Applied Materials (AMAT), the semiconductor capital equipment maker, reported better than expected revenue and earnings Thursday for its first quarter fiscal 2012 ending January 30, 2012. Although the stock traded up after-hours on Thursday, by the end of day Friday it closed at $12.99, down $0.22 or 1.7% from the Thursday close.
Last quarter Applied management stated they believed they were past the bottom of the order cycle, but that revenues were not likely to start increasing until the second half of 2012. The lag is because semiconductor equipment is not made until after it is ordered, and customers sometimes place orders well in advance of their required delivery times.
Prior guidance was that Q1 revenue would be down 5% to 15% sequentially. Q1 Revenue were $2.19 billion, up 0.5% sequentially from $2.18 billion. Despite that revenue was down 18.5% from $2.69 billion in the year-earlier quarter.
The difference between guidance and results was mostly because a couple of large foundries (plants where semiconductor chips are manufactured) placed unexpected orders and took delivery faster than expected on Q4 orders. Most of this unexpected bonus was to fabricate mobile application processors, which are the hearts of tablet computers and smartphones. These processors are becoming more complicated, often adding computer cores as well as peripheral functions. This means die sizes become larger, so more dies must be processed, and more equipment lines installed. The number of units of smartphones and tablets sold globally is also expanding rapidly.
Two other Applied Materials segments, display technology and solar, did poorly as expected and are not believed likely to recover much in 2012.
Which brings us back to the question of where we are in the cycle. To some extent that depends on the global economy. It is also sector-specific, as capacity utilization and end demand growth differ for sectors like RAM, Flash memory, application-specific chips and display technology. Growth comes in two forms: more equipment to pump out more units, and new equipment for chips that work with smaller transistors.
In addition to continued strong demand for mobile-specific devices, PC demand is expected to rebound in 2012 as the hard-drive shortage bottleneck disappears. In addition, Windows 8 could be a driver if it releases as expected this Fall.
While we are probably now past the bottom of the order cycle for semiconductor production equipment, the exact nature and extent of the ramp remains to be seen. Guidance for Q2 is for revenues to be up sequentially between 5% and 15%. We are far enough into Q2, and enough shipments were ordered back in Q1 or even Q4, that investors can probably count on that.
Since (at Friday's closing price) Applied pays a dividend of 2.42% ($0.08 per quarter), I see Applied Materials as one of the safest technology stocks to invest in. Earnings in Q1 were $0.09 GAAP, $0.19 non-GAAP, so even in a slow quarter there was plenty of cash generated to cover the dividend. Despite using $4.2 billion to acquire Varian in the quarter, Applied's cash balance ended near $3 billion.
Despite unevenness, we are still in a global economic ramp with billions of consumers set to acquire smartphones in the next 3 years (600 million in China alone). Everyone wants devices that do more with less power, and the only way to get that is with new semiconductor manufacturing capabilities. It does not matter who wins the smartphone race; everyone needs the kind of semiconductor manufacturing solutions Applied Materials (and its competitors) provide.
I am also excited about Applied's acquisition of Varian, but I'll save that for a different article.
For more details about Q1 results, including questions by analysts, see my Applied Materials Q1 2012 Analyst Call summary.
Disclaimer: I have a long position in Applied Materials (AMAT), with a long term view. I will not trade in AMAT for at least 7 days after this article is published.
And keep diversified!
Showing posts with label demand. Show all posts
Showing posts with label demand. Show all posts
Saturday, February 18, 2012
Monday, August 8, 2011
Dendreon Provenge Demand Questioned
The price of Dendreon stock plunged after hours on August 3, 2011 after the company announced that revenues from its new prostate cancer treatment Provenge would be considerably less than expected during the remainder of 2011.
Prior to the release of Q2 results and the Dendreon Q2 2011 analyst conference call the main concern about Dendreon had been its ability to bring Provenge capacity online [See Dendreon Ramps up Provenge Production, July 15, 2011]. Provenge is not a drug. It is a tweaking of the patient's own blood cells to generate an immune reaction to prostate cancer cells.
Dendreon management went over the situation with analysts both in their presentation and in the question and answer session. Clearly analysts were suspicious of Dendreon's explanation for the situation.
The issue (per management) was reimbursement. There had been earlier questions about whether private insurers and Medicare would pay the $90,000 or so Dendreon charges for Provenge. That question was settled by a July 30 government ruling that as long as the prescription was "on label," reimbursement would be made. Note that was after the the second quarter ended. Rather than resolve the issue, that positive development bifurcated to two new ones. One was doctor ignorance of the new situation, the other was cash flow issues.
