Thursday, December 31, 2009

Portfolio Report for 2009

The numbers are in, and for a change my strategy of doing a lot of research on the future value of technologies paid off. Many investors had a great year in 2009, whatever strategy they used, but I was smart or lucky enough to beat the market averages.

I added only three new stocks in 2009: Cantel Medical, CMN (on December 9), Hansen Medical, HNSN (on July 8), and Petsmart, PETM on (October 8); they did not affect the outcome much. I sold out of only one, Red Hat, RHT (on September 8), which was up significantly. Here is how the stocks I held for the entire year did (links are too my Analyst Conference Summaries for the stocks):

December 31, 2008 priceDecember 31, 2009 price
AMATApplied Materials10.1313.94
HILLDot Hill0.801.90
MRVLMarvell Technologies6.6720.75
ONXXOnyx Pharmaceuticals 34.1629.34
SGISilicon Graphics International (was RACK) 3.947.01
TTMITTM Technologies5.2111.53

Keep in mind that the calendar year is artificial. Some of the 2009 losers have gained since I bought them, and some winners are down overall.

My big loser in 2009 was Anesiva, which has a promising therapy but ran out of money to develop it. Gilead was a loser, too, despite steadily increasing profits and ending with a very low P/E ratio. Onyx was the only other loser, and I accumulated more in 2009.

Biggest winners included Dendreon, which reported data for Provenge that should mean FDA approval of the prostate cancer therapy in 2010; it was up 473%. AMD rose 348% as renewed global computer sales combined with a settlement with Intel to give it a boost. Marvell was up 211% as it cut costs while demand ramped for its new generations of semiconductor chips for storage and communications. Dot Hill was up 137% as its storage device technology revenues ramped up during tough times.

Given my mix, my portfolio gained 107% for the year.

Some people do very well as momentum investors, but I think in the long run the market is about profits, not investor psychology. There have been years when my investment ideas seemed foolish, but 2009 was not one of them. Also note that my main use of cash for investment in 2008 and 2009 was paying down the mortgage on my home.

Happy New Year! (And Keep Diversified!)

Tuesday, December 29, 2009

Red Hat (RHT) analyst conference summary

Red Hat


conference date: December 22, 2009 @ 2:00 PM Pacific Time

for quarter ending: November 30, 2009 (3rd quarter fiscal 2010)

[at the time this is written] See also "I Sell Red Hat"

Forward-looking statements

Overview: Another excellent quarter for revenue for the commercial Linux leader, but earnings continue to lag.

Basic data (GAAP) :

Revenue was $194.3 million, up 4% sequentially from $183.6 million, and up 18% from $165.3 million year-earlier.

Net income was $16.4 million, down 43% sequentially from $28.9 million, and down 32% from $24.3 million year-earlier.

EPS (diluted earnings per share were) were $0.08, down 47% sequentially from $0.15, and down 33% from $0.12 year-earlier.


Assuming stable currency exchange rates: Q4 revenue $191 to $193 million. Services and training expected down $2 to $3 million due to holidays. 23.8% non-GAAP operating margin. Non-GAAP EPS $0.15 to $0.16 per share. Cash flow expected up.

Conference Highlights:

Subscription revenue was $164.4 million, up 21% y/y. Training and services revenue was $29.9 million, flat y/y.

Towards the end of the quarter RHEV virtualization software was released. Interest is strong among established customers. Cloud initiative is attracting clients.

There was an $8.8 million charge for litigation settlement in GAAP numbers. Non-GAAP operating income was $46.1 million, up 20% y/y; operating margin 23.7%, up 50 basis points y/y. Non-GAAP net income was $33.5 million (down from $36.9 million year-earlier), for EPS of $0.18.

Operating cash flow was $54.1 million, down from $59.1 million year-earlier. Accounts receivable increased $24 million y/y due to record billings in the quarter. Total cash, equivalents and investments ended at $959 million, up $47 million sequentially. $52.3 million was spent repurchasing stock.

Bookings were particularly strong in North America.

Cost of revenues was $29.6 million, leaving $164.7 million in GAAP gross profit. Operating expense of $145.0 million consisted of: sales and marketing $71.5 million (up $13 million y/y), R&D $36.8 million, general and administrative $26.1 million, and the $8.8 million litigation settlement. Leaving $19.8 million income from operations. Interest and other income was $5.5 million. Income tax provision was $8.8 million. Some of the expense increase was due to the October Red Had summit.

Linux is now 18 years old. Red Hat remains the number one contributor to the kernel.

All of the largest 25 deals that were up for renewal did renew, at a total value of 120% of last-year's value. 14 deals in the quarter were for over $1 million. 8 deals included JBoss.

Deferred revenue was up 23% y/y to $619 million. Average deal length was 22 months.


Economy effects? We are beginning to see some recovery in certain markets, like the financial sector. Does not think this is generally a year-end budget flush, instead there are indications of optimism from COOs.

JBoss? Continues to grow at a faster pace than the main business. The pipeline looks strong.

Lower earnings on higher revenues? Exchange rate pushed operating expenses up in quarter; Red Hat summit expense; launch of RHEV expenses. We continue to invest in the future, including hiring new employees.

Implication that a lot of billing was right at the end of the quarter? The quarter was similar to most other quarters, 20/20/60 linearity. This is why we don't forecast cash flow by quarter. There was a 21% increase in unleveraged quarterly cash flow y/y.

Goal is to find another 100 basis points (1%) in operating margin each year.

We are growing because of an ASP benefit as we add products, we are picking up market share from other Linux providers, and server shipments are improving.

Geographic? Strong Americas performance. Asia Pacific and Europe are solid. This quarter Americas is picking up more quickly than EMEA.

RHEL AP is not just for the largest customers, it is useful to smaller customers as well.

Earlier in the year we invested a lot in sales training globally, which has had a positive effect.

Red Hat Investor Relations Page

OpenIcon Red Hat main page

Friday, December 18, 2009

Oracle Analyst Conference report

Oracle (ORCL)

Note: I do not own any Oracle stock as of the date of this entry - William P. Meyers

conference date: December 17, 2009 @ 2:00 PM Pacific Time
for quarter ending: November 30, 2009 (2nd quarter fiscal 2010)

Overview: Strong sequential revenue growth with strong earnings.

Basic data (GAAP) :

Revenues were $5.86 billion, 16% sequentially from $5.05 billion and up 4% from $5.61 billion year-earlier.

Net income was $1.46 billion, up 30% sequentially from $1.12 billion and up 12% from $1.30 billion year-earlier.

EPS (earnings per share) were $0.29, up 32% sequentially from were $0.22 and up 16% from $0.25 year-earlier.


Excludes Sun acquisition.

Pipelines are strong, but assuming conservative close rates, 3rd quarter fiscal 2010. Revenue up 4 to 7% y/y at current exchange rates. Non-GAAP EPS $0.36 to $0.38 at current exchange rates. GAAP $0.26 to $0.28. 28% non-GAAP tax rate assumed.

Conference Highlights:

Exceeded high end of prior guidance. Software new license revenue was up 2% y/y to $1.7 billion (but down 5% in constant currency). Software updates and support revenue was up 14% y/y to $3.3 billion. GAAP operating margin was 37%, up from 35% year-earlier. This was the highest operating margin in Oracle history.

Non-GAAP results: operating income was $2.9 billion, up 9% y/y. Net income was $2.0 billion up 12% y/y. EPS were $0.39, up 15% y/y. Operating margin was 49%, up from 46.2% year-earlier.

Expects the Sun acquisition to clear with the European Commission in January.

Took market share from SAP "in every region around the world."

Exadata continues to be a "red-hot product."

Suns machines run Oracle databases "faster than IBM's fastest computer. We expect Sun to rapidly improve both its market share and margins once this merger closes." Oracle plans to avoid using Sun for the low-margin, high volume market. Will deliver "private cloud" complete solutions.

Stock holders of January 19, 2010 will receive a $0.05 per share dividend on February 9, 2010.

Cash, equivalents, and marketable securities balance ended at $20.78 billion. Debt in notes payable was $13.75 billion. 11.6 million shares of stock were repurchased for $253 million.

Operating expenses were $3.68 billion, composed of: Sales and Marketing $1.13 billion; product support expense $264 million; cost of services $832 million; research and development $708 million; general and administrative $183 million; amortization $436 million; acquisition related $10 million, and restructuring $114 million. Leaving operating income of $2.18 billion. Interest expense was $188 million. Non-operating income $33 million. Income tax provision $565 million.


Database business growth drivers? People had been putting off decisions, now some of that is starting to come back. 11g work with ISVs is kicking in as well.

Linearity? Typical linearity, not back-end loaded. But current quarter started off in better shape. Europe is lagging by about two quarters.

Guidance looks better than anticipated, does this mean there is a meaningful recovery in spending? We are seeing customers back buying, broadly. But it may be due to our strong products and sales teams. We also see the environment improving.

Are close rates improving? We did better than the close rates we expected. The economy is uneven, so we are continuing to use a very low close rates for guidance. Pipeline is very good, especially with Exadata.

