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follow up earnings and CEO thoughts ?2
19:48 27-Feb-18
The Resonant and Energy Recovery presentations have concluded. I'll start with former and end with the latter, sandwiching a few new comments on AES and FIT in between. There's a lot of detail, none of which significantly changes the outlooks I've already expressed. So, as per the ranking, feel free to skip this if you're not one of those who wants to know everything.
---
Resonant spent a great deal of time reviewing its growth but the
two pieces of new information were that 5M units have already
shipped in January and that it expects royalty revenue to grow to
seven digits by year end. Both represent very good growth, but if
the latter projection is not topped by much, it will represent
only one fifth of analyst estimates for 2018.
$19.5M on the balance sheet could last most of the way through the second half, but we'll probably see a capital raise in a single digit number of months, given cash burn rising to nearly $5M per quarter as the company continues to expand its headcount from 50+ to 80+. As always, my main concern will be the terms of dilution. Furthermore, given the rate of growth, unless the size of the capital raise increases dramatically, this year probably still won't be the last of it.
RESN hasn't done much after hours, and I expect to see it continue to languish below $5 tomorrow and for some time to come while we assess the pace of growth in coming quarters and eventually get details on procurement of further capital.
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By contrast, AES was one of the few stocks that rose sharply
today. I wouldn't be surprised to see that continue, given how
undervalued it has been, but of course that will be colored by
broader market movement. The main detail to be added from the
conference call is that the company now expects to reach
investment grade in 2019, one year earlier than originally
expected. It's also worth mentioning that this is another company
that points out that the new tax code requires more clarity. So
far, management expects it to represent a 5-8 EPS cent hit for the
next 2-3 years, dropping off after that, but I expect some pretty
significant accounting adjustments going forward. In the
meantime, AES Corp. continues to build out new
facilities while selling or cleaning
up others. Fluence contributions are still at least a few
years off, but that is to be expected given the length of most
projects.
---
Fitbit did release
an Adidas co-branded Ionic today, but it's not really a new
product, and I don't think it changes anything. Again, the new
tax code looks quite troublesome for Fitbit, given the weakness in
America vs the rest of the world. The heart of the problem,
though, is that the company is finding its (increasingly
international) customers to be very price sensitive, which should
be no surprise. Consequently, the focus on more expensive smart
watches is pressuring gross margins, which is exactly the opposite
of what you want. In retail, the rule of thumb is that you can
either compete based on best features, or on lowest price. The
former is better but the state of Fitbit's software is clearly
forcing it to the latter end of the market.
None of this is to say that Fitbit is already in the grave. There is an argument to made that downside is limited from here, based on the balance sheet. One might add a net $47M of line items expected this year to the $679M already there, but then you might also want to subtract out $110M of stock compensation for 2018. If not, you'd at least use the expanded share count, to arrive at a projection of $2.72 per share at the end of 2018, if management can succeed in being cash flow neutral for the year. This is not a major impact, but it compares unfavorably to the current $2.83 per share on the balance sheet as of this report, which goes right back to the expense of developing the software platform that I've been harping on for months now.
Looking further out, increasing corporate interest in health care may eventually make a market for Fitbit products and centralized data from them, but some of it will be siloed and one still has to wonder at what margins the rest will come. Reading between the lines, management pretty much admitted that fixing up the software is going to run into next year. Unlike many out there, I admire the honesty, and think that preserving the balance sheet as best they can while going after a long-term opportunity to play a part in digital health research and care is smart. However, none of this adds up to a reason to own FIT shares now.
---Continuing with the CEO commentary, Energy Recovery's impromptu
presentation from its new one this evening added a few minor
updates. First of all, it was stated that there is no formal
search for Gannon so far. An analyst already commented today that
he will be an improvement because Gay had lost credibility. That
seems to be a fairly common opinion, but what will ultimately
matter in the short term is VorTeq success or failure. My
thoughts are that executives play a secondary role, at the very
best, in such outcomes. That said, Gannon seems less forcefully
optimistic than Gay was, and it may at least be easier to get
realistic, if less optimistic, projections from him.
To that end, VorTeq discussion seemed to admit that the softer
grade of tungsten carbide which experienced erosion problems was
Energy Recovery's decision, as I suspected. The entire PX, not
just end covers, is now moving to the harder grade tungsten
carbide. Supposedly, the new missile design will address the
prior vibration issues that were experienced with this setup.
Gannon also admits, what I thought should have been obvious from
the beginning, which is that there is no substitute for field
testing. That in turn implies that the internal testing may not
be conclusive. So, even though the time table that I outlined
previously was confirmed, putting initial field testing in the
latter half of the second quarter, I think I've been quite right
to say that success is not assured.