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Posts from the ‘Radisys (RSYS)’ Category

Q1 Earnings: Radisys

Radisys stock has been pretty flat since it announced its first quarter results, and while I can understand that lack of interest, I nevertheless was pleased with what I heard on the call.

The first quarter was on the low end of guidance.  Revenue came in at $37.6 million, while the company had anticipated a range of $37-$41 million.  Guidance for the second quarter was $41-$47 million, which is pretty close to my expectation, though maybe the top end is a couple million higher.

The stock didn’t move on any of this and it shouldn’t have.  There is nothing surprising.  The Radisys story continues to be a wait and see one.  We wait for announcements of new DCEngine, FlowEngine, and MediaEngine orders and we’ll see if they materialize.

There was lots of qualitative progress on this front but not much quantitative in the way of meaningful orders yet.

Here are the highlights:

Verizon announced their Exponent platform in February.  The platform allows carriers to deploy off-the-shelf(ish) next-gen solutions using technology Verizon has developed.   Brian Bronson (CEO) said that DCEngine and FlowEngine are designed into the Exponent solutions and that they have seen  incremental customer relations develop.  While this is very new and the relationships are mostly still in the early stages, Bronson did say that “a couple of engagements are fairly close”.

A second partnership was announced with Nokia.  This one revolves around MediaEngine and to me seems very significant.  Nokia will be marketing MediaEngine as their single MRF solution.  The Alcatel-Lucent MRF will be mothballed in favor of the Radisys product.  The partnership is expected to open access to new CSP customers.  They expect that given Nokia’s customer base, MediaEngine will be the MRF in 3 of the 4 CSPs in North America, and that there are opportunities in Asia/India as well (beyond Reliance).  In the past there were a number of MediaEngine deals where MediaEngine saw a half share win (with the Alcatel-Lucent MRF picking up the other half) but will now have the full deal go to MediaEngine.

They are close to closing 3 new carrier wins with DCEngine.  First, they are pretty close to signing a master agreement with a US Tier 1 CSP.  They said this wasn’t Verizon (already the primary DCEngine customer) so I think it has to be AT&T (??).  They were confident enough to say that they expect purchase orders this quarter from this operator.

Second, Reliance Jio is trialing DCEngine for a single use case and they expect orders with respect to this use case in the second half.  Third, a South East Asian CSP has received proof of concept DCEngine units to in the first quarter for a use case that has a revenue potential of around $20 million.

They formally announced the new FlowEngine, called TDE-2000, in the first quarter.  Management provided color around a strong response and the initiation of trials and proof of concepts but nothing specific.  They did say that Verizon is using the older version of FlowEngine for a new packet-inspection use case (they have used it in the past as a edge-router) and that they expect “incremental deployments in the second half” for this use case.  Bronson also said that by year end he expects that at least one of the DCEngine wins will incorporate FlowEngine.

With MediaEngine, the big news is the Nokia partnership that I already mentioned, but there also appears to be some progress around transcoding.  They are still looking “to disrupt transcoding”.  I talked about how MediaEngine provides an alternative to session border controllers (SBC) to perform transcoding operations in this post (there is also a good youtube video on how MediaEngine can save money on transcoding)  The punchline is that Radisys can offer a solution that is 3x to 5x cheaper.  On the call they disclosed that MediaEngine is already deployed to a small extent performing the transcoding function with a couple of operators, which is new information.  They also have a new “in” with operators, as they can leverage the Nokia-ALU relationship.  Nokia-ALU is the number two SBC provider in the world.  Bronson said there are a couple of operators that have “strong interest” and that they are looking to a  7-figure deal.

So is it good or bad?

You can look at this one of two ways,  You can optimistically count up all the engagements, trials, proof of concepts and agreements on the verge of being signed and think that the second half of 2017 and 2018 are going to be a great ramp.  Or you can pessimistically point out that nothing has been signed yet, there is still very little incremental revenue beyond Verizon, Reliance Jio and some piecemeal one-offs and that the clock continues to tick.

Both of these perspectives seem perfectly valid.  I prefer to take the first, mainly because I believe the upside in the stock is significant if it turns out to be right.

