Mr Spacely

Mr Spacely
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  • AMD's X86 Dead End  [View article]
    One problem with that. Historically, the reason chips werent built as semi-custom was the cost to develop many small batches. AMD went around this and uses the already developed CPU tech and repurposes it. So to be able to continue to support semi-custom, they need the CPU biz. Said differently, the only way the semi-custom biz works is by piggy-backing off the R&D spent on CPUs.
    Jan 20, 2016. 05:09 PM | 2 Likes Like |Link to Comment
  • Micron Technology: A Lump Of Coal In The Stocking?  [View article]
    Of course. That would net out. But the value I mentioned above for the shares is today's value. Lets say this case pushes out a few years and the value of Inotera goes up (or down). Remember, the market cap was >double today's level in mid 2014. So tell me what the value of Inotera will be when the case finally settles and I can give you a better number. My estimate has very wide bounds in terms of my level of confidence but I do think its a reasonable assessment. Plus I think part of the reason why mgmt doesn't talk about this too much is partly because they don't think it will be a big number.

    And who says they have to give Qimonda cash? Maybe they issue shares.
    Dec 17, 2015. 09:45 AM | Likes Like |Link to Comment
  • Micron Technology: A Lump Of Coal In The Stocking?  [View article]
    Dec 16, 2015. 04:46 PM | Likes Like |Link to Comment
  • Micron Technology: A Lump Of Coal In The Stocking?  [View article]
    Good article. These are two important aspects that don’t get talked about. I dont know that we can read too much into the Inotera sales results because no one outside of MU or Inotera knows the exact pricing or cost formula which makes their revenue numbers almost irrelevant. I would guess that the trend is accurate but the magnitude is probably not.

    I too have concerns about the Qimonda litigation and I asked the company about it. They brushed it off. I’m not sure if that was an indication of the level of how serious they think it is, or if they didn’t want me asking too many questions about it. But let’s look at what we know from what has been disclosed. Prior to this recent news, the Qimonda Inotera shares were 55% of MUs holdings which was 33%. So 18% of the shares are at risk. The German administrator ruled that MU needs to pay $1m for shares sold post the acquisition and give information regarding the share sales and benefits they received from owning the shares. The administrator also cancelled the cross license agreement but also denied Qimonda’s claims of damages for the JV relationship. Finally the administrator issued an interlocutor judgment, meaning it is unenforceable until final judgment which could be years away, requiring MU to return the shares and compensate the estate for any sold shares as well as any benefit received from owning the shares.

    So what’s the possible damage? Ultimately it’s the value of the 18% ownership plus any benefits derived from that ownership. At the time of the transfer in 2008, this was maybe a few hundred million USD. Today those shares are worth maybe $1bln. The patent in question was already ruled by the US Bankruptcy Court that it couldn't be broken so that is mute and Qimonda has no claim on any damages. As far as other benefits, there really aren’t any that I can tell that occurred because MU owned the shares. The supply agreement was arms length and presumably they would have bought the other 15% that they own regardless of the Qimonda shares. At the very least, it will be extremely difficult to prove otherwise. So the reason why this doesn’t get talked about is that its maybe $1.5-$2.0 bln of damage. MU has $3.5 of cash and STI plus $3.5 b of LTI and other equity investments. Plus they have at least $1.25 b of revolver capacity and generate cash every year so paying this amount won’t be much of a burden.

    Also the thing to keep in mind is that the estate is trying to recoup as much value as possible to repay creditors. They don’t want to harm MU because if they do, they ultimately harm Inotera and thus Qimonda. What is most likely is that there will be a cash transfer and business will continue as usual.
    Dec 16, 2015. 04:44 PM | 9 Likes Like |Link to Comment
  • OpenText: With Numerous Catalysts And Trading At A Reasonable Price, Upside Expected In 2016  [View article]
    my 2 cents

    Recurring revenues growth at 4% constant currency. What are recurring revenues? Those that recur contractually, specifically in their case, maintenance and subscription revenues. Typically those contracts are 3 years in nature and have some sort of price escalation annually that is above inflation, often 3-5%. So recurring rev growth at 4% means they grew no more than their annual price increases. It is still growth which is good, but I would like to see that number above their annual price increases because it would indicate new business is being layered on

    Case in point. You say “revenues, EPS, and FCF have all grown at a CAGR in the 18-25% range over the last 5 years.” How are you calculating these? Judging by the size of the numbers, these are not organic growth rates but instead include acquisitions. If you go back and look at their acquisitions and make an estimate of acquired rev, which I have done, you will see that organic growth has gone from strongly positive, i.e. 8-10% annually, to flat or even negative in recent periods. That growth number you site is them buying growth. That’s not necessarily a bad thing especially given their strong FCF, but my exercise shows that the underlying business is not strong which makes sense because it is highly saturated and highly competitive, thus the need to buy growth

    This reveals the true issue with OTEX and the reason why the stock is down. Because of all their acquisitions, they now have over 350 products. I assure you, their salesforce is not selling 350 products. This creates confusion in both the salesforce and the customer base and so while they say they can do all these things for customers, their customers view them as only being able to do one or some small set of things and growth in that group of solutions has slowed.

