Saturday, November 17, 2012

Velti's Q3: Why The Doomsday Scenario?

Like just about everybody else these days, investors tend to live in the moment. This is probably due to the 24/7 Twitter world we live in, but if you take a step back, you may be less inclined to suffer from investing myopia. Case in point: Velti (VELT).

After reporting Q3 financial results, the security sold off considerably because although Velti met revenue expectations, they were six cents short on earnings. This equates to a loss of three cents a share as opposed to earning three cents. Many large companies beat on earnings, and come up short on sales. For small companies, it's just the opposite. Despite that fact, Velti got crushed, down about 35% to $4.50 the day after the presentation. In addition, the equity has sunk approximately 60% from $10 since the major indexes started correcting in mid September.

According the the Q3 conference call transcript, Velti gave Wall Street what they've been asking for: a solid business plan for lowering DSOs (day sales outstanding). Elevated DSOs caused the shares to sell off last quarter, only to rebound when the company announced they signed a huge yet-to-be-named brand as a client. DSOs for Q3 were 242 days, very high by conventional standards, but an improvement over Q2.

To combat this problem, CEO Alexandros Moukas announced a divestiture of assets in the Balkan countries, select North African and Middle Eastern geographies, and his ancestral homeland of Greece. DSOs in these areas were approximately 450 days, and have heavy capital requirements. The slate will be swept clean in 2013, and DSOs are projected to be under 180 days by the end of the year.

If we examine guidance for Q4, and full year 2012, I believe you are getting a bargain at $3.85/share. CFO Wilson Cheung articulated:

Starting with the fourth quarter, we estimate total revenue adjusted for the impact of our asset divestiture and reduced internal developed software capitalization will be in the range of $97.1 million to $113.1 million, and adjusted EBITDA of $50.8 million to $59.8 million.

From a full year perspective, we estimate total revenue adjusted for the impact of our asset divestiture and reduced internal software development capitalization will be in the range of $270 million to $286 million, and adjusted EBITDA of $68.3 million and $77.3 million.

With 65 million shares outstanding, this gives us a market cap of $250 million. As just stated by Mr. Cheung, revenues are projected to be around $278 million, which equates to a price/sales of under one. This is for a company that is growing revenues at approximately 62% this year, and is projected to be 35% in 2013.

Earnings for Velti are back-end loaded for the fourth quarter. The company will be on the plus side for not only Q4, but 2012, too. Yahoo Finance earnings estimates for the current year are $.60, with $.64 projected for the last quarter of this year. That's a full year P/E Ratio of 6.5. Very reasonable, if not a blue light special. The big problem here is that throughout the year, earnings are very lumpy. Not what pleases the average investor, or Wall Street. However, this is the business billing cycle for the advertising industry.

So why would Velti be selling at a reduced price? A few things:

  • Macro Environment: The S&P 500 is down over 10% since early September, taking a majority of equities down with it (Velti is not a member of the index). Issues like the Fiscal Cliff are putting a lot of pressure on the markets, and stocks in general.
  • Small Caps Are Out Of Favor: The "risk off" trade is in vogue right now. Dividend paying stocks are the flavor of the month. When the Fiscal Cliff issue is resolved, or compromise from both parties appears to be happening, then the "risk on" companies will surge to the forefront.
  • Wireless Stocks Are Out of Favor: When you see a quality company like Apple (AAPL) down 25% in two months, you can infer the wireless sub-sector is the fall guy. The fever has been broken on the companies having anything to do with smartphones and tablets. Velti is a major player in mobile marketing and advertising.
  • High Frequency Trading: Selling begets more selling. Fundamentals have very little impact on the trading bots that constitute 70% of all the action on the exchanges. Once a stock gets in motion to the upside, or to the downside, there is a herd mentality, especially with the cyborgs.
Investors got religion over wireless stocks last year, and I continue to believe they will be leaders, as opposed to laggards once the fiscal cliff issue is behind us. I'm betting they will defy gravity, and have placed substantial bets on the sector with equities like Velti. Besides making headway on the fiscal cliff, there two other catalysts that may propel the company forward in the next few months.

