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!
Showing posts with label technology. Show all posts
Showing posts with label technology. Show all posts
Wednesday, January 18, 2012
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.
Friday, June 24, 2011
Oracle (ORCL) Sun Shines
Yesterday Oracle (ORCL) issued stunningly good results for its 4th fiscal quarter (Q4) 2011 ending May 31st. The price of the stock promptly took a major dive in after-hours trading, and is still down substantially as I write.
Usually when this sort of thing happens, a good report followed by a price fall, it is because either: (1) investors expectations were even higher or (2) guidance for the next quarter is below analyst expectations.
This time the issue is something far more specific: the revenue derived from a specific segment, computer hardware, that was acquired with Sun Microsystems last year. Before reading my commentary below, you might want to first familiarize yourself with Oracle quarter results with my notes on Oracle Q4 2011 Analyst Call.
Despite an overall increase in Oracle revenues of 13% from year earlier, hardware systems product revenues were $1.16 billion, down from $1.23 billion in the year-earlier quarter. That raised some flags with some analysts. Which mostly shows these guys have too many stocks to cover, or were hired for their connections, not their analytic ability. Oracle management explained their strategy before, and they explained it again during the question and answer session.
I'm with management on this one: Sun was poorly run from a business perspective, and Oracle is not obligated to repeat Sun's business mistakes. Rather than looking at specific products, Oracle looked at the overall Sun problem: low margins. Fortunately, those low margins were not all of a kind.
Oracle decided to stop selling low margin computer hardware products whenever possible, with the exception of those that margins could be raised over time. So a year later, they are selling slightly less product, but making far more profits on it. Not only that, but they are gearing up to sell a lot more product, in particular their Exadata and Exalogic lines. What is there not to like about that?
Oracle is a rapidly growing, undervalued technology stock. We are not in a tech bubble. A gold bubble, yes. A bond bubble, yes. Idiots are holding bonds at this point. Bonds are trash, in most cases not bringing in enough returns to keep even with inflation. Their principal is just as much at risk as it would be if invested (wisely) in quality stocks.
I don't own Oracle stock at this point, but with the price drop and a bright future, I could buy ORCL in my next buying round. The competition is mainly small cap tech and biotech stocks that may grow even faster, and yet are also cheap right now. [See what I own at William Meyers current stock portfolio]
One aspect of the situation not mentioned was Oracle's current war with HP over Intel Itanium based computers. I don't see much downside for Oracle here. Oracle software can run on many types of hardware. Itanium was always a bad idea, and Oracle should not be obligated to support two different Intel chip architectures.
Usually when this sort of thing happens, a good report followed by a price fall, it is because either: (1) investors expectations were even higher or (2) guidance for the next quarter is below analyst expectations.
This time the issue is something far more specific: the revenue derived from a specific segment, computer hardware, that was acquired with Sun Microsystems last year. Before reading my commentary below, you might want to first familiarize yourself with Oracle quarter results with my notes on Oracle Q4 2011 Analyst Call.
Despite an overall increase in Oracle revenues of 13% from year earlier, hardware systems product revenues were $1.16 billion, down from $1.23 billion in the year-earlier quarter. That raised some flags with some analysts. Which mostly shows these guys have too many stocks to cover, or were hired for their connections, not their analytic ability. Oracle management explained their strategy before, and they explained it again during the question and answer session.
I'm with management on this one: Sun was poorly run from a business perspective, and Oracle is not obligated to repeat Sun's business mistakes. Rather than looking at specific products, Oracle looked at the overall Sun problem: low margins. Fortunately, those low margins were not all of a kind.
Oracle decided to stop selling low margin computer hardware products whenever possible, with the exception of those that margins could be raised over time. So a year later, they are selling slightly less product, but making far more profits on it. Not only that, but they are gearing up to sell a lot more product, in particular their Exadata and Exalogic lines. What is there not to like about that?
Oracle is a rapidly growing, undervalued technology stock. We are not in a tech bubble. A gold bubble, yes. A bond bubble, yes. Idiots are holding bonds at this point. Bonds are trash, in most cases not bringing in enough returns to keep even with inflation. Their principal is just as much at risk as it would be if invested (wisely) in quality stocks.
I don't own Oracle stock at this point, but with the price drop and a bright future, I could buy ORCL in my next buying round. The competition is mainly small cap tech and biotech stocks that may grow even faster, and yet are also cheap right now. [See what I own at William Meyers current stock portfolio]
One aspect of the situation not mentioned was Oracle's current war with HP over Intel Itanium based computers. I don't see much downside for Oracle here. Oracle software can run on many types of hardware. Itanium was always a bad idea, and Oracle should not be obligated to support two different Intel chip architectures.
Monday, May 30, 2011
Marvell Technology Sees Higher Q2
Marvell Technology (MRVL) makes semiconductor chips for hard disk drives, cell phones, networking and telecommunications. Recently the going has been rough for Marvell stockholders, as reflected in its stock price. After a high of $22.87 in April 2010, the stock hit a 52-week low at $13.87. After the Marvell analyst conference call, on Friday the stock jumped 11%, from the Thursday May 26 close of $14.56 to the Friday close of $16.17. So is that it for Marvell, or are we starting a new ramp?
Marvell's management described the results for Q1 fiscal 2012 ending April 30, 2011 as a low point in their cycle. Partly this was the usual seasonality as consumer end products build in Q2s and Q3s. But it also reflected poor sales to RIM for Blackberry models, a slow growth rate in the hard disk drive market, and slow new product ramps. In each case Marvell makes one or more mixed digital and analog chips for the end products.
Revenue for Q1 was $802.4 million, down 11% sequentially from $900.5 million and also down 6% from $855.6 million in the year-earlier quarter. Revenue was at the very low end of guidance. I think the stock had been shorted on the theory they would actually miss guidance, and they did miss Street estimates.
However, Marvell reported that things are already picking up in Q2 and the long-promised Marvell Inflection Point may finally make an appearance in Q3. Q2 revenues are now expected between $870 to $910 million, with non-GAAP EPS of about $0.37, which would support a stock price far higher than Friday's close.
The change in fortunes has several factors. Marvell is leading (or certainly one of the top 2 leaders) in the Solid State Drive market, which is ramping pretty nicely as prices drop and people see the advantages of SSDs. It is also a leader in chips for high-end networks. In the smartphone market we know the competition is intense, but Marvell providing the core chips for the Chinese TD-SCDMA standard based OPhone market. While OPhones started to be available in 2010, they are expected to ramp quickly as 2011 progresses. We are talking potentially 600 million OPhone customers, which makes the fight over American market share seem like a global side show.
Marvell is also sampling solutions for the LTE smartphone market. Again, expect fierce competition, but Marvell should win a share of slots in 2012.
I own Marvell stock and understand the risk of competing against the talented people at other semiconductor companies.
See also:
http://www.marvell.com/
My May 26, 2011 Marvell (MRVL) analyst call summary
My March 2011 Marvell (MRVL) analyst call summary
Friday, May 13, 2011
Cisco Systems Rearranges Itself
Cisco Systems CEO John Chambers, once a hero to tech sector investors, now has serious credibility problems. During the recession, as Cisco struggled along with most other companies, he promissed that investments made during that period would result in a rapid growth of the company post-recession. He repeatedly stated that the growth in data transfers on the Internet, driven largely by the increase in collaboration and video content, would drive a rapid growth in sales of Cisco's routers and switches. In addition, Cisco would enter new areas, "market adjacencies," that would further power revenue and profit growth.
It sounded reasonable. Cisco, led by Chambers, had done it before. It could still happen, but the horizon keeps receding.
Reporting fiscal Q3 (ending April 30) results at the analyst conference call Wednesday, Chambers did not sound as confident as in the past. GAAP EPS of $0.33 was down 11% from year-earlier; non-GAAP EPS of $0.42 was flat y/y. He admitted to problems, but his description of rearanging the management structure of Cisco was not very confincing.
Ethernet switches are a lagging performer. Switch revenue was down 9% from year earlier. That was a year in which the economy expanded, and many companies did very well turning datacenters into "cloud" stuff.
Government ("public sector") purchases were weak. Tax increases, anyone? Without tax revenue, governments are constrained in how much they can buy from companies like Cisco. More money might end up in consumer pockets, but consumers don't by industrial strength 10 gigabyte switches. There is a lot of competition in switches. With Cisco trying to scoop up datacenter server spots from HP, it looks like HP did a better job scooping up switch spots from Cisco. Another example of ruinous competition.
More generally, there are always two tides running at cross currents in the technology sector. If Internet usage doubles, but switch technology improves so that the cost per unit of bandwidth halves, the overall switch manufacturing sector will stand in place. We have certainly seen this with PCs. You just don't need that expensive of a PC anymore to send an email, or even to watch HD video.
I don't own Cisco stock despite following the company for years. I've considered buying, but have always been attracted to companies with lower P/E ratios or higher growth rates. Now might actually be a good time to buy Cisco. Despite its troubles it had $1.8 billion in GAAP net income in the quarter. It had $43.4 billion in cash at the end of the quarter. The stock price is reasonable, if you believe Cisco can continue to compete.
In the past I watched people who buy enterprise switches and routers buy Cisco equipment as the safe, can't get fired for that decision alternative. Now things are more up in the air. Cisco may not be able to get the default victor pricing premium.
Keep it factual for a while, John. Don't be promising investors utopias you can't deliver. Focus on introducing great products, focus on engineering, focus on sales. Even that may not be enough to maintain Cisco's position in this highly competitive neighborhood, but it will do a lot for Cisco's credibility.
For more details on the call, see my Cisco Q3 2011 Analyst Call News Summary.
See also http://www.cisco.com/
It sounded reasonable. Cisco, led by Chambers, had done it before. It could still happen, but the horizon keeps receding.
Reporting fiscal Q3 (ending April 30) results at the analyst conference call Wednesday, Chambers did not sound as confident as in the past. GAAP EPS of $0.33 was down 11% from year-earlier; non-GAAP EPS of $0.42 was flat y/y. He admitted to problems, but his description of rearanging the management structure of Cisco was not very confincing.
