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Cybersecurity on Deck; Palo Alto Earnings Out This Week

Cybersecurity continues to grow as a concern for individuals, businesses and government entities as the world increasingly performs daily activities electronically. A host of companies have formed to deal with cybersecurity, and if you play your cards right, you may find one, or more that make for solid investment choices for your needs.

Services provided by cybersecurity companies include providing protections to companies’ networks through the use of firewalls, providing cloud storage protections, and preventing e-mail viruses. Most appealing is their ability to stop hackers.

While several of these companies are thriving due to the services they provide, many are suffering from the various costs of doing business. If you want to invest in the space, pay attention to the risks that each of them possess.

The problems range from skyrocketing stock options for employees, to declines in customer demands. These problems can cause the revenues of companies that operate in the space to fluctuate. In fact, many see cybersecurity as being one of the most volatile spaces within the tech sector.

Considering the needs for their services and products, cybersecurity companies are making plenty of money. Furthermore, there is plenty of money to be made. According to Markets and Markets, the global cyber security market size is estimated to grow from $106.3 billion in 2015 to $170.2 billion by 2020, at a Compound Annual Growth Rate (CAGR) of 9.8%.

Of the companies that provide cybersecurity services, Palo Alto (NYSE:PANW) is one that has managed to give investors the most fits. For the past seven quarters, its sales have grown by at least 50%. On that same note, its earnings per share are not doing so well. They are negative $2.29. Of some of its competitors like Barracuda Networks (NYSE:CUDA) and Fortinet (NASDAQ:FTNT), Palo Alto’s EPS is the worst. For example, Barracuda’s EPS is negative $0.08 and Fortinet’s EPS is $.02.

The street expects Palo Alto to report earnings of $339.4 million for the third quarter of 2016 and $.41 in EPS. That would be an impressive increase of 45% and 78%, respective over the same period in 2015. It reports on Thursday.

Observers point out that this is likely the first quarter in at least two years where any sort of slowdown has been detected in Palo Alto’s demand.

Like most observers of Palo Alto, I would not make it a short-term play. Go long, and be ready to weather the ups and downs from its fluctuating revenues and expense pressures.

A good short-term play is Barracuda. Its stock is up more than 4% over the past month, reflecting growing interest in the stock. Zacks points out that Barracuda’s consensus estimate trend has also increased, from $.04 cents per share 30 days ago to $.09 cents per share as of Friday. That’s an impressive increase of 55.6%.

Fortinet has been singled out as a winner in the space by Barron’s due to the company’s ability to help its clients manage their existing technology, and offer protection on multiple fronts. Barron’s noted that Fortinet is up 37% since it recommended them nearly three years ago in a report looking at the industry.

There is an ETF that contains several security software companies whose performance also reflects the fact that the security sector is starting to show signs of slowing. The slowing is based on the guidance that was provided for the second quarter of 2016, as well as full year guidance by cybersecurity companies. The ETF is called the PureFunds ISE Cyber Security or HACK, and the fund is down more than 30% since last year.

Given the demand for their services, cybersecurity companies stand to make billions in the coming years. The key for them is to be able to handle the expenses of providing their services without damaging their top and bottom lines.

Newspaper Industry is Not Dying; Just Not Investable?

The newspaper industry has experienced steep declines in sales over the past few decades, causing them to be less attractive in the eyes of investors.

Many newspapers have merged, or have been acquired, while others have simply gone out of business. I took a look at a few of the larger companies, and came away with mixed feelings. While their efforts to improve are positive, their financials still are worrisome.

Let’s take a look at some of the happenings in the industry right now.

 

 · Gannett

 

First up is Gannett (NYSE: GCI), the publishing company that owns USA TODAY. Look no further than the buying binge that it’s been on to see that it is well capitalized as a force in the industry.

Gannett has completed several impressive acquisitions of newspapers throughout the country. They include buying Journal Media Group, which owned the Knoxville News Sentinel, The Commercial Appeal in Memphis, and 13 other newspapers in Tennessee.

Now Gannett has set its sights on Tribune Publishing Company (NYSE: TPUB), which owns the Chicago Tribune, the Los Angles Times and the Orlando Sentinel. Gannett is facing a problem in acquiring Tribune Publishing, however – Tribune Publishing has declined several offers.

The latest offer is $15 per share, which represents a 99% premium to the $7.52 closing price of Tribune’s common stock on April 22, the last trading day before Gannett publicly announced its initial offer for Tribune Publishing. That values Tribune Publishing at roughly $864 million.

On Friday, Gannett sent Tribune shareholders a letter asking them to send a “clear and coordinated message” to their Board that “they expect superior and certain value for their shares and that the Tribune Board should substantively engage immediately with Gannett regarding Gannett’s offer to acquire Tribune for $15.00 per share in cash.

