Marvell Technology Group (MRVL) reported results on Thursday, May 23 that were at the high end of prior guidance. You can see my notes on the analyst conference at Marvell analyst conference, fiscal Q1 2014.
The most significant point is that new products that have been a couple of years in development should start ramping revenues in the second half. While no specific guidance was given for Q3 or Q4, the guidance for Q2 was revenue between $770 million and $800 million, which would be a significant sequential increase.
I own stock in Marvell.
Showing posts with label revenues. Show all posts
Showing posts with label revenues. Show all posts
Saturday, May 25, 2013
Wednesday, October 24, 2012
Can Design Wins Save AMD?
AMD got crushed in Q3, following a disappointing Q2. Yet at the Q1 analyst conference AMD execs were optimistic (See AMD Guides to Strong 2012, April 19, 2012).
Right now AMD stock is trading not just near 52-week lows, but near lifetime lows. At $2.07 per share AMD has a market capitalization of $1.5 billion. Is AMD now a matter for bankruptcy courts, where stockholders will get wiped out and even bondholders get pennies on the dollar? Or is there still hope for investors?
I could pick only one cause for optimism at the recent Analyst Call. It is not the restructuring plan, which will cut costs but will also probably cut R&D and sales muscle. It is alleged design wins.
Note that as bad as the quarter was (revenue of $1.27 billion, down 10% sequentially from $1.41 billion and down 25% from $1.69 billion in the year-earlier quarter), AMD is still a large company, with annual revenues of perhaps $5 billion. Its market cap, again, is $1.5 billion. If it could make those revenues profitable its market cap should trend back up towards $5 billion.
So design wins could matter, if they either increase revenues at good margins, or replace poor-margin revenue with good margins. Margins have always been a problem for AMD because rival Intel has always been able to set good margins and leave the dregs for AMD, even when AMD has brought out products that, in certain niches, were superior.
For months rumors have circulated that AMD had won spots in some of the major forthcoming game consoles: Sony, Microsoft Xbox, and Nintendo. Rumors vary: in the most optimistic, AMD wins all three.
All CEO Rory Read would say was that AMD already has confidential high-volume design wins in place. He would not even specify if these were game console wins as opposed to tablets or just Windows 8 notebook computers.
Certainly AMD's combined CPU and GPU chips, or APUs, fit well with any graphics-intensive, low cost system design. The current generation of game consoles is ancient and are expected to be refreshed in 2013.
But as experienced tech investors know, while design wins are a necessity, they are no guarantee of commercial success. Not all products sell. Gaming consoles have to compete against everything from smartphone games to Google TV to HTPCs. We also don't know how well Windows 8 tablets that don't use ARM-based processors will sell. We don't know if Windows 8 will help or hamper computer sales (I like Windows 8 a lot, but then I can be pretty geeky. Disclaimer: I just finished a freelance subscontracting job for Microsoft).
So the good news is that you can buy AMD stock for a song right now, and it will probably survive the year 2013, and might even thrive if the console and tablet manufacturers are not able to bargain margins down too much.
I am keeping AMD to a very small percentage of my portfolio, but opportunistically accumulating more stock. The safe thing to do is to keep away from AMD unless you already own it.
I will also repeat what everyone knows: AMD's IP is worth more than its market capitalization. Korean or Chinese companies would probably be willing to pay at least $3 billion for the graphics division alone, but AMD management thinks it can do better on its own.
Disclaimer: I am long AMD. I won't make any changes for at least a week after this article is published. I do not own Microsoft, Sony, ARM, Intel or Ninendo stock.
See also my AMD Q3 2012 analyst call summary;
www.amd.com
Right now AMD stock is trading not just near 52-week lows, but near lifetime lows. At $2.07 per share AMD has a market capitalization of $1.5 billion. Is AMD now a matter for bankruptcy courts, where stockholders will get wiped out and even bondholders get pennies on the dollar? Or is there still hope for investors?
I could pick only one cause for optimism at the recent Analyst Call. It is not the restructuring plan, which will cut costs but will also probably cut R&D and sales muscle. It is alleged design wins.
Note that as bad as the quarter was (revenue of $1.27 billion, down 10% sequentially from $1.41 billion and down 25% from $1.69 billion in the year-earlier quarter), AMD is still a large company, with annual revenues of perhaps $5 billion. Its market cap, again, is $1.5 billion. If it could make those revenues profitable its market cap should trend back up towards $5 billion.
So design wins could matter, if they either increase revenues at good margins, or replace poor-margin revenue with good margins. Margins have always been a problem for AMD because rival Intel has always been able to set good margins and leave the dregs for AMD, even when AMD has brought out products that, in certain niches, were superior.
For months rumors have circulated that AMD had won spots in some of the major forthcoming game consoles: Sony, Microsoft Xbox, and Nintendo. Rumors vary: in the most optimistic, AMD wins all three.
All CEO Rory Read would say was that AMD already has confidential high-volume design wins in place. He would not even specify if these were game console wins as opposed to tablets or just Windows 8 notebook computers.
Certainly AMD's combined CPU and GPU chips, or APUs, fit well with any graphics-intensive, low cost system design. The current generation of game consoles is ancient and are expected to be refreshed in 2013.
But as experienced tech investors know, while design wins are a necessity, they are no guarantee of commercial success. Not all products sell. Gaming consoles have to compete against everything from smartphone games to Google TV to HTPCs. We also don't know how well Windows 8 tablets that don't use ARM-based processors will sell. We don't know if Windows 8 will help or hamper computer sales (I like Windows 8 a lot, but then I can be pretty geeky. Disclaimer: I just finished a freelance subscontracting job for Microsoft).
So the good news is that you can buy AMD stock for a song right now, and it will probably survive the year 2013, and might even thrive if the console and tablet manufacturers are not able to bargain margins down too much.
I am keeping AMD to a very small percentage of my portfolio, but opportunistically accumulating more stock. The safe thing to do is to keep away from AMD unless you already own it.
I will also repeat what everyone knows: AMD's IP is worth more than its market capitalization. Korean or Chinese companies would probably be willing to pay at least $3 billion for the graphics division alone, but AMD management thinks it can do better on its own.
Disclaimer: I am long AMD. I won't make any changes for at least a week after this article is published. I do not own Microsoft, Sony, ARM, Intel or Ninendo stock.
See also my AMD Q3 2012 analyst call summary;
www.amd.com
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!
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, March 30, 2012
Red Hat Tipping Point?
Red Hat (RHT), in the year 2000, was going to be another Microsoft. Its open source software, would, in a few years, replace the overpriced, proprietary software known as Windows.
Come Wednesday, when Red Hat reported its fiscal Q4 2012 results (for the quarter ending February 29) and held its analyst call, Red Hat GAAP net income came in at $36 million. Up 7.5% from Q4 2010, to be sure, but dwarfed by Microsoft's Q4 GAAP net income of $6.62 billion.
So Red Hat is still not the next Microsoft. Aside from that, the specialist in open source software is doing very well. Fiscal 2012 marked the first time Red Hat, and the first time a primarily open source software company, showed over $1 billion in annual revenue.
Revenue for the quarter was $297.0 million, up 2% sequentially from $290.0 million and up 21% from $244.8 million year-earlier.
GAAP net income was $36.0 million, down 6% sequentially from $38.2 million but up 7.5% from $33.5 million year-earlier. GAAP EPS (diluted earnings per share) were $0.18, down 5% sequentially from $0.19, but up 6% from $0.17 year-earlier. Non-GAAP net income was $57.2 million, for EPS of $0.29.
A 21% annual revenue ramp rate amounts to explosive growth in this slow-growth environment. Red Hat Enterprise Linux (RHEL) substantially reduces the cost of doing business and has proven itself for more than a decade it critical business environments. For enterprise data centers, switching to Red Hat is an easy decision to make. Along with Linux most companies are going to want RHEV for virtualization of servers and JBOSS middleware for applications.
Where Linux has not caught on is the corporate or home desktop. For practical purposes Red Hat no longer tries to compete in that space.
Note that net income and EPS did not ramp as quickly as revenue. Normally that might be a warning sign, but it is likely to reverse itself at a later point. Red Hat bought a storage software company last fall and has devoted a lot of R&D to getting the product ready and certified for sale. They are also in the midst of a rapid international expansion. There is a lag between setting up an office in a new nation and seeing significant revenues.
It is certainly possible that Red Hat has finally reached a tipping point where it will become the standard provider of operating systems for servers in datacenters and the cloud. In that scenario growth could even accelerate in the next few years.
Still, it would seem that Red Hat at its present price is for the boldest of investors. Currently Red Hat's P/E ratio is 80, compared to 12 for Microsoft and 17 for Apple. Keep in mind that the revenue growth rate for 2011 may not be a good predictor of future growth rates.
Disclaimer: I do not hold a position in Red Hat, or any other company mentioned in this article, though I have in the past. I won't trade Red Hat for at least one week after the publication of this article.
For more detail on Q4 results, see my notes on the Red Hat Q4 fiscal 2012 analyst call.
Keep diversified!
Come Wednesday, when Red Hat reported its fiscal Q4 2012 results (for the quarter ending February 29) and held its analyst call, Red Hat GAAP net income came in at $36 million. Up 7.5% from Q4 2010, to be sure, but dwarfed by Microsoft's Q4 GAAP net income of $6.62 billion.
So Red Hat is still not the next Microsoft. Aside from that, the specialist in open source software is doing very well. Fiscal 2012 marked the first time Red Hat, and the first time a primarily open source software company, showed over $1 billion in annual revenue.
Revenue for the quarter was $297.0 million, up 2% sequentially from $290.0 million and up 21% from $244.8 million year-earlier.
GAAP net income was $36.0 million, down 6% sequentially from $38.2 million but up 7.5% from $33.5 million year-earlier. GAAP EPS (diluted earnings per share) were $0.18, down 5% sequentially from $0.19, but up 6% from $0.17 year-earlier. Non-GAAP net income was $57.2 million, for EPS of $0.29.
A 21% annual revenue ramp rate amounts to explosive growth in this slow-growth environment. Red Hat Enterprise Linux (RHEL) substantially reduces the cost of doing business and has proven itself for more than a decade it critical business environments. For enterprise data centers, switching to Red Hat is an easy decision to make. Along with Linux most companies are going to want RHEV for virtualization of servers and JBOSS middleware for applications.
Where Linux has not caught on is the corporate or home desktop. For practical purposes Red Hat no longer tries to compete in that space.
Note that net income and EPS did not ramp as quickly as revenue. Normally that might be a warning sign, but it is likely to reverse itself at a later point. Red Hat bought a storage software company last fall and has devoted a lot of R&D to getting the product ready and certified for sale. They are also in the midst of a rapid international expansion. There is a lag between setting up an office in a new nation and seeing significant revenues.
It is certainly possible that Red Hat has finally reached a tipping point where it will become the standard provider of operating systems for servers in datacenters and the cloud. In that scenario growth could even accelerate in the next few years.
Still, it would seem that Red Hat at its present price is for the boldest of investors. Currently Red Hat's P/E ratio is 80, compared to 12 for Microsoft and 17 for Apple. Keep in mind that the revenue growth rate for 2011 may not be a good predictor of future growth rates.
Disclaimer: I do not hold a position in Red Hat, or any other company mentioned in this article, though I have in the past. I won't trade Red Hat for at least one week after the publication of this article.
For more detail on Q4 results, see my notes on the Red Hat Q4 fiscal 2012 analyst call.
Keep diversified!
Tuesday, March 20, 2012
Adobe Waiting for CS6
Adobe (ADBE) yesterday reported a Q1, 2012 with only a slight increase in revenue over Q1 2011, with a decline in earnings per share (EPS). I use Adobe as a proxy for the computer software industry, but in this case special factors may have contributed to the poor showing, so the industry as a whole may do better in Q1. Adobe's fiscal Q1 2012 ended March 2, 2012, so it is a frontrunner to firms that report on a regular calendar basis (Q1's ending on March 31).
GAAP revenue was $1.045 billion, down 10% sequentially from $1.152 billion but up 2% from $1.027 billion year-earlier. Net income was $185.2 million, up 7% sequentially from $173.7 million but down 21% from $234.6 million year-earlier. Earnings per share (EPS) were $0.37, up 6% sequentially from $0.35 and down 20% from $0.46 year-earlier.
At the analyst conference call management claimed the poor showing was because of customers beginning to anticipate the future release of Creative Suite 6 (CS6). Creative Suite comes in a variety of flavors incorporating a number of Adobe software products such as the well-known Photoshop and Acrobat. Because the web is transitioning to include mobile devices and a new standard, HTML5, the products for web developers (including page layout, photo, animation, and video editing) are also changing rapidly.
Because of cost issues, developers sometimes do not upgrade to each new version. This was particularly true during the recession. If is possible that management is right in believing that the number of changes has become so great that CS6 will be a must-do upgrade even for customers that have CS5.5 or CS5, much less earlier versions.