Ethernet switches are a lagging performer. Switch revenue was down 9% from year earlier. That was a year in which the economy expanded, and many companies did very well turning datacenters into "cloud" stuff.
Government ("public sector") purchases were weak. Tax increases, anyone? Without tax revenue, governments are constrained in how much they can buy from companies like Cisco. More money might end up in consumer pockets, but consumers don't by industrial strength 10 gigabyte switches. There is a lot of competition in switches. With Cisco trying to scoop up datacenter server spots from HP, it looks like HP did a better job scooping up switch spots from Cisco. Another example of ruinous competition.
More generally, there are always two tides running at cross currents in the technology sector. If Internet usage doubles, but switch technology improves so that the cost per unit of bandwidth halves, the overall switch manufacturing sector will stand in place. We have certainly seen this with PCs. You just don't need that expensive of a PC anymore to send an email, or even to watch HD video.
I don't own Cisco stock despite following the company for years. I've considered buying, but have always been attracted to companies with lower P/E ratios or higher growth rates. Now might actually be a good time to buy Cisco. Despite its troubles it had $1.8 billion in GAAP net income in the quarter. It had $43.4 billion in cash at the end of the quarter. The stock price is reasonable, if you believe Cisco can continue to compete.
In the past I watched people who buy enterprise switches and routers buy Cisco equipment as the safe, can't get fired for that decision alternative. Now things are more up in the air. Cisco may not be able to get the default victor pricing premium.
Keep it factual for a while, John. Don't be promising investors utopias you can't deliver. Focus on introducing great products, focus on engineering, focus on sales. Even that may not be enough to maintain Cisco's position in this highly competitive neighborhood, but it will do a lot for Cisco's credibility.
For more details on the call, see my Cisco Q3 2011 Analyst Call News Summary.
See also http://www.cisco.com/
Wednesday, December 29, 2010
Red Hat accelerates earnings growth
Red Hat (RHT) had impressive improvements in revenues and net income (profits) in its fourth quarter (its 3rd fiscal 2011 quarter). For details, see my Red Hat analyst call summary for the December 21st call.
Still, while Red Hat is a great company, its price-to-earnings ratio is much higher than many other good, rapidly growing technology companies. So at this price it is for momentum players and those who can wait a few years to see its profits catch up to the expectations. I don't own any Red Had stock presently, but did when it had a lower P/E ratio.
Red Hat specializes in Linux for the enterprise and related technologies.
Still, while Red Hat is a great company, its price-to-earnings ratio is much higher than many other good, rapidly growing technology companies. So at this price it is for momentum players and those who can wait a few years to see its profits catch up to the expectations. I don't own any Red Had stock presently, but did when it had a lower P/E ratio.
Red Hat specializes in Linux for the enterprise and related technologies.
Thursday, November 11, 2010
Cisco Leads Market Lower After Conference
The market is being led lower by Cisco (CSCO) today. Yesterday Cisco released slightly disappointing results and, at its analyst conference call, gave very disappointing guidance for the current quarter, which is Cisco's Q2 fiscal 2011.
In short, government spending is a big part of Cisco's pie, and government spending, especially by American states that have balanced-budget provisions, was weak. A second area of weakness was sales of set top boxes to cable companies.
For a more detailed report try my Cisco fiscal Q1 2011 analyst conference call summary.
I don't own Cisco stock.
Up today is NVIDIA. But I have other conferences to cover for clients, so I may not be posting my NVDA conference call summary (Q3 fiscal 2011) until late tonight or even Friday. But you can bookmark the page and return to it later.
For a complete list of technology stocks I cover for the public, see analyst conference call list.
In short, government spending is a big part of Cisco's pie, and government spending, especially by American states that have balanced-budget provisions, was weak. A second area of weakness was sales of set top boxes to cable companies.
For a more detailed report try my Cisco fiscal Q1 2011 analyst conference call summary.
I don't own Cisco stock.
Up today is NVIDIA. But I have other conferences to cover for clients, so I may not be posting my NVDA conference call summary (Q3 fiscal 2011) until late tonight or even Friday. But you can bookmark the page and return to it later.
For a complete list of technology stocks I cover for the public, see analyst conference call list.
Monday, October 4, 2010
The Cost of Anything is Everything
Money was the first universal standard of value. While even today there is not yet a universal unit of money, the art of trading the coins of different nations at some fair exchange rate is well recorded in some of mankind's earliest documents.
Economics got its modern thrust largely from Adam Smith's Wealth of Nations, published in 1776, and still probably the best single book on econmics ever written. Carl Marx shocked the political and economic world with his mid-18th century Labor Theory of Value in which he noted that all productive economic activity involved human labor. If one allowed that all human time spent in productive work was of roughly equal value (or took into account qualitative differences in individual efforts, and used the average as a standard hour of labor), one could see that anything from a bushel of corn to a railway locomotive could be seen to have embodied in it some number of hours of human labor.
The labor theory of value is interesting, but has had limited use. More recently there have been numerous descriptions of how economic activity can be measured in terms other than money. One of the most commonly cited lately is energy. How much energy is used to cool a house, grow a head of lettuce, serve up a Facebook page? Popular press articles act as if these quantities are simple to calculate. But they are not.
Taking one example, measuring the energy required to cool one house on one hot summer day seems easy enough. You just put a meter on the outlet leading to the air conditioner. But what about the cost of the air conditioner? Why, its money cost should be depreciated over the life of the machine, and the energy costs of producing the machine accounted for in a similar manner. And what of the house itself? Should we depreciate the insulation? The roof? The cost of the foundation, or the power lines, or the road to the house?
I say, why bother with all that. If energy really is the secret currency of our time, it should show up more or less accurately in all pricing. The price of something corresponds pretty well to the energy that went into the something. A Prius actually wastes a lot more energy than a Ford Focus, because the initial price shows how much more energy was needed to produce the Prius. Better gas economy over the lifetime of the car won't compensate for the intial energy cost differential.
The cost of air conditioning in dollars, and depreciating the cost of the air conditioner itself, captures energy units used almost as well as more detailed systems.
There are many items besides energy that go into everything. Research and development expense is an interesting universal. Look around you: everything has been improved by research and development. Gas motors and electric motors, the bread from the wheat produced by scientific farming, the special machines of bread baking factories. Even when inventions are ancient, like paper making, smelting metal, and cloth production, R&D has been at work making improvements in what we actually use or how it is produced. Generally speaking, modern goods are created with less labor and more capital investment, thus upending much of the thinking that went into the labor theory of value.
The almost total interconnectedness of almost all things used by today's humans has become the fundamental reality of this era. Almost anything can be used to measure the cost of all other things, if you want to. Tantalum metal for capacitors, which are used in communications and information processing, which are used in all production and distribution of goods. Corn itself, which is used to grow new human beings as well as food animals. Nitrogen-based fertiliser, without which everything, and I mean everything, would collapse in two years. Water. Coffee. Antibiotics. Plastic. Education. Even Law, medical services, or accounting.
In this column I mainly write about individual technology companies and their prospects for future growth. We have seen in the recent global economic downturn how financial prospects are interwoven, and how good people and companies can be hurt when bad practices (predatory lending and credit bubbles, for instance) undermine the rest of the production system.
It would do well to keep in mind that the cost of anything is everything. If I buy a new car (I am at that point), it seems to be a discrete thing, bought in a discrete transaction. But any new car contains parts made by hundreds of companies. The employees who make the car and its parts consume goods made by hundreds of companies. The engineers who designed the car based their efforts on hundreds of years of earlier science, technology and engineering. The option of buying a car would not be available to me if it were not for a complex global network of people and things.
The system of production also produces negative side effects that society is slow to deal with. Air and water polution, crime of many sorts, even war. Everything we buy, and every service we consume, could be measured in terms of these negative valuations as well.
The cost of anything, of any particular thing, is everything. That is just the nature of society. We can make individual adjustments to the mix. That is what humans do when we make the choices in our lives.
Economics got its modern thrust largely from Adam Smith's Wealth of Nations, published in 1776, and still probably the best single book on econmics ever written. Carl Marx shocked the political and economic world with his mid-18th century Labor Theory of Value in which he noted that all productive economic activity involved human labor. If one allowed that all human time spent in productive work was of roughly equal value (or took into account qualitative differences in individual efforts, and used the average as a standard hour of labor), one could see that anything from a bushel of corn to a railway locomotive could be seen to have embodied in it some number of hours of human labor.
The labor theory of value is interesting, but has had limited use. More recently there have been numerous descriptions of how economic activity can be measured in terms other than money. One of the most commonly cited lately is energy. How much energy is used to cool a house, grow a head of lettuce, serve up a Facebook page? Popular press articles act as if these quantities are simple to calculate. But they are not.
Taking one example, measuring the energy required to cool one house on one hot summer day seems easy enough. You just put a meter on the outlet leading to the air conditioner. But what about the cost of the air conditioner? Why, its money cost should be depreciated over the life of the machine, and the energy costs of producing the machine accounted for in a similar manner. And what of the house itself? Should we depreciate the insulation? The roof? The cost of the foundation, or the power lines, or the road to the house?
I say, why bother with all that. If energy really is the secret currency of our time, it should show up more or less accurately in all pricing. The price of something corresponds pretty well to the energy that went into the something. A Prius actually wastes a lot more energy than a Ford Focus, because the initial price shows how much more energy was needed to produce the Prius. Better gas economy over the lifetime of the car won't compensate for the intial energy cost differential.
The cost of air conditioning in dollars, and depreciating the cost of the air conditioner itself, captures energy units used almost as well as more detailed systems.
There are many items besides energy that go into everything. Research and development expense is an interesting universal. Look around you: everything has been improved by research and development. Gas motors and electric motors, the bread from the wheat produced by scientific farming, the special machines of bread baking factories. Even when inventions are ancient, like paper making, smelting metal, and cloth production, R&D has been at work making improvements in what we actually use or how it is produced. Generally speaking, modern goods are created with less labor and more capital investment, thus upending much of the thinking that went into the labor theory of value.