Tribune shareholders will meet on June 2.

When Gannett reported its first quarter revenues for 2016, operating revenues for the quarter were $659.4 million compared to $717.4 million in the prior year, a decrease of $58 million or 8.1%.

It was able to boost digital-only subscriptions by 37%. The company is also enjoying revenue from diversified businesses. That it has acquired and that includes Cars.com and CareerBuilder.com

As far as guidance, the company said it expected full year revenue trends to improve over 2015 driven largely by growth in digital. Advertising revenues were expected to decline in the 5% to 7% range and circulation revenues were expected to decline in the 2% to 4% range.

So while I think Gannett is among the strongest in the business considering its ability to make acquisitions, it will be important to pay attention to how these efforts affect its top and bottom lines.

 

 · Tribune Publishing

 

On Friday, Tribune Publishing said that Gannett’s statements are misleading. On that same note, Tribune says it is studying the $15 per share offer.

Tribune Publishing boasted $398.2 million of revenue during Q1 2016, which was flat compared to $398.3 million of revenue generated during Q1 2015.

It did suffer from a slip in advertising revenues, which were down 4.4% to $215 million. Circulation revenues of $122 million were up 11.4% in the quarter compared to the prior-year quarter and increased 1.7% from last year. Total digital revenues for Q1 2016 were $55 million, which was an increase of 15% from the prior-year quarter.

Tribune CEO Justin Dearborn said the first quarter results were driven by good momentum in digital and increased circulation revenue offset by a decline in advertising revenue.

To deliver value to shareholders, Dearborn noted that the company was at the “very early stages” of executing its plan to transform the company by increasing monetization of its “important” brands, capitalizing on the global potential of the LA Times, and significantly accelerating the conversion of content to revenue through an enhanced digital strategy.

However, of note is that the company’s second largest shareholder, Oaktree Capital, disagrees with that strategy. The company’s vice chairman, John Frank, noted in a letter, that the turnaround plan is risky and far behind those of competitors in the media business. Saying that the turnaround plan could destroy shareholder value, Oaktree wants Tribune to accept Gannett’s offer.

 

 · News Corporation

 
News Corporation (NASDAQ: NWSA), which owns The Wall Street Journal, also suffered from a decline in advertising revenues.

It reported its Q3 2016 earnings for the quarter ending March 31 on May 5. Its revenues were $1.9 billion compared to $2 billion for the same period in 2015.
I’d keep an eye on News Corp. because I think its diversification of revenue streams will help mitigate the effects of lower advertising revenue. At the forefront for it is are efforts to improve and expand its digital properties.

 

 · In conclusion

 

Companies that own newspapers, but that also have diversified products, should be viewed more favorably than those that simply own newspapers. Depending solely on the revenues from newspapers (that are more likely to be used to line bird cages) is a recipe for more disaster for publishing companies. If you sample the newspapers that have gone by the wayside, you’ll likely find that they relied heavily on subscriptions and ad revenue.

Relying on subscriptions is very dangerous considering consumers are cancelling them in droves as they can find their news online. Take the dust up over Facebook this week from critics saying the social media site was blocking conservative news. Newspapers don’t have to be a dying breed. Their owners just have to find other revenue streams, such as those from digital products, and even other businesses, to deliver the best in shareholder value.

Charter Eyeing MVNO Launch After Time Warner Buyout Closes

Charter Communications (NASDAQ: CHTR) this week officially closed its deal in acquiring Time Warner Cable and Bright House. The natural thought is on how this deal will affect the cable industry. However, there is another benefit that Charter considered in buying Time Warner and it is called an MVNO, and it could be just as profitable than the cable business.

Companies in the wireless space know that investors in their stock are curiously interested about MVNOs and how companies will maximize their use of it. Considering how crowded the wireless space is, anything that a company does to make their services more attractive will add to their bottom lines. That is why investors are looking at MVNOs, or at least they should be.

 

 · MVNO defined

 
An MVNO (Mobile Virtual Network Operator) is a mobile service that operates without its own licensed spectrum, and it may not have the infrastructure to provide mobile service to its customers, according to Webopedia. So basically MVNOs do not own the network on which they provide voice and data traffic. MVNOs lease wireless capacity from pre-existing mobile service providers and establish their own brand names that are different from the providers.

Think Virgin Mobile, which uses Sprint (NASDAQ: S) as its underlying carrier. Virgin Mobile is the MVNO.

Back in 2011, Verizon (NYSE: VZ) saw that there were players in the market that had a high-quality radio spectrum called AWS-1, which is used for data, voice, video and messaging. Those companies included Bright House Networks, Comcast (NASDAQ: CMCSA), Cox and Time Warner. The companies teamed up and Verizon entered into an agreement to purchase their spectrum.