    So they needed to make acquisitions. It is not entirely evident that they have been successful with their acquisitions (please see comments on slowing growth). On top of that, their ability to continue to make acqs is somewhat limited. If you go back a few years, the company had a much stronger balance sheet and started their latest acq spree in a much better condition. Today they have roughly 1.5 turns of additional debt (1.0x in 10 to 2.5x today). If you do the math on their acquisition plans, factor in their FCF less div and the $550m tax payment and make some assumptions on valuations, which I did, you see that they are roughly $1.5bln short of being able to fund their current $3bln aspirations. This will have to come from debt so leverage will increase from here.

    Maybe you are ok with that. It makes sense to use cheap debt to buy high growth businesses. Maybe, if that leads to high growth in the PF biz. But if the legacy is flat or declining and they are paying high valuations for this growth, eventually EBITDA will stagnate and leverage will go up. That is exactly what has happened so far this year. Even after excluding FX, growth is below their targets and EBITDA has declined yoy for the past 3 qtrs. In my view, the company needs to halt their acquisitions, sell some non-core assets, focus on getting their core business to work better and pay down debt. If they do that, the stock will go up. If they continue on their current path, the stock will not go up.
    Dec 7, 2015. 01:27 PM | Likes Like |Link to Comment
  • Why Intel Is Better Positioned Than Qualcomm  [View article]
    So Apple is going to buy from INTC only for its US phones? Because other geographies don't have the same issue as the U.S. Why would Apple want to buy from a vendor that can only supply to less than half their volume? Dual source yes, but limiting one of those vendors is not a good strategy and removes the purpose of dual sourcing.
    Nov 4, 2015. 12:43 PM | 1 Like Like |Link to Comment
  • Western Digital Leverages Itself For SanDisk  [View article]
    @motleytrout I agree but it’s not as straightforward as you say. The memory industry is changing. For the past 20 years, HDDs were the way to store data. In the next 20 years, HDDs will go the way of tape drives and be replaced by NAND. How long that transition takes is the key issue.

    If it’s orderly, then WD has just become the only company to be able to sell both high end NAND SSDs and low end HDDs. They will be the most vertically integrated memory maker and can address the entire market. It’s true that their 3D NAND is not cutting edge, but it’s one of only three options and if they can sell good enough NAND along with HDDs, they become more competitive.

    Even the mighty Samsung can’t cover as much of the market as WDC because they only sell NAND/SSDs – they have limited themselves to the high end. It may be the future and have the most growth with the most profit but today, it’s just a small portion of the market. Plus Samsung made a big bet on bringing everything in house. If their phones and computers sold like Apple’s, they would have been right, but so far, they haven’t, which has created utilization issues.

    MU/INTC were moving in the direction of becoming more vertically integrated but INTC got greedy and announced their own separate plans. At first blush, this appears to be a major reversal and leaves MU as it once was, a largely DRAM chip maker, not a vertically integrated memory maker. Yes they have 3D NAND and 3D XPoint, but how they make money on that outside of selling to INTC is still unclear. MU has once again been relegated to the commodity producer.

    With yesterday’s announcement Intel moves one step closer to becoming that vertically integrated master. In fact, I would argue that Intel is the model that they will all need/try to emulate – CPU, GPU, and storage – the convergence of the data center as Michael Dell calls it. They already do a pretty good business selling NAND to their DC customers now and this fab expansion will only help them. Once Intel moves big into memory and pairs 3DXPoint with a CPU, it’s over for everyone else.

    If I were to pick the winner, it would be Intel
    Oct 21, 2015. 11:46 AM | 6 Likes Like |Link to Comment
  • AMD's Classic Death Spiral  [View article]
    I agree with the principle of your article that AMD is in bad shape but I don't think its as bad as you say.

    First, I was at the Financial Analyst day. My impression of Zen's timing was that they would qualify in 16 with maybe a little front end rev but full ramp revenue would occur in 2017. I've heard nothing over the past 5-6 months to suggest otherwise.

