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  • Chipmos: Shares Have Over 100% Upside And Near-Term Catalysts [View article]
    Despite the run in ChipMOS over the past several years, shares remain cheap on both an absolute and relative basis. With an EV/EBITDA of under 5x and a double-digit free cash flow yield (the company is and has been an FCF machine) there is a substantial margin of safety - which explains why despite many iffy quarters, the stock is up almost 5-fold over the past 2 1/2 years.
    The company reports earnings Tuesday after the close. This may be the last chance to get shares on the cheap, although in our view, the play is over the next 6-9 months and not just for the quarter. That said, the stock is cheap, and the catalyst should be the biggest positive earnings revision in a very, very, very long time.
    On Friday ChipMOS posted July revenue of $64.7 million, the best month since October 2007, the second best month in company history, an 8% m/m improvement, and well above our expectation. And despite a rallying market, the stock was down. Frankly, that's one of the things we continue to like about IMOS (despite the occasional frustration) it's under the radar screen and provides an unusual opportunity.
    Assuming typical seasonality (i.e. modest improvement in both August and September) 3Q revenue should be $196-200+ million, well above the consensus of $186mn. Management could set the low end lower, but that would in all likelihood reflect typical conservatism. Given June revenue declined from May, it is probable that July improved over the course of the month, meaning there is a good deal of momentum entering August.
    Typically, a low multiple stock with a big upward guide leaves 1) a lot of room for shares to run, and 2) potential for significant multiple expansion.
    But as we have written about in multiple prior articles, this is not a stock about a given quarter, this is a well-positioned, inexpensive company that should see meaningful growth over multiple quarters. With the advent of 4k2k screens, and growing complexity in cellular handsets, ChipMOS' driver IC packaging/test (duopoly with Chipbond) should enjoy rapid growth. Notably top customers Novatek and Himax guided to double-digit q/q growth for 3Q. And the memory segment, with 18% customer Micron is enjoying well-noted stability in the first time...perhaps forever. In addition, NOR flash customers such as Winbond, Macronix and Spansion are once again growing and outsourcing more test (almost 100% incremental GMs). ChipMOS will likely also discuss new Toshiba (high-margin) test business when they report earnings.

    Beyond being well positioned, ChipMOS is likely to discuss consolidation of their operating entities into a single, simpler corporate structure. If they don't discuss it on their call, then they should sometime after their late August board meeting. This was discussed in a recent article by SA author Jaret Wilson - we believe such an event would result in a reduced sharecount, with the company eliminating a significant number of shares via a recent $300mn+ loan at 2% (of shares yielding FCF >10%). In the likely event the company pursues such a strategy, we'd expect meaningful and pronounced share appreciation.
    Aug 10 10:59 PM | 4 Likes Like |Link to Comment
  • Christopher's Lemonade Stand Update – Wednesday, July 16, 2014 [View instapost]
    Am very much looking forward to my thank you note.
    Jul 16 05:34 PM | 1 Like Like |Link to Comment
  • Crossroads Systems: Valuable IP And Niche Product Could Lead To Significant Upside [View article]

    Please see our comment from 6/29. Our best guess as to why Eberwein exercised early (in addition to his publicly stated filings that shares are undervalued) is that additional funds via option/warrant exercises from Eberwein and others can be used to pre-pay the Fortress debt. Paying this debt eliminates costly interest and also takes away Fortress' participation in the monetization of the non-972 patent portfolio. If Crossroads genuinely believes that non-972 is worth $10s or $100s of millions or more, then paying off Fortress asap is logical and consistent with CRDS' claims. It wouldn't be surprising if we learned of additional warrant/option exercises by other holders when the co next reports earnings.
    Jul 13 10:33 AM | 4 Likes Like |Link to Comment
  • NQ Mobile: Don't Be Fooled [View article]
    Had NQ wished to provide a more substantive press release they could/would have addressed 1) materials that Sherman and Sterling noted were missing/compromised in their investigation (sure, nothing was FOUND improper, but S&S noted that materials appeared to be missing), and 2) that they were moving ahead with PwC by providing them the materials they deemed necessary for the expanded scope of their audit. Significant unanswered questions remain.
    Jul 9 09:09 AM | 5 Likes Like |Link to Comment
  • Crossroads Systems: Valuable IP And Niche Product Could Lead To Significant Upside [View article]

    On the 972 patents there is a very high probability they are worth something. They have had litigation or threatened litigation with more than 40 parties and never lost. Their Markman hearing will be in front of the same judge who heard their previous cases. If you're Cisco is it worth perhaps a huge loss in court versus a reasonably smaller lump sum or modest royalty (several million a year is a rounding error to Cisco but hugely impactful to CRDS). It could be a zero, but we believe there is a high probability of a positive outcome, potentially a big one.