The problem for web designers is that the design standards of 3 years ago, where they could count on a (well-designed) site appearing the same to viewers no matter which browser or operating system they used. Now every mobile device has a different screen size and many device users prefer apps, using a mobile web browser only as a last resort. What designers have had to do since the iPhone introduction is either write multiple web pages (one for desktop/notebook screens and one for each mobile device) or include programming on a single page that reformats that page for various screen configurations. Plus they
Given the endless complaining I have heard from fellow designers and programmers, I expect CS6 will be a big hit if it actually delivers the ability to design once and deploy, with minimal changes, to an assortment of devices. On the other hand if they think CS6 fails in that regard, they will probably cherry pick and only upgrade the Adobe software that work well for them.
The lower profits on flat revenues is attributable to up front investment in marketing and readying CS6 for deployment.
A number of pundits declared Adobe dead when Apple refused to support Flash animation on iPhones. So far Adobe is coping well with the new environment. It is the nature of IT things to see rapid die-offs and new growth.
Another area Adobe seems to be doing well in is helping its customers with dealing with another complex area, Internet advertising. A well-designed web page that does not generate ad revenue is not a good ROI. In January Adobe closed its acquisition of Efficient Frontier, which should help keep Adobe in the forefront of this area.
Today Adobe closed down $1.35 to $33.16. Its price to earnings ration was 29.5, which is pretty steep even if you buy the back-with-CS6 story. Adobe's lack of faith in its own future is shown by it's failure to pay a dividend. On the other hand it generated $314 million in free cash flow and ended with a cash balance of $2.8 billion.
CS6 is scheduled for release in late Q2, so probably in May. We will get a little bit of revenue feedback when Q2 results are announced in June.
Disclaimer: I don't have a position in Adobe. I do use some Adobe software, and I am long in a variety of technology stocks that might have relationships with Adobe.
GAAP revenue was $1.045 billion, down 10% sequentially from $1.152 billion but up 2% from $1.027 billion year-earlier. Net income was $185.2 million, up 7% sequentially from $173.7 million but down 21% from $234.6 million year-earlier. Earnings per share (EPS) were $0.37, up 6% sequentially from $0.35 and down 20% from $0.46 year-earlier.
At the analyst conference call management claimed the poor showing was because of customers beginning to anticipate the future release of Creative Suite 6 (CS6). Creative Suite comes in a variety of flavors incorporating a number of Adobe software products such as the well-known Photoshop and Acrobat. Because the web is transitioning to include mobile devices and a new standard, HTML5, the products for web developers (including page layout, photo, animation, and video editing) are also changing rapidly.
Because of cost issues, developers sometimes do not upgrade to each new version. This was particularly true during the recession. If is possible that management is right in believing that the number of changes has become so great that CS6 will be a must-do upgrade even for customers that have CS5.5 or CS5, much less earlier versions.
The problem for web designers is that the design standards of 3 years ago, where they could count on a (well-designed) site appearing the same to viewers no matter which browser or operating system they used. Now every mobile device has a different screen size and many device users prefer apps, using a mobile web browser only as a last resort. What designers have had to do since the iPhone introduction is either write multiple web pages (one for desktop/notebook screens and one for each mobile device) or include programming on a single page that reformats that page for various screen configurations. Plus they
Given the endless complaining I have heard from fellow designers and programmers, I expect CS6 will be a big hit if it actually delivers the ability to design once and deploy, with minimal changes, to an assortment of devices. On the other hand if they think CS6 fails in that regard, they will probably cherry pick and only upgrade the Adobe software that work well for them.
The lower profits on flat revenues is attributable to up front investment in marketing and readying CS6 for deployment.
A number of pundits declared Adobe dead when Apple refused to support Flash animation on iPhones. So far Adobe is coping well with the new environment. It is the nature of IT things to see rapid die-offs and new growth.
Another area Adobe seems to be doing well in is helping its customers with dealing with another complex area, Internet advertising. A well-designed web page that does not generate ad revenue is not a good ROI. In January Adobe closed its acquisition of Efficient Frontier, which should help keep Adobe in the forefront of this area.
Today Adobe closed down $1.35 to $33.16. Its price to earnings ration was 29.5, which is pretty steep even if you buy the back-with-CS6 story. Adobe's lack of faith in its own future is shown by it's failure to pay a dividend. On the other hand it generated $314 million in free cash flow and ended with a cash balance of $2.8 billion.
CS6 is scheduled for release in late Q2, so probably in May. We will get a little bit of revenue feedback when Q2 results are announced in June.
Disclaimer: I don't have a position in Adobe. I do use some Adobe software, and I am long in a variety of technology stocks that might have relationships with Adobe.
Thursday, March 15, 2012
Dot Hill Expects New OEM Customers in 2012
Dot Hill (HILL) is up today after reporting a poor fourth quarter 2012 yesterday. Q4 results were in line with revised guidance given in February. Today's stock price upside came from new customer sign-ups that management hopes will provide both higher revenues and better margins in 2012.
Dot hill manufactures data storage arrays for the low-end of the enterprise market, selling to OEMs that typically rebrand the devices. A few years ago Sun was their main customer, but Sun dropped them, leading to a crisis. HP is now their main customer. While they are happy with the HP relationship, which was extended for five years last year, management has been building an impressive list of other customers, reducing reliance on HP.
Revenue in Q4 was $47.0 million, down 2% sequentially from $48.1 million and down 28% from $65.4 million year-earlier. Part of the y/y decline resulted from the purposeful ditching of NetApp as a client because NetApp would not allow Dot Hill workable margins.
HP represented 67.5% of revenue in Q4. In Q1 2011, after NetApp dropped out, HP accounted for 76% of revenue. Partly there was a drop in revenue from HP, but mainly their share shrank because Hill's sales to smaller, Tier 2 OEMs grew 40% y/y.
Q4 revenue was also hurt by the Thailand flooding and resulting shortage of disk drives. Hill did not raise its prices in Q4, but did raise prices in February largely because of the higher prices of disks due to the shortage. They estimated they could have generated another $4 million in revenue in Q4 if not for the disk shortages. Q1 also has seen supply shortages, but drives are generally available except for the highest-capacity, newest technology drives. The disk supply issue should be over by Q3.
Autodesk and Concurrent Computer were cited as OEMs signed in 2011 that are seeing sales ramps. Official announcements of newer customers should be coming out as the year progresses.
Finally, new storage arrays that have mid-level enterprise features should be released in the second half of the year. OEMs are already excited about them, but a significant revenue ramp of the new products is probably a 2013 story.
Earnings were disappointing. GAAP net income was negative $6.6 million, non-GAAP net income was negative $1.6 million, but some of the charges were non-cash. Cash flow from operations was positive by $1.1 million.
On the whole Dot Hill management was upbeat, particularly about the second half of 2012. The hope would be that with no disasters, a reasonably healthy global economy, and the ramping of lines at newer OEM customers, Dot Hill will be able to enter an era of sustained profitability. Given that the company is debt free and holds $46 million in cash, and that its market capitalization today is just $82.6 million, Dot Hill is highly speculative, but has a lot of upside potential if management can execute according to plan.
Disclaimer: I am long Dot Hill, and sometimes actively trade in the stock. I won't make HILL trades for 1 week after publishing this article. I do not have positions in any of the other companies mentioned.
Dot hill manufactures data storage arrays for the low-end of the enterprise market, selling to OEMs that typically rebrand the devices. A few years ago Sun was their main customer, but Sun dropped them, leading to a crisis. HP is now their main customer. While they are happy with the HP relationship, which was extended for five years last year, management has been building an impressive list of other customers, reducing reliance on HP.
Revenue in Q4 was $47.0 million, down 2% sequentially from $48.1 million and down 28% from $65.4 million year-earlier. Part of the y/y decline resulted from the purposeful ditching of NetApp as a client because NetApp would not allow Dot Hill workable margins.
HP represented 67.5% of revenue in Q4. In Q1 2011, after NetApp dropped out, HP accounted for 76% of revenue. Partly there was a drop in revenue from HP, but mainly their share shrank because Hill's sales to smaller, Tier 2 OEMs grew 40% y/y.
Q4 revenue was also hurt by the Thailand flooding and resulting shortage of disk drives. Hill did not raise its prices in Q4, but did raise prices in February largely because of the higher prices of disks due to the shortage. They estimated they could have generated another $4 million in revenue in Q4 if not for the disk shortages. Q1 also has seen supply shortages, but drives are generally available except for the highest-capacity, newest technology drives. The disk supply issue should be over by Q3.
Autodesk and Concurrent Computer were cited as OEMs signed in 2011 that are seeing sales ramps. Official announcements of newer customers should be coming out as the year progresses.
Finally, new storage arrays that have mid-level enterprise features should be released in the second half of the year. OEMs are already excited about them, but a significant revenue ramp of the new products is probably a 2013 story.
Earnings were disappointing. GAAP net income was negative $6.6 million, non-GAAP net income was negative $1.6 million, but some of the charges were non-cash. Cash flow from operations was positive by $1.1 million.
On the whole Dot Hill management was upbeat, particularly about the second half of 2012. The hope would be that with no disasters, a reasonably healthy global economy, and the ramping of lines at newer OEM customers, Dot Hill will be able to enter an era of sustained profitability. Given that the company is debt free and holds $46 million in cash, and that its market capitalization today is just $82.6 million, Dot Hill is highly speculative, but has a lot of upside potential if management can execute according to plan.
Disclaimer: I am long Dot Hill, and sometimes actively trade in the stock. I won't make HILL trades for 1 week after publishing this article. I do not have positions in any of the other companies mentioned.
Friday, February 24, 2012
Hansen Medical Q4 up on Vascular Surgery Robot Introduction
Hansen Medical Inc. (HNSN) manufactures catheter based medical robots. It is effectively still a startup company, since it typically loses money each quarter. For several years it has marketed its Sensei robot for electrophysiology procedures, which measures electrical activity inside the heart. Meanwhile it has developed its robotic catheter technology for use in vascular (blood vessel) surgery. Last year its Magellan vascular robotic catheter system was approved in Europe. The company hopes it will be approved in the U.S.A. by the FDA some time in the second quarter.
Financial results for Q4 2011 were much better than expected. Six robotic systems were shipped, while revenues were recognized for eight systems. Revenue recognition lags sales due to accounting rules. Of the six systems shipped, four were the Sensei electrophysiology systems and two were the new Magellan systems. One of the vascular robot systems was sold in the U.S., so technically it is a research system rather than a commercial medical system.
Compare that to Q3, when only 2 systems shipped, which is more typical of shipments these last couple of years. There is typically some positive Q4 seasonality since the systems are capital intensive and dependent on hospital budget issues.
Despite the improvement profitability is probably not going to be a 2012 phenomena. With revenue of $6.2 million in the quarter Hansen showed a net loss of negative $9 million.
If and when the FDA approves Magellan for commercial use we are likely to see a good, but slow, ramp of system sales. In Europe Hansen is working closely with surgeons at St. Mary's Hospital in London to get data on surgical procedures and to train more surgeons. Discussions are underway with hospitals both in Europe and the United States to buy and install the robots. Willingness to move to robotic surgery is high given the success of Intuitive Surgical (ISRG) systems. Because Hansen Medical robots are catheter based they target a different set of procedures than the Intuitive systems.
So revenues are likely to be lumpy in 2012, but accelerating in the second half of the year.
One sad note at the February 22nd analyst call concerned the Lynx ablation catheter, which allows for treatment of some heart conditions using the Sensei robot. While procedures are being done in Europe, Hansen has de-prioritized getting FDA approval for the device in the U.S.A. Hansen had a cash balance of $52 million at the end of Q4 and is prioritizing cash use for ramping the Magellan system in Europe and getting commercial approval in the U.S. Given the time and cost requirements for FDA approval, Lynx will have to wait.
Hansen Medical is not a stock for conservative investors. It has astonishing potential, long term, but it is also a long way from financing itself through profits. It should only be bought by investors who know how to manage risk.
Disclaimer: I am long HNSN. I will not trade in the stock for 1 week following this post. I have no position in ISRG and no plans to take any.
Keep diversified!
See also:
Q4 2011 Hansen Medical Analyst Call Summary
Financial results for Q4 2011 were much better than expected. Six robotic systems were shipped, while revenues were recognized for eight systems. Revenue recognition lags sales due to accounting rules. Of the six systems shipped, four were the Sensei electrophysiology systems and two were the new Magellan systems. One of the vascular robot systems was sold in the U.S., so technically it is a research system rather than a commercial medical system.
Compare that to Q3, when only 2 systems shipped, which is more typical of shipments these last couple of years. There is typically some positive Q4 seasonality since the systems are capital intensive and dependent on hospital budget issues.
Despite the improvement profitability is probably not going to be a 2012 phenomena. With revenue of $6.2 million in the quarter Hansen showed a net loss of negative $9 million.
If and when the FDA approves Magellan for commercial use we are likely to see a good, but slow, ramp of system sales. In Europe Hansen is working closely with surgeons at St. Mary's Hospital in London to get data on surgical procedures and to train more surgeons. Discussions are underway with hospitals both in Europe and the United States to buy and install the robots. Willingness to move to robotic surgery is high given the success of Intuitive Surgical (ISRG) systems. Because Hansen Medical robots are catheter based they target a different set of procedures than the Intuitive systems.
So revenues are likely to be lumpy in 2012, but accelerating in the second half of the year.
