Reminiscences of a Stockblogger

Research: Ribbon Communications

• 110mm shares at $4 for $440mm market cap
• $81mm of cash
• $391mm of debt
• cash flow was okay though $37mm in H120 $22mm fcf in H120
• company seems to generate a fair bit of FCF – see table at the end
• this is one of those companies where their business description is all jargon which is a flag of sorts
• software solutions provide a secure way for our customers to connect and leverage multivendor, multiprotocol communications systems and applications across their networks and the cloud
• here it is in a nutshell: their products help CSPs and to lessor extent enterprises upgrade legacy infrastructure to cloud, IP-based networks
• 70/30 split with CSPs/enterprise
• software is about 50% of product revenue

Their business is focused on:

1. providing software to modernize network to IP
2. providing IP network security
3. providing edge solutions
4. providing NFV solutions

here is how they break down what they are providing in the 10-K:

• sell mainly to service providers – both fixed and wireless, MSOs, ISPs
• I’m not sure if I have ever made money on a company selling to CSPs 😛
• secure cloud-based delivery of UC solutions
• use direct and indirect sales channels
• These guys are a merger and acquisitions machine, making it even more complicated to look at

Competition:

• Network transformation: AudioCodes Ltd., Mavenir Systems, Inc., Metaswitch Networks Corporation, Oracle Corporation (Session Border Controller) and ADTRAN, Inc (also MSFT recently bought Metaswitch)
• Security and Analytics: SecureLogix Corporation, RedShift Networks Corporation, Empirix Inc. and Oracle Corporation.
• A concern I see in transcripts is they are competing against much bigger companies, I guess referring to Oracle and Microsoft

Acquisition of Anova Data

• Feb 2019
• provides advanced analytics solutions (wtf is that?)
• acquired Feb 2019
• has something to do with big data analytics and machine learning

Edgewater Networks

• Network Edge Orchestration for the distributed enterprise and UC market – well at least I can understand what that one is
• software leader in session border controlers
• allows RBBN to get into SD-WAN market

GENBAND

• not really clear what product these guys sell but improves RBBN position in move to IP networks and cloud-based networks

ECI Telecom Group

• merger in Nov 2019
• issued 32.5mm shares to ECI and $324mm of cash
• leading packet optical solution provider
• address markets like NFV and SDN
• had $25mm EBITDA in 2018, $27mm EBITDA in 9m 2019
• 50% of ECI revenue comes from India and Russia
• There’s some sort of adjusted revenue accounting problem in India right now with major CSPs and that is impacting the India business
• the Cowen guys don’t think a lot of ECI
• According to RBBN merger presentation ECI does have a big TAM – not sure if its growing much though

Kandy

• this one was a divestiture
• received 13mm shares of ACVtechnologies for Kandy
• Kandy was a provider of deployments of UCaaS, CPaaS, and CCaaS for mid-market and enterprise
• so these Kandy guys are competition to RingCentral, 8×8, Vonage
• they had a slight loss in Q220 – revenue was significantly higher yoy though

This is from Cowen about the risk of competition now from MSFT:

• Metaswitch portfolio is similar to RBBN both have session border controllers (SBCs), media gateways, voice applicationservers, and software under the Unified Communications
• There is also an interesting point alluded to on last CC – asking whether UCaaS is going to be against headwinds
• It seems like a lot of elements of their business are under headwinds
• Makes you wonder what real reason was for acquisition of ECI

Cash flow

• working capital was about -$30mm though so that would be something to look into more

Conclusion

• while the stock is pretty cheap, I’m not sure its worth buying
• The Cowen guys note on a number of pieces that they are going up against larger, better capitalized competitors
• Would probably want to see that they can succeed first, esp with ECI acquisition
• doesn’t really seem like they are in a good place, competing against very large competition, MSFT just bought up a smaller player to add to that competition, so I don’t know… seems like a pass for now

Research: At Home Group

I bought these guys at $12 and at $20, and with them reporting Tuesday, I’m taking another look to see if I should sell.

Stock still seems reasonable and I would imagine their Q32021 guide will be okay.

