November 22, 2010, 3:36 pm

IPHI - Inphi

2010-11-06
IPHI - Inphi

IPHI - Inphi plans on offering 7.8 million shares(assuming overs) at a range of $10-$12. Morgan Stanley, Deutsche Bank and Jefferies are leading the deal, Stifel and Needham co-managing. Post-ipo, IPHI will have 25.1 million shares outstanding for a market cap of $276 million on a pricing of $11. Ipo proceeds will be used for general corporate purposes.

**Note that IPHI also has 6.6 million share via options at an average exercise price of $3.68. Expect most of these options to be exercised the first 2 years public, which will dilute market cap by over 25%.

Walden International will own 14% of IPHI post-ipo.

Samsung will own 5% of IPHI post-ipo. IPHI derives approximately 1/3 of their revenues annually from Samsung.

From the prospectus:

'We are a fabless provider of high-speed analog semiconductor solutions for the communications and computing markets. Our analog semiconductor solutions provide high signal integrity at leading-edge data speeds while reducing system power consumption.'

IPHI's semiconductors address bandwidth bottlenecks in networks.

Two notes. IPHI is a fabless semi operation, meaning they do not manufacture they design. Margins tend to be higher at fabless operations; Secondly IPHI is an analog semiconductor operation in a world that is moving digital where possible. Analog semis at this time tend to have lower margins and be more of commodity.

IPHI does note that their solutions do provide a high speed interface between analog signals and digital information in telecommunications systems, networking equipment, datacenters, and storage systems.

17 product lines with over 170 products. End customers include Agilent, Alcatel-Lucent, Cisco, Danaher, Dell, EMC, Hewlett-Packard, IBM and Oracle. As noted above, Samsung accounted for 1/3 of revenues the past 6 quarters. Micron has accounted for 12% of 2010 revenues.

43% of revenues in 2009 were from a single semi product, the GS04 which consists of an integrated phase lock loop, or PLL, and register buffer. The GS04 provides an interface between the CPU and memory to increase the memory capacity. Essentially the GS04 assists in handling wireless network signal deterioration issues by making existing equipment more efficient. A next generation semi to make previous generation equipment run more efficiently if you will. The primary driver here is the growth in video, mobile and cloud computing putting stress on current network bandwidth. The GSO4 helps declog bandwidth issues by increases existing memory capacity and efficiency. Next generation versions of the GS04 now comprise substantial revenues for IPHI.

Wireless networks are driving the need to improve network bandwidth. Most of the semi ipos we've seen over the past year deal with the need to improve wireless network capacity.

Products can operate up to 100 gigahertz.

IPHI does not work off of long term contracts. It is 100% purchase orders.

Risks - Very cyclical and competitive sector. Companies rarely enjoy extended pricing power on next generation products as the competition tends to catch up and surpass quickly. Tends to mean pricing drops quickly after products are introduced to market. IPHI's GS04 is a great example. This product accounted for 43% of 2009 revenues, however IPHI notes that it is now considered a 'mature' product and sales are declining. In fact, IPHI expects nearly zero 2011 revenues from the GS04. Companies such as IPHI constantly need to develop better/faster/newer mousetraps to drive revenues. End products highly dependent on consumer and enterprise spending cycles. Not uncommon for an inventory glut to strike during economic slowdowns sending pricing and revenues down hard from expectations. Conversely, at the trough of a cycle these type companies tend to outperform going forward as inventory levels for end products are depleted.

The above tends to mean quarterly results can be quite choppy.

Sector also characterized by lots of litigation. In '09 Netlist filed a patent infringement suit against IPHI. IPHI in turn filed against Netlist claiming NLST infringed on IPHI's patents. Suit is still in early stages of litigation. In addition a customer has filed an $18 million warranty claim against IPHI for defective parts shipped in 2009. IPHI believes the $4 million already paid to cover the warranty issues is sufficient. Case still to be decided.

Acquisition - In 6/10 IPHI purchased the assets of Winyatek Technology for just under $10 million.

Financials

$3 per share in cash post-ipo.

IPHI has had extensive tax incentives and tax loss carryforwards. Tax rate going forward should be in the 10% ballpark for awhile. Note that in 2010, IPHI booked a substantial gain on taxes. This is non-operational and will be folded out of results below.

2009 was IPHI's first year of operational profitability.

2010 - Total revenues should reach $85.2 million, a strong 41% increase from 2009. Keep in mind, '09 was a trough year for the sector. Gross margins of 64%. R&D is the major expense line here as IPHI needs to continue developing new and better semis. 15% operating margins. Plugging in pro forma 10% taxes, net margins of 13.5%. EPS of $0.46. On a pricing of $11, IPHI would trade 24 X's 2010 estimates.