    Second, I would say that the C&G results are positive. Sure its down ~30% yoy but it is up seq and expected to grow seq again. Mgmt said Q2 was the trough. Should I believe them? Well, this is largely due to new graphics chips that are still ramping so it seems plausible. But the bigger takeaway is that they developed them, launched them and its now leading to revenue and share growth. Thats a positive story. Will it fix their problems, probably not, but were they able to develop a new competitive chip that improved the business? Yes. Baby steps. This is a model now for future graphics rollouts in 16 on FinFet and a model for Zen.
    Oct 20, 2015. 12:18 PM | 6 Likes Like |Link to Comment
  • Micron: Analysis Of The Analysts And Go-Forward Thoughts  [View article]
    First, I wish Russ a speedy recovery

    Second, your first quote was not so ground breaking. It was basically a rehash of comments from the analyst day which is why it didn’t elicit a response. Mgmt said then that ramps and yields were ahead of prior node transitions. They also laid out a similar timeline for run rate production of 3D NAND at Singapore, ie 2016. This was merely an update to those comments.

    Third, 3DXpoint is a wild card. If you think it will be $4.8b in rev from $0 today, you should be levering your house, your car, your children and be putting those dollars along with every other one you can find into MU’s stock. Not even mgmt is doing that. Why? Intel. They said on the call that the best uses are in-memory databases and ultra-high-performance storage systems. But Intel is going to capture a big chunk of this market, especially IMDB. This wont be a memory technology in the sense that we currently define memory. The best use of this is when it is combined with a cpu, which Intel dominates, on an SoC. Intel is frantically working to create an SoC with 3DXpoint. This will change computing. Right now, one of the biggest bottlenecks is between the CPU and memory and I/O. If they sit right next to each other on a chip, with a very large memory cache, that bottleneck will be eliminated (or greatly reduced) and computing as we know it will forever be changed. So if the power of 3DXpoint relies on the CPU and MU doesn’t make a CPU that means Intel will dominate the market and MU will be left with the scraps. I seriously doubt that MU can ramp that market from $0 to $4.8b in 2 years. Some of your other quotes from the transcript more or less confirm this - mgmt’s inability or unwillingness to provide much detail. They either don’t know what the market will look like or are hamstrung by Intel and can’t say.

    To be sure, MU will benefit from 3DXpoint because they and INTC are the only ones selling it. But as of yet, we have no products, no design wins, no qualifications for anything 3DXpoint which means it is waaaaay too early to make a call on it.

    Oh ya, this acq today was absolutely imperative. Memory isn’t that great without a good controller. These are former SandForce guys who had a pretty good controller that they sold to STX so this should make a MU SSD highly competitive
    Oct 5, 2015. 03:10 PM | 9 Likes Like |Link to Comment
  • The Debt Whisperer: What Are AMD Bonds Telling Us?  [View article]
    Great article from a credit guy. Many equity investors often struggle to understand what the credit implications are for a stock. The fact that the original recommendation (by a separate poster) to buy the 19s referenced it as a good relative value vs similar duration bonds shows that that guy didnt understand credit. Duration is almost meaningless for a high yield bond. To be fair, it is at the bottom of the list in terms of important risk factors. Cash flow is at the top.

    The issue with AMD is Zen + liquidity. The bond market isnt making a call on Zen, they are making a call that AMD wont be able to stabilize their cash burn before Zen launches. And if that is the case, AMD will probably need a liquidity lifeline. The problem with that from an unsecured bondholder perspective, and another factor contributing to the price decline, is that this liquidity lifeline will come in the form of an IP backed term loan that will prime existing unsecured bondholders. But $65 is kind of a push. If it was truly distressed, the price would be lower. If liquidity and being primed wasn't an issue, the price would be higher. So the $65 is kind of like kissing your sister. Meh.

    I am a bull on AMD. I think there are several things going into 2H that will show improvement. Remember, the company originally called for a strong 2H at their analyst day. This was derailed by HP in Q2 as they pulled back on buying and burned inventory ahead of their corporate split, but the underlying trends for 2H improvement are still there.
    1. AMD is launching new CPU products, Carrizo et al, which will diminish the overall trend of the PC market. Growing from low share is easy to do
    2. Graphics revs will grow and gain share simply because they have new product that is competitive and Nvidia doesn't have anything to counter.
    3. Similarly, commercial PCs should grow because they are new and again growing from a low share will be easy. And any incremental sales of comml PCs will benefit margins.
    4. A restock at HP will help drive PC sales
    5. Consoles will grow because of 2H seasonality.
    6. A reprofiled WSA will allow them to reduce inventory and add cash to the balance sheet by year end.

    All this suggests to me that their liquidity profile will improve in the near term. That still leaves all of 2016 to worry about, but I do think someone, likely MSFT more than Silver Lake, steps in with a few hundred million to ensure the company stays liquid. As another poster said, this will only add to the bullish sentiment. I think the bonds can push back up into the 70s if not 80s.
    Sep 14, 2015. 09:42 AM | 4 Likes Like |Link to Comment
  • So I Bought More Intel, And It Came With Some Micron  [View article]
    Apple doesnt make chips, they make systems and only ones with half eaten apples on them.

