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Marty Chilberg
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Marty Chilberg is a seasoned financial professional with over 30 years of executive leadership, board, consulting and advisory experience.  He began his career as a certified public accountant (CPA). He moved to Silicon Valley in 1981 to begin his career in the software industry, working for... More
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  • Natera: What Will It Take To Achieve Revenue Guidance?

    Now that the Natera (NASDAQ:NTRA) earnings for the September 2015 quarter have been digested (see analysis here and here), here's a look at the analyst revenue targets for the next quarter and year.

    The analyst forecasts for revenue in Q4 2015 are as follows (Yahoo link):

    • High $46.4m
    • Low $44.3m
    • Consensus $45.5m

    These forecasts all fit within the updated company guidance for 2015 of between $180m-185m. Based upon the analyst forecasts it appears most are forgetting the company commentary from the August 15th Q2 earnings conference call. CFO Herman Rosenman stated: "We believe revenues may be adversely affected by entering in-network contracts with certain payers, which has long-term strategic benefits and which we expect to occur in the second half of the third quarter or in the fourth quarter of 2015." In light of now three quarterly sequential revenue declines and noting this cautionary guidance, it would appear that some uptick in unreimbursed tests to close out the year is needed to achieve above the low end of the range. This could very well happen, but after years of watching other molecular diagnostic companies with similar recognition difficulties it's clear that cash reimbursements are highly unpredictable.

    Looking forward to 2016, the analyst revenue forecasts are:

    • High $242m
    • Low $200m
    • Consensus $223m

    Company guidance on the recent conference call included this statement from Mr. Rosenman: "We have no change to our 2016 guidance, which I will reiterate here. We expect to achieve revenues of $220 million to $240 million in 2016, assuming robust adoption and reimbursement of the Panorama test within the average risk population in 2016." During the Q&A session management was asked whether they are tracking the 2016 guidance given the reiteration. Mr Rosenman's response: "I think you can assume that in our model, which also, in turn, assumes robust adoption, that the adoption we assume for 2016 is greater than we have seen." Based upon these comments it would appear the following are needed for the guidance and consensus targets to be met:

    1. NIPT is endorsed as Medically Necessary for average risk pregnancies in the first half of 2016.
    2. This declaration of medical necessity in average risk needs to prompt a robust adoption of Panorama.
    3. Any resulting increase in billings will be recognized in 2016.

    Trying to gauge the probability of each of these variables is challenging. My reactions are:

    1. Seems highly likely (90%) that this will occur sometime in 2016 and perhaps more likely than not (60%) that it would occur in the first half. Illumina (NASDAQ:ILMN) CEO Jay Flatley mentioned on their last earnings conference call that he thought average risk would be endorsed in the second or third quarter of 2016.
    2. Panorama is currently best positioned to take advantage of the average risk market based upon their field sales relationship to the OB/GYN community and their acceptance of tests regardless of reimbursement probability. Given that I would target this probability around 80% for volume acceleration unless the company alters it's policy of disregarding coverage and reimbursement probability when accepting orders.
    3. This achievement appears the most daunting for the company. I would put the probability at around 20%. This lower likelihood is based upon the following data points:
    • Currently only about 25% of Natera revenues are recorded on an accrual basis.
    • Approximately 25% of the quarterly NIPT accessions are being recognized in the quarter processed.
    • For the remaining 75%, trends indicate that roughly half will result in some recognition in the future and the other half will not. I've seen no disclosure about the average age of billings that are recognized from prior periods.

