Broadcom

 

BRCM : NASDAQ : US$38.26

BUY 
Target: US$46.00

Technology — Hardware — Semiconductors and Related Technologies
INCREASINGLY CONFIDENT IN EXPEDITED
CELLULAR BASEBAND EXIT; CONCLUSIONS FROM MANAGEMENT MEETINGS

CEO Scott McGregor at
Broadcom’s HQ. - with stronger conviction that an exit
of the cellular baseband business will happen quickly and therefore are
more confident in our 2015 pro forma estimates excluding the baseband
business. We discuss drivers of solid growth for Broadcom’s retained
businesses and areas for incremental investment with cash recouped
from prior cellular baseband investments. We reiterate our BUY rating
and raise our price target to $46, as we assume our pro forma EPS
estimates post the baseband exit as the basis for our price target.
Investment highlights
 We assume a baseband business exit before the end of 2014. Given
the much lower gross margin of the baseband business likely lost
during this transition and the significant operating cost savings, we
believe gross margin can expand into the mid-50s and operating
margin will expand into the mid-to-high-20s exiting 2015.
 We believe Broadcom’s core Home and Infrastructure businesses are
well positioned for growth and could benefit further from increased
management attention and investment post the baseband exit. In
fact, we believe Broadcom’s Home business should grow in the mid-
to high-single digits with solid mid-20s operating margins. Further,
we believe the Infrastructure business is positioned to exceed 10%
top-line CAGR over the next several years, with operating margins
moving toward 40%.
 With our increasing confidence in an expeditious cellular baseband
exit, we are adopting our 2014/15 pro forma revenue and non-GAAP
EPS estimates of $8.4B/$2.58 and $8.3B/$3.28. Our estimates largely
exclude any additional initiatives that could be funded with
incremental investments from the baseband business exit.
Valuation: Our $46 price target is based on shares trading at roughly 14x
our 2015 pro forma non-GAAP EPS estimate of $3.28.

MiX Telematics Limited

MIXT : NYSE : US$9.90
MIX : JSE
BUY 
Target: US$19.00

COMPANY DESCRIPTION:
MiX Telematics is a leading global provider of fleet and mobile
asset management solutions delivered as SaaS to customers in
over 100 countries. The company’s products and services provide
enterprise fleets, small fleets and consumers with solutions for
safety, efficiency and security.

Technology — Communications Technology — Software
STRONG Q4/F14 RESULTS AND F2015 GUIDANCE;
WELL POSITIONED FOR LONG-TERM GROWTH WITH ATTRACTIVE VALUATION
Investment recommendation:

MiX Telematics reported Q4/F2014
results with subscription revenue and adjusted EBITDA ahead of our
estimates. Further, MiX issued F2015 guidance with subscription
revenue slightly above our estimates but adjusted EBITDA slightly below
due to ramping investments to drive longer-term growth. Given its
strong balance sheet, we believe MiX is investing to drive growth in
markets such as North America and South America to drive accelerated
recurring revenue subscription growth exiting F2015 and beyond. We
believe MiX has a strong solution for its targeted customers and has
strong long-term growth drivers. Therefore, we believe MiX’s current
valuation versus its competitors represents an attractive entry point. We
reiterate our BUY rating and $19 price target.
Investment highlights
 MiX reported Q4/F2014 results with a subscriber base of 451k and
subscription revenue of R233M ahead of our 448k/R222M
estimates. Subscriptions grew 25.3% Y/Y and subscription revenue
grew 24.9% Y/Y.
 Given MiX’s strong base of fotune 500 companies -

Valuation: Our $19 price target is based on shares trading at a multiple
of roughly 14x EV/adjusted EBITDA based on our F2016 estimates

 

Akamai Technologies BUY

AKAM : NASDAQ : US$54.53
BUY 
Target: US$68.00

COMPANY DESCRIPTION:
Akamai provides content delivery and cloud
infrastructure services for accelerating and improving the
delivery of content and applications over the Internet,
ranging from live and on-demand streaming videos to
conventional web content, to c-commerce tools. The
company is headquartered in Cambridge, Massachusetts

Telecommunications — Telecommunications
STRONG Q1/14; INCREASING ESTIMATES; REITERATE BUY
Investment recommendation
Akamai once again managed to produce yet
another quarter of above-expectations growth and margins with a
solid outlook for Q2/14. Even though the company has reiterated
its H2/14 margin guidance for 40%-42%, we note they have
consistently beat their margin forecast for the past six quarters.
Strong volume growth and reported traction in the security
business should continue to provide investors with confidence that
the company will continue to produce solid double-digit top-line
growth with improving margins.
Investment highlights
 Managing expectations – delivering results – As has been the
case with the company for the past six quarters, guidance
beyond the next quarter was once again muted with the
expectation for margins to return to 40%-42%. Q2/14 revenue
estimates call for $464-478mm with slightly lower margins.
 Volumes trends remain strong – Although we had speculated
that recent traffic trends were supported by continued Internet
video growth, the strength appeared equally strong from
software downloads as well as gaming.
 Reasonable valuation relative to history – Currently priced at
8.8x 2015E EBITDA, we find the stock to be attractively
valued, especially given accelerating growth trends

