Millennial Media Circles The Wagons

"The market for digital media has proven, time and again, that those who position themselves for success early, particularly in the face of large markets, win outsized rewards." - Paul Palmieri, CEO, Millennial Media

The technology landscape is littered with companies engaged in mobile advertising exchanges. The larger headline grabbing entities like Google's (GOOG) AdMob, Apple's (AAPL) iAd, Facebook (FB), and now, up and comer Twitter (TWTR), (with its recently acquired MoPub), are fairly familiar to the investing public. Smaller combatants such as Mobclix (a division of Velti (VELT)), Nexage, Smaato, inMobi and Hipcricket (HIPP) are also in the mix. Not to be forgotten is Millennial Media (MM), a star-crossed IPO that has been uprooted because of a few backbreaking quarters.

The chart below is not a pretty picture, but just the same, I purchased shares at $6.60 due to a significant sell off courtesy of the current government crisis. As a quick background note, I've written about Millennial Media in a previous posting, stating that although I was interested in the security, I wouldn't pay anything more than $3-$4 a share. The well worn phrase by John Maynard Keynes comes into play here: "When the facts change, I change my mind.".

(Chart Source: Yahoo Finance)

The recent IPO of Rocket Fuel (FUEL), (which doubled on its first day of trading), altered my thinking on Millennial Media. With Millennial's recent acquisition of JumpTap, it now competes with Rocket Fuel in programmatic sales channels, otherwise known as "artificial-intelligence digital advertising solutions". There's a turf war brewing. Millennial Media is no longer a stand-alone advertising exchange.

The Old School Millennial Media

Back in early March, Millennial Media made a presentation at Barclays Internet Connect Conference. Although March was only a few short months ago, it's almost ancient history in the lightning fast mobile advertising world. Millennial Media CFO Michael Avon made this succinct description of his company which still holds true today:

We power the advertising for many of the app developers out there, over 39,000 apps. They download our software into their applications, and we run ads for them. That's 100% of our business.

Besides the promise of a mobile advertising market that's in ultra-growth mode, one of the reasons the stock got so hyped up during its IPO phase was the quality of clients. I don't think that attribute should be overlooked, and is a primary catalyst for investing in the company. Michael Avon again:

Today we reached over 400 million unique users on a monthly basis with about 160 million of those in the US. We work with 85 of the top 100 Ad Age advertisers. These are the largest advertisers in the world that is measured by Ad Age, big global advertisers, and we think that penetration of 85% of this top 100 is second to none, certainly in mobile and we think across digital.

Fast forward seven months and we still find Millennial Media in an enviable position in regards to clientele, but the company has changed significantly due to the JumpTap acquisition and various partnerships.

The New Wave

The onslaught of new business relationships have come fast and furious since early August. The first being a partnership with Adsmovil, the principal mobile ad network in Latin America and the U.S. Hispanic markets. This extends the Millennial Media platform into South America, Central America and Mexico. According to the press release: "With more than 400 million mobile users in Latin America, and smartphone penetration expected to reach almost 40 percent by 2016, according to eMarketer, Adsmovil will tap into Millennial Media’s first party data to enable brands to target these consumers on more than 45,000 sites and apps.".

Next, is the acquisition of JumpTap, and in reality is more like a merger of the two companies. It was mostly a stock deal where Millennial Media issued approximately 24.6 million new shares of common stock to the JumpTap shareholders for all of their equity. Here are some highlights presented by company executives during the last conference call:

• "Where Millennial is known as the leader in mobile brand advertising, Jumptap has more of a focus on the performance advertising side of the business. Additionally, Jumptap is the leader in mobile real-time bidding, or RTB, capabilities, reporting that they are seeing over 2 billion impressions per day to deliver app, download and other performance campaigns."
• "Jumptap is the second-largest independent mobile advertising platform in the U.S. behind Millennial Media and has been a respected player for many years in the performance segment of our business. According to IDC, Jumptap represented 10.7% of the U.S. mobile advertising network industry last year, compared to Millennial Media's 18%. Together, Millennial and Jumptap combined, would have accounted for 28.7% of the industry last year, about on par with Google's share, according to IDC."
• "By acquiring Jumptap, we expect to be able to accelerate our revenue growth rate from our standalone forecasts in 2014 and beyond. Advertisers, both brand and performance advertisers, are increasingly looking to buy through just a handful of select partners that can provide a full suite of digital advertising solutions. Today, Millennial is the key independent mobile partner for many large brands and agencies and for larger premium performance advertisers."

Finally, is the recent partnership with AppNexus. This relationship created the Millennial Media Exchange [MMX], the world’s largest premium mobile advertising exchange. The MMX provides advertisers and developers a unique opportunity to buy and sell on a real-time, programmatic basis with unique data at scale. I believe the operative word here is programmatic, which brings us back full circle to the recent Rocket Fuel IPO.

Rocket Fuel

This post is not intended to be an evaluation of the differences between Millennial Media and Rocket Fuel because it's not an apples to apples comparison. Nevertheless, they compete for some of the same advertising dollars in programmatic marketing solutions. As Rocket Fuel pioneers its way into mobile computing, and as Millennial Media expands its coverage to more varieties of connected devices, they will be at loggerheads.

According to Seeking Alpha, as they currently stand, Rocket Fuel has a market cap of $2 billion, Price/Sales of 14, Price/Book of 53, and cash/share of $.58. On the other hand, Millennial Media's market cap is $0.57 billion, Price/Sales of 2.67, Price/Book of 3.48, and cash/share of $1.51. There's a price dislocation here - Rocket Fuel is overvalued, and Millennial Media is undervalued. Irrational exuberance can go both ways. Neither companies are profitable at this juncture, but this is often the case with young growth companies.

Conclusion

You can chase a high flyer like Rocket Fuel, or invest in an organization like Millennial Media which may give you a more favorable outcome in the long run. With revenue growth clocking in at roughly 55% per year, you're buying the stock on the cheap, and giving yourself a decent margin of safety. The company appears to be looking out for long-term shareholder value, which is a plus. Although the next quarter may be bumpy because of the assimilation of JumpTap, I consider any drop in value a good buying opportunity. 2014 may very well be the year that mobile advertising equities take off, and Millennial Media is certainly in the hunt.

Mellanox Technologies: How Low Can It Go?

"We see Intel as the primary competition, and we're very concerned. For us, the game plan is to stay ahead of Intel. Today, we are leading by a generation." - Yakov Shulman, CFO, Mellanox Technologies

The semiconductor industry is rife with boom and bust cycles. There are anomalies like Intel (INTC) in the mid 80's to late 90's, or Qualcomm (QCOM) in the iPhone (AAPL) era, but for the most part, it's feast or famine. Exhibit A is a two year chart for Mellanox Technologies (MLNX), a fabless semiconductor company that designs, manufactures and sells high-performance interconnect products that help to facilitate data transmission between servers, storage and systems.

(Chart Source: Yahoo Finance)

There's an old Wall Street chestnut that says an investor shouldn't catch a falling knife, but after a drop from $120 to $34.50, I purchased some shares a shade under $35. If we rewind to 2102, the company earned $3.57/share when it shot up to $120. For 2013, that figure declined to an estimated consensus of $1.17, which accounts for the sell off. However, if we fast forward to 2014, average earnings/share estimate is for $2.22. At $35, that gives us a forward P/E of 16. I find that metric reasonable, and will continue to dollar cost average, even if the price keeps falling.

This really isn't just an article about Mellanox Technologies, but the brewing battle between Mellanox and Intel for supremacy in the data center. I'm betting on Mellanox. To buttress my investment thesis, the entirety of this article is helped by the most recent Mellanox Technologies 10-K, its last conference call, and the presentation at the Barclays Global Technology, Media and Telecommunications Conference.

A Brief Company Background

It's all about Big Data. Mellanox Technologies allows seamless integration between servers and the end users with their insatiable appetites for all sorts of information. It's the only game in town for 56 gigabit per second InfiniBand products. InfiniBand is an industry-standard architecture that provides specifications for high-performance interconnects. According to the annual report, these high-performance interconnect solutions remove bottlenecks in communications between compute and storage resources through fast transfer of data, latency reduction, and improved central processing utilization.

Although the majority of the company's revenues come from InfiniBand (which they've been shipping since 2001), it's also an early supplier of 40 Gigabit Ethernet to the market. This provides Mellanox with the opportunity to gain additional share in the Ethernet arena as users upgrade from one or 10 Gigabit to 40 Gigabit. Both technologies are crucial in the Cloud, and Mellanox is a one stop shopping place for the digerati looking to make their data centers run at mind boggling speeds.

As far as customers go, Oracle (ORCL) (which owns 10% of the company) put Mellanox on the map by exclusively using the organization's InfiniBand offerings. Other heavy hitters followed suit. The enclosed diagram gives you a detailed presentation of Mellanox clientele:

(Diagram Provided By Mellanox Technologies)

In regards to marketing, the company primarily sells to large server OEMs such as IBM (IBM) and Hewlett-Packard (HPQ). Both entities represented 35% of revenues in Q1, 2013. In aggregate, OEMs constitute approximately 90% if its sales, with the remaining 10% coming from distribution. Enough said.

