Facebook Ahead of Earnings!

For some investors it may seem like a scary thing to get into Facebook’s (NASDAQ: FB) stock right now, and who can blame them right? I mean, the stock has appreciated some 52% from $19.50 on Oct 23, 2012 a day before the 3Q12 earnings release to $29.66 as of Jan 18, 2013, while others, are still very optimistic about the future for this young company. 

I have written on two other occasions about the prospects for this company and the future of the stock ahead (those of you who want to read the full reports please visit my personal blog and just look for the articles on the right side), and it looks to me as a still great opportunity to jump in, here’s a recap:

Revenue - It has been consistently increasing over the last 9 quarters at a compounded rate of about 13% sequentially, but decreased over the last 4 quarters to a rate of 3.5%

Costs and Expenses – The Company should start delivering improvements in this area, during 2012 they recognized a huge portion of their RSU’s (Restricted Stock Units) causing a big impact on the bottom line and more specific during the 3Q12 and it is now expected to get back to normal levels.

Monthly Active Users (MAU’s) – A very important metric for Facebook, it has consistently increased to a nice 1,007 million, as reported on the last earnings call. This number, in my opinion, will be maintained if not improved during this quarter with no signs of deterioration.  Google+, the social site of Google (NASDAQ: GOOG) has been improving over the last few months, in terms of users, but not as much to represent a dent in Facebook’s user base at least yet. 

Average Revenue Per User (ARPU) – Another important metric, and one I expect to be improved this quarter (4Q12) given the fact that mobile monetization was in full display and many products targeting mobile users were rolled out over the last few months. I have said before that at least $1.40 but now I think it can hit $1.50.

Cash on Hand – Having more cash available than their entire debt is certainly a good factor for Facebook’s management team, giving them room to work on what matters for them and investors and not spending time on managing debt.

Products – There are now several money making products where the Company relies on to bring in revenue. Though we may know the name of the products, the truth is that we don’t know if they will ever breakdown the amount of revenue each generates. However, it is important to stay up to date with most of them to get a sense of what’s going on.

Gifts, for example, is one of the products I believe will take off eventually. Although right now I haven’t seen many people using this feature, it may be just a matter of time for this to catch up. I have used it and I am very satisfied with it.

In the most recent press release, Zuckerberg talked about a new product, “graph search” a way to know better your friends and surroundings. This new product and the “nearby” feature are competing with Yelp (NYSE: YELP), not only you can see what others think or say about certain business but get more trustworthy reviews when coming from people you actually know.

With all the information Facebook possesses from its users and the constant interaction users have with each other on the site, this social platform is getting content richer and stronger every day. I won’t be surprised if one day Facebook becomes the ultimate marketing company, after all, marketing companies where using “bulk” information on customer groups, now it is becoming more and more specific getting to a point where an add may be tailored just to one person.

Facebook should be releasing their latest earnings reports on Jan 31, 2013 and with it I expect the stock climb and continue its upward trend, at least in the near future.

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More on Facebook.

• Facebook Stock is Destined to Rise
• The Fiscal Cliff Won't Stop Facebook From Soaring!

   

Deckers Signaled Growth at the ICR XChange Conference

On January 17^th 2013, Deckers (NASDAQ: DECK) participated in the 15^th annual ICR XChange conference in Miami, Florida. There, Mr. Zohar, Chief Operating Officer gave the presentation and several pieces of information are worth mentioning. So, here is a recap of that conference.

Brand Portfolio.

The company gave us a breakdown on the sales and what percentage is attributable to each of the brands they carry.

·         UGG Australia           84%     -Decreased from 87% on 2011.
·         Teva.                          9%       -Reaccelerated on the 3^rd quarter (growth of 21.8% y-o-y)
·         Sanuk                         6%       -Showed a 17% growth y-o-y on its first comparable quarter
·         Other                          1%       -Ahnu, Tsubo, Mozo & Hoka.

One thing I noted while reviewing their 3Q12 income statement once again, was the fact that overall revenues showed signs of improving. While in 2011 Deckers reported 1,377M on revenue, if we take a look at their last twelve months, this number shows an increase of 1.7% for a total of 1,401M.

2012 a Challenging Year.