    As has been seen with other diagnostic companies, one way to accelerate recognition is to alter the billing relationship. This could occur in a couple of ways:

    1. Eliminate any billings to coverage providers until coverage contracts are negotiated. This could be done by accepting a much lower average price from patients up front with an agreement not to submit a bill to providers for reimbursement. This has been seen with some sequencing companies with marginal success. This option might generate sufficient revenue to achieve the company guidance while potentially decreasing short term margins and long term cash flows.
    2. Achieve in-network status for average risk quickly for a meaningful percentage of the test mix. The hurdle here is the price determination and resolution of past disputed billings. Natera will need to decide how much of a discount to accept if it wants to go this route. Additionally, Natera screens for microdeletions when requested at an additional cost. If standard average risk NIPT incorporates this screening at a lower price it will likely add to the reimbursement negotiation challenge.

    Finally to recognize any billings, revenue recognition rules need to be applied. Conversion to accrual basis recognition can't occur until there is 1) a definitive agreement, 2) a price that is fixed and determinable and 3) some collection history to prove billings are collectible. Overall I credit the company for qualifying their guidance relative to these contingencies. Let the investor gauge whether or not they will occur as part of their own investment thesis.

    Nov 27 1:55 PM | Link | 1 Comment
  • SunEdison: Is The Bottom In?

    SuneEdison (NYSE:SUNE) has seen a massive selloff over the past few weeks/months caused by growing liquidity concerns. This fear has been stoked by a very convoluted structure and strategy. Just 2 weeks ago Deutsche Bank analyst Vishal Shah defended the stock by reiterating his buy and $28 price target, taking on career risk in doing so. After a brief rally, the stock continued on it's downward trajectory, selling off another 50% to under $3 per share. In the past few days a number of changes have been announced by the company to ease investor concerns and they appear to have finally put in a bottom. Today the stock is up 40% but is still well below the $6 price it was trading at on the day Vishal Shah provided his views.

    This one is still a very high risk stock but the risk/reward seems to tilt to the buy side. The upside potential is very high noting the recent price history over $30 and the price target support at $28. The downside risk is real. Layered risk needs to be deleveraged to reduce debt default risk or bondholders could squeeze equity out. There appears to be at least a year before that could occur. Analysts seems just as confused as investors as indicated by the price target range of $3 to $42.

    It' also worth noting that investors should take care to read the 8K filings associated with any company press releases. There are material disclosures that are included in the SEC filings that are being excluded from press releases. For instance the recent $231m drop down to their Yieldco included a notable $150m current cash infusion which was the focus of the company press release. In the 8k they disclosed that this would be refunded should they be unable to reach agreement on some issues still being negotiated.

    Tags: SUNE, Solar
    Nov 24 3:50 PM | Link | Comment!
  • Comtech: Initial Look Suggests Caution

    As I mentioned in my previous post about the Comtech (NASDAQ:CMTL) purchase of TeleCommunication Systems, Inc (NASDAQ:TSYS), I purchased an underweight position in Comtech. I intend to spend some time analyzing the combined company operations and liquidity over the coming weeks. A first glance look at the combined operations shows several positive attributes including cross selling opportunities, geographical opportunities, minimal product overlap and organizational synergies.

    However the leverage of the combined companies appears to suggest that Comtech will look source capital through a secondary offering post transaction to reduce their debt load. A simple back of the envelope look at the balance sheet:

    • Combined cash level today $200m
    • Projected payoff of TSYS debt $145,
    • Cash cost of tender offer $340m
    • Deal costs $30m
    • Combined capital need in excess of cash $315m
    • Credit line negotiated by CMTL to fund transaction $400m

    The bottom line is that the company will very likely decide to reduce their leverage by raising equity capital post transaction. They state in their deal presentation that they intend to retain the existing dividend payout. The following statement seems quite likely to occur: The credit facility provides that Comtech may conduct an equity offering for newly issued common shares to reduce total leverage prior to or after the close


    This looks like a combination worth watching but investors should be cautious about committing capital until this settles down a little. I sold my starter position until I learn more about any secondary offering. The integration and leverage risk is a bit too high in the short term for me given the current capital market volatility relative to credit issues. I still see some interesting upside once the balance sheet is addressed.

    Nov 24 11:57 AM | Link | Comment!
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