It is clear that Charter, and any other player in the wireless space that’s worth their salt, understands the value of spectrum. According to FierceWireless, Charter’s CEO Tom Rutledge said at a conference this week that his company can now potentially offer a nationwide wireless service because its Time Warner acquisition gives it access to the same Verizon MVNO agreement as Comcast.
 

 · Comcast working on MVNO

 

Now that we’ve gotten all of the technical stuff out of the way when it comes and spectrum’s importance, let’s take a closer look at how getting it can help these companies take more market share in one of the most competitive industries around.
All eyes are on Comcast right now as it is expected to introduce its own mobile service, perhaps by the end of the year.

In some circles, Comcast is the industry darling in terms of launching an MVNO service right now because it can largely fulfill the main thing that investors want – capital efficiency. It is estimated to have more than 13 million WiFi hotspots. Other contenders may have considerable costs to incur in developing that many WiFi hotspots to compete with Comcast.

 

 · And then there’s Charter

 
One of the things I found interesting about Charter’s $66 billion acquisition of Time Warner and Bright House is how it positioned it to be able to make its move into the wireless market…right alongside Comcast. While the company has not outright said it will enter the space, documents from the Federal Communications Commission about the acquisition, which were released May 10, tell another story:

“The applicants contend that the transaction would enable New Charter to be a new entrant in the mobile wireless market by offering mobile products through increased WiFi deployment, the deployment of licensed spectrum or a mobile virtual network operator (MVNO) arrangement – and likely through some combination of these.”

As an investor, I would definitely keep an eye on Charter as another player in this growing, and potentially area of wireless offerings. If it does enter the arena, it could effectively compete with Comcast. This is especially the case since the acquisition gives it a considerable number of Wi-Fi hotspots.

At the meeting that I noted above that FierceWireless covered, Rutledge said this.
“In my view, we’re already a wireless company,” adding that a good amount of data is already transmitted wirelessly by customers to Charter’s network.
 

 · Others to watch

 

The market had anticipated last year that Apple (NASDAQ: AAPL) would launch its own MVNO, but it denied it then and seems to still have no intentions of launching one. Google (NASDAQ: GOOGL) has launched an MVNO service. It leases network capacity Sprint (NYSE: S) and T-Mobile (NASDAQ: TMUS).

Protect Your Nest Eggs With a Bond Ladder

On Wednesday, Federal Reserve Chair Janet Yellen said that interest rates could be raised next month depending on a wide range of factors that can show whether or not the nation’s economy is improving.

In the meantime, investors continue to look for the best ways to spend their money, especially people who are tucking away money for their retirements. While stocks are the most popular investment, especially when it comes to making fast money, if you have patience to watch your nest egg grow, consider bonds.

For this article, I’ll go over bond ladders. I’ll discuss the details of putting them together as an investment strategy. But of course, as with all strategies, check with your financial advisor about whether this is best for you. Stock investments can be tricky, but bond ladders can be particularly tricky, especially for novice investors.
 

 · What’s in a name?

 

Yellen’s announcement gave a better, sooner indication idea of when interest rates may rise, but it is clear that there is a lot of uncertainty surrounding the future of interest rates and the outlook for bonds. That’s one reason to consider a bond ladder.

As noted by Charles Schwab, “investors often build bond ladders to help generate predictable cash flow and help reduce some of the volatility resulting from rising or falling interest rates.”

Bond ladder portfolios contain bonds with different maturities bonds and coupon payments. They can be reinvested according to the “rungs” that make up the ladder. For example, bonds that are reinvested in the longest rung of the ladder offer higher yields than those bonds that are reinvested in the shorter rungs.

For example, if you had $50,000 to invest in bonds, you could use the bond ladder like this: Buy five different bonds each with a face value of $10,000. In the bond ladder approach, each bond would have a different maturity. One bond may mature in five years, and another may mature in 10 years, but each bond would represent a different rung on the ladder.
Here are some tips to build your bond ladder
 

 · Dealing with falling interest rates

 

As you know, when interest rates rise, bond prices fall, and when they fall, bond prices rise. So you may wonder how this could affect a bond ladder. In this case, you wouldn’t make as much income as before with the same amount invested.

A bond ladder gives you a framework in which to balance the reinvestment opportunities of short-term bonds with the potentially higher yields that longer-term bonds typically offer, says Richard Carter, Fidelity vice president of fixed income products and services.

And consider this. By using the bond ladder approach and staggering the maturity dates, you won’t be locked into one particular bond for a long duration. A problem that can arise when you lock yourself into a bond for a long duration you can’t protect yourself from interest rate risk, notes Investopedia.