Mr. Zohar continued the presentation reviewing what the year 2012 meant for Deckers. He noted that weather – being warmer than average – had an impact on the business. Also, he noted that the macroeconomic conditions in Europe played an important role on the sales in that part of the world. Sheepskin (a key component of the UGG boots, the main source of income) costs increased significantly, therefore, putting pressure on margins.

This is not new, management has been telling us this for a while now, and as a matter of fact that was the reason they kept lowering guidance during 2012. However, I do believe that a shift to that trend is happening right now. A Business Insider article by Kim Bhasin noted that the hottest product that shoppers were looking for during Thanksgiving holiday was in fact the UGG boots, and the results of that, has yet to be released on the next earnings report.

Weather, this small-yet-important factor, is also playing in favor of Deckers. At least in the United States, colder temperatures have been registered during the last couple of months, making the UGG boots more appealing than they were 6 months ago. This can also translate into higher sales for this 4^th quarter 2012 and 1^st quarter 2013.

Sheepskin costs will be lower for this 2013. Mr. Zohar said on the conference that prices of sheepskin have been locked at an 11% reduction compared to 2012. With this, margins will be wider, affecting positively the bottom line.

International Markets.

Though Europe is still struggling with the macroeconomic conditions, the company gave two good indicators of international presence and growth; Asia, Japan sales, to be more specific, grew 80% from a year ago putting Japan as the #3 market for Deckers. China also showed improvement of 70% from 2011 placing the People’s Republic of China as the 4th biggest market.

Store Count.

In my opinion, here is where the real profit for the company will come in the next couple of years. Deckers opened 30 new stores in during 2012 bringing the total store count to 77, that’s an increase of 63% in one year. Sales per square foot is averaging $1,700.00, that is pretty much in line with Coach (NYSE: COH) with $1,824 per square foot - according to Kim Peterson in an article published in 2012 - and roughly 55% of what Tiffany (NYSE: TIF) is doing - $3,085 per square foot .

That alone, is no indicative of the future performance of Deckers, but, if we consider that the company plans to have 200 stores by 2014 and that, as per Mr. Zohar, marketing campaigns budget increased to 5% from sales compared to a 4% from previous year, we can then get an idea to where the company is heading with its retail stores.

Deckers is diversifying to other products as well. Handbags, accessories and apparel are some examples of the items they are promoting in order to bring the company into a year round business and not only winter concentrated. The Sanuk brand for example, is a sports action brand targeting young individuals. This brand competes directly with Sperry Top-Sider owned by Wolverine World Wide (NYSE: WWW) and with crocs loafers which of course is a trademark of Crocs (NASDAQ: CROX).

There’s still more road to be covered by Deckers and its management team before investors realize that a positive shift in the company has occurred, but this can give us a good indication that things are improving.

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After a Reader's Request... Aware, Inc.

A few days ago (probably more like a week or so) I was asked, by one member of my Google Community, to perform analysis on two companies he considered to be worth looking at. +Terrence Chan , I am sorry for taking so long but as an Accountant having a Tax Office you can only imagine my business hours right now. I have only been able to work on on one so far and wanted to share it with you.

Aware (NASDAQ: AWRE), a company that supplies various products for the bio metrics and digital subscriber line (DSL) service assurance industries primarily in the United States and Germany.

Giving it a first glance, I was reluctant to analyze it because of the low trading volume and lack of awareness on the company. However, I went ahead and looked at it realizing the good opportunity to make money from it. Unfortunately, for my reader, the way to profit from this company is, in my opinion, being on the other side of the trade, shorting the stock, writing calls or buying puts. Please continue reading and see for yourself.

The company has been trading publicly since 1997, and in some years became very profitable, more specific in 99’ and 00’ where they reported $0.21 and $0.52 per share respectively. Nonetheless, the story drifted dramatically on 2001 and then on, after reporting several non-profitable years (5 to be specific). Then, the story started to become “interesting” once again about a year or two ago, this is because, since 2006, the company has reported net profits and during this 2012 showed signs of improving the bottom line (as you can see in the chart below).

But don’t get carried away with that, bottom line numbers (Net Profit and EPS), although are very important don’t tell the story completely. One must dig deeper to find what’s really going on with the business itself. Companies can make money not only in their core business, but also by selling assets they own, as it’s the case of Aware.