Vertical standouts? Communications had a good quarter. Financial services pipeline is improving. Retail is coming back.

How big could Exadata business be? We think it will be huge, billions of dollars a year. How long it takes to get there remains to be seen. We want to group our industry standard components into machines like Exadata for transaction processing and data warehousing. Customers then don't have to do system integration. We want to apply the same strategy to operating systems, middleware, etc. We think that is what the computer business is going to look like for large customers going forward.

When we have acquired Sun all of you are going to have to redo all of your models.

Fusion products are SOA, so they can be bought individually and integrated easily.

List of my analyst conference summaries

My Oracle page

Wednesday, December 9, 2009

I Buy Cantel Medical (CMN)

Today I bought an initial bit of Cantel Medical, ticker CMN. This was something of a lightning decision, compared to my usual research and long-term observation before buying a stock. Yesterday, while researching it, I thought the company's focus on infection control was interesting, and I saw that it would report quarter results today. The quarter ending October 31, 2009 results were better than expected. I could have bought it cheaper yesterday, but I think the price is still very attractive today.

Cantel Medical can be thought of as a conglomerate where the separate units each are engaged in some technology or service related to infection control. Its Minntech division makes sterile disposables for dialysis and other medical procedures.

Crosstex provides sterile disposable sundries for dentistry and medical use. Mar Cor Purification makes systems for ultra-pure water for medical use, including for biotechnology research and production. Saf-T-Pak specializes in packaging that is sterile or that is used to transport biohazards.

Cantel Medical reported a particularly good quarter for both revenues and profits, partly due to a surge in demand for masks for flu season. However, while this sweetener will probably back off next quarter, I see a growing demand for infection prevention technologies. With many species and strains of antibiotic-resistant bacteria becoming increasingly common, the best way to protect patients is to use sterile disposables. With the globalization of the economy viral diseases spread very rapidly. Again, the best procedure is to protect people with sterile disposables.

See the Cantel Medical fiscal Q1 2010 results for the press release.

Normally I like to know more about a company before I plunge in, but having bought a small amount of stock, now I will watch Cantel closely and report back in this blog.

Thursday, December 3, 2009

Marvell Technology (MRVL) Blows Past Competitors

Even non-engineers can appreciate the engineering of Marvell Technology Group (MRVL). After making a number of technological break-throughs in 2008 and earlier in 2009, revenues are ramping very quickly as products containing their semiconductor chip systems are being built.

For an overview of Marvell technology, see Marvell Under the Hood. For my past analyst conference summaries, see Marvell Analyst Conference Summaries.

Revenue for the quarter ending October 31, 2009 was $803.1 million, up 25% sequentially from $640.6 million and up 2% from $791.0 million year-earlier.

Net income of was $201.6 million, up 245% sequentially from $58.5 million and up 183% from $70.9 million.

EPS (earnings per share) were $0.31, up 244% sequentially from $0.09 and up 181% from $0.11 year-earlier.

Cash and equivalents ended at $1.46 billion. Cash flow from operations wa $203.5 million. $196 million free cash flow. Inventories rose to $239 million to deal with areas of tight supply. Long term liabilities are $174.3 million.

Non-GAAP, which excludes $34.4 million in stock-based compensation, $26.5 million amortization, $1.9 million restructuring, but adds back in the $32.6 million tax benefit: net income $231.8 million. EPS $0.35.

Guidance for fourth fiscal quarter 2010 was $802 to $850 million in revenues. Networking and storage sequential growth, with normal seasonal slowdown of wireless. 58.5% non-GAAP gross margin. $235 million non-GAAP operating expenses. $254 million operating profit. Other income $1.5 million. Tax $12 million. 670 million diluted shares. $0.33 to $0.39 non-GAAP EPS. $150 million free-cash flow. GAAP EPS about $0.09 less than non-GAAP.

Analyst Questions and Answers (summary):

Hard drive market dynamics? First quarter 2010 should continue to be helped by low cost of PCs. Our hard drive customers are optimistic.

Gross margin improvement and mix? We don't provide gross margin by end-market segments. Mobile and wireless end markets experienced very good growth, and your margin estimates for that segment may be off.

China Mobile processor market size? PXA920 is very specific, high volume, high performance for standards of China market. It is state-of-the art smart phone solution, but also cost effective enough for the mass market. Our aspiration is higher than any number anyone is throwing out yet.

Sustainability of gross margins? Semiconductor business gross margins should be on high end as prices go down, to offset other expenses. This is a fundamental shift. The numbers we have are fair numbers and we plan to maintain them as long as we can, and best-in-class semiconductor companies will need to achieve this range.

Are your customers in hard drives adding to inventories? We are on a consignment basis, so they do not need to build inventories of our chips. Full feature PCs, even laptops, are now under $500, which is building demand, especially in emerging economies.

Dividends? We do not believe we are out of the economic downturn, so it is too soon to talk about distribution of cash. Our bias is to have more cash than we need in order to not be at the mercy of banks.

China business going forward? We are optimistic about our work for China Mobile; we have been working with them for 2 years. PDS/CDMA 3G is the pride of China. We believe it will be the main technology in China going forward, so we expect a very strong second half of next year.

Visibility is much improved. Inventory is leaner. We have had some shortages and longer lead times, so customers are giving us more visibility.

O-phone success detail? PXA920 will be used by many OEM cell phone makers for the China market; not all of them will be O-phones. The main chip is the most highly developed ever, but we also have the chip set solutions (power, wi-fi, etc.) that go with this. Revenues will start to ramp in the second half of next year; not contributing yet.

Bluetooth Wi-Fi combo part growth? We are very happy with traction with this device is finally taking off. The ramp now is the first generation device, a second generation is in design now. Any device requiring Bluetooth and WiFi is a potential market.

Reviewed how integration of systems on a chip help everyone, including the OEMs and end customers, while lowering everyone's costs despite increasing Marvell's gross margin.

ARMADA initial end markets? Across the board. Chips range from low end to high end. The run on all the ARM software in the market. So the market is any consumer device from HDTV decoders to picture frames to Internet portals like netbooks to automotive display consoles.

Tuesday, November 24, 2009

TTM Technologies (TTMI) Merges with Meadville

On November 16, 2009 TTM Technologies (Nasdaq: TTMI) announced that it would be merging with Meadville Holdings Limited. Both companies are in the printed circuit board (PCB) manufacturing business. TTM is the largest PCB manufacturer by revenue in the United States, but was not in the top 10 such companies worldwide. Meadville is listed on the Hong Kong exchange and is somewhat larger than TTM.

TTM has been looking for a Asian acquisition for as long as I can remember. The U.S. PCB industry has been on the ropes for over a decade because of competition from overseas, especially from Asian companies. TTM, and some of its American rivals, have survived and even prospered by specializing in a few areas. One is low volume production where the savings from going overseas are outweighed by the logistics of it. While we tend to think of electronics as high-volume items, in fact outside of the consumer sector often industrial kit is made in low volume.

Another area where some American companies have retained an advantage is high-technology. These are not your Dad's PCBs. They have multiple layers of conductors and insulators and tiny thru-holes drilled with lasers. TTM specializes in high-end boards and provides engineering support to customers.

Quick turn-around time, aka the quick-turn segment, is also quite profitable. This is often for prototypes during the development phase of a project. A company might want ten prototype boards, and it wants them ASAP. TTM does quick turn.

Still, TTM has wanted to be a one-shop solution for its customers. Typically for high volume products, where cost per board is an issue, TTM's customers have gone elsewhere.

Meadville is just what TTM has been looking for, although it is much larger than I expected the acquisition would be. Meadville has good standard technology capabilities, so it will benefit from TTM's cutting edge ability. Meadville has the high-volume capacity that will allow TTM to become a one-stop shop. Meadville has a variety of factories in various locations in China.

Merged into TTM, the companies will form the third largest PCB company in the world. Meadville will be spinning off its PCB laminate manufacturing division as part of the deal.

Meadville has a lot of debt that enabled it to acquire the capital equipment and smaller companies it needed to expand rapidly. New credit facilities of $582 million are being provided by Hong Kong banks. However, both TTM and Meadville have been generating cash, even during the recession, so on first impression it seems they should be able to pay down the debt over time without too much difficulty.

TTM is buying Meadville with cash and common stock. As a result Meadville investors will own about 45% of the merged company.

Due to the large number of PCB companies in the U.S., this merger is not likely to be seen as anti-competitive by U.S. regulatory agencies. However, issues arise because a significant proportion of TTM's business is from defense contracting. The Department of Defense and the Committee on Foreign Investment in the U.S. (CFIUS) must approve the deal before it goes through. Management did not think that would be a problem once protocols were established to keep Defense information secure. But one analyst at the conference claimed the largest Meadville stockholder is "close to" the Chinese Communist government, and rather than asking management a question seemed to be saying she (or whoever was using her, possibly Taiwanese interests) thought the merger should be disallowed by CFIUS.

Mergers are always tricky, but I believe TTM has been very cautious in looking for this acquisition and has done its due diligence. It will probably take a good year or so after the merger, however, before we see any result of its synergies.