One sad note at the February 22nd analyst call concerned the Lynx ablation catheter, which allows for treatment of some heart conditions using the Sensei robot. While procedures are being done in Europe, Hansen has de-prioritized getting FDA approval for the device in the U.S.A. Hansen had a cash balance of $52 million at the end of Q4 and is prioritizing cash use for ramping the Magellan system in Europe and getting commercial approval in the U.S. Given the time and cost requirements for FDA approval, Lynx will have to wait.
Hansen Medical is not a stock for conservative investors. It has astonishing potential, long term, but it is also a long way from financing itself through profits. It should only be bought by investors who know how to manage risk.
Disclaimer: I am long HNSN. I will not trade in the stock for 1 week following this post. I have no position in ISRG and no plans to take any.
Keep diversified!
See also:
Q4 2011 Hansen Medical Analyst Call Summary
Saturday, February 18, 2012
Applied Materials Q1 Boosted by Mobile Demand
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!
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!
Wednesday, February 8, 2012
SGI Challenged by Analysts
Today Silicon Graphics International (SGI) stock plunged over 20% following yesterday's release of December 2011 (fiscal Q2 2012) numbers. A group of analysts on the investor conference call challenged statements by SGI management and tried to pin down details on why profits were lower on higher revenues.
SGI manufactures what are still sometimes called supercomputers: high capability computer systems for datacenters, scientific research, and high performance business uses. Amazon.com is the largest single client by revenue. The U.S. government, in aggregate, is an over 10% customer.
Revenues for fiscal Q2 were $195.2 million, up 9% sequentially from $178.9 million and up 10% from $177.5 million in the year-earlier quarter. Bookings were even stronger in the quarter, partly due to the newest marvel, the ICE X HPC platform, which booked $90 million.
Costs, however, were up enough to reduce GAAP EPS to negative $0.07 per share. Non-GAAP EPS was positive $0.04, but that represents non-GAAP net income of just $2.3 million on $195 million of revenue, or about 1%.
What analysts wanted to understand was exactly why SGI has gone back to the old SGI way of making great products and generating revenues while losing investors' money. Also, if it can be fixed, exactly how that fix would take place. If you have followed SGI you know the current version was created when Rackable bought the old, bankrupt SGI. Rackable itself had been consistently losing money, but had a lot of cash and bought SGI for essentially nothing.
Even before the analyst question segment began the new temporary CEO, Ron Verdoorn, gave a number of reasons for the earnings shortfall. The three main ones were fixed costs in Europe that are too high, forex exchange rates issues, and the transition to new product lines. Success in selling the rackable line of server systems, which have lower margins than other lines, also led to lower overall margins.
The Europe problem would appear to be fixable by either cutting costs in Europe or selling more product while keeping costs level. SGI has lost money in Europe for over 2 years, hoping the sell more option would work out. Now restructuring is planned, but as usual that will create short term costs before generating long term savings.
I was surprised that management did not try to divert analysts in another direction. Research and development expense was up almost $3 million from the December quarter of 2010. I consider that a form of reinvestment. If ICE X alone generated $90 million in orders, that would certainly rationalize the $5 million increase in sales and marketing expense.
An even bigger bite out of revenue came from cost of revenue, which would be cost of goods sold for the hardware, but includes cost of providing services, too. That was up almost $18 million from the year-earlier quarter. Maybe SGI is pricing its products and services too low, but there could be a time lag effect as new systems are developed, manufactured, and sold before revenue is recognized.
Inventories were listed as worth $117.6 million, which is an astonishing increase of $36.6 million from $81.0 million year-earlier. I doubt those inventories consist of unsold or unsellable supercomputers. They should represent orders in hand and a reasonable estimate of pipeline demand.
If that is true, maybe management's statement that things will look a lot better in the second half of calendar 2012 is believable. Of course such estimates always assume no Japanese earthquakes, Thai floods, or Euro collapse issues, which were bad assumptions in 2011. Despite all of the problems of 2011, SGI made a big impression on the computer world with its new products, generating record revenue.
Analysts are right to challenge management's statements and assumptions. Most investors would like to see a lot more of that on investor conference calls. It is tough on management, but I feel I knew a lot more about SGI's real situation by the time the call was over.
I remain optimistic about SGI, but consider it one of my risky investments, with a limited place in my portfolio until it can demonstrate consistent higher profit margins.
Disclaimer: I am long SGI. I will not initiate any changes in my position for the next 2 weeks.
Keep diversified!
SGI manufactures what are still sometimes called supercomputers: high capability computer systems for datacenters, scientific research, and high performance business uses. Amazon.com is the largest single client by revenue. The U.S. government, in aggregate, is an over 10% customer.
Revenues for fiscal Q2 were $195.2 million, up 9% sequentially from $178.9 million and up 10% from $177.5 million in the year-earlier quarter. Bookings were even stronger in the quarter, partly due to the newest marvel, the ICE X HPC platform, which booked $90 million.
Costs, however, were up enough to reduce GAAP EPS to negative $0.07 per share. Non-GAAP EPS was positive $0.04, but that represents non-GAAP net income of just $2.3 million on $195 million of revenue, or about 1%.
What analysts wanted to understand was exactly why SGI has gone back to the old SGI way of making great products and generating revenues while losing investors' money. Also, if it can be fixed, exactly how that fix would take place. If you have followed SGI you know the current version was created when Rackable bought the old, bankrupt SGI. Rackable itself had been consistently losing money, but had a lot of cash and bought SGI for essentially nothing.
Even before the analyst question segment began the new temporary CEO, Ron Verdoorn, gave a number of reasons for the earnings shortfall. The three main ones were fixed costs in Europe that are too high, forex exchange rates issues, and the transition to new product lines. Success in selling the rackable line of server systems, which have lower margins than other lines, also led to lower overall margins.
The Europe problem would appear to be fixable by either cutting costs in Europe or selling more product while keeping costs level. SGI has lost money in Europe for over 2 years, hoping the sell more option would work out. Now restructuring is planned, but as usual that will create short term costs before generating long term savings.
I was surprised that management did not try to divert analysts in another direction. Research and development expense was up almost $3 million from the December quarter of 2010. I consider that a form of reinvestment. If ICE X alone generated $90 million in orders, that would certainly rationalize the $5 million increase in sales and marketing expense.
An even bigger bite out of revenue came from cost of revenue, which would be cost of goods sold for the hardware, but includes cost of providing services, too. That was up almost $18 million from the year-earlier quarter. Maybe SGI is pricing its products and services too low, but there could be a time lag effect as new systems are developed, manufactured, and sold before revenue is recognized.
Inventories were listed as worth $117.6 million, which is an astonishing increase of $36.6 million from $81.0 million year-earlier. I doubt those inventories consist of unsold or unsellable supercomputers. They should represent orders in hand and a reasonable estimate of pipeline demand.
If that is true, maybe management's statement that things will look a lot better in the second half of calendar 2012 is believable. Of course such estimates always assume no Japanese earthquakes, Thai floods, or Euro collapse issues, which were bad assumptions in 2011. Despite all of the problems of 2011, SGI made a big impression on the computer world with its new products, generating record revenue.
Analysts are right to challenge management's statements and assumptions. Most investors would like to see a lot more of that on investor conference calls. It is tough on management, but I feel I knew a lot more about SGI's real situation by the time the call was over.
I remain optimistic about SGI, but consider it one of my risky investments, with a limited place in my portfolio until it can demonstrate consistent higher profit margins.
Disclaimer: I am long SGI. I will not initiate any changes in my position for the next 2 weeks.
Keep diversified!
Wednesday, January 18, 2012
Marvell Technology Group Hones Edge
Marvell Technology Group (MRVL) was started by a young man, Sehat Sutardja, with a belief that he could make a better chip for controlling disk drives. 16 years later, Marvell dominates the market for hard disk drive controller chips, but now receives about half of its revenue from other market segments.
At the CES this year Marvell showed off some products that again put Marvell on the bleeding edge. I'll come back to those after providing some background for those of you not so familiar with the Marvell story.
For investors the last few year with Marvell have been tough. The stock pays no dividend. After splitting in 2004 and again in 2006, the stock price entered 2007 at well over $20 per share. At the 2008 bottom it hit a low around $4.48. Today it ended sharply up at $15.12 and representing a market capitalization of $8.8 billion.
These stock price gyrations exaggerated Marvell's changes in revenues and net income. Total 2006 (fiscal 2007) revenue was $2.24 billion, with slightly negative net income. Revenues for 2010 (fiscal year 2011, ending January 29) were up to $3.6 billion, with net income hitting $904 million. This fiscal year 2012 revenues are trending towards $3.45 billion, but with just $690 million net income.
A series of problems and even a catastrophe hid Marvell's growing profit potential in 2011. Aside from general global economic turmoil, one major problem was RIM's failure to recapture lost market share with its newer Blackberry smartphone models. This may or may not be temporary. Marvell makes the processors for some Blackberry models. Marvell did not get a slot in the new RIM PlayBook tablet, which sold poorly. It appears that the failures are largely RIM's, and often software related. The Marvell processors, when used, seem to work well.
The catastrophe was flooding in Thailand, which knocked HDD (hard disk drive) factories out of commission, and so the revenue for HDD controller chips will be low for the current quarter. Factories should be mostly back online by February 1 when Marvell's new fiscal year begins.
Meanwhile the main good news has been the rapid ramping of sales of Marvell-processor based smartphones in China. Marvell's chips not only include the processor, but most of the functions needed to run a smartphone (graphics, cellular modem, wi-fi, bluetooth). Thus while brand-happy Chinese are dying (almost literally) to get iPhones, the middle-class masses are buying Android based smartphones that run on a new high-speed, invented-in-China protocol, TD. The ramp in revenue from this in calendar 2012 will be substantial, and the baseline should be noted in the Q4 report due in early March.
Which brings us back to CES (and leaves out Marvell's leading enterprise-grade Wi-Fi and wired internet switch chips). I can only hit highlights, so many products were introduced.
Foremost, Google chose Marvell's ARMADA 1500 HD Media System-on-Chip (SoC) for the next generation of Google TV. While there is no guarantee that Google TV will become a mass market product, it does much to validate the hundreds of millions of dollars Marvell has invested in research and development for ARMADA and related technologies. ARMADA is ARM-based and contains many of the same technologies used with smartphones and tablets. Google has worked closely with NVIDIA, Qualcomm and other ARM-based chip designers; this is a clear sign Marvell is also in the inner circle. The ARMADA chip series has been adopted by OEMs for a wide range of consumer and business appliance applications. See also ARMADA and PXA application processors.
Plug computers are a Marvell invention: inexpensive, small but powerful computers that plug directly into electric sockets and can act as local servers. SMILE plugs are designed to connect a classroom of up to 60 students and complement the One Laptop per Child program and Marvell ARMADA based low cost, low power tablet computers. This is mainly for developing nations, but given funding shortages should be considered by U.S. schools as well.
In storage, much has been said about replacing hard drives with SSDs, and PCs with Flash-based tablets. Change has come slowly. Marvell already leads in SSD controller chips. Now it introduced a chip that attached through PCIe, an existing, faster port than the standard SATA disk port. Everyone agrees this will be popular. Alternately another chip allows for an SSD and hard drive to function together better to lower response times while keeping bulk storage costs low.
Consumer home connectivity and automation were addressed by several products. New models of Avastar wireless chips make it easier for all sorts of devices to connect, including Internet phones and video surveillance. Lighting with LEDs was specifically addressed with new, automation-ready chips. The Smart Energy Platform, a combination of a wireless microcontroller and management software, is aimed at lowering price points for energy-conscious appliances in the home.
Except for Google, OEMs will make their own announcements as branded products become available this year.
I will wait on management's Q4 fiscal 2012 in early March before trying to estimate directionality for the new year. Technology is rapidly evolving. More individual devices mean more information needs to be stored in the cloud, requiring in turn more HDD storage and connectivity. All these trends favor Marvell, but competitors will be gunning for the same revenue and profits.
What do I think would most enhance shareholder value? A dividend. As of last quarter Marvell had 2.4 billion in cash, no debt, and cash flow of $262 million. Marvell has used its cash mainly for stock buy backs, and is likely to continue to do so.
Disclaimer: I am long Marvell. I seldom trade the stock and won't for a week after this article is published.
Keep diversified!
At the CES this year Marvell showed off some products that again put Marvell on the bleeding edge. I'll come back to those after providing some background for those of you not so familiar with the Marvell story.
For investors the last few year with Marvell have been tough. The stock pays no dividend. After splitting in 2004 and again in 2006, the stock price entered 2007 at well over $20 per share. At the 2008 bottom it hit a low around $4.48. Today it ended sharply up at $15.12 and representing a market capitalization of $8.8 billion.
These stock price gyrations exaggerated Marvell's changes in revenues and net income. Total 2006 (fiscal 2007) revenue was $2.24 billion, with slightly negative net income. Revenues for 2010 (fiscal year 2011, ending January 29) were up to $3.6 billion, with net income hitting $904 million. This fiscal year 2012 revenues are trending towards $3.45 billion, but with just $690 million net income.
A series of problems and even a catastrophe hid Marvell's growing profit potential in 2011. Aside from general global economic turmoil, one major problem was RIM's failure to recapture lost market share with its newer Blackberry smartphone models. This may or may not be temporary. Marvell makes the processors for some Blackberry models. Marvell did not get a slot in the new RIM PlayBook tablet, which sold poorly. It appears that the failures are largely RIM's, and often software related. The Marvell processors, when used, seem to work well.