The claim that doctors who treat prostate cancer remain ignorant of the availability of reimbursement for Provenge strained credulity. Even before the FDA approved the therapy investors money was spent at a mad rate, typically over $100 million a quarter, to prepare to manufacture, sell, and administer Provenge. It is hard to believe that Dendreon's pretty good sized sales force could not dial up a bunch of doctors and say, "Did you hear the good news? Medicare will reimburse for Provenge as long as it is used according to the label." I assume this massive muckup should not take too long to straighten out.
The cash flow problem arises because most doctors (urologists and oncologists, in this case) were not set up to handle a situation that turned out to have novel economics. Dendreon is no more expensive than most high-end cancer therapies. However, the entire process is done in about four weeks. Most chemotherapies and newer drug-based therapies take place over a longer period of time, so the payments are broken up over a period of months.
With Dendreon, the doctor's office has to pay $90,000 to Dendreon in one month, then wait maybe two months for Medicare reimbursement. An oncologist with ten patients meeting the criteria for Provenge (asymptomatic or minimally symptomatic metastatic hormone refractory prostate cancer) would have to front $900,000 to treat all ten patients immediately. So, no surprise with hind site, many decided to treat one or two patients, then wait for reimbursement for them before treating another patient or two.
Of course Dendreon has huge cash resources, so anticipating this problem might have been able to work something out, like giving 60 days credit. Sixty days, however, is enough time to through revenues into the next quarter, causing missed predictions of mounting revenue.
So the real question analysts and investors are asking is whether this is just a delay in the revenue ramp, or whether the cash flow issue is just a cover for less demand than has been assumed in the past.
Some of the demand-is-less than expected scenarios are credible; management says they are not seeing them so far. The main threat is competition. Because of the narrowness of the label, men are only in the Provenge treatment zone for a period of time. After that they progress to symptomatic cancer, and they are off label and ineligible for reimbursement. So if a doctor and patient choose another therapy, even if just for cash flow reasons, even if that therapy fails, then the patient will have progressed beyond the Provenge label.
How will it really work? Assuming the cash flow and reimbursement ignorance issues are resolved, it is a question of who has the better sales force. Provenge has some great selling points, mainly its low toxicity. But it is more complicated to administer. Management talked about making the logistics of it easier for clinics, so they are aware of that issue, too.
My guess is that Provenge will ramp and eventually meet earlier expectations. In the meantime, however, visibility will be poor for investors. Management lost a lot of trust in the recent fiasco. The stock price will stay low until we have a quarter where revenues prove demand.
Key to further growth of Dendreon is extension of the label. There is no scientific reason I know of that Dendreon should not be helpful both earlier and later in the progression of prostate cancer. In theory all men whose disease progresses pass through the current label, but catching them earlier should lead to more good outcomes, and hence give the therapy a lift against any competition. Also, of course, getting approved in Europe and the rest of the globe should lead to a major ramp in revenue.
You can see all of my notes on Dendreon as well as links to other important data at my Dendreon main page.
This is yet another real-world proof that in addition to known risks, their are potential unknown risks, so keep diversified!
See also: Provenge Press Releases
Prior to the release of Q2 results and the Dendreon Q2 2011 analyst conference call the main concern about Dendreon had been its ability to bring Provenge capacity online [See Dendreon Ramps up Provenge Production, July 15, 2011]. Provenge is not a drug. It is a tweaking of the patient's own blood cells to generate an immune reaction to prostate cancer cells.
Dendreon management went over the situation with analysts both in their presentation and in the question and answer session. Clearly analysts were suspicious of Dendreon's explanation for the situation.
The issue (per management) was reimbursement. There had been earlier questions about whether private insurers and Medicare would pay the $90,000 or so Dendreon charges for Provenge. That question was settled by a July 30 government ruling that as long as the prescription was "on label," reimbursement would be made. Note that was after the the second quarter ended. Rather than resolve the issue, that positive development bifurcated to two new ones. One was doctor ignorance of the new situation, the other was cash flow issues.
The claim that doctors who treat prostate cancer remain ignorant of the availability of reimbursement for Provenge strained credulity. Even before the FDA approved the therapy investors money was spent at a mad rate, typically over $100 million a quarter, to prepare to manufacture, sell, and administer Provenge. It is hard to believe that Dendreon's pretty good sized sales force could not dial up a bunch of doctors and say, "Did you hear the good news? Medicare will reimburse for Provenge as long as it is used according to the label." I assume this massive muckup should not take too long to straighten out.
