Thursday, August 30, 2012

Adept Technology (ADEP) Initial Look

Adept Technology is a Pleasanton, California based maker of robotic machines for materials handling. I was mentioned in a New York Times article recently, which I read because of my interest in robots and artificial intelligence. I decided to take a look at the company as a potential investment. Yesterday Adept (ADEP) released its June quarter (fiscal Q4) results, and I listened to the analyst conference. You can read my notes at: Adept Technology fiscal Q4 2012 notes.

The first thing that individual investors should note is the Adept has a small market capitalization and is not yet profitable. Revenue in the quarter was substantial, however, at $17 million. Net income was negative $360,000, which is within sight of break-even. However bright the future of robotics and Adept might be, it needs to be treated as a risky stock. The stock price ran up after the Times article, and is falling today along with most of the market. Right now it is at $4.30, which would give it a market capitalization of $45.3 million.

I certainly don't consider a young technology company with an annual revenue run rate approaching $70 million to be overpriced when the market cap is $45.3 million and it is running near break-even.

Judging mainly from the conference, Adept makes three basic types of robots, all of which are based on artificial intelligence applied to video, as well as the usual need to manipulate the robots themselves. It mainstay is robots used in the manufacture of hard disk drives.

It has also introduced robots for handling semiconductor wafers, and has a first client for these mobile robots in Singapore.

A third line is designed to rapidly pack agricultural products in plastic clamshell packaging, and there is a California company that is the first customer and proving ground for this product.

It is tempting to plunge in and buy an initial stake of ADEP, but I am going to follow my usual path of being patient and doing more research. There are many robotics companies already, and while there are a lot of applications that could benefit from robots, it is important to understand the competition. Also, I need to read the more recent SEC filings, which I have not done yet.

I already own stock in a medical robotics company, Hansen Medical, and in a manufacturer of microcontrollers used in robotics, Microchip.

I should mention that Adept raised $3 million in the quarter through a new stock issue, and has less than $9 million in cash on hand. In addition to stock dilution through stock-based compensation, there could be a need to raise more cash.

Going forward, I would hope to see better margins on the newer robot lines. If they are valuable to customers, they should be valuable enough to price at a point where there are profit margins for Adept. Otherwise they are just having fun with robots and are not an investment-grade company.

My initial impression of Adept Technologies is very positive overall. At the same time there are a lot of alternatives for my (or your) investment cash. If I do start buying Adept I probably will report that only after the fact. Often I follow stocks for years without ever buying in.

Disclaimer: I have no relationship to ADEP and currently do not own stock. I may buy ADEP at any point without prior notice

See also:

Tuesday, August 28, 2012

Applied Materials Q3: Trend or Dip?

Applied Materials (AMAT), the semiconductor capital equipment maker, reported worse than expected revenue and earnings for fiscal Q3 when it reported on August 15, 2012. Contrast my story about Applied's Q1, where I said results came in better than expected because "a couple of large foundries placed unexpected orders and took delivery faster than expected on Q4 orders. Most of this unexpected bonus was to fabricate mobile application processors, which are the hearts of tablet computers and smartphones."

What are investors to make of such quarterly fluctuations? Is AMAT in trouble, or is was Q3 just a small bump in the road?

Capital equipment of any kind can be very cyclical and sensitive to changes in ultimate product demand. If end-market demand is not increasing factories (in this case foundries) don't need to add more equipment to keep up with demand. In semiconductors this is somewhat mitigated by the constant shrinking of transistor sizes, but that also comes in cycles, with Intel typically doing the first shrink and everyone else catching up later depending on their specific product needs, usually new product introductions.

The numbers tell the overall story of Q3 (which ended July 29). Revenues were $2.34 billion, down 8% sequentially from $2.54 billion and down 17% from $2.79 billion in the year-earlier quarter. GAAP Net income was $218 million, down 25% sequentially from $289 million and down 54% from $476 million year-earlier. GAAP EPS (earnings per share) were $0.17, down 23% sequentially from $0.22 and down 53% from $0.36 year-earlier.

Note that profits were substantial even at this level of revenue. This may not be the very bottom of the current cycle, but it is probably pretty close.

Foundries were cautious ordering in the quarter, prefering to risk not being able to produce enough chips in Q4 if demand is greater than expected. The same seems to be true throughout the semiconductor industry lately, with everyone trying to keep inventories low in case demand in Europe or China sinks further.

