Piston

Piston
Contributor since: 2013
How is it 3x normalized EBITDA? you claimed the EV was $376mm? Isn´t that closer to 9-10x normalized ebitda based on $40mm? 3x normalized ebitda is $120mm which is less than the equity and doesn´t reflect all the debt that sits in front...EBITDA belongs to both debt and equity holders...
Thanks for your article. I don't really see GM as a turnaround at this point. They are already generating great earnings (ex. recall costs) and are making excellent vehicles and selling at high volumes. They just need to continue what they are doing and the earnings power will show. Furthermore, Mary Barra has been at GM for 30 years so it's not as though she is innocent in any cultural issues within the company. She was head of engineering and product quality from 2008 so many of these issues are indeed on her watch also. Company is doing well, most of the worst headline risk is behind them at this point.
non-GAAP earnings is not about differentiating one-off items...it's about excluding the amortization of patents over time which is non cash but technically has to be replaced over time in order to gain new revenues...so using Wi-lans adjusting earnings figure is massively, massively overstating their true earnings power.
Did you miss the fact that not one private or strategic buyer wanted to buy the company? They would have gone private in a heartbeat if they could have...There is no 'meat' behind the $200 million revenue figure...it's purely 'pie in the sky'. you can't create revenues without spending money...last year, they spent over $50mm on litigation and over $50mm on patents tied primarily to getting deals done, not for new revenue opportunities...that's $100mm spent for very little additional backlog...there is no faith on bay street with these guys, none whatsoever...it's a retail/dividend trap. They have over-promised and under-delivered for years...why do you think that it will change? it's the same mgmt team. The cash balance can't be valued. The fact that they won't special divvy the cash tells you they need it all to run the business...i.e. it's not redundant. They went through a 7 month process, and all they came up with was an uptick in the regular divvy and a ridiculous 5yr $200mm plan with no supporting evidence whatsoever.
But how does this translate into the equity value? Are you arguing that the equity is going to zero? that market share drops 400bps in N.A.? there has to be numbers tied to a thesis to support it. Using media hysteria to support a thesis is not enough. You may be correct but the above article is not sufficient for a short thesis.
Michael,
The recall crisis is an unmitigated disaster, without question, but you did not provide any balance to your article. To be short the stock, you have to trade on headlines and/or believe there will be massive mkt share declines from here. It also ignores the fact that product quality at GM has improved dramatically over the years and they have a lot of good, high quality products on the road at the moment. GM has taken $10bn of fixed costs out of the business and has more room to go cutting in Europe and cosolidating platforms. It trades at and EV/unit sales of sun $6k/vehicle vs the others in the $10-$14k region. Perhaps some of the worries are priced in? Their break-even during the bailout was a SAAR of 14-15mm, it is now 10mm. They also have $28bn in cash and $10bn revolver, with at least $10bn of excess liquidity...I have no position in the stock but i think it's starting to be interesting. This was a big hedge fund holding so my guess is there is some forced liquidation going on at the moment. I will let it play out but would look to get long once "peak headline risk" has subsided.
The point is that if they have to use a lot of litigation, then it's not a very good business model - very low ROI. It was great when people would settle but companies like Apple won't settle with WiLan. Further, the fact that they have to buy patent porfolios to get licensing deals done is concerning. It feels like they have to pay up for the bigger licensing deals.
The Company spent $48 million on litigation last year and increased the patent finance obligations by $50 million, and yet quarterly revenues are only going to be up by a few million per quarter, at best. It seems like a low return on investment in a very active year in terms of litigation. The deal with Samsung is murky because they agreed to pay out $26 million over the following 24 months, which means the net inflow from that deal in the first two years will be low. Many of the other signings were obviously quite small. Can any of the v chip licensees be renewed or do those just expire and then go to zero? I struggle to see people paying up for future license opportunities when they lost major cases and the deals they did actually sign were not that favourable. I don't see a private equity firm paying up and I assume that is the route mgmt wants to go.
It's not clear that the company is undervalued. Its has a US$380mm mkt cap and $131mm of cash but also has $52mm of patent finance obligations, $8mm of a success fee obligation...so the net cash number is closer to $80mm. This brings the EV to roughly $300mm. They had $325-$350mm of backlog as of October...that declined by $29mm after Q4 to $296mm - $321mm and will decline after Q1 to $270mm to $300mm without any new meaningful agreements...The backlog will continue to decline each quarter by $20-$25mm. Further, even if we take the $300mm backlog of revenues, we must subtract off the expenses to run the business (opex, R&D, litigation, taxes, etc..) as the shareholder only values the free cash flow, not the revenue...even at 50% margins, the backlog is worth at max $150mm and we must discount this for time. so the net cash plus backlog cash flow is around $210-$220mm or just under $2/share...the rest is what is being assumed for the residual patent portfolio and future license/renewal opportunities...