Research: Innodata

Innodata

What they do:

• data engineering
• solve complex data challenges that companies face when they build and maintain artificial intelligence (AI) systems and analytics platforms
• seems like they basically manipulate large data sets so it is more usable
• 27.6mm shares outstanding at $1.95 for $56mm market cap
• they have $11mm of cash and $5mm of debt
• revenues were flat yoy on Sept quarter
• about 35% gross margins
• they made about 3c EPS in September quarter
• they were operating cash flow positive $4mm of operating cash flow in 9m

Employees:

• have 3000+ employees
• deep data domain expertise in various fields, including law, sciences, health, finance, and technology
• process data in over 25 languages
• work from our global operations centers in India, Israel, Sri Lanka and the Philippines
• expert staff provides an attractive alternative to the crowdsourced labor pools of competitors
• well-suited for high-context data, such as legal contract classification, medical images, medical records, and scientific and legal literature
• hybrid approach to produce large-scale, highly accurate data – AI and human expertise to tackle

AI SaaS Platform

• have AI-augmented SaaS platforms
•                 automates complex data annotation and data transformation tasks
• combines advanced dataflow, deep learning (a branch of AI), and purpose-built applications used by human experts
• enables us to perform data annotation and data transformation at higher efficiency
• dataflow technology enables us to configure workflows for specific data annotation and transformation setting and refining our accuracy thresholds and quality assurance parameters
• our AI is suite of domain-specific and task-specific microservices each of which performs a discrete data-related task
• AI microservices have a range of capabilities for data annotation and data transformation including deep sequence labelling, categorization, segmentation and sequence-to-sequence mapping
• when review required, dataflow automatically routes data to an appropriate human expert
• Synodex intelligent data platform – competes with Risk Righter, EMSI, Parameds and a few BPO companies
• Agility intelligent data platform competes with Meltwater, Cision, Kantar, Infomart and West Corporation

Problem they seem to be trying to solve:

• For AI-based algorithms to perform accurately, they need to be trained on large amounts of high-quality data
• projects fail, stall or perform inadequately because data sciences teams are unable to perform the complex and resource-intensive data preparation tasks necessary to properly train, tune, and operationalize AI models
• preparing high-quality data takes up 80% of the time for most AI and machine learning projects
• 19% of companies responding stated that lack of data or data quality issues was a main bottleneck holding back further AI adoption

New Market Opp

• re-designed our solutions and product portfolio in order to address the needs of enterprises across verticals for data annotation and data transformation
• aim to dramatically expand our addressable market
• historical core market for providing data services to information companies is relatively small (estimated by us to be approximately $250 million and to not show growth over the next several years), the market for AI and machine learning-relevant data preparation solutions is estimated to grow from $1.5 billion in 2019 to $3.5 billion by the end of 2024
• overall enterprise AI spend that is projected to reach $53.06 billion by 2026, registering a CAGR of 35.4%
• intend to shift our revenue mix from “services” to “solutions” and “SaaS products”

What is data preparation?

• data annotation (which is estimated to take up 25% of the time)
  • image and video annotation services and platforms may be used to annotate, or label, objects or people in images/video for facial recognition systems
  • text annotation services and platforms may be used to convert raw text data into richly tagged, AI training data
  • provide image/video data annotation and text annotation as full solutions, in which we provide all required technology, infrastructure and expert resources
  • provide data annotation for healthcare, compliance, scientific, financial and legal markets
• data transformation (which includes data identification, aggregation, cleansing and augmentation and is estimated to take 55% of the time)
  • data transformation solutions for high-accuracy data identification, aggregation, cleansing, augmentation and extraction
  • enables data to be extracted from websites, as well as internal data stores; converted from disparate formats including PDF; enriched with the necessary semantics, metadata and linking; and classified in accordance with an ontology or knowledge graph
  • consumed via API
• TAM: AI and machine learning-relevant data preparation solutions is estimated to grow from $1.5 billion in 2019 to $3.5 billion by the end of 2024
• global services and technology company focused on data transformation, enrichment, and management