 

 · Here are some tips to build your bond ladder

 
Try to include only callable bonds
Avoid the highest-yielding bonds; at any given credit rating
Include high credit bonds; avoid junk bonds
Build your ladder with high-credit-quality bonds

Posted by TwillyD May 18, 2016

What’s Old is New Again; Nokia Hopes So

Remember when the hottest cellphones in the market were made by Nokia (NYSE: NOK). We watched it go by way of so many others in the wake of the iPhone made by Apple (NASDAQ:APPL) and devices powered by Android from Google (NASDAQ: GOOG).
(Google is now Alphabet and its ticker is GOOGL)

Well, you may be seeing Nokia devices back in the market, thanks to an agreement announced on Wednesday. Through a strategic brand and intellectual property licensing agreement, HMD global will be allowed to create a new generation of Nokia-branded mobile phones and tablets.

HMD global is a newly founded company based in Finland that is charged with providing the focus Nokia needs to start making devices again. Under the agreement, Microsoft (NASDAQ: MSFT) is selling the low end phone unit for $350 million. In 2014, Nokia was acquired by Microsoft for $7.2 billion. It took just a year for Microsoft to write Nokia off of its books, costing it to take a $7.6 billion charge.

The change is expected to be complete this year. HMD intends to invest more than $500 million over the next three years to support the global marketing of Nokia-branded mobile phones and tablets, funded via its investors and profits from the acquired feature phone business. Nokia will receive royalty payments from HMD for sales of Nokia-branded mobile products, covering both brand and intellectual property rights.

Nokia will need this help. While it dominated the smartphone market in the 1990s, it began to lose steam with the introduction of the iPhone and Android devices.

However, its troubles ran deeper than that, especially with rolling out products that consumers were not attracted to. Also, it failed recognize the importance of software, such as apps that run phones. It also didn’t accurately estimate how dominant smartphones would eventually become. While smartphones with apps were growing in demand, Nokia seemed to want to stick to developing phones with touchscreens, which were all the rage, was best. We see where that got the company.

Nokia was only cleared to enter the smartphone business at the beginning of the year. At that time, it answered rumors that it would deliver a smartphone this year through a brand-licensing model. It noted that the right path back to mobile phones was to allow that partner to manufacture and provide customer support for a product.

The question now becomes whether this deal will pay off for Nokia. Of course it boils down to whether HMD can actually pull off devices consumers will like? Consumers are so enamored with the mobile device leaders, it may be difficult.

For its latest quarter, Q1, Nokia reported an 8% year-on-year net sales decrease.
In reporting those earnings, it was that while the revenue decline was disappointing, the shortfall was largely driven by Mobile Networks, where the challenging environment is not a surprise. The company noted in its Q4 2015 earnings release that it expected some market headwinds in 2016 in the wireless sector.

After the announcement on yesterday, during intraday trading, Microsoft’s stock was up about .5%, while Nokia’s stock was up roughly 3.52%.

Posted by TwillyD May 17, 2016

Regenerative Medicine Company Faces NASDAQ Delisting

After being given roughly a month to show that it had gotten its financials in order, Osiris Therapeutics (NASDAQ: OSIR) has failed and faces a real chance of being delisted.

On Monday, the company provided an update regarding the status of its compliance with the Listing Rules of the NASDAQ.

In March, Osiris received a notification from NASDAQ indicating that, as a result of the company not timely filing with the Securities and Exchange Commission (SEC) its Annual Report on Form 10-K for the year ended December 2015 Osiris had failed to comply with the periodic filing requirements.

On May 12, the company received an anticipated letter from NASDAQ noting that it had still filed its quarterly report for the quarter ended March 31.
Osiris has submitted to the NASDAQ listing qualifications staff a plan to regain compliance with NASDAQ’s continued listing requirements. The NASDAQ staff has discretion to grant up to 180 calendar days. That would put the maximum date at Sept. 12, 2016.

The question is whether Osiris work to complete its previously announced accounting reviews, restatements of prior period financial statements, transition to a new independent registered public accounting firm and 2015 audit will be enough to put it in a position to bring its SEC filings up to date.

Founded in 1992, the medical device company managed to carve out market share and a strong reputation for its research, development, manufacturing, marketing and distribution of several regenerative medicine products. Those products, Grafix, which are cryopreserved placental membranes that are used to treat hard-to-treat acute and chronic wounds. Grafix and its two other products, Cartiform and Bio4, have helped it grow its revenues; and they helped it go public in 2006. Back then Osiris’ stock opened for its first public trade around $10. It peaked at $23 last year, and now it is trading just under $6 and faces delisting.

