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!

 

 

Sonoma County: News and Notes

 

This week I get to my review of Enphase.  This is long delayed due to other business activities for me as well as the Thanksgiving Holiday.

The company reported $77M of revenue and a non-GaaP loss of $0.01 a share.  This is a significant gain over past quarters and was based around a nearly 3.5% gain in Gross Margin.  This has been a troubling metric for the company as it is still in the low 20% range.  The response of the stock has been almost explosively positive with today the stock being $2.90.  The stock was hovering below $1 a share not too long ago.

There are three things that I would like to say about this very positive result for the company. 

First, I want readers to note the ongoing R&D spend that the company has.  This number is about 10% of Revenue.  Nowhere near the numbers that I decry in Calix's results, but the company needs to continue to invest in cost reduction activity.  There is a balancing act in the R&D plan between reducing cost and opening markets.  As the CEO notes throughout the call, there is a 7-10% annual price reduction in the market.  R&D must keep lowering costs or Enphase will fall back below 20% Gross Margins.  At the same time, the company needs to expand Sales.  Right now the projection for Q4 is flat again.  Without Sales Growth, the company will need to manage itself very tightly.

Second, this was the first time we got to hear the new CEO (Badri Kothandaraman) on the call. I know that many will regard these results as his success.  The thing is that as he points out this result started when the IQ6 started shipping.  The plan to get to today was before his tenure as CEO.  Essentially, we now see the outcome of Paul Nahi's plan.  The next couple of years will tell us all about Badri as a CEO.  In particular, he talked about caution on pricing.  This will limit upside Sales at least in the near term.  So, you will want to monitor the control of Operating Expenses and Gross Margins over the next several quarters.

Finally, we will have a shifting competitive landscape over the next few quarters.  Beyond the Sunviva ruling, there will be competitive response to the products announced on the call for 2019.  Because Enphase is ASIC based, it takes a longer development cycle to build new products (you have to design and prove your silicon AND design and prove your circuit boards).  It also means that non-ASIC based solutions can be available with less time from the start of development.  There is also this notion of pushing into India and Africa.  I think India is a more likely place, as the Chinese have little to no influence there.  However, caution needs to be applied to Africa.  Many if not most countries in Africa are in bed with the Chinese.  It will be interesting if a company like Huawei, which is already huge in these markets becomes a factor.

Those notes aside, this was a very positive quarter.  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, 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 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

 

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!