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David Eller
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David is an independent financial advisor with 15 years of experience. He began his career at Morgan Stanley where he worked on the #1 ranked Institutional Investor research team in Enterprise Software. Since his time at Morgan Stanley he has worked for one other Investment bank, two technology... More
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Ronin IP
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  • Why Options Traders Think Blackberry Won't See A Big Earnings Miss

    When a technology company reports earnings, a stock can move as much as 10% up or down on a solid earnings beat or miss. In the case of Blackberry, sentiment has been terrible since the last earnings report but a big move isn't implied by the options premium.

    Traders a pricing only half the downward move of last quarter
    At the money puts expiring this Friday are only pricing in a 4.4% move to the downside. This means that traders do not believe Blackberry's share price will be as volatile after earnings as it was last quarter.

    At the money means that the strike price is consistent with the current share price so if shares of Blackberry are trading at $8.00, a put with an $8.00 strike price would be considered at the money.

    Small put premium compared with last quarters post earnings move
    Since Blacberry's puts that expire this Friday are priced at $0.36, traders are expecting that a miss would cause no more than a 4.4% move downward. This is much less than the 7.1% decline that Blackberry experienced after its last earnings report.

    Last quarter saw a big negative reversal
    Just as a reminder, on 3/27, Blackberry shares closed at $9.05 and after earnings, the company gapped up initially to $9.20 before concerns over continued revenue declines and a massive drop in cash (partly due to the accounting treatment of debt) caused people to become more cautious.

    Isn't sentiment negative?
    What gives? Isn't sentiment around Blackberry extremely negative? Every article we see from the press indicates it is one step away from demise. What are the options traders seeing that we are missing?

    Risk is to the upside
    Maybe they understand that reports of Z3 sales in Indonesia were strong, expenses have been brought down, Blackberry is closing the app gap by embracing Android, manufacturing is being done at a lower cost, real estate has been sold off and a debt offering has been completed to stabilize cash somewhat.

    How to play it

    In our last article on Blackberry, we suggested a conservative long strategy into earnings might be appropriate for some investors. Buy the stock and a married put for a total cost per share of $8.36. This allows investors to participate in upside over multiple weeks but shelters them from short term volatility for two days after earnings are announced.

    New product, lower cost structure, and new strategy. Options traders seem to think that the risk of a painful miss is less likely than last quarter. What do you think?

    Disclosure: The author is long BBRY.

    Additional disclosure: The author is long puts.

    Jun 18 6:53 AM | Link | Comment!
  • Expectations gap closing but not closed
    This piece was published through TownHall earlier today...

    Palm reported quarterly results that showed a significant 29% sequential decline in smartphone units sold through.  We believe results are beginning to reflect the lower than expected Palm Pre sell through at US and international carriers.  This is a step towards closing the gap between guidance and buyer behavior.  However, we believe that revenue guidance continues to reflect volume and pricing targets that will be increasingly difficult for the company to meet.  We continue to believe revenue guidance is at risk.  At this time, we continue to believe that PALM shares are a source of funds and reiterate our Unfavorable Opinion.  We look to become more positive on the company's fundamentals when we see traction of sell through with either the Pre or a future handset at a major carrier.

    We believe that the bullish case for owning shares of PALM is driven by a focus on new carriers and new products.  The weak sales at Sprint can be blamed on Sprint's ability to sell the phone and when released with Verizon and AT&T, results could be better.  This may be the case, but investors need to ask themselves why a carrier such as Verizon would commit meaningfully to sell or market the Palm Pre when it could get the same revenue stream by offering a less expensive Smartphone such as the HTC Eris or RIM devices.  It is clear that the Pre is not bringing new customers to Sprint, as the carrier had hoped so why would a carrier such as AT&T aggressively back a phone that is just "good”?

    We believe that wholesale prices are coming under pressure in a phased process.  First, co-marketing dollars will be cut for handsets that are not substantially differentiated, shifting the sales, and marketing burden to the handset manufacturer.  Second, store placement of the handsets will begin to shift to indicate which handsets are getting the greatest sell through.  Lastly, handset manufacturers will be forced to capitulate on wholesale prices to enable carriers to offer handsets at low or no upfront cost to consumers while offering a higher margin for the carriers.