Q2 Results/CC

• Synodex and Agility: expecting that we grow both of these businesses this year
• Synodex
  • have built the technology and systems to extract complex medical data from unstructured medical records
  • first half revenues increased 28% over last year, with revenues this quarter increasing 31% year-over-year.
  • enjoys strong 60% plus incremental margins, and nearly all of its revenue is recurring in nature
• Agility
  • SaaS Platform
  • providing full PR workflow platform
  • small player in the overall $3 billion global PR workflow market
  • ended the quarter with a year-to-date net retention of 87%, just a few points shy of our internal target of 90%
  • booked about $750,000 of new business with a small direct sales staff
  • from Q1 2019 to Q4 2019, we practically tripled bookings per sales executive.
  • given improved productivity, economics now support rapidly scaling the sales force
• on AI market:
  • late last year, we discovered a whole other market, practically made-to-order for us, just in its formative stages with significant growth expected in the next several years. This market is the AI data preparation and annotation market
  • Data sciences teams that want to build AI models need to train those models with large quantities of very high-quality data. But they express continued frustration that creating high-quality data is a task for which they are ill equipped
  • started marketing and selling AI data prep and annotation services in Q4 of last year
  • have closed 15 new customers. We have another 16 customers in late-stage pipeline that are expected to close in the second half.
  • majority of these deals will produce recurring managed services revenue at our target margins.
  • one of our recent data annotation wins is with a prominent big tech company
• did a very important release just in the fourth quarter. And the result of the work that we’ve done, the release that we’ve done is enabling us to compete with the 2 largest companies that dominate this market.
• product has been validated by Atlas and ranked highly in, I think, 7 out of 9 areas. It’s ranked as the top product
• saw a couple of important acquisitions take place last year in this space. One of which was -I want to say it was 5x revenue, their valuation
• Forecast:
  • new data annotation market in combination with a forecasted expansion from one of our largest traditional market clients will nevertheless enable us to show sequentially improving revenues
  • just the first half of 2020, we have already booked 71% of our full year 2019 bookings
  • presently forecasting beating 2019 bookings by 32%,
  • expect that the result will be a net savings of approximately $2 million in 2020 and $2.6 million in 2021

Tough to buy this after the big move.

Research: Innovative Solutions and Support

Notes from their Q2 Release and Call:

Q220 results

• backlog was up to $6.5mm
• started seeing production deliveries from newest customer – Textron
• they had just announced that they had been awarded supplemental type certification (STC) with thrustsense autothrottle of the Beechcraft King Air 300 on Aug 4^th
• thrustsense provides VMCA and engine protection – proportionally reduces engine power to maintain directional control
• offers protection against catastrophic upsets with the loss of an engine if pilot fails to maintain adequate airspeed
• installing the autothrottle is risk mitigation
• is the first and only certified autothrottle for King Air 200 and 300 aircraft
• there are over 5,000 King Airs out there
• annual production rates of King Air is higher than Pilatus
• is being actively marketed at service centers and at Textron shops
• will be standard equipment on all new King Air 360 turboprops
• also will be added to new 200s and C9s
• – their operating expenses were not up at all even though revenue was up 30%
• so now they have OEM production contracts for 3 aircraft: Boeing KC-46A, Pilatus PC-24 and the King Air
• are beginning to market the autothrottle to Textron and other OEMs for twin jets – so so beyond twin turboprop aircraft
• from QA: also do single engine airplanes, finding that military and air transports
• said in Q&A they are in advanced discussions with other OEMs and military
• Pilatus program remains on-track to deliver 50 aircraft this year – that woud be about $2.75mm for the Pilatus
• they are already on 100 Pilatus manufactures
• seeing steady demand for flat panel displays from air cargo companies buying 757 and 767 and converting them
• KC-46 program, which is also a production contract, continues to make contribution
• the one questioner seems to suggest that new production from the King Air isn’t very much – says King Air has been around for 30 years, doesn’t know how many new King Airs will be produced
• large market for King Air is not ongoing production, it is the 5,000 units out there – and points out these are valuable aircraft, not “single engine piper cubs” – the piper cub is a small 1-2 seater, vs a King Air is this:
• new King Air 360 is a fast airplane – and older airplanes are getting upgraded with new engines
• FAA said they lose 100 lives a year and that the safety feature on the autothrottle will save those
• they shipped 13 units for King Air in the quarter
• the company is built on retrofit, in the past did: $150 million on the KC-135 program. RVSM for over 60% of the world market
• according to one questioner – they are doing “pretty aggressive hiring”
• Textron retrofit business could be more than the OEM business – sounds like it should be – the 5,000 aircraft out there are all operating, they are significant investments, retrofit cost is small compared to the expensiveness of the airplane
• have not sold one retrofit yet and market opportunity is $250mm to $300mm – this is King Air only, we are not talking the existing Pilatus retrofit opp
• should know in 1-2 quarters how they are penetrating retrofit market

While I imagine the stock still doesn’t screen that well because they haven’t hit any inflection, this is aerospace so there would be a perception that this will get hit by commercial air travel recession (it will not) and it remains a small company ($120mm market cap).  But the business is as well placed as it could be.  Unless they are lying about the opportunity I don’t see what derails this.