For a report on TTM's latest financial results, see my TTMI Q3 2009 analyst conference summary. Also see TTM Technology press release on Meadville Holdings merger.

And of course Meadville Holdings Limited.

Wednesday, November 18, 2009

The Gold Bubble

I correctly called bubbles in the stock market in the late 1990's, in the housing market, and in oil [See Oil Bubble to Burst, [March 11, 2008]. I believe there is a bubble in gold right now. I am not saying the bubble will pop soon, or at what price; seeing a bubble is a lot easier than saying when it will pop.

The magic of gold is purely psychological, and mainly a historic artifact. Gold is pretty and does not tarnish, so it makes nice jewelry. It is just uncommon enough that finding and mining it is usually not easy. Hence when money was invented, gold was adopted for use in coins.

Gold has more uses now. Of course it is used in dentistry. Its main use, besides jewelry, is in electronics. Gold is an excelent conductor of electricity, and does not corrode, so it is used to plate contacts on the best-quality electronic products. Because they are much cheaper, silver and copper are more widely used.

Gold investors often believe that gold is the ultimated measure of value. But its intrinsic value is negligible. If it were more common it might be regarded as a cheap anti-corrosion metal.

A lot of gold is being hoarded around the world. As in typical in auction markets, as long as the price is going up, people are given incentive to hold onto their gold stock, no matter how high it goes. That is how auction markets create bubbles.

But study history and you will find there have been many times and places where gold was not highly valued in comparison to other commodities. If something else is desirable enough, it is worth its weight in gold. Famously, salt was once traded in some places in Africa weight to weight with gold.

A new gold find can cause gold inflation. This happened when the Spanish stole the gold of Mexico and Peru in the 1500s. Europe at that time could not aborb that much gold, so the price of gold relative to other commodities swooned. Much of the gold migrated to China and India, which then had far more robust economies than the European nations.

The ratio of the price of gold to silver used to be a big, big deal back when money mostly meant metal coinage. It was the prominent issue in the U.S. Presidential campaign of 1896, in which the Democratic Party "declared for the unlimited coinage of silver at the ratio of sixteen ounces of silver to one of gold, though the market ratio was about thirty-two to one" as a means of getting more money into circulation [The American Pageant by Thomas Bailey, p. 599]. The Republican Candidate, William McKinley, won the Presidency after his campaign outspent his pro-silver rival sixteen to one.

Today, as I write, the quoted values of ounces of gold and silver are $1141.30 and $18.42. That gives a price ratio of about 62 to 1. Historically they have mainly fallen between 10 to 1 and 40 to 1. So if history is any indicator, either the price of silver has to skyrocket or the price of gold has to plunge to get us to equilibrium. It is possible that when the bubble bursts both will plunge in tandem.

One relatively sound source of gold's strength has been the weak dollar. The theory is that gold stays stationary in value. Therefore, if the dollar falls, the value of gold in dollars should rise. Of course normally financial brains would see right through that simple equation. The dollar should fall against any currency that rises against the dollar, if the theory were valid.

More fundamental is the usual fall in the value of goods versus currency when there is slack demand. In other words, deflation. There is concern that the astonishing amount of fictional money pumped into the American economy by the Federal Reserve starting in 2008 is going to cause the opposite, a great inflation. So the high price of gold, under that theory, is about looking ahead to the coming inflation. But the newly pumped money, so far, has not even replaced the money that dissappeared in the Great Panic of 2008. So it is a bit early to place heavy bets on inflation. If the Fed starts raising interest rates in 2010, and raises them fast enough, inflation should be held to its normal pace.

Like everything auctioned, the price of gold at any given time is highly dependent on the dynamics of the auction system. On an upswing people have every reason to delay selling in order to get higher prices at a later date. This in itself can create shortages that cycle into higher prices.

But there are always mini-cycles within the larger cycles. No one thinks much of a drop of a few pennies in the price of gold during the course of a trading day.

During a bubble at some point enough people will bail out to drive down the price of the asset enough for other holders to notice. If this trend become prolonged or deep, all the theories in the world won't support the price of the asset. Once gold starts falling consistently, people will realize it is not a magical store of value. They will trade their gold for something they can actually spend or invest more profitably.

Of course a gold bubble could also be popped by the discovery of a new gold field.

What confirms for me that we are in a gold bubble is that normally, during a severe recession, all asset classes are sold by investors. Gold should have come down subtantially in price in 2008 and 2009. Perhaps gold investors are more conservative by nature than those who invest in asset classes, so that they were not leveraged, and did not need to sell. I don't get that impression from the few big-time gold bugs I have met, but some times anecdotal evidence is misleading.

Remember, gold could go a lot higher before the bubble bursts. Shorting gold is no more a sure thing than going long on it.

Hedge your bets: keep diversified!

William P. Meyers

Thursday, November 12, 2009

Shortages for Electronics, Semiconductor and Computer Makers

Listening to a variety analyst conferences this last couple of weeks I heard a variety of executives mention shortages of the components they needed to manufacture their own products. Some simply had to scurry to get parts, others lost sales because they were unable to deliver product.

Extreme Networks, EXTR, for instance, was unable to manufacture its latest and greatest network switching devices in sufficient quantity. They had let their inventories get too low.

Integrated Silicon Solutions, ISSI, reported that there was a shortage of wafers (the starting point for making their memory devices), but that they actually sold more than expected because their rivals in the SRAM and specialty DRAM market were not able to make deliveries.

NVIDIA, NVDA, had the most serious problem I heard. They make graphics processors for computers and mobile devices. NVIDIA's third quarter revenues grew 16% sequentially, but they believe they could have shipped $50 million to $100 million more in product if they had product to ship. The problem was mainly in the newest, high-end graphics chips. TSMC, the foundry that makes them for NVIDIA [and makes much of the world's semiconductors], could not make the chips fast enough. Partly this was due to low process yields on the latest, most miniaturized technology.

AMD's graphics processor segment probably picked up some of the slack, but they are also using TSMC and can't get enough of their newest product either. However, they apparently did a better job anticipating demand than NVIDIA did.

Dot Hill, HILL, was able to get enough disks to ship their storage units to HP, NetApp, and other customers, but reported that they had to work hard to get enough disks and could not guarantee they could get as many disks as they will need in the fourth quarter if demand continues to ramp.

There are probably many more examples, and of course there are always companies products aren't competitive and so are not worried about shortages. But the general pattern is clear. From bottom to top, inventories were taken too low earlier this year, and manufacturing capacity was cut back too much.

Much of the increase in end-user demand is coming from China, but there is a buildup in demand in the United States off the lows of late 2008 to early 2009.

I am expecting robust growth in most segments of the global semiconductor, networking, and computer equipment industry during 2010.

Even capital equipment makers like Applied Materials, AMAT, are looking at a return of demand. It might seem that since on the whole demand is still lower than in 2008, foundries would not need to be buying new semiconductor manufacturing equipment yet. But just as new, better, higher capacity products are always being designed, the machinery for making them has to be upgraded. If someone wants 33nm parts, you can't make them with 90 nm tools. So it now makes sense to buy newer, higher-technology equipment rather than simply restarting production lines that make parts that are no longer in demand.

Disclaimer: I own shares of AMD, HILL, and AMAT. I do not own shares of the other companies mentioned (as of today). - William P. Meyers

Monday, November 9, 2009

Akamai, Microchip, and other conferences

I spent the last two weeks writing the index for Windows Server 2008 Administrator's Pocket Consultant, 2nd Edition by William Stanek. Despite that, I managed to listen to a few analyst conferences and posted summaries for them. Here's the list:

Akamai, AKAM, October 28, 2009
Cisco, CSCO, November 4, 2009
Dot Hill, HILL, November 5, 2009
Microchip MCHP, November 4, 2009
Maxim Integrated, MXIM, October 29, 2009
Onyx Pharmaceuticals, ONXX, November 3, 2009
SGI November 4, 2009
TTM Technologies November 4, 2009

I missed the NVIDIA analyst conference November 5, 2009, but hope to write a summary of that tomorrow.

Looking at the list, I wonder how I managed to get all that done. Mostly I suppose I know the routine so well that summarizing them takes only slightly more time than listening to them.

If you really want to understand a company, you might look at what the executives were saying to analysts a year or two ago. That would be a good test of how well they are predicting reality as against how much they are just blowing smoke an investors. To see a list of all the companies I do analyst summaries of, with links to all the past summaries I have done for each company, just visit my List of Companies Covered for Analyst Conference Summaries page.

Friday, October 23, 2009

Celgene Third Quarter 2009 Results and Analyst Conference

This is just to let you know that I have posted my Celgene (CELG) Third Quarter 2009 analyst conference summary.

Celgene is doing well marketing its current drugs Revlimid, Thalomid and Vidaza. Since Revlimid and Vidaza are still in their global launch period, revenues are almost certain to continue to ramp. Celgene also has a variety of therapies in various stages of development. While some may not make it to market, there are enough good candidates to make it likely growth will continue well into the coming decade.

See also and my main Celgene page with links to summaries of prior analyst conferences.

