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Nov 7

Week 278: Shorter Posts and thoughts on Credentials

Portfolio Performance

Top 10 Holdings

See the end of the post for my full portfolio breakdown and the last four weeks of trades.

Thoughts and Review

I had such a good response from my post on Radisys that I decided to change things up for the blog. Rather than posting monthly letters summing up all my thoughts, I am going to deliver updates in a more traditional blog format. I will write as things come up. So this update will be more brief, and will not cover any lengthy company updates.

I had a pullback in the last month. I guess it shouldn’t be unexpected. The previous three months were almost parabolic. Having a portfolio that is weighted only to a few stocks, any kind of lull in the performance of those stocks can cause big fluctuations. Right now my portfolio is heavily dependent on the performance of Radcom and Radisys. Both stocks had corrections leading into and following their third quarter earnings.

The good news is that nothing has occurred with either to warrant a change in mind. While I expressed some concerns about Radcom in my earlier post, I felt a lot better about the stock after their Needham conference presentation. I even bought some back over the last couple days.

I sold out of a number of oil stocks. I still hold positions in Swift Energy, Journey Energy, Zargon Oil and Gas and a very tiny position in Gastar Exploration. Other than Swift Energy, none of my positions are very big. I started by selling Granite Oil after these comments on InvestorsVillage (here and here). Looks like I was wrong there. Later, as the price of oil began to break down I sold Jones Energy and Resolute Energy. Both of these are levered plays and I expect out-sized moves as oil corrects.

I added a couple of new starter positions under the theme of Big Data: Attunity and Hortonworks. The latter has begun to work out but the former has not at all. I’m doing some more work to understand if I just made a mistake on Attunity. With the new blog format I will write-up the positions and my thoughts on the Hadoop market (which led to my investments) in separate posts.

I also added a position in Nimble Storage. The company has some good technology, can compete with Pure Storage and take market share away from incumbents like NetApp. Again I’ll give more details in a later post.

Finally I mentioned in my last post that I had taken a very small position in Supernus Pharmaceuticals. I’ve held that position over the last month and watched the stock correct downwards almost every day. This is a big biotech sell-off and I don’t think the move has much to do with the company itself. Supernus is growing very fast, there appears to be plenty of opportunity for further growth, and the pipeline of new drugs seems to be quite robust. I’m seriously considering adding a big chunk to this one.

Credentials

One final thought on the topic of credentials. As I have written in the past, I manage my own family’s money. Recently I had an opportunity to expand that to a number of friends. But before going too far down that path I wanted to understand the regulatory requirements.

It turns out that in Canada at least, managing money and taking any sort of payment for it is very regulated. It requires a number of courses, which is reasonable, but also years of very specific experience under the tutorage of a dealer.

Clearly I am not going to take 3 or 4 years to work as an understudy just so I can start a small part-time business on the side for a few friends.

My frustration is that there is no distinction between someone trying to scale into a large fund, soliciting money from the general investing populace, and someone who wants to do what I was looking into; basically help out some buddies and get paid on performance to do it. These two activities do not seem equivalent in terms of public risk. But in the eyes of the regulator there is no distinction.

I’m not a conservative in most ways but this certainly gives me sympathy to the position that abhors regulation. I’m in a region that is suffering, I have a ready-made opportunity to create a small business, and the government has basically said no you can’t do that, because we know best. Because as anyone who has read this blog for the past 6 years knows, I am clearly not qualified to pick stocks.

Portfolio Composition

Click here for the last four weeks of trades.

Nov 5

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Third Quarter Earnings Updates: WLDN and RMGN

Willdan

Willdan has put together a number of good quarters in a row and did not disappoint in the third quarter.

Earnings were 28c per share and revenue was $58 million. Revenue was at a similar level to the second quarter but up 75% over the prior year. Though part of the revenue increase was due to acquisitions, organic growth played a big part as well. Organic growth is up 30% year to date.