The catastrophe was flooding in Thailand, which knocked HDD (hard disk drive) factories out of commission, and so the revenue for HDD controller chips will be low for the current quarter. Factories should be mostly back online by February 1 when Marvell's new fiscal year begins.
Meanwhile the main good news has been the rapid ramping of sales of Marvell-processor based smartphones in China. Marvell's chips not only include the processor, but most of the functions needed to run a smartphone (graphics, cellular modem, wi-fi, bluetooth). Thus while brand-happy Chinese are dying (almost literally) to get iPhones, the middle-class masses are buying Android based smartphones that run on a new high-speed, invented-in-China protocol, TD. The ramp in revenue from this in calendar 2012 will be substantial, and the baseline should be noted in the Q4 report due in early March.
Which brings us back to CES (and leaves out Marvell's leading enterprise-grade Wi-Fi and wired internet switch chips). I can only hit highlights, so many products were introduced.
Foremost, Google chose Marvell's ARMADA 1500 HD Media System-on-Chip (SoC) for the next generation of Google TV. While there is no guarantee that Google TV will become a mass market product, it does much to validate the hundreds of millions of dollars Marvell has invested in research and development for ARMADA and related technologies. ARMADA is ARM-based and contains many of the same technologies used with smartphones and tablets. Google has worked closely with NVIDIA, Qualcomm and other ARM-based chip designers; this is a clear sign Marvell is also in the inner circle. The ARMADA chip series has been adopted by OEMs for a wide range of consumer and business appliance applications. See also ARMADA and PXA application processors.
Plug computers are a Marvell invention: inexpensive, small but powerful computers that plug directly into electric sockets and can act as local servers. SMILE plugs are designed to connect a classroom of up to 60 students and complement the One Laptop per Child program and Marvell ARMADA based low cost, low power tablet computers. This is mainly for developing nations, but given funding shortages should be considered by U.S. schools as well.
In storage, much has been said about replacing hard drives with SSDs, and PCs with Flash-based tablets. Change has come slowly. Marvell already leads in SSD controller chips. Now it introduced a chip that attached through PCIe, an existing, faster port than the standard SATA disk port. Everyone agrees this will be popular. Alternately another chip allows for an SSD and hard drive to function together better to lower response times while keeping bulk storage costs low.
Consumer home connectivity and automation were addressed by several products. New models of Avastar wireless chips make it easier for all sorts of devices to connect, including Internet phones and video surveillance. Lighting with LEDs was specifically addressed with new, automation-ready chips. The Smart Energy Platform, a combination of a wireless microcontroller and management software, is aimed at lowering price points for energy-conscious appliances in the home.
Except for Google, OEMs will make their own announcements as branded products become available this year.
I will wait on management's Q4 fiscal 2012 in early March before trying to estimate directionality for the new year. Technology is rapidly evolving. More individual devices mean more information needs to be stored in the cloud, requiring in turn more HDD storage and connectivity. All these trends favor Marvell, but competitors will be gunning for the same revenue and profits.
What do I think would most enhance shareholder value? A dividend. As of last quarter Marvell had 2.4 billion in cash, no debt, and cash flow of $262 million. Marvell has used its cash mainly for stock buy backs, and is likely to continue to do so.
Disclaimer: I am long Marvell. I seldom trade the stock and won't for a week after this article is published.
Keep diversified!
Monday, December 12, 2011
Cantel Medical Record Quarter
Cantel Medical (CMN) had a record fiscal Q1 2012 ending October 31, 2011, driven by organic growth and acquisitions.
Cantel Medical has been a good stock to hold so far in 2011, closing today at $26.91, up 18% from $22.81 a year ago, with a 52 week high of $28.50 and a 52 week low of $19.02. Not a bad showing in this tough market.
Cantel Medical is a smallish company (market capitalization today ended at $483 million) specializing in infection control through sterilization and disposables. Infection control is more cost effective than treatment for infection, which has become a much larger problem because of the evolution of multiple-antibiotic resistant bacteria.
Cantel is not a well-known name, even in hospitals, partly because it operates through named divisions. Minntech makes and markets endoscope and dialysis equipment sterilizers. Crosstex is the disposables business, working mostly in the dental market, but also moving into the general medical market. It makes face masks, sterilization patches, and other single-use items. Mar Cor makes machines to purify water, often for specialized medical needs. A smaller division is Saf-T-Pak, which produces specialty packaging for transporting specimens, and related materials.
For the latest fiscal quarter, Q1, Cantel reported revenue at $93.3 million, up 8% sequentially from $86.0 million, and up 29% from $72.0 million in the year-earlier quarter. GAAP net income was $6.2 million, up 32% sequentially from $4.7 million, and up 24% from $5.0 million year-earlier. GAAP EPS was $0.35, up 30% sequentially from $0.27 and up 21% from $0.29 year-earlier.
The latest acquisition was of Byrne Medical, announced August 2, 2011. Byrne manufactures products that act as replacements in gastrointestinal endoscopy procedures, eliminating the need for sterilization before reuse. The price of $100 million for a company with trailing annual revenues of $38.6 million seemed high on a revenue basis, but trailing annual pre-tax profits were $8.6 million. Cantel expects to increase gross margins in the business, which had a historical growth rate of over 20%. Byrne Medical had a 30% y/y increase in sales to $11.5 million in Q1 and is already accretive to earnings and cash flow.
Cantel has been fueling its growth with acquisitions. As a result, it ended the quarter with $116.5 million in debt, as against a cash balance of $19.6 million. If you, like me, have been burned occasionally by the poor acquisition strategies of other companies, you might not take this as a recommendation. However, for the few years I have followed Cantel they have done very well with acquisitions. They don't pay too much and sometimes acquire a division of a company they want, rather than the whole company. Then they cross-sell the new products with their established sales force. They have made it work well so far.
Meanwhile, the water purification business also keeps growing. The disposables business should ramp up when (or if) the unemployment rate tweaks down. People have been avoiding doctor and dental visits for economic reasons. When they have the dough to head back in for a checkup, the run rate will pick up again, meaning more use of infection prevention disposables.
So, in summary, the overall anti-infection story is a good one. Cantel is a pure infection play, and it has top-notch management. Should you be cautious because the stock is up 18% y/y? My guess is that the stock is currently priced about right for the short term, although the stock could make another run for its 52 week highs, if the overall market firms up. The trailing P/E ratio at the end of today was 22 (per NASDAQ), which is reasonable for a company with a strong track record of growth. In the longer run I expect continuing profit growth will compell a higher stock price. Cantel Medical should be attractive to long-term investors looking for diversification in the healthcare space.
As a kicker, the dividend was recently raised to $0.14 per year, paid semi-annually.
For more details on quarter results, see my Cantel Medical Q4 fiscal 2011 analyst call summary.
Disclosure: I am long Cantel and will not change my position in the next 2 weeks.
Keep Diversified!
Cantel Medical has been a good stock to hold so far in 2011, closing today at $26.91, up 18% from $22.81 a year ago, with a 52 week high of $28.50 and a 52 week low of $19.02. Not a bad showing in this tough market.
Cantel Medical is a smallish company (market capitalization today ended at $483 million) specializing in infection control through sterilization and disposables. Infection control is more cost effective than treatment for infection, which has become a much larger problem because of the evolution of multiple-antibiotic resistant bacteria.
Cantel is not a well-known name, even in hospitals, partly because it operates through named divisions. Minntech makes and markets endoscope and dialysis equipment sterilizers. Crosstex is the disposables business, working mostly in the dental market, but also moving into the general medical market. It makes face masks, sterilization patches, and other single-use items. Mar Cor makes machines to purify water, often for specialized medical needs. A smaller division is Saf-T-Pak, which produces specialty packaging for transporting specimens, and related materials.
For the latest fiscal quarter, Q1, Cantel reported revenue at $93.3 million, up 8% sequentially from $86.0 million, and up 29% from $72.0 million in the year-earlier quarter. GAAP net income was $6.2 million, up 32% sequentially from $4.7 million, and up 24% from $5.0 million year-earlier. GAAP EPS was $0.35, up 30% sequentially from $0.27 and up 21% from $0.29 year-earlier.
The latest acquisition was of Byrne Medical, announced August 2, 2011. Byrne manufactures products that act as replacements in gastrointestinal endoscopy procedures, eliminating the need for sterilization before reuse. The price of $100 million for a company with trailing annual revenues of $38.6 million seemed high on a revenue basis, but trailing annual pre-tax profits were $8.6 million. Cantel expects to increase gross margins in the business, which had a historical growth rate of over 20%. Byrne Medical had a 30% y/y increase in sales to $11.5 million in Q1 and is already accretive to earnings and cash flow.
Cantel has been fueling its growth with acquisitions. As a result, it ended the quarter with $116.5 million in debt, as against a cash balance of $19.6 million. If you, like me, have been burned occasionally by the poor acquisition strategies of other companies, you might not take this as a recommendation. However, for the few years I have followed Cantel they have done very well with acquisitions. They don't pay too much and sometimes acquire a division of a company they want, rather than the whole company. Then they cross-sell the new products with their established sales force. They have made it work well so far.
Meanwhile, the water purification business also keeps growing. The disposables business should ramp up when (or if) the unemployment rate tweaks down. People have been avoiding doctor and dental visits for economic reasons. When they have the dough to head back in for a checkup, the run rate will pick up again, meaning more use of infection prevention disposables.
So, in summary, the overall anti-infection story is a good one. Cantel is a pure infection play, and it has top-notch management. Should you be cautious because the stock is up 18% y/y? My guess is that the stock is currently priced about right for the short term, although the stock could make another run for its 52 week highs, if the overall market firms up. The trailing P/E ratio at the end of today was 22 (per NASDAQ), which is reasonable for a company with a strong track record of growth. In the longer run I expect continuing profit growth will compell a higher stock price. Cantel Medical should be attractive to long-term investors looking for diversification in the healthcare space.
As a kicker, the dividend was recently raised to $0.14 per year, paid semi-annually.
For more details on quarter results, see my Cantel Medical Q4 fiscal 2011 analyst call summary.
Disclosure: I am long Cantel and will not change my position in the next 2 weeks.
Keep Diversified!
Friday, December 9, 2011
Applied Materials See Cycle Bottom
Applied Materials (AMAT), the semiconductor capital equipment maker, had a very difficult fourth quarter of fiscal 2011 ending October 30th. The stock is trading trading today around $11.20 per share, less than 8 times earnings and not that much above its 52 week low of $9.70 touched on October 4.
Yet revenue for the fiscal year set a record. Applied Materials and other semiconductor equipment makers tend to be very cyclical because demand for new equipment is only strong when semiconductor end use is ramping. It looked like calendar 2011 would continue to be part of a strong up cycle that started in 2010, but global economic turmoil and weak consumer electronics end demand has made chip makers and the foundries that serve fabless chip makers reluctant to increase capacity.
Sales continue because even during slow periods there are advantages to moving to new process technologies that put more transistors on any given area of chip surface. Applied Materials also derives considerable revenue from related services. Its services division contributed $629 million in revenue in the quarter.
Total Q4 revenue was $2.18 billion, down 22% sequentially from $2.79 billion and down 25% from $2.89 billion in the year-earlier quarter. GAAP net income was $456 million, down 4% sequentially from $476 million and down 3% from $468 million year-earlier. GAP EPS (earnings per share) were $0.34, down 6% sequentially from $0.36 and down 3% from $0.35 year-earlier.
Non-GAAP net income was $271 million, down sequentially from $467 million and also down from $476 million year-earlier. EPS $0.21. The vastly lower non-GAAP than GAAP earnings were mostly due to a $203 adjustment to the prior-year's income tax filings.
Despite the poor quarter, cash flow from operations was near $700, or about $425 million excluding the income tax refund. Cash and equivalents were over $7 billion.
The stock pays a dividend of $8 per quarter per share. Management reiterated that they are committed to increasing the dividend, but stock buy backs are the preferred method of returning profits to shareholders. The acquisition of Varian Semiconductor will put a temporary crimp in cash, but is a good long-term move.
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.
Applied Materials management has had decades of experience with these cycles. They expect the first half of their fiscal year 2012 to be difficult. In particular Q1 fiscal 2012 (ending January 30th) guidance was for revenues down sequentially another 5% to 15%. However, they believe they are already past the bottom of the order cycle. Because we are talking about capital equipment, when the order cycle starts trending upward it can be six months before actual revenues start trending back up.
Flash and mobile processor capacity utilization are already high, so any further increase in demand should generate equipment orders. However, RAM capacity is plentiful, so we probably won't see a big uptick in revenues until demand catches up to capacity in that segment, probably later in 2012.
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 provides.
For more details about Q4 results, including questions by analysts, see my Applied Materials Q4 2011 Analyst Call summary.
Disclaimer: I have a long position in Applied Materials (AMAT), with a long term view. I have no plans to change my position anytime soon.
See also: www.appliedmaterials.com
And keep diversified!