The Ensuing Battle With Intel

Where semiconductors for wireless handsets are concerned, it's common knowledge in investing circles that Intel is behind the eight ball. They're also a generation behind in InfiniBand and Ethernet solutions for Big Data transfers. Nevertheless, they're a formidable opponent with deep pockets for R&D and acquisitions. Intel recently circled the wagons by purchasing four companies to compete head to head with Mellanox. CFO Yakov Shulman at the Barclays Global Technology, Media and Telecommunications Conference:

• "Our closest competition is Intel. Intel acquired 4 companies to compete with us. Intel acquired NetEffect for Ethernet, they acquired Fulcrum for Ethernet switching, they acquired QLogic InfiniBand assets, as well as Cray Interconnect."
• "To date, Intel offers 40 gig solution on InfiniBand side. We hear that they decided to skip 56 gigabit per second generation and will try to intercept us at 100 gig."
• "We expect to introduce our full end-to-end 100 gigabit solution sometime in 2014, 2015 time frame. We think that Intel is behind us. We estimate that they will launch their solution in 2015 time frame."
• "For us, it's a matter of execution. I think we have better technology, and if we execute well, we could take significant market share."

The Mellanox Counterpunch

As part of its plan to deliver the next generation of interconnect, with speeds of 100Gb/s in 2014, 2015 timeframe, Mellanox acquired Kotura and IPtronics. These acquisitions bring to Mellanox important technology capabilities for interconnect solutions at 100Gb/s and beyond. By owning the core competency and controlling all the building blocks of the interconnect solution, Mellanox is positioned to continue to lead the fast interconnect market and to serve the High Performance Computing, Web 2.0, cloud, storage, database and financial applications.

Here's the Cliff Notes sales pitch as paraphrased by CEO Eyal Waldman in the latest conference call:

But even when Intel comes with a 100 gig solution, Mellanox has so many sticky design wins, it will take some time for Intel to really become a viable competitor in those markets. If you look at multiple design wins Mellanox has with Oracle, Teradata (TDC), IBM, and EMC, when Intel comes with their solution, these customers will have to rewrite some of the code they created around Mellanox products, and Mellanox would have to qualify the code.

Valuations

Comparing Mellanox Technologies to Intel is no apples to apples comparison. Besides the technology, the only thing the two companies have in common is that they both greatly underperformed a roaring stock market in 2013. Year to date, Intel has moved from $21 to $23.70. If you screened for a Dog Of The Dow, you'd probably unearth Intel. Mellanox is a pure play on the semiconductor market for Data Centers. Intel is a behemoth, with tentacles that reach into many markets.

If you're an investor looking for fixed income, Intel may be a good bet for you. The dividend yield is 3.8%, but the P/E Ratio is 13, with projected earnings growing at a paltry 7.5% for the next 3 years. I've been through three market crashes: 1987, 2000 and the "Great Recession" of 2008-2009. Because of the instability at times in the market, I prefer my fixed income in CDs. However, your comfort zone may be different. That said, I think Intel's days as a growth company are over.

With Mellanox, earnings are projected to grow 100% in 2014. Wall Street is a forward looking mechanism, and October is when the smart money starts crunching numbers for the next calendar year. Although there are headwinds in the market like a possible government shutdown, I'm wagering that Mellanox technologies has stopped falling. The short float is 13.5%, and with the next conference call scheduled for mid October, I'm betting on a short squeeze. This is a good investment for the next year.

Medidata Solutions: Priced For Perfection

"Medidata is uniquely positioned at the intersection of life sciences and technology." - Tarek Sherif, CEO Medidata Solutions

The best of both worlds. That's the enviable position Medidata Solutions (MDSO) finds itself in as we enter the Fall of a blistering year in the stock market. Two sectors that have outperformed are Cloud Computing and Biotech. Medidata's flagship product Medidata Rave sits solidly in the center of these two arenas. It offers cloud based solutions in the clinical trial process for biotechnology companies, medical device manufacturers, and big pharma.

The company had its IPO in June 2009 at $14/share. It barely budged from its initial share offering for two years as investors slowly waded back into the stock market. Once earnings and revenues increased at a healthy pace, investors took notice, and elevated the share price from $16 to $100 in 24 months.

(Chart Source: Yahoo Finance)

At par value, the equity sports a trailing twelve month P/E Ratio of 121. Although earnings growth for 2013 is a healthy 33%, the consensus estimate on Wall Street drops to 17.5% for 2014 (which may be conservative). My contention is that Medidata Solutions is ahead of itself, and may be due for a significant haircut if the next quarter doesn't live up to lofty expectations, or guidance disappoints. After all, Wall Street is looking for next year's numbers now.

To make my point, the remainder of this article will be liberally paraphrasing and quoting from the company's annual report, most recent conference call, and its presentation at the Morgan Stanley Technology, Media & Telecom Conference.

The Company Near Term

The Pharmaceutical Industry spends spends $90 billion a year developing new drugs, and Medidata Solutions is the largest task provider of solutions to the life sciences companies. According to the CEO, in its core market, it has over 50% market share, and has achieved "critical mass" in terms of the kind of data it's collecting. The company's chief competitors are Oracle (ORCL), Perceptive Informatics, and Tableau Software (DATA).

The annual report states primary product Medidata Rave is built on industry standards, enabling interoperability with legacy and third-party applications throughout the development process. CEO Sherif gives his spin:

We focus on replacing paper-based, Excel-based, and legacy-based processes in drug development in actual clinical trials with a very innovative disruptive technology solution that helps them to both save money, and to drive down times in drug development.

The company's software has end-to-end support for Unicode characters, required to deliver multi-lingual studies, which enabled its globally positioned sales force to land a who's who of pharmaceutical juggernauts. Johnson & Johnson (JNJ), Roche and AstraZeneca (AZN) are clients of note. Medidata can also boast a laundry list of biotechnology all-stars on its roster. The company's five largest customers accounted for 29%, 31% and 43% of Medidata revenues in 2012, 2011 and 2010, respectively. However, in 2012 and 2011, no single customer accounted for 10% or more of total sales.

Medidata is taking market share from some of the incumbents, or the legacy solutions. Last year, it added 100 new customers. It has 363 customers currently. There are over 2,000 companies globally that develop drugs. So there's a wide open field for it to continue to add new names.

It has a subscription model in terms of customers having the right to use Medidata technology for a period of time. It drives volume in terms of the adoption of the technology solutions, it recognizes revenue on a ratable basis over the contracts short-time, and its strategy is to drive adoption of the company's technology through its infrastructure, which is highly scalable on a gross margin basis.

The applications are very sticky. Last year, its retention was in the high-90% range, and that's not even counting the up sell opportunity it has with those customers. Last quarter, the retention rate rose to 99%.

Although this gestalt of information is impressive, it still doesn't warrant a trailing P/E Ratio of 120. However, as experienced investors understand, you are paying for future earnings growth. Medidata Solutions executives believe they are at the right place at the right time to take advantage of the paradigm shift in drug discovery.

The Company Long Term

Although trends in pharmacology such as Personalized Medicine, which includes genomics and targeted therapeutics, will likely be catalysts going forward, it is the expansion of Medidata's core competency that will drive share price higher. Recently, the company broadened its platform dramatically, and now focuses across the entire drug development spectrum. So from conception of a clinical trial through to completion of that trial. Last quarter, non-Rave revenues increased 144% year-over-year.

CEO Sherif:

We are able to increase market share across multiple functions within a single customer. As we identify new customer needs, our cloud model makes it much faster and more efficient to develop and deploy new functionality and solutions, continuously broadening and improving our platform and therefore, expanding our revenue opportunities.

Medidata is helping to define the vertical cloud business model, and its power is evident in its financial results. Not only did it exceed its previously stated outlook for revenue and EBITDA, and saw cash flow from operations increase to record levels, but it also continued to lead its SaaS peers in profitability measures. Second quarter highlights included:

• Application services grew 36% year-over-year.
• 45% of existing clients purchased more than one product, up from 41% in the first quarter.
• Total revenues for the second quarter of 2013 were $68.1 million, an increase of $14.6 million, or 27%, compared with $53.5 million in 2012.
• Application services backlog for the remainder of the year as of June 30, 2013, increased to $110 million, up 38% over the comparable period a year ago.
• Total cash, cash equivalents and marketable securities were $140.4 million at the end of the second quarter, an increase of $26.5 million, or 23%, as compared with $113.9 million at the end of the second quarter 2012.
• Cash flow from operations was a record $26.2 million in the second quarter, up 361% year-over-year.

No question is was an outstanding quarter, and I realize sell side Wall Street analysts are giving Medidata premium pricing, but I still remain convinced the stock is overvalued.

Conclusion

Medidata Solution's short float is only 5.5%, so the smart money is betting the stock has room to run. It keeps ascending to new highs on a daily basis, so short sellers beware. That said, its price/sales is 11, price/book is 16 and cash/share is only $1.45. That seems expensive to me. Young growth companies plow a lot of their revenues back into SG&A [Selling, General and Administrative Expenses] and R&D, and therefore, don't make a dime. That's not the case with Medidata. It's an extremely profitable and well run company, even with an R&D budget that's 19% of revenues.