Week 294: It doesn’t matter how you get there

Portfolio Performance

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Top 10 Holdings

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

Thoughts and Review

It’s a seminal moment for the blog!  For the first time in what seems like forever my largest position is something other than Radcom.  Thanks to more than doubling in price in the last four months (and even after pulling back from $6 to $5), Identiv now holds that honor.

At the beginning of November I wrote the following about Identiv:

I tweeted a couple of times this morning that I don’t think this stock makes sense at a $20 million market cap… The company has a $55 million trailing twelve month revenue run rate, they are showing growth, they are EBITDA positive now and it’s not an insignificant amount of EBITDA.  That feels like it should warrant at least 1x sales.

We are already at a $55 million market capitalization but with momentum at the company’s back I haven’t sold a share.

A second position, RMG Networks, has also ran up the ladder, and now sits as my fourth largest position at a little less than 5%.

I wrote this about RMG Networks when I first took the position in late June:

With the focus on the new verticals and improve productivity of the sale force new opportunities in pipeline are up over 40%.  And here is where we start to see an inkling that the strategic shift is bearing fruit.  In the sales pipeline, Michelsen said that the number of deals $100,000 or greater has increased by 50% in the last year while the number of $1 million deals have tripled…My hope is that these early signs of sales improvements lead to an uptick in revenues in short order.

We are starting to see that pipeline bear fruit.  The entire move has come in the last two weeks.  The stock has moved from 70 cents to a dollar on news that they had secured contracts in the healthcare vertical and converted one of their previously announced trials into revenue in the supply chain vertical.

Finally, a third company, Combimatrix, which I wrote about earlier this week, is beginning to run and take a more significant position in my portfolio after releasing solid fourth quarter results.

So that’s all great, but the reason I mention these three examples is because they illustrate how bad I am at predicting how things will play out.   In the second half of last year had you asked me what my portfolio would move on I would have replied it will rise and fall on the fortunes of Radcom and Radisys.

Flash forward a few months and my portfolio has moved significantly higher and Radcom and Radisys have done nothing.  Radisys has actually went backwards to the tune of 20%.  Whodathunkit.

This is why I carry so many positions.   A. I’m a terrible timer.  The events that I think are imminent take months or years to play out, while the events that I think are distant have a habit of manifesting much faster.

Second, my favorite ideas are often not my best one’s.  I have no idea why this is.  If I did I would change my favorite ideas.  But it’s uncanny.  I’ll sit on a thesis like Radisys, work it into the ground to understand it in depth, and then along will come a Health Insurance Innovations, which I will buy on a bare thesis (in this case that the Affordable Health Act will be repealed and this is going to be good for HIIQ) and when the dust settles I’ll have more gains from the latter than the former.  Its kinda crazy.

I guess as long as you are moving in the right direction it doesn’t really matter how you get there.

Portfolio Changes – Adding Silicom

I added a couple of new positions this month.  The Rubicon Project and Silicom.

Silicom got hit after releasing what I thought was a pretty good fourth quarter.  The company traded down to $35 from $39 pre-earnings.  I’ll try to get a more detailed write up out on Silicom at some point, but the basic points are:

  • This is a $250 million market capitalization company with $36 million of cash and no debt
  • It’s trading at a little over 2x revenue and just guided 15% growth in the first quarter and double digit growth for the year
  • Their past seven year compounded annual growth rate is 26% and growth was 21% in 2016.

Silicom designs a wide range (over 300 SKUs) of networking, cybersecurity, telecom and storage products. These are generally board level and appliance level hardware solutions.

They expect their security vertical will grow double digits, their cloud vertical will “grow significantly” and that a contribution from SDWAN will kick-in in 2017 and is expected to become a “major growth area”.  They said that over the intermediate term they see a larger opportunity in their pipeline than they have have in the past.

Already the stock has rebounded on news of a significant contract for encryption cards that will ramp in 2017 and reach $8 million in sales in 2018.

I’ll talk more about Rubicon Project in an upcoming post.

Apart from these new positions I did a bit of tweaking of my positions, adding a little to Nuvectra and Combimatrix, reducing my position in Bsquare and selling out of DSP Group.  I also have added to my Vicor position in the last couple of days (subsequent to the update end so not reflected in this update).

Taking advantage of Bovie Medical Weakness

I also added significantly to my position in Bovie Medical.  The stock sold off on news that their pilot project with Hologics for selling the J-Plasma device would not be extended.    As I tweeted at the time, I didn’t think this was as big of news as the market did.