Yet revenue for the fiscal year set a record. Applied Materials and other semiconductor equipment makers tend to be very cyclical because demand for new equipment is only strong when semiconductor end use is ramping. It looked like calendar 2011 would continue to be part of a strong up cycle that started in 2010, but global economic turmoil and weak consumer electronics end demand has made chip makers and the foundries that serve fabless chip makers reluctant to increase capacity.
Sales continue because even during slow periods there are advantages to moving to new process technologies that put more transistors on any given area of chip surface. Applied Materials also derives considerable revenue from related services. Its services division contributed $629 million in revenue in the quarter.
Total Q4 revenue was $2.18 billion, down 22% sequentially from $2.79 billion and down 25% from $2.89 billion in the year-earlier quarter. GAAP net income was $456 million, down 4% sequentially from $476 million and down 3% from $468 million year-earlier. GAP EPS (earnings per share) were $0.34, down 6% sequentially from $0.36 and down 3% from $0.35 year-earlier.
Non-GAAP net income was $271 million, down sequentially from $467 million and also down from $476 million year-earlier. EPS $0.21. The vastly lower non-GAAP than GAAP earnings were mostly due to a $203 adjustment to the prior-year's income tax filings.
Despite the poor quarter, cash flow from operations was near $700, or about $425 million excluding the income tax refund. Cash and equivalents were over $7 billion.
The stock pays a dividend of $8 per quarter per share. Management reiterated that they are committed to increasing the dividend, but stock buy backs are the preferred method of returning profits to shareholders. The acquisition of Varian Semiconductor will put a temporary crimp in cash, but is a good long-term move.
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.
Applied Materials management has had decades of experience with these cycles. They expect the first half of their fiscal year 2012 to be difficult. In particular Q1 fiscal 2012 (ending January 30th) guidance was for revenues down sequentially another 5% to 15%. However, they believe they are already past the bottom of the order cycle. Because we are talking about capital equipment, when the order cycle starts trending upward it can be six months before actual revenues start trending back up.
Flash and mobile processor capacity utilization are already high, so any further increase in demand should generate equipment orders. However, RAM capacity is plentiful, so we probably won't see a big uptick in revenues until demand catches up to capacity in that segment, probably later in 2012.
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 provides.
For more details about Q4 results, including questions by analysts, see my Applied Materials Q4 2011 Analyst Call summary.
Disclaimer: I have a long position in Applied Materials (AMAT), with a long term view. I have no plans to change my position anytime soon.
See also: www.appliedmaterials.com
And keep diversified!
Monday, December 5, 2011
NVIDIA Takes Up ARMs
Back in February I warned that "at $25.48 [per share], you might want to consider that it could take NVIDIA [NVDA] a couple of years of outstanding growth to justify this price."
Maybe it is just the stock market and macroeconomic turmoil, but NVDA closed today at $15.48.
What I think about the pricing of a stock is only loosely linked to what I think of a company. As to engineering and execution, I have long believed NVIDIA is one of the best technology companies in the world. As the long-term leader in computer graphics chips (GPUs), however, it is now at a crossroads where the old rules no longer seem to apply. It is a time of both tremendous opportunity and tremendous danger, which makes predicting future profit streams mainly guesswork.
NVIDIA reported fiscal Q3 results and held its analyst conference call on November 10, 2011. Note the quarter ended October 30, so its not a calendar quarter and chips going into consumer products for the holidays pretty much had to be out the door by the end of the quarter. Q4, ending January 30th, is historically a slower quarter for NVIDIA. Note also that rivals AMD and Intel had quarters ending September 30.
Revenues were $1.07 billion, up 5% sequentially from $1.02 billion and up 26% from $840 million in the year-earlier quarter. Net income was $178.3 million, up 18% sequentially from $151.6 million and up 110% from $84.9 million year-earlier. EPS (earnings per share) were $0.29, up 16% sequentially from $0.25 and up 93% from $0.15 year-earlier.
That is pretty strong growth over the past year. However, from a licensing deal and litigation settlement with Intel, NVIDIA got roughly $60 million in royalties it did not get a year earlier (the royalties run about another 5 years). That had some impact on revenue and a huge impact on net income and EPS. It is real money, but it did not come from chips sales.
At this point NVIDIA has two games going. One is in its classic discrete GPU chips, which are now also used as math and application acceleration co-processors. Its only real rival in that market is AMD.
The other is combining its graphics engine with ARM chip designs for mobile devices. That results in a chip called Tegra. The first version was interesting but did not generate much revenue. Tegra II sold a lot better, and has powered a number of smartphones and tablets. Tegra III, or Kal-El, became available in the quarter, so a few devices are available now and it will be widely available in 2012. NVIDIA management did not break out Tegra revenue for the quarter.
The NVIDIA vision is not just to dominate the smart phone and tablet markets. Future versions of Tegra are supposed to be powerful enough to go into notebooks, desktops, and even servers.
The problem with being in the ARM market is that anyone can license the ARM design. Graphics and cell phone connectivity chips and designs are available as well. NVIDIA seems tight with Google, but any ARM-based design can run the Android software.
Competitors each have some advantages. Apple, of course, is the perceived frontrunner. There is no guarantee that the iPhone is ultimately going to be defeated by Android-based phones or less likely competitors.
When it comes to ARM based chips for tablets and phones, each competitor brings some serious advantages to the court. Qualcomm has far more extensive experience in cell phone chips than NVIDIA does; so does Texas Instruments. Among a host of other contenders, Marvell (MRVL) should be noted, since they generate a lot of cash each quarter and have a lead in China, a much bigger market to fight over than the U.S. market. Then there are the Koreans, and Japanese, and numerous small innovators.
Another problem for NVIDIA is the lack of a x86 CPU chip design. AMD and Intel both are incorporating graphics into their base designs, eliminating the need for NVIDIA's GPU chips for most users. This already appears to be hurting them in the notebook segment. It will take some time and at least a couple of die shrinks before the pure GPU chip dies (except in specialty markets), but that time is coming at a fairly predictable clip.
So far profit margins have been good at the leading edge of smartphone and tablet processors, but at some point pricing could become more competitive.
2012 is likely to be a make or break year for NVIDIA. If they are able to dominate the Android phone market they might become the dominant semiconductor company, a position Intel has had for a couple of decades now. Myself, I am not willing to make that bet, but I'll keep a close watch. However, I do believe NVIDIA's price is now pretty reasonable, everything taken into account.
See also my Q3 NVIDIA analyst call summary.
Disclaimer: I have no position in NVIDIA and will not take a position for at least 2 weeks following the publication date of this article.
Keep Diversified!
Maybe it is just the stock market and macroeconomic turmoil, but NVDA closed today at $15.48.
What I think about the pricing of a stock is only loosely linked to what I think of a company. As to engineering and execution, I have long believed NVIDIA is one of the best technology companies in the world. As the long-term leader in computer graphics chips (GPUs), however, it is now at a crossroads where the old rules no longer seem to apply. It is a time of both tremendous opportunity and tremendous danger, which makes predicting future profit streams mainly guesswork.
NVIDIA reported fiscal Q3 results and held its analyst conference call on November 10, 2011. Note the quarter ended October 30, so its not a calendar quarter and chips going into consumer products for the holidays pretty much had to be out the door by the end of the quarter. Q4, ending January 30th, is historically a slower quarter for NVIDIA. Note also that rivals AMD and Intel had quarters ending September 30.
Revenues were $1.07 billion, up 5% sequentially from $1.02 billion and up 26% from $840 million in the year-earlier quarter. Net income was $178.3 million, up 18% sequentially from $151.6 million and up 110% from $84.9 million year-earlier. EPS (earnings per share) were $0.29, up 16% sequentially from $0.25 and up 93% from $0.15 year-earlier.
That is pretty strong growth over the past year. However, from a licensing deal and litigation settlement with Intel, NVIDIA got roughly $60 million in royalties it did not get a year earlier (the royalties run about another 5 years). That had some impact on revenue and a huge impact on net income and EPS. It is real money, but it did not come from chips sales.
At this point NVIDIA has two games going. One is in its classic discrete GPU chips, which are now also used as math and application acceleration co-processors. Its only real rival in that market is AMD.
The other is combining its graphics engine with ARM chip designs for mobile devices. That results in a chip called Tegra. The first version was interesting but did not generate much revenue. Tegra II sold a lot better, and has powered a number of smartphones and tablets. Tegra III, or Kal-El, became available in the quarter, so a few devices are available now and it will be widely available in 2012. NVIDIA management did not break out Tegra revenue for the quarter.
The NVIDIA vision is not just to dominate the smart phone and tablet markets. Future versions of Tegra are supposed to be powerful enough to go into notebooks, desktops, and even servers.
The problem with being in the ARM market is that anyone can license the ARM design. Graphics and cell phone connectivity chips and designs are available as well. NVIDIA seems tight with Google, but any ARM-based design can run the Android software.
Competitors each have some advantages. Apple, of course, is the perceived frontrunner. There is no guarantee that the iPhone is ultimately going to be defeated by Android-based phones or less likely competitors.
When it comes to ARM based chips for tablets and phones, each competitor brings some serious advantages to the court. Qualcomm has far more extensive experience in cell phone chips than NVIDIA does; so does Texas Instruments. Among a host of other contenders, Marvell (MRVL) should be noted, since they generate a lot of cash each quarter and have a lead in China, a much bigger market to fight over than the U.S. market. Then there are the Koreans, and Japanese, and numerous small innovators.
Another problem for NVIDIA is the lack of a x86 CPU chip design. AMD and Intel both are incorporating graphics into their base designs, eliminating the need for NVIDIA's GPU chips for most users. This already appears to be hurting them in the notebook segment. It will take some time and at least a couple of die shrinks before the pure GPU chip dies (except in specialty markets), but that time is coming at a fairly predictable clip.
So far profit margins have been good at the leading edge of smartphone and tablet processors, but at some point pricing could become more competitive.
2012 is likely to be a make or break year for NVIDIA. If they are able to dominate the Android phone market they might become the dominant semiconductor company, a position Intel has had for a couple of decades now. Myself, I am not willing to make that bet, but I'll keep a close watch. However, I do believe NVIDIA's price is now pretty reasonable, everything taken into account.
See also my Q3 NVIDIA analyst call summary.
Disclaimer: I have no position in NVIDIA and will not take a position for at least 2 weeks following the publication date of this article.
Keep Diversified!
Tuesday, November 29, 2011
SGI Supercomputer Revenue Growth Continues
Looking for the technology company that reported calendar Q3 2011 revenue that was 58% higher than its Q3 of 2010? That would be Silicon Graphics International (SGI), manufacturer of high-performance technical computers (supercomputers) and high-efficiency server systems for datacenters and cloud computing.
GAAP revenues for fiscal Q1 2012 ending September 30, 2011 were $178.9 million, down 8% sequentially from $195.5 million, but up 58% from $112.9 million in the year-earlier quarter. GAAP net income was negative $2.7 million, improved sequentially from negative $12.1 million and improved from negative $11.2 million year-earlier. EPS (earnings per share) were negative $0.08, improved sequentially from negative $0.39, and also improved from negative $0.37 year-earlier.
While in the red on a GAAP basis, on a non-GAAP basis (mostly eliminating non-cash expenses like stock-based compensation) SGI managed a profit of $2.2 million, or $0.07 per share. SGI has gone through a period of investing to introduce new products, and also expanding its sales force. Profit margins could improve as further ramps in revenue should not require similar ramps in operating expenses.
While not giving guidance by quarter, for fiscal year 2012 (running to June 2012) revenue is expected between $740 and $780 million, up to 24% over fiscal 2011.GAAP EPS is estimated between $0.15 and $0.30. Non-GAAP EPS expected between $0.60 and $0.80.
How are they achieving such stellar growth while other computer makers are lagging? SGI specializes in expensive computers used for scientific research, as well as large systems for cloud computing and Web farms. These are all areas that continue to grow quickly. While there is competition from the likes of IBM, HP, Dell, and Cray, the newest systems introduced by SGI, notably Altix UV, are better at addressing the needs of their markets.
Nor is SGI resting on their laurels. They are introducing computers that run large scale systems running Windows SQL Server. They have improved their compatibility with Hadoop and Red Hat Enterprise Linux. They continue to be a major supplier for Amazon's cloud system. They also have started acquiring small companies that specialize in supercomputer application software. SGI expects that the ability to sell software as well as hardware will be a major advantage for verticals they service, with higher profit margins.
Finally, they ended the latest quarter with $115 million in cash with no debt. They did use $30 million of cash to build inventory in the quarter, but the systems built had been pre-ordered and should be shipping this quarter.
Because of the size of the systems involved, some quarter-to-quarter lumpiness is to be expected.
If you read what scientists are saying about Altix UV, you will realize why management has become very confident in SGI's future. On the analyst call they stated the next big SGI milestone will be $1 billion in annual revenue, which should bring between $1.75 and $2.00 non-GAAP EPS per share.
The recent growth has been in the face of a lot of uncertainty and a poor macroeconomy. Even so, if the doomsayers are right about global slowdown or meltdown scenarios in 2012, that could impact sales. I am more concerned about competition, but it does seem that for now SGI has found a niche where it can outcompete far larger companies.
For more details on calendar Q3 results, see my SGI Q1 fiscal 2012 analyst call summary.
Disclaimer: I am long SGI. I won't change my position for at least one week from today.
The usual risks apply, so keep diversified!
