Reminiscences of a Stockblogger

May 21

Q1 Earnings: Identiv

I wasn’t planning on writing anything about Identiv’s first quarter. There was nothing that stood out about the results. The company reported so-so year over year growth (7%) that was hindered a little by slower growth in their Physical Access segment (5%) which is seasonally weak in the first quarter. The Credentials segment grew at 11% and the Identity segment grew at over 20%.

The company reiterated guidance, which was set at $64-$68 million in revenue for the full year 2017 and EBITDA of $4-$7 million.

Nothing exciting. Until the company decided to offer stock.

The news came out on Thursday. It was priced by Friday morning at $4.85 and oversubscribed. The pricing was favorable when compared to the close Thursday night (there was essentially no discount) but when you consider the stock has had maybe 3 or 4 up days in the last month, not so much.

So why did they do the offering?

The simplest explanation is that the stock price has moved significantly in the past few months, the company has only a small cash position on the balance sheet ($7 million) and the board thought it was prudent to raise funds (it ended up being about $12 million). This would be the Occam’s Razor explanation.

While it’s probably as simple as that, there are some circumstances that make me wonder if other reasons were at play. First, why would they do a share offering so close to the annual shareholders meeting? It seems odd to raise the ire of shareholders right before they get their chance to speak to management unless the timing was precipitated by some specific need of cash.

And speaking of the word precipitate, there was an awkward exchange on the first quarter conference call between Stephen Humphreys (Identiv’s CEO) and an analyst. The analyst asked about the recent shelf that Identiv filed. Humphreys provided the usual run-around, the marketplace is exciting, looking for opportunities, making sure they have access to funds if something comes up. But he also said there was “nothing precipitous”. That seems to me like an odd phrase to use if you are one week away from issuing equity. He didn’t have to give that color. So why did he, or what changed in the following 7 days?

Also on the call was an odd disclosure by Humphreys about potential opportunities. In his prepared remarks Humphreys explained the three tiers of growth for the company. First is the base business growth. Second is finding upside in their existing platform of products, new target markets or solution packages. And the third is “disruptive growth”. Humphreys spent some time on this, explaining how the company positions itself for a “black swan” event and “aspire for moon shots” with its “disruptive and transformational solutions”. There was nothing specific in these remarks, which made me think it was odd to mention it at all. What was the point? Put yourself in the position of CEO. What would cause you to decide to write prepared remarks discussing moonshots and black swans? Would you really decide to do that on a purely hypothetical basis?

Finally there is the move in the stock price. I was pretty surprised to see Identiv rocket up over a dollar after announcing the public offering. I’ve seen an offering lead to a positive move in the price of shares, but its usually happens to a company where investors are concerned about solvency and the offering puts those concerns to rest.

So I don’t know. Maybe the move was just a reaction from a very oversold state. Or maybe it had to do with the underwriter. Whatever it was, there was nothing I could find in the prospectus or its follow disclosures to justify the reaction. They were very standard documents. It will be curious to see what transpires over the next few weeks and to see what they use the cash for.

May 16

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Q4 Earnings: Medicure

I didn’t love everything I read in Medicure’s fourth quarter results. So much so that I reduced my position. Here’s why.

With the acquisition of Apicore, Medicure took on much more debt than they previously had. In order to acquire Apicore they added about $60 million of debt. The debt isn’t cheap, at 9.5% plus 400,000 warrants that they issued for shares at $6.50 (they say in the MD&A that the effective interest rate is 12%). With a market capitalization of $100 million, the additional debt is not inconsequential.

The debt isn’t crippling, but it makes it crucial that Apicore performs in an accretive manner. But from the disclosures provided by Medicure, it’s not clear to me just how accretive Apicore is.

The Apicore deal closed December 1^st, 2016, and the one month numbers were excellent, sales of $7.8 million and gross margins of $4.5 million (after adjusting for inventory at the time of the acquisition). But on the conference call the company said that December is by far the strongest month for Apicore and that we should not expect that level of results over the full year. In the financial statement Medicure disclosed that had Apicore been part of Medicure for the full year, net income would have actually been lower, which is a bit worrisome:

On the other hand, in the quarterly presentation Medicure gave color around additional EBITDA from Apicore had they been consolidated for the full year 2016. It is significant (around $6 million). But I don’t know how to reconcile that with lower the net income?

Its not so much that I think that Apicore is going to be dilutive to earnings. I doubt that. It’s just that the company hasn’t made it clear what to expect so it’s difficult to forecast going forward.

The other development that gives me pause is that there has been a move to 2-6hr infusions of Aggrastat. Basically physicians are using Aggrastat for shorter durations. This helps them limit side effects and they are seeing acceptable efficacy. The company described this as a positive development because A. Aggrastat is the only glycoprotein inhibitor (GPI) that has shown efficacy at the shorter infusion time, and B. the reduced side effect profile will lead to usage by physicians previously wary of using GPIs. I quote/paraphrase the comments around this from the call below:

Only about 15-20% of physicians use a GPI. This used to be 75%. The reason for decline is bleeding risk. Because Aggrastat doesn’t have a minimum infusion time, it is better positioned for physicians that don’t use or minimize use of GPIs

While it may end up being positive, I can’t help but think that in the short run this is a headwind for Aggrastat demand. Physicians are going to be using less Aggrastat, that seems like the bottom line here until these other factors catch up.