    For the non-972, it is a family of 117 patents. Management has not detailed if there are certain ones that are more or less material or who the litigants would be. In all likelihood there would be numerous cases (some likely settled right away). There could be patent sales or JVs with IP litigation firms. We think it is probable the company is relatively quiet about details until they prepay their Fortress debt. Doing so would shift ownership of the patents from what we believe is an 80:20 JV to 100% ownership by CRDS. That they prepaid $2mn of the debt in early May (see most recent call transcript) suggests to us that they understand the value of the IP (as does Eberwein's new 10b5).

    Given the scope/breadth of non-972 patents it seems unlikely they are worth zero, and could be worth a lot more, just hard to size, so we are trying to frame our analysis with conservative assumptions. For now, we are assuming they will receive a PV of less than $200mn, although this is the segment about which we have the least knowledge, and we could be positively surprised by a magnitude.

    Absolutely agree with you that initial disappointments often yield exceptional opportunities. Given the historic failures of the company we think relatively little is baked in - based on our work we believe this time is very different.
    Jun 29 10:06 AM | 5 Likes Like |Link to Comment
  • Crossroads Systems: Valuable IP And Niche Product Could Lead To Significant Upside [View article]
    Ruerd - given we are frequently thinking about the questions you pose, we'll offer some thoughts (apologies for hijacking the comments section). Of course any/all opinions are welcome.

    >>> I find this stock fascinating but difficult to value. So based on VI's responses I have a few more questions to anyone here.

    We also find it difficult to value given the potential wide dispersion of outcomes. Our approach has been to probability weight outcomes to arrive at an expected value (E). In our view CRDS trades at a steep discount to E, although our confidence that E is the right number is far less than if we were modeling P&G (in our analysis, the probability of the actual number being above/below E is equal). Of course, an uncorrelated portfolio of stocks trading at a huge discount to their respective Es should massively outperform over time.

    >> VI's minimum revenue estimate of 20 million is very helpful. What I understand is that StrongBox is worth at least $3.3 (conservative 5 multiple). Do you agree with the author on the steep adoption curve? In how many years will StrongBox achieve 20 million of revenue?

    We're not going to argue on multiple although 5x seems extremely conservative. We agree regarding the adoption curve. Strongbox revs could be flat to slightly up for 2 or 3 more quarters. $20M could be a '16 number, or possibly slightly later. Kind of begs the question why own the stock today. 1) If there is evidence of traction with Strongbox sooner, the stock likely will move well ahead of revenue. 2) We could wake up to news of a meaningful settlement for any of the 972 patent cases (CSCO, DELL, HILL, Huawei, NTAP, ORCL) any day. It could be a lump sum or an ongoing royalty. The Markman hearing is the first week of October. We believe a positive outcome for 972 is very likely, and an extremely positive outcome is conceivable - and some of the parties may decide to settle ahead of the Markman.

    >> And if it turns out CrossRoads patents are valid why should CrossRoads only collect 2.5 to 5% of the royalties they will be entitled too? If they win these cases, is there still any way to escape from paying royalties?

    There is no reason they couldn't collect 3-5% on $82bn if they won all the non-'972 cases on which there is relevant infringing revenue. Of course, it would likely be decades before we saw all of that money. Given our view that this is a pragmatic management that would be willing to settle for a reasonable amount, factoring in time, potential for winning/losing, etc. we are steeply discounting the low end. That said, we have no idea the dollars for which the company would settle, sell the patents, etc.

    >> Without any additional information the chances someone wins in court are 50%, since only one of the 2 opponents can win. But in this case, does anyone have an idea what the chances are that Crossroads wins all cases and can collect $5 per share or, more importantly, what are the chances they loose all cases? How much dependent is the outcome of one case from the other? How many cases are there at the moment? And in these court cases, what is the total revenue these companies should pay royalties over?

    Are you referring to '972 or non '972? The '972 is likely several billion in annual revenue. A 3% royalty on that would be very big. To be conservative, assuming they got only $500k per Q from the 6 litigants, that would be $12mn or $0.50 EPS per year. Of course, it could be many multiples of that or a significant lump sum with no future royalties. Based on the work we've done, we have a strong view that there will be a favorable outcome - we don't think it's 50:50.
    Jun 29 07:30 AM | 6 Likes Like |Link to Comment
  • Crossroads Systems: Valuable IP And Niche Product Could Lead To Significant Upside [View article]

    To be clear, it could be far more than $20mn. The point is, that even on $20mn (we'd be disappointed if, over time, it's not a good deal more), EPS is $0.66. We have a view on how the mkt. tends to value 80% GM storage businesses with strong IP and a healthy recurring rev component. And this EPS excludes potential incremental royalty streams from both '972 and non-'972 IP.