 

RF Micro Devices Update

RF Micro Devices

RFMD : NASDAQ : US$7.95

HOLD 
Target: US$9.25

COMPANY DESCRIPTION:
RF Micro Devices is a leading supplier of power
amplifiers, front end modules and other RF components
for mobile devices (handsets, smartphones, tablets) and
communications infrastructure.

All amounts in US$ unless otherwise noted

Technology — Communications Technology — Semiconductors
MERGER WITH TRIQUINT REMAINS ON TRACK;
UPDATING PRICE TARGET FOLLOWING TRIQUINT Q1/14 RESULTS
Investment recommendation: We believe RFMD’s merger with TriQuint
(TQNT : NASDAQ : $13.28 | HOLD) remains on track to close in H2/C’14.
We believe the combined company will have a broad RFIC portfolio
covering the global mobile device, networks, and defense and aerospace
markets. Further, we believe the combined company can leverage
significant cost synergies through consolidating fab facilities, optimizing
R&D expenditures, and eliminating duplicate public company costs to
generate gross and operating margin leverage. However, we believe
RFMD’s stock price appreciation post the merger announcement factors
in a large portion of the anticipated synergies and combined earnings
power potential. Following TriQuint’s Q1/C2014 results, we have updated
our TriQuint model and are publishing our pro forma model for the
proposed combined company. We maintain our HOLD rating on RFMD
but raise our price target to $9.25 from $7.25.
Investment highlights
 We believe the RFMD and TriQuint merger remains on track and the
new entity will have significantly improved scale, a leading RFIC
portfolio, and an improved operating model through increased scale
and operating cost efficiencies. In Mobile Devices, the combined
company could leverage its leading position with the three leading
major constituents of the smartphone ecosystem including Apple,
Samsung and the Chinese smartphone OEM market. In the higher
margin Defense & Aerospace and Networks Infrastructure
businesses, we believe the combined entity will be well positioned for
stable long-term growth through its industry leading GaN-based and
optical product portfolios.
 Following TriQuint’s Q1/14 results, we have updated and published
our pro forma model for the combined company in this report.
Please see our separate TriQuint report published today, titled
‘Strong gross margin and 2014 outlook; merger with RFMD remains
on track’ for further details on our updated TriQuint estimates.
 Based on our model expectations and assumed level of synergies
achieved, we estimate the combined company can generate F2016
pro forma EPS of roughly $0.77 per share based on approximately 583M diluted shares outstanding.
Valuation: Our $9.25 price target is based on shares trading at roughly
12x our F2016 pro forma EPS estimate for the combined company and
then assigning 50% of the value to RFMD.

Q2 Holdings

QTWO : NYSE : US$13.68
BUY 
Target: US$17.00

COMPANY DESCRIPTION:
Q2 Holdings provides a cloud-based platform for
customer facing web and mobile banking solutions for
regional and community financial institutions. The
platform enables users to pay bills, check balances,
transfer funds, and deposit checks through a unified
online platform or mobile device. Q2 was founded in
2004 and is headquartered in Austin, TX.

All amounts in US$ unless otherwise noted.

 

GROWTH; INITIATE WITH BUY, $17 PT
Investment thesis
In our opinion, Q2 Holdings could be one of the quiet winners of the recent IPO
class. The firm sells customer-facing banking applications, competing largely
with legacy software vendors and aging custom code. Q2 signs 5+ year
subscriptions (excellent visibility), is growing revenues ~30%, but won’t likely
break even until sometime in 2017. If Q2 can articulate and demonstrate a
clear and consistent path to profitability, the stock could get re-valued into the
25%+ growth SMID cap cloud cohort, which implies a 7-9x forward revenue
multiple. As is our custom, our price target is more conservative and assumes a
modest deterioration in the EV/revenue multiple, but a 20% appreciation in the
face of 30% revenue growth. We are initiating coverage of QTWO with a BUY.
Investment highlights
 An upgrade cycle is underway. Regional and community financial
institutions (RCFIs) are increasingly becoming viable competitors to the
national mega-banks – this means that they too need online and mobile
banking functions and sleek, next-generation user interfaces. Enter Q2.
 Legacy competition. Being founded in the mid-2000s, Q2 has the
advantage of being constructed on a unified, cloud-based platform with a
mobile-first development mentality. The firm competes either with vendors
like Digital Insight (NCR) and First Data, who are attempting to morph
timeworn applications, or oftentimes in-house, custom-built code.
 Attractive micro-economics. Q2 signs 5+ year initial deals, dollar-based
retention including upsell tops 125%, and the firm crosses into profitability
after 1.8 years of a new customer relationship. This means that in the near
term at least, the faster Q2 adds clients, the more money they will lose.
 What it means for the numbers. From the firm’s roughly $65M run rate,
we expect Q2 to be a ~30% revenue grower for the next several years.
Gross margins should scale from ~40% this year to 60%+ with scale, and
Q2 should become cash flow and EBITDA profitable sometime in 2017.

magicJack VocalTec Ltd.