The final thing that I didn’t love about the disclosures is I found some mistakes in it. For example, on page 25 of their MD&A the total debt does not add up from the constituent pieces. Similarly, on page 24 their operating income isn’t right in their EBITDA reconciliation (though the actual EBITDA end result is fine).

Nevertheless there are positives. With the acquisition of Apicore, Medicure has a number of generics on the horizon that will generate growth.

In March Medicure announced FDA approval for tetrabenazene, which is a generic form of a drug used for Huntington’s disease called Xenazine. Xenazine had over $300 million in sales in 2015, so if the generic can take a decent percentage of that it could be material. They also filed an abbreviated new drug application (ANDA) for a generic in December and have two others in the development stage. In total there are 15 ANDA’s in the pipeline.

So there is quite a bit of potential for growth. But it could still be a number of quarters off. Meanwhile the stock has an enterprise value of over $150 million and trailing EBITDA of $15 million, so it’s not particularly cheap. I do like the growth pipeline though. I’m just not sure at this point, so I took some off.

May 11

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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.

May 7

Q1 Earnings: Silicom

Silicom had a good quarter. They beat on revenue (25.3 million) and they guided to a nice revenue increase in the second quarter ($28.5-$29.5 million).

As I wrote about last month, the rise in the stock price has been mostly due to the large switch fabric NIC design win that they announced in March. On the conference call management provided more color around this win.

The win is for the design of a new, custom 100G switch fabric NIC to be deployed in datacenter racks. The design presents a number of technical challenges and they are still working through those challenges. So far Silicom has received an initial $25 million purchase order and a follow-on $8 million order from the customer. The PO’s are being written even though the card is still in the beta phase and thus still under development. The PO’s are to insure that Silicom has components on hand and can ramp production quickly to the $30 million plus run rate once a final design is approved.

Interestingly, Shaike Orbach, Silicom’s CEO, said that they were engaged with 10-15 other cloud players for similar designs. He tempered those remarks by saying that the sales cycle was long (can take as much as two years), that some of the engagements would be for smaller wins (but some could be bigger) and that the architecture of all cloud vendors do not line up as well with Silicom’s technology as this vendor did.

At any rate though, there is a large pipeline of potential deals. As an aside, if anyone knows who the existing win is with, please email or direct message me.

SD-WAN

There were also comments around SD-WAN. They have a similar number of SD-WAN prospects that they are talking to (around 10). These include traditional telecom vendors that have SD-WAN solutions, start-ups, and even service providers. Talking directly to service providers is a new development as Silicom has traditionally worked through OEM vendor channels.

There was a bit of color around the potential of the SD-WAN opportunity. Alex Henderson from Needham asked the following question:

If it’s the entire white label box at the edge, I would think that A, that would be a little bit lower margin but B, a lot of revenue associated with that because we’re talking about 1000s of branches and individual deployments here, that seems like a very big ramp when that starts to kick in. Am I thinking about that right? I mean it seems like a very large number?

Orbach’s response was to agree that potential quantities were “very big” and that they had some competitive advantage in that they could provide features not available from others. I’m still quite excited about the SD-WAN opportunity.

FPGA Opportunity

One comment that came up a few times on the call was the growing importance of their FPGA solutions. Orbach said that while the switch fabric win is not an FPGA solution, Silicom’s FPGA capabilities were instrumental in getting the win as the customer expects future generations of the product to require FPGA’s.

At the end of the call Orbach gave more color around the importance of FPGA solutions (my underline):

So first of all I would like to tell you that we think that FPGA technology and solutions around FPGA are going to be extremely, extremely important. We’re investing in that. You understand it may take some time but we believe that it will be extremely important. Just like you have said, I mean one of the reasons I mean there are two I would say trends, not trends, but two events and — well even event is not the right word but two things which are happening together which I believe are important to understand, maybe even three. So one is again the cloud, I mean the cloud, I think that cloud vendors do understand today and that’s by the way why we have been able to success even with that customer that in order for their cloud to be effective, in order to cut down their expenses they need to have several ways or to do offloading within the cloud. Our FPGAs seem to be recognized now almost by everyone as the right technology for the purpose of doing this kind of offloading. I think that although — when I’m saying cloud by the way I mean the whole package, I mean it’s cloud and NFV, SD-WAN virtualization, all that together. So when build systems using these technologies you would need to do offload, the right technology to do offload is FPGA.

Orbach also hinted at collaboration with Intel (and their Altera FPGA designs) and referred to a MOU around FPGA development that he said was important.

I did a little bit more research into FPGA development and this looks like an area that is beginning to hit its stride with more and more use cases. FPGA designs offer more flexibility, less up front cost and are preferable to vendors that either don’t want to commit a large spend to a custom ASIC design or do not have funds to commit to such a closed end design. It sounds like the performance gap with ASICs, which has largely been what has limited their use, has closed considerably over the last few years.

In particular I found one white-paper by Altera/Intel that was particularly insightful. The paper describes 3 evolving use cases for FPGA’s that all seem very closely aligned with Silicom’s strengths. They are:

Datacenters
400G cards
Wireless Remote Radio Units

The paper basically suggests that the requirements of the next-gen designs will fit much better with FPGA solutions than ASIC solutions.

While Orbach and the above paper suggest that big FPGA wins are still some time in the future, it really starts to clarify the runway of opportunities for Silicom for me. I think this could be a multi-year run for the stock as the company seems very well positioned for trends to white-box hardware, offload functionality to secondary NIC cards, and utilize more FPGA based solutions. I didn’t add to my position on the results, but if there was enough of a correction I certainly would.