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Sunday, February 21, 2016

AT&T And The Mountain Debt

As many of my followers know I have been covering AT&T (NYSE:T) heavily of late because I continue to establish the thesis that the company is changing. How? Well, one word - innovation. I argue that this is no longer the second-rate phone company it was once known as. I contend that moving forward that the stock will cease to trade sideways while paying its nice dividend, because the company is changing its approach. Look I love the dividend. I love the stability of the stock. But what I love even more is a company that is able to increase its payout to shareholders and provide growth as well. This path to innovation and the crux of my thesis centers on the unprecedented push to integrate its DirecTV content with mobile. If you have not looked into the service in a while, it is offering the best new customer deals I have seen in years. The company is also looking to take the lead in the sector and be first on 5g technology. I invite you to review these pieces and to read more on the story of innovation that I am telling. The bottom line is that AT&T is serious about being a leader as the 21st century progresses. However, there remains one key bottleneck to the company andthe stock's success. I am talking about the debt. Strike that. I am talking about the mountain of debt.

I have cited many times previously in prior articles that the large amount of debt is a risk for AT&T. The debt is keeping management from raising its dividend by more than a penny each year. The debt keeps a lid on research and development expenses. The debt also keeps many would be investors out of the name. I am on record as saying that the company must prioritize reducing its debt and protecting its ratings. That said, the company has taken yet another step in the right direction.

In a somewhat quiet and under-covered story in my opinion, the company today began exchange offers of 16 series of its DirecTV notes for AT&T notes. We are talking about a credit positive move on the order of $17 billion. Now I will admit, I am certainly not an expert in debt restructuring, but the news sounded very positive. You can read specifically about the notes being exchanged here. The details of the exchanges, while important, are beyond the scope of this article and would really be a regurgitation of the facts. But I will say that each AT&T note issued in exchange for a DirecTV note will have an interest rate and maturity that is identical to the interest rate and maturity of the tendered DirecTV note, as well as identical interest payment dates and optional redemption prices. No accrued but unpaid interest will be paid on the DirecTV notes in connection with the exchange offers. However, interest on the applicable AT&T Note will accrue from and including the most recent interest payment date of the tendered DirecTV note. In other words, the move isn't really costing the company, other than interest on the AT&T note. So why is this move a positive?

To answer this question I turn to expert commentary from Moody's, who specializes in debt and debt ratings. They discussed the move. There is one key point in Moody's note that I want to focus in on. They stated:

"The exchange offer has the potential to greatly reduce in the degree of structural subordination of debt at AT&T Inc. If a large majority of debt is tendered, the exchange will reduce the amount of debt structurally senior to unsecured creditors of AT&T Inc. from $37billion (26% of total, including device securitization and Mobility II preferred equity) to around $20 billion (15% of total)."

What this means for shareholders is that without such a move, the amount of debt as stands today in its current format would pressure AT&T's unsecured ratings. This means, that the move is helping stave off a potential credit downgrade. That is a key piece of positive news. A downgrade means increased costs of borrowing and of course unsettles investors. Any DirecTV debt that is exchanged for AT&T notes will be rated at Baa1, which is in line with current ratings. All in all, if a large degree of debt is moved in this manner, it will reduce the amount of debt structurally senior to unsecured AT&T creditors from $37 billion to around $20 billion, yielding the $17 billion figure I mentioned above.

Bottom line here? The move saves money. It makes the debt "cheaper" for lack of a better term and protects the rating of the debt. Since the debt is among the largest concerns of shareholders, I felt it prudent to cover this piece. Now I want to turn it over to you? What do you think about the move? Will DirecTV debt holders bite? Do you agree lowering costs long-term makes the debt more manageable? Let the community know below.

Tuesday, May 5, 2015

Invensense earnings. Some positives and some negatives.

It wasn't the best and it wasn't the worst. InvenSense, Inc. (NYSE: INVN) the leading provider of intelligent sensor system on chip (SoC) for Motion and Sound, today announced results for its fourth quarter and fiscal year ended March 29, 2015.

Net revenue for the fourth quarter of fiscal 2015 was $99.3 million, down 14 percent from $115.9 million for the third quarter of fiscal 2015, and up 68 percent from $59.0 million for the fourth quarter of fiscal 2014.

Gross margin determined in accordance with U.S. generally accepted accounting principles (GAAP) was 43 percent for the fourth quarter of fiscal 2015, consistent with the third quarter of fiscal 2015. GAAP gross margin for fourth quarter of fiscal 2015 included stock-based compensation and related payroll taxes, and amortization of acquisition intangibles. Excluding these items, non-GAAP gross margin was 46 percent for the fourth quarter of fiscal 2015, consistent with the third quarter of fiscal 2015.