To expand on my reasoning, Hologics has a particular business model they follow for their instrumentation and disposable business, of which J-Plasma would have been a part (from 10-Q):

we provide our instrumentation (for example, the ThinPrep Processor, ThinPrep Imaging System, Panther and Tigris) and certain other hardware to customers without requiring them to purchase the equipment or enter into a lease. Instead, we recover the cost of providing the instrumentation and equipment in the amount we charge for our diagnostic tests and assays and other disposables.

So they go “full razor blade”.  Bovie on the other hand, generates significant sales from generators.   The average selling price (ASP) for a generator is much higher than hand piece so Bovie generates a significant slice of their revenue from it.  From the 2015 fourth quarter conference call :

I guess when you think about it, the generator ASP is north of $20,000, the hand piece ASP is $375

So the models aren’t aligned.

Second, Hologic’s Gyn Surgical business segment (consisting of the NovaSure Endometrial Ablation System and our MyoSure Hysteroscopic Tissue Removal System) is a $400 million business so J-Plasma is microscopic for them.  They may not have been inclined to bend their model for Bovie.

Also worth noting is that Hologics wasn’t even mentioned in the Bovie 10-Q whereas the agreement with Arteriocyte that was mentioned favorably.

Finally the language used on the third quarter conference call around Hologics wasn’t exactly definitive:

Well, as you know, the sales channel partnership with Hologic,right now,is in a pilot phase.  So we wouldn’t be in a position, if we were to disclose the economic relationship, until that’s a permanent agreement.  So the pilot portion of our partnership will go until the end of February.  So you could look at some period after that before we can announce a permanent relationship and we’ll decide at that point in time if we’re going to elaborate on the economics of the relationship.

The agreement with Hologics hadn’t generated material revenue so there is no hit to the bottom line.  And in a separate press release (which oddly was released on the same day as the Hologics information but didn’t get on their website for a couple days after), Bovie reiterated guidance for 2017, including “accelerated growth for J-Plasma”.

I think the stock sold off in the following couple of days because its small, illiquid and under followed, not because this agreement was meaningful to the company.  So I bought.

Portfolio Composition

Click here for the last four weeks of trades.

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Radisys Fourth Quarter Update: Expected and Unexpected

I was bracing myself for a beat down when Radisys reported their fourth quarter earnings.  And I was right!

There were two problems with the quarter:

  1. Guidance was poor
  2. The signs that guidance would be poor were ignored by analysts.

Let’s take a look at the signs.

On the third quarter conference call Brian Bronson, the company’s CEO, talked about having low $40’s (in millions) of revenue in the first two quarters of 2017.  In January Radisys disclosed an updated credit agreement where they made reductions to the EBITDA covenants for the first and second quarters that were consistent with a level of $40 million of revenue.  Finally, if you took in the color around trials from the third quarter call and the Needham conference, you would be led to conclude that material revenue was unlikely before at least the second quarter, more likely the second half of the year.

So it was actually pretty easy to see what the guide would be for the first quarter and full year.  I made the following estimates after reading through the EBITDA covenants of the credit agreement (but before the guidance was announced).  I shared these thoughts in the comment section here.

ebitda

My estimates turned out to be pretty close.  They would have likely been even closer if it hadn’t been for the fall off in the legacy business (which I will get to in a minute).

Nevertheless analyst estimates heading into the quarter were much higher.  Most had $50 million of revenue for the first and second quarter.  So when the first quarter number came in lower, the estimates were slashed.

So that was a big part of why the stock has done poorly.  But it’s not the only reason.  The company also announced news that the legacy business revenue, referred to as embedded systems, would decline more in 2017 than previously anticipated.  Embedded systems revenue is now expected to be $55 million in 2017.  As recently as January Radisys had said it would be around $75 million.

Its unfortunate.  But not crippling.  The embedded systems business is not a reason to own Radisys.  Its just a distraction.

The reason to own Radisys are the new products and services offerings.   And here the company did okay, though not enough to offset guidance revisions and the negative perception around embedded.

My hope for the quarter was a firm new order for DCEngine.  Given where Radisys had stated they were in trials I knew this was a long shot.  Indeed, no such big announcement came to pass.

