Saturday, April 17, 2010

Intuitive Surgical Q1 2010 Analyst Conference

Intuitive Surgical (ISRG), the leading maker of medical surgical robots, has not quite made it out of the recession quite yet. While revenue and profit growth were strong for the first quarter (Q1) of 2010, sales in Europe were slow as capital spending at hospitals there turned cautious.

At its Q1 analyst conference on Thursday, April 15, 2010 Intuitive reported revenues of $328.6 million, up 2% sequentially from $323.0 million and up 74% from $188.4 million in the year-earlier quarter.

Net income was $85.3 million, up 10% sequentially from $77.6 million and up over 200% from $28.1 million year-earlier.

At an average of $1.45 million per robotic da Vinci system, you can see why each robot is a major decision for a hospital. I think on the whole Q1 was quite positive since typically the March quarter is a slow one for capital equipment purchases. A total of 104 systems were purchased.

Q2 is another matter. In Q1, 7 systems were sold to Japan, the first to that country. These are really for experimentation since the Japanese have not approved reimbursements yet for robotic surgeries. Intuitive does not expect to sell many more systems to Japan until reimbursements are approved. So if Europe remains slow, Q2 could see a downtick in number of systems sold unless U.S. sales ramp rapidly.

Intuitive is working with surgeons to increase the types of surgeries the robots can be used for. This process should keep sales growing for some time, so they are hiring sales and support personel to keep up with the demand.

For a more detailed look at first quarter results, see my Intuitive Surgical Q1 2010 analyst conference summary.

See also the Intuitive Surgical corporate site.

Friday, April 16, 2010

Paint AMD Black: Profits at Last!

AMD, contrary to expectations, posted a profit in the first quarter of 2010. This is remarkable. The maker of computer processing unit (CPU) and graphics processing unit (GPU) chips was not expected to show a profit until well into 2010, if ever.

In Q4 2009 AMD's rival Intel paid it $1.25 billion to settle (probably true) allegations that Intel had engaged in illegal, monopolistic practices that lowered AMD's sales earlier in the decade. Whether or not AMD was profitable in Q4 is problematic. GAAP (Generally Accepted Accounting Principle) net income (profit) was $1.18 billion. But take away the $1.25 million from Intel, and you have a $70 million loss. On the other hand AMD claimed in had non-GAAP net income of $80 million. But to get that number they had to exclude GlobalFoundries, which is the new company holding the fabrication facilities AMD had formerly owned 100% of. Still, Q4 revenue of $1.65 billion was up an astonishing 42% from Q4 2008.

Q1 2010 had positive net income any way you look at it. Revenue was up 33% from $1.18 billion in the year-earlier quarter. But there were a number of one-time charges and benefits related to spinning off GlobalFoundries that need to be examined by investors. GAAP net income was $257 million. Most of the time companies give non-GAAP numbers because they are higher that GAAP numbers, but in this case AMD owned up that on a comparable non-GAAP basis net income was only $63 million (then again, prior guidance was for negative that figure). See my AMD Q1 2010 Analyst Conference Summary for a more detailed explanation, or the AMD 4/15/2010 earnings release for a number of reconciliation tables between GAAP and non-GAAP numbers.

Because of the cyclical buying patterns of both consumers and enterprise buyers, the first half of the year is typically slower for AMD and Intel than the second half. Even with the global semiconductor industry climbing rapidly out of the recession (or, as I prefer, the Panic of 2008), AMD was expecting to show a loss this quarter. What made the difference?

AMD has introduced some very competitive products lately. In servers, it offers chips with more cores than Intel (although Intel cores allow more threads per core, which helps in some multi-threaded software applications). In notebook computer chips it has been coming from behind, which makes it relatively easy to gain market share. In graphics chips AMD picked up a lot of market share from competitor NVIDIA these last two quarters, and with very good profit margins (there's a manufacturing capacity shortage, so no price war at present).

As we move into 2010 the most probable trajectory is fairly sweet for AMD, but of course competition with NVIDIA and Intel will remain fierce. One way to categorize servers is by number of processors; most low end servers are 1P, while 2P servers are very popular. There has been a historic price premium for 4P and up servers because of the difficulty making that many chips communicate effectively with each other. Now, at least for 4P, AMD has solved that problem. The new 6000 series 2P chips are ready for 4P. At first they will be used mostly for 2P boxes, but the incentive to move to 4P boxes, especially in virtualized server farms, will be significant. A 4P box would have 4 AMD processors with as many as 12 cores per processor, or 48 cores. Each core can easily run as a virtual machine, so for instance for Web server farms, each box would be the equivalent of 48 Web servers. The economies of scale will be quite attractive.

On the other hand, a lot of tech guys just wait for Intel, no matter how slow Intel is. So how much actual market share AMD will pick up while those guys are waiting for Intel is not predictable.

There are other new products being introduced this year, but the next big thing is Fusion, in which chips can act as both CPUs and GPUs. Look to hear more about that this coming fall.

Monday, April 12, 2010

ISRG, AMD analyst conferences Thursday

Intuitive Surgical (ISRG) will hold its analyst conference following the release of its results for the first quarter of 2010 on Thursday, April 15, 2010 at 1:30 PM Pacific Time (4:30 PM Eastern). For my summary of the results and conference, to be posted Thursday evening, bookmark Intuitive Surgical analyst conference summary. You can also access my previous ISRG summaries at my ISRG summaries main page. Although Q1 is usually a seasonally down quarter in the hospital capital equipment market (Intuitive makes surgery robots), I expect a strong showing within that context.