Many investors subscribe to the Efficient Market Hypothesis where prices reflect all publicly available information, and that prices instantly change to reflect new public information. I take a different approach and believe that investors aren't always rational. Although the rank and file at Medidata are doing a great job where the company is concerned, in my opinion, the stock isn't worth $100, not at this juncture. I wouldn't short it. Personally, I don't short individual stocks, and that's especially true in a bull market.

Bottom line is I'd like to own this equity, but not at the lofty valuation. My purchase price for Medidata Solutions is somewhere between $65-$75. Its 200 day moving average is $64, and I prefer to buy my holdings for bargain basement prices. Your investment style may be different, and this stock has a full head of steam. If you don't mind the macro issues that hover over the stock market, this a great choice for short-term momentum players.

Stay Hungry

In most aspects of your life, it's best not to spread yourself too thin, but in investing, it's just the opposite. Diversification is the recommended plan of attack, and for the majority of retail investors, I would agree with that assessment. The original spider (SPY) (an ETF that tracks the S&P 500), is a terrific way to take advantage of a market that's running. It's the benchmark that professional portfolio managers judge themselves by. If you beat the S&P 500, you're outperforming the overall market, which at times is difficult to do as a stock picker.

For the past year and a half, I've been putting my investable assets in the technology sector. Most specifically, I bet on small cap companies that are levered to the smartphone and tablet markets. Hit a major cold streak for awhile. Both Velti (VELT) and Glu Mobile (GLUU) were big disappointments, but after a 30% gain in the portfolio the past six weeks, I'm gaining ground. A 110% rise in Facebook (FB) and a 75% profit in Synchronoss Technologies (SNCR) purged a lot of sins.

It's a given we're in another bull market, but nobody really knows how long the duration will be, and when the next significant correction will come. One theory I've heard, and one that I subscribe to, is that technology may be the place to be for the next three years. The technological change from legacy software systems to cloud based applications for the enterprise is one big area of growth. In addition, the explosion of wireless broadband for the corporation as well as the consumer is another. As automation engulfs us, companies are making the transition, and I want to take advantage of this evolution.

Nevertheless, technology companies can leapfrog each other in a heartbeat, and the losing companies can find significant erosion in market share, as well as share price in a nanosecond. A buy and hold strategy (a strategy I prefer), often doesn't work with small to medium sized organizations in the transformational era that we live. However, these smaller companies is where the growth is, so I've got some of the securities I own on a short leash.

I've recently sold some stocks because of very nice gains. We may be heading into a corrective phase with the government taper looming, plus, September is a historically bad month, and October is known for its market crashes. I want to have plenty of cash available to take advantage of a dip. If the market keeps running, there is always the upcoming earnings season, and promising companies may be on sale after an earnings miss. The remainder of this post will discuss some of the moves I've made the last two months, and the reasons for doing so.

Glu Mobile

A few months ago I liquidated my position in mobile gaming company Glu Mobile for $2.10/share. Although I sold half of my shares for a 40% gain when it traded at $5.90 in the Summer of 2012, I was underwater with my investment. This is because I loaded up on the company again when it dropped to $3. Besides the dip in price, one reason I jettisoned my stake is a lack of execution. Management has also recently changed their accounting practices, and the company has diluted shares by putting more on the open market. Although it rallied for awhile on a Microsoft (MSFT) buyout rumor, it can't seem to get off the mat.

This company has a lot of potential, and if they can monetize the multi-player gaming platform, it may get some price appreciation in the 4th quarter which is historically strong for Glu. They're also involved with mobile gambling in the United Kingdom which is another revenue generator. With my average price of $3.25, I thought Glu mobile could be a five or ten bagger if they started to execute. However, they seem to have dropped the ball this year after a nice 2012.

What this company needs is for a larger organization to throw investors a Hail Mary pass in the form of an acquisition. Although this is a distinct possibility, and they may have a good 4th quarter because of the Christmas selling season, I wasn't willing to wait. The dilution of shares, and change in accounting procedures were red flags. I wanted to give them till March to get their act together, but with the market running, decided to invest elsewhere.

Teradata

Data warehousing and analytics company Teradata was a short lived investment for the portfolio. I only owned the stock for six weeks, but made a 30% profit on a company that is growing at 13% a year. Double digit growth is very impressive, but the stock almost reached its consensus price target for the next 12 months in a month and a half. I bought at $48, it ran to $65, and I sold on the way back down at $62.

It was a toss-up whether to keep it or sell it because I bought Teradata at multi-year lows, and believe it has a bright future. This is especially true with new initiatives like Hadoop which may raise revenue growth. However, the Las Vegas over-under lines told me that the stock could go lower after a 30% gain, and a 15% growth rate. It dropped to $56 shortly after I sold it. With a forward P/E ratio of 21, it seems a bit expensive to me. I've got it on my watch list now.

Fusion-io

I held data accelerator Fusion-io (FIO) shorter than my position in Teradata - three weeks, or better put, 15 trading days. Again, I had a 30% gain in the equity. The stock got hyped up after a blistering IPO, and one blowout quarter when two of their hyper-scale clients, Facebook (FB) and Apple (AAPL), were buying Fusion-io products hand over fist. Clearly at $11, the stock was oversold, and that's when I purchased it. I like to bottom fish, especially with former high fliers when investor psychology goes in the opposite direction.

The stock is heavily shorted, and jumped 40% in two days after Pac Crest stated that $22-27 would be a good buyout price for the company. I wanted to keep Fusion-io, but needed to raise some cash for the possibility of an overall market correction. Thirty percent gain in three weeks is a tidy profit. Best-case scenario, the stock drops back below my purchase price of $11, and I will buy more shares. Worst-case scenario, the rumors drive the story line forward, and they get scooped up by a whale like IBM (IBM).

Facebook

Facebook is in my investing highlight reel - over 100% gain in a little over a year. There's always a bit of luck involved when you buy a stock near its 52 week low, but that's what happened when I bought the company at $19. Fifty percent off of the IPO price. In my last post, I said I thought it may double to $100 in twelve months, if not by Christmas, if they pull off another monster quarter, and the markets keep humming. I still believe that, and continue to consider the company a cornerstone in the portfolio.

On a personal note, I'm not a Facebook user. I utilize Twitter. Twitter is a great way to aggregate news all over the Internet. Twitter's recent announcement that they're going public has put some pressure on Facebook the last few days, but this will soon subside. The two technologies really compliment each other, although they compete for advertising dollars. Facebook is in the Investor's Business Daily top 50 stock picks. This is like performance enhancing drugs for an equity because it's where all the hot money flows. You've come a long way, baby.

Synchronoss Technologies

Another pillar in the portfolio, Synchronoss Technologies has been a workhorse for me, just like it is for telecommunications companies globally. Although 75% of sales are from smartphone activation, this will soon change because they are quickly becoming the cloud storage option for customers of clients like AT&T (T) and Verizon (VZ). This stock has all the essential ingredients to become like a Cisco (CSCO) or EMC (EMC) in their growth heyday back in the 1990's. Not that Synchronoss competes with Cisco or EMC, just in the price appreciation potential.

Wells Fargo believes the company can beat Wall Street's expectations, and grow 23% for the next three years. I agree with them. The stock is a bit pricey now, but it's had a terrific run. One thing to consider with Synchronoss is that they are not one of these sexy technology stocks. They do all of the heavy lifting for the telecommunications carriers. Back in the 90's I invested in Internet infrastructure plays, not the dot coms, and did quite well. I continue the same tack as Web 2.0 builds out.

Nuance Communications

Although I bought Nuance for their superior voice recognition technology, I'm waiting to see what Carl Icahn does with his 17% stake in the company. Icahn also has a stake in Apple, so speculation is that he will push for an acquisition. I really thought all the headline grabbing news concerning Icahn and Nuance would push shares higher, but that hasn't been the case. I expect a 15% return from Nuance per year from my purchase price of roughly $19, a multiyear low for the company.

Allot Communications

Israeli based Allot Communications (ALLT) is slightly above my purchase price of $12. This is a short term holding unless they can provide guidance. The company is currently under pressure from a numbers miss last quarter, and many Israeli based stocks are feeling the pain of a civil war in Syria. I'm giving Allot two quarters to produce better numbers. Company executives believe that telecommunications spending in Europe and China is picking up, which could boost revenues. This is another wireless broadband infrastructure play.

Ruckus Wireless

Ruckus Wireless (RKUS) is a recent IPO. At $16.50, it trades about $3 above the public offering price, and about $3 above my average cost per share. The company provides the infrastructure for WiFi hotspots, both in the enterprise and with telecommunications carriers. Nokia-Seimens is a large partner, and the equity has rallied on rumors of an acquisition by the larger company. Cisco is a big competitor, but many telecommunications carriers prefer duo vendors. I like their prospects even without being bought out.

Conclusion

The concentrated portfolio only holds five stocks right now, plus the cash I've raised from selling Fusion-io. This is a dangerous strategy, especially if technology securities go into a funk. Nevertheless, my perspective is that we're in a three-five year window of opportunity for investors with the buildup of wireless broadband and cloud infrastructure. I'm willing to take my chances.