Instead they gave a positive but mostly qualitative update.  Here’s a summary:

  • Making progress with their North American Tier 1 communication service provider (CSP) that is in trials with their DCEngine rack – they have three DCEngine units in the lab and Radisys expects commercial revenue could begin as early as the third quarter.
  • A second DCEngine trial with a customer that will be, in turn, selling to a Tier 1 customer who I am guessing is AT&T, giving Radisys a foot in the door there.
  • A new FlowEngine use case for an existing customer (Verizon?).
  • In Europe, an expansion of the existing hardware and services contract with the Tier 1 (this was a contract related to the open-source Central-Office-Redesigned-as-a-Datacenter or CORD initiative that I wrote about in my earlier post on Radisys)
  • Also in Europe, a new Tier 1 engagement again revolving around CORD.

Overall the company said they were ahead of their plan to have 10 tier one engagements by the summer.

It’s all directionally positive, but as of yet there has been no big win to add to Verizon and Reliance Jio.  And its clear that color alone is not going to move the needle unless revenue can be tied to it.

So what do you do from here?

I’ve waffled a couple of times but in the end have added a little to my position.  I think the bad news is most likely out.  We know from the Needham conference that the European CSP engagements are initially targeting professional services around CORD but that they will likely include a DCEngine component as well (if you go back and listen to the Needham conference again the language is pretty clear: expect that little can be announced by the February earning call but that more engagement with this CSP, around DCEngine, is to come).

We know that the new FlowEngine product will be launched mid-year and in fact a press release just came out today that it is now available for field trials (this is ahead of the end of March date they had previously suggested).  We know that Verizon (and likely others?) are waiting on the new version before purchasing more FlowEngine products.  Interestingly, Radisys mentioned Gigamon, F5 and A10 as competitors whose space they looked to infringe on with this new product.

There was a press release earlier this month describing a partnership with China Unicom to build open-source PODs for mobile 5G.  If this is successful one would expect follow-on orders for DCEngine. China Unicom is a very large service provider.

And finally there was a second press release today describing a new 5G RAN version of Cell Engine.  It is probably not coincidence that also today CORD and xRAN announced project alignment. Three large telecoms, AT&T, Deutsche Telekom or SK Telecom, are all mentioned in the release.  Radisys mentioned that the new Cell Engine was “developed in close collaboration with a leading mobile operator”, likely one of the three mentioned in the CORD/xRAN collaboration.

Away from the news flow and looking at numbers, when I parse the guide for 2017 it’s not hard to spin it bullishly.   We all knew the first and second quarters were going to be poor, low $40s revenue at best.  But given $40/$40 (million) in Q1/Q2 the implied Q3/Q4 guide is a range of $55/$55 to $70/$70 (million).  These are solid revenue numbers particularly given that they are going to be more heavily weighted to the new products than in the past.

So I’ll wait.  Some more.   But as so many of the other positions in my portfolio scream higher (Identiv, Combimatrix, Hortonworks, Ichor and Attunity of late) and I still sit with a decent percentage of my portfolio tied up in Radisys, I certainly hope it’s worth it.

Week 282: Two Big Events

Portfolio Performance

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Top 10 Holdings

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

Thoughts and Review

My portfolio bounced back this month.  This was somewhat remarkable given that my two largest positions, Radisys (RSYS) and Radcom (RDCM), continued to perform poorly.  I don’t expect much from either of these stocks until they are able to secure additional contracts with service providers.  With year end coming up, I am hopeful (but not counting on) some news on that front.

The rest of my portfolio did extremely well, benefiting from the rotation to small caps that occurred after the election of Donald Trump.  I didn’t anticipate the market move or the small cap revival.   But I wasn’t the only one, in fact I didn’t hear that prediction from anything I read.  I would be interested if anyone else knows of an expert, newsletter writer or manager that predicted the move?  They would be worth following.

In retrospect it makes sense; expectations of significantly lower taxes and a relaxation of regulations would lead to a market rally with a bias on small caps with domestic exposure and few tax loop holes.  The stocks that have performed the best for me have had that characteristic.

Willdan Group (WLDN) is a text book example.  Willdan has always paid a high tax rate, sometimes over 40%.  If the companies tax is cut in half, which is not impossible under a Republican government, earnings go up by 30%.  They are also essentially an infrastructure play, another positive.  The stock has moved from $16 to $24 in the month since the election.