Just by reading their latest earnings release (3Q12) I was able to spot red flags all over it. Here is a list:

1.      Aware has discontinued operations on their DSL Service Assurance Hardware as of this quarter.

2.      Out of the $5.3M in revenue they reported, $3.9M came from the sale of patent assets and not from the business itself.

3.      On the bottom line (Net Income), the company reported $10.3M which included $15.2M net gain from the sale of more assets. In other words without the sale of those assets the company would've showed a loss for the quarter.

4.      Year-to-Date Net Income includes $86.4M net gains from patents and other assets. So, out of the $66M of net income that the company has reported YTD, $86.4M has come from the sale of assets and not from the business. Isn't that actually losing?

That is not all, reading a little more Rick Moberg, Aware’s co-chief executive officer and CFO said:

“Third quarter results were driven by three important factors. That is, the sale of a large portion of our DSL patent portfolio, another strong quarter of revenue and profitability by our bio metrics and imaging business, and the completion of the shutdown of our DSL service assurance hardware business.
With respect to our patent monetization efforts, we would like shareholders to understand that the majority of the remaining patents in our patent portfolio after the recent patent sales relate to our bio metrics and imaging and DSL service assurance software product lines. At the current time, we do not intend to pursue patent monetization alternatives for these patents, although that decision is subject to change."

After reading that, there is no need to go forward, this is a broken business and they are practically selling everything of value on their portfolio to subsist waiting for a business opportunity to present. But until that happens, I will not recommend this stock. You may get better results by shorting the stock than by investing in it.

Thanks +Terrence Chan for making that request and I will be working on $BITA later in the month. As for my other readers please feel free to ask about a company you're interested. Although I may not be able to do it very fast I promise I will do it as soon as I can.

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Greed Will Make You Lose!

“The point is, ladies and gentleman, that greed, for lack of a better word, is good. Greed is right, greed works…” that’s a memorable quote from the controversial Gordon Gekko in the movie Wall Street from 1987. However, that doesn’t apply in real life, or at least not all the time. If you are too greedy looking for profits and don’t pay attention to every aspect of a company you’re investing in, you may end up paying the ultimate price of greed. And that is, losing your money!

For those of you, who are investors of Sprint (NYSE: S), and got in somewhere at the beginning of last year (2012), nothing is sweeter than watching your investment almost triple in value. Shares of Sprint were trading on the low range of the $2 mark during January 2012 and have just touched their 52 week highs of $5.97 this Tuesday. Yes, that is a gain of +184% from its 52 week low. But, staying on this boat for 2013 may be too dangerous and greedy if you ask me.

Let’s take a look at the reasons that made me skeptical of Sprint’s future performance:

1 Customers.

As I wrote in a previous article titled, " BEWARE! Sprint is Actually Losing Customers!" where I point out in detail how management is actually telling us in their latest earnings release that they are losing customers. And to add to that point, I've been talking to people in my circle of friends and in the communities I am a member on Google+ (which of course is in no way a proper sample, but can give me a quick sense of the sentiment about the company), and I found out that either people has left, is leaving or planning to leave Sprint, but, no single positive comment, supporting the company or its services was offered.

2 Statements of Operations.

We know that they’re not profitable and this has been for a good while now. But, did you know that metrics are not improving? And that is certainly needed to get to a profitable stage.

Statement of Operations (YTD Comparison)(in millions)
	9/30/2011	As % of Rev	9/30/2012	As % of Rev	Change
Revenue	$24,957	100	$26,340	100	n/a
Cost of Services	8,170	32.74	8,277	31.42	(1.32)
Cost of Products	5,426	21.74	6,912	26.24	4.50
SG&A	7,131	28.57	7,208	27.37	(1.20)
Depreciation & Am	3,684	14.76	5,050	19.17	4.41

Revenue has grown, it’s true, but it has been driven more by the increase in ARPU (Average Revenue per User) rather than by organic growth. During the first 9 months of 2012, ARPU was about $60.64 compared to $56.83 during the same period the year before. This is because of more smart phones that are being sold requiring customers to pay extra for that service.

Even with the ARPU improving about 6.7% from a year ago there’s no guarantee that Sprint will get back to a profitable stance. For this to happen, growth must come from users, and that is not happening. They can only raise prices so much before pushing another chunk of customers out of the door.