However, after living through the crashes of 1987, 2000, and the most recent "Great Recession", I'm still skeptical of Wall Street. I do my own research because I remain confounded by the sell side research houses, and their vested interests with the companies they cover. I'm not suggesting all sell side research is bad, in fact it's just the opposite. If you need a blueprint for a particularly difficult company to understand, the professionals do it very well. I just take it with a grain of salt because you just don't know who they're in bed with.

Once Bitten, Twice Shy - Impressions Of The Mobile Advertising Market

In March, eMarketer published the enclosed chart for their projections on the mobile advertising market:

At the time I was overweight in my portfolio with Velti (VELT), who at that juncture was the leading independent global mobile advertising exchange. I believed owning shares of Velti was like walking into Fort Knox with a government issued withdrawal slip - like a winning ticket for supermarket sweepstakes. With the growth that eMarketer extrapolated, all I would have to do was wait a few quarters, and I could make a nice percentage on my original investment. This one was going to give me a run for the money.

I sold my entire position in Velti at $2.35/share only a few days after the publication of these statistics for a whopping loss. It was another bad quarter in a year of bad quarters for the company. I cringe when I look at the decrease in my portfolio. Velti now trades for thirty-five cents a share. In fact, they are currently being scrutinized by two law firms for a possible class action suit for securities fraud. It's like Global Crossing or WorldCom all over again.

That said, I don't want to fall asleep on the mobile advertising industry. The chart eMarketer offered says it all - $27 billion in ad sales by 2017 by their calculations. It's a huge growth story in the overall advertising spectrum. Velti may have come up short, but there are plenty of other companies that compete in the space.

The fate of a company like Velti may have put the kibosh on other small, independent mobile advertising networks in the eyes of the AdAge 100. These conglomerates don't want some fly-by-night operator handling their marketing on handheld devices. Far from it. The only publicly traded independent on the major exchanges that excels in mobile marketing is Millennial Media (MM). They can boast of 85% of the AdAge 100 as clients, although they have less than 1% market share.

The chart below was released by eMarketer last week, and is an eye opener if you are investing in the sector:

Google's (GOOG) growth from 2012-2013 remains relatively flat, although they do a lion's share of the business with AdMob. Apple's (AAPL) iAd isn't included in the chart, but they command about an 2.3% market share according to 2012 statistics by eMarketer. Millennial Media has less than 1% of the pie, and their growth is in decline as a function of overall industry share. Facebook (FB) tripled its business this past year, and is the dark horse at #2.

Facebook

The big knock on Facebook is that it is overvalued. Perhaps that's true, but you could say the same for Amazon (AMZN), Tesla (TSLA), and Netflix (NFLX), and they keep pushing through the stratosphere. My original post on Facebook was back in late August of 2012, and I specifically stated I was buying the stock at $19. People thought I was crazy because the security was "overvalued".

This company is a full fledged dreadnought. I believe it will see $100/share in the next twelve months, if not by Christmas, if they produce another stellar quarter. Right now it sits at #15 in the Investor's Business Daily top 50 stocks. This is where the hot money goes, all the momentum players. Facebook currently trades at $44/share, and the high estimate on Wall Street is $55 by SunTrust. When Facebook eclipses analyst predictions, the sell side players will up their estimates, which will push the stock even higher. It's a vicious cycle, but it happens quite frequently.

There are a lot of catalysts to propel the equity higher. Most importantly is the possibility of inclusion in the S&P 500 during the next year. If this comes to fruition, many mutual funds would forced to buy the company. Next would be window dressing at the beginning of next quarter by fund mangers if the stock keeps churning and burning. Lastly, the monetization of Instagram would add incremental dollars to an already fat bottom line.

Although this is a big company in regards to market capitalization, there is still plenty of room to grow. They're currently a $100 billion organization, #33 in the United States, but that pales in comparison to competitors like Google and Apple.

Google

Where technology is concerned, you can't go wrong with Google. They were a category killer from the get go when they made Boolean searches on search engines like Alta Vista and Northern Lights obsolete. They continue to trounce Apple in global market share with the Android operating system in the smartphone wars. If eMarketer is correct, the company commands an enviable lead in mobile advertising. However, they are a mature company with a large market cap.

As of September 2nd, Google has the #3 market capitalization for all U.S. equities at $282 billion. In addition, they don't pay a dividend. Consensus analyst estimates for earnings growth as reported on Yahoo Finance is 9.4% for this year, but levitates to 17.5% for 2014. Let's just say they are going to be growing at 15% per year (that's the five year consensus), for demonstration purposes. At their current price of $880, that would give you a share price in about a year's time of roughly $1,050 give or take a few dollars. A nice gain if they meet those projections.

My experience has been that most companies get about a ten year window to produce significant growth. Google certainly fits that bill. They may also buck conventional wisdom by continuing to expand for the next five years. We are in the wireless broadband revolution, and they are a kingpin. However, the law of large numbers may catch up to them, much the same way that Apple experienced last year. Even with Google's highly regarded AdMob service, I'd be more inclined to invest with them if they paid a sizable dividend.

Apple

I'm not like Rain Man or Mr. Know It All when it comes to the granular technological aspects of Apple's iAd service, but it would appear to me that their mobile advertising division is top shelf if it's anything like their handheld product lineup. Like Google, Apple needs little introduction, but they do pay a dividend, 2.5% which is very good for a technology stock. In the United States, the company is numero uno in market capitalization. $442 billion dollars was the tally on September 2nd. $50 billion more than Exxon Mobil (XOM) which comes in at #2.

From my perspective, the large market cap is the big problem growth investors may have with investing in a company like Apple in regards to their advertising network. The equity trades for $500/share, and has had a terrific run since the introduction of the iPod. However, when we break down the consensus numbers as reported on Yahoo Finance, we get earnings growth of only 8.3% for 2014, although the five year projection is for 20% expansion annually on average. Like Google, you have an opportunity to make money with this stock, but Apple pays the dividend.

Millennial Media

Millennial Media is fairly new to the public domain, and hasn't fared too well since their IPO a little over a year ago. Millennial's 52 week range is $16/share at the high point, and $6 at the low, right about where it trades today. In 2011, they commanded 1% of the overall mobile advertising market, but that has descended each of the past two years to 0.82% last year, and 0.72% currently. Although they're growing because the overall sector is growing, they are still losing market share which may have contributed to the price decline.

The company sports reasonable valuations: Price/Sales 2.3, Price/Book 3.29, Cash/Share $1.51. However, I believe this stock can go lower, and wouldn't pay anything above $3-$4 for it. As impressed as I was with the Barclays Internet Connect Conference presentation in March, circumstances have changed for the company. Most specifically, Millennial's recent acquisition of Jumptap. CEO Paul Palmieri sheds some light on the recent acquisition in the most recent conference call:

Jumptap is the second-largest independent mobile advertising platform in the U.S. behind Millennial Media. According to IDC, Jumptap represented 10.7% of the U.S. mobile advertising network industry last year, compared to Millennial Media's 18%. Together, Millennial and Jumptap combined, would have accounted for 28.7% of the industry last year, about on par with Google's share, according to IDC.

This combination of companies makes for a formidable competitor, at least stateside. About 80% of Millennial's revenues this past year were domestic. There is plenty of opportunities internationally. However, Millennial Media and Jumptap still have to assimilate the two organizations which will take some time. Millennial also missed on revenue projections last quarter. It wasn't much, 47% realized as opposed to 50% projected, but it was a miss nonetheless.

Conclusion

Although Velti left me on the hook, I still believe there is plenty of money to be made in the mobile advertising space. All four companies I've discussed do have significant growth, some better than others. The Wall Street Journal reported this weekend that Apple will be doing business with China Mobile (CHL), so that may move the stock in the short run despite the possibilities of margin pressure. Google is another good one if you like mega-cap companies.

That said, with a sector that is in hyper-growth, I prefer to go with the momentum players. My preference is Facebook. Unless Sheryl Sandberg resigns, the stock may keep on running despite the always present obstacle of insider selling, most specifically by founder Mark Zuckerberg. I've had Millennial Media on my watch list for six months now, and it does nothing but go lower, despite the 47% revenue growth. I'm going to continue to monitor it, but after my experience with Velti, they're going to have to show me they can execute their numbers.

Allot Communications: Lumpy Earnings Mean A Bumpy Ride For Investors

"We are now playing in the big rules game and the big guys game." - Rami Hadar, CEO of Allot Communications

In late April, Infonetics Research published a paper proclaiming Allot Communications (ALLT) the 2012 overall market share leader in Deep Packet Inspection [DPI]. DPI-based solutions identify and leverage the business intelligence in data networks, allowing operators to capitalize on the network traffic they generate. Service provider DPI product revenue totaled $596 million worldwide in 2012. Allot got about $100 million of that market. Infonetics attributed the company's advance to increased sales in the Americas, and boosted revenues from APAC.

