean or crazy (or mean and crazy) political systems. Like fascism or totalitarian communism. Or some system that we can't even forsee.

Thursday, September 25, 2008

Red Hat (RHT) Opportunities, Dangers

Red Hat is doing well navigating its dangers and opportunities.

Yesterday Red Hat (RHT) released their numbers and held the analyst conference for their fiscal 2nd quarter 2009, which ended August 31, 2008. Revenue was $164.4 million, up 5% from $156.6 million in Q1 and up 29% from $127.3 million year-earlier.

For more financial details, management comments, and answers to questions posed by analysts, just go to my Summary of the Red Hat September 24, 2008 Analyst Conference.

Red Hat is now the best known, and largest in terms of revenues, open source software company. Its two best known products are Red Hat Enterprise Linux and JBoss middleware (which helps Java software applications run and interconnect with clients).

In one sense Red Hat is still a small company. Proprietary software companies like Oracle and Microsoft have quarterly revenues in the multiple billions of dollars, dwarfing Red Hat revenues.

There are really only two major operating systems fighting for market share, Linux and Microsoft Windows [caveat: there are also Sun Solaris and Apple OSX, but they are closely related to Linux]. There is only one Microsoft, but there are many Linux vendors, so Red Hat has to fight for its share of the Linux market, which is smaller to begin with.

Linux is open source, which means you can get it for free and run it without a license. That may not seem like much of a business model. The Linux companies Like Red Hat make their money from offering support for their clients. There just aren't enough Linux experts to go around, and it makes sense to centralize certain tasks. Most corporations that use Red Hat say they are getting a bargain when they get reliable, tested solutions from Red Hat and pay for support. Support includes upgrades and security and bug fixes and the ability to get a question answered by experts.

Microsoft has the advantage of being able to spread out its research and development costs over a large number of installed systems. Red Hat and other Linux companies in effect spread out their development costs by sharing code innovations, and by getting free inovations from clients and independent Linux coders.

Companies that make money from technical support now offer Linux support that competes with Red Hat. This includes hardware vendors like HP and IBM, as well as software vendors like Oracle. The Oracle case is particularly interesting. Oracle claims that it provides its customers with a duplicate of Red Hat Enterprise Linux for free, and then charges for support. Two years ago when this was announced Wall Street thought Red Hat was doomed.

In fact, Oracle had endorsed the Red Hat product. You can bet that Oracle software runs well on Red Hat Linux. And while Oracle has great products, it has angered plenty of competitors and clients over the years. Corporations may not want the convenience of having a single software vendor when it comes with a price tag that may be jerked up, leaving them no alternative but to pay. Red Hat, especially now that it provides an enterprise version of JBoss Java middleware, provides a highly reliable alternative to being married to Oracle (or IBM, or HP).

The use of open source software is growing rapidly, especially for server operating systems, datacenters, and Internet computing. Red Hat continues to capture a significant share of this growth.

Sometimes computer giants simply crush smaller companies that they cannot buy by underpricing them. But underpricing Red Hat to capture its smallish market share would mean a major devalutation for Microsoft or Oracle. Red Hat has $1.4 billion in cash, a tremendous amount of money considering their overall size. Its clients appear to be very loyal.

It may take another year to completely get JBoss revenues rolling in. If I were Red Hat, my next acquisition would undercut one of the main selling points of Microsoft, Oracle, IBM and Sun. I would buy an open source, database system and make it enterprise-ready. Given the stiff pricing of Oracle and Microsoft database software, I am sure many businesses around the world would appreciate that.

I own some Red Hat stock. All technology companies are subject to competition and should be treated as risky (even when they have great potential). So ...

Keep diversified

More data:

My Red Hat analyst conferences page

Saturday, September 20, 2008

Aztreonam Lysine decision by FDA, Research Note.