See also: www.sgi.com
GAAP revenues for fiscal Q1 2012 ending September 30, 2011 were $178.9 million, down 8% sequentially from $195.5 million, but up 58% from $112.9 million in the year-earlier quarter. GAAP net income was negative $2.7 million, improved sequentially from negative $12.1 million and improved from negative $11.2 million year-earlier. EPS (earnings per share) were negative $0.08, improved sequentially from negative $0.39, and also improved from negative $0.37 year-earlier.
While in the red on a GAAP basis, on a non-GAAP basis (mostly eliminating non-cash expenses like stock-based compensation) SGI managed a profit of $2.2 million, or $0.07 per share. SGI has gone through a period of investing to introduce new products, and also expanding its sales force. Profit margins could improve as further ramps in revenue should not require similar ramps in operating expenses.
While not giving guidance by quarter, for fiscal year 2012 (running to June 2012) revenue is expected between $740 and $780 million, up to 24% over fiscal 2011.GAAP EPS is estimated between $0.15 and $0.30. Non-GAAP EPS expected between $0.60 and $0.80.
How are they achieving such stellar growth while other computer makers are lagging? SGI specializes in expensive computers used for scientific research, as well as large systems for cloud computing and Web farms. These are all areas that continue to grow quickly. While there is competition from the likes of IBM, HP, Dell, and Cray, the newest systems introduced by SGI, notably Altix UV, are better at addressing the needs of their markets.
Nor is SGI resting on their laurels. They are introducing computers that run large scale systems running Windows SQL Server. They have improved their compatibility with Hadoop and Red Hat Enterprise Linux. They continue to be a major supplier for Amazon's cloud system. They also have started acquiring small companies that specialize in supercomputer application software. SGI expects that the ability to sell software as well as hardware will be a major advantage for verticals they service, with higher profit margins.
Finally, they ended the latest quarter with $115 million in cash with no debt. They did use $30 million of cash to build inventory in the quarter, but the systems built had been pre-ordered and should be shipping this quarter.
Because of the size of the systems involved, some quarter-to-quarter lumpiness is to be expected.
If you read what scientists are saying about Altix UV, you will realize why management has become very confident in SGI's future. On the analyst call they stated the next big SGI milestone will be $1 billion in annual revenue, which should bring between $1.75 and $2.00 non-GAAP EPS per share.
The recent growth has been in the face of a lot of uncertainty and a poor macroeconomy. Even so, if the doomsayers are right about global slowdown or meltdown scenarios in 2012, that could impact sales. I am more concerned about competition, but it does seem that for now SGI has found a niche where it can outcompete far larger companies.
For more details on calendar Q3 results, see my SGI Q1 fiscal 2012 analyst call summary.
Disclaimer: I am long SGI. I won't change my position for at least one week from today.
The usual risks apply, so keep diversified!
See also: www.sgi.com
Monday, November 28, 2011
Microchip (MCHP) Inventory Correction End May Be Near
There is no way to describe Q3 2011 as a good quarter for Microchip (MCHP). The maker of microcontroller and analog chips reported revenues of $340.6 million, down 9% sequentially from $374.5 million in Q2 and down 11% from $382.3 million in the year-earlier quarter.
GAAP net income was $79.3 million, down 20% sequentially from $99.3 million and down 24% from $104.7 million year-earlier. GAAP EPS were $0.40, down 18% sequentially from $0.49 and down 26% from $0.54 year-earlier.
Given that and the general stock-market and macroeconomic malaise, the main thing propping up Microchip's stock price (closing today at $33.07) is the dividend, now running at $1.392 per share per year, or 4.3% at today's price.
As to the outlook, Q4 guidance was week, with revenue in the range of flat to down 7% from Q3.
I don't think that Microchip is failing to compete in its market segments. It continues to be the world's leading microcontroller provider. Economic uncertainty caused weakend demand, which in turn caused OEMs to tighten up their inventories.
Then again, the picture could be brighter for Q1 2012. The first quarter is typically seasonally slow for semiconductor chip makers, but within that seasonality Microchip's management, as early as the analyst call on November 3, foresaw an uptick, predicting that "shipment rates in December will be below the consumption rates of our customers."
Here it is important for analysts to note that, unlike most chip manufacturers, Microchip does not recognize revenue when it makes shipments to distributors. Because of the nature of Microchip's business (selling a large number of parts to a large number of OEMs), a lot of sales are through distributors. Microchips recognizes the revenue when the distributors have shipped the chips to end customers.
This means that Microchip tends to see results (reported revenue) of general semiconductor trends, both up and down, a quarter earlier than its peers. While there can be differences in results because of focus and competition for market share, a Microchip revenue downturn is a fair predictor of a sector downturn one quarter later, and the same for upturns.
If this December shapes up to be a good one for electronics sales in the U.S., and if Europe holds together, January may look very different than most investors would have expected until recently. If end sales cause inventory shortages at OEMs, the pace chip sales in Q1 could be strong, compared to the usual range from seasonality.
So keep an eye on Microchip's Q4 results and Q1 2011 results. In the meantime, if you are holding MCHP, enjoy the dividends.
Keep in mind that the semiconductor industry, including its microcontroller and analog segments, is very competitive.
Disclaimer: I am long MCHP and have no plans to change my position this year.
See also:
www.microchip.com
GAAP net income was $79.3 million, down 20% sequentially from $99.3 million and down 24% from $104.7 million year-earlier. GAAP EPS were $0.40, down 18% sequentially from $0.49 and down 26% from $0.54 year-earlier.
Given that and the general stock-market and macroeconomic malaise, the main thing propping up Microchip's stock price (closing today at $33.07) is the dividend, now running at $1.392 per share per year, or 4.3% at today's price.
As to the outlook, Q4 guidance was week, with revenue in the range of flat to down 7% from Q3.
I don't think that Microchip is failing to compete in its market segments. It continues to be the world's leading microcontroller provider. Economic uncertainty caused weakend demand, which in turn caused OEMs to tighten up their inventories.
Then again, the picture could be brighter for Q1 2012. The first quarter is typically seasonally slow for semiconductor chip makers, but within that seasonality Microchip's management, as early as the analyst call on November 3, foresaw an uptick, predicting that "shipment rates in December will be below the consumption rates of our customers."
Here it is important for analysts to note that, unlike most chip manufacturers, Microchip does not recognize revenue when it makes shipments to distributors. Because of the nature of Microchip's business (selling a large number of parts to a large number of OEMs), a lot of sales are through distributors. Microchips recognizes the revenue when the distributors have shipped the chips to end customers.
This means that Microchip tends to see results (reported revenue) of general semiconductor trends, both up and down, a quarter earlier than its peers. While there can be differences in results because of focus and competition for market share, a Microchip revenue downturn is a fair predictor of a sector downturn one quarter later, and the same for upturns.
If this December shapes up to be a good one for electronics sales in the U.S., and if Europe holds together, January may look very different than most investors would have expected until recently. If end sales cause inventory shortages at OEMs, the pace chip sales in Q1 could be strong, compared to the usual range from seasonality.
So keep an eye on Microchip's Q4 results and Q1 2011 results. In the meantime, if you are holding MCHP, enjoy the dividends.
Keep in mind that the semiconductor industry, including its microcontroller and analog segments, is very competitive.
Disclaimer: I am long MCHP and have no plans to change my position this year.
See also:
www.microchip.com
Tuesday, November 22, 2011
Hansen Medical: Slow Magellan Ramp Planned
Hansen Medical Inc. (HNSN) manufactures catheter based medical robots. It is effectively still a startup company, since it typically loses money each quarter. When it has shown a profit is has been from licensing its technology, not from robot sales. However, this is a well-understood business model. Research and development has to be done upfront. The FDA and other national medical agencies must approve each application of the technology. At the moment one application, electrophysiological exploration, is approved both in the U.S. and Europe. Two other applications have been approved in Europe, but have not yet produced revenue.
The difficulty of guessing the future value of this technology is why (along with overall market volatility) the stock price of Hansen has been all over the map this year. The fifty-two week high was $5.28, the fifty-two week low was $1.24, and the stock was up $0.15 today to close at $2.37. If Hansen continues to burn through its cash, $1.24 might be generous. If it starts selling significantly more surgical robots at a good profit margin, $5.28 will seem like nothing two or three years out.
I expected Hansen to trade higher after the new peripheral vascular surgical system, Magellan, was approved in Europe back in Q3. I expected it would take time to ramp up sales since these robots are big ticket items. The November 2, 2011 analyst call about Q3 results, however, tempered my short term hopes. The first working Magellan had been installed in St. Mary's Hospital in London, but Hansen wanted to take things slowly. One might hope their salespeople would have ten or more sales lined up for Q4, but instead they wanted to do a number of actual surgeries at St. Mary's and study the results.
Based on earlier trials they expect good results, but more data would not only help to drive sales. Experience is something that can be shared. Getting the surgeon's experiences at St. Mary's should help future surgeons and the Hansen employees who train them. That means better outcomes for patients and a better argument for the value of robotic vascular surgery.
Investors, of course, want their results this quarter, not sometime in the vague future.
If Hansen continues to move cautiously it may be a couple of quarters into 2012 before we see significant sales of the new Magellan system. Also Hansen, after an earlier accounting practices muck-up, now only recognizes revenue when doctors are trained and successfully operating a system. So the ramp will probably be in deferred revenue before it hits the actual revenue line.
Nor are the current Sensei robots for electrophysiology likely to come to the rescue. Only two systems were shipped in Q3, although revenue was recognized on five systems. Hansen lost $10.1 million in the quarter on revenue of $5.4 million.
Management seems confident that the new Magellan system will turn the company around. Hansen ended the quarter with $26 million in cash and just $3.6 million in debt. Answering an analyst question about running out of cash, management said they would get another $3 million from their licensing agreement with Philips. That should get Hansen through Q2, the commercial launch in Europe, and FDA approval for Magellan in the U.S. They are considering strategic financing similar to the Philips financing as well as debt or equity financing. They said they were confident of their ability to raise capital. A few days later they raised $10 million selling stock to existing investors.
Market capitalization ended today at $130 million. While that sounds high for a company with a $22 million annual revenue run rate and a history of losses, I know I am not the only person who thinks the future value of this technology is much higher. Earlier this year Philips paid $29 million for non-exclusive rights to use one of Hansen's technologies.
Start up costs for surgical robotics are high, but we are reaching a point when Magellan sales should start pointing us in the right direction. Buying in now has its risks, but so does waiting until later in 2012 when buying in is likely to be much more costly. The price can be very volatile because this tends to be traded in large blocks by aggressive traders.
I have owned Hansen Medical stock since July of 2009, after starting posting Hansen analyst call summaries in February of 2009.
Disclaimer: I am long HNSN. I will not trade in the stock for 1 week following this post.
The difficulty of guessing the future value of this technology is why (along with overall market volatility) the stock price of Hansen has been all over the map this year. The fifty-two week high was $5.28, the fifty-two week low was $1.24, and the stock was up $0.15 today to close at $2.37. If Hansen continues to burn through its cash, $1.24 might be generous. If it starts selling significantly more surgical robots at a good profit margin, $5.28 will seem like nothing two or three years out.
I expected Hansen to trade higher after the new peripheral vascular surgical system, Magellan, was approved in Europe back in Q3. I expected it would take time to ramp up sales since these robots are big ticket items. The November 2, 2011 analyst call about Q3 results, however, tempered my short term hopes. The first working Magellan had been installed in St. Mary's Hospital in London, but Hansen wanted to take things slowly. One might hope their salespeople would have ten or more sales lined up for Q4, but instead they wanted to do a number of actual surgeries at St. Mary's and study the results.
Based on earlier trials they expect good results, but more data would not only help to drive sales. Experience is something that can be shared. Getting the surgeon's experiences at St. Mary's should help future surgeons and the Hansen employees who train them. That means better outcomes for patients and a better argument for the value of robotic vascular surgery.
Investors, of course, want their results this quarter, not sometime in the vague future.
If Hansen continues to move cautiously it may be a couple of quarters into 2012 before we see significant sales of the new Magellan system. Also Hansen, after an earlier accounting practices muck-up, now only recognizes revenue when doctors are trained and successfully operating a system. So the ramp will probably be in deferred revenue before it hits the actual revenue line.
Nor are the current Sensei robots for electrophysiology likely to come to the rescue. Only two systems were shipped in Q3, although revenue was recognized on five systems. Hansen lost $10.1 million in the quarter on revenue of $5.4 million.
Management seems confident that the new Magellan system will turn the company around. Hansen ended the quarter with $26 million in cash and just $3.6 million in debt. Answering an analyst question about running out of cash, management said they would get another $3 million from their licensing agreement with Philips. That should get Hansen through Q2, the commercial launch in Europe, and FDA approval for Magellan in the U.S. They are considering strategic financing similar to the Philips financing as well as debt or equity financing. They said they were confident of their ability to raise capital. A few days later they raised $10 million selling stock to existing investors.
Market capitalization ended today at $130 million. While that sounds high for a company with a $22 million annual revenue run rate and a history of losses, I know I am not the only person who thinks the future value of this technology is much higher. Earlier this year Philips paid $29 million for non-exclusive rights to use one of Hansen's technologies.