Wednesday, October 21, 2009

Intuitive Surgical Third Quarter Analyst Conference

Intuitive Surgical (ISRG) held its third quarter analyst conference yesterday, October 20, 2009. While Intuitive is actually doing well, especially when you consider the depressed economy, it is not doing as well as investors had hoped. Any stock with a high Price to Earnings (P/E) ration such as Intuitive has is vulnerable to these sorts of let downs.

Revenues were $280.1 million, up 8% sequentially from $260 million, and up 19% from $236 million in the year-earlier quarter. Net income was $64.5 million, up 3% sequentially from $62.4 million, and up 12% from $57.6 million year-earlier. For more details on third quarter results see my Intuitive Surgical Analyst Conference Summary for October 20, 2009.

Those numbers would make ISRG a growth company; for a recession they are stellar. Yet I don't own any Intuitive Surgical stock, and hesitate to buy it at today's price. It is true that if the economy recovers and doctors continue to adopt robotic surgery techniques at a rapid pace, today's stock price can be easily justified by future expectations. But the late debacle should warn us to be careful about assigning high P/Es to stocks.

If you want to criticize Intuitive, you would point to the number of its da Vinci Surgical systems sold in the quarter. At 86, that is down from the 91 sold in Q3 2008. The new generation of systems are pricier, and a good bit of revenue, more than half now, comes from servicing the installed base and supplying instruments and accessories for surgeries performed. So 86 is not a disaster. But recall that Q3 2008 was a time when wiser heads were already starting to be careful with their capital spending. It was not a boom quarter.

Among doctors there is still a great deal of excitment about Intuitive Surgical, the da Vinci systems, and robotic surgery in general. On the other hand, I expect competition in this field to ramp up in the next few years.

Intuitive Surgical may be a bit overpriced, but it is a good stock to buy on dips. However, always be wary of stock prices that are based on investor enthusiasm rather than profits and reasonable expectations of future profits. Even after today's stock drop Nasdaq (which uses non-GAAP measures) is reporting Intuitive's P/E ratio at 48 trailing, 40 forward. That is flying pretty high in this stock market.

So ...

Keep diversified!

Gilead Sciences Reports Third Quarter 2009

Gilead Sciences (GILD) reported stellar revenues and profits for it third quarter 2009, featuring revenues up 30% from the year-earlier quarter and GAAP EPS up 38% from last year. See my Gilead analyst conference summary for October 20, 2009 for details.

So why did the stock price fall today, and why does it have such a low price to earnings ratio? I own the stock because I think it is one of those rare value plus growth stocks. There are some factors in this quarter's revenues that may be non-recurring. Notably, because of the swine flu scare royalties from Tamiflu (sold by Roche) were $113.5 million. When the flu season is over those revenues are likely to dive back towards normal. This also has a heavy effect on net income and earnings per share because royalties don't entail costs. The drugs that Gilead does sell are expensive to manufacturer.

But I think the main reason investors shy away from Gilead is that its focus is on anti-viral drugs, particularly HIV (AIDS) drugs.

There is every reason to expect that HIV drugs will continue to be a rapidly growing global market, and medical concensus is that Gilead's Atripla is the best drug available.

In addition Gilead makes drugs for Hepatitis and is moving into the cardiovascular field, where its Ranexa for chronic angina already racked up $49 million in revenues for the quarter.

Normally, I would expect a company like Gilead to have a price-to-earnings ratio of at least 25 to 1; in a bull market more like 50 to 1. According to the Nasdaq web site (which uses non-GAAP measures), today Gilead's P/E ratio (trailing) is 17.39 and forward looking P/E is 15.6.

It may not matter, in the long run, that some investors see Gilead as a yucky HIV stock. Gilead is generating cash. Part of it gets used for acquiring companies or rights to therapies. But management announced yesterday that $1 billion will be used for share buy backs.

What I would like to see, instead of or in addition to share buy backs, is dividends. The company is large enough and stable enough to pay dividends, which are the gold standard of investing. You can't argue much with dividends.

As with any company, there are risks in buying Gilead Sciences stock, notably competition to introduce new therapies that may drive down the value of old therapies, and the expiration of patent rights.

So keep diversified!

Sunday, October 18, 2009


AMD announced its third quarter 2009 results and fourth quarter guidance at its analyst conference on Thursday, October 15, 2009. On a GAAP basis, AMD lost $128 million in the third quarter. While that improves on a $330 million loss in Q2, and on $134 million loss in the year-earlier quarter when revenues were higher, no one could claim it is a good number for stockholders.

On the other hand AMD announced $214 million adjusted EBITDA. That is Earnings before Interest, Taxes, Depreciation, and Amortization.

I know investors who keep a very close eye on EBITDA and prefer it as a measure to GAAP or even non-GAAP net income. A better way to look at it is it is a real number, and it has meaning if you understand it and its relation to the current stock price and future expectations.

In AMD's case, they announced that all non-GAAP measures (EBITDA is not a GAAP measure) reported are for the AMD Product Company. This is the main part of AMD that designs and sells microprocessors, graphics processors, and other semiconductor parts. The other part of the company own the fabs, the factories that make those parts, which has been largely spun off. AMD still owns part of that, which is now called GLOBALFOUNDRIES. At present GLOBALFOUNDRIES has only one customer, AMD, but it is talks to expand its client list.

The AMD Product Company, if it were a separate entity, would have been profitable, barely, on a non-GAAP basis, with net income of $2 million. GAAP, they showed a loss, because non-GAAP net income excludes certain one-time or non-cash expenses (and sometimes income).

The biggest single difference between EBITDA and non-GAAP earnings is interest, in this case costing $110 million. The rest is depreciation and amortization of $96 million, and a mixture of smaller items.

Depreciation and amortization refer to cash that was already spent in the past, usually on capital equipment or acquisitions, that is written off gradually as an expense due to IRS rules.

Interest, however, is a real expense, and in AMD's case is caused by over $5 billion it owes from acquiring ATI. The ATI purchase is beginning to pay off with traction in graphics and the planned introduction in 2010 of combined microprocessor-graphics chips, but the money owed and the interest is quite real. The interest payments won't go away until the principle is paid down, and it can't be paid down without cash profits.

Knock $110 in interest off the $214 EBITDA, and you have $104 million in what you could argue was some kind of profits for the quarter.

Q3 is usually a strong season for AMD, compared to Q1s and Q2s. But the economy should recover in 2010. If Intel does not start another price war — not likely given that they are under a great deal of scrutiny for their illegal and unethical past behavior — it is not unreasonable to project $104 million out another three quarters.

With a big rounding that is $400 million a year in earnings of a sort. A moderately bullish analyst might argue that a market capitalization of $8 billion is justified by those earnings. To get to an $8 billion market cap, the price of AMD's stock would need to hit $11.50 per share.

That sounds very bullish, and given the competition, it might be. But it might also be the case that in 2010 AMD is going to take a lot of market share from both Intel and NVIDIA, and it might even be market share with good margins. In which case this little calculation exercise will seem conservative in retrospect.

In conclusion, both the risks and opportunities for AMD investors are great. It is not a stock for the faint of heart.

So keep diversified!

See also AMD: The Dream Renewed [May 18, 2009] in which I describe the situation based on the AMD v. Intel lawsuit. And of course my AMD analyst conference summary for October 15, 2009

Disclaimer: I own some AMD stock.

Monday, October 12, 2009

Onyx Pharmaceuticals Acquiring Proteolix

Today Onyx Pharmaceuticals (ONXX) announced it is buying Proteolix in a structured deal that includes a $276 million cash payment (at closing) and potentially $575 million in payments based on clinical developments and regulatory approvals. It is a pretty sweet deal for both biotechnology companies.

Onyx is acquiring a great deal of risk in that Carfilzomib may not do well enough in Phase III trials to get regulatory approval for marketing. But Onyx is acquiring even more opportunity since if Carfilzomib is as successful as the Phase II trials indicate, the revenue stream should eventually pay for the deal many times over. On the whole Onyx is reducing its risk by acquiring a late-stage drug development company with a specialty adjacent to, but well-differentiated from, Onyx's own blockbuster Nexavar for kidney and liver cancers.

Carfilzomib is a pretty good bet. It is a proteasome inhibitor. A healthy person would not want to take proteasome inhibitors, since proteasomes are a key element of cells that break up and recycle damaged and over-abundant proteins. When proteasomes don't do their jobs, damaged proteins can build up in a cell, causing disease including cell death. However, cancer cells tend to be over-dependent on proteasomes because they have acquired a variety of mutations that create damaged proteins (which is how they became cancer cells). So a proteasome inhibitor can kill cancer cells without causing too much damage to healthy cells, particularly if they are somehow selectively targeted at cancer cells. There is already an approved proteasome inhibitor, Velcade. Carfilzomib represents a new generation inhibitor designed to be more selective than Velcade.

Phase II studies have shown Carfilzomib to be compellingly effective for multiple myeloma (MM), which is a type of hematological malignancy.

