Sonoma County: News and Notes

Today I will go over the next company in my usual list to analyze for quarterly results:  Keysight.  The raw numbers are that Revenue was $753M up from $731M a year ago.  Non-GaaP Net Income was $0.64 compared to $0.61 a year ago.  These are reasonably level results on a year over year basis, given that a tiny amount of Ixia is included in these numbers.

I want to point out what looks to be the strategy here, based up on the acquisition of Anite and now Ixia.  This looks to be a form of a roll-up.  Keysight is acquiring some smaller companies that are specialists in technologies that are adjacent to markets that Keysight is strong in.  To be clear, these markets are sub-markets of larger market segments.  So think of this as Keysight buying much of its future product development.  Anite has replaced the revenue of some of the more troubled parts of Keysight’s business.  Ixia will bolster Keysight in other markets.

The question for you:  “What does this mean for the future of Keysight?”.  That is hard to say.  Remember both Ixia and Anite were bought with cash.  That means that the value of this cash was removed from the shareholders and given to the shareholders of Anite and Ixia.  In the case of Ixia, the cash given to them was 45% above the closing price at the time of the deal.  When the deal was announced there was a bit of run in the stock.  This culminated in the announcement of the results.  The stock did really well in after hours the night of the quarterly conference call.  If you ignore this bump, the stock has been on a flat to slightly downward trend for a few days.

The company itself is large and profitable.  What we are discussing is how the company uses the cash that it makes.  There are 2 basic alternatives.  First, the company can keep the cash.  At the level that Keysight has it (or Google or Apple or Microsoft for example), it is not a service to shareholders.  Keeps more cash than is required means that your investment is in a CD or a Checking account under the control of the company.  The second alternative is to return the cash to the shareholder as a dividend.  This allows the shareholder to invest this cash in other, hopefully successful, places.  I favor this last, because the market that Keysight is addressing is slow growth but high technology.  It means there will be struggles in increasing share price until there is some rationalization in Product Development.  If you need to “buy” your future, then that means your current R&D is not being productive.  The right thing to do is to cut back on older products and focus on the growth areas.  The problem with is that you likely will be laying off current employees and replacing them with those from the company that you just bought.

I hope this helps you and 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

Well, it is nice to report on a good quarter from one of the companies that I follow.  In this case, it is the results from Autodesk.  Let us start with the raw numbers.  The company reported Revenue of $485M and a loss of $0.59 per share.  Revenue was down year over year and they lost less money.  Given what I have written about other companies, why is this such a good result?

Well, the financial statements are all whacked up at the moment due to the change from Selling Software to Selling Subscriptions to Use Software.  There is a large number of changes that go on when that happens.  The biggest of which in the short term is Revenue Recognition.  If you sign a 1 year contract for a Cell Phone Service, companies can Recognize that Revenue 1 month at a time (for 1/12th of the total).  This is true even if you paid completely up front.  Autodesk’s software was generally pretty expensive, some licenses cost thousands of dollars annually.  So people converted to the subscription model slowly.  I have had the same Microsoft Office package for over 5 years.  I don’t see the reason to get the latest version.  Over time, Autodesk has converted many people to this new model and it looks to have turned the corner on that.

One big gain for investors this quarter is the way they have started breaking down Revenue.  I have been been asking for this transparency for some time.  Now they report in 3 categories:  Subscription, Maintenance, and License and Other.  Subscription Revenue is the kind of Software Revenue that we have been talking about.  Maintenance is Software Maintenance for those that had previously bought software and have a Maintenace Subscription.  License and Other is a catch-all for all one-time revenue like those last few Sales of Software that have existed.

There are 3 pools of people left to convert to the subscriptions.  First, there are those people that bought Software relatively recently.  This will take time and the company estimates that there are about 2M packages left to convert.  Not all of these will convert, but that is the idea.  The second group is software that is pirated.  The company estimates that this is 12M packages.  Some of this will become legitimate.  Given the size of the pool, even a modest transition could be quite good.  Finally, there are the Maintenace users.  The company is instituting a program to convert these customers by raising Maintenance Costs over time, with a Reduction in Subscription Cost for those that convert sooner.