On WILN, 1 year out (if nothing changes), the backlog will have declined from $325-$350mm to $225-$250mm, so the NAV will be serioiusly reduced though dividends received during the year and/or cash build will offset a portion. I don't see the stock working unless they can show an ability to increase the backlog, and there is not a lot in the pipeline now. Nothing imminent and anything with Apple has to be considered a low probability event. Valuing short life patent licenses using a p/e or EV/Ebitda metric is very flawed.
The problem with valuing WILN at 15x p/e is that there is little visibility on future revenue streams. We know they have a 4 year backlog of $325-$350 million but it is unclear what can be built on top of that given recent setbacks in 2013. I prefer a NAV approach on these stocks to see how much I'm paying for future signings. WILN had $140mm of cash at last Q but remember they also had $52mm of patent finance obligations, $8mm of succee fee obligations and $32mm of A/P vs. just $12mm of A/R...so the net cash is much lower. That being said, numbers should start to look good in Q4 and heading into Q1. Q1 should be $24-$25mm of revs vs $18mm in Q1 2013 and significantly lower litigation costs so the comparisons will look better. Its' not abundantly clear to me how they grow the running royalties of $24mm beyond 2014 without major litigations in play.
Insiders lose all the time. PW has lost on several other investments. There is no special treatment for his common equity.
I think Fairfax backed away because there was zero interest. Not one Canadian pension fund stepped up for the debt offering and they all have very developed and sophisticated debt and private equity groups. Fairfax debt piece may be profitable in a restructuring but the initial $750 million common equity bet they made will suffer the same fate as everyone else if the cannot turn things around.
While Heins was no miracle worker, its unfair to throw him under the bus given he simply executed the plan Laziridis and Watsa pushed for. The fact that they failed to sell was the result of a bad strategy from the board level. Everyone knew Heins would push Hardware when he took over. I think the outcome was even worse than the bears thought given they had an installed base to sell into.
There is very little downside for John Chen here. People assume the company is beyond repair, which may be accurate. He gets a big pay package and his comp. will still be quite nice even if the equity value deteriorates by half or more from here. Presumably he was an advisor at Silver Lake looking for a next ceo gig in a PE deal. This is a pretty good alternative based on the deal he negotiated. If he does somehow save it, he will cement a legacy of being an unbelievably great turnaround artist and a hero in Canada. Any failure and people will say the company was too far gone anyway. The investor list wasn't that impressive. Basically every major Canadian pension fund said no and no U.S. investor of note. Brookfield is really sharp but $50mm debt piece is not big for them.
Lazaridis likely dumped his shares when he jumped off the board May 1st. he had almost 60 days before the bad results came out and could have netted $13-$15/share. he would have known very bad news was coming. Remember, Balsillie left the board in March/2012 and didn't report that all his shares were sold until Jan 2013.
The service revenue will disappear or drop considerably over time. To think it will remain at $800 million is lunacy given the migration away. What does focusing on enterprise mean? Thorsten Heins said himself that you have to succeed in consumer to succeed in enterprise, given BYOD.
How can you be sure the extra 2.2mm was all bb10 sales? perhaps there was still bb7& below in the channel that were being drained down as well like each of the last 5 or 6 quarters. There was nothing positive to be gleaned from the Q except the 50% opex target reduction. Thorsten Heins was flat out lying to the public on several occasions. Shameful activity.
Fair point. I certainly was not arguing that it was the 'end-game'. However, given they have considerable excess cash, they could probably do a $50-60mm dutch auction and buy back 15% of the company, at a bargain price. The CEO has commented that litigation expenses will be moving lower so they should be able to fund that piece, plus the dividend and opex through revenue generation.
Sure, but the dividend and buybacks are coming from the cash balance as the revenues are eaten up by litigation and opex plus new patent acquisitions. So cash will continue to decline. Why is the company not doing a Dutch auction to buy back $50mm in shares if this is so cheap?
Right now, it seems as though it has asymetrical downside.