However, investors should be aware that the good results in the MM were for a trial involving only 46 patients. There are currently five ongoing Phase I or II trials; one has 155 patients and should be a far more compelling indicator if the results are statistically significant.

In theory Carfilzomib should work with cancers other than MM. This is a good example of how drug development works: you want to pick a roadmap that will get a drug its initial approval from the FDA based on its safety and efficacy. If that is achieved, then you can go back and try to expand the label for the drug to other indications. This is what Onyx has already succeeded in doing with Nexavar, which began as a kidney (renal) cancer drug, has been expanded to liver cancer, and looks like it may eventually be extended to breast cancer as well. As with carfilzomib, new drugs are typically brought in as second line therapies when established therapies have failed. If they can show better safety and efficacy than the standard of care, they may eventually be approved as a first line therapy.

The earliest we might see an FDA approval for Carfilzomib would be 2011. So in the meantime Onyx's expenses will go up. This acquisition is a play for long-term value, which fits into Onyx's past style.

In 2010 Onyx, in partnership with Bayer, expects Nexavar revenues to exceed $1 billion for the first time. Onyx splits expenses, and profits, evenly with Bayer. For the second quarter of 2009 global revenues were $201 million. Onyx ended up with GAAP net income of $9.4 million and non-GAAP net income of $15.3 million. Net income should grow much faster than revenues even with the increased expenses from the Proteolix acquisition. For details of Onyx's second quarter results, see my Onyx Q2 2009 analyst conference summary.

In summary, the Proteolix acquisition is a good bet, but involves significant risks. Onyx is not yet a stock for investors looking for safety. It does have a great deal of long-range appreciation potential.

So keep diversified!

Thursday, October 8, 2009

I Buy Petsmart (PETM)

Today I bought some Petsmart stock (PETM). This is well outside my fields of expertise, technology and biotechnology. It is the only stock I own outside these fields. But don't take this as a recommendation. I am looking for some diversification and I owned Petsmart in the past, so I did not need to to a lot of research to get up to speed on the company. I am not going to post analyst conference summaries on the stock to my web site, as I do with the technology companies I own or follow.

I originally bought Petsmart on August 5, 2005 at $25.76 per share. I sold it March 21, 2007, for $31.87 per share. Today I bought share for $22.31 per share. Petsmart currently pays a dividend of $0.10 per quarter or $0.40 per year. That works out to a 1.8% dividend at my buy price. According to NASDAQ, it has a trailing P/E ratio of 14.1, or earnings of 7% at my buy price.

Petsmart is a well-run company that has done pretty nicely during the recession compared to other retailers. Also, my wife and I got a puppy, Hugo, last year and I have watched how much of our normally tight-fisted household budget goes to pamper this pet.

The main risks I see for Petsmart are not unusual. There is competition in the pet supplies space, as in every other retail space. There is the danger of a double-dip recession. Also, Petsmart management already gave guidance for Q3 that is not fantastic.

But the main probability sequence is a retail sales recovery in 2010, so I expect to see a gradual upward trend in PETM revenues and then net income; hopefully even in dividends.

Keep diversified!

Wednesday, September 30, 2009

Onyx Pharmaceuticals Breast Cancer Trial Results

Onyx Pharmaceuticals (ONXX) held an analyst meeting this morning to discuss the results from one of its clinical trials for Nexavar (sorafenib) for breast cancer. It also issued a press release on the results of a separate trial for the same indication, but with a different simultaneous chemotherapy. All together these two Phase II trials indicate that Onyx should design and initiate Phase III studies for this indication. If Phase III results are positive, then it would be likely that the FDA would approve Nexavar in combintion with chemotherapy for HER-2 negative breast cancer. Investors (and cancer patients) should keep in mind that 2011 would be an early date for this event.

Onyx is not exactly the darling of the investment community right now, and several analysts asked questions that have been circulating about the validity of the study results.

In the conference and the September 23, 2009 Nexavar breast cancer press release, the study methods were explained in detail. Patients had HER-2 negative breast cancer that was locally advanced or metastatic. The study was double-blind and had 229 patients. All patients received capecitabine, a common chemotherapy agent for breast cancer, especially in Europe. Half reveived Nexavar and half a placebo.

Those treated in the Nexavar arm had progression-free survival (PFS) of 6.4 months, compared to 4.1 months in the chemotherapy-alone arm.

That is an extremely good result in the world of breast cancer. Jose Baselga, M.D., who spoke at the conference and was the principle investigator for the study, reported that a colleague told him the results were comparable to the early results for Herceptin (a Genentech drug) for HER-2 positive breast cancer. About one-fourth of malignant breast cancers are HER-2 positive.

Chemotherapy is notably rough on patients, so toxicity of added therapies is always a big concern. The main additional side effect from Nexavar was hand-foot rash. These rashes could be serious, but were managed by gradually reducing dosages of the two compounds in the patients affected. One analyst asked if there could have been investigator bias because patients with the severe rash could be assumed to be on Nexavar. Doctor Baselga disputed that, pointing out that the rash affected those getting capecitabine only, but to a lesser extent. In a Phase III trial additional precautions could be taken to eliminate this issue.

The press release today for Nexavar in combination with Paclitaxel for advanced breast cancer was vague, but that is because the industry practice is to have detailed results presented at professional medical conferences. The key result was that the Nexavar patients "demonstrated a positive trend towards improvement of progression-free survival in the treatment group." This may turn out to not be sufficient to warrant a Phase III trial with this combination, but even so lends support to Nexavar's effectiveness for breast cancers.

So why did Onyx stock take a dive today? Probably two different issues. One is that Phase III trials are expensive and will probably eat into Onyx's not particularly robust profits in 2010 and 2011. Nexavar is already generating significant revenue for Onyx's partner Bayer: in the latest quarter global sales were $200 million, but Onyx reported GAAP net income of only $9.4 million ($15.3 million non-GAAP). This is largely due to expenses for ongoing trials for Nexavar for kidney (renal) and liver cancer. Other trials are planned or under way for lung and other coancers. Nexavar is still being rolled-out globally, which is an expensive process since drugs must be approved for sale (and for reimbursement) on a nation-by-nation basis.

But the big clunker is the plan to make a major acquisition. Onyx does not want to be dependent on a single therapy, Nexaver, no matter how broadly it might be applied in oncology. But spending a large sum of cash on a promissing, but not-yet-approved, therapy is always a big gamble.

I own Onyx stock, but have spread my risk over many therapies by holding a number of biotechnology stocks. I think Nexavar revenues, and Onyx net income, are going to improve in 2010, from liver and kidney cancer.

Onyx won't buy a clunker on purpose, so I don't think there should be any deep discounting because of an acquisition that has not yet been decided upon. But Onyx is definately a long-term play. It may be cheap now, but the big payoffs won't be until 2011 or later, when the global rollout for liver cancer is complete and we have more definitive data on Nexavar's benefit for other kinds of cancers.

Keep diversified!

See also:
my August 4, 2009 Onyx Analyst Conference Summary
Onyx Pharmaceuticals web site

Sunday, September 20, 2009

Mixed Software Report: Adobe and Oracle

Adobe and Oracle, two of the larger software companies, reported quarter results this week. Adobe (ADBE) was the weaker of the two, with revenue for its quarter ending August 28, 2009 (3rd fiscal quarter 2009) at $697.5 million, down 21% from $887.3 million year-earlier.

Oracle (ORCL), in contrast had revenues of $5.05 billion, down only 5% from $5.33 billion year-earlier.

The two companies are not, in the main, competitors. Adobe sells applications that are used for content creation (print, graphics, and video), and dominates that field. Oracle sells its database applications and related business management software. It competes mainly with IBM, Microsoft, and SAP, mostly successfully.

Adobe's slow sales mainly reflect the economy, not a loss of market share to competitors. Oracle has certainly gained market share this last year, allowing it to compensate for the slowed economy.

Both companies are involved with big acquisitions, which are always a danger for shareholders, but both have been successful with acquisitions in the past. Adobe is aquiring Omniture, a web analytics company. Adobe wants to build web analytics into its web products, and Omniture is a profitable business in its own right.

Oracle, in case you had not heard, is acquiring Sun Microsystems. It may not be able to keep all of Sun because of regulatory issues. A lot of people are afraid it will kill MySQL, the main open-source competitor to proprietory database applicatins. My SQL was bought by Sun not that long ago. The thing about acquiring Sun is that it has been years since Sun has made a profit. Sun, like IBM, is both a hardware and software company. Oracle appears to be wanting to add more hardware to its lineup. Hardware has low profit margins, but if you sell the hardware, you can usually sell software with it.

You can find out more at my Oracle Analyst Conference Summary for September 16, 2009 and my Adobe Analyst Conference Summary for September 15, 2009.

This week, a smaller but still-important software company reports: Red Hat (RHT) on Wednesday, September 23. You can visit my Red Hat Analyst Conference Summary page and bookmark it. I usually post my summaries by the end of the day the conferences occur, unless I have too much other work.

I don't own Oracle or Adobe stock at this time, and I sold my Red Hat stock recently.

Keep diversified!

