Sonoma County: News and Notes

I apologize for being slow in getting these out.  Post-Fire Business Activity has been quite high and I have had some trouble getting these out.  I want to start by talking about Calix.  The company announced results before Valentine’s Day and I want to talk about that.  Revenue for the quarter was $137M and the company lost $0.15 per share.  This was slightly lower than Wall Streets estimates but at the low end of the company guidance.

Once this release was out the company was down in aftermarket trading.  The stock has since gone positive and I want to talk about both of these items.

I believe the intial negative reaction was due to two items.  The company has had lower product revenue in 2017 than it did in 2016.  The total revenue is up but is skewed by the increase in services revenue.  The challenge is that this service revenue is negative gross margin (sold at a loss) today and predicted to be substantially below product gross margins (products are a lot more profitable).  All of this came at a cost of more Operating Expense (OPEX) than in the past, though this trend has reversed itself in the 4th Quarter.

That lowered OPEX is the first reason that I think the stock has recovered.  It has been very clear that the company has been spending too much money.  By lowering these costs, there seems to be a recognition for what I have been asking the company to do for the past year.

The wild card here is the announced contract and trial deployments with Verizon.  The analysts have done a terrible job with this.  Verizon already has a substantial Fiber To The Home (FTTH) project with FiOS.  It seems unlikely that Verizon will be doing this new trial for FTTH.  It seems much more likely to part of the 5G Wireless deployments that Verizon has also announced.  There is good news and bad news for this.  A FTTH home deployment in Verizon represented millions of endpoints.  It is unclear what a 5G rollout would represent.  This is partly because the density of 5G stations is unclear.  Verizon believes that it will be able to get several hundred megabits per second with distances of say 1,000 ft (3 football fields).  Other carriers (in other spectrums) think the distance will be more like 300 feet (1 football field).  I think the issue is up for debate and you may want to look at this article as an introduction.

Wireless cells would be a nationwide rollout which would be good, but again it probably won’t be millions.  Imagine rolling out a cell antenna every couple of thousand feet across Montana on I-90.  So 5G coverage will be less than 4G for a long time.

What this means to me is that you are buying an option on this Verizon business with the stock.  Verizon will not stand for high prices and I suspect analysts question the gross margins on the deal.  No public information is available, but you would have to think that this will be a squeeze.

Finally, this notion of a multi-year ramp in Verizon is flawed (see the Q & A with Christian Schwab on the call).  The company quoted past Fiber Rollouts.  I take that to mean FiOS.  Within the 2 years from first deployment, Verizon was building FiOS at $150M/quarter business rate.  By setting the expectation at about 10% of that, I would guess that Calix is really unsure what is going to happen here.

Have a great day and weekend!

Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business – Change Your Life!

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Sonoma County: News and Notes

Well, its earnings season and I am starting my posts with Calix.  I want more time with the 10-Q from Enphase but what I have to say about Calix is unequivocal.  Since reporting, the stock is up considerably.  This is due to the 4Q guidance, but what I have to say I think eclipses that.

Let’s talk numbers first.  Revenue was $128M of which $106M was product.  The company with that lost $0.35 per share.  The guidance for Q4 was Revenue of between $140M – $145M and a loss of $0.10 – $0.15 per share.  The company lauded this set of results and predictions as substantially on track with their plan and how things should be.

I completely disagree.  If you look at the numbers, the Product Revenue was down year over year on a quarterly basis.  From my time in the industry, I know Q3 is a big quarter.  That represents a huge problem for me.  Secondarily, they have been increasing revenue year over year with services.  In this case, they are losing $6M on the services at Gross Margin.  This compares to essentially breakeven last year.  This means to get the business associated with these services that Calix had to give its customers a $6M discount.  Now, to complete this thought we need to come back to the R&D expenses.  Right now, if you ask Calix I am sure they would say they are spending about 25% of Revenue on R&D.  The reality is that this R&D has to do with product and not services.  That means that really that is more like 30%.  That is an extraordinarily high number for a company that is flat this year for Product Sales.  Add into that that they had to give a discount, you get real problems.  If you are building such great and valuable products with all of that R&D, why did you have to give your customers a discount?

Now the stock has done well post-announcement.  I see a completely different story than the one the company tried to sell.  The analysts were all over the service margin issue, but I don’t believe that anybody tied it up in a bow for you like this.