Start up costs for surgical robotics are high, but we are reaching a point when Magellan sales should start pointing us in the right direction. Buying in now has its risks, but so does waiting until later in 2012 when buying in is likely to be much more costly. The price can be very volatile because this tends to be traded in large blocks by aggressive traders.
I have owned Hansen Medical stock since July of 2009, after starting posting Hansen analyst call summaries in February of 2009.
Disclaimer: I am long HNSN. I will not trade in the stock for 1 week following this post.
Monday, November 7, 2011
Celgene Q3 shows model strength
Celgene provides a double dose of growth potential: further growth of its currently approved therapies and a rich pipeline with some therapies closing in on FDA approval and commercialization. Since I last wrote about Celgene on August 2, its stock price has risen from $57.29 to today's close of $64.29. Celgene's 52 week high is $68.25 reached on October 24th.
Consider Celgene's Q3 earnings reported last week. Revenue was $1.22 billion, up 3% sequentially from $1.18 billion and up 41% from $886 million in the year-earlier quarter. GAAP net income was $373.0 million, up 34% sequentially from $279.2 million and up 33% from $281.2 million year-earlier. GAAP EPS were $0.81, 37% sequentially from $0.59 and up 35% from $0.60 year-earlier. Non-GAAP EPS was EPS $1.02.
Most of this rapid growth was based on a single therapy, Revlimid for multiple myeloma (MM) and myelodysplastic syndromes (MDS). Revlimid revenues grew 28% from a year earlier. Expansion is largely international now, with Russia, China and Brazil still ahead. In addition various clinical trials have indicated Revlimid will be beneficial in other types of cancer. Revlimid is in Phase III trials for CLL (chronic lymphocytic leukemia), NHL (non-Hodgkin lymphoma) and prostate cancer.
Thalomid is ancient and had revenues $83 million, down 12% y/y.
VIDAZA for multiple myeloma revenues were $191 million, up 35% y/y. This is despite losing exclusivity in the United States.
The bit new revenue generator is ABRAXANE for breast cancer. Abraxane is also in clinical trials for treating lung, pancreatic, bladder, skin, and ovarian cancers. ABRAXANE revenues were $114 million, up 20% sequentially, that is quarter over quarter; Celgene did not market it a year ago. A Phase III trial comparing it to decarbazine for metastatic melanoma is expecting to read out data in mid 2012. Phase III Pancreatic cancer trial should complete enrollment in Q1 2012. International revenue continues to ramp. For instance, in the quarter Celgene received reimbursement permission for Abraxane in in Greece and the Czech Republic.
Earlier in the pipeline Celgene displays depth-of-field. Of course most pre-clinical drugs don't make it through all the clinical phases and FDA approval; there are likely to be some losers. Celgene's pipeline is so broad and important you could write a book about it.
In Oncology/Hematology we have pomalidomide in Phase III trials for myelofibrosis and nearing the end of Phase II for multiple myeloma. There is Amrubicin, in Phase III for small cell lung cancer. In Phase II we also have ACE-011 for CIA and ABI-008 for prostate cancer. In Phase I we have Tork Inhibitor and ABI-009, both for solid tumors. There are two additional pre-clinical ABI variants for solid tumors.
Apremilast completed enrollment of patients in Phase III trials for psoriasis and psoriatic arthritis, with three more Phase III trials to complete enrollment by year-end. Phase II trial data for ankylosing spondylitis will be presented in November. In inflammation and immunology we also have JNK CC-930, CC-11050 and PDA-001 in Phase II.
Pomalidomide Phase II data for relapsed and refractory myeloma will be presented at ASH in December. The company is conducting a broad clinical program to support global registrations for pomalidomide.
Beyond that Celgene lists over a dozen agents in discovery and pre-clinical phases.
Of course, what will affect Celgene's stock price soonest are the late stage candidates. The first big movers is likely to be expanding the label for Revlimid to first-line (initial) treatment of multiple myeloma. The second would be Abraxane for non-small cell lung cancer, with FDA submission in second half of 2011 and a decision likely in the first half of 2012.
In general it is a very good time to invest in biotechnology, even given the known risks. Celgene is a cash cow that also has unrealized value in its pipeline. Small, risky biotechs aren't commanding the high premiums they used to, which is good because many of their drug candidates don't work out. With the larger biotechs like Celgene if a drug candidate fails it is disappointing and the stock can lose some momentum, but cash flow can be used to buy and develop more candidates. Celgene's cash and equivalents balance ended at $2.58 billion. Cash flow from operations was $602 million. $885 million was spent on share repurchases in the quarter.
Hopefully some time soon Celgene will start paying out a dividend, which is the true gold standard for today's investors.
Keep diversified!
Disclaimer: I am long Celgene. I have no plans to buy or sell Celgene in the next two weeks.
Consider Celgene's Q3 earnings reported last week. Revenue was $1.22 billion, up 3% sequentially from $1.18 billion and up 41% from $886 million in the year-earlier quarter. GAAP net income was $373.0 million, up 34% sequentially from $279.2 million and up 33% from $281.2 million year-earlier. GAAP EPS were $0.81, 37% sequentially from $0.59 and up 35% from $0.60 year-earlier. Non-GAAP EPS was EPS $1.02.
Most of this rapid growth was based on a single therapy, Revlimid for multiple myeloma (MM) and myelodysplastic syndromes (MDS). Revlimid revenues grew 28% from a year earlier. Expansion is largely international now, with Russia, China and Brazil still ahead. In addition various clinical trials have indicated Revlimid will be beneficial in other types of cancer. Revlimid is in Phase III trials for CLL (chronic lymphocytic leukemia), NHL (non-Hodgkin lymphoma) and prostate cancer.
Thalomid is ancient and had revenues $83 million, down 12% y/y.
VIDAZA for multiple myeloma revenues were $191 million, up 35% y/y. This is despite losing exclusivity in the United States.
The bit new revenue generator is ABRAXANE for breast cancer. Abraxane is also in clinical trials for treating lung, pancreatic, bladder, skin, and ovarian cancers. ABRAXANE revenues were $114 million, up 20% sequentially, that is quarter over quarter; Celgene did not market it a year ago. A Phase III trial comparing it to decarbazine for metastatic melanoma is expecting to read out data in mid 2012. Phase III Pancreatic cancer trial should complete enrollment in Q1 2012. International revenue continues to ramp. For instance, in the quarter Celgene received reimbursement permission for Abraxane in in Greece and the Czech Republic.
Earlier in the pipeline Celgene displays depth-of-field. Of course most pre-clinical drugs don't make it through all the clinical phases and FDA approval; there are likely to be some losers. Celgene's pipeline is so broad and important you could write a book about it.
In Oncology/Hematology we have pomalidomide in Phase III trials for myelofibrosis and nearing the end of Phase II for multiple myeloma. There is Amrubicin, in Phase III for small cell lung cancer. In Phase II we also have ACE-011 for CIA and ABI-008 for prostate cancer. In Phase I we have Tork Inhibitor and ABI-009, both for solid tumors. There are two additional pre-clinical ABI variants for solid tumors.
Apremilast completed enrollment of patients in Phase III trials for psoriasis and psoriatic arthritis, with three more Phase III trials to complete enrollment by year-end. Phase II trial data for ankylosing spondylitis will be presented in November. In inflammation and immunology we also have JNK CC-930, CC-11050 and PDA-001 in Phase II.
Pomalidomide Phase II data for relapsed and refractory myeloma will be presented at ASH in December. The company is conducting a broad clinical program to support global registrations for pomalidomide.
Beyond that Celgene lists over a dozen agents in discovery and pre-clinical phases.
Of course, what will affect Celgene's stock price soonest are the late stage candidates. The first big movers is likely to be expanding the label for Revlimid to first-line (initial) treatment of multiple myeloma. The second would be Abraxane for non-small cell lung cancer, with FDA submission in second half of 2011 and a decision likely in the first half of 2012.
In general it is a very good time to invest in biotechnology, even given the known risks. Celgene is a cash cow that also has unrealized value in its pipeline. Small, risky biotechs aren't commanding the high premiums they used to, which is good because many of their drug candidates don't work out. With the larger biotechs like Celgene if a drug candidate fails it is disappointing and the stock can lose some momentum, but cash flow can be used to buy and develop more candidates. Celgene's cash and equivalents balance ended at $2.58 billion. Cash flow from operations was $602 million. $885 million was spent on share repurchases in the quarter.
Hopefully some time soon Celgene will start paying out a dividend, which is the true gold standard for today's investors.
Keep diversified!
Disclaimer: I am long Celgene. I have no plans to buy or sell Celgene in the next two weeks.
Friday, November 4, 2011
Dendreon Capitulation
Following the announcement of Q3 results on November 2, 2011, Dendreon (DNDN) stock capitulated. One can only surmise that those who came to the Dendreon game late and hoped to make easy profits, thereby showing their lack of understanding of cancer drug introductions or poor choice in momentum stocks, are now out of the stock. It would be interesting to know who now owns all that stock. Dendreon's 52-week high was $43.96, but it actually hit a post-FDA approval of Provenge for prostate cancer high of $55.43 on May 10, 2010. Its 52-week low was on November 3, at $6.46, with a dead cat bounce today bringing it up to $6.69 at the close. That represents a market capitalization of just under $1 billion.
Q3 results were about what any reasonable person would expect. On August 9, 2011, I guesstimated Q3 revenue at $66 million. It came in at $64.3 million. That included $3 million in non-Provenge royalty payments. Which puts Provenge at $61 million, up 23% from $49.6 million in Q2. Where else would that be a slow ramp?
For those who baled there were two major factors. Revenues were not ramping as quickly as they hoped, and there is a not-unreasonable questioning of where Provenge revenues might peak. In a mere 12 months we have gone from wildly optimistic to deeply pessimistic projections.
What are reasonable projections for Provenge revenues? You have the number of patients covered by the label annually, less those who don't try the therapy. There is no financial reason to not try the therapy since it is covered by Medicaid and Medicare, as well as all major private health insurance plans. The current label constitutes a window through which most prostate cancer patients whose disease progresses will pass, but currently you have to wait for the window. If you a different therapy during the window and wait long enough you can find yourself off label. There is no good reason for a rational patient (or physician) to let that happen. Provenge is very safe and takes only 1 month to administer. It should be the first therapy tried when a patient enters the window. Other therapies can then be tried before waiting to see if Provenge is working, a good strategy given the low percentage of men it provides complete remission for.
33,000 men are expected to die of prostate cancer in 2011, but not all of those go through the Provenge label window because the cancer can become symptomatic before becoming castrate-resistant. I estimate that 15,000 men in the United States will reach the stage of hormone-refractory, non-symptomatic or minimally symptomatic, metastatic prostate cancer each year. This estimate is less that the over 30,000 deaths from prostate cancer each year, since not all men go through the window before dying. Men who knowingly hit this stage usually have already had surgery or radiation therapy plus hormone therapy, but many are not diagnosed until after they have passed the window. Provenge therapy costs about $90,000. If 10,000 men per year try Provenge revenues would be $900 million per year. (There will be 240,890 new prostate cancer cases in the U.S. in 2011 according to the National Cancer Institute, but most men are cured by surgery or radiation or die of something else before their cancers become metastatic.)
I can only conclude that the $61 million for Provenge in Q3, annualized to $244 million, is just the beginning of the ramp. Add to that European patients. Add to that the rest of the world. Add to that the possible expansion of the label. Provenge works by getting immune cells to attack cells presenting PAP (Prostatic Acid Phosphatase). It is present in symptomatic disease and during the hormone dependent phase. It would not be surprising if Dendreon were able to extend the label following clinical trials targeting off label phases.
Guaranteed? Of course not. It may make sense to prescribe Provenge, but that does not mean doctors will universally make that a practice. Competitive therapies may prevail, and we can expect new therapies to come down the pipeline until something really can cure the great majority of metastatic prostate cancers.
Dendreon won't stand still either. In addition to global expansion and Provenge label expansion, we can expect other immunotherapies to be developed. Each cancer type that has an appropriate immune system target should be addressable by this paradigm.
Will this happen over night? Of course not. Management was way overconfident in their projections in early 2011. Now they seem to have received the message and are digging into the task of educating patients and physicians. Q4 will not see much of a revenue ramp, but that is because patients and doctors are not likely to start a complicated, month long procedure during the holidays.
Just guessing, but I would expect Q1 2012 to show a better revenue ramp, probably to between $75 and $80 million. Management won't give guidance, and it is really up to the doctors who deal with prostate cancer. I think as word gets out about successes from Provenge, the process will become demand driven. How long that might take, I am not willing to guess.
In any case Dendreon is a stock for patient investors, as has been keenly demonstrated several times in the last 5 years.
Disclaimer: I am long Dendreon. I won't trade the stock for at least 3 days after this article is posted. I am likely to be a buyer at today's price.
Q3 results were about what any reasonable person would expect. On August 9, 2011, I guesstimated Q3 revenue at $66 million. It came in at $64.3 million. That included $3 million in non-Provenge royalty payments. Which puts Provenge at $61 million, up 23% from $49.6 million in Q2. Where else would that be a slow ramp?
For those who baled there were two major factors. Revenues were not ramping as quickly as they hoped, and there is a not-unreasonable questioning of where Provenge revenues might peak. In a mere 12 months we have gone from wildly optimistic to deeply pessimistic projections.