Management reported that much of the equipment is being sold to manufacture chips for mobile devices, but as device sales are seasonal, semiconductor fab equipment sales are starting to show more annual seasonality than in the past. The industry is moving to 28 nm based mobile devices, so even without global demand expansion 28 nm capacity has to be added (at 28 nm smartphone makers can get more computing capacity while extending battery life).

Applied Materials is also suffering from its display equipment segment, as display factories have plenty of capacity. However, new technologies will likely be introduced in 2013. Similarly its solar equipment sales were minimal as factories in China are able to meet short term demand for solar cells. Prices have dropped enough that demand should gradually pick up the slack caused by overproduction, despite new U.S. punitive tariffs. In addition, there has been talk of Applied selling its solar division. That makes no sense to me, it would make more sense to at least hold onto it until demand returns, when it would fetch a considerably better price.

One strong point for Applied during demand dips is its services division. Old equipment needs maintenance. Services revenue was $579 million, up 5% in the quarter.

Of course if the global economy melts down even bonds and gold will be worthless, but the most likely scenario for Applied Materials is for stronger growth in late 2012 and into 2013. This will be driven by returning demand for display and solar manufacturing equipment, as well as the more complicated (and expensive) equipment lines needed to manufacturer semiconductor chips and 28 nm and below.

AMAT has a number of competitors, but loss of market share has not been an issue. Applied spent $209 million on research and development in the quarter and has a healthy pipeline of new and future products.

For more details about Q3 results, including questions by analysts, see my Applied Materials Q3 2012 Analyst Call notes.

If you are a long-term investor in Applied Materials you can still do what I do, taking advantage of the mistakes of short-termers. We know revenue of from sales of expensive pieces of capital equipment will be cyclic. In the long run the cycles don't matter to much, only the long-term trend and dividends. On down legs the stock tends to be underpriced, and at least in bull markets on the upward portion of cycles the stock may get overpriced. Buy low, sell high. There are always people doing the opposite who will be happy to trade with you.

AMAT stock ended yesterday at , giving it a market capitalization near $14.3 billion. Its 52 week low was $9.70 on October 4, 2011, and its 52 week high was $13.94 on February 17. It pays $0.09 per quarter in dividends, making its yield today 3.1%.

Disclaimer: I have a long position in Applied Materials (AMAT), with a long term view. I will not trade in AMAT for at least 7 days after this article is published.

See also the Applied Materials web site.

And keep diversified!

Saturday, August 25, 2012

Akamai Price Justified?

Akamai (AKAM) has made and lost investors and speculators vast sums of money over the years, going back to the original Internet bubble of the late 1990s. Yesterday the stock closed at $37.10, giving it a market capitalization near $6.58 billion. It had a trailing Price to Earnings (P/E) ratio just over 35 (per NASDAQ), considerably higher than most technology stocks currently. That indicates either that investors expect substantial profit growth in the future, or that speculators have bought into momentum and are ready to get out quickly if the momentum turns. Or both.

Akamai's core technology accelerates the delivery of Web pages and media. This is critical to e-commerce sites, where people may go elsewhere or fail to make a purchase if a page downloads slowly. It is also crucial to video and audio playing without stuttering. Building on that, Akamai offers its enterprise partners other key Internet cloud technologies, notably security.

Look at the quarter results and analyst conference of July 25 and you will see that Revenue was $331.3 million, up 4% sequentially from $319.4 million and up 20% from $277.0 million year-earlier. But GAAP net income was $44.2 million, down 8% from $47.9 million year-earlier. GAAP EPS (earnings per share) were $0.24, were down 4% from $0.25 year-earlier.

So GAAP profits did not climb y/y the way you would expect a company with a P/E of 35. Akamai reported non-GAAP "normalized net income" of $78 million or $0.43 per share, up 3% sequentially and 23% y/y. EBITDA was $143 million, flat sequentially and up 13% from year-earlier. Cash flow from operations was $150 million. $67 million was spent in the quarter to repurchase stock. Capital expenditures were $56 million.

Clearly Akamai bulls are looking at revenue growth and cash flow growth, rather than GAAP numbers. Akamai has a rather high non-cash stock-based compensation expense, $25.6 million in the quarter, and depreciation and amortization, $50.1 million in the quarter. That accounts for most of the difference between the grim GAAP profit lack of growth and the outstanding non-GAAP growth rates.