My view is quite simple.  This is the third or fourth major growth initiative from Calix that has gone essentially nowhere.  That is a problem from not recognizing that strategic situation and dealing with it correctly.  To me that starts at the top and the Board of Directors should do something about it.  Yes, I think it is time for Carl Russo to go.  Look the company is substantial and not going away anytime soon.  But they clearly need a new path forward as the last several have not worked.  That is why you need a change of leadership.  They have turned over just about every other position in the leadership.  And yet the problem remains.  Now it is up to the Board to act.

Have a great day!
Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business – Change Your Life!

Sonoma County: News and Notes

I was asked about another public company here in the North Bay and what I thought about them.  That company in Biomarin Pharmaceuticals.  I don’t have any background in the company nor do I have a lot of background in the drug companies.  But I will give it a shot.  This is a bit last minute, so I was only able to do a modest amount of research on the company.  As I move forward, I hope my reviews get better.

So the basics.  Biomarin reported Revenue of $317.4M ad a loss of $0.21 per share.  One of the first challenges here is that the company is also reporting a Profit of $17.6M instead of a loss of $36.8M.  That delta of over $54M is mostly in stock based compensation.  Many of these plans do not require the company to spend any cash.  It is one of the reasons that these are excluded in non-GAAP versions of the financials.  There is a lot of work to do but it means that the company got about 5% Profit in the quarter.  That is not great but it is a lot better than a 10% loss.

The company has a lot of cash and similar components (over $1.2B) and in some quarters is building cash and in others it is losing it.  So, the company is in no difficulty at the moment.

Right now this company is worth $16.5B.  To put that in perspective, Keysight is worth $7.8B and Autodesk is worth $25.5B.  Keysight is the most profitable of the 3 today, but Autodesk has the most clear growth path forward.  From a value investor standpoint, I could not buy Biomarin shares.  But that is me and how I look at things.

Clearly the value here is in all the drugs and research.  The problem for me is that I read the transcript and would have needed a PhD in something to understand much of it.  There are several drugs that are moving along in trials.  The challenge is that there is little to no information about the competitive landscape or the prospective future value of these drugs.  The analysts do me no favor in asking the questions that they do.  They don’t seem to really understand what is going on.

So, what does that mean for you.  Hey this could be a great stock.  It seems pricey, but other folks that play in this area seem even more so.  I hope to have better advice for you in the future.

Have a great day!
Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business – Change Your Life!

Sonoma County: News and Notes

This week we are going to go over Autodesk’s results for its most recent quarter.  The story has been very good for them so it is important to take a critical look at where they are going.

Let’s start with the basics.  The company had $501M in Revenue and lost $0.66 per share.  Again, the company is in the conversion from Sales of perpetual licenses to a subscription based service.  This has caused this apparent loss but if I look at the Cash Flow statement the company only burned $27M in cash out of a total of about $1.6B on the books.  So, the company should complete the transition before it runs out of cash easily.  Autodesk also projected between $505M – $515M in revenue for the next quarter and a loss of $0.58 – $0.64.  It should be noted that the loss narrows to $0.12 – $0.16 if accounting charges (non-operating considerations) are omitted.  The good news is that these metrics are all better than expected.

So, I want to say something about “Beating the Street” or a “Miss against Expectations”.  The Sell Side Analysts on these calls will generally put out a note a day or so after the call.  They use the transcript of the call and the numbers provided by the call to give some thoughts about how the company is doing and where they think the price will go.  What they don’t do is deep market analysis by calling customers, studying market research, deeply studying competitors or any other type of detailed work.  They simply have too many companies to cover and so much analysis is surface layer.  All I am saying is that this is not PhD work.

As to Autodesk, I want to put forth some numbers.  Non-GaaP Operating Expenses (excluding all those non-cash, non-operating expenses) are $464M (from the Press Release).  Non-GaaP Gross Profit is $435M so on an ongoing basis the company only needs to close about $30M in Profit.  That equates to about $534M of revenue.  That number will not be done in Q4 (which ends 1/31/18), but should be achieved next year.

I saw an Article on Seeking Alpha that talked about the stock being at or near its peak.  I don’t work on those kinds of terms.  What I can say is that this transition shows great evidence of work and the company has a solid foundation.  They have some more transition to complete and I look forward to seeing more results from them

Have a great day!