No, they have a fiduciary responsibility to their stakeholders. Bailing out failing Canadian companies is not, and should never be part of their mandate. Canadians should protest publicly if they buy it anywhere near the current price.
If Silver Lake said no, there is no way CPP would jump in the fray.
I cannot understand any scenario where the pension funds + Fairfax buying this makes any sense whatsoever. Deteriorating fundamentals aside, what is the exit? To a strategic that you outbid or wasn't interested in buying this time around? Your point on Jim or Mike not being involved is a good one. The fact that neither one is interested in doing a deal with financial backers, etc tells you what they think of the prospects. Isn't Balsillie on the OMERS venture board? I'd be curious on Mike L's exit May 1st, what happened to his shares as he only has to file in the new year. Feels like the entire thing was orchestrated for him to get off his stake with Thorsten Heins public bravodo despite terrible underlying results. The comment that comes to mind, among many, was "We're firing on all cylinders as a company right now" made in Orlando in mid May just 2 weeks before the end of the Q, a disastrous one which led to an inward approach to future guidance and a near admission of disaster.
When a company with sizeable working capital requirements shrinks, there is cash generation as inventories are drained down and receivables collected. It is not a sustainable model. That is what happened with blackberry as a result of managing down BB7 & below products, not due to prudent mgmt. Payables have doubled in the last two quarters from $600mm to $1.2 billion. That is unsustainable, particularly given elevated inventory levels could contain units that have to be written down. This happened with the Playbook and could happen with the z10, Q5, etc. Further, the SRED credit last Q benefited them greatly. The purchase commitments are sizeable given they are through launch quarters and now can only rely on refreshes into the channel which are usually materially lower levels of volumes. Having worked in both private equity and a leading hedge fund, I can tell you no one will value the cash at $3.1 billion. Working capital adjustments will happen. Restructuring cash cost adjustments will be happen. Adjustments for cash burn on the next several quarters will happen. Any buyer will have full access to a data room that the public shareholders do not. They will see everything real time, including the warts.
I find it difficult to believe. If true, Thorsten would have been screaming from the rooftop about their increased U.S share. I think they have now entered the long cash burn, restructuring cycle that some have feared. The $5.3 billion in purchase commitments is also quite large given sell thru of devices has been poor. As that number represents 9+ months of volume, it may ultimately move to blackberry's balance sheet. Thus could mean that the $3.1 billion cash balance will be used to buy inventory that likely will face writedowns. I see no reason for a buyer to rush in given things are only going to get worse. 9 months from now, cash will be lower and losses substantial.
No, QNX has been around for 30 years. When people talk about it being in all these diverse markets (trains, cars, nuclear, etc), that all adds up to just $40-$50 million of annual revenues. Its an industrial grade real time operating system that could be swapped with 700 other similar systems. That's the reason it doesn't generate a lot of revenues and is commodity like.
QNX doesn't generate more than $40-$50 million of revenue annually. BlackBerry paid $200 million for it in a desperate period. Its probably worth $100-$150 on the market now.
The company has been for sale for two years and no one has made a bid. Every strategic and private equity firm has looked at it. The entire MDM market is only projected to be $700 million thus year. BlackBerry annual operating expenses are $4.5 billion. The math doesn't work. With every financial advisory firm saying it's not worth more than $10-$12, (some much less), how could you go to your board of directors and suggest it's worth $30? It's sheer lunacy.
If any of this was true, Jim Balsillie wouldn't have dumped all his shares once he left. The company will not fetch anywhere near $30/share. If I was a strategic, I would just wait. What could improve? Service revenue will continue to melt away and hardware has already flopped and will get worse. Two or three quarters from now, operating expenses will exceed gross margin by $300-$500 million per Q meaning major cash burn. Any company that pays up for blackberry would get crushed by the markets.
QNX has been around for 30 years and hasn't generated revenues greater than $40 million in any given year. Either it's an unbelievable secret or not many are interested. Its very difficult for someone to choose blackberry over an iPhone or Android device as the applications are not there and future apps won't get on the device. While the Z10 is indeed fluid and smooth, the market has spoken and doesn't want it. Can't fight reality.
I think you should subtract payments for prepaid intangible licenses as that is a true operating cost and comes out of cash flow from investing so isn't part of the CFO cited above. It is $350mm quarterly. Also, payables are near a record high at $1.2bn and have doubled over the last 2 quarters. Combine that with potential inventory writedown forthcoming.