Then there was some bad publicity that the company faced that raised some eyebrows surrounding its hiring of Todd Clawson, who was the head of the company’s national sales department. Prior to going to Osiris, he worked at Advance Bio Healing. Federal prosecutors are now looking at him over his work while at Advance Bio due to allegations that he gave doctors several perks in exchange for them doing business with Advance Bio.

There has been no evidence presented that Clawson did anything corrupt while at Osiris. Clawson was credited with the company’s sales jumping substantially when he was hired. Sales went to $60 million in 2014 from $24 million in 2013.
So as we wait for the final outcome for Osiris and its NASDAQ possible delisting, I advise to stay away from this stock.

The DOL Fiduciary Rule is Here; Now What for Advisors and Insurers

If you invest in variable or fixed annuities, you will see some changes in the commission costs soon. That’s due to the Department of Labor’s new fiduciary rule that will begin taking effect over the coming months.

The investment advisors who sell the products and the insurance companies that employ them are all on alert about how much of an effect, or difference will make.
 

 · The need for the rule

 The thought behind the rule is that many advisors have promoted products with high commissions knowing full well that the product may not be needed by the client. This has especially been the case for annuity products, which are notorious for being complex for the average client. The rule is hoped to discourage advisors from pushing these high commissioned, products, and promote products that will best suit their client’s news, not just supply the advisor with high commissions.

That’s great for the client, but for advisors, it may lead to less money for them, and less money for the companies they work for. The chief of enforcement for Finra, the securities industry watchdog, has noted that variable annuities are complex and expensive products that are routinely pitched to vulnerable investors as a key component of their retirement planning.

Over the past few years, Finra has stepped in when clients were charged on an annual basis for holdings that would have been free of the trade costs.

For example, in 2005, Finra fined Morgan Stanley a reported $1.5 million and ordered it to pay $4.6 million in restitution to clients to make up for inadequately supervising its fee-based brokerage business.

Two years later Finra fined Wachovia Securities $2 million for a similar violation. Baird, SunTrust and Raymond James were also dinged by Finra for poor oversight of their clients’ fee accounts. So there was a need for the rule. Annuities are offered as variable or fixed in a client’s retirement account.

Generally, variable annuities charge explicit fees, while fixed annuities tend to embed their costs in the interest rate or income payout amount, according to Fidelity Investments. Under the new rule, advisors are expected to scale back their offerings of variable annuities, which can have high upfront commissions.

Annuity providers are expected to find ways to deliver products that meet both client needs and the new DOL standards. Some advisers are thinking about changing their account minimums, presenting new investment solutions to their clients, or transitioning appropriate clients from brokerage to advisory under the rule.
 

 · Choices for Advisors

 
What is clear is that if you provide advice pertaining to retirement savings, qualified plans, IRAs or IRA rollovers, this issue will affect you, and you will likely need help.

According to a study called “The Economics of Change,” the majority of advisers surveyed currently recommend annuity products in retirement accounts — nearly two-thirds use variable annuities, and two-thirds also claimed to use fixed annuities — products that, due to cost and complexity, will be thrown into flux in the coming years.

While researching the choices advisors have under the rule, I found the following from Think Advisor.

They can serve as a fiduciary under the Employee Retirement Income Security Act (ERISA) without conflicts. While serving as an ERISA fiduciary is the more restrictive of the two options, it is also the clearest as to what is allowed and what is not. I predict that many advisors will take this more conservative route.

The advisor can serve as an ERISA fiduciary with conflicts under the Best Interests Contract Exemption (BICE).

The contract exemption, while allowing advisors to make relatively minimal changes to their existing business model, comes with many uncertainties. Questions such as what is “reasonable” compensation, what fees must be disclosed and how, and what other forms of payment must be disclosed will be debated by every financial institution. I suspect many of the answers to these questions will not be known until the lawsuits are filed after the next bear market.
 

 · The Insurers

 
Among the affected companies are MetLife (NYSE:MET), AIG (NYSE: AIG) and Prudential Financial (NYSE: PRU).

In December 2015, those companies were among those in the annuity industry that authored an opinion editorial, claiming the DOL’s proposed rule would have a “potentially devastating impact” on Americans’ access to annuity products, particularly for low and middle-income earners.

The sum includes a $20 million fine and $5 million to be paid to customers for “negligent” misrepresentation and omissions, according to Finra. It has among those who have been increasing scrutiny of variable annuities, which can combine securities investments with guaranteed income, an arrangement that may generate attractive fees for insurers.
 

 · In Conclusion

 
Now, variable annuities and fixed indexed annuities have lost their coveted exemption. Advisors and insurers are now subject to the requirements of BICE. Compliance risks come into play, which means litigation could come into play. That should be considered if you decide to invest in a distributor of annuities.