On September 16, 2008 Gilead (GILD) issued a press release stating the FDA review of "aztreonam lysine for inhalation, an investigational therapy in development for people with cystic fibrosis who have Pseudomonas aeruginosa (P. aeruginosa)," had been completed and the FDA said it "cannot approve the application in its current form and an additional clinical study will be required." See the press release FDA Complete Response Letter for Aztreonam Lysine.

This came as a bit of a surprise. All prior indications from Gilead were that the drug was safe and effective. Aztreonam Lysine was not expected to be a blockbuster because there just are not that many cystic fibrosis patients with P. Aeruginosa infections at any one time, although the number is by no means trivial. Other antibiotics are already available for this condition. The main reason to add Aztreonam as a treatment is the propensity of bacteria to develop immunity to antibiotic agents.

Financially it is not that big of a deal to Gilead, which is growing its HIV and Hepatitis franchise revenues at a rapid clip [See Gilead Should Rise on Penetration, Viread]. Still, money was spent on research, and approval would have meant an additional revenue stream. I am writing this blog because I was appalled by the poor coverage by the mainstream financial press. Also, mainstream articles almost never include links to more detailed data (because that might lessen ad revenue). I own Gilead stock, so I want to know, and see no reason not to share.

Progressing from the present, towards the past ...

On June 13th of this year, Gilead announced that a Phase III follow-up study showed Aztreonam to be safe when administered to cystic fibrosis patients [See Interim 12-Month Phase III Study Results for Aztreonam Lysine for Inhalation in Patients With Cystic Fibrosis]. This study, which was open-label [not double-blind], was done mainly to give a larger safety database for the drug. Patients showed improved respiratory symptoms and no evidence that the drug was unsafe. This was the third Phase III study.

On November 16, 2007, Gilead announced it had submitted its New Drug Application (NDA) to the FDA [See Gilead Submits New Drug Application to U.S. FDA for Aztreonam Lysine for Inhalation for Cystic Fibrosis]. Gilead said "The NDA is supported by data from two Phase III clinical studies (AIR-CF1 and AIR-CF2) and interim data from an ongoing open-label extension study (AIR-CF3) of patients who participated in AIR-CF1 or AIR-CF2. " Further "Data from AIR-CF1 demonstrated improvement in respiratory symptoms for people with cystic fibrosis," data from CF2 showed the therapy delayed the time needed before IV antibiotics needed to be started, and both studies showed the therapy increased patient respiratory functions. Common adverse reactions were listed, and said to be similar to those from placebos. In other words, there was every reason to get approval for the drug, and no reason for it to be rejected.

Going further back, on October 4, 2007, [See Gilead Announces Detailed Results of Phase III Study of Aztreonam Lysine for Inhalation in Patients With Cystic Fibrosis] details of the CF1 study were given. Again, it seems pretty good. The patient improvement is measurable, the p value is low (meaning it is highly likely the results would hold up if the trial were repeated, or done with more patients), hospitalization rates for treated patients were lower, and side effects were in line with those from placebos.

This was consistent with the May 29, 2007 press release "Gilead Announces Achievement of Primary Efficacy Endpoint in Second Phase III Study of Aztreonam Lysine for Inhalation in Patients With Cystic Fibrosis " Reaching the primary endpoint(s) for a clinical study, if the safety profile is good, is usually the main criteria for approving a drug.

You can go further back, but there does not seem to be any negative data on Aztreonam.

Probably the FDA just wants more data. The number of patients studied is not that large. On the other hand, the number of cystic fibrosis patients in the U.S. is typically around 30,000, and the number with Pseudomonas aeruginosa at any given time must be considerably smaller.

Gilead should tell the investment community exactly what the FDA said in rejecting the application. I don't see how keeping that secret can aid competitors. But it can aid us all in evaluating the value of Gilead as a company.

In biotechnology there is always the risk that a promising therapy will fail to be approved, and that established therapies may turn out to have risks that were not uncovered in clinical trials. I think Gilead is vastly undervalued by the market, but given the unknowns it is always best to ...

Keep diversified!

See also my Summaries of Gilead Analyst Conferences