The almost total interconnectedness of almost all things used by today's humans has become the fundamental reality of this era. Almost anything can be used to measure the cost of all other things, if you want to. Tantalum metal for capacitors, which are used in communications and information processing, which are used in all production and distribution of goods. Corn itself, which is used to grow new human beings as well as food animals. Nitrogen-based fertiliser, without which everything, and I mean everything, would collapse in two years. Water. Coffee. Antibiotics. Plastic. Education. Even Law, medical services, or accounting.
In this column I mainly write about individual technology companies and their prospects for future growth. We have seen in the recent global economic downturn how financial prospects are interwoven, and how good people and companies can be hurt when bad practices (predatory lending and credit bubbles, for instance) undermine the rest of the production system.
It would do well to keep in mind that the cost of anything is everything. If I buy a new car (I am at that point), it seems to be a discrete thing, bought in a discrete transaction. But any new car contains parts made by hundreds of companies. The employees who make the car and its parts consume goods made by hundreds of companies. The engineers who designed the car based their efforts on hundreds of years of earlier science, technology and engineering. The option of buying a car would not be available to me if it were not for a complex global network of people and things.
The system of production also produces negative side effects that society is slow to deal with. Air and water polution, crime of many sorts, even war. Everything we buy, and every service we consume, could be measured in terms of these negative valuations as well.
The cost of anything, of any particular thing, is everything. That is just the nature of society. We can make individual adjustments to the mix. That is what humans do when we make the choices in our lives.
Monday, May 24, 2010
Marvell Profits from R&D
In most of the computer and electronics industry the 3rd and 4th quarters are hot. Then Q1, and Q2 are seasonally down. Not that much is selling; inventory is being built for back-to-school, then for the consumer holiday spree and and-of-year corporate buying. This year so far is trending a bit different for many electronic parts suppliers because of the rapid recovery from the 2009 business panic. Judging from its quarter ending May 1, 2010 (its first fiscal quarter of 2011), Marvell Technology Group (MRVL) is benefitting from more than just industry trends.
Marvell first came to dominate the hard drive semiconductor chip industry, and those chips still account for over half of Marvell's revenue. Marvell engineers lead in combining analog and digital chip functions, so we are seeing market penetration in areas where this is an advantage. So far this has been in wired and wireless networking chips and in cell phones, particularly in smartphones. Marvell makes chips for Wi-Fi and Bluetooth, for the wireless signal that connects to cell towers, and for application processors that give the phones their ability to act like computers. While its entry into this market is relatively recent, it is already a major player.
In Q1 Revenue was $856 million, up 2% sequentially from $842.5 million and up 64% from $521 million in the year-earlier quarter. The mobile and wireless end market accounted for about 22% of revenue, so about $188 million. The segment grew 18% sequentially, and that despite Wi-Fi chips "only" growing 6% sequentially.
What is most likely to happen in the next few quarters is that wired networking and storage chips will do their usual annual ramp based on demand, plus any market share gain. Smartphone revenue will continue its explosive growth as a larger number of phones using Marvell's chips are brought to market. And the ramp will include chips for oPhones in China, which by 2011 should, by themselves, be a major source of revenue for Marvell.
In a normal market, Marvell would have a high PE ratio because of its track record and future prospects. But this is no normal market. It is a fear-driven, better a 0% treasury than a 8% stock market. It's pretty weird. Who knows, maybe the world will end and we will sink into an economic depression. But I have news for you. In that case, U.S. treasuries will be as worthless as stocks, because there will be no way the government can raise enough in taxes to cover interest payments.
I own Marvell stock to my portfolio rules limit. I could be wrong, maybe a competitor or two will best Marvell in some segment of the market, but I believe the most probable outlook is that in a few years everyone will wish they had bought Marvell in 2009 or the spring of 2010.
That's my opinion. You can also get the facts, as management presents them, by reading my Marvell MRVL analyst conference summaries.
And of course see also www.marvell.com
Marvell first came to dominate the hard drive semiconductor chip industry, and those chips still account for over half of Marvell's revenue. Marvell engineers lead in combining analog and digital chip functions, so we are seeing market penetration in areas where this is an advantage. So far this has been in wired and wireless networking chips and in cell phones, particularly in smartphones. Marvell makes chips for Wi-Fi and Bluetooth, for the wireless signal that connects to cell towers, and for application processors that give the phones their ability to act like computers. While its entry into this market is relatively recent, it is already a major player.
In Q1 Revenue was $856 million, up 2% sequentially from $842.5 million and up 64% from $521 million in the year-earlier quarter. The mobile and wireless end market accounted for about 22% of revenue, so about $188 million. The segment grew 18% sequentially, and that despite Wi-Fi chips "only" growing 6% sequentially.
What is most likely to happen in the next few quarters is that wired networking and storage chips will do their usual annual ramp based on demand, plus any market share gain. Smartphone revenue will continue its explosive growth as a larger number of phones using Marvell's chips are brought to market. And the ramp will include chips for oPhones in China, which by 2011 should, by themselves, be a major source of revenue for Marvell.
In a normal market, Marvell would have a high PE ratio because of its track record and future prospects. But this is no normal market. It is a fear-driven, better a 0% treasury than a 8% stock market. It's pretty weird. Who knows, maybe the world will end and we will sink into an economic depression. But I have news for you. In that case, U.S. treasuries will be as worthless as stocks, because there will be no way the government can raise enough in taxes to cover interest payments.
I own Marvell stock to my portfolio rules limit. I could be wrong, maybe a competitor or two will best Marvell in some segment of the market, but I believe the most probable outlook is that in a few years everyone will wish they had bought Marvell in 2009 or the spring of 2010.
That's my opinion. You can also get the facts, as management presents them, by reading my Marvell MRVL analyst conference summaries.
And of course see also www.marvell.com
Monday, May 3, 2010
Akamai Q1 Upside Surprise
Akamai (AKAM) had a kickass first quarter of 2010. Q1 is usually a down quarter for the Internet delivery acceleration company because there is a fall off advertising. Making sure that ads get delivered efficiently along with the other content of web pages is a major task for Akamai. Also many sell-side (brokerage house) analysts did not like Akamai's lowering of its prices to attract more volume in 2009.
But revenue was $240.0 million in Q1, up 1% sequentially from $238.3 million, and up 14% from $210.4 million in Q1 of 2009. Net income was $40.9 million, up 2% sequentially from $40.1 million, and up 10% from $37.1 million year-earlier. GAAP EPS (earnings per share) were $0.22, up 5% sequentially from $0.21, and up 10% from $0.20 year-earlier.
In other words, by helping its customers with lower prices, Akamai helped itself.
Although I like GAAP numbers because they are usually conservative, in Akamai's case the cash position is better than normal compared to GAAP. Cash from operations was $87.8 million, compared to net income of $40.9 million. Of course AKAM continues to invest heavily in iteslf: capital expenses in the quarter were $35.1. My guess is this is very well-deployed capital. Most of it pays for servers that are expanding Akamai's global reach. 78% of revenues are still from the U.S.
In its startup period Akamia lost money, accumulating NOLs (net offsetting losses). It has been using the NOLs these last few years to lower its tax rate. The NOLs run out this year, so its cash tax rate will go up. I'd rather make profits and pay taxes than accumulate losses.
There are a lot of companies trying to compete with Akamai, so it does not constitute a risk-free investment. So far, however, no company has come close to being able to match Akamai at Internet content delivery. While I would not describe Akamai's current stock price as cheap, it is likely to seem so later as Internet video delivery picks up steam, to Akamai's benefit.
See also my Akamai Q1 2010 analyst conference summary for April 28, 2010.
I have been a long-term Akamai investor since January 2008. My own business includes technology consulting and buy-side analysis.
See also www.akamai.com
Akamai at Wikipedia
NASDAQ Akamai summary page
But revenue was $240.0 million in Q1, up 1% sequentially from $238.3 million, and up 14% from $210.4 million in Q1 of 2009. Net income was $40.9 million, up 2% sequentially from $40.1 million, and up 10% from $37.1 million year-earlier. GAAP EPS (earnings per share) were $0.22, up 5% sequentially from $0.21, and up 10% from $0.20 year-earlier.
In other words, by helping its customers with lower prices, Akamai helped itself.
Although I like GAAP numbers because they are usually conservative, in Akamai's case the cash position is better than normal compared to GAAP. Cash from operations was $87.8 million, compared to net income of $40.9 million. Of course AKAM continues to invest heavily in iteslf: capital expenses in the quarter were $35.1. My guess is this is very well-deployed capital. Most of it pays for servers that are expanding Akamai's global reach. 78% of revenues are still from the U.S.
In its startup period Akamia lost money, accumulating NOLs (net offsetting losses). It has been using the NOLs these last few years to lower its tax rate. The NOLs run out this year, so its cash tax rate will go up. I'd rather make profits and pay taxes than accumulate losses.
There are a lot of companies trying to compete with Akamai, so it does not constitute a risk-free investment. So far, however, no company has come close to being able to match Akamai at Internet content delivery. While I would not describe Akamai's current stock price as cheap, it is likely to seem so later as Internet video delivery picks up steam, to Akamai's benefit.
See also my Akamai Q1 2010 analyst conference summary for April 28, 2010.
I have been a long-term Akamai investor since January 2008. My own business includes technology consulting and buy-side analysis.
See also www.akamai.com
Akamai at Wikipedia
NASDAQ Akamai summary page
Thursday, March 25, 2010
Red Hat (RHT) Virtualization Signal
Red Hat (RHT) continues to be not only a fascinating technology company, but a fascinating experiment in investor psychology. It has always been a good company for its customers, who benefit from its enterprise quality, low cost operating system, virtualization, and middleware. Yet the stock began highly overvalued during the first internet stock boom, became vastly undervalued in the crash that followed, and only in 2009 became somewhat overvalued again.
Yesterday's release of results for the quarter ending February 28, 2010, were quite good compared to realistic expectations, but investor's expectations were not reasonable. With Red Hat stock trading today with a Non-GAAP PE (price/earnings) trailing ratio of 41.4 and 40 times future earnings (per NASDAQ.com), meeting investor expectations was an unlikely scenario. You need faster sequential and annual growth rates to justify that kind of PE in this market.