Oracle Making Strong Entry Into Cloud; Is It Too Late to Grab Market Share

“What the Hell is Cloud Computing?”

That was the question posed by Oracle founder Larry Ellison about eight years ago when he spoke to a gathering of financial analysts.

Since then, it seems Ellison, now chief technology officer, of Oracle (NASDAQ: ORCL) has been enlightened. That, or Ellison has adopted the policy of, “if you can’t beat them, join them.” This is reflected in the company’s recent spending spree in buying small cloud computing businesses.

For investors, if Oracle’s acquisition efforts can help it carve out a significant portion of the cloud computing market share, this is great news. So far this year, the worldwide public cloud services market is projected to reach $204 billion, according to Gartner. That represents a 16.5% increase over last year’s market size of $175 billion.

Gaining market share in the cloud services business won’t be easy and breezy for Oracle. Despite its dominance as a tech player, the cloud business has some pretty dominant players. That includes Salesforce (NASDAQ: CRM), Microsoft (NASDAQ: MSFT) and Amazon (NASDAQ: AMZN).
 

 · So what is cloud computing; think layers

 
Back in 2008, when Ellison questioned cloud computing, he said this:
“I don’t understand what [Oracle] will do differently in the light of cloud computing, other than change the wording on some of our ads.”

If you share Ellison’ questions about what is cloud computing, to put it simply, cloud computing is a kind of Internet-based computing. It entails applications, servers and storage services that are accessed via the Internet by a company’s computers and devices that employees use, such as their smartphones.
Cloud computing consists of three segments, or layers: Infrastructure-as-a-Service (IaaS), Platform-as-a-Service (PaaS) and Software-as-a-Service (SaaS).

IaaS allows businesses to eliminate the costs associated with buying and maintaining servers in house. Instead, they outsource such needs to cloud providers. This allows businesses the ability to run their applications and access their data anytime on devices connected to the Internet.

With PaaS, businesses use a platform to develop, run and manage applications without having to build the infrastructure used to develop and launch applications. Google’s App Engine, Microsoft’s Azure and Saleforce’s Force.com, are examples of PaaS platforms.

SaaS allows businesses to eliminate the costs and time of installing and maintaining software. Businesses can access that software via the Internet. Among the companies that use SaaS applications are ADP, Citrix (Go To Meeting) and Cisco (WebEx).
 

 · Acquisitions paying off

 
Considering Oracle is a relative newcomer to the cloud services business that is already dominated by some pretty strong competitors, it is good that it set out on acquiring smaller businesses that already offer the services. It now provides all of the platforms explained above.

The following is a list of Oracle’s most recent acquisitions:
Maxymiser; August 2015; undisclosed amount
StackEngine; December 2015; undisclosed amount
AddThis; January 2016; $200 million
Ravello Systems; February 2016; $500 million
Textura; April 2016; $663 million
Crosswise; April 2016; $50 million
Opower; May 2016; $532 million

The acquisitions made during prior to the end of Oracle’s third quarter of 2016 seemed to have contributed positively to the company’s revenues. SaaS, PaaS and IaaS totaled $737 million, which represented a 43% increase from last year. Also, the Q3 gross margin for SaaS and PaaS was 51%, up from 43% last quarter. The company expects to see further improvement in Q4. After that, Oracle will be targeting 80% over time.

This is positive news, but Oracle should give as much focus as possible to its IaaS segment. That’s because the IaaS segment is, and is expected to remain, the fastest-growing segment in 2016. According to Gartner, IaaS is projected to grow 38.4% this year.

Gartner pointed out that the growth in the IaaS’s segment is due to enterprises moving away from data center build-outs and moving their infrastructure needs to the public cloud. Furthermore, it would behoove companies like Oracle to focus on differentiating their products because several market leaders have built a significant lead in this segment already.

Oracle is on the right track, expecting IaaS revenue to grow from negative 1% to positive 3% for Q4. However, Oracle CEO Safra Catz said the company’s IaaS revenue growth will be more moderate for now as it is currently dominated by its hosting business.

Also on guidance, Catz said, “Looking further out for Q1, SaaS and PaaS revenue growth should be higher than the 59% midpoint of my Q4 guidance. SaaS and PaaS gross margin are expected to be higher than Q4 gross margins. Q1 non-GAAP EPS growth should be very solid. I will revisit Q1 with you as part of the Q4 earnings call in June.”

We’ll see how Oracle has continued to grow its revenues from cloud computing in June when it reports earnings for Q4 and the full year. Oracle’s commitment to the cloud through the acquisitions, and its ability to embrace it despite the early on misgivings of its founder are positives. Consider Oracle as a long-term investment play.