    Jun 28 11:53 PM | 4 Likes Like |Link to Comment
  • Crossroads Systems: Valuable IP And Niche Product Could Lead To Significant Upside [View article]
    Some very good questions/comments. Given we've continued to do significant due diligence on CRDS since we published on CRDS as a Pro Top Idea last Dec. 11 we thought we'd weigh in with a few brief thoughts. Upfront disclosure: we hold a significant long position. We also recommend you do your own due diligence.

    Mike Arnold - on the last call they said the addressable revenue for which they could litigate is $82bn and they traditionally get a 3-5% royalty. At the low-end that would be $2.4bn. We agree, litigation is long and uncertain (although the variety of patents makes a handful of settlements/wins/or sales of patent families probable). Assuming they collect 2.5% to 5% of the low-end, that is $60-$120mn or $2.50-$5.00 per share, (assuming 24mn shares out, which would be the case if all current options/warrants exercised). The recent partial prepayment of Fortress debt is a path to exiting their non-'972 JV and owning 100% of monetization rights.

    Neilcataldi - we absolutely agree that the promise of Strongbox has been unfulfilled - and there were many promises from Rob Sims. We are cognizant of tech companies showing the same failed technologies to a new set of investors to pump their stocks. We'd suggest 1) this is a new CEO, 2) the co has not been promotional (you can count StrongBox press releases over the last year on 1 hand), and 3) as you mention, the Chairman of the company is buying stock, not selling. We believe Sims was a very talented engineer but according to our contacts had a very high pride of ownership (as many excellent innovators do) - meaning he was fairly inflexible on certain changes that would make the product more commercially viable/successful. Based on our due diligence there have been some important product modifications, and marketing/sales strategy changes that should enhance the likelihood of success - if your checks suggest differently, we'd be curious to know. We don't agree with the numbers in this article. However, we think it's realistic that Strongbox will become a $20mn product over time (and we think it easily could be more), with 80% GM that is $0.66 (based on 24mn shares and no taxes given $130mn NOLs).
    Regarding Iron Mountain, we don't know the specifics that led to the termination of the relationship (recall, the development was largely under the prior regime), but we believe its noteworthy that Iron Mountain signed an agreement not to sell their shares in CRDS for 12 months following the termination of the development deal. We are not aware of any legal obligation for them to make such an agreement.

    Ponto - The stocks you site all had ~100% appreciation with Lone Star/Eberwein involved in a year or less. He owns 14.9% of CRDS and recently filed a 10b5-1 buy plan (how often do you see a 10b5-1 BUY plan?) to acquire an additional 500,000 shares - with the plan announced with shares near a 52 week high (approx $3 at the time - 100% return would be $6). In addition, publicly available information (as of April 29 - sites HSON with ~$10mn value as his portfolio's "single largest position") suggests that assuming Lone Star/Eberwein purchases the 500,000 shares and exercises warrants, CRDS would easily be the largest position in Lone Star's portfolio.

    Ruerd - This is a very good question that requires a lengthy answer - one which probably makes more sense in a different venue. Therefore, to be brief: based on our diligence there are certain environments where CRDS provides a substantial cost savings and others where it is less relevant (we do think tape and lower energy usage, is, on average, much cheaper). But clearly the data in this article is showing the case that paints CRDS in the best light. There is a lot of information regarding StrongBox/Tape Storage available from the Linear Tape Consortium (, Storage Switzerland, Jon Toigo and numerous others. (we note that SS and Jon Toigo are compensated by CRDS - they are also compensated by numerous other market players). Of course, we also recommend speaking with people in the channel who have recently seen Strongbox and have a view of the pros/cons versus other solutions.

    Jun 28 11:09 PM | 7 Likes Like |Link to Comment
  • Dorman Products: 70% Downside As Cyclical Headwinds Pick Up & Aggressive Accounting Unwinds [View article]
    Insightful analysis.

    Notable that the company recently increased its buyback from $10M to $30M, although the cynic would suggest the buyback 1) serves as a nice headline, 2) represents a relatively inconsequential amount relative to cash and market cap, and 3) pales relative to the size of insider sales. We tend to be cynical.