The cash flow problem arises because most doctors (urologists and oncologists, in this case) were not set up to handle a situation that turned out to have novel economics. Dendreon is no more expensive than most high-end cancer therapies. However, the entire process is done in about four weeks. Most chemotherapies and newer drug-based therapies take place over a longer period of time, so the payments are broken up over a period of months.
With Dendreon, the doctor's office has to pay $90,000 to Dendreon in one month, then wait maybe two months for Medicare reimbursement. An oncologist with ten patients meeting the criteria for Provenge (asymptomatic or minimally symptomatic metastatic hormone refractory prostate cancer) would have to front $900,000 to treat all ten patients immediately. So, no surprise with hind site, many decided to treat one or two patients, then wait for reimbursement for them before treating another patient or two.
Of course Dendreon has huge cash resources, so anticipating this problem might have been able to work something out, like giving 60 days credit. Sixty days, however, is enough time to through revenues into the next quarter, causing missed predictions of mounting revenue.
So the real question analysts and investors are asking is whether this is just a delay in the revenue ramp, or whether the cash flow issue is just a cover for less demand than has been assumed in the past.
Some of the demand-is-less than expected scenarios are credible; management says they are not seeing them so far. The main threat is competition. Because of the narrowness of the label, men are only in the Provenge treatment zone for a period of time. After that they progress to symptomatic cancer, and they are off label and ineligible for reimbursement. So if a doctor and patient choose another therapy, even if just for cash flow reasons, even if that therapy fails, then the patient will have progressed beyond the Provenge label.
How will it really work? Assuming the cash flow and reimbursement ignorance issues are resolved, it is a question of who has the better sales force. Provenge has some great selling points, mainly its low toxicity. But it is more complicated to administer. Management talked about making the logistics of it easier for clinics, so they are aware of that issue, too.
My guess is that Provenge will ramp and eventually meet earlier expectations. In the meantime, however, visibility will be poor for investors. Management lost a lot of trust in the recent fiasco. The stock price will stay low until we have a quarter where revenues prove demand.
Key to further growth of Dendreon is extension of the label. There is no scientific reason I know of that Dendreon should not be helpful both earlier and later in the progression of prostate cancer. In theory all men whose disease progresses pass through the current label, but catching them earlier should lead to more good outcomes, and hence give the therapy a lift against any competition. Also, of course, getting approved in Europe and the rest of the globe should lead to a major ramp in revenue.
You can see all of my notes on Dendreon as well as links to other important data at my Dendreon main page.
This is yet another real-world proof that in addition to known risks, their are potential unknown risks, so keep diversified!
See also: Provenge Press Releases
Wednesday, April 8, 2009
Inventory Corrections and Short Memories
My wife's business actually sells widgets. It is a micro-business, not even receiving her full time attention. She has no employees. And she just might be seeing, on a micro scale, the turn around of the American and global economies.
She makes jewelry. Most of what she sells she designed and is made specially for her by foundries. She packages the pieces and sells them wholesale to non-profit groups that use them either as fundraisers or for reward gifts. A good number of retail stores also buy from her. Almost everything she sells wholesales for $4 each. See her jewelry site.
When the faux-Depression panic hit last fall she noticed many of her customers ordered less than they had in the past, or not at all. Worried that she might get stuck with a bunch of inventory, she curtailed orders to her suppliers. We discussed it. I voted for keeping a good inventory because it is a microbusiness; the inventory value is pretty small, so the real risk is not having enough to keep customers happy when they do order. Her vote, the one that counts, was to do minimal reorders. Only reorder when actually out of an item. This can be a problem because is can take 6 weeks to get the foundry to fill an order for more parts.
Here we are in April, and she is complaining that all her money is going to be used to restock her inventory. She has almost lost large orders because of not having enough items in stock.
So now the foundries - she uses an American pewter specialist and an American glass blower - have orders from her. These are small businesses too, so even at her scale, that has an impact. They seem pleased to get the orders.
The economic statistics keepers tell us that business inventories have declined a lot since 2007. The question seeing these aggragate statistics does not answer is: are inventories low or high? Of course some businesses did not cut inventories enough, and may still be still cutting. Others must be finding themselves in the same position as my wife: they were too careful, too cautious. They need to restock.
