Feltl and Company (7/25/2008)
Key Points:
• A solid Q2 beat expectations. Non-GAAP EPS was $0.06 on revenue of $15.5 million versus our estimate of $0.05 on $15.1 million. Revenue growth was 26% for the quarter and 27.4% for the six months. Gross margin was 54.2%, just under the 54.4%
of last quarter and last year and at the top end of the 53%-54% 2008 target. Expenses were kept in check leading to operating margins of 8.8%, up nicely from 7.5% last quarter. Non-GAAP net margins (pretax and preFAS123) were 11.4%, up from 10.4% in Q1 and comfortably within management’s target for 2008 of 10%-12%.
• RMTR shipped a record 21.3 million units in the quarter versus the previous record of 16.5 million in Q1. Growth is coming from low priced custom chips for printers so the ASP has declined to $0.71 from $0.84 in Q1.
• The call was upbeat, with management hitting its targets and raising its growth outlook to 26%-29% from 24%-28% previously. Six of 14 targeted new products have been introduced and management states it will comfortably exceed its target.
Shipments of the 2mb and 4mb high density chips, which have been sampling for about a year, nearly doubled in Q2 relative to Q1. Numbers are still relatively low, but should become meaningful over the next few quarters as we believe there are dozens of design wins that could move into volume production over the next year.
• We have raised our estimates based on this solid quarter and increased guidance We increased 2008 non-GAAP EPS to $0.25 on $64.7 million (27% growth) from $0.23 on $63.2 million and 2009 to $0.34 on $81 million (25% growth) from $0.33 on $79
million. Management believes that as the high density 2mb and 4mb chips start to ramp (they sell for up to $17), that growth will accelerate, moving the company to its long term goal of 30%-35% growth. Thus we think our outlook could be conservative.
• The customer product failure issue is more of a buying opportunity for investors than a risk. A customer had some field failures and wants compensation. While no dollar figures have been mentioned, investors seem wary of an open-ended liability and the stock seems to have been discounted a good $0.50 on the news. However, the chips had been tested and met specifications, the chip manufacturer has admitted some process issues with the two batches in question and the customer (still a customer and still buying chips) apparently was running them hard in a tough application. We see
shared responsibility and situations like this are what insurance is for, but management can’t say anything until the situation is settled. We guess this gets resolved fairly quickly and any cost to RMTR should be modest and quickly forgotten about. The resolution of this issue should certainly be a positive for the stock., and the current discount due to
the uncertainty, in our opinion, is a buying opportunity.
• Cash rose to $8.2 million from $6.6 million in Q1 and a $4 million credit line remains unutilized. We think RMTR is adequately capitalized.
Investment Recommendation:
RMTR is nicely profitable, growing rapidly and growth appears to be accelerating. Its new high density 2mb and 4mb chips open up whole new markets. After sampling for over a year, RMTR has captured many design wins and is now ramping volume on these chips which can sell for $8-$12 in volume versus the current ASP of less than $1.00. We think the ramp of these products will drive both growth and investment interest. The stock looks modestly priced at 18x our non-GAAP current year estimate given a mid- to upper-20% growth rate.
We reiterate our BUY rating and $6 price target. |