2011 - In 2010, revenues grew faster than expenses on a percentage basis. A good sign and IPHI's 3rd year in a row of improvement on that metric. Looking at direct competitors, they are forecasting low double digit growth in 2011 of 10%-12%. If we plug in similar for IPHI we get: $96 million top line/65% gross margins/16.5% operating margins/15% net margins and $0.55-$0.60 in EPS. On a pricing of $11, IPHI would trade 19 X's 2011 earnings.

Direct competitors include HITT and BRCM. As each is more diversified than IPHI, a straight comparable of the entire company is not quite apples to apples. However each does compete directly with IPHI and each has been doing quite well of late. HITT has been one of the more successful ipos of the past decade actually.

Conclusion - Well run company that was not only able to increase revenues in a trough year 2009, but had first year of operational profitability. By all metrics 2010 has been a very good one for IPHI. I do like the annual increases in revenues and operating margins here the past few years. If IPHI can sustain each through 2011, this will be a successful deal in the short and mid-term. Definite recommend here. Solid, well run semi company finding solutions to the wireless bandwidth bottleneck.

One note to keep in mind is the option dilution which should hit pretty hard from the 6 month to first year public timeframe.

November 8, 2010, 8:55 am

PRMW - Primo Water

2010-11-07
PRMW - Primo Water

PRMW - Primo Water offered 9.6 million shares at $12. Stifel and BB&T led the deal. Janney Montgomery and Signal Hill co-managed. Post-ipo PRMW has 19.1 million shares outstanding for a market cap of $229 at $12. Bulk of ipo proceeds will go to help pay for the Culligan Refill acquisition, the remainder to repay debt.

The Chairman, CEO and President Billy Prim owns 10% of PRMW post-ipo.

From the prospectus:

'We are a rapidly growing provider of three- and five-gallon purified bottled water and water dispensers sold through major retailers nationwide.'

Purified water company, selling those larger bottles you see in company water systems. Initial sale of water dispensers and then generate recurring revenues via sales of the 3 and 5 gallon bottles of water. Empty bottles are exchanged at recycling center displays in retail outlets.

Exchange centers include Wal-Mart, Lowe's, Sam's club, Costco, Target, Kroger, Albertsons and Walgreens. 7900 exchange locations nationwide. PRMW has done a nice selling in their water bottles/exchange centers at major US retail locations. **Looking at PRMW's margins I suspect they were able to sell in their dispenser/exchange centers into so many large retailers by giving the retailers premium pricing...in other words Wal-Mart and Lowes etc...are getting a chunk of PRMW's margins by allowing PRMW to locate with them. PRMW does even note in the prospectus that they offer retailers 'attractive margins'.

PRMW believes dispenser owners consume 35 3-5 gallon bottles annually on average.

PRMW utilizes 55 independent bottlers and 27 independent distributors to service their retail network.

Acquisition - PRMW recently purchased Culligan's water filtration ansd store vending/refill business. Culligan operates in 4,500 retail locations. Total cost was $105 million. Customers of the Culligan Refill Business include Walmart, Safeway, Meijer, Sobeys, Target, Hy-Vee and Kroger. In 2009 this business generated $26 million in revenues.

Revenues thru Lowes account for 33% of revenues, Sam's Club 19% and Wal-Mart 15%.

Same store sales have increased approximately 5% through the first nine months of 2010.

**Management team took Blue Rhino public in 1998 through sale in 2004. Note that soon after ipo, there were auditing issues with Blue Rhino due to extensive revenues derived from sales to inter-related party companies. In an article in early 1999, the WSJ questioned Blue Rhino's business practices. Blue Rhino's stock went from $13 pricing to $25 soon after ipo to $2 within a year. Blue Rhino did rebound and eventually sold to Ferrellgas for $17 a share in 2004. All in all, after the turmoil first year, Blue Rhino was a successful public company. Ipo market cap was $94 million in 1998, buyout market cap was $340 million in 2004.

PRMW's management team is using the same exchange business model here with water that they employed with propane at Blue Rhino.

Financials

$11 million in net debt post-ipo.

PRMW has never had an annual operational or net gain.

2010 - Pro forma(factoring in Culligan purchase) revenues actually look to dip slightly in 2010 as sales of PRMW's systems have dipped. Refills have increased in 2010, the actual systems have lagged though. Full year revenues should be $69 million, down 4% from 2009. Operating margins are negative, losses should be in the $0.10-$0.15 ballpark.

Conclusion - Since operation commenced, PRMW has never been able to generate positive operating margins. The core business will show a revenue dip in 2010. PRMW blames this on inventory glut from 2009. Either way a company not generating growth and with consistent negative margins and debt on the books should not be generating a market cap 3 X's+ revenues. Yes there could be potential here if PRMW is successful in integrating the Culligan business in a cost-effective manner, however I'd rather wait and see than step in here on ipo. Pass.

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