Revenues and profits depend primarily on the dynamics between Internet data growth and drops in pricing. According the Akamai, pricing drops are not primarily due to competition, although Akamai has competitors who are forced to compete on price. Rather Akamai drops prices on a regular basis to encourage data growth. In the long run this helps its customers and yet grows Akamai profits. There is no sign that the amount of data sent over the Internet will stall anytime soon as the use of mobile devices and video expand. There is also an ongoing expansion of the customer base to lower-income users around the world.

Guidance for Q3 is for increased income and a slight contraction in non-GAAP EPS. Internet traffic is seasonal, with lows during summers, but a lot of people used the Internet to watch the Olympics. The better guide to Akamai performance is growth over periods of a year or longer.

For most investors AKAM has probably reached the point where the high P/E is getting hard to justify, given the other choices in the market. I originally bought AKAM during a slump when it was clearly undervalued, and because of its volatility I have traded in and out more than I like (I am a buy and hold guy). Given Internet trends, and Akamai's move into security and other cloud services, I think over the longer run Akamai will become considerably more profitable, but there is some P/E height at which I would dump the stock. Then again, if the P/E dropped below 25, I would be a buyer again.

Since I've made a deal out of P/E ratios as buy and sell signals, I should note that you can get different P/Es by looking at GAAP vs. non-GAAP and different time spans. As a check, note the non-GAAP EPS for Q2 was $0.43. A year's EPS at that rate would be $1.72. Divide into $37.10 and you get a P/E of 21.6. Which is a much safer sounding number than NASDAQ's trailing P/E calculation of 35. On the other hand the GAAP current P/E would be $37.10 / 4 x $0.24, or 38.6, which sounds much more pricey. You might want to think deeply about Akamai's reasons for reporting non-GAAP numbers before you trade this stock.

Disclaimer: I am long AKAM and won't trade in it for 5 days after this article is originally published.

Wednesday, August 22, 2012

TTM Technologies Prepares for Future Mobile Device Demand

Almost every electronic device made contains at least one printed circuit board, or PCB. The leading U.S.-based manufacturer of PCBs is TTM Technologies (TTMI). Post the acquisition of a Hong Kong based PCB manufacturer, TTM is able to serve its customers with quick-turnaround, small quantity prototyping in the U.S. and low-cost mass production in China. Its five largest clients by revenue in Q2 were, in alphabetical order, Apple, Cisco, Ericson, Huawei, and IBM.

Revenues were disappointing in Q2 at $327.4 million, up 9% sequentially from $300.5 million but down 11% from $366.1 million in the year-earlier quarter. The y/y drop reflected a slowdown in the telecommunications sector. This was also reflected in Juniper and ZTE dropping out of the top-five customer list, though they remain major customers.

As one of the world's largest manufacturers of PCBs, TTM has trouble escaping fluctuations in global demand. Despite that, the industry is consolidating as smaller players, particularly in the U.S., are unable to make the capital investments necessary to create PCBs with ever-denser component layouts. In particular smartphones and tablet computers are built on PCBs with multiple layers and high-density interconnections (HDI). In 2011 and this year TTM has been investing significant cash in upgrading its Chinese factories to be able to handle more HDI work.

TTM management is expecting a surge in smartphone and tablet production for Q3 and Q4. Exactly how much of a surge depends on end consumer demand, particularly in Europe, the U.S., and China.

Even at Q2 levels of revenue TTM generated profits and cash. Non-GAAP net income was $13.6 million, down sequentially from $18.8 million and down from $32.9 million year-earlier. EPS was $0.17. EBITDA was $42.3 million, and cash flow from operations was $39 million. Capital expenditures in the quarter were $33 million.

Cash and equivalents balance ended at $248.5 million. TTM has $299.9 million net debt, reflecting the cost of acquiring and upgrading the Chinese factories.

During the quarter revenue from Chinese operations was $195.6 million, while U.S. factories generated $132.3 million.

I like TTMI partly because it is an unglamorous yet essential part of the electronics industry. While there is certainly competition in the PCB industry both in the U.S. and globally, TTMI has a strategic advantage thought it leading edge PCB manufacturing capabilities and volume production capabilities. Smartphone turnover at the consumer level is far quicker that most prior electronic devices, guaranteeing demand for HDI PCBS for the foreseeable future. I don't care who the smartphone, e-book reader, or tablet winners are, as long as they get their PCBs from TTMI.