Cost of Services, it’s a metric that improved from a year ago along with Selling General & Administrative. However, the improvement in those to areas (less than 1.35% each) is not enough to make up for the increase in Costs of Products (4.5%). The latter is probably due to the introduction of the iPhone from Apple (NASDAQ: AAPL), which by the way, the company has sold about 1.5 million since inception, and the subsidies they have to pay.

Depreciation and Amortization also increased significantly during the YTD period. I know this is because of the accelerated depreciation of the already planned and discussed Nextel platform shutdown. Nevertheless, please remember that during 2013 the remaining portion of the Nextel equipment will be depreciated to zero, therefore, causing this metric to still be a major factor for this year’s statement of operations.

3 Balance Sheet & Peer Comparison.

Please read the table below while following the comments underneath it.

Balance Sheet Comparison vs. Peers.
TICKER	Book Value		Cash x Share		Debt/Cash		Debt/Equity
	12/31/11	09/30/12	12/31/11	09/30/12	12/31/11	09/30/12	12/31/11	09/30/12
S	$3.80	$2.83	$1.86	$2.11	6.78	6.39	3.32	4.76
VZ	$12.62	$13.19	$4.90	$3.62	13.94	18.77	5.41	5.14
ATT	$18.62	$17.69	$0.56	$0.39	51.75	74.83	1.56	1.64

AT&T (NYSE: T) is the strongest of the group when comparing all four aspects on the table. Although it may seem dangerous to have a debt-to-cash ratio of 74.83 is not as bad when there is not much debt on the books, which bring me to the point of debt-to-equity ratio of only 1.64. In my opinion having more debt on the books than equity is not a good thing, but I must realize that leveraging has become a normal practice of corporations nowadays, and AT&T is certainly the better one of the three.

Verizon (NYSE: VZ) on the other hand, seems to be doing well too. Though, is the highest leveraged of the group is the only one of them that actually improved its balance sheet by decreasing debt and increasing its book value.

This leaves me with Sprint. While its cash per share grew considerably well (+13%) the truth is that what troubles me most is the piling of debt. Debt-to-equity ratio spiked 43% while book value decreased 25%. Sprint is has way too much debt on its books for a company of its size.

4 Other.

Although the deal with SoftBank is definitely a good sign for the company, and it comes with more cash that, can, and it’s being used in the new 4GLTE technology that Sprint is deploying in order to compete better with AT&T and Verizon. This deal still has to be approved by the regulators and will take some time before it happens.

Clearwire’s (NASDAQ: CLWR) deal, even with the threat that Dish Network (NASDAQ: DISH) may take it away because of the higher bid they put out a couple of days ago, might still happen as we can read on a statement that was released by Sprint on January 8 that says:

“Sprint believes its agreement to acquire Clearwire, which offers Clearwire shareholders certain and attractive value, is superior to the highly conditional DISH proposal.

In contrast, the DISH proposal includes a series of interdependent commercial agreements, debt and equity purchases and spectrum sales, which together with the other conditions required by DISH to complete the transaction, makes the proposal not viable. In addition, the DISH proposal would require Sprint to voluntarily waive rights that it holds as a stockholder of Clearwire and that it possesses through various vendor and customer contracts that significantly predate Sprint’s proposed acquisition of the remainder of Clearwire. Sprint does not intend to waive any of its rights and looks forward to closing the transaction with Clearwire and helping consumers across the country realize the benefit of this combination.”

This deal also needs time to materialize (if it does), and time, dear investors, is an expensive commodity.

5 The last and strongest of the reasons.

The ultimate reason why I believe Sprint stock will lose value on 2013 is the very fact that, since 2006 (yes, that’s 5 full years) they show no profit, 2012 will be once again a no profit year and surely, given the facts, on 2013“THEY WILL NOT BE PROFITABLE”.

Why would you put in your money on a company (Sprint) that sells for 2.10x its book value (as of 1/10/13 close), pays no dividend and loses money, when you can buy another (AT&T for example) that sells for less (1.94x book value), pays a dividend and its actually making money?

Greed, as it ultimately happened to Gekko on that movie, will make you lose dearly. Please be careful and vigilant with your money, if you don’t watch it yourself no one will.

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