Mark Gomes'  Instablog

At the time of QAD's IPO, the company owned 28 acres and 54,000 square feet of office space which it was carrying on the balance sheet at $8.9 million. During fiscal 2005, the company took on $18.0 million of financing and constructed its new headquarters on the property. Thus, QAD's total real estate investment was $26.9 million.

Based on our (and other) valuation estimate(s) of $50M+, QAD's property is currently understated on its balance sheet by about $25 million.

To double-check this calculation, we utilized a second methodology:

Since the time of its IPO, land price indexes in the area have risen between 135% and 170%. Based on the carrying cost at the time, the company is likely sitting on at least $12-15 million of unrealized gains on the original property. Of course, this assumes a 1997 purchase date and is solely based on the original financing and carrying values. Regardless, we'll stick with the lower figure ($12M) for the sake of conservatism.

By comparing the geographical breakdown of QAD's property & equipment balance to its geographical revenue breakdown, we estimate that its Santa Barbara headquarters (land + building) is now being carried on the books at just over $20 million. That's $6.9 million lower than the original $26.9 million. In addition, the $18 million loan it took to construct the new headquarters now has a balance of $16 million (all data as of the end of its 2012 fiscal year).

Via simple arithmetic, we calculate a second estimate of unrealized profit:

$12M + ($26.9M - $20M) + ($18M - $16M) = $20.9M

This brings us pretty close to the original $25 million estimate. Keep in mind, if we go with the higher end of the $12-15 million range above, our second estimate becomes $23.9 million.

Considering QAD's cash and deferred revenue balance, this $21-25 million is an significant addition to the company's true net-asset value. Juxtaposed against its free cash flow and maintenance revenue stream, it becomes easy to see the value represented in its current share price.

Disclosure: I am long QADA, QADB.

Here's a link to HIMX's product page. Not flashy, but certainly real, functional, and modestly informative.

http://www.himaxdisplay.com/en/product/info.asp

Here's what I see there:

(click to enlarge)

On my computer, each of the Product Information links work. FYI, I'm not a technical expert, but the color sequential specifies digital, as opposed to analog.

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This post was formed as part of my response (pasted below) to Mr. Karl Guttag in my previous blog post, "Karl Guttag Weighs In On Himax And Google Glasses"

seekingalpha.com/instablog/84364-mark-go...-glasses

Hi Karl,

Thanks again for lending your expertise on this subject. I think everyone can see that your motivations are purely to uncover the truth about the progression of this exciting market. In many people's eyes, my motivations are apparently more questionable! But as an American, I believe everyone is entitled to their opinion. :)

Frankly, I believe we both just seek the truth. If HIMX is unlikely to serve GOOG's needs, I will graciously reverse my stance. I would also probably purchase shares of KOPN, since their odds of being designed into GOOG would be higher if HIMX's odds are lower. However, after doing some research on your concerns, I still believe HIMX is the most likely beneficiary.

Here's what I've found:

First, addressing the trouble you've encountered with their website, I've clicked around the site often. I see the "¡@" that you see, but I also see their product information. I did have some initial issues with a Firefox browser, but no issues with Explorer. I've provided a link and screenshot in an instablog post (More HIMX Information & Product Website).

From what I've gathered, HIMX didn't give up on LCOS. It's actually a growing revenue line for them. To your point, it appears that they had to work very hard to build its transmissive and color sequential capabilities. Via their earnings calls and direct discussions with company representatives I have also gathered the following:

• They've been working on these capabilities for several years, investing over $300 million into R&D over the past four years (imagine what could be done with a budget like that!). By comparison, KOPN's R&D spending over the same timeframe has been just over $80 million (this is not a knock on KOPN; just a reference point…I happen to like their positioning and its prospects for Golden-i)

• They made it clear that they are not publicly disclosing all of their capabilities and/or offerings for competitive purposes.

• They have publicly disclosed several capabilities, beyond LCOS, that fit nicely into the Google Glass vision. Here's a quote from their last earnings call -- "Also adding to this growth were our pilot shipments of LCOS microdisplays for the new and exciting head-mounted display application. Our fourth quarter non-driver businesses overall grew 27.6% year-over-year as many products experienced double-digit growth. Such products include CMOS image sensor, touch panel controller, power management IC, white LED driver, wafer level optics, IP licensing, and operational amplifiers."

• They do have a LCOS factory (public knowledge). In fact, LCOS is the only thing they produce in-house. I have also ascertained that it was built for scalability, such that 5M units/year of capacity can be added for $25 million.

• The company has stated that the LCOS we are discussing has an ASP in the $15-20 range, so it has to be a bit more sophisticated, since lesser components would be closer to $5 apiece. At $15 per unit, the revenue-ROI on factory expansions is four months and the margin-ROI is about 8-12 months.

Adding that $15-20 to the ASPs on the other parts listed above, HIMX has the capability to reap well in excess of $50M of revenue from a 2 million unit order. As the market and competition expands, that 2 million / $50M can quickly move to 20 million / $500M.

For the sake of my readers, I reiterate my stance that I don't refute any of your technical claims (to do so would be lunacy!). My background (going back to my hiring at IDC in 1994) is in working closely with industry experts (such as yourself!) and digging up key data points - pieces of a mosaic that has yet to be fully revealed to the general public :^)

Frankly, I see plenty of room for MANY vendors to benefit. I have simply started with HIMX, due to my calculation of the odds that they are playing a part in Google Glass.