With unemployment still growing, we can't be sure that we won't need another round of inventory cuts. But there are scattered reports that some of the companies that laid off people early are understaffed. For a while that will mean overtime expenses, but eventually it makes more sense to start hiring again.
I went to the birthday party of a retail store in Gualala (California) last Saturday. It was having a 40% off sale, that day only. The stuff there is what I call luxury items, optional items. Thrifty people don't shop there. I expected a gloomy party where people ate free food and drank free champaign and nothing much sold. Instead there was a line of women snaking through the store. They were clutching items they had been desiring for months. The platters of cheese and cupcakes were almost ignored. The demand is there; people who have not lost their jobs are looking for an excuse to spend.
More than 8% of the workers in America may be unemployed, but senior citizens are mostly just fine. Most followed the advice of conservative financial planners and got out of risky investments as they aged. Their CD's may not pay high interest rates these days, but the money is there to be spent if they want to.
I think American consumers have shown more restraint than they are capable of in the long run. I am all for thrift and restraint. I think you should avoid buying things on credit. But there are still plenty of American families with strong balance sheets, and there are more of them after a year of restraint.
I think we are going to see good consumer demand from March, and growing demand in April and May, taking the unemployment rate into consideration. Retail stores will be among the first to rehire, and in many areas new housing construction looks like it is on the agenda.
We could have avoided this down cycle by being less exuberant in the up cycle, but that is not the American way. We party hard and we crash hard. We are happy to leave it to the Fed and Congress to try to balance things out.
We have short memories. We forgot the tech bubble and jumped into the housing bubble. We'll forget this economic lesson in a few years as well.
Buy low, sell high. It is great for the professional investor, but we know what the masses will do. They sold when they were scared, when the market was low. Then they won't buy back in until they feel they are missing the new party.
She makes jewelry. Most of what she sells she designed and is made specially for her by foundries. She packages the pieces and sells them wholesale to non-profit groups that use them either as fundraisers or for reward gifts. A good number of retail stores also buy from her. Almost everything she sells wholesales for $4 each. See her jewelry site.
When the faux-Depression panic hit last fall she noticed many of her customers ordered less than they had in the past, or not at all. Worried that she might get stuck with a bunch of inventory, she curtailed orders to her suppliers. We discussed it. I voted for keeping a good inventory because it is a microbusiness; the inventory value is pretty small, so the real risk is not having enough to keep customers happy when they do order. Her vote, the one that counts, was to do minimal reorders. Only reorder when actually out of an item. This can be a problem because is can take 6 weeks to get the foundry to fill an order for more parts.
Here we are in April, and she is complaining that all her money is going to be used to restock her inventory. She has almost lost large orders because of not having enough items in stock.
So now the foundries - she uses an American pewter specialist and an American glass blower - have orders from her. These are small businesses too, so even at her scale, that has an impact. They seem pleased to get the orders.
The economic statistics keepers tell us that business inventories have declined a lot since 2007. The question seeing these aggragate statistics does not answer is: are inventories low or high? Of course some businesses did not cut inventories enough, and may still be still cutting. Others must be finding themselves in the same position as my wife: they were too careful, too cautious. They need to restock.
With unemployment still growing, we can't be sure that we won't need another round of inventory cuts. But there are scattered reports that some of the companies that laid off people early are understaffed. For a while that will mean overtime expenses, but eventually it makes more sense to start hiring again.
I went to the birthday party of a retail store in Gualala (California) last Saturday. It was having a 40% off sale, that day only. The stuff there is what I call luxury items, optional items. Thrifty people don't shop there. I expected a gloomy party where people ate free food and drank free champaign and nothing much sold. Instead there was a line of women snaking through the store. They were clutching items they had been desiring for months. The platters of cheese and cupcakes were almost ignored. The demand is there; people who have not lost their jobs are looking for an excuse to spend.
More than 8% of the workers in America may be unemployed, but senior citizens are mostly just fine. Most followed the advice of conservative financial planners and got out of risky investments as they aged. Their CD's may not pay high interest rates these days, but the money is there to be spent if they want to.
I think American consumers have shown more restraint than they are capable of in the long run. I am all for thrift and restraint. I think you should avoid buying things on credit. But there are still plenty of American families with strong balance sheets, and there are more of them after a year of restraint.
I think we are going to see good consumer demand from March, and growing demand in April and May, taking the unemployment rate into consideration. Retail stores will be among the first to rehire, and in many areas new housing construction looks like it is on the agenda.
We could have avoided this down cycle by being less exuberant in the up cycle, but that is not the American way. We party hard and we crash hard. We are happy to leave it to the Fed and Congress to try to balance things out.
