Category: Internet Equity Research
3D Systems: Can New Management Turn the Tide?
On April 4, 2016, following a six month search, the board of directors of 3D Systems (3DS hereafter) appointed Vyomesh Joshi, aka VJ, as president and CEO. The appointment occurred as the venerable manufacturer of 3D printers attempts to regain its footing, following an extended period of questionable acquisitions, loss of market focus, and damaged credibility among investors.
Joshi, aged 62, had been president of the Imaging and Printing Group of Hewlett Packard for 11 years, beginning in February 2001, and left as EVP in March of 2012, bringing to a close a 31-year career at HP, after HP, in one of its many reorganizations in the last number of years, combined printers and personal computers into the same business unit. While leading the $26 billion H-P printer business, Joshi doubled the division’s operating profit. Joshi appears to have been lured out of near-retirement with a stock and options package worth a potential $27 million, based in large part on 3DS’ future stock performance. Joshi is currently on the board of directors of both Wipro (NYSE: WIT) and Harris Corporation (NYSE: HRS). He received his bachelor’s degree in engineering from L.D. College in Ahmedabad, India, and a master’s degree in electrical engineering from the Ohio State University.
Joshi replaces 3D Systems’ highly flamboyant and acquisitive CEO Avi Reichental. Over the last few years 3DS has endured numerous set-backs, including an over-emphasis on acquisitions for growth, missteps in the consumer printer market, distribution channel challenges, product quality issues, a delay in the filing of its 2015 10-K, along with a lack of investor confidence, which has resulted in a more than 80 percent contraction in its share price since peaking at $97.25 in late 2013.
Since taking the helm at 3DS Joshi has been somewhat coy regarding future plans, but has noted the company’s lack of operational efficiency, and the challenge to build a sustainable corporate culture from among the company’s employee base of roughly 2,500, many of whom have come to 3DS via acquisition. In mid-June 3DS announced it had hired John N. McMullen, age 58, as VP Finance and CFO, replacing David Styka. McMullen had most recently been at Eastman Kodak, where he took the helm as CFO beginning in June of 2014. Prior to that, McMullen, was SVP Finance and Corporate Treasurer, as well as CFO of HP’s Imaging and Printing Group, where he worked alongside 3DS’ new CEO, Joshi.
The new management team will have much to confront, including helping customers sift through the reality versus the hype of 3D printing, along with the need to create printers with faster speeds and more precision to produce parts that can be used in volume production, in addition to prototypes utilized for visualization and marketing purposes. 3DS has, along with many of its competitors, from time to time over the last three years, produced printers with varying levels of product quality.
With regard to Joshi’s future strategy, we can gain a glimpse into his thinking. In an address before the Net Impact Conference at Stanford in November of 2005, Joshi spoke of the elements required to create a sustainable business. These include: identifying holes in the market, developing appropriate price models, establishing business partnerships, fostering trust and respect among employees, and providing leadership that puts business first, people second, and the egos of managers third.
Veeva Systems: Taking the Cloud to Life Sciences
With projected calendar 2015 sales of $410 million and a market cap of roughly $3.3 billion, Veeva Systems is a leading provider of cloud software for salesforce automation, content management, and sales contact data to the global life sciences industry. Based on an exclusive software license from salesforce.com (NYSE: CRM), Veeva’s CRM software is now utilized by 17 of the top 20 largest pharmaceutical and biotech companies, including eight of the top 10. Within the top 20, only three have thus far not made the switch to Veeva: Switzerland-based Roche Holding, France-based Sanofi, and France-based Novo Nordisk, which ranks in the top 15.
Veeva has identified an annual market spend of over $5 billion in software for CRM, content management, and sales data, and so it has much running room ahead. Veeva has already captured an estimated 50 percent of the CRM market for pharma and biotech, and could very well capture as much as 60 percent of the market over the next several years, as the company continues to roll out new seats to existing customers, and sell additional CRM add-on modules.
Since Veeva is cloud-based, and features a multi-tenant architecture, the company can update the software of its entire customer base at the same time, reducing the time, aggravation, and cost associated with maintaining and updating several versions of the same software program. Veeva’s cloud-based product set stands in contrast to two of its largest competitors, Oracle (NASDAQ: ORCL), and IMS Health Holdings (NYSE: IMS), which support and maintain several software packages simultaneously, many of which have been developed for older client server computer systems, and are not hosted in the cloud. Support for these older software products detracts from keeping their cloud products up to date, which will likely lead to further market share erosion.
