Equity research: Symmetricom, Inc. (Part 2 of 7)
Symmetricom, Inc. (SYMM)
SYMM is presently $210 million in revenue, $13.6MM in EBITDA (earnings before interest, tax, depreciation, and amortization), $11.9 million in FCF (free cash flow) business through FY’13 (based roughly on management’s FQ4 estimates). 55% of sales and 75-80% of EBIT are from the communications segment, with the remainder coming from government/enterprise. 60% to 65% of sales are from the United States, with Europe and Asia covering most of the rest. The business is based out in San Jose, California, and was founded in 1956. It is presently one of only two commercial suppliers (the other being Swatch’s Oscilloquartz division) of caesium atomic clocks and contributes over 90% of Coordinated Universal Time (or UTC), the globally accepted standard for civil timekeeping.
It grew differentially during the days of wireline infrastructure build-out before hitting a wall at the turn of the millennium, particularly in FY2002, when revenues declined (52%) because of one major contract loss. The company completed major time and measurement business acquisitions the following year and stabilized through the rest of the decade under CEO Tom Steipp. Dave Cote took over after Steipp’s retirement in June 2009 (incidentally after an 11% workforce reduction) and presided over SYMM’s transition to an outsourced manufacturing model through plant consolidations/closures, the launch of CSAC and development of the Syncworld Ecosystem Program to begin leveraging the PackeTime platform of solutions. In the current fiscal year, R&D (research and development) spending has ramped up to 15%+ of sales (as the company tries to build out a future product pipeline) while trimming its OpEx some $4MM YTD (year-to-date) and planning another $13 million of labor/overhead cuts in lieu of declining legacy/government business.
PackeTime and CSAC (E&P and government) business are estimated to be about 40% of current revenue (per management’s guidance on FQ2 earnings call) while traditional sync solutions and government instruments and other frequency reference business fills much of the rest.
Before turning to the end-markets and their time standards, some further notes on the timekeeping nomenclature for a business like SYMM:
- The scales for timekeeping generally fall between atomic, astronomical and civil standards. The TAI scale is the international atomic scale based on a continuous counting of the metric second. GPS time is basically TAI time set to satellites and ground control stations. Astronomical time (UT1) is based on the Earth’s rotation (sunrise/sunset), which is slightly longer than 24 hours/day because the Earth wobbles when rotating on its axis. The civil (or UTC) scale bridges the two and requires the periodic addition of “leap seconds.” It is used to synchronize local and wide area networks (Internet). The addition of leap seconds has in the past been problematic for certain Internet systems, causing meaningful disruptions in air bookings, for example (think a real version of Y2K), and the International Telecommunication Union is debating whether to abolish the practice altogether and seek a TAI-based alternative like PTP protocol.
- The major protocols for timekeeping are set out in the table above. Highlighted are chip scale atomic clocks and PTP standards of the New SYMM book of business.
Here is a useful primer on the different timekeeping protocols and their respective scales for those who want to dig into the technical understanding.
The Market Realist Take
In its financial results for 1Q 2014 ended September 29, 2013, Symmetricom reported a net revenue of $48.0 million, compared to $56.4 million reported for 1Q 2013. Symmetricom reported a net loss of $1.0 million, or $0.02 per share, for 1Q 2014, compared to net loss of $0.2 million, or $0.01 per share, in 1Q 2013.
The company said in its September 10K filing approximately 25% to 30% of its net revenue has been generated from sales to U.S. government agencies either directly or indirectly through subcontracts. It stated that delays in approvals of the annual defense budget or supplemental funding bills may adversely impact its government sales. The company’s export sales to Europe, Asia, Canada, and Latin America continue to account for a significant portion of its net revenue. It anticipates that sales to customers located outside of the United States will continue to be a significant part of the net revenue for the foreseeable future. Therefore, it is subject to the risks involving such transactions.
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