All of this is essentially growth in this model before we talk about new users and new products.  If you are concerned about whether the company is viable, the place to look is the Cash Flow Statement.  Here the important number is Net Cash Provided by Operating Activities.  In this case, the company generated $45M in cash in the quarter. This is a key number for all companies as it tells you if the ongoing operations of the business is producing positive cash flow or not.  With all the vaguaries of reporting under Sarbanes-Oxley, this one number is an investor’s best friend.  Just to compare this one number, Enphase burned $24M and Calix burned $23M in Operating Cash.  Think of it this way.  Imagine you have one bank account and it is a free checking account.  You check your balance at the start of a quarter and at the end.  If did not do any investing or take out/pay back any loans, then this number would be how to look at how you are doing financially.  If you are generating cash (adding), that is good.  If you are burning cash (subtracting), that is bad.

So, we have a really nice quarter by Autodesk and a reporting structure that makes sense AND we can use to understand how the transition is going.

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

Change Your Business – Change Your Life!

Visit the FocalPoint Norcal Forum – We have many tools for helping your Business!

Sonoma County: News and Notes

It was the best of times.  It was the worst of times.  It could be the “Tale of Two Cities” or it could be the Q1 Earnings report from Calix.  The raw numbers are that the company had $117M in Revenue and lost $0.57 per share (non-GaaP).  We need to dig a bit into these numbers to understand where the company is and what it is up to.

The $117M in revenue is up significantly from the past year.  The challenge is that it includes $26M of Service Revenue up from $6.6M the Q1 of last year.  This left the Product Revenue almost completely flat.  Additionally, this Service Revenue comes at what is an apparent Gross Margin of less than 1%.  But this can be deceiving and may not actually represent the actual Costs here.  One of the challenges under Sarbanes-Oxley is that you report Cost of Goods Sold (COGS) when they happen.  You recognize the Revenue when the customer accepts the service.  This means that there can be a delay from the reporting of Costs to the recognizing of Revenue.  The conference call stated that there will be a decline in this type of Revenue in Q2 and that it should return to more historical levels.  This implies that the Cost and the Revenue all happened in Q1, but I don’t think this is as clear as it should be.

Now, I would generally rail against adding in a 0% Gross Margin business.  It certainly should not be the cause for celebration and growth pinned to it is disingenuous in its marketing of the results.  However, we know that Calix is in very competitive situations at its major customers with Adtran.  If this was a way of securing a chunk of footprint for later additional work, then it is a good deal.  I need to caveat this now.  Calix’s primary products are chassis that generally are installed partially filled.  The sale of add-on cards is a great deal of the Gross Margin of this kind of business.  If this was about securing footprint for that kind of work, then this was a great move.  If on the other hand it was for the box products that are complete as installed, then I think we need to view this business with great concern.  The analysts on the call should have pursued this but did not.  In the latter case, it would say that this kind of work is what keeps Calix competitive.  If true, then that is a problem.

The real downside comes on the Operational Expense (OPEX) front.  The company $67M in OPEX, including a 50% jump in year over year R&D expenses. This is coupled with a $10M decline in Gross Margin from Systems to make the company extremely unprofitable in Q1.  This wiped out about 50% of Calix’s cash reserves.  The Q2 guidance suggests that this should reverse based upon the growth in Accounts Receivable in Q1.  There is supposed to be growth, but I will want to see growth in Systems and not in Services in Q2.  We shall have to see how this works out, but the company is spending too much money based on the return this is bringing shareholders.

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

Change Your Business – Change Your Life!

Visit the FocalPoint Norcal Forum – We have many tools for helping your Business!

Sonoma County:  News and Notes

We are entering Earnings Season and two of the companies that I post about reported yesterday.  I have decided to start with my review of Enphase’s Q1 results.  The basics are the company had Revenue of $54M down from $64M a year ago.  The company lost $0.30 per share compared to a loss of $0.41 a year ago.  I want quote the transcript from the Q4 Conference Call held on February 28th, 2017:

“Now, let’s discuss our outlook for the first quarter of 2017. We expect our revenue for the first quarter of 2017 to be within the range of $60 million to $65 million. While our first quarter results are typically impacted by normal seasonality, the extraordinarily wet winter in California, where we have a strong presence, has negatively impacted our first quarter revenues. We estimate that the residential PV market in California will be off by as much as 50% in Q1. However, we believe that the California market will recover in Q2 and return to normal growth rates.

Turning to margins, we expect GAAP and non-GAAP gross margin in Q1 to be within a range of 16% to 20%. Non-GAAP gross margin excludes approximately $250,000 of stock-based compensation expense. We expect GAAP operating expense for the first quarter to be within a range of $27.5 million to $29.5 million, and non-GAAP operating expense to be within a range of $19 million to $21 million, excluding an estimated $1.5 million of stock-based compensation expense and approximately $7 million of additional restructuring expense.”