    Am curious your view on when the thesis plays out. What/when causes the stock to break?
    May 30 12:12 PM | Likes Like |Link to Comment
  • Spherix +64.9% after commenting on Senate bill [View news story]
    Well worth doing work on $CRDS as well $SPEX. Large IP portfolio and an operating business guided to breakeven.
    May 27 11:37 AM | Likes Like |Link to Comment
  • ChipMOS Technologies EPS of $0.36 [View news story]
    Revs up 12.9% y/y and 2% vs 4Q13
    2Q rev and GM guidance above consensus.
    May 14 07:19 AM | 3 Likes Like |Link to Comment
  • ChipMOS: Catalysts Plus Excess Capital Should Drive 50% Upside [View article]
    This is from Randy W. Furr, CFO of Spansion, from last week's 1Q earnings call: "Our Flash was, as I said, pretty much in line with what we thought it would be, but just to stay on top of inventory there, we chose to pull the utilization back just a little bit. But we expect to see that bounce back up to similar rates or maybe even slightly better than what we were in Q4, we expect that to bounce back up in Q2."

    As an aside, 4Q was the high point for utilization, so this bodes well for Spansion/IMOS in addition, some of the Taiwan-based research suggests that new integrated flash/microcontroller products from Spansion may be an incremental opportunity for IMOS in 2014. Not counting on that, but would be nice.
    May 13 04:45 PM | 2 Likes Like |Link to Comment
  • ChipMOS: Catalysts Plus Excess Capital Should Drive 50% Upside [View article]

    We went through your numbers. Then we had some very strong coffee and went through your numbers again. We've spent A LOT of time on ChipMOS. We don't follow your approach - maybe more coffee would help :-) We're not saying that your approach is wrong. However, we would suggest that this has been, and remains, a MATERIALLY, miss-priced security.
    As we always suggest, please do your own work. That said, skepticism regarding ChipMOS (a frequent reply from many of our good investor friends) has been a losing bet over the last few years. Despite many earnings/guidance shortfalls over the last few years, the stock is a 4-bagger from 4Q2011. We understand your point regarding concern over a "highly cyclical, capital intensive company" and would point to 1) the capital discipline exhibited by IMOS over the last few years, and 2) the outsized gains that can be achieved when an industry becomes more rational (see MU) - which we believe has become the case with IMOS and its peers.
    May 12 10:03 AM | 3 Likes Like |Link to Comment
  • ChipMOS: Catalysts Plus Excess Capital Should Drive 50% Upside [View article]

    You ask a fair question, and to be clear, we are not simply using the profit figures from the consolidated financials.

    US (IMOS) market cap is 30 million shares times $20.73 per share or approximately $620 million. Assuming cash is ONLY the cash "owned" by IMOS, and not the entire ~$200 million of corporate cash, EV would be $545 million. We expect EBITDA of at least $225 million. If we consolidated the entire EBITDA, that would be 2.4x EV/EBITDA. Assuming that IMOS only "owns" 60.2% of the EBITDA (or $135 million) generates an EV/EBITDA of 4x. A 6x multiple, plus 60.2% of anticipated cash generated over 2014 results in EV/EBITDA of 6x at year-end equating to approximately $31.

    With the above said, the way we are (expect to continue to be) looking at IMOS is based off the valuation of 8150. Currently 8150 trades at around 4.3x EV/2014 EBITDA. At 6x it would trade over 50ntd, resulting in IMOS at about $32, assuming IMOS trades at par, which we believe it will - if not in the short term, then when a deal collapsing the share structure is consummated.

    All of the above being said, the fact that a question on valuation methodology requires such a long-winder response speaks to the undue complexity of ChipMOS' corporate structure and the hindrance it has been on investors getting their arms around the story. We think this all changes soon.

    Our aim is to be analytically rigorous and intellectually honest and if you differ in how you would model it (we believe we are modeling using more conservative assumptions in terms of what we include for IMOS than the Street) then we are open to other approaches. Still, a sanity check for us is 1) considering what a reasonable, ongoing dividend, can/will be, and 2) what a private equity buyer would pay for a single structure Taiwan entity with the potential to achieve an acceptable return. Using both those checks we arrive at a price in excess of $30 per share.

    May 12 07:27 AM | 2 Likes Like |Link to Comment
  • The Cost Of Sapphire Displays Matter, But Less Than You Think [View article]
    I completely agree with your view. The smartphone segment is increasingly competitive and Apple need something to kickstart/differentiate them in the marketplace. Undoubtedly even a more costly sapphire screen would result in greater gross profit dollars. More importantly, it would demonstrate products leadership, and would lessen customer frustration with frequently scratching/cracking screens.

    Given Apple's significant investment in GTAT I'm a believer that Sapphire is coming, whether iPhone 6 or a follow-up iteration, it's a when not if. And, as you correctly mention - screen ASPs have declined, and will continue to do so, making the cost/benefit increasingly compelling for Apple.

    Disclosure: Long GTAT
    Feb 12 11:55 AM | 11 Likes Like |Link to Comment