Senior VP and Gen Mgr sold 130,000 shares at 18-20 $/share last week from a total of 370,000 shares.
CEO sold 270,000 shares at 18 from a total of 700,000 shares.
It is their and the underwriting bankers job to identify a top in the market. So they sold the short term debt to the Wall Street.
Anyway, I would wait for a pullback. Blackstone and the banksters that underwrited the past IPOs of FSL, timed the top of the market quite nicely. I would give 60% chance of a significant pullback in semiconductor investment cycle in the short term, few months (so, a good timing to tap the market for funds), and 40% this will not happen.
Actually, close to 40 mil shares. Assuming that the quarterly interest will decrease to below 100 mil $ and the EBIT will grow to 610 mil $ per year, it means that 2014 will be a first year with positive bottom line, 210 to 250 mil $ net profit against 262 mil shares out there. So 0,8 to 1 $ EPS.
But the 20$ price per share means more than 20x forward earnings. Kind of expensive.
I got the answer to that: refinance it again for another 5 years, pay 500 mil in fees and use whatever interest rates might be at that time (probably higher than last year). And keep working for another long years for the interest paid to the bank instead of investing in the business. That is death over long run.
That while the competitive landscape changes every year. Now Intel wants really bad in embedded, telecom and IoT, LSI was bought, etc. Significant FSL competitors were bought by more cash potent companies that will have the power to invest. FSL will not have that power over the long run unless they delever faster by raising capital through equity. And I am pretty sure Blackstone will get some preferred stock to which dividends can be leaked while the common will be diluted.
That is true. FSL has a bit more than 5 years until debt matures.
In 2013, the EBITDA was 860 mil but that is not a fair assumption as a silly financial analyst asked in the press conference:
"Rajvinda Gill - Needham
Alan, just a question on the capital structure. If you are doing $893 million of trailing EBITDA and your current debt outstanding is around $6.4 billion, if you assume that you are on track, maybe to do $900 million of EBITDA or something greater next year, theoretically you could pay off the entire debt load in six years or 6.5 years"
You see, this stupid analyst from Needham then run home and upgraded FSL from BUY to STRONG BUY with a price target of 25$.
He is stupid because what he forgets is that you cannot ignore the I from the EBITDA. T (Taxes) was small in the past because of widespread GAAP losses. Taxes will amount for 20-30 mil per year. And I (interest) will be a bit more than 430 mil per year. So, out of the 850 mil EBITDA he is happy with in the future, actually only 400 mil per year could be used to pay down the debt. So, in 5-6 years until the debt matures, FSL will only get 2.5 bil $ cash from a total debt of 6.5 bil $.
EBITDA does not include CapEx, dear Mr. Analyst from Needham. In one of the most intensive capital expenditure industry, even without manufacturing, assuming FSL will become fabless in some future. Today FSL is fab-lite. The depreciation amounts to 200 mil per year so that's your CapEx to keep the business running. That leaves only 200 mil per year for deleveraging so by 2020, FSL might only save less than 1.5 bil $. Who will pay the other 5 bil $?
Yes, some people look at the balance sheet.
Yes, FSL was the target of an LBO with the buyers being the Blackstone & others. As in other leveraged buyout, the Co was stripped of its 1 bil $ in cash and the money taken from banks to finance the purchase was put to the Co's balance sheet.
Today, Blackstone owns 196 mil shares out of 258. 76% of shares. At the IPO, Blackstone used the proceeding from the sale of 25% of shares (60 mil shares x 18 $ IPO price, minus the discount of the underwriter), around 1 bil $, to pay some of the debt with high interest.
Now, your question is: if or WILL Blackstone do the same with the other 200 mil shares? At 20 $ per share, the proceedings would be 4 bil $ out of 6.5 bil $ long term debt. If Blackstone would do that, the Co would be left with 2.5 bil $ in debt. Its market cap would be 260 mil share x 20 $ = 5.2 bil $ and it has today 3 bil assets. So the debt/market cap would be 50% or 83% debt/assets. On Semiconductor has a ratio of 25% debt to market cap.
You can look at semiconductor companies based on these two ratios and see that TXN has 27% debt/assets. MCHP has 25%. So, all in all, the debt seems crushing. The FSL fabs are old and they will require investment that FSL will not be able to do.
You as an investor have two things to consider:
1) Will Blackstone give up all their 200 mil shares to clean up the balance sheet of FSL? Without any reward? Blackstone already wrote-down a significant loss in their balance sheet regarding the FSL assets. But they still hold 75% of FSL. I do not believe they will do the same act of philanthropy to use the secondary IPO proceedings to erase debt as they did for the first 25%. No, no, no, that is what I think.
2) On a long run, 2-3 years down the road, will the lack of cash to invest in the business, in its hardware (manufacturing side) impact FSL? My opinion is that FSL will let the fabs extinct and become fabless. And pay more to TSMC to make their chips.
It's complicated to breakdown the FSL revenues specifically for the IoT considering that some parts could be reused in different applications.
1) The Auto MCU, 1063 mil in 2013, some of these parts are for the engine control, airbags, etc. But there is also the infotainment part that could meet the IoT. My guess is that only 10-15% of revenues come from the infotainment in this business. The point is that with IoT in every home, every driver will want to update the infotainment module in the car with one that is IoT enabled.
2) Microcontroller MCU, 826 mil in 2013, most of the revenues come from appliances compatible with IoT: tablets, wireless small range comm, etc. I mean the MCU that goes into the hub, running Linux.