Willdan’s strategy has been to expand by acquiring small engineering services firms with complementary skills that operate in areas that expand Willdan’s reach. These acquisitions have been Genesys Engineering, Abucus Resource Management and 360 Energy. The expectation is that the more complete services package will allow them to bid on contracts they previously would not have been able to.

The strategy has worked. In the third quarter Genesys generated $16.2 million of revenue, up from $8 million the previous year.

Willdan also provided a robust update of projects in the early stages. They named the following new programs that are ramping in the third and fourth quarter of this year:

6 year $90 million LCR program for SGD&E announced in March is expected to ramp in 2017
2.5 year, $41 million multi-family program for ConEd, announced in June, continues to ramp, will make a larger contribution next year
3 year, $35 million contract, small/medium business direct install and industrial program for PacifiCorp in Utah, will contribute a little in revenue this year, ramp in 2017
2 year $10 million clean energy program in New Jersey will contribute a little this year and ramp 2017
NYC housing program is beginning to contribute a “modest amount”, and is “expected to increase considerably next year” – they only have notice to proceed on small amount of the program right now, expect to know more about the timeline by year end

All the major ongoing programs are expected to remain in place in 2017. With only a few small projects rolling off, 2017 will almost assuredly be a growth year. The company put a “minimum public target” for growth of 10% for next year.

Also mentioned on the call was the improving growth landscape in California. Right now in California 20% of energy efficiency services are outsourced by utilities. The total ultities budget is around $1.8 billion. The California Public Utilities Commission (CPUC) has mandated across the board that outsourced volumes needs to exceed 60%, and they have used language that they would like to see it “as high as 100%”. This will “dramatically increase the market as new procurements are initiated”. Basically it is a 3-fold to 5-fold increase in contracted services. Willdan will be well positioned to take some of this business.

Finally the Tom Brisbin, the CEO, made comments about how he would like to expand the company into more industrial projects, specifically oil and gas and refining. Industrial end users are larger users of electricity. The amount of savings per user will be higher and so these will be larger contracts. Given past history, an acquisition in this area would not surprise me.

I was tempted to add to my position in the stock, but its already quite large.

RMG Networks

RMG Networks had what I would consider pretty decent results, and the color on the conference call was very positive. Yet the stock has floundered flat to down.

In my opinion investors are being too impatient with the story. Everyone is looking for a big top line number. When it doesn’t come they are ignoring what is happening under the surface.

Everything is moving in the right direction: pipeline, partners, pilots, and products. One of these quarters, maybe even the next one, the momentum will break through to the surface with a big revenue number, $12-$13 million, and it will be off to the races.

The company continues to make inroads into the supply chain vertical. On the third quarter conference call they said that they had 40 supply chain prospects that were in various stages of negotiation and that the 3 previously mentioned pilots had “been extended” to investigate functionality roll-out in 2017, Each of these pilots can be $1 million of revenue or more.

They also put aside some time to give us more detail on their 3 recently signed partners:

Manhattan Associates – Manhattan manages supply chains, sells supply chain products, has 1,300 products, performed account planning in Q3, training to Manhattan sales team, expect initial sales in early 2017
Regan Communications – Regan is a leading corporate communications consulting company – are specifically educating and promoting Inview. The relationship will materially expand reach into the internal communication market. The partnership kicked off on Sept 29^th at Global Employee Communication Conference at Microsoft. Robert Michelson, Chief Executive Officer was MC for part of event and delivered a keynote presentation. The presentation demonstrated Inview. RMG has received 30 new leads on Inview from summit
Airbus DS Communications – Airbus is a 911 call leader, 60% of 911 calls are received by Airbus. A new RMG-Airbus solution puts real time data displays into the Airbus system. RMG closed their first two Airbus customers in Q3 for $100,000 in revenues. There are a total of 2,800 Airbus customers.

They believe these channel partners can generate $5-$10 million of revenue annually once they are trained and ramped.

Michelson also reiterated that large deals in the pipeline have “increased dramatically” over the past couple of quarters.