According to the report, Allot pulled ahead of Sandvine (SNVNF) to take the overall DPI revenue market share pole position. This was Allot's first time as leader in the space. System integrators Cisco (CSCO), Ericsson (ERIC), and Oracle (ORCL) (with their recent acquisition of Acme Packet), also compete in this field. However, it's stand-alone Allot that topped the wireless DPI segment, while Sandvine is number one in fixed-line DPI. Fixed-line DPI is a more mature market which diminishes growth. If Allot can maintain their advantage in wireless, they could experience double digit gains going forward. The wireless DPI sector is projected to grow at a CAGR of 33% to 2017.

This glowing news did nothing for Allot's stock price. Because of belt tightening with Tier 1 telecom service carriers, Allot has missed their numbers for a few quarters. They now trade at $12/share, near the bottom end of their 52 week range of $11-$30. Lackluster earnings reports, an overall decline in the markets (August was the worst month since May of 2012 for the S&P 500), and an expansion of Allot's core competency, has put the share price under tremendous pressure.

(click to enlarge)

(Chart Source - Yahoo Finance)

I recently took a position in the company because of their reasonable valuation and superior technology. Nevertheless, I've got them on a short leash. After reading the May 7th, Q1 conference call transcript, and the August 6th, Q2 conference call transcript, I have decided to make Allot Communications a short term investment. I believe the stars are aligned to see a nice pop in the equity's price in the next six months. However, if they begin to give guidance, I would reconsider my position for a longer duration. As is, they only provide qualitative information, and as far as numbers are concerned, they only state the book to bill ratio.

The book to bill ratio is the ratio of orders received to units shipped and billed for a specified period. In Allot's circumstance, it's for each quarter. In the latter half of 2012, and the early part of 2013, the company had a book to bill ratio less than one. In the past two quarters it was over one. A ratio of above one implies that more orders were received than filled, indicating strong demand, while a ratio below one implies weaker demand. You can see why the equity sold off this year if you utilize this metric. You can also wonder why the security didn't rise with the book to bill at one plus.

In Q1, Allot had the first sequential decline in top line revenue after 15 quarters of consecutive growth. The primary cause for the sequential decrease in revenues was the softness felt in EMEA [Europe, Middle East, Asia] during the second half of 2012. The revenue decline also resulted from normal first quarter seasonality. This softness in EMEA still hounded the company in Q2. A $5 million deal with an EMEA Tier 1 fixed-line operator, has been delivered however, revenue recognition has been delayed to the second half of 2013.

However, business didn't stand still for the company. As they stated in their press release concerning quarterly achievements:

• During the quarter, large orders were received from 13 service providers, 3 of which were new customers. (Typically, 60% to 80% of revenue comes from follow-on orders from existing customers. 40% - 20% comes from new clients)
• Six of the large orders came from mobile-service providers, two of which were new customers.
• Secured orders from three of the world's top ten telecommunication operators to assist in their LTE network rollouts.
• Cash, cash equivalents, short-term deposits and marketable securities totaled $134.7 million with no debt.
• VAS [Value Added Services] accounted for 26% of total bookings.

The last bullet point highlighting Value Added Services is a key selling point for Allot when they market their products to the Tier 1 telecom companies. Management believes this is a tremendous growth opportunity going forward. This can be illustrated by the fact overall revenue in VAS went from 15% - 20% in 2012, to 26% in the most recent quarter.

As data usage over mobile networks continues to rise, operators are adopting solutions that not only manage the increased traffic, but include specialized capabilities like video optimization, content caching, and usage-based billing.

CEO Rami Hadar in the most recent quarter:

In terms of the product leadership, I believe that we have a very strong product in terms of scalability, on one hand and also in terms of the features, on the other hand, which each one relates to an advantage versus our two other competitors. On top of that, we are quite unique in our Value-Added Services offering, and that's the key differentiator and sometimes it makes the whole difference in winning.

In Q1 he also discussed VAS:

After spending large part of 2012 executing cost-cutting and layoffs, some of the more advanced operators realized that they need to move past saving and into monetization and differentiation rather than cutthroat pricing competition. The strategies vary, but current trends around opting Value-Added Services, such as Parental Control; premium services such as high-quality video delivery; and early trials with application-based charging. We believe that the commercial success and rate of acceptance of these new offering by end users are important drivers for our future growth.

Currently, Parental Controls is the leading charge, but DDOS [Distributed Denial Of Service Attack] is also coming on strong. Enclosed is a chart spotlighting the potential revenue streams for Allot in Value Added Services.

(click to enlarge)

(This chart was obtained from an interview with Allot's AVP of Marketing Jonathon Gordon)

In addition, to buttress their leading position in the DPI sector, the company has expanded their product portfolio the last two years. This includes recent acquisitions of Ortiva Wireless and Oversi to enable Allot to offer integrated solutions. I think this is a key point because now Allot will compete with global video caching companies such as Akamai Technologies (AKAM), and Application Delivery Networks like F5 Networks (FFIV).

I believe that this transition from a stand-alone company to an integrator may be putting additional pressure on the equity as Wall Street waits and sees how well Allot does on a much larger stage. They are also an Israeli company and the conflict in Syria may have caused the security to sell off even more in the past two weeks with the world waiting to see what the United States' involvement will be. Nevertheless, Allot's lifeblood is DPI with the major telecom carriers, and I'm betting that delayed orders will be signed, sealed, delivered. They've got a long track record of selling to the telecommunications industry, and no longer have to evangelize their mission.

You can get really granular discussing the technology of some of these telecommunications companies, but it's the numbers that count. The short float is only 7.7%, so Wall Street seems to believe that shares may be adequately valued. Price/Sales is 4. Price/Book is 2.38. Cash/Share is $2.90. Not dirt cheap, but still very reasonable for a small cap technology firm with a fairly substantial track record and good prospects.

According to Yahoo Finance, consensus earnings estimates for 2013 is $0.15/share, but that figure jumps to $0.48/share for 2014. We're already in September and analysts begin looking to the next year's numbers in early Fall. Sales growth is projected to be 22% for 2014. That may prove to be a conservative extrapolation if integration initiatives begin to pan out. However, they will be going toe to toe in bake-offs with F5.

With only $100 million in annual revenue, this is a small company attempting to do battle with some formidable opponents. However, telecom carriers prefer Allot's DPI solutions, and could allow a more integrated approach if Value Added Services continue to pan out. I believe at $12/share, it's a decent bet for price appreciation going into the New Year.

Nuance Communications Transitions From Perpetual Licenses To Cloud-Based Delivery

Before I discuss Nuance Communication's (NUAN) Q3, I would be remiss not to mention that corporate raider Carl Icahn recently increased his stake in the company to 16%. According to Investopedia, the definition of a Corporate Raider is:

An investor who buys a large number of shares in a corporation whose assets appear to be undervalued. The large share purchase would give the corporate raider significant voting rights, which could then be used to push changes in the company's leadership and management. This would increase share value and thus generate a massive return for the raider.

I can't speak for Mr. Icahn's intentions as to why he is taking such a large position in Nuance. For all I know it may be a passive investment like his stake in Netflix (NFLX), but one thing I can tell you is that he probably sees opportunity here. News just broke that Icahn is taking a stake in Apple (AAPL), and Nuance is the engine behind Apple's Siri technology. Perhaps there will be a shotgun wedding for the two companies somewhere down the line. In any event, I would think it would be positive for Nuance in maintaining a large and influential client like Apple.

Nevertheless, Nuance is going through some growing pains from the transition from perpetual licenses to cloud-based delivery. According to the company's prepared statements (.pdf file) for Q3:

We are transitioning to a higher concentration of recurring revenues associated with on-demand, transactional, term-based or subscription pricing models. This benefits the business in the medium and long term by increasing recurring revenues and predictability. However, it has a negative effect on near-term revenue and margins.

Negative effect indeed. Nuance projects Q4 sales of $470 million to $500 million. That's below consensus of $520 million. Blended gross margins for fiscal 2013 will decline by between 450 and 500 basis points. As CFO Tom Beaudoin states in the Q&A session: "I think you should model margin improvement as being modest next year."

If you examine the chart below carefully, you can see where all of the organic revenue growth came to a standstill in 2013.

click to enlarge

This is a direct correlation from two phenomena - the shift away from desktops to mobile, and the move to the cloud. The company isn't giving guidance for 2014 yet, but Yahoo Finance shows a consensus sales growth of low single digits, $1.96 billion for this year to $2.09 billion for 2014. It's putting a lot of pressure on shares.

Earnings are another story. Nuance expects Q4 earnings per share to be in the range of $.24-$.32. They predict Fiscal Year 2013 earnings to be in the range of $1.27-$1.35. They had previously forecast earnings of $1.33-$1.45. Some of this decrease could be from litigation expenses. CEO Paul Ricci explains:

Throughout this year, fiscal ’13 we’ve had a larger amount of litigation and patented related expenses than anticipated, and that’s been accentuated and particularly true in the second half of this year as specific litigations have moved to more critical phases.

Another reason for the decline in revenue and earnings for Q4 is that some of their mobile customers are delaying contracts. Clients want lower prices, and Nuance is not giving discounts to their superior technology. Mr. Ricci believes in delaying deals for the sake of price discipline. Sales from their mobile segment constitutes roughly 30% of revenues. Revenue from that division dropped 14% in Q3.