Veeva’s newer products for content management and sales data, respectively, accounted for less than 10 percent of sales a year ago, but now account for about 20 percent of product sales. These products carry slightly higher gross margins than the company’s CRM products, and more than double its addressable market. Veeva has additional room to sell Veeva CRM, Veeva Vault, and Veeva Network to existing and new customers, as well as to sell the new products to other segments in the life sciences market, such as medical devices, laboratory instruments, and CROs—segments with which the company conducts limited business currently.
Veeva benefits from an experienced management team, led by Peter Gassner, a former SVP of Technology at saleforce.com, and at Peoplesoft (later acquired by Oracle), where he was Chief Architect and General Manager for PeopleTools, and at IBM Silicon Valley Lab, where he participated in database research and development. Matt Wallach, co-founder and President, was formally GM of the Pharmaceuticals and Biotechnology division of Siebel Systems (later acquired by Oracle). CFO Tim Cabral has held financial management positions at Peoplesoft and other technology companies. Detailed knowledge of the specific needs of the pharma and biotech segments, gives Veeva a leg up over its competitors, many of whom have only general knowledge of the life sciences sector.
Veeva has a strong balance sheet, which features $438 million in cash and no debt, and continues to generate very solid cash flow, all the while growing the business, while running at a 30 percent operating margin in the most recent quarter.
WebMD Health: a Precarious Prognosis
With projected 2014 revenues of $574 million and a market cap. of roughly $1.8 billion, WebMD is a leading provider of ad-driven health-related content. Online ad sales, principally to drug companies, account for 80 percent of sales. WebMD also provides private content portals to 100 companies, which account for the remaining 20 percent of sales. These portals provide information, advice, education, and services that enable employees and health plan members to evaluate healthcare benefits, treatment, and insurance options.
With the assistance of new management in the last couple of years, WebMD rekindled growth in its online business in part by reducing ad pricing and offering more flexible business terms, including ad campaigns of shorter duration, as well as targeting healthy lifestyle consumer advertisers and health insurance sponsors. As a result, WebMD’s online ad business rebounded by 11 percent in 2013, following a precipitous 18 percent decline in 2012.
In the last couple of quarters, however, online ad spending growth has begun to decline, due in part to tougher comparisons against last year’s performance, a greater emphasis on mobile advertising, for which advertisers spend less than on full-fledged PCs and tablets, which offer larger screen sizes, and the ability to gain more metrics on user behavior. Although not a single company accounted for more than 10 percent of ad sales in either 2012 or in 2013, WebMD depends on a concentrated customer base of drug companies, and an unspecified contribution from non-pharma brands in its online ad business. Recent and proposed consolidation in the global pharmaceutical business is likely to increase the company’s customer concentration.
WebMD’s private portal business, in which it provides healthcare related information to employers, employees, and health care services providers, contributed 18 percent of sales in WebMD’s Q3, and grew by 21 percent over the prior year, almost entirely due to the Blue Cross Blue Shield Association Federal Employee Program that the company launched at the beginning of 2014. The five million member program is WebMD’s largest-ever contract in this category, although the margin impact is less clear. We note that WebMD does not disclose the gross or operating margins for the private portal business, making it difficult to assess the financial impact of the transaction. Elsewhere within the business trends are not positive. WebMD had 100 private portal customers as of the end of the end of the third quarter of 2014, down from 113 in the prior year.
Key swing factors for the next 12 months include whether WebMD can (1) maintain and/or grow its share in online ad spending by the drug companies; (2) attract more consumer brands and health plan sponsors to advertise on its websites; (3) achieve margin expansion beyond current levels, while investing in new platforms and programs.
PetMed Express: an Investor’s Best Friend?
