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Marty Chilberg's  Instablog

Marty Chilberg
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I'm a retired CPA who spent the majority of his working career in technology companies. My work included management stints at Atari Inc, Daisy Systems Corp, Symantec Corp and Visio Corp. My last position at Visio (VSIO) was as CFO and VP Finance and Operations.
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  • TeleCommunication Systems, Inc-Taking A Flyer Into Earnings

    TCS (NASDAQ:TSYS) appears ready for a rebound. I'm taking a position leading into earnings given the number of signs I'm seeing that their business metrics have indeed bottomed and the business is rebounding. This may be a little early but given the current valuation, I'm happy to be early and add on any weakness if I hear some confirmation of the trends on the conference call on Thursday.

    My bullish thesis is based upon the following:

    • TCS reliance on government systems revenues has declined significantly. There is no evidence that they will show improvement in Q3, but the downside risk has been mitigated. Govt systems represented only 16% of 1H-14 revenues as compared to 32% for C12.
    • Commercial revenues improved to over 50% of company revenues for the 1H-14. The commercial segment is made of up of E/NG911 business (48%), LB Apps (28%) and LB Platforms/SMS/IP/secure mobility (24%).
    • E/NG911 business appears to be taking off, based upon company presentations to various state agencies this year. As new PSAPs are implemented, commercial system revenues are recorded. As implementations go on-line, service revenues improve through annual maintenance agreements, subscriptions and call handling services. To put the recent improving business in perspective, in Mar-14 the company disclosed that they had 72 PSAPs live and 26 in progress with a population served of 9.0m. In Sep-14 the company disclosed that they had 146 PSAPs live and 333 in progress with 18m population served. Clearly a very significant jump to date. This should equate to a nice step up in commercial system revenues in Q3 and more importantly much better expectations for Q4 and C15 in both systems revenues and service.
    • Commercial gross margins have improved from 52% for C13 to 60% for the 1H-14. This improvement was helped by the elimination of amortization (written off) but primarily it appears the improvement is a better margin for the commercial lines of business that are growing.
    • The Intrado 911 debacle can only help TCS to maintain or increase their 58% market share.
    • The announced purchase by Planet Labs of the antenna system to track satellites and the Kimball partnership to provide cyber security for state and local networks appear to be evidence that the company is making progress taking the government sector expertise and leveraging it into commercial wins.
    • The Cellcrypt partnership announced earlier combined with the TCS IRIS added substance to their attempts to sell Virtual Private Network capability that is compliant with NSA Mobility Program-Capability Package 3.0.
    • The AT&T Drive Studio announcement is evidence that the LBS telematic SDK toolkit is of interest in the market place and added to the QNX relationship could be poised to provide traction in C15-16.

    There is still downside risk but the risk/reward seems beneficially tilted to a long position at present. Having so little analyst coverage and institutional ownership could also benefit shareholders if these potential upside trends continue and awareness increases.

    Disclosure: The author is long TSYS.

    Oct 27 7:23 PM | Link | Comment!
  • NIPT US Market

    Estimate of the C13 NIPT US market:

    High Risk:
    MaterniT21 Plus 138k (60%)
    148,500 accessions disclosed. Estimated Intl samples per company disclosures 10,500
    Harmony 50K (22%)
    Company S-1 disclosure was 143,700. Intl revenues were 25%. Estimate 100K of accessions were from US market and 50% for low risk.
    Verifi 31K-WAG (13%)
    Panorama 11K (5%)
    Per March Curnow study published they analyzed 31,032 consecutive samples rec'd of which 28,709 met quality control (ignored no calls). Of this group, 17,524 were low risk.
    Total C13 high risk tests estimate 230k

    Low Risk:
    Harmony 53k (76%) (rounded up a little for round total number)
    Panorama 17k (24%)
    Total C13 low risk test estimate 70k

    Cumulative US NIPT Market 300K C13
    Sequenom 46%
    Ariosa 35%
    Illumina 10%
    Natera 9%

    I find it unlikely that Sequenom will be able to report on the High Risk market after this year. It has always been hard because the split or totals for competing tests is not available. Now with VisibiliT and InformaSeq it will be that much more difficult. I don't see how they could determine how much of either test is for high risk nor do I think they will want to try to separate them as it creates new disclosures challenges. So it seems reasonable at this point to look at C14 as a transition year and from C15 on the market will be total NIPT with the low risk component hampered by reimbursement issues until overcome.

    For C14 I'm going to start considering the Total Available Market to be 1.2m:
    - High risk all reimbursable 750k
    - Low risk 15% of 3.35m (assumes 15% of market will self pay when no insurance is available)

    Once the tests become reimbursable (probably sometime in C15) the TAM will increase to all births or around 4.1 for US.

    C14 market recap:
    - MaterniT21 looks to be up modestly for this year to around 148k in US plus 7k from Quest per below for a total of 155k-ish

    - Verifi is likely in same boat with some pull back due to reimbursement/Medicaid issues. No real info available so use 35K as WAG. Note some impact of nonrenewal of PKI contract.

    - Harmony has two significant changes this year:
    1) LabCorp revised agreement to apparently stop paying for unreimbursed tests. Assume this reduced tests by 10-15%.
    2) Effective 8/19 LabCorp launched InformaSeq (ILMN IP). WIth this being effective only for 4+ mths and brand new, the impact this year is likely far less than it will be next year. Call it another 20%.
    Considering normal growth in low risk, the total year test count in US for Harmony will likely decrease but probably not dramatically. Maybe down to 70-80k this year?

    - Panorama lost Quest as their partner but only for last couple of months of CY. Given Quest is 50% of the clinical lab market in US, that is likely a big impact, but mostly in C15. If they did around 30k in C13, they likely did most of that with Quest. Perhaps around 90% if they had a similar experience as what Ariosa had with Labcorp. So 27k is at risk for C15 but only 1/4 of that for the rest of this year. That should reduce their accessions by 7k and transfer most of that business to SQNM.

    - InformaSeq launch means 1/3 of a year's volume from Harmony. Perhaps 25-35k this year?

    - VisibiliT launch is going to be understated this year but I suspect Quest will push it to compete with LH. So we may get 10-15k or so in US this year. WAG only.

    If these assumptions are anywhere close:
    MaterniT21 155k 44%
    Harmony 85k 24%
    Verifi 35k 10%
    InformaSeq 35k 10%
    Panorama 25k 7%
    VisibiliT 15K 5%
    Total tests C14 350k

    No confidence level for the above as it's most guesswork. We will have a much better chance to estimate C15 with some confidence after some data is available on InformaSeq and VisibliT.

    Disclosure: The author is long SQNM.

    Sep 13 3:44 PM | Link | Comment!
  • Microsoft: Dividend Increase Vs Buyback?

    Microsoft (NASDAQ:MSFT) should announce a dividend increase for Q4 in the next 2 weeks and could be the reason why the stock has been strong of late. Interesting decision that could be a tell for investors. Over the trailing twelve months the company has paid out $8.9 billion in dividends while using $6.7 billion to buyback stock, net of issuances. The company has over $30 billion remaining in their stock buyback program announced last September though it's worth noting that this program has no expiration date, allowing management to use discretion. With the stock up 44% over the past twelve months, it wouldn't be surprising to see a reduction of buybacks in F15. If so, additional capital could be allocated to the dividend.

    The 2013 dividend increase announced on September 17th was a strong 22%. I don't expect them to go quite that far this year for many reasons, but would not be surprised with a 10-15% increase. Worth watching to gauge management confidence in future cash flow generation.

    Disclosure: The author is long MSFT.

    Sep 09 11:32 AM | Link | 1 Comment
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