Adding Healthcare, Infrastructure, Biotech

While I wasn’t positioned for a rally leading into November 8th, I adapted as the market moved higher.  As I’ve written about here, I added Health Insurance Innovations shortly after the election on the expectation that changes to the Affordable Care Act (Obamacare) would open up competition, which would be positive for their business.

I also added an infrastructure play, Smith-Midland (SMID), as it seems that this will be the focus of spending under the Trump administration.  Smith-Midland makes make pre-cast concrete products like barriers, sound walls, small buildings, and manholes.  They have a market capitalization of $25 million and even after having run up to $5 are not expensive.  There is a good article on the company here.  I also added to my existing position in Limbach Holdings, another infrastructure play.

My last move in response to the election result was to add to a few biotech names.  This worked out initially but interest has waned in the last couple of weeks.  I added to my position in Supernus (SUPN), to Bovie Medical (BVX) and added back some TG Therapeutics (TGTX).  I may jettison the latter position soon.

Responding to OPEC

The Trump move was followed by the OPEC move, which I again don’t profess to have predicted.  I was agnostic going into the OPEC meetings; I held my usual weighting of energy positions, but did not pile into them as a bet that a deal would be reached.

Instead, as is my typical strategy, I chased the news, adding to energy names on the heels of the announcement.  By waiting I missed out on the first 10% move, but once the deal was announced it was a far lower-risk entry into stocks on my watchlist.

It can be argued that OPEC’s cut will only lead to high US production, or that it will be diluted by cheating by OPEC members, but nevertheless its difficult to argue that this doesn’t put a floor on prices.  And if there is a floor, stocks that previously had to discount the possibility of another move into the $30’s do not have to anymore.  Therefore stock prices needed to move higher.  I think they still do.

Many of the names I am interested in are small enough that they do not move immediately with the market.  Thus I have been able to add to Journey Energy (JOY) and Zargon Oil and Gas (ZAR) at prices not too different to what they were leading up to the announcement.  There is a good SeekingAlpha article (and comments, in particular note those on the interim CFO hire) on Zargon here.  I haven’t seen any analysis on Journey, and I will try to write up a summary on the stock in the next couple of weeks.

A second energy name that I added to and am in the process of writing up is Swift Energy.  As I tweeted on Friday:

I also added Resolute Energy (REN), a Permian player I have been in and out of over the past 6 months, and added back Granite Oil (GXO).  There was a good comment to my last portfolio update that gave me some perspective on the concerns I had raised about Granite.  I wanted to add to Jones Energy (JONE), but it moved so quickly off of the OPEC news that I didn’t get a chance.

Finally I added to a derivative play, CUI Global.  CUI Global is a bet on Trump as well as OPEC.  The company has said in their presentations that they have struggled gaining traction with their GasPT products in North America because of the dour investment climate for oil and gas infrastructure.  This should change under Trump and with support to oil prices.  Its no guarantee that CUI Global will be the beneficiary, but if their product is as good as they profess it to be, it should be the preferred measurement tool for new projects.

I also added a position in Contura Energy.  It was written up here.  I think this article will move behind the paywall soon, so I would recommend reading it sooner than later.

Where we go from here?

I’ve taken on some risk as the market has moved higher and especially after the OPEC agreement.  But I do not expect this to last long.  I’ll be paring back positions over the next few weeks.

I don’t feel like I know what to expect from this new US regime.  Tweets like the one’s Donald Trump made over the weekend, promising a 35% tax against companies moving production abroad, leave me wondering where we end up?  Are these just empty threats, impossible to implement?  Or is this only going to escalate?

It’s uncharted territory.  If government spending increases significantly, taxes are cut and trade restrictions are imposed, I’m not sure where it leaves us.  Will bond yields rise, setting off a negative market event?  Will investors continue to pile into domestic US equities?  Will stocks based in foreign locales or with manufacturing operations abroad sell-off on concerns over tariffs being implemented.  The answers are just way beyond me.

Lacking confidence in the answers means I have to get smaller.  That’s the only response.  Since July (my year end) I am up nearly 30%.  I feel like I am pushing my luck asking for the same kind of performance in the second half of my fiscal year.

Portfolio Composition

Click here for the last four weeks of trades.

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