Thanks again for gracing us with your wisdom!

Mark G.

p.s. Here are some additional key comments from the last HIMX earnings call:

"there are quite a few segments which, we believe, as we move along to Q2 and second half, will pick up strongly. And they include among others CMOS image sensors, LCOS microdisplay, touch panel controller, et cetera."

"I just also want to mention LCOS. I think starting second half hopefully, we will some exciting growth, but probably certainly much less, though, in the first half when we will still be going through engineering runs with our customer. But that is on panel display. And there are non-panel display applications that we are working along with a few leading players in the world. So we are excited about that. But again, in terms of LCOS, you won't really see meaningful volume until second half of the year."

Unmistakably, they are working on SOMETHING that is coming out in the back half of the year… ;^)

Disclosure: I am long HIMX.

In the wake of my article on Google Glass and Himax, we had the honor of a response from Karl Guttag himself. Karl is one of the world's foremost authorities on LCOS technologies (among others). His credentials are too extensive to list here, but I encourage everyone to check them out here: http://www.kguttag.com/about-karl-guttag/

His response seems to have sparked the precipitous reversal in HIMX shares today. Keep in mind that I neither endorse nor condemn today's move. That being said, I maintain my belief that shares of HIMX are poised to triple. How and how fast it gets there is not something I can forecast (in fact, I'm a terrible trader). My strength -- and the basis of Pipeline Data -- is in fundamental analysis.

Without further ado, here's Mr. Guttag's note…and my reply.

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Mark,

Thanks for referencing my blog and your kind words about my expertise, but I would like to correct/comment on a few things in your article and related comments.

As my blog (and other comments) have pointed out, I think it is unlikely that Google is using a Himax LCOS panel in the newer design. I was just pointing out the fact that the old prototype used a Himax panel. Himax's current LCOS site does have the appearance of being "abandoned" with broken pages and missing links.

It is no simple matter to go from reflective LCOS to a transmissive panel as the technologies to form the transistors are radically different. The major technical different that it requires the transistor to be on a glass/clear substrate rather than silicon. There are other companies such as Kopin and Epson and others who are much more established players and are much more likely to be providing transmissive panel than Himax. I don't know what information you got from Himax, but there is a chance that there was a communication error.

Himax has sold their color filter LCOS panels into products sold in China and/or India for several years. So selling 20K in a quarter would not necessarily indicate a build up for Google Glass.

Additionally as my blog points out, I am more than a little skeptical that any head mount display, including Google Glass, is ready for "prime time" high volume sales any time soon. Just because a lot of companies are looking at and researching something does not mean that it is about to happen in high volume. Head mount displays while solving some problems, have a hole host of issues that have I have yet to be convince have been solved.

Karl

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Hi Karl,

First, I thank you for your note…and more so for the expertise you routinely share on your blog. I believe it is a must-read on the topics you cover.

In regards to your comments, I concede all technical points. You are by-far the expert on this subject. Along those lines, I read and understood your thoughts regarding the likelihood of Google of utilizing a transmissive panel in the commercial-launch version of Google Glass.

It would be understandable to dismiss Himax on that basis. Indeed, their website could use some updating, but I assure you that it's functional. http://www.himaxdisplay.com/en/product/info.asp

Comparisons to past iterations (via Google's Wayback Machine) show that changes are made fairly regularly. Most importantly, its ties to LCOS are alive and well. My colleagues and I have contacted several folks in the industry to check on the status of each competitor's offerings. Specific to HIMX, I asked the company directly. This was the response:

Mark,

I just heard back from the CFO, Jackie Chang, on your question.

The answer to your first question is "Yes" the Company does offer a transmissive color filter device.

Best regards,

John Mattio
MZ Group |Senior Vice President - MZ North America

I have no doubt in your assessment of the difficulty involved with moving from a reflective LCOS to a transmissive panel. Not surprisingly, my communications with Gartner Group yielded no refutation to any of your expertise either. However, I believe that the feedback from HIMX's CFO would imply that they have indeed crossed those tough, but surmountable hurdles. Indeed, $80 million of annual R&D spending can go a long way.

Further, as your excellent detective work revealed, they were in the prototype. While that's no guarentee of being designed into the final product, indications seem to point in that direction, including the company's claim to offering a transmissive CF device, along with its ability to offer Google a color sequential device, should they choose to pursue that path in future versions. I haven't been able to identify any other company that offers this combination of capabilities.

As for your skepticism regarding the readiness of Google Glass for prime time, that is surely the debate du jour! Sergey Brin certainly did his best to show what Glass can currently do and moved up Google's timeline for launch. I can only assume that they feel confident in the progress they have made.

I have no doubt that the first iteration will reveal issues that will need to be addressed. Battery life and price come to mind. That being said, it is my understanding that HIMX is mulling a multi-fold increase in its manufacturing capacity, which is already measured in the millions.

Frankly, I wouldn't consider a couple million units to be a runaway hit. However, for HIMX it would represent substantial upside relative to what is currently baked into the Wall Street estimates. Such upside and future prospects could move the stock toward the "growth" category in investors' minds which would warrant a EV-basis P/E far in excess of the single-digits it commands today.

In short, I don't refute any of your points -- our facts are not in conflict. Rather, your research and mine seem complementary.

Thanks again for your generous contribution. I welcome the honor of any further thoughts. My curiosity is always piqued by the pursuit of the truth and you provide much to the world in that regard!

Kindest Regards,

Mark G

Disclosure: I am long HIMX.