Monday, September 14, 2009

To The Federal Reserve: Start Raising Interest Rates

The Federal Reserve should have set its "federal funds" rate at 0.25% at its last meeting. Unless there is a marked reversal in the economy, it should raise the rate to 1% in steps.

Confidence in the Federal Reserve is near zero at this point. We have had two major asset bubbles in less than a decade. While there were other reasons for the bubbles, the main reason the bubbles grew to catastrophic proportions was the failure of the Federal Reserve to raise rates quickly in response to the bubbles. True, there should have been better oversight of the mortgage industry and the derivatives based on it. But when an economy as a whole inflates unreasonably, it is the money supply and interest rates that need to be controlled.

The Board of Governors of the Federal Reserve current policy is to "maintain the target range for the federal funds rate at 0 to 1/4 percent." [See August 12, 2009 Federal Reserve meeting release]

One of the causes of the crash of 2008 was inadequate consumer savings. Because most consumers had little of no savings, when credit was reduced they had little or no ability to keep consuming.

Since the Fed lowered interest rates to deal with the crash it should have prevented, those who did save by putting deposits in CDs and saving accounts have been severly punished. True, they may be happy that they were not invested in stocks or speculating in real estate, but as time passes the punishment becomes more real. It must be particularly gauling to get a notice that you credit card interest rate has been raised to over 20% from the same bank at the same time your CD renewal rate is lowered to 0.5%.

There is something obviously corrupt, and diverging from free market pricing doctrines, when the Fed is lending to banks (at the discount rate) without charging interest, and the banks are turning around and charging over 20% interest to the citizens of the United State.

But if you can, forget about justice for a moment. Consider the economic implications of the Fed's current policy. Money costs nothing to those borrowing directly from the Fed. What are the chances that free money will be allocated in an economically efficient manner? Zero, the same as the interest rate.

The biggest problem, however, is that the Fed is signaling that it does not care about inflation. With global supplies of oil, grain, and other basic commodities likely to tighten quickly once the global economy starts expanding, the danger of inflation from commodities alone is high. In addition, the Federal deficit and debt are huge indicators of potential inflation.

It is unlikely that a Fed funds rate of 1% would derail a recovery, even if such a rate had been announced in August. Putting 1% gradually into place is no danger at all. The danger is that the Fed will, yet again, get behind the curve and then be forced to overreact. The even greater danger is that the Fed will get behind the curve and then fail to ever catch up without causing a crash, as happened in 1999 and 2007.

Even if the economic recover is gradual, there is no reason to have rates below 3% by the end of 2010. High interest rates reward savings. That is not just putting money in a savings account. That is thrift, doing things efficiently, doing without waste or luxury. High interest rates also punish borrowing, which is associated with economic inefficiency and waste.

You can let the Federal Reserve know what you think at Federal Reserve Feedback.

Tuesday, September 8, 2009

I Sell Red Hat (RHT)

Today I sold all of my Red Hat (RHT) stock at $24.51 per share. I bought about half at $17.91 per share on January 21, 2008 and half at $10.86 on November 14, 2008.

This is in no way a reflection of lost optimism about Red Hat the company. I think they will continue to gain share in the server operating system and middleware markets. They have a great product (Linux Enterprise Edition) and serve their customers well.

Nevertheless, I do not like to bet on market psychology or price momentum. By the numbers Red Hat's stock price has gotten ahead of itself, especially compared to other technology stocks that have not run up as much. Last quarter revenues (not profits) were $175 million. So at a flat run rate 2009 revenues will be $700 million. Yet the market capitalization for the stock is $4.6 billion. There is a lot of optimism built into that market cap number. My guess is that in 2 years Red Hat will easily justify that number, but today I would rather have the cash.

I am going to continue to do analyst conference summaries for Red Hat. If the price dips, or if revenues and profits accelerate faster than I am assuming, I could buy back in. I watched Red Hat a long time before buying in; it is one of my favorite stock stories.

The next Red Hat results and analyst conference is scheduled for September 23.

See also Red Hat's site.

And keep diversified!

Thursday, September 3, 2009

Applied Materials Under the Hood

Applied Materials makes capital equipment, which is equipment used to manufacturer further equipment or goods. In Applied Materials' case it manufactures the machines used to make semiconductors and related electronic equipment. It has four major segments: semiconductor; display; solar; and services.

Capital equipment can be a bad place to be in a down cycle. With demand slack, manufacturers don't need to expand their capacity. Even after the macroeconomic cycle has hit bottom it may take months or years for capacity to become constrained enough to force businesses to make significant investments in new capital equipment.

Each type of capital equipment, however, has its own quirks. The main quirk to be aware of in the semiconductor industry is that the expansion of capabilities of logic and memory chips is dependent on ever-shriking circuit elements. In the industry the vocabulary is in "process technologies" measured in nanometers (nm). For instance, not that long ago the cutting edge was 90 nm; today it is 45 nm; 33 nm is expected shortly.

So while the 2008-2009 recession left manufacturers with plenty of capacity, much of it is now the wrong capacity. For a specific NAND (Flash) memory chip, for instance, the oldest manufacturing capacity may no longer cost effective because the prices for the chips have dropped so dramatically. To keep up to pace, smaller process technologies must be used.

While semiconductor making equipment sales dropped sharply for AMAT during the recession, they did not drop to zero. Part of this was because orders had been made long in advance. Partly it was because some confident, well-funded manuacturers continued to buy the newest equipment in order to be set to have better profit margins than competitors.

When will the need for new equipment compensate for the decreased overall end demand? It has not happened yet. For Q2, semiconductor segment revenue ramped from Q1 to $498 million, but was down 34% from $756 million in Q2 2008, which itself was a soft quarter. Management said orders picked up significantly in the June.

The most likely scenario is that 2010 will be a good year for Applied Materials. Between the ongoing shift to smaller process technologies and the shift in computer memory to DDR3, a lot of new equipment is going to be required. Whether the ramp up will be strong in the second half of 2009, however, is an open question.

Applied Materials has also invested heavily to develop technologies for manufacturing solar cells. Several solar cell factories are now operating that use Applied equipment. Financing restraints have cut back planned equipment purchases, but this is likely to be a temporary effect. When the global economy revives and oil prices start heading up again, there will be another rush to solar. This time Applied Materials will be ready with perfected manufacturing processes.

In display, which is flat panel displays, demand in the China market is breathing life back into the market. There was plentiful capacity in mid 2008, so most manufacturers paused their equipment purchases. Now, while prices are still low, unit sales globally have ramped to the point that factories are nearing their capacity constraints. So expect new equipment orders, especially in 2010.

Applied Materials did a pretty good job cutting back on expenses during the difficult times. As a result, in Q2 GAAP its GAAP loss was $55 million, but cash flow from operations was $194 million.

Applied Materials is predicting to at least break even on a GAAP basis in Q3.

The usual business risks from competition and shifting demand patterns remain present.

So keep diversified!

Applied Materials main page

Applied Materials Investor Relations page

Openicon Applied Materials main page

Friday, August 28, 2009

Marvell Technology (MRVL) Under the Hood

About half of Marvell Technology Group (MRVL) revenue comes from its disk drive segment. It does not make hard drives; it makes the chips that enable the drives read and write data and communicate with the rest of the computer. This was Marvell's first business and it now dominates that market.

Like most technology companies, Marvell had a rocky last half of 2008 and first half of 2009. Even after a 23% sequential revenue increase in its latest quarter (which ended August 2, 2009; second quarter fiscal 2009) to $640.6 million, its revenue was down 24% from the year-earlier quarter. On the other hand, Q2 2008 had been a blockbuster quarter, with Marvell proving that its investments in new technologies could pay off.

While Marvell may yet expand its market share in the hard disk market, and that market may expand as nations like India and China continue to expand their technology sectors, to understand (or at least guess at) Marvell's future revenue, profits, and stock value you must look at the other 50% of the company. This revenue already was approximately $320 million in the latest quarter, yet many of its products are just beginning to produce revenue or are still in development.

The networking end market accounted for about 20% of revenue in the most recent quarter. This segment includes the chips that go into network switches and routers. This is a very big market, and highly competitive, but Marvell has plenty of room to grow its market share.

Mobile and wireless networking is also an important end market. Here the combined analog and digitial expertise of Marvell, which are now integrated onto single chips, comes into play. One new type of product using Marvell chips takes a 3G signal usually used for cell phones and broadcasts Wi-Fi for local wireless internet connectivity.

Marvell also makes chips to control printers. According to HP printer sales have not been so great this last year, so expect this segment to rebound when people's legacy printers start dying.

Most fascinating are Marvell's application and communication processors (based on Kirkwood and Discovery Innovation). These are designed for the type of high performance users now expect from mobile computing devices and use very low amounts of power. More important, Marvell is able to put these processors on a single chip with one or more of its other technologies. It already has chips that combine Bluetooth and Wi-Fi capabilities. Rather than just sell discrete chips, it works with customers to design whole systems-on-a-chip. Other companies do this, but Marvell is the leader in the field.