On a GAAP basis, revenue was $195.9 million, up 1% sequentially from $194.3 million and up 18% from $166.2 million in the year-earlier quarter. Net income was $23.4 million, up 43% sequentially from $16.4 million and up 46% from $16.0 million year-earlier. EPS (diluted earnings per share were) were $0.12, up 50% sequentially from $0.08 and also up 50% from $0.08 year-earlier.
If the stock were at a reasonable price, those would be good numbers. But emotional investors who do not understand the technology market perpetually convince themselves that Red Hat is the next Microsoft. There is a big difference between being a great company in a niche and being the next Microsoft.
For the details you need to make your own analysis of the value of Red Hat stock, see my Red Hat Q4 2010 analyst conference summary and past summaries.
I have owned Red Hat stock at times; I currently do not own any. If sentiment shifts again and Red Hat becomes undervalued again, I might become a buyer. This in-and-out goes against my main line of investment thinking, buying undervalued stocks and holding them for the long term. But most of the stocks I invest in are not as volatile as Red Hat has been.
Compare Red Hat to Marvell Technology (MRVL). Marvell revenues in the quarter ending January 30, 2010 were up 65% y/y and 5% sequentially. Even taking into account the different business models (Red Hat income is subscription based, so steadier), it is reasonable to expect Marvell revenues and profits to grow faster than Red Hat in 2010 and 2011. Yet Marvell is trading at only 21.4 times past earnings and 13.9 times future earnings. Note that I own Marvell stock. But look at the PEs of other Nasdaq 100 technology stocks and you will see what I mean. Even Apple, which I frequently diss as overpriced, has a trailing PE of just 28 today; certainly no bargain, but not unreasonable.
There are a lot of technology stocks that offer better value than Red Hat right now. That is not because they are necessarily better companies (though some might be); it is just because of their relative stock prices.
More data:
http://www.redhat.com/
http://www.marvell.com/
Yesterday's release of results for the quarter ending February 28, 2010, were quite good compared to realistic expectations, but investor's expectations were not reasonable. With Red Hat stock trading today with a Non-GAAP PE (price/earnings) trailing ratio of 41.4 and 40 times future earnings (per NASDAQ.com), meeting investor expectations was an unlikely scenario. You need faster sequential and annual growth rates to justify that kind of PE in this market.
On a GAAP basis, revenue was $195.9 million, up 1% sequentially from $194.3 million and up 18% from $166.2 million in the year-earlier quarter. Net income was $23.4 million, up 43% sequentially from $16.4 million and up 46% from $16.0 million year-earlier. EPS (diluted earnings per share were) were $0.12, up 50% sequentially from $0.08 and also up 50% from $0.08 year-earlier.
If the stock were at a reasonable price, those would be good numbers. But emotional investors who do not understand the technology market perpetually convince themselves that Red Hat is the next Microsoft. There is a big difference between being a great company in a niche and being the next Microsoft.
For the details you need to make your own analysis of the value of Red Hat stock, see my Red Hat Q4 2010 analyst conference summary and past summaries.
I have owned Red Hat stock at times; I currently do not own any. If sentiment shifts again and Red Hat becomes undervalued again, I might become a buyer. This in-and-out goes against my main line of investment thinking, buying undervalued stocks and holding them for the long term. But most of the stocks I invest in are not as volatile as Red Hat has been.
Compare Red Hat to Marvell Technology (MRVL). Marvell revenues in the quarter ending January 30, 2010 were up 65% y/y and 5% sequentially. Even taking into account the different business models (Red Hat income is subscription based, so steadier), it is reasonable to expect Marvell revenues and profits to grow faster than Red Hat in 2010 and 2011. Yet Marvell is trading at only 21.4 times past earnings and 13.9 times future earnings. Note that I own Marvell stock. But look at the PEs of other Nasdaq 100 technology stocks and you will see what I mean. Even Apple, which I frequently diss as overpriced, has a trailing PE of just 28 today; certainly no bargain, but not unreasonable.
There are a lot of technology stocks that offer better value than Red Hat right now. That is not because they are necessarily better companies (though some might be); it is just because of their relative stock prices.
More data:
http://www.redhat.com/
http://www.marvell.com/
Wednesday, March 24, 2010
Adobe (ADBE) Illustrates Tech Spending Revival
Adobe (ADBE) held its first quarter fiscal 2010 analyst conference yesterday and reported generally good numbers. Revenue was $858.7 million, up 13% sequentially from $757.3 million and up 9% from $786.4 million in the year-earlier quarter. Earnings per share (EPS) were $0.24, up sequentially from negative $0.06, but down 20% from $0.30 year-earlier. (See my Adobe Q1 2010 conference summary)
Note that the quarter reported ended March 5, 2010. So the period mostly overlaps with what most companies would call their first quarter ending March 31, 2010. So it is an early indicator for software, and probably hardware, trends in the quarter.
I don't own Adobe stock, nor do I think it is undervalued compared to other tech stocks. But I do think that revenues and profits will accelerate this year.
Creative Suite 5 (CS5), the upgrade from CS4, will be released later this year. CS4 has been a disappointment, and that is mainly due to the recession and the Windows operating system cycle. CS4 corresponded to Windows Vista; CS5 will take advantage of Windows 7.
Can we admit now that much of the depth of the recession in the last quarter of 2008 and first quarter of 2009 was a business panick? Businesses cut their purchasing to the bone, some times well into the bone, because of economic uncertainty from the banking/financial sector failures, which in turn had been triggered by the housing downturn. But except for housing and finance, by and large the technology businesses were healthy. Many had large pools of cash to draw on, and were never in any danger of going under. By firing employees and cutting their own spending they made the economy worse, in particular within the tech sector, where they do a lot of buying each other's products.
In Adobe's case lots of people, freelancers and corporate drones alike, decided they could make do with CS3 rather than upgrading to CS4. Also, CS4 did not run so great on Windows XP. Remember when XP was introduced and their was the usual anti-Microsoft campaign and people were slow to adopt it? Then, once they learned XP and got used to it, they could not live without it and did not want to learn a new operating system. The same might have been true of Vista. I use Vista and it was a major improvement on XP. But between the usual timidity and the recession, a lot of people, including large enterprises, skipped Vista. Delaying taking advantage of its higher productivity over XP. Of course, Vista consumed more resources (faster processors, more memory), so by sticking with XP people were also able to avoid hardware upgrades.
2010 looks like it is shaping up to be one big refresh cycle. Old desktops can be replaced by supercomputers or even notebooks at $500 per pop. Windows 7 has gained people's confidence and really shines on newer hardware. And CS5 is going to have many new features that will increase productivity among creative professionals. As the guys at Adobe said, Create Suite lets you create once, then easily export the content to print, large screen Web format, mobile format, or even high-definition video. And it won't work well with a pokey old single-core computer running XP.
I am predicting a great year for AMD, Intel, NVIDIA, Adobe, and Microsoft. Most other innovative tech companies, both hardware and software, should do well to the extent they are competitive within their specialties. Right now the tech companies I actually own are Marvell, AMD, Dot Hill, Microchip, TTMI, SGI, and Applied Materials. Typically the first quarter of a year is seasonally down for tech companies, but I expect it to be less seasonally down than usual, followed by ramping through the year.
Later today Linux specialist Red Hat will report results for its quarter ending February 28. At openicon.com I'll be posting my Red Hat (RHT) analyst conference summary soon after the conference ends. And probably my column hear tomorrow will give some additional insight into Red Hat.
Note that the quarter reported ended March 5, 2010. So the period mostly overlaps with what most companies would call their first quarter ending March 31, 2010. So it is an early indicator for software, and probably hardware, trends in the quarter.
I don't own Adobe stock, nor do I think it is undervalued compared to other tech stocks. But I do think that revenues and profits will accelerate this year.
Creative Suite 5 (CS5), the upgrade from CS4, will be released later this year. CS4 has been a disappointment, and that is mainly due to the recession and the Windows operating system cycle. CS4 corresponded to Windows Vista; CS5 will take advantage of Windows 7.
Can we admit now that much of the depth of the recession in the last quarter of 2008 and first quarter of 2009 was a business panick? Businesses cut their purchasing to the bone, some times well into the bone, because of economic uncertainty from the banking/financial sector failures, which in turn had been triggered by the housing downturn. But except for housing and finance, by and large the technology businesses were healthy. Many had large pools of cash to draw on, and were never in any danger of going under. By firing employees and cutting their own spending they made the economy worse, in particular within the tech sector, where they do a lot of buying each other's products.
In Adobe's case lots of people, freelancers and corporate drones alike, decided they could make do with CS3 rather than upgrading to CS4. Also, CS4 did not run so great on Windows XP. Remember when XP was introduced and their was the usual anti-Microsoft campaign and people were slow to adopt it? Then, once they learned XP and got used to it, they could not live without it and did not want to learn a new operating system. The same might have been true of Vista. I use Vista and it was a major improvement on XP. But between the usual timidity and the recession, a lot of people, including large enterprises, skipped Vista. Delaying taking advantage of its higher productivity over XP. Of course, Vista consumed more resources (faster processors, more memory), so by sticking with XP people were also able to avoid hardware upgrades.
2010 looks like it is shaping up to be one big refresh cycle. Old desktops can be replaced by supercomputers or even notebooks at $500 per pop. Windows 7 has gained people's confidence and really shines on newer hardware. And CS5 is going to have many new features that will increase productivity among creative professionals. As the guys at Adobe said, Create Suite lets you create once, then easily export the content to print, large screen Web format, mobile format, or even high-definition video. And it won't work well with a pokey old single-core computer running XP.
I am predicting a great year for AMD, Intel, NVIDIA, Adobe, and Microsoft. Most other innovative tech companies, both hardware and software, should do well to the extent they are competitive within their specialties. Right now the tech companies I actually own are Marvell, AMD, Dot Hill, Microchip, TTMI, SGI, and Applied Materials. Typically the first quarter of a year is seasonally down for tech companies, but I expect it to be less seasonally down than usual, followed by ramping through the year.