About the only thing that the company hit was the Operating Expense numbers.  Revenue was less than expected as was the Gross Margin.  Note that on the Q1 call the weather in CA was blamed for much of the downturn in Q1.  The problem is that the Q4 call happened at the end of February.  The company should have had a really good look at the totals for Q1 and apparently did not.  Which leads to the thing that I think that investors need to deal with.  Do you trust Management and their projections?

I think this is a fair question in this case.  There have been so many wrong turns that you have to wonder if Management is in touch with what it is doing.  Let me point something else out from the conference calls.  The Q4 call predicted that Q2 would see a return to normal growth rates.  On the Q1 call, we were told that California is 40% of Enphase’s business.  And the projection for Q2 is flat to down from last year.  How is this a return to growth?

I think it is important to judge management by their words and actions.  We will be having this conversation again about Calix, but it is so stark with Enphase that I want to call it to your attention.  Enphase builds great products but are they a great company?  Is the Leadership in place to lead them into the future?  These are the decisions that you need to make.

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

Change Your Business – Change Your Life!

Visit the FocalPoint Norcal Forum – We have many tools for helping your Business!

Sonoma County:  News and Notes

This week we look at the last of the 4 stocks that I track, Autodesk.  This company is going through the business model change that I have discussed and I want to analyze that change a bit.
First off, let’s give you the big picture numbers.  Revenue was $478M and the company lost $0.28 per share.  This was considered better than expected.  A couple of other numbers is the “new model subscriptions were at an ARR of $529M for a total of 1.1M subscribers.  It is this last bit that I want to talk about.  I would be remiss if I didn’t note that total ARR was $1.6B from 3.1M subscribers.
Time for some definitions.  ARR stands for Annualized Recurring Revenue.  What this means is that if you look at the subscription revenue of today and got it for all 12 months of a year, you would make a certain amount.  So, $529M ARR means that the company has subscriptions of $44M a month for the new model.  This new model is the rental of the software that Autodesk creates.  They had older subscriptions for service, but they have stopped selling packages and now only rent them.  This is the key to Autodesk’s future.
The whole point of this model is that every month is the same.  That instead of big bumps when new software comes out, there is a smooth income of money from the software that people rent.  There is one other number that we need to get in here and that is Total Spend.  Because of the business model change, it is hard to separate out Cost of Goods Sold (COGS) from Operating Expenses (OPEX).  The non-GaaP Total Spend at Autodesk was $560M.  On a monthly basis this would be $187M a month.  That is the number that the company needs to reach to cover its expenses.
If I take an average of $44M per month at 1.1M subscribers, I end up with $40 per subscriber per month.  If I needed to cover all $187M with that amount, I would need 4.7M new model subscribers.  The good news is that there are these older subscriptions that account for $89M per month in revenue.  If that remains constant, then I only need $98M from the new model.  This equates to 2.5M subscribers, not too far out of reach.  Additionally, the company could look at ways of cross marketing its products.  This would mean the average monthly bill went up.  If the average bill was $86 per subscriber, the company would be in good shape as well.
I am sure that Autodesk will be looking at both methods simultaneously and the number of new subscribers and the average value per subscriber will not need to be that high.  The one number we don’t know is churn.  How many subscribers exit the new model?  We just don’t know.  But that should give you some things to think about in choosing whether to put money into Autodesk.
Jim Sackman
Focal Point Business Coaching
Business Coaching, Executive Training, Sales Training, Marketing Strategy
Change Your Business – Change Your Life!
Visit the FocalPoint Norcal Forum – We have many tools for helping your Business!