Number one is Apple. Apple is like a glowing ember in a dry forest, just ready to ignite the tinder that surrounds it. The same holds true with Google (GOOG) and the Android operating system. If either one of these companies reports business is coming apart at the seams for their handheld products, it may generate a halo effect for stocks that depend on the sale of wireless devices.

The second catalyst would be a confirmation of just who this new client is, that supposedly signed the biggest mobile advertising contract ever with Velti. Twenty-seven million dollars for a two year deal. Velti is holding an analyst meeting at the end of January, and stated they would like to make an announcement there, if not sooner via press release. You can rack your brain guessing who this may be, but it could be anybody.

You won't find stocks like Velti covered in Investors Business Daily because it sells for under $10. Stocks sell for under $10 for a reason: they are dangerous. As an investor, you should be aware of this, and use judgement and caution. I'm more than eager to march in Velti's parade because I believe in the company, and the wireless sector. Even after a really rough day on Thursday, Velti was down again on Friday, so the final capitulation may not be in.

Sunday, November 11, 2012

Synchronoss Technologies Tempers Near Term Outlook Because Of Hurricane Sandy

A lot has happened to Synchronoss Technologies (SNCR) since my previous article. Most notably, Hurricane Sandy. According to the November 5th conference call transcript, not only did they adjust their view for next quarter, Q4, but they are not giving guidance for 2013 for the time being. This is because major clients like AT&T (T) and Verizon (VZ) are allocating resources to the clean-up, and restoration of power in the Northeast United States. This is priority one, and well should be.

As altruistic as the majority of us are, we are still dealing with Wall Street, and the projected price of equities. Synchronoss is no exception, and took a hit even after they reported a very good Q3. The security was trading near $23 thirty days ago, but has since slammed on the brakes, and now crosses the tape at $18. Although it provides an important service to smartphone owners, and has a huge potential in cloud infrastructure for Tier 1 carriers, it's selling for less than 50% of the 52 week high.

Before I get into 2013, let's examine some bullet points condensed from CFO Larry Irving in the prepared statements concerning Q4.

  • It is our expectation that AT&T will be down slightly both on a sequential and a year-over-year basis in the fourth quarter (it should be noted that Ma Bell constitutes about 50% of revenues).
  • We do not believe it is prudent to expect that Synchronoss will achieve the upper end of the guidance range we established prior to the hurricane. Due to this uncertainty, we are providing a wider range than in previous calls.
  • This translates into a full-year results as follows. Total non-GAAP revenues in the range of $269.3 million to $273.3 million, representing growth of 17% to 19%. We are now targeting non-GAAP EPS of $1.05 to $1.08.
At first glance, you can see why Synchronoss sold off. However, when doing basic arithmetic on the full year projections, we get a stock that is not selling for a bargain, but at a reasonable valuation: P/E of 18, growth at 18%, and PEG rate of one.

The reasons I believe the stock is under pressure, besides the reduced Q4 guidance, is threefold:

  1. The mobile technology sector in which it resides is currently out of favor, which instills negative investor psychology. Just look at valuations of Apple (AAPL) and Google (GOOG).
  2. Because of Hurricane Sandy, Wall Street's perception of an additional delay in 2013's cloud infrastructure initiatives by AT&T and Verizon. This is above and beyond the diminished expectations for Q4.
  3. The upcoming battle between the carriers (where Synchronoss has an alliance), and the mobile smartphone/tablet companies like Apple, Google and Amazon (AMZN) for the privilege of backing up your smartphone data. Think pictures, videos, music, and text, just like Apple's iCloud.
Regarding the mobile sector being out of favor, I believe it is just a question of time before investors rotate back into stocks like Apple and Google, and the securities that support their portable products. Smartphones and tablets aren't going away soon. The flavor of the last two quarters has been dividend paying, "risk off" equities. My impression is that will soon fade, especially when the fiscal cliff is behind us.