I see TTMI finishing most of its capital buildout this year. In 2013 it should turn into a cash cow, capable of quickly paying down debt and returning cash to shareholders.

TTMI closed today at $10.20, up 1.39%. It has a 52-week high of $13.75 and low of $8.55. The trailing P/E is 15.94.

Disclaimer: I am long TTMI. I will not trade in the stock for 1 week after this is first published.

The usual risks and uncertainties apply, so keep diversified!

Friday, August 17, 2012

Dendreon Provenge Sales Wobbling

Reporting on Q2, Dendreon managed to pull a skunk out of a hat. I said in my last Dendreon column, Dendreon's Boring Q1 Results, that "Failure to gain approval in Europe, or continue to ramp sales up past the $125 million per quarter level, would tank this stock further."

Q2 revenues from Provenge for metastatic non-symptomatic prostate cancer were $80.0 million, down 2% sequentially from $82.0 million, but up 66% from $48.2 million in the year-earlier quarter.

Investors were not appeased by management's plan to close down it New Jersey manufacturing facility and other cost cutting measures.

Shorts and backers of rival prostate cancer therapies have been trashing Provenge for close to a decade now. But from its introduction until Q1, 2012 revenues grew each quarter sequentially. Note that even the poor Q2 results were up 66% from the year-earlier period. Dendreon supporters (including me) understood that since Provenge is complicated to administer, and expensive, it was not likely to ramp as quickly as an oral or even an IV administered therapy.

$80.0 million, at about $0.1 million a pop, means about 800 patients in the quarter. Management offered the theory that sales were poor because individuals in their sales force had been lured away by rivals (not necessarily prostate cancer therapy rivals). They claimed a correlation between areas where there were holes in the sales force and areas where new patients failed to materialize. While that may be true, it also says something about Provenge not yet being a preferred option for many oncologists, urologists, and patients.

On the positive side, more data analysis of Provenge's effectiveness were released during the quarter. It is possible that, as the word gets out that it extend's the average patient's life more than a few weeks, it will become more attractive. Doctors and patients will be more likely to try it during the "window" that the label allows for (you can't prescribe on-label if the cancer is not metastatic and hormone-castration resistant, but once it progresses to being symptomatic, in this case meaning painful, the patient has again also gone off-label).

It is easy to verify that Provenge is now widely available as a therapy. As a test I was easily able to find several qualified providers within a 100 mile radius of my home [try: Provenge provider locator]. There may still be holes in the geographic coverage, but they are not very extensive. Anecdotal evidence that there are men who have lived much longer than expected following Provenge therapy is also easy to find, at least on the Internet. While Provenge is complex to administer, its side-effects are minimal for a cancer therapy.

How much hope is there for a Dendreon stock price recovery at this point? Today Dendreon closed at $$4.94, corresponding to a market capitalization of $761 million. The recent low, following the release of Q2 results, was $4.17, while the 52 week high was $17.04. In the euphoria after FDA approval the stock hit $54.06 in April, 2010.

When the New Jersey facility is closed and the deadweight in Seattle is ushered out, current management expects a break-even run rate of $100 million per quarter, or $400 million per year.

It is anyone's guess whether Dendreon can make it to break even and beyond. Break even means over 1000 patients per quarter, or up over 200 from Q2, or a 25% increase. You would think that would be doable, but if were doable it should have been done in Q2.

What we have, apparently, is an army of rival sales people in the field not only pushing their therapy, but in the process trying to push patients out of the Provenge therapeutic window. The Provenge data looks compelling to me, but apparently it is not so compelling to at least a portion of the oncologists and urologists out there. It may be too bad we have medical decisions effectively made by profit-driven sales pitches, but that is not going to change anytime soon.

On the upside is the possibility of European approval some time in 2013. Given the expense of Provenge therapy, and the state of European economics, even if approved there might be some negotiation over price and another slow ramp. Still, Europe is a big market, and then there is the rest of the globe.

If Q2 turns out to be an anomaly, if Q3 revenues are north of $85 million, then those who dumped Dendreon in the $4 range will look like fools. I like Dendreon at this price, but not enough to actually buy any more until I see a significant uptrend in revenue.

Manage your risk, keep diversified!

Disclaimer: I am long Dendreon. I won't trade DNDN for 1 week following the publication of this article.