Looking at geographical strength, the United States and Europe have been strong but the Middle East has not. Michelson said with regard to the Middle East that (I’m paraphrasing here):

[We have] orders in the millions but need to see the down payments, the customer has signed the contract… we need things to clear up with the economies there because price of oil has such a disproportionate impact on economy, it gives more beta there.

If oil can return and stay at the $50 level we could see some upside there. On the other hand at current prices, the Middle East may continue to be a drag on results.

Finally, some color was given on the recently filed S-3. Michelson was clear that they believed the stock was under priced and any move to raise funds would only be done because growth led to the need for additional working capital. He said that they would “protect stockholders” and keep them from being diluted, leading me to think it may be a rights offering. Michelson also said the raise would not be for anywhere near the $10 million shelf that was filed.

I didn’t add to my position but continue to sit tightly.

Nov 3

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Third Quarter Position Earnings Updates: ACHI and HDSN

Accretive Health

I first wrote about Accretive here.

Accretive announced third quarter results last night. If I didn’t pay attention to the stock price I would swear they knocked it out the park. But the stock was down 10c on 10,000 shares for most of the day and ended flat. So I guess I must be wrong.

As I wrote in my original write-up, Accretive’s GAAP accounting is a disaster but their gross customer billings, which would be revenue under any sane accounting methodology, grew from $38 million to $60 million. My own estimate of EBITDA, which excludes stock option expense, is around $5 million, a big improvement over the last couple of quarters.

Equally important is that they retained their second largest existing customer (next to Ascension), Intermountain. On the call they said:

The third area I’d like to highlight is our multi year renewal with Intermountain Healthcare. Intermountain is our second largest customer and we are delighted to continue to partner with them for their revenue cycle needs.

This relationship is a good example of a complementary partnership between us, Intermountain and their EHR vendor as they go through a multiyear EHR implementation process. This renewal demonstrates the important role that Accretive plays to provide focused and comprehensive RCM solutions in the face of the increasingly complex environment our customers are operating in.

Accretive is continuing to on-board the Ascension business. Hospital count increased from 72 in the second quarter to 91. Their physician advisory services business (PAS), while still small, is growing quickly, revenue was up to $4.2 million from $3.2 million the previous year and hospital count for the segment is up from 93 at year end to 167 today. As the on-boarding continues revenues should continue to ramp, driving more EBITDA. Reaffirming guidance means revenue (gross customer billings) of between $60-$80 million in the fourth quarter.

Finally, they are expecting to re-brand in 2017, not a bad idea considering that when you google the company name you get stories about patient shakedowns. Part of the process will be a move to a real stock exchange. This may end up as the biggest catalyst of all, as I suspect the stock doesn’t get much of a following on the OTC.

Hudson Technologies

I originally wrote about Hudson here.

Hudson had a very good third quarter, basically reaching a similar revenue level as the second quarter even as the third quarter was seasonally weaker (see below for historical perspective).

R-22 prices averaged $15 per lb in the third quarter. This is up from $12 per lb in the second quarter. R-22 makes up about 40% of volumes, so even with what was likely seasonally lower volumes, revenues came in at $34.9 million, so up a touch from Q2.

The company took some one-time charges around the ramp of the Department of Defense contract as well as a charge for the retirement of their former CFO. If you remove those one-time events I get earnings of around 19c per share.

On the call Hudson said that they have yet to see any evidence of refrigerant switching. They did say that with the continuing upward trajectory of prices that switching will eventually have an impact. On the other hand there will be a further ramp down of virgin production next year, meaning more of a shortfall for reclaimants like Hudson to fill.

The DoD contract implementation is ramping and they expect revenues from the contract in the second quarter of 2017. Remember that the contract is for roughly $40 million a year (its $400 million over 10 years though the company can’t say for sure how that revenue will be distributed annually). But lets just say its $40 million a year. They already said that they expect similar margins from the new business as their existing businesses. So 20% EBITDA margins are reasonable. That means the DoD contract brings in $8 million of EBITDA a year. Its probably a less volatile business than their typical reclamant business so its probably worth a higher multiple. Maybe 10x?