Later today Linux specialist Red Hat will report results for its quarter ending February 28. At openicon.com I'll be posting my Red Hat (RHT) analyst conference summary soon after the conference ends. And probably my column hear tomorrow will give some additional insight into Red Hat.
Monday, March 8, 2010
Marvell Sees Inflection Point
Marvell Technology Group, Ltd. (MRVL) is led by Sehat Sutardja, who built the company on his invention of a better chip to enable hard disk drives. Marvell has been the leading (by market share) supplier of hard drive controller chips for years, and this segment still represented 50% of revenue for the latest quarter. Marvell has also branched out to a variety of newer areas, based on its ability to combine analog functions and digital functions on a single chip (called SoC, for System on Chip).
Marvell was hit hard by the recession: in fiscal Q4 2009, ending January 30, 2009, it had $512 million in revenues, down from a peak of $843 million in the quarter ending August 2, 2008.
Last week Marvell reported for fiscal Q4 2010, ending January 30, 2010, revenues of $842 million. GAAP net income was an amazing $205 million; cash flow from operations was $281 million.
But the future, while speculative, could be even more amazing. Sehat referred to a coming inflection point. An inflection point on a curve can be from going down to up or vice versa, but in this case he is talking about a dramatic increase is Marvell's revenue growth rate.
As I have pointed out in the past, Marvell spent a lot of money on research and development in the earlier part of this decade, and only cut back a little during the recession. This year new products that were sampled in 2009 are ramping into volume production, and new products sampling this year are going to ramp in 2011. What are those new products?
Most notable are "communication processors" for smart phones, particularly the oPhone beginning to be sold in China. In order to get a price point low enough for mass marketing in China, more features than ever before had to be integrated into a single semiconductor chip. Marvell is unique in being able to offer general application and signal processing, Wi-Fi, Bluetooth, graphics, and cellular modem. Over 90% of oPhone models (there are several companies building them) use Marvell chips.
This alone could be sufficient to cause the inflection point. While the oPhones are far less expensive than models sold in the U.S., Marvell gets very good profit margins on the chips it makes for them. Start multiplying these per-chip margins by the 100s of millions of likely oPhone buyers in China, and you can see the potential.
But there is more. Marvell has become an increasingly prominent player in high-speed Internet switching chips. The competition there is intense, but intense competition has not impeded Marvell for very long in other fields it has chosen to enter.
Many of the newer products will be based on a microprocessor line called Armada. The thing about Marvell is that unlike Intel, they usually don't just make a microprocessor and sell it to customers who put it in a socket. Marvell works with manufacturers to integrate exactly what they need for their products on a single chip that incorporates the microprocessor. This gives faster execution and communication times and reduces costs, while leaving Marvell an ample profit margin.
Expect new products to be announced based on Marvell technology all though 2010 and 2011 (and likely well beyond).
While competition is intense and there are many pitfalls, it looks to me like Marvell is going to become the very center of the semiconductor chip industry during this decade. Of course others have already entered the SoC business, and stand-alone chips will continue to be manufactured for equipment with volumes insufficient to justify an SoC design. I'm not saying the engineers at Intel, AMD, NVIDIA, Broadcom, Microchip, etc. are not very good, and all these companies have plenty of financial ability to compete however they like. But Marvell seems to have found how to
I have owned Marvell stock since January 2005.
For detailed results from Marvell's latest reported quarter, see my
Marvell Technology (MRVL) Q4 2010 analyst conference summary
See also www.marvel.com
Marvell was hit hard by the recession: in fiscal Q4 2009, ending January 30, 2009, it had $512 million in revenues, down from a peak of $843 million in the quarter ending August 2, 2008.
Last week Marvell reported for fiscal Q4 2010, ending January 30, 2010, revenues of $842 million. GAAP net income was an amazing $205 million; cash flow from operations was $281 million.
But the future, while speculative, could be even more amazing. Sehat referred to a coming inflection point. An inflection point on a curve can be from going down to up or vice versa, but in this case he is talking about a dramatic increase is Marvell's revenue growth rate.
As I have pointed out in the past, Marvell spent a lot of money on research and development in the earlier part of this decade, and only cut back a little during the recession. This year new products that were sampled in 2009 are ramping into volume production, and new products sampling this year are going to ramp in 2011. What are those new products?
Most notable are "communication processors" for smart phones, particularly the oPhone beginning to be sold in China. In order to get a price point low enough for mass marketing in China, more features than ever before had to be integrated into a single semiconductor chip. Marvell is unique in being able to offer general application and signal processing, Wi-Fi, Bluetooth, graphics, and cellular modem. Over 90% of oPhone models (there are several companies building them) use Marvell chips.
This alone could be sufficient to cause the inflection point. While the oPhones are far less expensive than models sold in the U.S., Marvell gets very good profit margins on the chips it makes for them. Start multiplying these per-chip margins by the 100s of millions of likely oPhone buyers in China, and you can see the potential.
But there is more. Marvell has become an increasingly prominent player in high-speed Internet switching chips. The competition there is intense, but intense competition has not impeded Marvell for very long in other fields it has chosen to enter.
Many of the newer products will be based on a microprocessor line called Armada. The thing about Marvell is that unlike Intel, they usually don't just make a microprocessor and sell it to customers who put it in a socket. Marvell works with manufacturers to integrate exactly what they need for their products on a single chip that incorporates the microprocessor. This gives faster execution and communication times and reduces costs, while leaving Marvell an ample profit margin.
Expect new products to be announced based on Marvell technology all though 2010 and 2011 (and likely well beyond).
While competition is intense and there are many pitfalls, it looks to me like Marvell is going to become the very center of the semiconductor chip industry during this decade. Of course others have already entered the SoC business, and stand-alone chips will continue to be manufactured for equipment with volumes insufficient to justify an SoC design. I'm not saying the engineers at Intel, AMD, NVIDIA, Broadcom, Microchip, etc. are not very good, and all these companies have plenty of financial ability to compete however they like. But Marvell seems to have found how to
I have owned Marvell stock since January 2005.
For detailed results from Marvell's latest reported quarter, see my
Marvell Technology (MRVL) Q4 2010 analyst conference summary
See also www.marvel.com
Thursday, February 18, 2010
Applied Materials and NVIDIA correlation
Yesterday I listened to the quarterly analyst conferences for graphic chip maker NVIDIA (NVDA) and semiconductor equipment manufacturer Applied Materials (AMAT). You can see my summaries at:
Applied Materials (AMAT) Q1 Fiscal 2010 analyst conference summary
NVIDIA (NVDA) Q4 Fiscal 2010 analyst conference summary
One data point that matched up was that there is a shortage of key production capacity for semiconductor manufacturing. Nvidia described this as a supply constraint. This is called process technology, and it comes in generations, with less nanometers (nm) being better. 40nm is where Nvidia is at for process technology its newest chips.
The result was a great quarter for semiconductor equipment makers including Applied, which had revenues of $1.85 billion, up 21% sequentially, and up 39% from the year-earlier quarter.
The question for Applied is, how long can this last. Executives were cautious with their guidance, saying it is hard to predict the second half of 2010 at this point. The jump in the quarter that ended January 31 has a lot to do with manufacturers needing to make up for pent up demand. Remember the gloom and doom of January 2009? No one was buying manufacturing equipment; there was plenty of capacity. But designers like Nvidia expect a new generation of smaller chips about every 2 years. So their new products can't even be done on the older processes, which have plenty of capacity.
So two scenarios are possible. One is that with some extra equipment bought in the second half of 2009 and first half of 2010, manufacturers will be up to date on the newer technology. This assumes that the global economy, and in particular the consumer electronics segment of the U.S. economy, grows slowly in 2010.
I think the other scenario is more likely. Demand in nations like India, China, Indonesia, and Brazil will grow rapidly, and the U.S. will ramp moderately, rather than slowly. People are going to want the new smartphones, especially ones that use Marvell's chips to get prices under $125 in Asia. At the same time mobile pushes the small end of web presence, technologies like Nvidia's 3D Vision and AMD's Eyefinity will reinvigorate the large screen segment. Applied Materials makes equipment to manufacture large screen displays, so they should benefit.
All bets on technology involve risks. So ...
Keep diversified!
Applied Materials (AMAT) Q1 Fiscal 2010 analyst conference summary
NVIDIA (NVDA) Q4 Fiscal 2010 analyst conference summary
One data point that matched up was that there is a shortage of key production capacity for semiconductor manufacturing. Nvidia described this as a supply constraint. This is called process technology, and it comes in generations, with less nanometers (nm) being better. 40nm is where Nvidia is at for process technology its newest chips.
The result was a great quarter for semiconductor equipment makers including Applied, which had revenues of $1.85 billion, up 21% sequentially, and up 39% from the year-earlier quarter.
The question for Applied is, how long can this last. Executives were cautious with their guidance, saying it is hard to predict the second half of 2010 at this point. The jump in the quarter that ended January 31 has a lot to do with manufacturers needing to make up for pent up demand. Remember the gloom and doom of January 2009? No one was buying manufacturing equipment; there was plenty of capacity. But designers like Nvidia expect a new generation of smaller chips about every 2 years. So their new products can't even be done on the older processes, which have plenty of capacity.
So two scenarios are possible. One is that with some extra equipment bought in the second half of 2009 and first half of 2010, manufacturers will be up to date on the newer technology. This assumes that the global economy, and in particular the consumer electronics segment of the U.S. economy, grows slowly in 2010.
I think the other scenario is more likely. Demand in nations like India, China, Indonesia, and Brazil will grow rapidly, and the U.S. will ramp moderately, rather than slowly. People are going to want the new smartphones, especially ones that use Marvell's chips to get prices under $125 in Asia. At the same time mobile pushes the small end of web presence, technologies like Nvidia's 3D Vision and AMD's Eyefinity will reinvigorate the large screen segment. Applied Materials makes equipment to manufacture large screen displays, so they should benefit.
All bets on technology involve risks. So ...
Keep diversified!
Thursday, February 4, 2010
Microchip Gains Market Share
Microchip (MCHP) reported impressive results for the December quarter this Wednesday.
Revenues were $250.1 million, up 10% sequentially from $226.7 million and up 30% from $192.2 million in the year-earlier quarter.