    My point is, Intel makes chips for the other 80% of the market or however big the other part of the market is. The reason Apple can do better than Intel is because everything in an Apple from hardware to software is optimized to run as efficiently as possible in that closed system. If Intel made closed systems, you better believe they would be as good if not better than Apple. As it stands now, Intel has to make as generic a chip as possible so that Dell, HP, Lenovo, Asus, Acer, etc etc can then design systems around them.

    Intel will never be rendered obsolete unless Dell, HP, Lenovo, Asus, Acer etc etc are also obsolete. And even then, Intel has this little data center business that gives them some extra pocket change.
    Sep 10, 2015. 03:01 PM | 5 Likes Like |Link to Comment
  • Unigroup's Micron Bid Dead - Really  [View article]
    I've said all along that the eventual buyer will be INTC. People think that's ludicrous but those people don't understand memory, just like the author. To truly do the Scifi computing sh1t you need compute and memory working in unison without latency. That means the two will converge. Right now Intel is fine partnering but eventually they won't be fine especially if MU is owned by the Chinese
    Sep 4, 2015. 09:36 PM | 1 Like Like |Link to Comment
  • Micron And Intel: Non-Volatile Memory Is Exploding  [View article]
    I also spoke to Rob Cooke. In terms of who can sell what, my impression is that Intel created this product to help improve compute. Not Intel and MU collaborated to design a new memory - Intel developed it to help compute. And therefore they will sell this everywhere there is an Intel CPU. Micron will be able to sell to the rest. I'll let you guess the size of that market

    He also made it sound like MU was INTC b!tch and they were only invited along because Intel couldnt do it all on their own. Its kind of like saying that Intel built the sweetest car you ever saw and MU built its transmission. Its a great transmission and MU can make money selling it to others, but people don't want the transmission, they want the car.
    Aug 19, 2015. 04:47 PM | 5 Likes Like |Link to Comment
  • Samsung Adds To Micron Bulls' Worries  [View article]
    AS said above, old news. DRAM is doubling on new phone. Mobile DRAM is in short supply so no one vendor can supply all. Micron still supplies 1gb equivalent and Samsung the incremental new. Not necessarily a positive for MU, but not a negative especially if the 6s takes share from Samsung and remains the only growing part of market. MU will be supplying the growing part and avoid the declining ie Samsung
    Aug 11, 2015. 07:15 PM | Likes Like |Link to Comment
  • ACI Worldwide: Acquisitions Driven Growth At Risk  [View article]
    While I agree with your premise, ie the stock could be overvalued, I think you draw the wrong conclusions. Here's why
    1. Book value is irrelevant for this firm. It is a software company and has no assets
    2. If EBITDA is $300m and net debt is $750m, then net leverage is 2.5x. That is perfectly acceptable for a BB credit and a company whose EV multiple is 16x.
    3. There is no relevancy in looking at “net” FCF after acquisitions or EPS as a measure of their purchasing power. I get your point that if they need to acquire they might want to be able to fund those acquisition out of cash flow but they don’t need to. The relevant metric is FCF (Cash from ops – capex). From your table, that number is ~$120m or 15% of their gross debt. Said differently, they could pay off their entire debt balance in 6.75 years using this FCF if they wanted. Again, perfectly acceptable for a BB credit which guarantees them access to relatively cheap funding. What is important is the amount of EBITDA and FCF that comes with an acquisition because since it will presumably be debt financed, the acquired EBITDA should be able to pay the interest on the new debt. Even if they buy technology with no revenue, they have a lot of cushion in that $120m to absorb incremental debt. The concern here is that they buy too many non-revenue generating companies with the hopes of attaining revenue soon but turns out to take much longer than expected.
    4. You ask where is the op leverage? You show that cost of license has cut in half. R&D has cut 6 points, S&M 3 points and G&A 7 points. I’d say that is a ton of leverage. Yes, cost of maintenance, services and hosting has increased but this isn’t a bad thing because hosting revs have been increasing much faster. You point out that GM is stable around 40%. This is the crux of the story. As they move to a cloud/SaaS/on-demand model, hosting revs and the costs to support those revs, like data centers, will increase. But once that infrastructure is in place, they will get leverage. They are simply going through a growth phase.
    5. Your bridge to next year’s EBITDA is wrong because it doesn’t factor in seasonality. The majority of sales and profits occur in 2H and mostly in Q4. Q1 and Q2 are significantly less than Q3 and Q4. Last year, Q2 EBITDA was $60m and Q4 was 110. This has some noise because of the ReD acq but the trend is still valid. You can’t annualize Q2
    Aug 7, 2015. 12:24 PM | 1 Like Like |Link to Comment