    PALM stated that it would be increasing spending in the coming quarter to "support its expanding business" but it is backing away from its profitability goals.  The company is now saying that being cash flow positive and profitable on a quarterly basis requires "carrier partners to execute strongly on the upcoming launches and successfully drive sustained sell through.”  However, the carriers are in the catbird seat, as increasing competition among the handset manufacturers will allow carriers to be more selective. 

    The company does not appear to be dramatically increasing reserves for doubtful accounts or returns yet.  Doubtful accounts rose a bit, by ~$500,000 less than a $1 per handset shipped.  This increase is more likely due to PALM's new relationship with Telcel, a carrier that has the bulk of its subscribers on prepaid contracts.

     

     

    4Q09

    1Q10

    2Q10

    Accounts receivable net of allowance for doubtful accounts

    66.5

    76.6

    72.4

        Allowances for Doubtful accounts

    0.350

    0.357

    0.845

    ADA as a % of Gross Receivables

    0.5%

    0.5%

    1.2%

    Other Accrued Liabilities, which contains rebate obligations, declined in the quarter indicating that returns are not an issue.  We estimate that there are nearly 500,000 Palm Pre units in Sprint's channel and we will be watching this metric as the inventory ages.

     




    Disclosure: No positions in PALM
    Dec 18 12:34 PM | Link | Comment!
  • NVTL, PALM: When the Music Stops, the Ponzi Impact of Sell In Revenue Recognition

    We, as analysts, can learn a lesson from Novatel’s (NVTL) financial report that applies to PALM as well.  Novatel, facing deteriorating financial results from a dated product line, released a new product (Mifi) that created overly optimistic expectations and dramatically disappointed shareholders. 

     NVTL released Mifi, a device that combines a 3G data access with a wifi hub in the June quarter.  Consumer response has been strong, reviews have been good and in its first full quarter shipping, accounted for 40% of revenue.  This success has led to nosebleed high earnings growth rates for 2010.  However, these expectations were based on continued revenue contribution based on sell in. 

     The company has been seeing increasing sell through each month since launch.  This success has attracted many additional carriers leading to 11 new customers for Mifi in C3Q09.  However, this success does not mean sell through has kept up with sell in.  The company owned up to this issue and guided C4Q09 results below consensus leaving shareholders with a 20+% overnight decline.  From our perspective, management should be commended for providing conservative guidance rather than aggressively anticipating new relationships to make up for a longer sales cycle which may lead to disappointing financial results.  Despite today’s sell off, if there are indications that sell through picks up as we enter the Christmas season, the stock will likely begin to recover quickly.

     Not all companies take this approach to financial visibility however.  PALM launched the Pre in June and has led people to believe the discrepancy between sell in and sell through are negligible.  We have a contrary opinion and believe that the gap is much more substantial than PALM’s “devices sold” metric would indicate.  The belief that additional products, sold through additional carriers will cushion the blow of lower than expected sales, is a pipe dream based on ponzi like distribution.  We believe that holders of PALM into the November quarter financial results risk a negative surprise similar to what holders of NVTL are experiencing today. Consider the comparison of the two companies:

     Product launch - NVTL launched with Verizon and Sprint in May and June, PALM launched with Sprint in June

     Follow on customers - NVTL signed 11 additional customers since the initial launch, PALM signed 5 additional carriers

     Sell through - NVTL has seen increasing sell through in every month since launch, PALM has seen slowing sell through (based upon our channel contacts) since the initial launch.

     Customer concentration - NVTL had 3 customers that accounted for 70% of revenue in the quarter, PALM had 1 customer that accounted for 85% of revenue

     Valuation - NVTL is trading at 1.5x book value, PALM is trading at -5x book value per share

     We highlighted Mifi as one of the most important products to come out of  this spring’s CTIA and are in the process of determining the natural level of sell through.  If we find that sell through is accelerating and sustainable, we will be publishing an investment opinion on NVTL in the near future.  Currently we have an Unfavorable Opinion on PALM.

     For a broader discussion on either NVTL or PALM, please contact us. Also, feel free to offer your thoughts at our blog: http://blog.townhallresearch.com/ .

     David Eller has no positions in either PALM or NVTL.

    Oct 30 10:56 AM | Link | Comment!
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