Net income was $69.4 million, up 56% sequentially from $44.5 million and down 4% from $72.4 million in the year-earlier quarter. EPS (earnings per share) were $0.37, up 54% sequentially from $0.24, but down 5% from $0.39 year-earlier.
Of course the December quarter of 2008 was an easy comparison, as the recession was in full swing. But the take away should be that Microchip outperformed its rivals in the microcontroller space during 2009. In retrospect it is easy to see why.
Microchip entered the recession with plenty of cash. Rather than laying off large numbers of employees, it retained most but reduced benefits and pay. It kept investing in new product development, and in new customer relationships. It even bought some small companies with key technologies. It kept its lead times short, while rivals underinvested, resulting in long lead times. Microchip gained market share.
Microchip looks ready for strong growth in 2010, but of course that is dependent on the global economy. It is also notable that year/year revenue increases were strongest in Asia, at 12.4%, and weakest in the Americas, at 6.1%. At this point over 50% of sales are to Asia.
For a more detailed report, see my Microchip Fiscal Q3 2010 analyst conference summary.
Normally I classify chip technology companies as having at least a moderate amount of risk, but Microchip is a dividend paying company (typically around 5% of the stock price), so it is a good way to get both growth and safety in the semiconductor sector.
See also www.microchip.com
And Keep Diversified!
Revenues were $250.1 million, up 10% sequentially from $226.7 million and up 30% from $192.2 million in the year-earlier quarter.
Net income was $69.4 million, up 56% sequentially from $44.5 million and down 4% from $72.4 million in the year-earlier quarter. EPS (earnings per share) were $0.37, up 54% sequentially from $0.24, but down 5% from $0.39 year-earlier.
Of course the December quarter of 2008 was an easy comparison, as the recession was in full swing. But the take away should be that Microchip outperformed its rivals in the microcontroller space during 2009. In retrospect it is easy to see why.
Microchip entered the recession with plenty of cash. Rather than laying off large numbers of employees, it retained most but reduced benefits and pay. It kept investing in new product development, and in new customer relationships. It even bought some small companies with key technologies. It kept its lead times short, while rivals underinvested, resulting in long lead times. Microchip gained market share.
Microchip looks ready for strong growth in 2010, but of course that is dependent on the global economy. It is also notable that year/year revenue increases were strongest in Asia, at 12.4%, and weakest in the Americas, at 6.1%. At this point over 50% of sales are to Asia.
For a more detailed report, see my Microchip Fiscal Q3 2010 analyst conference summary.
Normally I classify chip technology companies as having at least a moderate amount of risk, but Microchip is a dividend paying company (typically around 5% of the stock price), so it is a good way to get both growth and safety in the semiconductor sector.
See also www.microchip.com
And Keep Diversified!
Thursday, December 3, 2009
Marvell Technology (MRVL) Blows Past Competitors
Even non-engineers can appreciate the engineering of Marvell Technology Group (MRVL). After making a number of technological break-throughs in 2008 and earlier in 2009, revenues are ramping very quickly as products containing their semiconductor chip systems are being built.
For an overview of Marvell technology, see Marvell Under the Hood. For my past analyst conference summaries, see Marvell Analyst Conference Summaries.
Revenue for the quarter ending October 31, 2009 was $803.1 million, up 25% sequentially from $640.6 million and up 2% from $791.0 million year-earlier.
Net income of was $201.6 million, up 245% sequentially from $58.5 million and up 183% from $70.9 million.
EPS (earnings per share) were $0.31, up 244% sequentially from $0.09 and up 181% from $0.11 year-earlier.
Cash and equivalents ended at $1.46 billion. Cash flow from operations wa $203.5 million. $196 million free cash flow. Inventories rose to $239 million to deal with areas of tight supply. Long term liabilities are $174.3 million.
Non-GAAP, which excludes $34.4 million in stock-based compensation, $26.5 million amortization, $1.9 million restructuring, but adds back in the $32.6 million tax benefit: net income $231.8 million. EPS $0.35.
Guidance for fourth fiscal quarter 2010 was $802 to $850 million in revenues. Networking and storage sequential growth, with normal seasonal slowdown of wireless. 58.5% non-GAAP gross margin. $235 million non-GAAP operating expenses. $254 million operating profit. Other income $1.5 million. Tax $12 million. 670 million diluted shares. $0.33 to $0.39 non-GAAP EPS. $150 million free-cash flow. GAAP EPS about $0.09 less than non-GAAP.
Analyst Questions and Answers (summary):
Hard drive market dynamics? First quarter 2010 should continue to be helped by low cost of PCs. Our hard drive customers are optimistic.
Gross margin improvement and mix? We don't provide gross margin by end-market segments. Mobile and wireless end markets experienced very good growth, and your margin estimates for that segment may be off.
China Mobile processor market size? PXA920 is very specific, high volume, high performance for standards of China market. It is state-of-the art smart phone solution, but also cost effective enough for the mass market. Our aspiration is higher than any number anyone is throwing out yet.
Sustainability of gross margins? Semiconductor business gross margins should be on high end as prices go down, to offset other expenses. This is a fundamental shift. The numbers we have are fair numbers and we plan to maintain them as long as we can, and best-in-class semiconductor companies will need to achieve this range.
Are your customers in hard drives adding to inventories? We are on a consignment basis, so they do not need to build inventories of our chips. Full feature PCs, even laptops, are now under $500, which is building demand, especially in emerging economies.
Dividends? We do not believe we are out of the economic downturn, so it is too soon to talk about distribution of cash. Our bias is to have more cash than we need in order to not be at the mercy of banks.
China business going forward? We are optimistic about our work for China Mobile; we have been working with them for 2 years. PDS/CDMA 3G is the pride of China. We believe it will be the main technology in China going forward, so we expect a very strong second half of next year.
Visibility is much improved. Inventory is leaner. We have had some shortages and longer lead times, so customers are giving us more visibility.
O-phone success detail? PXA920 will be used by many OEM cell phone makers for the China market; not all of them will be O-phones. The main chip is the most highly developed ever, but we also have the chip set solutions (power, wi-fi, etc.) that go with this. Revenues will start to ramp in the second half of next year; not contributing yet.
Bluetooth Wi-Fi combo part growth? We are very happy with traction with this device is finally taking off. The ramp now is the first generation device, a second generation is in design now. Any device requiring Bluetooth and WiFi is a potential market.
Reviewed how integration of systems on a chip help everyone, including the OEMs and end customers, while lowering everyone's costs despite increasing Marvell's gross margin.
ARMADA initial end markets? Across the board. Chips range from low end to high end. The run on all the ARM software in the market. So the market is any consumer device from HDTV decoders to picture frames to Internet portals like netbooks to automotive display consoles.
For an overview of Marvell technology, see Marvell Under the Hood. For my past analyst conference summaries, see Marvell Analyst Conference Summaries.
Revenue for the quarter ending October 31, 2009 was $803.1 million, up 25% sequentially from $640.6 million and up 2% from $791.0 million year-earlier.
Net income of was $201.6 million, up 245% sequentially from $58.5 million and up 183% from $70.9 million.
EPS (earnings per share) were $0.31, up 244% sequentially from $0.09 and up 181% from $0.11 year-earlier.
Cash and equivalents ended at $1.46 billion. Cash flow from operations wa $203.5 million. $196 million free cash flow. Inventories rose to $239 million to deal with areas of tight supply. Long term liabilities are $174.3 million.
Non-GAAP, which excludes $34.4 million in stock-based compensation, $26.5 million amortization, $1.9 million restructuring, but adds back in the $32.6 million tax benefit: net income $231.8 million. EPS $0.35.
Guidance for fourth fiscal quarter 2010 was $802 to $850 million in revenues. Networking and storage sequential growth, with normal seasonal slowdown of wireless. 58.5% non-GAAP gross margin. $235 million non-GAAP operating expenses. $254 million operating profit. Other income $1.5 million. Tax $12 million. 670 million diluted shares. $0.33 to $0.39 non-GAAP EPS. $150 million free-cash flow. GAAP EPS about $0.09 less than non-GAAP.
Analyst Questions and Answers (summary):
Hard drive market dynamics? First quarter 2010 should continue to be helped by low cost of PCs. Our hard drive customers are optimistic.
Gross margin improvement and mix? We don't provide gross margin by end-market segments. Mobile and wireless end markets experienced very good growth, and your margin estimates for that segment may be off.
China Mobile processor market size? PXA920 is very specific, high volume, high performance for standards of China market. It is state-of-the art smart phone solution, but also cost effective enough for the mass market. Our aspiration is higher than any number anyone is throwing out yet.
Sustainability of gross margins? Semiconductor business gross margins should be on high end as prices go down, to offset other expenses. This is a fundamental shift. The numbers we have are fair numbers and we plan to maintain them as long as we can, and best-in-class semiconductor companies will need to achieve this range.
Are your customers in hard drives adding to inventories? We are on a consignment basis, so they do not need to build inventories of our chips. Full feature PCs, even laptops, are now under $500, which is building demand, especially in emerging economies.
Dividends? We do not believe we are out of the economic downturn, so it is too soon to talk about distribution of cash. Our bias is to have more cash than we need in order to not be at the mercy of banks.
China business going forward? We are optimistic about our work for China Mobile; we have been working with them for 2 years. PDS/CDMA 3G is the pride of China. We believe it will be the main technology in China going forward, so we expect a very strong second half of next year.
Visibility is much improved. Inventory is leaner. We have had some shortages and longer lead times, so customers are giving us more visibility.
O-phone success detail? PXA920 will be used by many OEM cell phone makers for the China market; not all of them will be O-phones. The main chip is the most highly developed ever, but we also have the chip set solutions (power, wi-fi, etc.) that go with this. Revenues will start to ramp in the second half of next year; not contributing yet.
Bluetooth Wi-Fi combo part growth? We are very happy with traction with this device is finally taking off. The ramp now is the first generation device, a second generation is in design now. Any device requiring Bluetooth and WiFi is a potential market.
Reviewed how integration of systems on a chip help everyone, including the OEMs and end customers, while lowering everyone's costs despite increasing Marvell's gross margin.
