Tuesday, February 14, 2006

Royalty King- Qualcomm

QCOM most probably just won the CDMA chipset game as NOK and Sanyo announced to merge their respective CDMA handsets businesses into a joint-venture. NOK/Sanyo JV would hold the #2 position in CDMA handsets after LG, putting Samsung in #3 position. This could be the last nail in coffin for the non-QCOM CDMA chipset consortium. NOK will most probably end up utilizing QCOM part as is the case with Sanyo currently. What it means that the Royalty King aka QCOM will continue its reign on the CDMA profilieration making nice healthy-margin on every CDMA handset sold in the world.

There are not many royalty based models in tech (MSFT, RMBS, TSRA..to name a few) but one of the best and most secure is QCOM. QCOM has never lost a lawsuit in its history. Companies like QCOM deserve premium valuation- where else can you get a 45% operating margins. Investors should always look out for opportunities to buy a name like QCOM whenever it's on sale.

Monday, February 13, 2006

Looking out for The Few

On February 8th the Board of Directors of EXTR approved an Executive Change in Control Severance Plan. The filing with the SEC was made yesterday right after the close of market. What this severance plan entails is a nice pay out for the executives and certain VPs upon change in control of EXTR. The board does not plan to do anything specific for the ordinary shareholders except for "maximizing shareholder value" by attaining the highest possible value in a change of control. Which for a lot of shareholders will mean a fraction of what they paid to become proud owners of the company.

The executives and cetain VPs will get to have 50% of their unvested options and stock appreciation rights (SARs) vested right away when someone takes over EXTR. If these executives or VPs are terminated within 12 months (that's a nice job guarantee) by the acquiring entity then these folks will get all of their options and SARs vested immediately. These terminated employees including the CEO will get 12 months (6 months for non-CEO executives and VPs) of salary and any bonus at time of termination also.

This does raise the question of why has the board acted on this now? Usually these change in control plans are good indicator of potential acquisition or god forbid a hostile takeover. EXTR has been rumored to have been courted by few suitors in the past. Does this indicate something imminent- no one can tell. But one this is clear, the board has performed its fidiuciary duty with flying colors by looking out for The Few and putting the burden on the acquirer. This might or might not make EXTR less attractive to the buyer but then again the board of directors only gets paid by EXTR not by the potential buyer.

Monday, February 06, 2006

Coat of Blues

BCSI pre-announced negatively this morning and the market cap took a 39% haircut; given that BCSI is one of the high-flying high expectations/high multiple stock. Company provided absolutely no details regarding the miss (that never helps in negative pre-announcements)

The really interesting educational lesson coming out of this pre-announcement was the importance of leverage. BCSI had originally guided to $38.2 million to $39.3 million in revenues and EPS between $0.32 and $0.36. Company now expects revenues in the range of $34.5 million to $35.1 million and EPS between $0.15 and $0.19. With a mere $4 million miss on the top line the company expects EPS to be cut in HALF!! Can you imagine running a company where your operating margin can be cut in half if you come in roughly 10% short of your goal? Obviously leverage works both ways and in this instance it had a negative affect. This suggets that a) there is some serious pricing pressure (from WBSN?) out there especially given that the company supposedly raised prices on its products last year b) the company had a huge spike in operating expenses (which any good management should have seen coming) or c) combination of both factors. My money is on the first option. BCSI is surely seeing slowing growth in its core proxy product and its web filtering product is already discounted generously against competitors. In order to meet growth goals (to support the high multiple) the company is further discounting products and that leads to the operating margins taking a serious hit.

We will not know the real cause until further details are revealed on February 14th conference call. But the slowing growth and lower profitability will definitely lead to lower valuation multiple. One positive thing this miss provides is that it sets the bar lower for the company which it might need especially given the recent expensive acquisition company recently announced and its plans to compete in the hotly contested L4-L7 market.