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!

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Sonoma County: News and Notes

I want to close up my thoughts about the Fires that hit the North Bay before we move into Earnings Season.  BioMarin has already reported, and others will do so starting next week.  So, there will be plenty to talk about.

What I have noticed that the sense of shock has started to ease and people are getting back to their lives, even if they have changed.  Many companies have gotten a bit conservative through the rest of the year.  I expect things to loosen up next year as people begin to rebuild their homes and the money from that begins to flow through the community at large.

But people will get nervous this time next year.  How do I know?  I lived in Florida for 15 years and lived in South Florida during Hurricane Andrew.  That was the last Class 5 Hurricane to hit the Mainland United States.  The incident and the events before and after are still clear in my mind.  I remember the anxiety before and during the storm.  I remember the sense of isolation.  Once a major Hurricane hits, you don’t want to be out in it.  I remember the meeting with the Insurance Adjustor and getting our repairs done.  I recall the drives into the rubble that was Coral Gables and Homestead to check on property belonging to relatives.  We had 250,000 homeless overnight and the system was overwhelmed.

That experience made me appreciate how well organized the response was here once it got going.  The rebuild will take time.  It will take a lot more time than you will expect.  For South Florida, it took about 5 years.  So be patient with the rebuild.  There is a lot of information out there from both the city and the county.  Take advantage of that information.

Finally, my experience with being in a large natural disaster has taught me that this too shall pass.  Yes, there was loss.  But you will come out the other side stronger and better prepared. Don’t assume this will be the last time you and your community are challenged.  This is the 3rd major natural disaster in my life.  I learned from all of 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

If you follow my writing, you will note that I was silent last week.  That is because of the North Bay Fires.  I ended up in a spot that did not require evacuation, but was out of power for about 96 hours.  There were two times that I thought we were going to be evacuated, but it just never came to pass for me.

Today, things are relatively calm for me.  There are still fires but there are containment lines between them and me.  I am still unaware of the fate of my office, but I expect it is okay.  This makes me much better off than a lot of people in Sonoma County and the North Bay at large.

This is my 3rd large scale natural disaster – the Ice Storm of 64 and Hurricane Andrew being the others.  Having those experiences helped me cope with what was around me.  Essentially, I drew in my perspective to what was truly local to me.  Of course, I was cut off from most of the news and had to rely on texts from the local authorities to know what was going on.  That is a great service and everyone should find out how their local emergency services want to communicate with them.

What comes next is likely to be a blame game.  The Coffey Lane area in particular will be a target with: “How could this happen?”  I am greatly concerned that we will spend an inordinate amount of time on this.  I ask our local and state officials really to focus on the rebuild.  We had a crisis in housing here already.  It just got worse.  We need to start rebuilds and new housing as fast as possible.  We are short on Construction Labor.  I know this because I hear it every week from various Contractors that are clients and friends.  If you know somebody out of work in the Trades, there will be jobs here for a long time.

Will we recover?  I am sure we will.  But this takes a lot longer than people think.  It took about 5 years for the full recovery after Andrew.  This will be a year or more.  So it is a time for both patience and steady action.  Let us look to a brighter future and make it that way.

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!