See also my Dendreon Q2 2012 analyst call summary

Monday, August 13, 2012

3 NASDAQ 100 Biotechs: Gilead, Celgene, Biogen Idec

When I wrote about Gilead Sciences (GILD), on July 26, 2011, I said "A convergence of factors is driving Gilead profits higher. This trend should accelerate in 2012 and continue through at least 2015." [See Gilead Sciences Readies Pipeline]. Gilead stock that day closed at $42.16. This morning GILD opened at $56.42. While I am a long-term investor, it is encouraging to see these short-term results.

The forward-looking story is now largely about curing Hepatitis C and refreshing Gilead's market-dominating anti-HIV franchise, but first the backward-looking numbers.

In Q2 revenue was $2.41 billion, up 6% sequentially from $2.28 billion and up 13% from $2.14 billion in the year-earlier quarter. GAAP net income was $711.6 million, up 61% sequentially from $442.0 million, but down 5% from $746.2 million in the year-earlier quarter. GAAP earnings per share (EPS) were $0.91, up 60% sequentially from $0.57, but down 2% from $0.93 year-earlier. Eliminating one-time and non-cash items, Non-GAAP EPS was $0.99, up 9% sequentially from $0.91, but down 1% from $1.00 year-earlier.

The y/y EPS showing may make you wonder why the stock is up so much. Bringing the new HIV drugs to the FDA and the hepatitis drugs through clinical trials is adding to expenses. The price of the stock had been beaten down because of fears of expiring patents. The increased revenue promises a healthy dose of future profits since it now appears the HIV franchise will remain strong and hep c revenues may kick in as early as 2014. Recent Phase II hep c trials have been encouraging. The goal is to have a multi-agent, highly effective once-a-day tablet that will completely cure hepatitis C over a reasonably short period of time.

Gilead's P/E Ratio? Just over 17. It's a bargain.

Celgene (CELG) also is generating healthy profits while getting ready to introduce blockbuster therapies over the next few years.

Celgene Q2 revenue was $1.37 billion, up 8% sequentially from $1.27 million and up 16% from $1.18 billion year-earlier. GAAP net income was $367.4 million, down 8% sequentially from $401.5 million but up 32% from $279.2 million year-earlier. GAAP EPS (earnings per share) were $0.82, down 9% sequentially from $0.90, but up 39% from $0.59 year-earlier.

With a 39% y/y growth in GAAP EPS, you might think Celgene would be flying with a higher P/E ratio. Is is just GAAP accounting? No, non-GAAP EPS in Q2 was $1.22, up 13% sequentially from $1.08 and up 37% from $0.89 year-earlier.

Celgene closed a bit down today at $71.85, but a year ago it was selling for under $55. Its P/E Ratio is near 21.

The two new Celgene drugs that could produce revenue in 2013 are Pomalidomide for relapsed and refractory multiple myeloma and Apremilast for psoriatic arthritis and psoriasis. Safety and efficacy look good for both drugs, but there is always a chance that the FDA will disapprove or cause delays by asking for more clinical data.

Biogen Idec has already proven itself to be one of the big winners of late.

Biogen (BIIB) closed today at $144.54. In 2010 you could have bought it in the fifties most of the year. It has a higher P/E Ratio than Celgene or Gilead at just over 26.

So is BIIB more of a product for profit taking? [Disclaimer: I did already take some profits on this one, but it's gone up since then.]

Q2 revenue was $1.421 billion, up 10% sequentially from $1.292 billion and up 17.5% from $1.209 billion in the year-earlier quarter. GAAP net income was $386.8 million, up 28% sequentially from $302.7 million and up 34% from $288.0 million year-earlier. GAAP EPS (earnings per share) were $1.61, up 29% sequentially from $1.25 and up 36% from $1.18 year-earlier.

That alone would seem to justify the P/E, but like Celgene and Gilead, Biogen has a pipeline that could mint money for investors. The first one coming up for an FDA decision is BG-12 (dimethyl fumarate), an oral therapy for multiple sclerosis. The data looks good and a positive FDA decision would mean a commercial launch this year.

While each of these stocks has its risks, as a group they have a large number of profitable drugs and a large number of therapies in their pipelines. Holding all three minimizes risk. They are all in the NASDAQ 100.

Keep Diversified!

Disclaimer: I am a long-term investor in Gilead Sciences, Celgene, and Biogen Idec. I will not trade in the stock for a week from today.

See also:

my Gilead Sciences Q2 2012 analyst call summary

Celgene Q2 2012 analyst call summary

Biogen Idec Q2 2012 analyst call summary