With annual sales of $233 million and over 2.6 million active customers, Pompano Beach-based PetMed Express (NASDAQ: PETS) is the largest pet pharmacy in America, and a leading online provider of medication, nutrients, and health-related supplies to pet owners and their dogs and cats. Leveraging the trends toward online commerce, an aging pet population, and the impending shift from topical medication to prescription pills, PetMed focuses on the health management needs of its customers’ pets. About 45 percent of sales comes from prescription medication, 45 percent from health-related products, and 10 percent from pet lifestyle products.
Health-related trends in the pet population mirror trends affecting their owners. These include rising levels of life expectancy, yet greater presence of disease and chronic conditions such as obesity, thyroid, and arthritis. Like their human companions, pets are benefiting from greater awareness of the impact of a nutritional diet.
A key factor impeding PetMed Express’ sales growth over the last couple of years has been the emergence of numerous brick and mortar and online retailers that have expanded their efforts in the pet health category, seizing upon an obvious area of consumer interest. PetMeds’ strengths include the ability to fulfill 80 percent of prescription orders through an online customer care group, at prices that range from 10 to 50 percent below veterinarians’ prescription medication prices. PetMeds boasts an 80 percent one-day turnaround time on orders, and an 80 percent reorder rate among customers. PetMeds’ highly efficient operations yield over $1 million in revenue per employee, which enables it to achieve a 12 percent operating margin, 20 percent higher than PetSmart, its closest publicly-traded peer, despite a dramatically lower sales volume. That said, competition ranks as the number one impediment to PetMeds’ near-term growth.
An experienced management team has been focused on identifying areas of profitable growth for the company, including a greater emphasis on higher margin prescription drugs. Newly introduced creative advertising may help to generate sales to new customers, an area which has been growing at a slower rate in the last year. While the company develops a profitable growth strategy, investors can draw upon a dividend, which has increased steadily over the last several years. Its current yield is 4.4 percent.
PetMeds’ core competencies in online distribution, customer service, efficient inventory management, and advertising, combined with a 2.6 million pet owner active customer base, and solid balance sheet make it an under-valued asset, one which we believe will grow in value over time.
Oculus VR: More than Meets the Eye
On Tuesday, March 25th, Facebook announced the $2 billion-plus acquisition of Oculus VR. Based in Irvine, CA, and founded in 2012, Oculus has been working to create a mass market virtual reality headset, which can be utilized to enhance the videogame experience. The brainchild of appropriately-named Palmer Luckey, Oculus has already created a successful developer tool kit, replete with a prototype headset, cables, power supplies, software, and lenses, and has sold over 60,000 copies thus far, according to the Wall Street Journal. Prices range from $300 to $350 per tool kit.
The strategy seems to be to get the tool kit into developer hands, gain feed-back on the product, and then create a consumer headset, already dubbed the Rift, which will be targeted to the large mass of video game users, four million of whom have purchased the Sony Playstation in the last several months.
The headset will feature ultra stereoscopic 3D rendering, a large field of view, as well as “ultra low latency head tracking,” according to the company’s founder. All of these features are designed to provide a more realistic, immersive, 3D experience than other products on the market, none of which have achieved critical mass. Oculus’ strategy is to provide an extremely affordable yet high quality device, which is already being assisted by breakthroughs in high density displays, and ultra lightweight sensors. Funded by several prestigious VC firms who have provided over $70 million in financing, Oculus is set to ship the second iteration of its software developer tool kit sometime in July.
The $2 billion acquisition includes $400 million in cash, approximately $1.6 billion in stock, and a potential earn out of $300 million, assuming certain milestones are met. Facebook CEO Mark Zuckerberg sees larger plans for the company as a social platform that might include the potential for doctor patient consultation, online learning, virtual vacations, and sporting events. We think it is highly plausible that Oculus caught the attention of other consumer-oriented tech companies, including Microsoft, Google, and Apple, but may have been persuaded that its best chance to develop a mass market device would be to link up with Facebook. No doubt, the company’s VCs had strong thoughts about the valuation. If published reports regarding the sale of 60,000 developer toolkits are true, it seems plausible that Oculus generated over $18 million in revenue in the last year.
John Chen’s Challenge
As BlackBerry (NASDAQ: BBRY) refines its mission of “pushing the boundaries of mobile experiences,” all eyes will be upon 58 year-old John Chen, who has been named interim CEO.