AMD, the rival of Intel in the computer processing chip domain, will hold its analyst conference at 2:00 PM Pacific Time. You can bookmark AMD Q1 2010 analyst conference summary or view past data at AMD analyst conference summaries. Sales of chips for computers is typically way down in Q1 from Q4, but again pent-up demand from 2009 should result in a strong showing within that context. Look for server chip sales and graphics processor sales as leading indicators for 2010 for AMD.

I own AMD stock, but not ISRG.

Sunday, April 4, 2010

Bonds, Danger! Bonds, Danger!

I have touched on this topic before, but this is a good time to repeat my warning.

Bonds are usually thought of as safe. That is the wrong way to think of bonds right now (except for very short term bonds, say less than 2 years).

Bonds are the most dangerous financial investment you can own today. It does not matter whether they are U.S. treasury bonds, corporate bonds, or municipal bonds. The general danger does not lie in possible defaults, though of course individual bond issuers could go bankrupt and default.

Many investors, including individuals whose investments come from 401k and IRA accounts, had little or no experience with bonds prior to the Panic of 2008. Typically, after taking significant losses in the stock market or in real-estate investments, individuals and sometimes even large entities like pension funds wanted some place to park their cash. They were advised to buy bonds. This advice was self-serving by brokers, who could take fees for buying the bonds, but would not get fees if they left the money in the form of cash.

Under normal circumstances bonds play a ballast-like role in investment portfolios. Normally they do not fluctuate in value as much as stocks and produced a decent long-term rate of return that is higher than you would get on a CD of similar term. Returns for a given length of time vary mainly according to the perceived risk of the entity doing the issuing, so the U.S. Government pays the lowest interest, solid corporations a middling interest rate, and weaker entities pay "junk bond" interest rates. Short term rates are usually much lower than long term rates, but the differential is affected by the outlook for inflation.

Underlying interest rates are typically set by the Federal Reserve, but even the Fed cannot fight market forces forever. Right now real short to medium term interest rates on Federal debt don't even cover the loss of principal from the effects of inflation. The Federal Reserve is keeping interest rates artificially low to help revive the economy and to keep the interest on the federal debt a relatively low percentage of the federal budget.

But the danger in bonds is not in the low interest rates they are paying today. It is not even in the fact that people who were 100% in bonds in 2009 lost out on a major stock market rally. And what I am going to point to should not be a problem with balanced portfolios that include appropriate ratios of bonds with stocks or other investments.

But if you are 100% in bonds, you had best get out, or largely out, while you still can, before everyone realizes what is happening.

Bond interest rates are highly likely to rise. And they may rise rapidly once they start rising, regardless of how the Fed tries to fight market forces.

If your broker put you in bonds or bond funds, you might think that higher interest rates is a good thing. After all, you have been getting about 2% interest (maybe 3.5% if you are all in long term bonds) for a couple of years now; that seems more like being a chump than an investor. Surely it is better for bonds to be at say, 6%? Isn't that a pretty nice return on a safe investment, as opposed to chewing your nails about stocks or real estate or commodity prices?

The problem comes when you (or your broker, or bond fund manager) tries to sell your 3% bonds to buy 6% bonds (note how I have made the math easy!). Say both bonds terminate the same year, say 2020. Who wants to buy a bond that is going to make 3% interest for another 20 years when they could buy a new bond at 6%? Only one kind of trader: the kind that will get a deep discount on the bond. Like say a 30% discount. Because for a thousand dollar bond, principal plus (simple) interest at 6% for ten years givens you a total of $1600. Pay a thousand, get $600. But your old bond will pay only $300 interest over the remaining ten years. So to be worth the same amount of money, the buyer would only pay $700 for the bond itself (getting, in the end, $1000 principal and $300 interest for $700; making the same $600). You, who foolishly were in 100% long bonds, suddenly have lost 30% of your life savings just because interest rates have gone up.

And they will go up, unless we are hit by a global Depression that makes the Panic of 2008 look like an ice-cream party. The indebtedness of the Federal government keeps ballooning, and that is, so far, while paying low interest rates. You know those penalty interest rates credit card companies like to charge their most unfortunate, weakest customers? That is the direction we are probably headed in, if taxes are not increased and expenses reduced to quickly balance the budget. The economy is reviving, but that won't increase government tax revenues fast enough to make up for reckless spending and ballooning debt payments.

No one in their right mind should be loaning the United States of America money at under 10% these days, to compensate for the default and inflation risk. Now that you have thought about it, I'm sure that you as a rational individual would not do that. But tens of millions of Americans depend on mutual funds, brokers, and financial advisers to manage their investments, and they are being told to keep their money in federal bond funds. It is bad advice brought to you by the same pack of jackals and fools who brought you the Panic of 2008. It is up to you to stop playing the fool and to warn your friends.

Most publicly traded American corporations are much sounder than the federal government right now, and so should be able to issue bonds at less than the government rates. But when federal bond rates go up, they become comparisons for all bonds. That will likely force corporate bond rates up as well, causing their principal value to weaken. So if you can get out of corporate bonds before the crisis, do it.