The company has an aggressive buyback plan. As of July 31, 2013, they have spent $174.6 million out of their authorized $500 repurchase plan, repurchasing 9.283 million shares. They expect to continue to execute their repurchase plan tactically. Their plans incorporate a full-year, weighted share count of 322.5 million diluted shares.

In a bull market, the equity trades at $19.50, near the low point of their 52 week $18-$26 range. In my opinion, the stock would have traded lower after poor guidance for Q4, but the anticipation of Mr. Icahn's potential fiscal actions have buoyed the stock. Nuance is primarily a domestic company with 72% of their revenue coming from the United States. There's a big opportunity for overseas expansion. However, the company has a history of being unprofitable, although the last few years have been in the black.

I'm long the stock because I use Nuance products, and believe they will remain the leader in voice-recognition technology for the foreseeable future. Although earnings are under pressure, the going rate of $19.50 seems reasonable of you utilize a price/sales metric of 3.38. Price/book is 2.2. Those are low figures for a technology company. Although I didn't buy the stock because of Icahn's stake, he's there nonetheless. I expect him to raise some dust at the next shareholder meeting. After all, he's an "activist shareholder".

Fusion-io: No Longer The Belle Of The Ball, But New Management Might Right The Ship

Sometimes the hot money on Wall Street gets a little too hot. Case in point data facilitator and accelerator Fusion-io (FIO). Last October, the stock had an outstanding quarter and went ballistic. It reached $32/share based on impressive revenue streams from hyperscale clients Apple (AAPL) and Facebook (FB). These large information sharing platforms where Fusion-io excels, propelled them to international prominence. It now trades at $11.25, and despite the drop in value, still remains an industry leader with disruptive technology.

Fusion-io gets little love on trading floors right now. I'm making an investment in the company not only based on superior technology, but because of a new management team that has the experience to turn things around. Valuation is still steep if you go by a P/E metric, but adding more hypersacle clients can raise those earnings figures (or lack thereof) in a heartbeat. Pandora (P), Alibaba, Salesforce.com (CRM), Spotify, LinkedIn (LNKD) and China Mobile are current customers that are building data centers, and Fusion-io will have an opportunity to deploy there, but not for the next year or two.

I believe it's a management change that is the key for the company to succeed. Back in early May, Fusion-io founder David Flynn resigned as CEO to pursue entrepreneurial investing activities. Mr. Flynn did a great job of guiding Fusion-io through its early stages, but perhaps wasn't the right person to lead a larger entity. This happens a lot in business. Not everybody is equipped to be a Bill Gates or Steve Jobs. In steps Shane Robison, an old pro who was formerly at Hewlett-Packard (HP) in the position of Chief Strategy and Technology Officer from 2002 to 2011.

This past quarter, 2013 Q4, was light, but since Mr. Robison has been at the helm only three months, I am giving him the benefit of the doubt. There were channel conflicts with the OEM's in Q4, and although those conflicts may have begun under Mr. Flynn's tenure, it is Mr. Robison who is now responsible for the mishaps. He discusses this at various points in the Q&A session during the conference call:

• "The kinds of channel conflict challenges that we've been having have to do with first, pricing. We've been inconsistent in how we priced our direct products relative to our OEM products. And we have to have very clear discipline about how we price our direct sales products, and how we price relative to what we're doing with the OEMs. So obviously, that's an easy thing for us to fix, and we will fix it."
• "Our ioControl product, which is the new name for NexGen, is now mature enough that it's really starting to get traction in the mid-market, and it will be exclusively sold through the value-added reseller channel. There's been a lot of question about channel conflict with our enterprise customers, and we're determined to eliminate that. So as we go into the second half of this year, we'll rebuild our OEM relationships."
• "When we talk to our OEMs about qualifying products, their qualification cycles sometimes take several months. And we'll go have a good discussion with the OEMs, get them to agree to qualify our products, they're working away on qualifying the products. And then all of a sudden, we pop up with an announcement in the market and pre-announce that product, which is very disruptive for them. And it's the kind of channel conflict that destroys relationships. We will fix that."

That's no way to run a railroad, especially when the OEM's in question may be Cisco (CSCO) and NetApp (NTAP). However, the new CEO is taking steps to correct the issues.

According to the conference call, IDC predicts that by 2016, the enterprise segment, which is what the OEM's are targeting, will be $78 billion. This is also referred to as the optimized server segment. The hyperscale market, where Fusion-io's direct sales team concentrates on, is purportedly going to grow to $43 billion by 2017. Although these lofty projections by data research companies often fall short of forecast, it is still a significant opportunity.

It wasn't just the weak quarter that hammered the stock. It was lowered guidance for fiscal 2014. Previously, Fusion-io expected 30% sales growth for next year, but has since calibrated that number to 20%. It came out of the blue, and put a black mark on their record. However, they are still selling products, albeit with concerns about slumping margins and pricing pressure. They did $432.8 million in sales last year. Tack on 20% for next year, and you've got over half a billion in revenues going forward.

They are also losing money, $.03/share for Q4, and aren't projected to earn much for 2014. The number I looked at from Credit Suisse is an estimate of $.09 from July 2013 to July 2014, with a loss of ten cents a share for the current quarter, Q1 2014. Credit Suisse maintains an outperform rating on the equity, so take that nine cent gain with a grain of salt. They could keep losing money for the next year, but with $238.4 million in cash and cash equivalents, they won't be going bust.

I've written two previous articles on Fusion-io cautioning investors about the overvaluation of the equity, one last August, the other in November. On a P/E Basis, I still feel the same way, but this a young growth company and other econometrics can be applied: Price/Sales is 2.57, Price/Book is 2.24, Cash/Share is $3.61. Not very expensive despite the lack of earnings. That's my train of thought, and may also be on the same wavelength of possible suitors.

Mergers and acquisitions are on the rise in the bull market. There's a lot of fat cat companies looking for canaries, and Fusion-io would be a nice quarry for one of those slow tech growers like IBM (IBM), Intel (INTC), EMC (EMC), or, Oracle (ORCL). Charity begins at home, so let's not forget that besides Apple and Facebook, Hewlett-Packard is also a hyperscale client of Fusion-io. They could be a possible suitor. So could OEM partners Cisco and NetApp.

I don't know what the downside is for this stock, but I do know that at my purchase price of $11.36, I may make a 20% gain in the next twelve months. That's not insignificant when you compare it to what a certificate of deposit is getting you at the bank. A 20% gain would equate to roughly $13.50/share by August of next year. I think that's manageable. However, we are near market highs in an incredible year, September is historically a bad month, and the company could come up short on that 20% revenue growth in the near term, so you may find a better entry point.

Ruckus Wireless: First Mover Advantage In Carrier Wi-Fi

With the proliferation of smartphones and tablets congesting cellular spectrum, off-loading end-users to Wi-Fi hotspots is a technique of choice for a majority of Tier 1 telecom carriers and MSO's (Multi-System Cable Operators). Ruckus Wireless (RKUS) has a first mover advantage over competitors Cisco (CSCO) and Aruba Networks (ARUN), and continues to occupy a leading competitive position in the carrier Wi-Fi market. They make the base stations that make off-loading happen.

If you aren't familiar with Ruckus, they were a hot IPO this past year. The company's coronation came shortly after launch when they bolted from approximately $14/share, to $25/share. It was a headliner. After a lackluster Q1, the equity crashed to $10. A bad quarter, but perhaps an anomaly. My belief is that the security just got too far ahead of itself from Wall Street's exuberance. It trades now at $14. Back to square one if you bought at the outset.

In the Q2 conference call, Ruckus had revenue of $63.9 million, an increase of 31% year-over-year, and at the top-end of their sales guidance. As CEO Selina Lo explained:

In Q2, our service provider business regained momentum. We had a record number of new customer wins, and expanded deployments by existing customers. Our enterprise business also continued to perform well. Q2 was a quarter of recovery and improved visibility for us.

My impression of Ruckus Wireless is that it's important to separate the enterprise market from the carrier market. As the CEO emphasized in the conference call, the enterprise business is very predictable, and they will have limited problems projecting numbers for this niche. It's with the telecom carriers and MSO's that the metrics become lumpy. Ruckus won't break out numbers on these two separate market segments on a quarterly basis, just annually, so it's hard to get a grip on things if you invest quarter to quarter.

Nevertheless, it's the business from the telecom carriers that may propel shares higher, so let's take a look at some of the initiatives the company is taking as stated by CEO Lo:

• "An important catalyst for the carrier Wi-Fi market is Hotspot 2.0 also known as Passpoint. Hotspot 2.0 enables the mobile device to automatically connect to any Wi-Fi access point belonging to the device users, service provider, or, the providers roaming partners. Apple (AAPL) recently announced support of Hotspot 2.0 in iOS 7, and a number of Android (GOOG) devices are already supported. Ruckus has been a strong sponsor of this technology."

  Ruckus is working with a number of partners in integrating their Wi-Fi technology into their smartphones.