ARMADA initial end markets? Across the board. Chips range from low end to high end. The run on all the ARM software in the market. So the market is any consumer device from HDTV decoders to picture frames to Internet portals like netbooks to automotive display consoles.
Friday, August 28, 2009
Marvell Technology (MRVL) Under the Hood
About half of Marvell Technology Group (MRVL) revenue comes from its disk drive segment. It does not make hard drives; it makes the chips that enable the drives read and write data and communicate with the rest of the computer. This was Marvell's first business and it now dominates that market.
Like most technology companies, Marvell had a rocky last half of 2008 and first half of 2009. Even after a 23% sequential revenue increase in its latest quarter (which ended August 2, 2009; second quarter fiscal 2009) to $640.6 million, its revenue was down 24% from the year-earlier quarter. On the other hand, Q2 2008 had been a blockbuster quarter, with Marvell proving that its investments in new technologies could pay off.
While Marvell may yet expand its market share in the hard disk market, and that market may expand as nations like India and China continue to expand their technology sectors, to understand (or at least guess at) Marvell's future revenue, profits, and stock value you must look at the other 50% of the company. This revenue already was approximately $320 million in the latest quarter, yet many of its products are just beginning to produce revenue or are still in development.
The networking end market accounted for about 20% of revenue in the most recent quarter. This segment includes the chips that go into network switches and routers. This is a very big market, and highly competitive, but Marvell has plenty of room to grow its market share.
Mobile and wireless networking is also an important end market. Here the combined analog and digitial expertise of Marvell, which are now integrated onto single chips, comes into play. One new type of product using Marvell chips takes a 3G signal usually used for cell phones and broadcasts Wi-Fi for local wireless internet connectivity.
Marvell also makes chips to control printers. According to HP printer sales have not been so great this last year, so expect this segment to rebound when people's legacy printers start dying.
Most fascinating are Marvell's application and communication processors (based on Kirkwood and Discovery Innovation). These are designed for the type of high performance users now expect from mobile computing devices and use very low amounts of power. More important, Marvell is able to put these processors on a single chip with one or more of its other technologies. It already has chips that combine Bluetooth and Wi-Fi capabilities. Rather than just sell discrete chips, it works with customers to design whole systems-on-a-chip. Other companies do this, but Marvell is the leader in the field.
Some of this last year's profits have been made by cost-cutting, particularly in Research and Development. But the key to profitability has been the model of integrating functions on a chip for customers particular products. To paraphrase management: We will continue to have above-industry margins as long as we are able to build products that our competitors cannot match.
Marvell has video processing capabilities. It says it has many design wins, but does not announce anything until its customers make their own announcements. You can imagine what might be coming out in 2010: devices with a digital processor, video processor, and either wireless or wired communications capabilities all on a single chip. Which will lower costs for consumers, driving unit sales, while allowing both the OEM and Marvell to maintain high margins.
The usual risks and uncertainties apply in the highly competitive technology field.
See also my August 27, 2009 Marvell analyst conference summary.
And keep diversified!
Wednesday, June 3, 2009
Cisco Systems Joins Dow Industrial Average
Cisco is becoming part of the Dow Jones Industrial Average. As far as I know it is remaining in the NASDAQ 100 for a time as well. The NASDAQ 100 is my favorite hunting grounds for new investments. Cisco's promotion to the DOW illustrates why.
I have been posting summaries of Cisco's analyst conferences since November of 2006. Now I'm going to stop. It is not that Cisco has become a poor investment. I expect Cisco to continue to be a technology leader, and a growth stock, for the foreseeable future. But I can only cover a limited number of stocks. Cisco is very well covered by the news media and other analysts, and as a DOW stock will receive even more attention. I watched it because it gave insight into Internet connectivity trends. I also often considered buying the stock, but it never became enough of a bargain for me, compared to the stocks I bought.
Note that Cisco is entering the Dow at one of the worst moments in its history. In the most recently reported quarter, revenues were $8.2 billion, down 10% sequentially from $9.1 billion and down 17% from $9.8 billion year-earlier. Net income was $1.3 billion, down 13% sequentially from $1.5 billion, and down 24% from $1.8 billion year-earlier. EPS (earnings per share) were $0.23, down 12% sequentially from $0.26, and down 21% from $0.29 year-earlier.
Yet that is not bad compared to most of the technology industry. Given the state of the economy, it is remarkable that Cisco is selling that much equipment. It is mostly capital equipment, which tends to stall during downturns.
In early 2008, we now know with hindsight, Cisco's management was overly optimistic. They thought their broad array of products, global reach, and tendency to rapid growth would mean a recession would just cut into their growth rate. They did not admit to revenue declines until they actually occurred. That said my impression is that management is very honest with investors. They just underestimated the severity of the crisis that was building. I did that too.
As of last report, the demand for Cisco products was stabilizing. Given the need to bringing high speed broadband Internet to more of the world, and the increased use of the Internet for video, I think Cisco's prospects are bright.
There is not much left of the old industrial economy in the DOW. But I think there is still hope for manufacturing in the United States, if Americans get back to working hard and being satisfied with global pay levels. U.S. executives are even more overpaid than their European and Asian counterparts. According to standard market economic theories, that has to change, or American manufacturing will continue to fail.
I have been posting summaries of Cisco's analyst conferences since November of 2006. Now I'm going to stop. It is not that Cisco has become a poor investment. I expect Cisco to continue to be a technology leader, and a growth stock, for the foreseeable future. But I can only cover a limited number of stocks. Cisco is very well covered by the news media and other analysts, and as a DOW stock will receive even more attention. I watched it because it gave insight into Internet connectivity trends. I also often considered buying the stock, but it never became enough of a bargain for me, compared to the stocks I bought.
Note that Cisco is entering the Dow at one of the worst moments in its history. In the most recently reported quarter, revenues were $8.2 billion, down 10% sequentially from $9.1 billion and down 17% from $9.8 billion year-earlier. Net income was $1.3 billion, down 13% sequentially from $1.5 billion, and down 24% from $1.8 billion year-earlier. EPS (earnings per share) were $0.23, down 12% sequentially from $0.26, and down 21% from $0.29 year-earlier.
Yet that is not bad compared to most of the technology industry. Given the state of the economy, it is remarkable that Cisco is selling that much equipment. It is mostly capital equipment, which tends to stall during downturns.
In early 2008, we now know with hindsight, Cisco's management was overly optimistic. They thought their broad array of products, global reach, and tendency to rapid growth would mean a recession would just cut into their growth rate. They did not admit to revenue declines until they actually occurred. That said my impression is that management is very honest with investors. They just underestimated the severity of the crisis that was building. I did that too.
As of last report, the demand for Cisco products was stabilizing. Given the need to bringing high speed broadband Internet to more of the world, and the increased use of the Internet for video, I think Cisco's prospects are bright.
There is not much left of the old industrial economy in the DOW. But I think there is still hope for manufacturing in the United States, if Americans get back to working hard and being satisfied with global pay levels. U.S. executives are even more overpaid than their European and Asian counterparts. According to standard market economic theories, that has to change, or American manufacturing will continue to fail.
Wednesday, April 1, 2009
Rackable Systems Eats Silicon Graphics
When I moved to San Francisco in the early 1990's and started meeting the computer graphics crowd, the place everyone said they wanted to work was Silicon Graphics. Not only was that where the cutting edge lay, it was also seen as a smart career move. Surely, in a few years, Silicon Graphics would surpass HP and then Intel and IBM.
It did not work out that way. Today Rackable Systems (RACK) announced it would buy Silicon Graphics (SGIC) for about $25 million. While that is certainly a bargain basement price for a treasure chest of intellectual property, I cannot assume that Rackable will do well with the acquisition.
Silicon Graphics' (aka SGI) traditional problem is running a business that actually makes money. That is exactly the problem Rackable Systems has had these last few years. Rackable has a substantial amount of cash in hand, but it was mostly generated from its initial IPO, not from profits. Rackable grew rapidly and had some profitable quarters a few years back, but then they got shoved around by bigger competitors, notably Sun, HP, Dell, and IBM. I think Rackable on its own could be profitable again if IT spending picks up some time this year, but this acquisition will create distractions and a lot of new variables to manage. So we have the dilemma of a company with a tremendous opportunity that could turn into a serious downside.
What are Rackable shareholders (that includes me) getting for their $25 million in cash? The latest results for SGI showed revenues of $82.8 million and a GAAP net loss of $49.2 million and an EBITDA of negative $17.3 million. That is no way to run a business. And it is not just from the recession. Once upon a time SGIC's market capitalization was over $1 billion.
So the first thing Rackable management should do is can as much of SGI's management as is necessary. Cut costs to the bone. Assuming an $80 million per quarter run rate, if you can't generate $8 million of profit on that, you should get out of the business. If there is revenue that can't be made to generate a profit, jetison it.
Having watched variously poorly managed technology companies for years, I will ball park what I would expect to see if I were a Rackable manager reviewing SGI. Sure, if you spend $1 million on a product, and it is a good product, and offer it for sale at $800,000, someone is going to buy it. What you need to do is price the product at $1.1 million. If your customer will not pay $1.1 million for the product that cost you $1 million, you don't need that customer. So first you try to raise the price, and if that does not work, you close that product line down. Let the managers and workers find jobs elsewhere (good luck). Or if they want to keep their jobs, and sell their product for $800,000, they need to find ways to reduce product cost, and if necessary give back enough of their compensation package to make that work. There a business people lacking high school diplomas who could tell you this; MBAs could tell you this; but technology guys often are mesmerized by their toys and forget they are in business.
SGI has some pretty nice products. Supercomputers. Those should be priced to generate a profit. Graphics software. Why should that not make a profit? Servers - lots of companies make profits selling servers. Professional services - how can you not make profits on professional services? (Technology geniuses have found a way to do that: pay your staff more than you charge the clients! Fail to take overhead into account!)
Rackable's last acquisition did not go well. Management said that RapidScale storage technology would be the Next Big Thing (back in 2006) but it was a failure that apparently could not be sold once Rackable no longer wanted it.