Some of this last year's profits have been made by cost-cutting, particularly in Research and Development. But the key to profitability has been the model of integrating functions on a chip for customers particular products. To paraphrase management: We will continue to have above-industry margins as long as we are able to build products that our competitors cannot match.

Marvell has video processing capabilities. It says it has many design wins, but does not announce anything until its customers make their own announcements. You can imagine what might be coming out in 2010: devices with a digital processor, video processor, and either wireless or wired communications capabilities all on a single chip. Which will lower costs for consumers, driving unit sales, while allowing both the OEM and Marvell to maintain high margins.

The usual risks and uncertainties apply in the highly competitive technology field.

See also my August 27, 2009 Marvell analyst conference summary.

And keep diversified!

Marvell site

Openicon Marvell main page

Wednesday, August 19, 2009

Dot Hill Beneath the Surface

Dot Hill makes data storage components, and they have had a rough time the last five years or so. If you just look at the bottom line, it has been a sad story. Dot Hill had (and has) a strong cash balance with no debt, and for years profitability has been just a little over two quarters away.

Yet a lot has changed. If you look under the hood, you can understand why I am not alone in thinking that Dot Hill is likely to start showing profits in Q4 2009 and then really take off in 2010. [Assuming the usual caveat: if the economy does not implode]

At the end of Q2 Dot Hill had $57. 1 million in cash (it has a $0.7 million note payable for a recent acquisition as its only debt). Revenues for the quarter were $54.3 million, barely up from Q1 and down 24% from $71.0 million in Q2 2008.

But expenses have been slashed as well. Part of this expense reduction is a response to the recession, but much of it has to do with Dot Hill's product development cycle. The heavy R&D expenses were in 2007 and 2008. Now much of the R&D expense is devoted to lowering the production costs of the current generation of data storage components.

A few years ago Dot Hill had one major customer for its products: Sun Microsytems. But Sun decided to buy a much larger data storage company, so the writing was on the wall: new products would be developed internally. Dot Hill was relegated to supplying parts for expanding or replacing its old components used by existing Sun customers. And, of course, now Sun has been eaten by Oracle (sound like a Greek myth, doesn't it?).

So Dot Hill used its cash to develop new products for new customers (equipment vendors, as opposed to end customers). Reports are the new products are very good and end customers like them. Dot Hill sells the components to an increasing number of OEMs. Sun represented only 5% of revenues in Q2. A year ago Sun repesented 28% of revenue, and two years ago that was 65%.

HP is now the single largest Dot Hill customers. The new products only became available from HP in March of 2008. In Q2 2009 they represented 51% of revenue. The next largest customer is NetApp, which represented 24% of revenue. All the remaining customers accounted for 20% of revenue.

With sales to Sun unable to drop much further, the ramping HP revenues should cause Hill revenues to ramp in coming quarters.

Dot Hill has hit an economic sweet spot with their new products, which greatly improve storage capacity, efficiency, and power savings at a very attractive price point for end customers.

To a large extent costs of goods sold will ramp along with revenues, as will some operating costs. But right at this moment Dot Hill is running a lean system, so much of the coming revenue increases should increase the bottom line. In Q2 GAAP net income was negative $4.1 million. Non-GAAP net income was negative $3.0 million. But cash flow from operations was positive $3.4 million.

Since cost of goods sold represented 85% of revenues (GAAP), it will take a considerable ramp to get to GAAP profitability. But management believes that as the product lifecyle lengthens cost of goods sold will decrease as a percentage of sales (which is typical for this type of equipment) and there will be savings as production runs scale. Also, Dot Hill (through HP) is starting to sell software to help with storage management, and that has much better gross margins.

As always, things could go wrong with the economy, with clients, or with end-customer demand. But Dot Hill management (and employees) have been through the fire and come out looking pretty good. I believe they are well tempered and able to respond rapidly to changes in technologies and economic conditions.

As always, keep diversified!

More Data:

Dot Hill web site
My summary of the Q2 Dot Hill analyst conference

Saturday, August 15, 2009

Dot Hill, Applied Materials, Dendreon, Microchip and NVIDIA

Soon I should be writing Dissecting the Bull blogs on a regular basis again. The first half of August was an exciting time for the economy and investors, but my head was buried in a project for Microsoft, which I turned in Friday.

I did post several analyst conference summaries. Probably the most interesting is the summary for Dot Hill, which posted huge percentage gains in the week after the conference.
In this post I am just providing links to my most recent conference summaries:

Applied Materials (AMAT) August 11, 2009 analyst conference summary
Dendreon (DNDN) August 11, 2009 analyst conference summary
Dot Hill (HILL) August 10, 2009 analyst conference summary
Microchip (MCHP) August 6, 2009 analyst conference summary
NVIDIA (NVDA) August 6, 2009 analyst conference summary

Wednesday, August 5, 2009

Analyst Conference Summaries for Onyx, Hansen, Akamai, etc.

I have been very busy with projects lately, hence few posts. Much as I would like to take the time to comment on them, all I can do right now is let you know that I have posted summaries of analyst conferences recently for the following companies:

Akamai (AKAM) July 29, 2009
AMD (AMD) July 21, 2009
Biogen Idec (BIIB) July 16, 2009
Celgene (CELG) July 23, 2009
Gilead Sciences (GILD) July 21, 2009
Hansen Medical (HNSN) August 4, 2009
Intuitive Surgical (ISRG) July 22, 2009
Onyx Pharmaceuticals (ONXX) August 4, 2009
TTM Technologies (TTMI) July 29, 2009

Later this week: Cisco, Maxim Integrated Products, NVIDIA, SGI

Thursday, July 9, 2009

I Buy Hansen (HNSN)

I bought my first shares of Hansen Medical (symbol: HNSN) today at $2.76 per share. It is a very risky move. It is not clear that Hansen is at a short-term bottom. I don't expect the stock to go up significantly until it reports an increasing number of sales for its robotic surgical catheter systems. That can't happen until after the September quarter ends, and may not be until well into 2010. On the other hand, I am looking at Hensen as a long term investment, and it is going for a small fraction of its 52 week high of $20.20.

Hansen was supposed to be the new Intuitive Surgical (ISRG). Unfortunately its timing was bad. It was starting to sell significant amounts of its products, which only began selling in 2007. Their surgical Sensei Robotic Systems run $600,000 each. When the economic turmoil hit last fall, hospitals started delaying orders. Revenues peaked at $10.9 million in Q3 2008. They seemed to be stabilizing after Q4 came in at $7.3 million and Q1 2009 came in at $7.1 million.

In April Hansen sold more stock, raising an additional $35 million. Which was necessary since they were burning over $5 million in cash per quarter, and the recession made it impossible to know when they might become profitable.

On July 6, 2009, the Hansen announced disastrous preliminary second quarter revenues of $3.1 to $3.3 million.

Hence the low stock price. Hence my buying.

Today the company's market capitalization is $103 million. In my book that still makes it an expensive stock considering that its net loss even in its best quarter so far, Q3 2008, was $12 million GAAP. True, cash burn is not that bad, much of it is depreciation of startup costs. Still if they repeated Q3 for an entire year, they would have just under $44 million in annual revenue.

So why am I buying the stock?

I like robots. The results from surgeries with the Sensei system are getting really good feedback. I think a lot of hospitals want these systems. I think that when credit becomes available again, most of the system sales that have been delayed will come through.

I also think that India and China, as well as the U.S. and Europe, are going to be big markets for these machines. India and China both need to rapidly improve medical care for their middle and upper classes. They are in a position to skip straight to the most modern technologies.

Of course I could be wrong on any of my guesses about the future. There is also danger from competition; Hansen is not the only company making medical robots these days.

The Sensei robots with their Artisan Control Catheters are mainly used for electrophysiology (EP) at present, but other uses are being developed.

So on the whole what I now have in Hansen Medical is a biotechnology startup company that has only recently begun to ramp sales of its products. Better still, I bought my position when people finally stopped pricing Hansen as if it is the next ISRG.

See also my summaries of analyst conferences for Hansen Medical.

Monday, July 6, 2009

Gilead Second Quarter Outlook

Gilead Sciences is a biotechnology pharaceutical company specializing in anti-viral drugs. More specifically, Gilead is the market leader in HIV therapies.

Gilead will be reporting its results for the second quarter on July 21. They will also have their analyst conference. I'll be posting a summary of the Gilead analyst conference as usual. You might want to bookmark that.

I own about as much Gilead stock as my portfolio model will allow.

Gilead's best selling drugs in Q1 were Truvada and Atripla, which together accounted for the bulk of sales. Truvada sales grew 23 % y/y to $590 million. Atripla sales grew 67% from the year-earlier quarter to $510 million. Given these trends, in 2010 Atripla should be Gilead's leading compound.

Atripla seems to be very effective in combatting the HIV virus, the cause of AIDS. It comes in pill form and can be taken once a day, making it easy for patients to comply with compared to older therapies. It contains three components: tenofovir, emtricitabine, and efaverenz. The efavirenz is provided by Bristol-Myers Squibb.

