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!

Sonoma County: News and Notes

Well, next week will start the Earnings season as Q2 results come out.  As you readers know, I publish Earnings Analyses of Enphase, Autodesk, Calix and Keysight.  If there are other public companies that are of interest in the North Bay, please let me know.  I have significant experience in the quarterly call language, the public market language and mergers and acquisitions.  I try to make my review of the numbers and the dialogue make sense to the lay person.

Real Estate continues to be a big story here in Sonoma County.  A number of properties that were in the rental space are being taken off the market and sold.  These were typically property owners who did not really want to be landlords but could not afford to sell these homes until recently.  This small inventory has not shifted the pricing down, but has helped put some inventory into the market.  The Commercial Real Estate world is tight as well.  The Cannabis market is causing significant amount of warehouse and similar space to be moved to becom grow houses.  This has caused some significant dislocation for local businesses.  I personally know of 3 automotive repair and service businesses that have had to relocate or go out of business because of this shift.  I have heard some rather challenging pricing for this kind of space at the moment.

It has been all quiet on the water front this year given all the rain we had.  The grape harvest forecast is in the “normal” range at the moment and is likely to hit its stride a couple of weeks later than last year.  Call it sometime in early to mid-September.  Somewhat lower yields are expected to be offset by higher quality, but there can still be slips twixt cup and lip.

This weekend is the Santa Rosa Ironman event.  There are significant Road Closures to support the event.  Take a look at the Press Democrat Website for details on that.  Also the Sonoma County Fair starts August 3rd, so remember that there will be increased traffic around the Fairgrounds.

Have a great day!

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

Change Your Business – Change Your Life!

Hodgepodge

So, there is not one overriding theme to this week’s post.  I am going to write about some things that interest me around the topics I cover.

Well, as hot as it is we know that it is now Summer.  One thing I have noticed in the North Bay is that we end up with a week or so every June of very hot weather.  I think this is our “natural air conditioner” starting up.  As you know we are cooled by air coming from the Pacific to take the place of the rising air over the Central Valley.  It is almost like this week is a pre-requisite to getting that machine started.  Enough latent heat and enough temperature differential.

The fact that it is now summer means that the SMART Train will miss its opening schedule.  There is currently no defined date for starting the regular schedule while a safety review at the Federal level proceeds.  I wonder how long we will continue to support the train after it comes on.  I am a skeptic for ridership.  Riders will need to secure transport at both ends of their commute and it does not extend into SF nor connect to BART.  Given the widely dispersed places that we have employment, I am not sure the right way for a commuter to use this today.  If it continues to exist, maybe a generation from now business will have moved.  Will it be open still?  I don’t know.

The Net Neutrality writing I have done was in response to the massive outcry over a Notice of Proposed Rulemaking (NRPM) at the FCC, which asked many questions about what it should implement for residential Broadband Service.  This resulted in the “Title II Light” that we have today.  I want to note that there are many NRPMs that go on so this was not a unique thing.  For example the FCC just announced one about changing how Payphone Service payments are audited.  I doubt this one will receive much public interest.  It should be noted that the FCC is likely to change a number of rules that you care about.  As things evolve, I will try to keep you informed.

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 want to talk a bit about the results of the election in Santa Rosa last week.  As you probably know by now, Measure C was rejected.  This was the implementation of Rent Control.  I was quite surprised that it was rejected and I had seen polls before the voting that said that Measure C was going to pass handily.  My guess is that a lot of this could have been turnout based.  Older voters (property owners) tend to vote.  Younger voters (renters) tend not to vote.  I don’t think that Measure C would do much to alleviate our housing crunch here in Sonoma County.  I am hopeful that we can get a plan in place to expand housing options soon.

The second thing that I note is that the SMART Train did a “soft launch” on June 7th and they are awaiting approval by the Federal Railroad Administration.  Well, they have less than 1 week to meet their last published schedule of a “late Spring” launch.  There is a schedule posted with 17 trips a day.  The first train leaves Sonoma County Airport at 4:19AM and arrives in San Rafael at 5:26AM.  The last train leaves San Rafael at 8:35PM and arrives at Sonoma County Airport at 9:42PM.  There are 17 round trips on weekdays and 5 on weekends.  So, it looks like things are ready to go for later this year.

While Measure C failed, Measure D passed.  The City of Santa Rosa now has a Pot Tax.  I think the bigger issue here is that the city is now having a space crunch for warehouse type buildings.  3 of my friends in the Automotive Business have lost their location so that it can be turned into a grow house.  I have heard outrageous pricing for space and I expect that this will cause a significant amount of disruption as well.  Looking forward, I wonder how these places will be constructed and staffed.  I suspect that there will be a great deal of money wasted in all of this and that 3 years from now there will be bargains to be had in space that failed.

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

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!

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