• "Wi-Fi is the predominant method of connectivity for tablets. We believe that tablets are becoming a key driver for high capacity, reliable Wi-Fi in many of our market segments such as education, hospitality and mid-tier enterprise. Wi-Fi access is also becoming a customer service differentiator for public venue."

  Many service providers are offering managed wireless line service for public venues as a way to capture the tablet population and improve their hotspot footprint.

• "We acquired YFind, a pioneer in indoor positioning and real-time location analytics technology. The YFind team has developed capabilities that we intend to integrate with our Smart Wi-Fi to create a new class of location intelligence, high performance wireless infrastructure."

  ABI Research released a report that forecasts by 2017, this will be a $5 billion market.

On a continual basis, every quarter Ruckus adds new service providers to the roster. In Q2 it was fifteen, bringing the total to 90. They also won four MSO's, and are seeing that accelerate. Although there was momentum in the quarter, it can take multiple quarters before service provider design wins come to fruition. As CEO Lo cautioned: "I think from a pipeline perspective, we have always been very, very careful about forecasting service provider and there is always chances for surprises."

One happy accident that could be brewing is China. Visibility in their China business has improved, but sales in China have not caught up to historical levels. Ruckus management is taking a very cautious view on the country. However, a recent win with China Telecom may be a catalyst for future business. They work with additional operators in China in the build-out of "wireless cities". This is the concept of turning an entire city into a Wireless Access Zone. Everybody gets free Wi-Fi courtesy of the government.

If we examine the Yahoo Finance earnings projections, we can see that Ruckus is slated to earn $.04/share in Q3. Full year 2013 earnings estimates are for $.18/share, and $.27/share for 2014. For the current year, that's a P/E of 75, an expensive stock. Going out 16 months, we get a P/E of 50, still paying top dollar even though many analysts will begin crunching next year's numbers sometime in early Fall. Sales and earnings are expected to be in the mid 20% region for the next two years. This gives you a PEG (Price/Earnings/Growth) Ratio on the steep side for both this year and next.

I'm long the stock, and believe that there is a three to four year window of opportunity in the buildup of Wi-Fi hotspots on an international basis. With a lofty P/E Ratio, I may be courting disaster, but the potential opportunities for Ruckus in mind-boggling. They've got a lot on the drawing board, and have set the standard for Tier 1 telecom operators to make your wireless experience much more efficient and cost effective. I may be in for a rude awakening, but once a year has passed, a 25% profit could very well be in the cards.

After Goldman's Kiss Of Death, Synchronoss Technologies Bounces Back

On July 9th, Goldman Sachs (GS) put the kibosh on Synchronoss Technologies (SNCR) by downgrading the stock from neutral to sell, sending shares into a tailspin. Synchonoss, which activates data-enabled mobile devices, and offers cloud storage to end-users via Tier 1 telecom operators, fell over 10% on that call, dropping the equity to $26.50. Investors ran for the exits.

After last week's blowout Q2 conference call, shares now trade at $35, and may be heading higher for the foreseeable future. The quarter was encouraging, with revenue of $85.2 million, an increase of 24% year over year. Earnings per share of $.31 was higher that Wall Street's expectation of $.29. Guidance for 2013 was raised, too, which probably accounts for the upward trajectory of the stock price in just a week.

With the Goldman downgrade, the analyst believed there was lack of visibility in the adoption of the personal cloud service for the next two quarters. Synchronoss CEO Stephen Waldis and his associate, CFO Lawrence Irving, rebutted this claim by implying that Q2 may just be an appetizer. The best is yet to come. This can be exemplified by the implementations of their Personal Cloud Platform with major Tier 1 mobile operators Verizon Wireless (VZ), Telefonica, Vodafone (VOD), and AT&T (T).

Here are some quotes from CEO Waldis about the early adoption of the Synchronoss Personal Cloud Platform:

• "The investments we have made over the past several years, building out the world's most comprehensive Personal Cloud Platform, and signing up multiple Tier 1 mobile operators, is in the early stages of paying off. And we believe that we are well positioned to drive meaningful growth in this business over the long-term."
• "We have now successfully deployed our Personal Cloud Platform with each of our major mobile operators. We are encouraged with the results to date, including how our Personal Cloud Platform had scaled at each of our mobile operator customers."
• "We have successfully completed the launch of our Personal Cloud Platform in 11 of the 14 Vodafone markets, slightly ahead of schedule."
• "Our Telefonica cloud deployment began scaling in the second quarter, and they are set to begin more significant promotions around their cloud during the second half of 2013."

It should be noted that Verizon was first to market with their deployment in April, and that AT&T is the laggard, not anticipating to launch until the second half of the year. Nevertheless, as the CFO stated:

We are in the early stages of a dynamic, high-growth market opportunity, and we are committed to making the investments necessary to ensure our long-term success...We anticipate revenue growth to accelerate in the second half of the year, as our mobile operator customers begin to more heavily promote their cloud services.

So what's the big deal about these remote digital storage systems? It's about to become a land office business. With the increased connectivity of smartphones and tablets, the telecom carriers are getting into the business of what previously was solely in the domain of handset manufacturers like Apple (AAPL) with the iCloud offering. Throw in the connected home with smart-TV's and appliances, and the connected car, you've got a gold mine on your hands.

Gartner predicts the worldwide need for total consumer digital storage will increase nearly twelve fold by 2016, at least according to CEO Waldis in the conference call. This is a sector that is ready to ignite, like a smoldering cigarette in a munitions factory. Waldis believes that as mobile operators roll out more devices, with more upgrades, and promote family sharing plans, the central glue for the telecom carriers will be the personal cloud, or, personal content locker.

For example, you will be able to share all of your favorite songs on your smartphone, car stereo system, or on an application enabled television. Have a favorite movie? All family members will be able to access the same video packets on a variety of devices if they are plugged into the cloud platform. This is high-tech wizardry at its finest. Synchronoss had the financial wherewithal to do the nitty-gritty, heavy lifting behind the scenes before competition stepped in.

Personally, I use Apple products, and fully understand the convenience of the Apple "ecosystem", and there is an argument to be made that only the non-Apple ecosystem is addressable. But Mr. Waldis informed the analysts that the company hasn't seen one particular operating system versus another that has significantly outperformed in terms of adoption of the personal cloud. Also, let's not forget that it's Android (GOOG) that has significant market share now.

The company is primarily spearheading its expansion into North America and Europe, but India and the Asia-Pacific region may be in the cards in the not too distant future. Synchronoss is moving into trials with an unnamed Indian mobile operator in the later part of this year. Developments in the Asia-Pacific region are encouraging, but nothing has been green-lighted as of this date.

To enable the continued thrust into new geographic and technical areas, the company allocated $14.5 million, or 17% of revenues into research and development in Q2. Another highlight of Q2 was cash flow from operations of $18.1 million which exceeded Wall Street's estimate of $11.6 million. The quarter's gross margin of 60% was in-line with guidance.

Examining the full year 2013 guidance given by the CFO, we can see that buying Synchronoss Technologies at this level may not be an open and shut case, but it sure is compelling if you like GARP (growth at a reasonable price).

• Sales guidance was increased to be in a range of $345 million - $352 million versus the previous guidance of $335 - $350 million. This represents growth of 26% to 28% on a year-over-year basis.
• Continue to target gross margins in the 60% to 62% range. Operating margins are expected to the in the 23% to 24% range.
• Earnings per share will be in the range of $1.31 to $1.36.

Although this is the beginning of August, we are almost halfway through Q3, and analysts will be looking at 2014 numbers to calculate Price/Earnings valuations sometime in the next month or two. If we divide the current price of $35 by the lower end of 2013 earnings per share guidance of $1.31, we get a P/E Ratio of 27. That's not a dirt cheap price, but with the equity growing at close to 25%, I believe it has room to run during the next twelve months.

Teradata: Heavy Hitter In A Nine Month Slump

In the midst of a half year rip roaring rally, Wall Street took a wrecking ball to data warehousing and analytics company Teradata (TDC). Shares peaked at $81 last September, only to be cut down to $48 in the last few days. Back in the Fall of 2102, Teradata warned analysts there would be significant headwinds from cutbacks in IT spending in the Americas, and the Americas constitutes 60% of the company's revenues. The company has disappointed investors for three quarters now.

Belt tightening in the executive suites of Fortune 1000 companies continues to dog the information aggregator and facilitator. However, Teradata is not alone in this fiscal fog. The entire S&P 500 technology sector was up only 5% for the first half of 2013 in an overall market that increased nearly 15%. The best first half of a year since 1999. With earnings season a few weeks away, it's crunch time for the tech sector. Many enterprise technology companies (including Teradata), have been promising second half results since the New Year.

The ranking general at Teradata is CEO Michael Koehler, and during the company's most recent conference call, he states that last quarter may be the end of his company's slide to the downside:

• "We believe the Americas hit bottom in Q1. Looking forward, the funnel for large CapEx data warehouse opportunities in Q2 has increased sequentially from Q1, while the prior year, large CapEx, data warehouse revenue in Q2 declined sequentially from Q1."
• "The second quarter will be challenging for revenue growth in the Americas, but it should be a good improvement from Q1 in terms of year-over-year quarter comparisons."
• "The large CapEx revenue headwinds in the Americas will be less severe in the second half of 2013 than they were in the first half. Large CapEx revenue in the second half of 2012 was less than what it was in the first half of 2012."