Service Providers like AT&T and Verizon may very well delay cloud infrastructure developments, but it won't be for very long. AT&T already moved ahead with their initial cloud deployment with Synchronoss. At Verizon, Synchronoss made tremendous progress in building out the infrastructure necessary to support the rollout of the consolidated cloud services next year. Another key cloud buildup is over the Atlantic where Vodafone (VOD) and Telefonica of Spain are partners with Synchronoss.

Concerning the turf war between the service providers and the mobile device companies for the right to back up your wireless data, that is an area that could be very lucrative for Synchronoss. CEO Steve Waldis articulates that the basic synchronization, backup, and securing content that they currently excel in is like table stakes. What will really take revenues and earnings to hypergrowth, is by commanding a large market share in the storing of all smartphone and tablet data. This is what the carriers are working on with the company.

According to Mr. Waldis:

During 2012 we have seen the initial adoption of comprehensive cloud platforms, and the fleshing out of carrier cloud strategies. As we look towards 2013, we see carriers moving into production with cloud platforms, fine-tuning their go-to-market strategies, and then ramping adoption. Then in 2014 we begin to realize the full potential of the cloud growth as all the platforms and marketing programs and devices are in place, and at full scale for the entire year.
This will come to fruition if the carriers have their way. However, Apple, Google and Amazon are already there, albeit on a much smaller scale. To the best of my knowledge, what differentiates the carriers from the device makers in their storage strategies, is that carriers will be device agnostic. For instance, if you utilize iCloud, that's just for Apple products. The Tier 1 service providers are operating system neutral, and want to take full advantage of consumers who utilize their "family plans".

In The Art Of War, Sun Tzu said: "The best strategy in war is to win without a fight.". If only it were that easy. This brewing storm between the carriers and smartphone manufacturers is not to be taken lightly. Picking the winners will ultimately lead investors to a bigger bankroll. My bet is on Synchronoss Technologies and the carriers. However, this is not to shortchange Google or Apple, I just think their focus is too narrow. At least Apple's is.

Wednesday, November 7, 2012

Fusion-IO: It's Not Just About Big Data, But About Fast Data

If you opened up a time capsule going back to my last article on Fusion-IO (FIO), you might surmise that not too much happened regarding share price. After all, the stock currently crosses the tape at roughly $25, and that's where it stood three months ago after announcing a killer quarter (it was their last quarter in fiscal year 2012). That may make sense since revenues were up only 11% sequentially in their most recent report with a lot of expectations for the security.

However, the stock was not stagnant. Just the opposite. It was in perpetual motion. Because of a showstopper Q4, and top notch technology, the Wall Street press has treated this company like royalty. The result was a moving target that topped the charts at $32, only to come back down to what I continue to believe is an inflated level at $25. Although I like the company, especially with a hired gun like Steve Wozniak as Chief Scientist, I still maintain this is a risky equity. Let's examine the 2013 Q1 conference call, and see what you think.

First and foremost, two customers, Apple (AAPL) and Facebook (FB), represent approximately 56% of revenues. Hewlett-Packard (HP) accounts for an additional 14% of sales, which brings us a total of 70% on the top line for just three companies. That is not diversification, although these are premium clients to have on the ledger. Many of Fusion-IO's enterprise end-users fulfill their products through OEM Hewlett-Packard. "Hyperscale accounts" like Apple and Facebook are handled by the in-house marketing staff.

Another item I consider somewhat dicey is that earnings from Q1 2013 were substantially lower than a year earlier. As presented in the press release: "Net income for the fiscal first quarter of 2013 was $3.9 million, or $0.04 per diluted share, compared to net income of $7.2 million, or $0.07 per diluted share, in the fiscal first quarter of 2012.". This may have accounted for the sell-off after the conference call.