Mr. Chen, who hails from a modest upbringing in Hong Kong, and lived in New England for several years, where he attended the Northfield Mount Herman school on the banks of the Connecticut River, and graduated with a EE from Brown University in 1978. He then headed West to receive his masters in electrical engineering from the California Institute of Technology the following year.
John Chen began his career at Unisys, (the merger of mainframe computer companies Burroughs and Sperry) as a hardware engineer, and later became president and COO at age 38 of Pyramid Technology Corporation, a fast-growing computer company, based in San Jose, California, started by former HP engineers, and a pioneer in Reduced Instruction Set Computing. After Siemens acquired Pyramid and merged it into Siemens Nixdorf, Chen became president and CEO of Siemens Nixdorf’s Open Enterprise Computing Division in 1996.
A year later he joined Sybase, as president and CEO. Sybase, at one time, was the youngest and fastest growing database software company in the world, and a perceived challenger to Oracle for technology leadership. A series of management missteps pertaining to its products and technology, misleading financial statements, and ultimately lost investor credibility, led to a multi-year phase of purgatory—not unlike that experienced by BlackBerry.
This set the stage for a turnaround, which was led by John Chen, after he assumed leadership of the company in 1997. Under his leadership Sybase reemerged as a provider of data warehouse and other analytics software, mobile data management, messaging and virtualization technology. And the company recorded 55 consecutive quarters of profitability. In May of 2010 SAP AG the German enterprise applications software giant acquired Sybase for $5.8 billion, thus filling a gaping hole in its own product line, and better positioning itself as an Oracle competitor.
Among the myriad challenges facing John Chen and the management of Blackberry is what to do with the company’s smart phone and tablet business, which has steadily lost market share to long-standing competitors and up-starts. The company’s software challenges are no less daunting, although the company possesses solid mobile and security assets. Blackberry also benefits from several thousand patents relating to mobile devices, software, and security, and these are sure to be powerful assets in the future.
All in all, John Chen’s challenges exceed those that he faced upon joining Sybase some thirteen years ago. It will be interesting to see whether his interim position is followed by a more permanent one in which he can reestablish the leadership once held by the venerable Canadian company.
Constant Contact Still Flying Below the Radar Screen
Constant Contact (NASDAQ: CTCT) of Waltham, Massachusetts is the category leader in email marketing software, with a cloud-based subscription software service that helps over 550,000 companies mount effective marketing campaigns, and maintain a continuous line of communication with customers and prospects. Though the company lost focus last year with an over-exuberant thrust into the social media market, Constant Contact, has, in the last several quarters returned to a more disciplined sales approach, and has added over 10,000 gross new customers in each of the last two quarters. We think it highly probable that CTCT will end 2013 with close to 600,000 active customers.
Constant Contact targets more than 20 million small and mid sized businesses in the U.S., as well as non-profits, including trade associations, schools, churches, hospitals and libraries. Constant Contact’s core email marketing product improves the quality and frequency of interaction with customers, constituents, and prospects, while reducing the costs associated with expensive, and often wasteful direct mail.
Three years ago Constant Contact offered only one product, email marketing, but now has six: online surveys, event marketing, social media marketing, local deals, and digital storefronts for small businesses. Each of these products target large addressable markets inside the company’s existing customer base, as well as new segments, which are receptive to the company’s affordable pricing. The new products have thus far been modest revenue contributors, yet signs are pointing in the right direction, as the company has demonstrated that its customer retention rate is 20 percent higher among customers that opt for two or more products, and 40 percent higher among customers who subscribe to three or more products.
CTCT has been slow to address overseas markets, but its products are used in the English language in over 100 countries. We believe the company will have a large addressable market overseas once it begins to roll out foreign language versions of its products.
Constant Contact, despite having made a dilutive acquisition, which cost the company over $65 million in cash, maintains a stellar balance sheet with nearly $100 million in cash, no debt, and negligible receivables. The company anticipates generating over $20 million in free cash flow this year, and not long ago initiated its first-ever share repurchase program, with an authorization for $20 million.
Constant Contact’s improving prospects coincide with a recent acceleration of M&A activity in the marketing automation sector led by Salesforce.com’s purchase of ExactTarget, and Oracle’s recent acquisition of Eloqua. Constant Contact’s large installed base, improving business model, growing portfolio of products, and untapped potential at the mid-range of the email marketing market are among its most alluring attributes, which may yet lift it above, rather than below many investors’ radar screens.