Herbalife, Still Trying to Shake Bill Ackman, Could Beat on Q1 Earnings

The much put upon Herbalife (NYSE: HLF) will post its earnings for the first quarter of fiscal 2016 on Thursday, and I’m going to go out on a limb and anticipate it will meet analysts’ estimates, if not beat them.

When I say “much put upon,” and “going out on a limb,” I’m referring to hedge fund manager and activist Bill Ackman who took controversial steps to run the company out of business. Claiming that Herbalife is a pyramid scheme, he shorted the supplier of weight management and nutrition supplements by $1 billion in 2012.

Ackman is convinced that Herbalife preys on minority communities who reap little in financial gains for being distributors of Herbalife products. Through extensive lobbying efforts, hours-long Power Point presentations, Ackman has managed to convince some lawmakers to join his cause in getting federal regulators to investigate and shut down Herbalife.

Although Ackman’s cause seems notable, on the surface, beneath it smacks the type of greed that could lead even the most well-intentioned causes failing to bear fruit.
 

 · Smooth sailing until Ackman

 
Prior to Ackman’s crusade to shut it down, Herbalife had posted 12 straight quarters of record earnings. It had enjoyed 12 straight record quarters and was trading around $52 in 2011, which was before Ackman’s billion-dollar short announcement.

Shortly after Ackman made his short position public in December 2012, Herbalife fell almost 50% in one day to close at $27.27. Over the course of 2013, and amidst volatile trading of its stock, the price slowly, but steadily, rose. It even hit an all-time high of $81.81 in January 2014. It closed Friday at $57.95.
 

 · Traders vs. investors

 
The volatility that Herbalife has experienced since Ackman’s attacks started make the company’s stock attractive to traders who can watch the stock’s movements like hawks and profit from them. After all, volatility is a trader’s best friend because of the potential for huge profits.

Volatility is not so good for long-term investors. It has a five-year beta of 1.4, which means it’s roughly 40% more volatile than the stock market. So long-term investors may want to shy away from Herbalife right now; at least there is some kind of resolution of squashing of Ackman’s allegations.

Interesting about analysts’ views on Herbalife are their reports. Since December 2012, there have been only two analyst downgrades. The others were reiterations, and there was even an upgrade. There have been mostly “buy” recommendations over that period.
 

 · When Wall Street meets Capitol Hill meets The Feds

 
In pursuing his effort to run Herbalife out of business, Ackman has called on community leaders, especially those that represent Hispanics and African-Americans, to join his cause. Many agreed to write lawmakers to urge the Securities and Exchange Commission (SEC) and the Federal Trade Commission (FTC) to investigate Herbalife. Ackman has also called on a slew of lobbying groups.

He’s been accused of assembling his supporters based on false information. Fortune magazine highlighted the tactic of astroturfing, in which “a client’s agenda is made to look like a grassroots movement. In the context of a short-selling campaign, however, such conduct began to resemble securities fraud. The SEC has held that if you make claims about a company you’re trading in and then falsely publish them under someone else’s name, that can be market manipulation, even if you believe the claims to be true.”

There are reports that some of those who signed these letters don’t recall doing so.

So far, other heavy weight hedge fund managers have been unpersuaded by Ackman’s findings. Take notary hedge fund manager Carl Icahn, for example. After Ackman presented his exhausting presentations about the legitimacy of Herbalife’s business model, Icahn took a long position in Herbalife. Another reputable investor, George Soros, also revealed a large stake in Herbalife after Ackman began lambasting the company.

For the sake of investors, small and large, I hope that The Feds do help resolve this issue. In the short-term, the market this week will get another chance to see how Herbalife has weathered the Ackman-generated turmoil that has wreaked havoc on its stock. As I noted above, the company reports earnings for the first quarter of fiscal 2016 on Thursday. Estimates are that it will report earnings of $1.07 per share; and $1.07 billion in revenue.

Don’t Count These Apple Suppliers Out Based on Slowed iPhone Sales

The disappointing earnings Apple (NASDAQ: AAPL) posted lastweek caused its stock to tank. We saw investors not only flee their positions in the iPhone maker, but we also saw them fleeing companies that supply the parts that Apple uses to build its smartphones, iPads and other devices.

The knee jerk reaction to this decline for many investors has been to get out of Apple and its suppliers in the short-term, or even the long-term. However, it may be worthwhile to hang in there for the long term when it comes to the suppliers.

Among Apple’s elves (suppliers) are Cirrus Logic (NASDAQ: CRUS) and Jabil Circuit (NASDAQ: JBL).I found that although these suppliers face repercussions from Apple’s sales’ downturn, they have individual strengths that have nothing to do with Apple. Those strengths include diverse product offerings that contribute significantly to their revenue growth. Their strengths contribute to their positive cash flows and attractive valuations.