GAAP net income for the fourth quarter of fiscal 2015 was $0.4 million, or zero cents per diluted share. By comparison, GAAP net income was $10.2 million, or 11 cents per diluted share for the third quarter of fiscal 2015. GAAP net income for the fourth quarter of fiscal 2015 included stock-based compensation and related payroll taxes, accreting interest expense on convertible notes, amortization of acquisition intangibles, business acquisition costs, certain legal expenses and the income tax effect of non-GAAP adjustments. Excluding these items, non-GAAP net income for the fourth quarter of fiscal 2015 was $11.4 million, or 12 cents per diluted share, compared with $19.3 million, or 21 cents per diluted share, for the third quarter of fiscal 2015.

Fiscal Year 2015 Results
Net revenue for the fiscal year 2015 was $372.0 million, up $119.5 million, or 47% from $252.5 million for the fiscal year 2014.

GAAP net loss for the fiscal year 2015 was $1.1 million, compared with net income of $6.1 million for the fiscal year 2014. On a non-GAAP basis, net income for the fiscal year 2015 was $42.7 million, or $0.46 per diluted share. This compares with non-GAAP net income of $52.3 million, or $0.58 per diluted share for the fiscal year 2014.

GAAP diluted net loss per share for the fiscal year 2015 as one cent, compared with diluted net income per share of seven cents for the fiscal year 2014.

Management Qualitative Comments
"Fiscal 2015 was a significant year for InvenSense," said Behrooz Abdi, president and CEO. "We achieved the highest revenue in company history, driven by strong market share gains and several high-volume customer wins. We also brought to market a record number of new products across our motion sensor, software and microphone portfolio intended to open up incremental revenue growth opportunities over the coming quarters. Our success in mobile in fiscal 2015 laid important groundwork for our continued achievement in the coming year, while the advancement of our platform strategy provides us with multiple entry points into verticals beyond mobile where our technology can provide significant value in the years to come."

Betflix urges rejection of AT&T and DirecTV merger

Netflix (NASDAQ:NFLX) is pressing the FCC to reject the $48B merger of AT&T (NYSE:T) and DirecTV (NASDAQ:DTV), according to regulatory filings revealed today, on complaints about market power -- as the merger could "lead to its becoming the largest (Internet service provider) in the country as well" as becoming the biggest MVPD.

The remarks came as Netflix officials met with more than 20 FCC staff last week.

"Such market power creates new incentives and abilities to harm entities that AT&T perceives as competitive threats," Netflix reps said, "and will exacerbate the anticompetitive behavior in which AT&T has already engaged."

Netflix shares are up 3.8% today in the wake of BofA/Merrill Lynch's heavy upgrade; AT&T is down 1.2% and DirecTV is down 0.5%

Thursday, March 5, 2015

Could Apple Watch Really Be Worth $26 Billion in sales?

The Apple Watch may be a $26 billion business by 2018, Deutsche Bank analyst Sherri Scribner predicted in a note Thursday.

However, she only reiterated a hold rating on Apple Inc.'s stock, saying a limited impact from the Watch and Apple's heavy reliance on the iPhone offer "limited catalysts" to drive shares higher over the next few quarters.

Her $110 price target implies a 14% share-price decline from Apple's $128.54 closing price on Wednesday.

To be fair, Scribner is one of the most bearish Apple analysts on Wall Street. The average rating on Apple's stock among more than 40 analysts is overweight, and the average price target is $134.92, according to FactSet.

While Apple will undoubtedly outsell all rival smartwatches this year, according to Scribner, she expects the Watch to remain a minor product category in relation to the iPhone, comprising 10% or less of sales and EPS by 2018. Shares of Apple traded up 0.3% in premarket trade.

Market top---ETFs tell a story

  • U.S. investors have pulled $16.8B from equity-based ETFs in 2015 and sent $16.9B to bonds. That’s the biggest divergence in quarterly data going back to 2000.

  • With nine straight quarters of stock-market gains, equity valuations at a five-year high, and the Fed bracing to raise interest rates, investors may be rethinking the $240B they've pumped into U.S. stocks over the past two years.

  • Bearish options contracts on the SP 500 are 9.25 points more than bullish ones. “There seems to be more apprehension and hesitation than we normally have at this stage of bull markets,” one analyst says.
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