Amazon.com: Streaming for Success
As part of its mission to provide planet earth with the largest selection of consumer products and services, Amazon.com launched Amazon.com Prime Instant Video in February 2011. The $79 per year annual service, an extension of its Amazon Prime two- day shipping program for all Amazon purchased goods, now features over 36,000 movies and television shows that can be streamed to its customers’ video devices, at no additional cost. In its most recent quarterly letter to shareholders, Netflix, Amazon.com’s most significant streaming competitor, indicated that of its top 200 most popular television shows and movies in the fourth quarter, Amazon.com offered 37 percent of these to its viewers. This overlap has risen from zero two years ago, and is the highest level of overlap among Netflix’s key competitors.
Amazon.com. like Netflix, has recently become more interested in proprietary content that can be displayed only to Amazon.com Prime Instant Video customers. Toward that end Amazon.com recently added FX crime drama Justified to its expanding line-up of exclusive content. Amazon has also announced exclusive agreements with PBS for Downton Abbey, and the CBS series Under the Dome, based on the Stephen King novel, and produced by Stephen Spielberg. Through Amazon Studios, an original movie and series production arm of Amazon.com, Amazon currently has 11 min-series in either trial or production mode, including five children’s series, and six comedy pilots. Amazon intends to air the productions on Amazon Instant Video, Prime Instant Video, Lovefilm UK and Germany (an Amazon.com subsidiary), where customers will pay no additional cost to view them. Amazon intends to gather feed-back during the pilot mode to determine further funding.
Amazon.com briefly experimented with a monthly subscription service in November of 2012 in advance of the holiday shopping season, but mysteriously pulled it after two weeks, preferring to keep Amazon Prime an annual, rather than monthly subscription service. A major motivating factor for Amazon.com may have been its desire to avoid getting stuck with a massive shipping bill during its seasonally strong fourth quarter, which ultimately revealed a declining rate of sales growth, which, in turn, has upped the ante on succeeding with its streaming strategy.
Illumina – Driving Next Generation Sequencing
Personalized medicine is the massive market opportunity next generation sequencing (NGS) offers. The market was about $28 billion in 2011 and dominated by tissue tests to determine drug therapy decisions. The opportunity lies with the ability to generate targeted medicines based on virus/disease composition or individual human genomes. Unfortunately, cost and lack of analytical abilities have acted as impediments to the expansion of this technology into the clinical diagnostics, pharmaceutical and other applied markets, but progress is being made. From a cost perspective, NGS equipment designers have successfully reduced the cost of sequencing a complete human genome to sub-$5,000, from $1 million in 2007. The consensus is that once the price hits or goes below $1,000, the technology will be fiscally viable for more commercial and industrial applications.
One step in this direction has been the desktop analyzers offered most notably by Illunina (NASDAQ: ILMN) and Life Technologies (NASDAQ: LIFE). These instruments are about a sixth of the cost of the higher-end models and are of increasing interest to clinical customers. Both companies have plans to seek FDA approval, with Illumina expecting to submit its request with a specific assay method by the end of 2012. Consumables pull-through appears to be a healthy $55,000, although the sample size is small at this point.
In an effort to reduce the data-interpretation-headwind, Illumina has announced plans to launch five targeted content sets. These consumables were designed by experts to offer streamlined, targeted sequencing for specific genetic diseases or conditions. The targeted conditions include autism, cancer, cardiomyopathy, inherited disease and exome (genetic diseases). The products are only for laboratory use. Shipments begin in Q4 2012. These standardized sets should help advance the analytical abilities of researchers delving into each condition.
Illumina has also teamed up with Partners HealthCare to speed up clinical interpretation. Together they will offer medical geneticists and pathologists infrastructure and networking tools to support the analytics and reporting processes for genetic sequencing data. The companies are combining Illumina’s MiSeq analyzer with Partners’ GeneInsight suite of IT solutions for streamlining analyses and reporting of genetic test results. GeneInsight is FDA approved. The new tools will link to Illumina’s BaseSpace cloud-storage product enabling analysis of the stored data.