 

 · The softening Apple

 

Apple reported shipping about 51 million iPhones during its second quarter of fiscal 2016, which represented a 16% decline compared to the same quarter in fiscal 2015. The numbers represented the first ever year-over-year decline in iPhone sales.

The softening partly reflects the slowing of smartphone sales throughout the world. Observers note that that the second quarter was the first time global shipments of the iPhone declined on an annualized basis since it was introduced. China’s smartphone market is maturing, which is a major market for smartphone makers.

 

 · Strong, but still Apple dependent

 

Cirrus Logic, which is a fabless semiconductor company that develops analog and mixed-signal integrated circuits, derives about a third of its revenue from Apple. It provides the audio chip to iPhones. Since warning flags began being raised at the end of 2015 about Apple’s shrinking iPhone sales, Cirrus Logic has been singled out as likely experience the worst ramifications of Apple’s declines.

Last week the company shared its quarterly Shareholder Letter that highlighted its financial results for the fourth quarter and full fiscal year 2016, which ended Mar. 26. Its revenue for fiscal 2016 was up 28% to $1.2 billion. That was higher than analysts’ estimates of $1.16 billion.

While its sales climbed 31%, its earnings per share fell 10% to $2.40. Cirrus also showed the company’s outlook, in which the company guided to fiscal Q1 revenues of $220 million to $250 million, which short of consensus estimates of roughly $256 million.

To stay viable as an investment opportunity, Cirrus must continue this kind of revenue growth. It must also continue to improve the median net profit margins so that it has operating leverage.

This is especially important if the company’s contribution to the upcoming iPhone 7 does not pan out. Apple is thought to be in the process of replacing its analog headphone jack for the iPhone 7 to add another speaker for stereo audio output. Rumors have abounded that Apple is working with Cirrus to change the audio chipset so that it works with the iPhone’s Lightning port.

The problem with this switch is that since the new iPhone may not have that standard audio port, the company’s current Ear Pod headphones will be incompatible. That could discourage buyers from purchasing the new iPhone.

No matter, if Apple does not make this audio port change, Apple’s need for Cirrus may be quashed. This means Cirrus must have a fallback.

Investors can take some comfort in the company’s supply chain teams being heavily engaged in new product ramps, take outs and design activity. Company officials stressed this during its earnings conference call last week in which it also noted that it has ramped a new flagship, multi-core smart codec with a key customer.

These products combine audio analog-to- digital converters (ADCs) and digital-to- analog converters (DACs) into single integrated circuits designed to provide maximum flexibility, features and performance.

Cirrus has also begun shipping a new boosted amplifier at another tier 1 smartphone customer, but it did not identify the customer during the conference call.

 

 · Then there’s Jabil Circuit

 

When Jabil Circuit reported its earnings, it noted that 24% of its total revenue came from Apple during its second quarter of fiscal 2016. Jabil Circuit slightly missed expectations for its Q2 fiscal 2016 reporting earnings per share of $.57 cents on sales of $4.4 billion, versus analyst expectations of $.60 in EPS and $4.5 billion of sales.

That is disconcerting, but I point to the company’s balance sheet as an example of its potential to grow steadily over the long term.

Another fallback that could take up the slack from less than stellar earnings related to Apple is the company’s Nypro healthcare business. The company has begun “leaning hard” into that business, according to its CEO Mark Mondello.

Nypro provides manufactured precision plastic products for customers in the healthcare, packaging and consumer electronics industries. It was acquired by Jabil Circuit in 2013. The company is expecting Nypro to be a healthy cash generator due to the hardware platforms it offers customers.

Jabil Circuit is also a leading provider of outsourced electronics manufacturing services (NYSE:EMS). This arm produces parts for consumer electronics, such as computers and smartphones. Jabil Circuit is banking on the scale and broad diversification of this business to provide “a stable, predictable, foundational backbone to our core business,” according to Mondello. He noted that the core operating income from EMS will grow 15% to 20% year-on-year, and core operating margins are hoped to grow beyond 3%.

When it reported its earnings, Jabil Circuit noted that 24% of its total revenue came from Apple during its second quarter of fiscal 2016. Jabil Circuit slightly missed expectations for its fiscal 2016 Q2, which ended Feb. 29. It reported earnings per share of 57 cents on sales of $4.4 billion, vs. analyst expectations of 60 cents EPS and $4.5 billion in sales.

Many observers are banking on Apple improving its financials after it rolls out another version of the iPhone later this year. This, in turn, could boost the earnings of its suppliers. On the other hand, the saturation of the smartphone market cannot be ignored; investors must take into account that the record profits Apple derived from iPhone sales in the past are over. The Apple suppliers that recognize this and who are able to shift gears to maintain, and improve their financials over the long term should be able to weather the Apple downturn.