Sonoma County:  News and Notes

Today we take a look at the earnings of Enphase.  Yesterday the company reported about $90M in Revenue and $0.21 per share loss.  These numbers were at the low end of the range that the company projected at time of reporting its Q3 results.  A bit more troubling is that the company has given guidance for Q1 that is essentially flat with last year and a linear decline from Q4.  On a brighter note, Inventories declined over $7M year over year.  On the other hand, Accounts Receivable went up significantly.  This leads to a bit of concern that there is too much product shipped at the end of the quarter to get paid.
But let us turn our attention to the conference call.  There are several points that I want to highlight here and I think they should lend some light on the path forward.  I have already noted on several occasions that this stock is at high risk.  Nothing on that front has changed.  The question is:  Are there indicators that it will change in the future?
First, the company has issued a claim that it will turn cash flow positive later this year.  Indications would be in the Q3 timeframe, but nothing that specific has been given.  Enphase just had another layoff and claims that this will save about $4.5M per quarter in cost.  This would place Operating Expenses (OPEX) at about $20M.  If we assume that there will not be great expansion of Gross Margins, this would put break even at about $100 – $120M per quarter.  This is not inconceivable with the existing business.
Second, there was a question about competition and this led to a comment about Huawei.  Entry of Huawei into the Solar Business should be considered highly troubling.  One can examine their track record in Telecom and only express concern.  Huawei has driven many competitors out of business by being able to compete at extremely low margins.  Any investor should be alarmed if Huawei enters a market that they are involved in.  Even if they become nothing but a stalking horse, prices are likely to be negatively impacted.
Third, the drop from Q4 to Q1 is blamed on the weather in California.  This is interesting because it is about a 1/3rd drop in the entire business.  The US market accounts for 80% of Enphase’s business and California a large chunk of that.  If the statements are correct, we can now pretty accurately judge the impact that California makes on the overall business.
Finally, I think this last bit should also show the current state of the battery business inside of Enphase.  The company talks regularly about how well received the products are.  But there seems to be little to no financial impact of them on the total company.  This implies that the actual sales are quite small.  As an example, Australia is noted as the leading market and its population is less than that of California.  So, we can only take this as leading indicators.  Once the battery business is significant on its own (10% or so of total revenue) then it should have its own reporting line in the quarterly numbers.  Since Storage is not separated out, we have to assume that this is less than $9M of Business quarterly.
So, there it is.  Q2 guidance will be critical as will be any announcements from Huawei.  This is still a high risk play but I hope this gives you some thoughts on how to judge possible futures for the company.
Jim Sackman
Focal Point Business Coaching
Business Coaching, Executive Training, Sales Training, Marketing
Change Your Business – Change Your Life!
Visit the FocalPoint Norcal Forum – We have many tools for helping your Business!

Sonoma County: News and Notes

Well, it hailing here today. I just looked outside at what was coming down and it was hail. I lived in Florida for almost 15 years so I am familiar with it. Just rare to see this stuff in California. Probably means that it will snow at lower elevations in the Sierra’s. But we are not here to talk about the weather. We are here to talk about Keysight’s Earnings. This was the blandest call given that they just did a $1.6B acquisition and that will be the focus of much of what we talk about. But the numbers are straightforward. The company had $726M in Revenue and $0.63 per share earnings. If you switch to the non-GAAP number, they are essentially flat year over year. The company is profitable and stable. The market it is in is about the same. The question for you as an investor is all about the deal.

Let’s talk about using cash in acquisitions, especially since this is going to be borrowed cash. The borrowing does not bother me, but it does up the purchase price slightly. The thing is that Ixia shareholders (the shareholders of the company that Keysight is purchasing) are getting cash for their stock. There was a slight uptick in the stock prices of both Ixia and Keysight. Ixia’s share price is quite close to the offered cash value. That means people are pretty sure the deal will go through. The question is what does it mean to shareholders.

Now, the truth is that the PROFIT that Keysight derives from the deal must exceed the cost of the deal. Think of it this way. I give you $100 and you pay me back over time. I don’t make a profit until I get my $100 back from you. Revenue is not what you get to give me, it is profit. So, if you use that money to build a business that makes $10 a month, then I get my money back in 10 months at best. Ixia made $5.4M in profit last quarter. Even if I round this up to $6M, it will take over 250 quarters to pay back which is more than 60 years. As an investment, that is a terrible deal on the face of it.

The question comes down to what are called “synergies” and this is where acquisitions make it or break it. There are cost synergies and revenue synergies. The cost ones are easier to understand. You don’t need 2 CEOs. So, there are a number of people that will be let go once this deal is complete. At a minimum, that will include Executives and G&A (HR, Accounting, etc.). There may be other gains as well, but let’s stop there for the moment. Then there are revenue synergies. This is the notion that you can increase sales by selling one company’s products into the other’s customers. This is a lot riskier than cost synergies and is the place that most deals don’t work. I generally like to think that any revenue synergy is a bonus to the deal and that is the way it was discussed on the quarterly call.

So, what you should be looking for is if you take the P&L statement of both companies and add them together that the combined company beats that business. My experience is that it is a lot harder than it looks. Think of the Anite deal. Keysight spent $607M of shareholder money. Profits have not appreciably grown. So, what will be different this time? We shall see.

Have a great day!
Jim Sackman
Focal Point Business Coaching
Business Coaching, Executive Training, Sales Training, Marketing

Change Your Business – Change Your Life!

Visit the FocalPoint Norcal Forum – We have many tools for helping your Business!