Another initiative Illumina has launched is its BaseSpace cloud-storage offering. The service will take genomics data and store it in a cloud-based system for easy sharing and analyzing. This bioinformatics product gives Illumina a key differentiator, as well as a new revenue stream and a way to help move past the data interpretation issue. Illumina will offer one terabyte free, then charge $250 a month for each additional terabyte, or $2,000 for the year. It also offers a 10 terabyte package that runs $1,500 a month, or $12,000 a year. The service will enable clinical customers and smaller research laboratories to avoid having to invest in their own expensive data warehouses. Illumina is also launching an app store for the BaseSpace that will enable researchers to develop analytical tools and sell them through the store, with Illumina taking a 30 percent cut.
Finally, Illumina has announced an addition to its whole genome sequencing service. The company will now offer a “RapidTrack” service that will expedite the sequencing of whole genomes that customers send to the company. Using the new HiSeq 2500, which is capable of sequencing a complete genome in one day, Illumina will now be able to return data sets to customers in less than two weeks. This high-end offering is much improved from main competitor, Complete Genomics, which can take three months or longer to return the completely sequenced genome. We believe this service offers another means to spur the adoption of sequencing techniques in new markets.
Two startups working to speed the process to achieve personalized medicine are DNAnexus and Bina Technologies. DNAnexus also offers a cloud-based service much like Illumina’s, positioning itself between researchers and the sequencing facilities. Bina Technologies is working on software to reduce the 300 gigabytes of information from each complete genome sequence, to a more manageable level. The company reduces the information into profiles, which are more easily uploaded to cloud-systems and are simple to share and manage.
While headwinds still remain, the push towards developing the ultimate market for NGS appears to be more at the forefront of sequence equipment manufacturers than ever before. We believe this bodes well for the long-term outlook for the industry.
Battle Road Research Announces the Battle Road IPO Review
PRESS RELEASE
Wednesday, September 19, 2012
Battle Road Research Announces
the Battle Road IPO Review
A Monthly Survey of Growth-Oriented IPOs
(WALTHAM, MA) Battle Road Research (www.battleroad.com), an independent stock research firm, has launched The Battle Road IPO Review, a monthly survey focused on the prospects of more than 150 growth-oriented companies that have come public in the last five years. The first issue features stocks across seven sectors: internet, software, hardware, consumer, business services, and manufacturing.
“Our clients tell us they are interested in seeking out new investment opportunities, particularly from among companies that are relatively new to the public markets. As a research-only firm, without an investment banking axe to grind, we are in a unique position to assess the prospects of many of these growth-oriented companies,” according to Ben Z. Rose, President of Battle Road Research.
From its proprietary database of growth-oriented IPOs of the last five years, Battle Roadanalysts utilize qualitative and quantitative measures to help its clients screen for investment opportunities across a range of technology, consumer, business services and manufacturing stocks. The initial focus of the Battle Road IPO Review is on long-oriented ideas. 90 percent of the companies are below $5 billion in market cap, as of mid September, 2012. The Battle Road IPO Review is available in hard copy or directly from Battle Road Research’s website at www.battleroad.com.
Established in 2001,Battle Roadis a research-only firm, not an investment bank, not a broker dealer, and not an asset manager. Unlike Wall Street and regional investment banks, who are paid by the companies they research,Battle Roadhas never accepted compensation from any company that it researches.
“As we set out in search of investment ideas for our clients, we trust that the Battle Road IPO Review will be a helpful addition to our clients’ stock-selection process, and will help further our reputation as a credible stock research company, free from the influence of investment banking,” Rose concluded.
About Battle Road Research
Battle Road Research provides fund managers and analysts with an independent voice on technology, and consumer stocks. Our research process combines rigorous financial analysis with insights gleaned from industry sources. We present our findings in straight-forward Buy, Hold, or Sell research reports. The Battle Road IPO Review is a monthly survey focused on the prospects of over 150 growth-oriented IPOs of the last few years. Since our founding in 2001 we have refrained from investment banking, company-paid reports, and personal investment in the stocks we research.
Media Contact:
Ben Z. Rose, President,Battle RoadResearch
781-894-0705, ext. 204
[email protected]