On the bright side, Rackable does have some pretty amazing talent, so maybe management can turn the company around and make hay with the SGI assets too. Rackable got big quickly because it took the need to lower power consumption at data centers seriously. It is still very, very good at that. It has clients like Amazon, Microsoft, Facebook, and Yahoo, and it has been making advances internationally and in new specialties like Defense and Oil exploration.
SGI looked like it should be valuable in the 1990's because it put technology first, before profits. Some times that works, but usually it does not. The best business model wins when the technology is good enough. The best business technology solves enterprise problems at a price that beats the alternatives. Profits have to be part of the model, or else you can't keep up research and development efforts. The leading edge wanders off to ATI or NVIDIA.
Because SGI is selling itself off through a bankruptcy, rather that directly with a merger, it is possible that debts will disappear. This, in itself, might help it move towards profitability, but even if it is the case, can't change the need for better management.
I'm not selling my Rackable stock, but I'm not buying more right now either. I'd like to see what Rackable does with the SGI assets over the next six months or so. If Rackable runs SGI like SGI ran SGI, this merger will sink it.
See also my Rackable Systems page, with links to Rackable analyst conference summaries.
It did not work out that way. Today Rackable Systems (RACK) announced it would buy Silicon Graphics (SGIC) for about $25 million. While that is certainly a bargain basement price for a treasure chest of intellectual property, I cannot assume that Rackable will do well with the acquisition.
Silicon Graphics' (aka SGI) traditional problem is running a business that actually makes money. That is exactly the problem Rackable Systems has had these last few years. Rackable has a substantial amount of cash in hand, but it was mostly generated from its initial IPO, not from profits. Rackable grew rapidly and had some profitable quarters a few years back, but then they got shoved around by bigger competitors, notably Sun, HP, Dell, and IBM. I think Rackable on its own could be profitable again if IT spending picks up some time this year, but this acquisition will create distractions and a lot of new variables to manage. So we have the dilemma of a company with a tremendous opportunity that could turn into a serious downside.
What are Rackable shareholders (that includes me) getting for their $25 million in cash? The latest results for SGI showed revenues of $82.8 million and a GAAP net loss of $49.2 million and an EBITDA of negative $17.3 million. That is no way to run a business. And it is not just from the recession. Once upon a time SGIC's market capitalization was over $1 billion.
So the first thing Rackable management should do is can as much of SGI's management as is necessary. Cut costs to the bone. Assuming an $80 million per quarter run rate, if you can't generate $8 million of profit on that, you should get out of the business. If there is revenue that can't be made to generate a profit, jetison it.
Having watched variously poorly managed technology companies for years, I will ball park what I would expect to see if I were a Rackable manager reviewing SGI. Sure, if you spend $1 million on a product, and it is a good product, and offer it for sale at $800,000, someone is going to buy it. What you need to do is price the product at $1.1 million. If your customer will not pay $1.1 million for the product that cost you $1 million, you don't need that customer. So first you try to raise the price, and if that does not work, you close that product line down. Let the managers and workers find jobs elsewhere (good luck). Or if they want to keep their jobs, and sell their product for $800,000, they need to find ways to reduce product cost, and if necessary give back enough of their compensation package to make that work. There a business people lacking high school diplomas who could tell you this; MBAs could tell you this; but technology guys often are mesmerized by their toys and forget they are in business.
SGI has some pretty nice products. Supercomputers. Those should be priced to generate a profit. Graphics software. Why should that not make a profit? Servers - lots of companies make profits selling servers. Professional services - how can you not make profits on professional services? (Technology geniuses have found a way to do that: pay your staff more than you charge the clients! Fail to take overhead into account!)
Rackable's last acquisition did not go well. Management said that RapidScale storage technology would be the Next Big Thing (back in 2006) but it was a failure that apparently could not be sold once Rackable no longer wanted it.
On the bright side, Rackable does have some pretty amazing talent, so maybe management can turn the company around and make hay with the SGI assets too. Rackable got big quickly because it took the need to lower power consumption at data centers seriously. It is still very, very good at that. It has clients like Amazon, Microsoft, Facebook, and Yahoo, and it has been making advances internationally and in new specialties like Defense and Oil exploration.
SGI looked like it should be valuable in the 1990's because it put technology first, before profits. Some times that works, but usually it does not. The best business model wins when the technology is good enough. The best business technology solves enterprise problems at a price that beats the alternatives. Profits have to be part of the model, or else you can't keep up research and development efforts. The leading edge wanders off to ATI or NVIDIA.
Because SGI is selling itself off through a bankruptcy, rather that directly with a merger, it is possible that debts will disappear. This, in itself, might help it move towards profitability, but even if it is the case, can't change the need for better management.
I'm not selling my Rackable stock, but I'm not buying more right now either. I'd like to see what Rackable does with the SGI assets over the next six months or so. If Rackable runs SGI like SGI ran SGI, this merger will sink it.
See also my Rackable Systems page, with links to Rackable analyst conference summaries.
Saturday, March 28, 2009
Red Hat (RHT) Runs Through Open Field
Red Hat (RHT) is my favorite company to watch because of all the stocks I know its history most clearly demonstrates the need to differentiate between the stock value and the finances of the underlying company. I became interested in Red Hat in the last years of the last century. I am now invested in the company, so you might want to take that into account in case I fall into the cheerleading for my own stocks trap.
Investors often talk of overvalued and undervalued company stocks. Typically one looks at the market capitalization of the company: the value of the stock shares times the number of the shares. This gives a total value for the company. Then one looks at the "true" criteria, which typically is some measure of future profits the company can generate, times some multiplier of how much capital it would typically take to generate those profits. If the market capitalization is higher than the "true" value, the company is overvalued.
Red Hat was one of many companies billed by Wall Street as a "next Microsoft" during the technology boom of the 1990's. Given that Red Hat was already establishing leadership in commercializing the Linux operating system, this was not an altogether dismissible line of reasoning. After all, the Microsoft empire was built around its original operating system, MS-DOS, which later evolved into Windows. The problem was that the stock was bid up to prices implying that being the next Microsoft was a done deal.
Several easily discernable obstacles stood in the way of Red Hat becoming the new Lord of the Computerverse. First, it really did not have very many paying clients in the year 2000. Second, Linux is Open Source, and can be had for free, which really cuts into profit margins compared to a proprietary system like Windows. Third, there was a lot of competition within the Linux space for the few commercial dollars available to it.
Red Hat stock took a big plunge in 2002. In retrospect, that was the time to buy. The stock was almost free. Investors did not want it. Partly they finally understood the three points I made above, but mostly investors don't like to buy stocks that are falling in price.
This week, on March 25th, Red Hat reported on its fourth quarter of fiscal 2009 that ended on February 28. Red Hat is still not the next Microsoft. But it is a highly profitable company with a secure niche in the computing space. Red Hat Enterprise Linux (RHEL) is the gold standard for Linux. Other closely related open source spaces are now attached to it, notably virtualization software and JBoss middleware. In addition, Red Hat has a huge cash reserve. Its profits on a cash basis are typically far above its profits on a GAAP basis.
It is a good company, and its earnings per share are a lot higher than what you can get on T-Bills right now. So it is not too late to buy in. But it is not the next Microsoft. Open Source people just don't bring the predatory hunger to the table that Bill Gates and crew had in their first couple of decades. Red Hat will continue to grow because it enhances the business goals of its customers. It will run profitably, but it won't be able to create the kind of monopoly profits Microsoft has been able to create.
I expect that as soon as IT budgets loosen up again, a lot of enterprises are going to make the shift to Red Hat products. But how big of an income and profit bump that will provide is not easy to predict.
So keep diversified.
And see my Red Hat Q4 fiscal 2009 analyst conference summary for details on the latest quarter.
Investors often talk of overvalued and undervalued company stocks. Typically one looks at the market capitalization of the company: the value of the stock shares times the number of the shares. This gives a total value for the company. Then one looks at the "true" criteria, which typically is some measure of future profits the company can generate, times some multiplier of how much capital it would typically take to generate those profits. If the market capitalization is higher than the "true" value, the company is overvalued.
Red Hat was one of many companies billed by Wall Street as a "next Microsoft" during the technology boom of the 1990's. Given that Red Hat was already establishing leadership in commercializing the Linux operating system, this was not an altogether dismissible line of reasoning. After all, the Microsoft empire was built around its original operating system, MS-DOS, which later evolved into Windows. The problem was that the stock was bid up to prices implying that being the next Microsoft was a done deal.
Several easily discernable obstacles stood in the way of Red Hat becoming the new Lord of the Computerverse. First, it really did not have very many paying clients in the year 2000. Second, Linux is Open Source, and can be had for free, which really cuts into profit margins compared to a proprietary system like Windows. Third, there was a lot of competition within the Linux space for the few commercial dollars available to it.
Red Hat stock took a big plunge in 2002. In retrospect, that was the time to buy. The stock was almost free. Investors did not want it. Partly they finally understood the three points I made above, but mostly investors don't like to buy stocks that are falling in price.
This week, on March 25th, Red Hat reported on its fourth quarter of fiscal 2009 that ended on February 28. Red Hat is still not the next Microsoft. But it is a highly profitable company with a secure niche in the computing space. Red Hat Enterprise Linux (RHEL) is the gold standard for Linux. Other closely related open source spaces are now attached to it, notably virtualization software and JBoss middleware. In addition, Red Hat has a huge cash reserve. Its profits on a cash basis are typically far above its profits on a GAAP basis.
It is a good company, and its earnings per share are a lot higher than what you can get on T-Bills right now. So it is not too late to buy in. But it is not the next Microsoft. Open Source people just don't bring the predatory hunger to the table that Bill Gates and crew had in their first couple of decades. Red Hat will continue to grow because it enhances the business goals of its customers. It will run profitably, but it won't be able to create the kind of monopoly profits Microsoft has been able to create.
I expect that as soon as IT budgets loosen up again, a lot of enterprises are going to make the shift to Red Hat products. But how big of an income and profit bump that will provide is not easy to predict.
So keep diversified.
And see my Red Hat Q4 fiscal 2009 analyst conference summary for details on the latest quarter.
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