If you can get comfortable with those assumptions, the DoD business is worth $80 million. The company’s current market capitalization is $250 million and I’d say it’s arguable whether its fully pricing in the R-22 phase out.

Nov 2

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Third Quarter Earnings Updates: RDCM and VICR

I had such a great response from my single story formatted post on Radisys that I decided to change things up a bit for the blog. Rather than posting monthly consolidated letters where I sum up all my thoughts, I am going to try to deliver updates in a more traditional blog format, writing as things come up.

Vicor

Its interesting to contrast Vicor with Radisys. Both companies are in a similar place; they have a large opportunity ahead of them, that opportunity is beginning to realize itself with new orders, the order build should really hit its stride in the second half of 2017, and the next couple of quarters will be relatively weak as we wait for the order book to build up.

The difference between the two companies is the way the market has interpreted the results. Vicor was up nicely on the day after their earnings release and has held up relatively well as the small cap market has suffered. Radisys was down and has continued to be down since their release.

Vicor reported a good quarter. VI Chip bookings were up 54%. Picor bookings were up 122%. Only legacy BBU bookings were down at 14%.

More importantly, on the call the company announced the first of its VR13 orders, “some major million dollar type orders that obviously are well beyond the prototype level”.

For those not following the story, VR13 refers to an Intel Skylake chip based server specification whose ramp has been delayed by continual delays in the Skylake chipset. Intel announced in their quarterly call that they were now shipping Skylake chips for sampling. Vicor’s announcement provides follow through to that data point.

Vicor also announced some other interesting development news. In last 3-4 months, they have been doing work on power on package technology, putting point of load power multiplier on the ASIC to provide 100’s of Amps in 6V to 1V range. Within several weeks they expect to see the first production of once such solution.

I added a little to my position in Vicor. I think that the VR13 ramp is upon us and results are more likely to surprise positively than negatively going forward.

Radcom

There was something a little bit off about the Radcom call. Maybe it was my expectation, or at least hope, that there would be some new announcements. There wasn’t.

It didn’t help that a replay of the call wasn’t posted until this morning. I wonder whether the delayed move in the stock is because of folks that couldn’t listen to the call and didnt’ get their first impression until this morning.

There were some positives. There was the extension of deals with two CSPs. There was the use of the word “accelerating” for several of the CSPs that they are engaged with. And there was color that 2017 has some upside on smaller non-NFV deals with emerging market CSPs.

But there were also a number of things I didn’t like to hear. I didn’t like the language around the relationship with AT&T being “ok”, which is the term they used a few times. And I didn’t like that they continued to be vague about the new product that they won’t talk about and haven’t released to the wider market.

Referring back to my post last month on Radcom, I had been hoping that there might be an announcement piggybacking the announcement by Gigamon and their involvement with AWS and AT&T. The question was actually asked on the call, and while the answer was cryptic enough to leave the question open ended, its hard to verify that a GIMO/AT&T/AWS connection is there.

Also, if I understand the wording around the estimate that Radcom’s service assurance total addressable market (TAM) is $100 million between now and 2020, maybe 2018 given acceleration, it’s not really that big, and it shows they really do need to expand to new products to grow into valuation.

Finally the guidance that “the models” are saying no deals until the second half 2017 is sobering. They had originally anticipated deals towards the end of this year, beginning of next year. This isn’t surprising to me, I mean everything that I have read about service providers is that they move at a glacial pace, but its still a slip from the original color.

So I reduced. I resized Radcom so it is now closer to a regular sized position for me. No need to try to be a hero. I wouldn’t sell any more at these levels. It was a big move down this morning. And the upside is still significant, so its a stock I want to own. But I don’t want to have my portfolio heavily dependent on the story if it won’t play out until the second half of 2017. I have enough “2017 stories” already. I’ll keep my reduced stake and wait until we get closer and see where the price shakes out.