3) Digital networking, 915 mil in 2013, 80% of revenues come from Internet routers (wired) for traffic processing and encryption, the rest is from basestations. If the IoT will demand more Internet access, than these numbers will increase. But perhaps not in the first phase of IoT ramp-up.
4) Analog and sensors, 736 mil in 2013, it is difficult to tell the product mix. You could assume 50-60% of the revenues from IoT. But keep in mind that most appliances today have sensors, they don't have IoT. Newer appliances will not add sensors, but rather MCUs and connectivity. I would not assume this business to grow much more. For instance, you do have sensors in the refrigerator, but this cannot talk to your cell over the net. New generations will add this communication (over the cloud and for the short range inside the house), not newer sensors.
5) RF, 352 mil in 2013, this is mostly related to macro basestations power amplifiers. I would not see this being influenced to much by the IoT.
To sum things: 15% of 1063 + 826 + 60% of 736, excluding the cloud effect that increases the demand for the network access. My guess is that only the first two terms of the sum will increase with the IoT growth.
It is a bit difficult to respond to your question as the domain IoT is not that clearly defined in terms of specifications. It is more like an umbrella for a stereotype of applications. And this application pattern is this:
- ultra low power agent: sensors, MCU processing data, persistent memory, wireless for small range comm
- hub: wireless for small range comm with the agents, full range CPU with connectivity to Internet (either wired, thus powered by PoE, or wireless like WiFi or 3G/4G user terminal stack)
- transport to the cloud: the more hubs are connected to the Internet, the bigger the need for wireless of wired connections to the cloud: thus you need small cell basestations or WiFi hotspots or plain Internet wired routers
- cloud: the service providers what to set a secured Internet space for your IoT application (being the cloud space of a hospital that remotely monitors your health, or your garden watering system, or your home appliances, etc); this requires server virtualization, IP encryption of the traffic, you know, the datacenter type of applications.
Pretty good earnings. For Freescale, that is. Largely benefited from the consumer microcontrollers. Quite interesting since on the other hand we hear ARM may be hit by slower smartphones sold. One would think the tablets where Freescale plays would have the same faith. But maybe not. However, Intel is playing in that field too so Freescale's march will be short lived.
If it wasn't for the microcontroller, the earnings would have been flat. Just flat with a crushing debt to service and with a constant share dilution of 5% per year. Too pricey. Let's go back to 12-14 $
It would have been perfect 0 GAPP net result if it were not those (59) millions for debt restructuring fees. Well, the results are bad anyway they would be spin.
Secondly, FSL diluted 1% their share count. BAD.
The equity sank by another 100 mil deeper into negative from yoy.
The only good news is that the 3Q is projected some 6-7% yoy increase, like TXN reported earlier this week.
Adjusted EPS: 0.09$
I was way wrong to the upside. This seems like a small disaster. No GAAP break-even? That is BAD.
Welcome to FSL board. I post some guesses in the past, around the earning release date. So, now is the time to do it again:
- Revenues: Wall Street will assume them to be in the upper limit of the projected range, based on the management preference for upside surprises. I would say even better at 1.050 B. If we look at the SIA reports about global semiconductor sales in Apr and May, they are flat (2 months) yoy. FSL will ride the market, last year they had 1.029 B, Maybe it is the rising trend of three months Mar/Apr/May that tells us a 6% improvement but it may not be sustained in June.
- Operating earnings: 140 mil
- Net income: 10-20 mil (after paying the debt interest)
Nothing to be overly excited. What I do not know is the forecast. Maybe it will not be that rosy, flat to 3% better.
You are right but be careful. You call was right at 16-17. Now the stock is going to 13-14 which is more acceptable. The best price would be around 10 to buy. It is hard to loose at that level as the Blackstone owners would do anything in the medium term 1-2 years to influence some stock analysts to upgrade it.
Basically everything is about flat, except for a positive Microcontroller division selling 177 mil versus 149 a year ago. That seems to be the only positive news.
I'm still not sure about the 254 mil in Automotive Microcontroller versus 240 mil a year ago. But it is better than being flat when the US auto market is growing at a bigger pace. Yet, this does not signal an aggressive market share capture by FSL.
Let's see my guess:
FSL Financial (in M$)
Revenues 967 957
Gross margin 391 375
% GM 40% 39%
SG&A 115 110
R&D 180 186
Restructure 28 20
Operating earnings 68 59
Other expense -145 -127
Net income Q -77 -68
You are invited to make your guess, as educated as possible, on the upcoming earning report due to be release in 2 hours.
What I do know is that I work in the semiconductor industry. What you say is a simply an urban myth about the gross margin. Silly.
The gross margin of FSL is heavily dependent on the factory efficiency. You surely did not know that FSL is not fabless. So do not compare its gross margins with those of the fabless semi companies. FSL is fablite. In fact it is not so lite as they FSL would want. In 2012, they manufactured outside only 30% of their production. The rest was in 3 of their fabs. Their fabs are old. In the last 2 years FSL demolished three other fabs: East Kilbride, Toulouse and Sendai. They tried very hard to find a buyer for these junks but nothing. The only luck came from the Fukushima earthquake which severely damaged the Sendai fab which was not operational at that time (in conservation, looking for a dream buyer). The only money FSL saw on those fabs was from the insurance companies which paid several tens of mil for damages of a ZERO valued factory.
So, the gross margins cannot double as you said. That is stupid. At best, they can grow to 42, maybe 45% from their current 39%.
Don't be shy, do continue this conversation but the case of gross margins doubling is just silly.
I follow this company more than just closely. "doubling their gross margin" is just a lie. If you want to have a serious conversation please be specific and we can discuss any topics. The company is reasonably good for a certain price (like about 10).