Going forward to next quarter, revenue is expected to be flat sequentially. Stock pundits like Jim Cramer use the expression "under promise, over deliver" when describing the low balling tactic some CEO's use to goose an equity's value, but I don't think this is the case for Fusion-IO. Too many times during the conference call, company executives used expressions like:

  • A macro environment that by all accounts appears to be growing more tepid.
  • Visibility is more difficult in this kind of an environment. And so our customers provide a little less tail, long tail if you will, as to what their deployment schedules are.
  • The macro environment is a little more attentive than it was six months ago. And our customers do in essence provide a little bit less visibility in the market. So while we know we're not immune to whatever the macro environment is up to, our solutions are more compelling in a tightening market scenario.
An additional tidbit that makes me wary about near term valuation of Fusion-IO is that revenues are back-end loaded. Full year sales growth for the company is expected to be in the range of 45 to 50%. We've already established that first and second quarters are practically flat, which means they'll really pour it on in Q4. I think that's great for the company, and the market is a forward looking mechanism, but a lot can happen in 3-6 months. What I'm suggesting is that the stock could go lower, not just on macro business conditions, but for company specific reasons.

So what's all the hubbub about the company? Their technology. It is projected to decimate the competition. Their two big clients, Facebook and Apple, are the upper crust of Silicon Valley, and primarily use leading edge technologies to remain ahead of the pack. Like the title of this post suggests, Fusion's software is faster than their rivals, and considerably more cost effective.

They produce an open system that runs on a majority of servers in the data center. With Fusion-IO's ioTurbine, Direct Cache and ION data accelerator software products, they are able to improve the capabilities of storage platforms including HP's 3PAR, Cisco's (CSCO) Blade Server, IBM's (IBM) D series, Dell's (DELL) Compellent and NetApp's (NTAP) ONTAP. In fact, during the second half of the year, recent marketing partnerships with both Cisco and NetApp will further expand Fusion's global footprint.

No stock gets a free pass, and Fusion-IO is certainly not an exception. Just look at what happened to the security after this past quarter when everything seemed copacetic. If we examine some of the measurables as provided by Seeking Alpha, we can see that the short float is 30.4%, forward p/e ratio is 222, price/sales is 5.5, and price/book is 5. That to me is a dangerous stock.

Although a legit company, it is no longer a favorite of the momentum crowd, which may put additional pressure on the equity because of negative investor psychology. Investor psychology can go both ways. My impression is that if you are a patient investor, you may be able to purchase this stock at a more advantageous price.

Monday, November 5, 2012

Glu Mobile Presses Restart After Disappointing Q4 Guidance

Don't kid yourself. Glu Mobile's (GLUU) lowered Q4 guidance is very bad news for the company in the short term, and may weigh heavily on the stock price for a few quarters. This is because Glu and the majority of mobile gaming organizations launch most of their titles near the end of the year. It's the holiday effect. All that Christmas and Hanukkah money for a certain male demographic goes to buying new smartphones, and the gaming apps that go with them.

Although the dice are running cold for Glu, and the stock has sold off to historical proportions ($5.90 52 week high to roughly a 52 week low of $2.50 where it currently trades), I am still long the stock. They remain a growth company in the growth sector of mobile content creation. Smartphones and tablets aren't going away soon, and Glu still remains one of the only gaming pure plays on these devices.

If you are a day trader looking for the big kill, my advice is to seek another security. If you have a longer time horizon, this may be a good entry point for you. However, before you put some money to work, let's look at the Q3 conference call to see what went wrong.

The man in charge of Glu Mobile is CEO Niccolo de Massi. He, along with consiglieri and CFO Eric Ludwig made no attempt of hiding the fact that they were overwhelmed by the degradation of their existing product catalogue. This degradation occurred because gamers tastes have migrated from the solitary arcade style games, to the player vs. player (PVP), or mobile social games.