Atripla is effective because it hits the viruses in three different ways. Tenofovir is a nucleotide analogue reverse transcriptase inhibitor. Emtricitabine is a reverse transcriptase inhibitor that is a nucleoside analog of cytidine, while Efavirenz is a non-nucleoside reverse transcriptase inhibitor. Without reverse transcriptase action, the HIV virus cannot reproduce. Because their are numerous strains of the HIV virus, having three inhibitors decreases the chances that a strain might outflank a particular anti-retroviral.

Q2 revenues are likely to be higher than Q1 revenues. Atripla is still in the process of getting approvals in many nations. As doctors find that the older drugs lose effectiveness in individual patients, they are now likely to switch patients to Atripla.

There is concern that Atripla sales will eventually eat into Truvada sales. But Truvada is Tenofovir with Emtricitabine, two of the Atripla ingredients. So any leveling off by brand name would be misleading. The underlying compound's sales will keep growing. While it seldom makes the news any more, the number of new HIV cases diagnosed both in the U.S. and internationally is not slowing down.

The usual risk factors for pharmaceuticals are present. If someone ever created an effective vaccine, there would be a decline in new cases. An actual cure would make Gilead irrelevant. A better therapy would also cut into sales. None of these appear to be on the horizon at present. New side effects could also cause the drugs to be withdrawn from the market, but these drugs have been massively distributed already, so that is unlikely. Patents, of course, will expire as well.

Gilead's research budget, however, is now around $750 million per year. That is bringing along a pipeline of anti-viral and other drugs that should more than compensate for expiring patents in the long run.

So you would think Gilead would be an expensive stock with a high P/E ratio. But it is not. According to NASDAQ, today's market capitalization ended at $41.5 billion and the trailing P/E ratio is 20.7.

For details on Q1 results, see my Gilead (GILD) Q1 2009 analyst conference summary.

And keep diversified!

Wednesday, June 24, 2009

Dendreon, The Glory and the Dream

A moment ago Dendreon's (DNDN) had a stock price of $24.70 and a market capitalization of $2.85 billion. At this moment Dendreon does not have a product approved for sale by the FDA. I would never buy such a company. Yet I own the stock, which I bought years ago when almost every other biotechnology analyst thought Dendreon's Provenge (sipuleucel-T) therapy would be summarilly rejected by the FDA.

At my Dendreon analyst conferences page you can find all of my past articles about the positives and negatives of DNDN's prospects. Before the latest data came in I recommended it only as a stock for risk-takers who know how to hedge risk. I have not written anything new since the latest data was announced. Good data has lowered the risk while increasing the stock price, which increases potential down side if something goes wrong. So a different class of investors are probably buying it recently.

Here, as implied by the title, I want to look at the best-case scenario, where in a few years investors might wish they had gotten in when the market cap was only in the low billions. In this scenario we go beyond the approval of Provenge for late-state metastatic, androgen-independent prostate cancer by the FDA some time in 2010. I believe approval by the FDA has already been fully-factored into the current price, at least by conservative, rational investors.

Provenge is an immunotherapy. There is no reason to think that its use cannot be extended to any prostate cancer that has antigen presenting cells (APCs) that can be activated with PAP (prostatic acid phosphatase). Or some similar method of stimulating a T cell response against prostate cancer cells, which is what Provenge does.

So while selling Provenge after FDA approval, the short term strategy for Dendreon is most likely to conduct more clinical trials that, if successful, will allow label extensions. Given Provenge's safety profile so far, and its ease-of-use (it requires just 3 infusions), it may become a blockbuster if it proves effective with earlier stages of prostate cancer.

Meanwhile, there is the pipeline Dendreon has already established. This includes Lapuleucel-T for breast, ovarian, and colon cancer. CEA for breast, lung, and colon cancer. And CA-9 for kidney, colon and cervical cancer. All three are immunotherapies, and only Lauleucel-T has started clinical trials. CEA and CA-9 are joined by Trp-p8 in being preclinical (lab/animal testing stage). The later is a small-molecule prostate therapy. I suppose they know a lot about prostate cancer now, and wanted a small-molecule as a hedge against the limitations of immunotherapy.

Developing a pipeline is a very long term process. It will probably take years to get any of the drugs already in the pipeline through FDA approval, and that is assuming the data is good. Figure 5 years for another approval, maybe 3 years under the most accelerated scenario. I know; most investors can't think that long term.

But look at the best case scenario ten years out. Dendreon could, by then, have brought out immunotherapies for all the major cancer types.

And therein lies the glory and the dream. Given the complexity of the human body, the immune system, and cancers, it is highly unlikely that immunotherapy will replace other cancer therapies. But given its safety (if it proves to be safe long-term), there is no reason not to try it on any and every cancer patient.

Just a hint of that scenario breaths life into Dendreon's stock price. We are talking truly big money. Others will accelerate their immunotherapy efforts, but Dendreon has a lead and will be generating revenues from Provenge that can be used to bring new immunotherapies to market.

What Dendreon owns is not just Provenge. It owns, and has protected with patents, a new type of technology. If the technology really works, Dendreon is not just a company. It is an industry in the making.

Keep diversified!

Tuesday, June 9, 2009

The Oil Price Oscillator

Most Americans have noticed gasoline prices have been jacked up for the summer driving season. Those who read the financial pages know there is a glut of oil and gasoline available. If the corporations that set pricing keep prices up, and demand remains low, the glut will still be there in September.

But if there is an economic recovery, either in the U.S. or globally, the current glut will work down to normal levels and then to shortages. Prices will get jacked up further at the pump. And that, in turn, should moderate any economic upswing. It might even bring consumer consumption of everything but gasoline crashing back down.

It is very possible that we are in a period of oil prices being the primary oscillator for the economy. That is, when oil prices are up, the economy will slow, stall, and then decline. Oil prices will then fall by a greater percentage than the economy as a whole. Which only allows the economy to repeat the cycle.

This is a limits-to-growth scenario. It assumes the economy can only grow so much without more oil as an input, because the price of oil determines how much of the economic pie is left for everything else.

Over time, oil prices should become less of a controlling factor. We have already seen some of this. The shift from low mile-per-gallon SUVs to smaller cars and hybrids is just one example of how the shift could take place in the long run.

Some economists and analysts will get out their spread sheets and try to make numeric predictions about exactly how oil and gasoline prices will affect the economy in the short run. When dealing with something as complex as the economy, using a rule of thumb is more honest than pretending you can predict with finer granularity. There are too many other factors affecting the macroeconomy, ranging from how the Federal Reserve sets interest rates to billions of one time decisions by individuals that are small in themselves but in aggregate create macroeconomic trends.

Friday, June 5, 2009

Microchip Looks for Market Share

Microchip (MCHP) specializes in microcontrollers and related semiconductor integrated circuits (ICs). Microcontrollers typically integrate a computer and memory with the ability to output control signals and receive input signals. They are truly ubiquitous in our era. Almost every machine made, from household thermostats to cell phones and automobiles, contains one or more microcontrollers.

There is plenty of competition for microcontroller sales. Because they go into such a large variety of machines, many designs are possible and the market is still fragmented. However, Microchip has the largest market share in the largest market segment, 8-bit microcontrollers. There are also 16-bit and 32-bit microcontrollers, which tend to incorporate more powerful computers (a 16 bit data path is twice as wide as an 8-bit path).

Microchip has thousands of firms that buy its chips and incorporate them into products for end markets like telecommunication, industrial equipment, and consumer items. Because of this, when end market demand is broadly down, there is no way for Microchip to avoid slump in its sales.

If you take a historical view of Microchip, however, you see a corporate culture that drives success. Over time, on the whole, Microchip tends to gain market share. It does this by focusing on customer needs.

So how is Microchip doing right now, and how will the future play out? The results for the fourth quarter of fiscal 2009, or the first calendar quarter of 2009, looked pretty grim at first glance. Revenues of $173.3 million were down 10% from the previous quarter and down 33% from the year-earlier quarter. Net income on a GAAP basis fell to $23 million, down from $73 million in the December quarter and from $77 million in the year-earlier quarter.

One point to notice: even at these low levels of production, Microchip turned a profit. And they continued to pay a remarkably high dividend. Microchip has consistently returned profits to shareholders through dividends. There may be scenarios where they would have to cut the dividend, but cash flow is covering most of the dividend payments even now. They also have a cash balance of $1.4 billion.

They say, and it appears to be true, that they are making money in this market even as most of their competitors are losing money. In a way it might be better for Microchip, in the long run, if the recession is long and deep enough to force some consolidation in microcontrollers.

Microchip will be dependent on an uptick in overall global consumption to start back towards previous record revenues and profits. But in the meantime they are winning plenty of placement in customers new products, as well as bringing out new products themselves. Notable is their touch-sense input business, which has grown through both an acquisition and internal development.

Dismal as the quarter was, the end of the quarter showed something of an uptick. They even cancelled a scheduled shutdown of their Thailand plant to deal with the resumption in demand. A notable source of demand is in the Chinese telecommunications market.

Buy Microchip at the current price, $21.67 per share, and you get a dividend of 6.13%. That is hard to beat.

I own Microchip stock.

Keep diversified!

More data:
My Microchip Analyst Conference Summary page