We have short memories. We forgot the tech bubble and jumped into the housing bubble. We'll forget this economic lesson in a few years as well.
Buy low, sell high. It is great for the professional investor, but we know what the masses will do. They sold when they were scared, when the market was low. Then they won't buy back in until they feel they are missing the new party.
Thursday, February 8, 2007
Semiconductor Inventories and Demand
I am fascinated by technology, by the businesses that create, manufacture, and sell it, and by the human factors in management. Listening to executives from Atmel, Linear Technology Corporation, Microchip, Maxim, Texas Instruments and Xilinx at their analyst conferences explaining Q4 results, all these factors converge. Q4 2006 was not the best quarter for the semiconductor industry. While most companies had year-to-year improved revenues, most were sequentially down from Q3. Many predicted further deterioration in revenues for Q1 2007. The down trend was widely attributed not to decreased demand, but to reductions of inventories at customers. To some extent seasonality is involved, as when end-products are aimed at consumer holiday buying and had to be produced in Q3 in order to be incorporated into products and shipped back across the Pacific to sell to spendthrift Americans.
So what investors want to know is whether this is the beginning of a downward trend, or just a temporary adjustment of inventories. It is also important to consider how companies are competing and may buck any trend.
Atmel (ATML) was down 5% sequentially and up only 2% year-over-year. They have never really recovered from the 2001 bust, so don't indicate any kind of trend.
Linear Technology Corporation (LLTC) did worse, down 8% sequentially but up 1% from the year-earlier quarter. They expect revenues to fall another 4% to 7% in this March quarter.
Microchip (MCHP) was down 6.3% sequentially, but up 6.9% year-over-year. They are optimistic that Q1 2007 will be the bottom of the cycle and are predicting that revenues will be flat sequentially. [I own MCHP stock]
Maxim (MXIM) escaped relatively unscathed, with revenues down only 1% sequentially but up 11% from Q4 2005. However, they are predicting that Q1 2006 revenues will be down 3% to 6%.
Texas Instruments (TXN) revenue was down 8% sequentially but up 4% from year-earlier.
Xilinx (XLNX) revenue was down 3.5% sequentially, but flat from the year earlier. They guided to flat to down 5% sequentially for Q1.
I think there was some tightening of end-user inventory because of uncertainty over the 2007 economy. Since the 2007 economy looks rosy at the moment, I think that when demand holds up the end users (electronics device makers) will have to start rebuilding inventories. But remember that each company produces chips in multiple categories. Slack or robust cell-phone demand will not impact all companies equally. Defense spending or cutbacks hurt some companies more than others.
When we get Q1 2006 results I'll be looking back to see which executives gave good guidance. Of course unfounded optimism is now suspect: it seems like an attempt to manipulate share prices upward.
So what investors want to know is whether this is the beginning of a downward trend, or just a temporary adjustment of inventories. It is also important to consider how companies are competing and may buck any trend.
Atmel (ATML) was down 5% sequentially and up only 2% year-over-year. They have never really recovered from the 2001 bust, so don't indicate any kind of trend.
Linear Technology Corporation (LLTC) did worse, down 8% sequentially but up 1% from the year-earlier quarter. They expect revenues to fall another 4% to 7% in this March quarter.
Microchip (MCHP) was down 6.3% sequentially, but up 6.9% year-over-year. They are optimistic that Q1 2007 will be the bottom of the cycle and are predicting that revenues will be flat sequentially. [I own MCHP stock]
Maxim (MXIM) escaped relatively unscathed, with revenues down only 1% sequentially but up 11% from Q4 2005. However, they are predicting that Q1 2006 revenues will be down 3% to 6%.
Texas Instruments (TXN) revenue was down 8% sequentially but up 4% from year-earlier.
Xilinx (XLNX) revenue was down 3.5% sequentially, but flat from the year earlier. They guided to flat to down 5% sequentially for Q1.
I think there was some tightening of end-user inventory because of uncertainty over the 2007 economy. Since the 2007 economy looks rosy at the moment, I think that when demand holds up the end users (electronics device makers) will have to start rebuilding inventories. But remember that each company produces chips in multiple categories. Slack or robust cell-phone demand will not impact all companies equally. Defense spending or cutbacks hurt some companies more than others.
When we get Q1 2006 results I'll be looking back to see which executives gave good guidance. Of course unfounded optimism is now suspect: it seems like an attempt to manipulate share prices upward.
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