Glu Mobile honchos saw this change coming over a year ago, and as a result, purchased mobile social gaming company GameSpy in Q2. What management didn't anticipate was that the player vs. player phenomenon would not only be an immediate must for many participants, but a seachange for the entire industry. It's a revolution, not an evolution. Although new titles launches in Q3 were well received by consumers and critics, they exhibited weak average revenue per daily active user. Because of this, Glu's management has altered their battle plan.

A big switch in an effort to monetize, they hired Electronic Arts (EA) and Zynga (ZNGA) veteran Matt Riccetti as President of Studios. Glu has a large global syndicate of operations, and Mr. Riccetti's job will be to oversee production values with an eye on profitability. As the CEO de Masi stated:

We are determined to prevent the reoccurrence of our weak Q3 new title performance. In order to do so and maximize Glu’s long-term growth, I have made the decision to delay five of our Q4 title launches. The delay is to enable our new President of Studios to review and refine the monetization system to his satisfaction. As such by year-end, we anticipate launching only two more titles. The run rate existing Q3 from new title launches has significantly, adversely impacted our prior Q4 expectation.
That quote just about says it all. However, this is not an affront to Glu's executive team. To be fair, it must be noted that Mr. de Masi has a done a tremendous job turning the organization around in three short years. The stock was selling for twenty-three cents in 2009. In addition, Mr. Ludwig has been with Glu Mobile since 2005 under the previous regime. He knows where all the bodies are buried, and has been instrumental in keeping the engine oiled.

When we look at the numbers, the press release for Q3 doesn't look that bad. The disappointing metric is that revenues are projected to be flat going into Q4, and this was the quarter de Masi and his cohorts expected the company to become profitable. CFO Ludwig reports this in the prepared statement section of the conference call:

We are adjusting our full year 2012 revenue and profitable guidance to reflect our updated Q4 expectations. We currently expect total non-GAAP revenues to be in the range of 86.4 million to 87.4 million, which includes 73.6 million to 74.6 million in non-GAAP smartphone revenues. We now expect the adjusted EBITDA loss of approximately 3.5 million to 4.4 million for the full year 2012.
He goes on to say they are not providing any update to 2013 at this point.

John Maynard Keynes once said: "When the facts change, I change my mind". Well, I've changed my mind on Glu Mobile. Although I'm still long the stock, and utilize it as a trade from time to time with the wild gyrations in equity value, I'm not so sure they won't be scooped up by a larger entity. I originally thought they could make it as a stand alone organization. I'm just not that sure now. In whatever unfolds during the next year, I'm confident that management will do what is necessary to increase shareholder value.

Saturday, November 3, 2012

Acme Packet Elevates Their Game

The death knell for Acme Packet (APKT) appears to be a bit premature as Wall Street boosted the stock price since their Q3 Conference Call on October 25th. The equity has been punished this year from anemic worldwide enterprise sales, and weak North American Tier 1 carrier spending, which pressured the top and bottom lines. However, the company seems to be well positioned to take advantage of three major growth drivers for their business: enterprise, interconnect, and wireless.

Although they have maintained their global leadership position in SBC's (session border controllers), Acme Packet may have gained the upper hand by recently introducing the Net-Net 6300. Net-Net 6300 is a plug-and-play quad core CPU and memory module that supports one million subscribers, and is capable of handling 200,000 calls at a time. Practically all interconnects among Tier 1 carriers use decades old legacy technology. The Net-Net 6300 is destroying the past as carriers switch to SIP trunking, an area where Acme Packet excels.

To paraphrase point-man and CEO Andrew Ory about the new product:

It improves our capabilities to meet the needs of our customers in three areas: for high-capacity network interconnect between service providers, for large-scale subscriber access environment, such as VoLTE, and for large-scale contact center and enterprises.
There is a near-universal agreement among telecom equipment providers that the North American Tier 1 service provider market continues to be CapEx challenged, and CEO Ory acknowledged this during his presentation. However, European carriers remain a bright spot for Acme Packet. Some of their strongest and most strategic relationships are from the Tier 1 service providers in Europe; large telecommunications carriers like Telefonica Germany.