CALL : NASDAQ : US$18.86

BUY 
Target: US$24.00 

COMPANY DESCRIPTION:
The company is the inventor of lightweight, VoIP-based
magicJack devices that allow customers to make phone
calls by plugging into the USB port on a computer or into
a power adapter and high-speed Internet source. The
company is headquartered in Netanya, Israel.

All amounts in US$ unless otherwise noted.

 

Telecommunications
MANAGEMENT ROADSHOW INSPIRES
CONFIDENCE – SLIGHTLY ADJUSTED ESTIMATES
Investment recommendation
On the road with the management of CALL as they continue to outline how they are repositioning the company.

Management discussed initiatives enacted to improve
customer care and ease the customer renewal process since last year.
They are also considering a return to the former pricing plan (12
months). Soon we expect to see the launch of a new device with a
revised advertising campaign that could return the company to strong
top-line growth. Over the next five years we continue to expect industry
voice telephony pricing will continue to compress and for the company
to continue to gain market share.
Investment highlights
 Less advertising drives Q1/14 higher EBITDA (EPS) – We now
believe the company spent significantly less on advertising than we
initially expected as we await the product refresh. As a result, Q1/14
profitability will likely be greater than we expected but on lower
revenues. We have adjusted estimates accordingly.
 Product refresh should better integrate App – With the refresh,
which could be launched in weeks, we expect a full refresh of the
App. In fact, the company just unveiled an updated, rebranded
version for Android. The refresh aims to improve integration with
the device, lowering churn and driving higher revenue growth.
 Transition continues, 2014 inflection – It’s increasingly clear the
direct competitor (Vonage) is not significantly impacting the market.
With the product refresh that should come in early May, we believe
it is likely that the company returns to double-digit revenue growth
this year.

Verizon Communications

VZ : NYSE : US$48.04

BUY 
Target: US$55.00

COMPANY DESCRIPTION:
Verizon Communications is a leading provider of
communications, information and entertainment
products and services to consumers, businesses and
governmental agencies. Formerly known as Bell Atlantic
Corporation, the company offers both wireless and
wireline products and services. The company is
headquartered in New York, New York.
All amounts in US$ unless otherwise noted.

Telecommunications
ADJUSTING ESTIMATES FOR VZW CLOSE
Investment recommendation
We are adjusting our estimates to account for the closing of the
Vodafone/Verizon Wireless transaction earlier than we had
assumed in our initial model. We maintain our BUY rating and
$55 price target which implies 7.0x 2015 adjusted EBITDA (pro
forma for VOD buyout of VZW ownership) and 14.7x pro forma
2015 EPS.
Investment highlights
 Deal closed 2/21/14 – With the consolidation now complete,
we update our estimates to reflect full pro forma adjustments
in Q1/14. We previously assumed the deal would close at
quarter-end.
 No change to above-the-line estimates – As the consolidation
only affects items below, our revenue and EBITDA estimates
are unchanged. Our new estimates reflect materially lower
minority interest, higher interest expense due to increased
gross debt, and a higher pro forma tax rate.
 Continue to favor over others in space – As the continued
market leader in the US wireless industry, we continue to
favor Verizon over others in the sector. We believe a solid
Q1/14 report from its now wholly-owned wireless business
will continue to differentiate Verizon from the others in the
sector.

 

Qualcomm

QCOM : NASDAQ : US$80.14
BUY 
Target: US$90.00

Technology — Communications Technology — Semiconductors
WELL POSITIONED TO BENEFIT FROM CHINA TD LTE
OPPORTUNITY, UPCOMING HIGH-TIER ANDROID
LAUNCHES AND IPHONE UPGRADE IN H2/C2014
Investment recommendation:

Based on our monthly survey work and
recent smartphone product introductions, we believe Qualcomm is
maintaining its dominant market share and strong content share in
leading Android smartphones. We have also increased our forecasts for
TD-LTE smartphones sold in China during 2014 and 2015, resulting in our increased Qualcomm estimates and price target.