What are reasonable projections for Provenge revenues? You have the number of patients covered by the label annually, less those who don't try the therapy. There is no financial reason to not try the therapy since it is covered by Medicaid and Medicare, as well as all major private health insurance plans. The current label constitutes a window through which most prostate cancer patients whose disease progresses will pass, but currently you have to wait for the window. If you a different therapy during the window and wait long enough you can find yourself off label. There is no good reason for a rational patient (or physician) to let that happen. Provenge is very safe and takes only 1 month to administer. It should be the first therapy tried when a patient enters the window. Other therapies can then be tried before waiting to see if Provenge is working, a good strategy given the low percentage of men it provides complete remission for.
33,000 men are expected to die of prostate cancer in 2011, but not all of those go through the Provenge label window because the cancer can become symptomatic before becoming castrate-resistant. I estimate that 15,000 men in the United States will reach the stage of hormone-refractory, non-symptomatic or minimally symptomatic, metastatic prostate cancer each year. This estimate is less that the over 30,000 deaths from prostate cancer each year, since not all men go through the window before dying. Men who knowingly hit this stage usually have already had surgery or radiation therapy plus hormone therapy, but many are not diagnosed until after they have passed the window. Provenge therapy costs about $90,000. If 10,000 men per year try Provenge revenues would be $900 million per year. (There will be 240,890 new prostate cancer cases in the U.S. in 2011 according to the National Cancer Institute, but most men are cured by surgery or radiation or die of something else before their cancers become metastatic.)
I can only conclude that the $61 million for Provenge in Q3, annualized to $244 million, is just the beginning of the ramp. Add to that European patients. Add to that the rest of the world. Add to that the possible expansion of the label. Provenge works by getting immune cells to attack cells presenting PAP (Prostatic Acid Phosphatase). It is present in symptomatic disease and during the hormone dependent phase. It would not be surprising if Dendreon were able to extend the label following clinical trials targeting off label phases.
Guaranteed? Of course not. It may make sense to prescribe Provenge, but that does not mean doctors will universally make that a practice. Competitive therapies may prevail, and we can expect new therapies to come down the pipeline until something really can cure the great majority of metastatic prostate cancers.
Dendreon won't stand still either. In addition to global expansion and Provenge label expansion, we can expect other immunotherapies to be developed. Each cancer type that has an appropriate immune system target should be addressable by this paradigm.
Will this happen over night? Of course not. Management was way overconfident in their projections in early 2011. Now they seem to have received the message and are digging into the task of educating patients and physicians. Q4 will not see much of a revenue ramp, but that is because patients and doctors are not likely to start a complicated, month long procedure during the holidays.
Just guessing, but I would expect Q1 2012 to show a better revenue ramp, probably to between $75 and $80 million. Management won't give guidance, and it is really up to the doctors who deal with prostate cancer. I think as word gets out about successes from Provenge, the process will become demand driven. How long that might take, I am not willing to guess.
In any case Dendreon is a stock for patient investors, as has been keenly demonstrated several times in the last 5 years.
Disclaimer: I am long Dendreon. I won't trade the stock for at least 3 days after this article is posted. I am likely to be a buyer at today's price.
Wednesday, November 2, 2011
Biogen Idec: Q3 Clues to Value
When I wrote "Biogen Idec PML Test Approved in Europe, Changing Tysabri Outlook" on March 15, 2011, the price per share of BIIB was $69.56. When I wrote "Biogen Idec, Is there more Value?" on July 11, 2011, it closed at $105.53, having backed off its recent 52 week high of $109.63. Quite a run. It is headed up today after closing at $114.23 yesterday, so at least those wise people who are in the stock market these days think the answer is yes, there is still more value to be had from Biogen.
So, the eternal investor questions: did something change? Does the run up reflect value that was already there back in March? Could this be another momentum run unjustified by fundamentals? Could there be even more value in the stock?
We have had a number of recent data points to inform our views. BG-12, an oral agent for multiple sclerosis (MS), produced Phase III clinical results that should gain marketing approval from the FDA (of course, there is no guarantee of that). Biogen is generally held to sell the most effective MS drugs, but recently Gilenya by Novartis, became the first oral agent on the market.
In addition Daclizumab HYP showed good Phase 2b trial results. Dexpramipexole for Lou Gehrig's (ALS) disease Phase III trial became fully enrolled recently.
Third quarter (Q3) results released on October 28, along with the analyst conference call, demonstrated that current therapies are still ramping revenues. Biogen Idec's two multiple sclerosis (MS) blockbuster drugs are Avonex, with revenues in Q3 of $682 million, up 6% y/y, and Tysabri, with revenues of $277 million, up 26% y/y. Avonex has been around a long time and dominates the market, but its sales had flattened until the PEN was recently introduced, which makes administering it much easier. On June 22 Biogen had announced the EU approved including JCV status as a risk factor for Tysabri, which we presumed would happen in March. The risk of death or severe injury from PML, a result of JCV getting out of control when immune responses are suppressed (immune responses are the cause of MS), had been a big problem for Biogen. Now patients can test to find out if they are infected with JCV or not and with the help of their doctors make appropriate decisions about the risks versus the benefits of Tysabri.
Given all this good news and the big run up in 2011, are we at a just-right stock price? Of course next year's price will depend on how revenues and profits ramp (or don't) in 2012, and what the outlook looks like for 2013.
I will be surprised if Tysabri revenue growth does not accelerate in the second half of 2012 if BG-12 comes online. I am would not sell the stock in the current price band, and believe BIIB is currently a good bet for new money. However, in aside to the usual macroeconomic and stock market risks, all therapies run some risk from new adverse reactions being discovered and from current and future competing products.
At this point Biogen pays no dividend, but is certainly a profitable enough company that it could. It would also show management's confidence in the company's future. They spend a lot on R&D, over $300 million (GAAP) in Q3, and have a lot of cash, $2.9 billion, and a lot of non-GAAP net income, $395 million in Q3. They do use cash for stock buy backs and to acquire promissing pipeline candidates.
Disclaimer: I am long Biogen Idec. I have no plans to buy or sell in the next 3 days, but do sell stocks I feel have become overpriced.
See also http://www.biogenidec.com/
So, the eternal investor questions: did something change? Does the run up reflect value that was already there back in March? Could this be another momentum run unjustified by fundamentals? Could there be even more value in the stock?
We have had a number of recent data points to inform our views. BG-12, an oral agent for multiple sclerosis (MS), produced Phase III clinical results that should gain marketing approval from the FDA (of course, there is no guarantee of that). Biogen is generally held to sell the most effective MS drugs, but recently Gilenya by Novartis, became the first oral agent on the market.
In addition Daclizumab HYP showed good Phase 2b trial results. Dexpramipexole for Lou Gehrig's (ALS) disease Phase III trial became fully enrolled recently.
Third quarter (Q3) results released on October 28, along with the analyst conference call, demonstrated that current therapies are still ramping revenues. Biogen Idec's two multiple sclerosis (MS) blockbuster drugs are Avonex, with revenues in Q3 of $682 million, up 6% y/y, and Tysabri, with revenues of $277 million, up 26% y/y. Avonex has been around a long time and dominates the market, but its sales had flattened until the PEN was recently introduced, which makes administering it much easier. On June 22 Biogen had announced the EU approved including JCV status as a risk factor for Tysabri, which we presumed would happen in March. The risk of death or severe injury from PML, a result of JCV getting out of control when immune responses are suppressed (immune responses are the cause of MS), had been a big problem for Biogen. Now patients can test to find out if they are infected with JCV or not and with the help of their doctors make appropriate decisions about the risks versus the benefits of Tysabri.
Given all this good news and the big run up in 2011, are we at a just-right stock price? Of course next year's price will depend on how revenues and profits ramp (or don't) in 2012, and what the outlook looks like for 2013.
I will be surprised if Tysabri revenue growth does not accelerate in the second half of 2012 if BG-12 comes online. I am would not sell the stock in the current price band, and believe BIIB is currently a good bet for new money. However, in aside to the usual macroeconomic and stock market risks, all therapies run some risk from new adverse reactions being discovered and from current and future competing products.
At this point Biogen pays no dividend, but is certainly a profitable enough company that it could. It would also show management's confidence in the company's future. They spend a lot on R&D, over $300 million (GAAP) in Q3, and have a lot of cash, $2.9 billion, and a lot of non-GAAP net income, $395 million in Q3. They do use cash for stock buy backs and to acquire promissing pipeline candidates.
Disclaimer: I am long Biogen Idec. I have no plans to buy or sell in the next 3 days, but do sell stocks I feel have become overpriced.
See also http://www.biogenidec.com/
Tuesday, November 1, 2011
Akamai Grows with Internet
Akamai Technologies' (AKAM) stock price is $26.43 as I write. Before (Wednesday, October 26, 2011) Akamai's Q3 results announcement and analyst conference call the price ended at $23.77, and its peak the last few days was $28.28 on Friday. Clearly the results and outlooks pleased more traders than they displeased. What can we learn from the results and conference call?
Akamai is best known from the dot.com boom bust era, when it soared in price before it started showing profits. During the last decade its earnings have grown pretty steadily on a year to year basis. Its stock price and P/E ratio has been pretty well-aligned with reality. Today the trailing 12 month P/E is 26. Non-GAAP earnings for Q3 were up 10% y/y, and revenues were up 11%. The P/E is a bit high for this market, but the almost the entire market is undervalued due to fear still triumphing over greed.
Akamai's core business is content delivery, speeding up web page and file delivery from originators to consumers. Increasingly its income and profits are derived from "value-added" businesses, including security for cloud datacenters and DSA (dynamic site acceleration). It is also involved in accelerating the delivery of content to mobile devices.
As the amount of data delivered by the Internet, including cellular networks, grows, so does Akamai, presuming it maintains its large market share in the business. But prices also drop on a per unit basis as volume goes up. Akamai management believes that the delivery of video content is going to drive up volume, revenue and profits. While video data delivery is growing rapidly, it has not yet started to accelerate at rates that would compensate for Akamai's aggressive pricing to its clients.
There is always concern about competition, but mostly competitors have had to compete on price to win customers, making their profit margins thin or non-existent.
Akamai has $1.2 billion in cash and equivalents and generated $116 million in cash flow from operations in the quarter. They invested $47 million in capital expenditures. It is hard to compete with that, as I wrote in Akamai or Limelight? in January of this year.
At this price I am holding my Akamai stock, believing that downside risks are mainly market risks while upside potential is present from both increased video delivery and broader adoption of Akamai's cloud services solutions. Another bright spot is international revenue, which grew 15% y/y. Akamai started in the U.S. and is still expanding its reach to developing economies.
I first bought Akamai for $17.56 per share in September of 2008 when everyone else was panicking. I have both bought and sold shares since then, as P/E ratios have swung rather wildly (the 52 week high was $54.65, 52 weak low was $18.25).
For more detail see my Akamai (AKAM) Q3 2011 conference call summary.
Disclaimer: I am long AKAM, but occasionally trim or expand my position. I don't plan to trade AKAM in the next 3 days.
See also: www.akamai.com
Akamai is best known from the dot.com boom bust era, when it soared in price before it started showing profits. During the last decade its earnings have grown pretty steadily on a year to year basis. Its stock price and P/E ratio has been pretty well-aligned with reality. Today the trailing 12 month P/E is 26. Non-GAAP earnings for Q3 were up 10% y/y, and revenues were up 11%. The P/E is a bit high for this market, but the almost the entire market is undervalued due to fear still triumphing over greed.
Akamai's core business is content delivery, speeding up web page and file delivery from originators to consumers. Increasingly its income and profits are derived from "value-added" businesses, including security for cloud datacenters and DSA (dynamic site acceleration). It is also involved in accelerating the delivery of content to mobile devices.
As the amount of data delivered by the Internet, including cellular networks, grows, so does Akamai, presuming it maintains its large market share in the business. But prices also drop on a per unit basis as volume goes up. Akamai management believes that the delivery of video content is going to drive up volume, revenue and profits. While video data delivery is growing rapidly, it has not yet started to accelerate at rates that would compensate for Akamai's aggressive pricing to its clients.
There is always concern about competition, but mostly competitors have had to compete on price to win customers, making their profit margins thin or non-existent.
Akamai has $1.2 billion in cash and equivalents and generated $116 million in cash flow from operations in the quarter. They invested $47 million in capital expenditures. It is hard to compete with that, as I wrote in Akamai or Limelight? in January of this year.
At this price I am holding my Akamai stock, believing that downside risks are mainly market risks while upside potential is present from both increased video delivery and broader adoption of Akamai's cloud services solutions. Another bright spot is international revenue, which grew 15% y/y. Akamai started in the U.S. and is still expanding its reach to developing economies.
I first bought Akamai for $17.56 per share in September of 2008 when everyone else was panicking. I have both bought and sold shares since then, as P/E ratios have swung rather wildly (the 52 week high was $54.65, 52 weak low was $18.25).
For more detail see my Akamai (AKAM) Q3 2011 conference call summary.
Disclaimer: I am long AKAM, but occasionally trim or expand my position. I don't plan to trade AKAM in the next 3 days.
See also: www.akamai.com
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