 

Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business – Change Your Life!

Sonoma County: News and Notes

I want to cover Keysight’s Q3 results this week and finish our quarterly calls with Autodesk’s next week.  Love to go out on a positive note.  For Keysight, Q3 saw Revenue of $832M and a Loss of $0.10 per share.  This latter was greatly impacted by some accounting changes associated with the Ixia Acquisition and without that this would have been a Profit of $0.61 per share.  Last year the Revenue was $718M and $0.63 per share.  This means there was growth in Revenue but not in Profit.  The Revenue Growth is associated with the Ixia Acquisition, which did just over $120M/quarter at the time of the purchase by Keysight.  The Q3-2017 Revenue was also impacted by some adjustments to the Deferred Revenue that Ixia had.

So, all of this makes it hard to give one an accurate picture of what is going on.  The company declared a great quarter with good year over year growth.  However, I can not see how this is really a gain of 3% in Revenue year over year and slightly down in profitability.  The next quarter looks to be a bit better year over year, but we will need to see it in practice.  This more favorable Q4 guidance is what looks to have moved the stock from something in the $36-$38 range to the $39 – $41 range.

I want to talk about some of the things that are going on with why there are these changes in Deferred Revenue and Amortization.  Companies often have policies around how things are accounted for.  Though you would think accounting would have very strict rules, there are many places where their are rules that are really handled through policies.  For example, when does a significant purchase count as an Expense and when as Capital Equipment.  In that latter case, the Equipment is depreciated on a schedule.  That schedule itself can be varied based on policy.  All of this is well within the bounds of legal accounting practices.  Often times companies have different policies and if they combine there are adjustments that need to be made to have their finances run under a single policy.  That is one reason you might hear about “1 Time Charges”.  These adjustments often flow through the Income Statement, but have little or nothing to do with the actual Cash or Profitability of a Company.

The other thing here is that the Company is clear that it is going to attempt to return the profit to the shareholders through acquisition.  That can be a challenge for shareholders as many acquisitions don’t work over the long haul.  The jury is still out on Anite and Ixia.  The company has spent around $2B in these acquisitions.  At the moment, the best I can say is that they definitely fill in gaps in the company.  The question is whether they will be worth it over just giving the money back through a dividend.  I suggested about 2 years ago that the company start a $0.25/quarter dividend.  If that had been pursued, then $2 a share would have been given back so far.  Think about that.

Have a great day!
Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business – Change Your Life!

Sonoma County: News and Notes

This week I will cover the results for Enphase.  The company reported $74M in Revenue and a loss of $0.14 per share.  The results also included some interesting number changes.  The first is that the company grew total cash by $1M.  This was accomplished by a dramatic draw-down of inventory from $33M at the end of Q1 to almost $21M at the end of Q2.  This allowed for net cash to be positive as the company was selling products that it had paid for previously.

The other large event in the quarter was that the CEO Paul Nahi has resigned effectively immediately.  The company did not appoint a CEO but instead created an Office of the CEO to run things.  Paul’s seat on the Board of Directors was not mentioned.  My assumption is that he will serve out his term and then someone else will replace him.  There is supposed to be an internal and an external candidate for CEO.  The internal candidate seems very likely to be COO Badri Kothandaraman.  He would seem to be the default candidate as he clearly joined Enphase at the behest of investor TJ Rodgers.

What this led to is a very odd conference call and I want to focus this on the guidance for Q3.  This guidance was essentially flat from Q2.  That seems very odd to me because Enphase has been somewhat seasonal with Q3 generally being the best quarter for the year.  I think there are 2 primary factors for this and I do not buy the stated reason on the conference call at all (a component shortage).

Factor 1 is that Quarterly Conference Calls are a big deal.  They are the primary sales call that can be done by a company on a periodic basis for the stock.  I am used to a cycle of a month of script writing, reviewing, updates and practice before the call.  A CEO transition will make this quite complex as Paul was on the call, but out the door at the end of the day.  How they project next quarter’s guidance would be tricky as the voices in the room will still be settling out.

Factor 2 is that Enphase is in a complete product transition.  Not only do we have the transition to newer micro-inverters, we have the potential transition to the AC Modules.  That latter transition is not completely under the control of Enphase.  It has to work with LG and Jinko to try to make this work right.  New Product Introduction is always a sloppy process and there are slips what happens.  Having them both at the same time with a new management team is going to be hard.