We believe continued growth of smartphones; connected devices such as tablets; the upgrade to new air interface technologies such as LTE, LTE Advanced, and TDD-LTE;
and continued strong share for integrated Snapdragon solutions should
drive solid F2014 and F2015 sales and earnings growth. We reiterate our
BUY rating and increase our price target to $90 from $86.
Investment highlights
 We believe QCT operating margins remain well positioned to
improve during H2/F2014 due to an increasing mix of the new LTE
chipsets, growing TD-LTE opportunities in China, and improved
leverage from Qualcomm’s cost optimization programs. We believe
TD-LTE smartphones sold in China should exceed 120M units in
2014 for the three Chinese carriers, leading us to increase our
global 3G/4G device shipment and ASP calculations.
 We anticipate a greater high-end TD-LTE smartphone mix in China
should benefit QCT margins and drive QTL growth and could provide
upside to consensus H2/F2014 and more likely F2015 estimates. Due
to our increased TD-LTE unit assumptions, we have increased our
F2014 pro forma EPS estimate from $5.12 to $5.14 and F2015 from
$5.76 to $5.95 versus consensus of $5.11 and $5.70, respectively.
 Given our increased TD-LTE expectations combined with Qualcomm’s
strong content in the Galaxy S5 and HTC One M8, we believe revenue

Towerstream Corp.

TWER : NASDAQ : US$2.61 
BUY  Target: US$5.oo

COMPANY DESCRIPTION: Towerstream is a leading U.S. fixed-wireless broadband service provider to approximately 3,500 business customers in 13 major markets across the U.S. In addition, through its wholly owned subsidiary, Hetnets, the company operates, and leases Wi-Fi/Small Cell rooftop tower locations to cellular phone operators, tower, Internet and cable companies and hosts a variety of customers on its network.
All amounts in US$ unless otherwise noted.

Investment recommendation

We continue to recommend purchase of Towerstream shares due to its significant potential in Wi-Fi/small cell. At current levels, we believe the market has ascribed little to no value to the company’s Hetnets strategy. While we assume that Towerstream will sign further cable Wi-Fi deals and a small cell carrier contract in 2014, we have pushed out our Hetnets forecasts by approximately 6 months due to uncertainty on the timing of carrier small cell deployment. While we have rolled forward the base year in our 5-yr DCF model to 2015E from 2014E due to the passage of time, the reduction in our cash flow assumptions for Hetnets reduces our target price to $5.00 (EV of 5.5x our new 2015E revenue) from $6.00.
Investment highlights  Towerstream reported slightly weaker than expected Q4/13 results – EBITDA loss of $1.9 million was slightly below our $1.8 million loss forecast, but better than consensus loss of $2.4 million and a loss of $2.1 million in Q4/12. FCF loss of $4.4 million matched our forecast and was above the Q4/12 loss of $7.8 million due to reduced capex.
Fixed-wireless expected to grow in 2014 driven by ARPU growth and M&A – New higher ARPU service plans appear to be gaining traction. The company also expects to resume acquisitions in fixed-wireless this year, which we have not built into our forecasts.
Demand for Wi-Fi/small cell remains strong – The company expects to sign further cable Wi-Fi deals and its first small cell contract in H2/14.

magicJack VocalTec Ltd.

As seen on TV !

CALL : NASDAQ : US$17.53
 
BUY 
Target: US$24.00

COMPANY DESCRIPTION:
The company is the inventor of lightweight, VoIP-based
magicJack devices that allow customers to make phone
calls by plugging into the USB port on a computer or into
a power adapter and high-speed Internet source. The
company is headquartered in Netanya, Israel.

STRONG 2014 GUIDANCE;
RAISING PRICE TARGET TO $24
Investment recommendation
magicJack reported solid results while providing more detailed 2014
guidance that was significantly higher than ours and Street expectations.
With solid activations in the quarter, still early in the renewed
advertising campaign, we expect they will continue to scale through the
year and could offer upside to even these more optimistic estimates.
Although the company has not fully articulated its plans to monetize the
app which now has 6.9mm registered users, we continue to believe that
upside exists above our base-case valuation of 6.0x adjusted EBITDA.
We are increasing our price target to $24 on higher 2014 and 2015
estimates and a higher EBITDA multiple as the company continues to
demonstrate a turn-around in the business.
Investment highlights
 Solid results for Q4/13 – The company reported revenues and
EBITDA that exceeded our and Street expectations as the company
continues to attempt to restructure the business and modernize the
product offering in the market.
 Very solid outlook for 2014 – With the results, management also
updated its outlook for 2014that includes more detail beyond double
digit topline growth. We now expect the company is capable of
$162mm of revenue and $52mm of EBITDA.
 New device on the way – The company announced that it will deploy
a redesigned device that is more tightly integrated with the app in
Q2/14 (April), only one year after the latest device launch. Combined
with an extensive list of changes to the way the company
approaches the market, including the complete rebranding effort,
we believe the change will drive higher active users and cause the
app user base to grow at a strong rate while improving effective
ARPU.

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