There is flimsy scientific evidence as to how much growth can be expected from the "Big Data" sub-sector in Information Technology out to the end of the decade. Last year, Big Data was the flavor of the month with promises of 15% growth as an aggregate for the next five years from the majority of research firms. Some of the stocks in the sector made lightning-quick moves to the upside, and this includes Teradata which is considered to be one of the best, if not the best data warehousing company on the planet. Competitors IBM (IBM), Oracle (ORCL) and SAP (SAP) may have something to say about that, but there is little doubt that Teradta is a top notch organization.

What most of these research companies didn't anticipate was a really lousy year. Many investors got their pockets picked when they bought in at the apex of enthusiasm for the sector last Fall. Traders with an insatiable appetite for momentum put Teradata on the Investor's Business Daily top 50 stock picks during that time. I don't believe that Teradata will get back to the lofty price levels of 2012 for at least a few years. However, that doesn't mean a patient investor can't find a decent entry point if indeed they want to invest in a company and sector that is clearly out of favor.

Despite the bad year, one big thing I like about the company is that they've increased earnings per share at a healthy clip since they were spun off from NCR (NCR) in 2007. That includes 2013. In 2012, Teradata made $2.44/share. This year, that number is projected to be between $3.05 and $3.20, the low end of guidance, but an increase just the same. The stock closed at $50.23 on Friday, so that equates to a P/E ratio of 16.3 for the year if indeed management hits its targets. Except for 2008 and 2009 when the market crashed, this gives us a historically low Price to Earnings for the company. However, this is with a six month extrapolation of the data.

This is not a small entity. It resides in the S&P 500 with an almost 9 billion dollar market cap. Research and Development was a healthy $45 million for the quarter, so they are not standing still. Net cash flow was $243 million in Q1 versus $192 million the first quarter in 2012. Teradata is also flush with cash with $865 million on the balance sheet. During Q1, they also repurchased 1.6 million shares for $94 million. The organization has approximately $230 million of share repurchase authorization remaining.

If we examine the consensus analyst estimates on Yahoo Finance, we get the something that is inline with company guidance when it relates to earnings per share: $3.01 for this year, and $3.41 for 2014. However, like with most securities, there is a wide discrepancy between the low and the high projections. In fact, for you Teradata bears, Cowen recently issued an underperform with a $45 price target for the company. Not everybody is in agreement that this is where to put your money, at least in the near term.

Earnings growth has ground to a standstill this year with the average analyst calculation of just 6.3% for 2013. A far cry from the 18% annual average the company achieved since it went public. If we look out five more years, the sell side is projecting a 13.5% growth trajectory. We can make an assumption that's not happening until spending picks up for big ticket enterprises.

The time-honored technique of buying laggards like Teradata may be a good investing option if you like to bottom fish. The current trend is buying dividend paying defensive securities, and with good reason. It was only four years ago we had an entire system overload and subsequent crash. Enough time has passed that we may have sector rotations into cyclical companies in the second half of 2013. It must be noted, specifically about this company that there was a decline in deal sizes, and number of deals in the last quarter. If we get a repeat for Q2, the stock may go lower despite rosy guidance.

Glu Mobile Goes On The Road

Earlier this week, members of the Glu Mobile (GLUU) executive team hit the road, and made two investor presentations. The first one came on May 21st, and was spearheaded by Chief Financial Officer Eric Ludwig at the Stifel Nicolaus Internet, Media & Telecom Conference. The second show was one day later at the B. Riley & Company Investor Conference, with Glu Vice President of Finance Greg Cannon as the master of ceremonies. This article will amalgamate both speeches to shed some light on topics that may enable investors to get a better grip on Glu Mobile's overall strategy, plus clarify some misconceptions about the company.

Gambling

During the past six months, Glu's shares temporarily spiked from an announcement of a move into mobile gambling with United Kingdom partner Probability PLC, and then the legalization of on-line gambling in some states in America such as Nevada and New Jersey. Day traders thought they were riding with lady luck, but the goose in share price didn't last too long. This is primarily because this relationship with Probability will not be a material contribution in 2013. Both Mr. Cannon and Mr. Ludwig emphasized this during their presentations.

Glu management believes they are just scratching the surface of what could become a meaningful revenue stream for the company. Here are some paraphrased quotes from the two presenters.

Greg Cannon:

Obviously long term you will want to be in the U.S., but with the legislation in Nevada and New Jersey, it is still too early to tell where Glu fits in. Do we want to go after our own license? Do we want to just work with a partner? So we will evaluate and use the knowledge and experience for gaming with working with Probability to determine that long term strategy.

Eric Ludwig:

We're definitely the early stages, and that’s the reason why we’ve not given any number for guidance to this in our numbers today. The UK market is still a very small revenue generating market for real-money gambling with the big prices in the states. But we think long-term, this is a great market, and has a great opportunity in the United States. Then there’s a lot of different ways to attack it, either with or without getting licenses, doing real money gambling on skill-based level and sweepstakes.

I don't know about you, but when I hear the word sweepstakes, I think of the Irish Sweepstakes, like the lottery. I'm not sure if this is what they are alluding to, but perhaps it's an extension of the mobile slot games they are providing for gamblers throughout the UK. With Probability, they are launching a White Label social casino with Zinga, Blackjack and Roulette. However, it must be emphasized, this won't be adding anything significant to the top line for awhile.

Monetization

Glu Mobile now has forty million active users playing their games on a monthly basis. Ninety percent of these consumers are on smartphones and tablets. Glu made a clean break from feature phones, and have now transitioned to primarily the iOS (AAPL) and Android (GOOG) operating systems. However, as well as Glu has executed in core game play, production values and consumer reach, they've come up short where monetization is concerned. This is why they're on the hot seat, not as a gaming entity, but as a publicly traded company.

I think management showed backbone by being up front with this, and highlighted it as the number one priority for the company as they transition from a player vs. environment organization, to a player vs. player production house. Eric Ludwig acknowledged that with the previous player vs. environment platform, the company didn't have any home run games using a baseball analogy. Just a lot of doubles and triples, or at least this is how I interpreted it. This is why the company is focusing on more social interactivity.

Games-as-a-service, Social Gaming 2.0, Player vs. Player, whatever you want to call it, this is where you're going to get the blockbuster games. They made a big step in the right direction by purchasing GameSpy last year, but now they have to produce. Although Glu Mobile has been in business for twelve years, it's still a turnaround story on Wall Street, no matter how high their production values are. They've got nowhere to run, but there are now low expectations for the company where last year, it was just the opposite.

You don't have to be a bean counter to know that monetization matters. If Glu doesn't start to increase revenues, it could be a death trap, just like Rite Aid (RAD). Rite Aid is the third largest drug store chain in the United States, yet their stock hasn't gotten over $3 for ten years now. I'm not suggesting this will be the fate for Glu, but pointing out that just because a stock is inexpensive, doesn't guarantee instantaneous results.

Third-Party Publishing

A new venture for Glu Mobile is their third-party publishing division. This may be exactly the right medicine to get the stock in gear because it will increase revenues for the company in 2013. Glu is a successful developer, so they know how to get a game to the international market. What they are doing now is partnering with small gaming companies in China, Japan and Korea that have achieved success in their native markets, and are bringing those games to the Western World by localizing the languages to English, Russian or Portuguese.

Glu has long track records with Apple, Google, Facebook (FB) and Amazon (AMZN) to get these third-party games to the right distribution channels. They're anticipating launching at least six third-party publishing titles in 2013. Two early in the third quarter, and the balance late in the third quarter, or the fourth quarter. In the long-run the third party publishing division would have the same EBITDA margin as what their internal studios will have.

Greg Cannon commented about the margin profile where it concerns the third-party games:

Obviously in the near term the gross margin will be impacted because we’re having to pay a rev share back to those partners initially. We have brought down our full year guidance to 88% on the gross margin basis to allow for those rev shares, but ultimately by reducing the R&D investment on the third party publishing, you still get to it the similar long term EBITDA margin.

It should be noted that Glu ended the first quarter with $21 million in cash, DSO [days sales outstanding] less than 60 days and no debt on the books. However, they are guiding lower to $14 million in cash by the end of the year without having to tap the capital or equity market.

Conclusion

Gambling, monetization and third-party publishing were the brunt of both presentations. Management also spoke briefly about the Quad Screen Future where they will be bringing Glu Mobile games to Apple laptops and HDTV's in addition to smartphones and tablets. You will be able to scale Glu games to all of these consumer products. Even now, you can do this to some extent. However, that is a reach into the future, and I'm more concerned about the next twelve months.

Bottom line is that the company restructured in November after a very promising Summer of 2012. What a difference a few months makes. If you want a turnaround equity with a lot of potential, Glu Mobile is the place to be. However, even though they are the poster child of pure-play mobile gaming, it's a risky investment, like all turnaround stocks.