I want to point out one more thing.  The Debt from Tennenbaum require that Cash + Inventory + Receivables is more than $75M.  There is also a requirement to have $10M of cash at all times.  At the end of next quarter, both of these will be within reach of not being met.  There should still be room.  But one can easily see a path in Q4 to missing one or both of the loan covenants.  I want to point out that breaching these covenants will be akin to bankruptcy for an equity holder.  So, I would expect yet another capital raise in Q3 after the new CEO is confirmed.

So, where does Enphase stand?  Well, it is on a knife’s edge.  The new products might not turn Enphase into a financial juggernaut.  They have the potential to bring the company to profitability and that would be enough to keep it alive and probably have the share price be somewhat higher.  However, there is the risk that these products fumble on introduction.  Not because they are bad, but because New Product Introduction is hard.

To me the real question for investors is a longer term path forward.  Despite the various fan boys on both sides, both Solar Edge and Enphase have solid working products.  At this time, Solar Edge is about 2x the Revenue of Enphase and has a much larger R&D budget.  This gives the company a big edge going forward.

Finally, I think about my friend Martin Fornage all the time.  This last couple of years can not have been a lot of fun for him and frankly he doesn’t need the money.  If the culture changes, maybe he exits stage left.  I don’t know what Enphase is without him.

Have a great day!

Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business – Change Your Life!

Sonoma County: News and Notes

This week both Calix and Enphase released their earnings.  I need to spend a bit more time on the 10-Q from Enphase (that is the formal report by the company filed every quarter with the SEC).  So, I will be reviewing the numbers and call from Calix.  Revenue came in at $126M with $107M of that being Product Revenue.  Losses were $0.38 per share.  In general, it was a bit more of the same as Q1.  The revenue growth year-over-year was from the service sector.  Unfortunately, this sector had negative gross margin (in other words they lost money on selling the services).  Operating Expenses were up $6M over last year with an $8M increase in Research and Development.  Over the last 6 months the company has burned $13M in cash and is about 9 months away from insolvency on that standpoint.  I don’t think that will be an issue anytime soon, but the company does need to figure out how to become profitable on a regular basis.

The company forecasted Q3 numbers as $126M – $130M in Revenue, 36% to 39% Gross Margin, and Losses of between $0.21 and $0.27 cents a share.  Since that time, the stock has tanked over $1 per share (over 20%) and is as of the moment $5.25 per share.

There is one other thing is that Calix announced the signing of a deal for NG-PON2 at a North American Tier 1 for Trials and Early Deployment.  This can only be at Verizon and there has been much talk about it for a very long time.  This is not going to replace FiOS.  There are too many units of FiOS installed and the pricing on those units were a total of about $100/customer.  It is not reasonable to have NG-PON2 priced that way otherwise there would be massive losses.  However, a deal would Verizon would have to be at much less than corporate gross margins overall.  They might be able to get good margins out of the CO units (and thus early shipments) but not out of a fully deployed system.  On the other hand, this could be a significant Revenue opportunity.

So, I think what investors see is two things.  All the growth of any substantial amount has been at very low gross margins.  There is concern that this will be true with the Verizon deal as well.  At today’s Operating Expense (OPEX) levels Calix will have to have Revenue of $181M per Quarter to break even.  If this is simply an addition of the Verizon deal, this implies that $60M a quarter or $240M per year would come from Verizon.  This is not outlandish at one level.  FiOS was about $600M a year for its equivalent.  But how many endpoints of NG-PON2 will be deployed.  For BPON, we did 3.5M.  If NG-PON2 is significantly smaller (used for Business and Cellular Services), then the Revenue will not be there.  Until we see how Verizon rolls this out we will not know.

And I think it is that uncertainty as well as the ongoing losses that are causing investors to sell Calix stock.  Right now to break even the company would need to reduce OPEX by about 33% and I see no indication of that coming in Q3.  So if you think there is something important going on with Verizon, this stock is a lot cheaper than it used to be.  One thing to point out is that business at Verizon could lead to a sale of Calix, but the number of companies who would be buyers can be counted on less than 1 hand.

Have a great day!

Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business – Change Your Life!