When we break down the numbers geographically, 49% of revenues come from the United States and Canada, with 51% from the rest of the world. That 51% of sales also includes the Asia/Pacific region, plus South America. So just because Europe is alive and kicking, it doesn't necessarily translate into a banner quarter. For instance, during the third quarter, sales were split 27% to enterprises and 73% to service carriers. Just doing back of the envelope calculations of the revenue breakdown, you can infer it was a tough three months for Acme Packet.

Although they serve over 1,850 customers in 109 countries (this includes 89 of the top 100 service providers, and 18 of the top cable operators globally), they still came up short where earnings are concerned. The Q3 bottom line breaks down to: "GAAP net loss for the third quarter of 2012 was $5.5 million, or $(0.08) per share, compared to GAAP net income of $7.9 million, or $0.11 per share, in the third quarter of 2011 and GAAP net loss of $0.1 million, or $(0.00) per share, in the second quarter of 2012.". Not good.

In fact, if we look at their econometrics provided by Yahoo Finance, we can see that revenues and earnings are only projected to grow 10% in 2013. In addition, earnings growth is expected to be 12.5% a year for the next five years when we view the consensus. This is a far cry from the blistering growth the company experienced from 2006-2011 when it grew at 26% on average. I believe this is one of the reasons Acme Packet disappoints Wall Street. Expectations were ratcheted way too high, and the equity got very far ahead of itself. The security traded at $83 a little over a year ago when everything seemed copacetic. How times have changed.

The reason I like Acme Packet as an investment is that they are replacing outmoded telecommunications systems. Not necessarily annihilating legacy infrastructure, but slowly making the change to LTE (long term evolution) networks.

As Senior Vice President James Hourihan stated:

There's no doubt that all service providers' mobile subscribers, at some point in time, will move on to LTE networks. Why? Because they are going to go out of business trying to run 2 or 3 mobile networks. They need to re-farm spectrum. So it's not a question of effort, it's only a question of when.
The when is a big question, especially since the company is betting the farm on LTE, or more specifically, VoLTE. Mr. Ory agrees with industry analysts that 2014 is when you are going to see subscriber growth rates accelerate. Because the implementation of this technology is time consuming, purchase-based opportunities ought to materialize in 2013. Next year they will probably be back on track, and get back to the positive side of the ledger.

Here are some bullet points provided by company executives from the Q&A session that shed some light on Acme's relationship with VoLTE:

  • From an LTE purchase point of view, or a VoLTE purchase point of view, there are very, very few carriers in the world that are actually doing this for now. And one example would be MetroPCS (PCS). And they purchased for several quarters, before they finally had the infrastructure ready to start rolling out that kind of service.
  • I don't know whether it's the top 25, the top 50 or the top 100, but these are the service providers that will dominate the spending environment and the subscriber management, of services over the next 5 to 10 years. And our goal is to win as many of those providers as we can, to diversify away from the reliance on 1 or 2, or even a region.
  • When people think of VoLTE, and our role in VoLTE, we don't make the application servers. What we do is we secure the application servers and we extend their reach to every single access network, and we provide security at the access network as well as at the peering network.
  • Our strategy is very simple, which is to provide the most comprehensive solution and provide the greatest capacity to meet their needs most cost effectively. So oftentimes, when we end up competing, why we win isn't because our element is better than someone else's element. It's usually because our approach is that of a disruptor.

As a countermeasure to the dwindling stock price, Acme Packet repurchased 1.6 million shares for approximately $29 million in Q3. This computes to an average of $18/share. Right about where it now trades. In my personal account, I've been dollar cost averaging shares for six months now, with my cost basis at $22/share. I'm underwater, but my original premise was that I'd double or triple my money in 3-5 years, and I believe I will still do so. 4G LTE is not going to go away, and Acme Packet has the end-to-end technology to make it happen in a secure fashion.