I posted reply to your mail on SIMG & HILT mail but they were deleted. Were the on the MOBL board?
I own SING & TKO but do not own HILT
Will post Murphys update again here:
Content on Demand MegaShift
Harmonic (HLIT) has a hot new product that combines switched digital video with a modular cable modem termination system, creating a one-box solution for cable companies moving to digital video on demand. Comcast is about to do a head-to-head comparison of products that manage bandwidth resources for customers that have their TVs turned on and are using video on demand. The two products they are comparing come from C-Cor and Motorola, and both trials use the Harmonic box.
Wall Street has trouble believing that Harmonic is about to post a string of good quarters, because investors have been burned before by surprises and lumpy quarters. But I think video is the place to be right now in the whole universal connectivity and convergence drivers for the Content on Demand MegaShift, and the new management at Harmonic is very likely to deliver upside surprises for the rest of the year. HLIT remains a Top Buy up to $10 for my $16 target.
Silicon Image (SIMG) licensed their multi-standard video decoder technology to CeRoma, a leading designer and manufacturer of advanced system-on-a-chip solutions for digital video broadcasting. CeRoma is entering the consumer electronics market, beginning with set-top boxes and digital TVs. The Silicon Image technology works with three video standards, H.264, MPEG-2 and VC-1, and can decode two high-definition streams at once in real time, with less than one million transistors and at low heat dissipation. The same technology is already in mobile devices and both new DVD standards, Blu-ray and HD DVD. The video market is moving from "almost HD" showing video at 30 frames per second to true HD at 60 frames per second, and Silicon Image has the only technology to do that in real time. SIMG remains a buy up to $13 for my $20 target.
Telkonet (TKO) has understandably been the subject of many, many emails that I want to address together. First, let's take a broad overview: The delivery of broadband over power lines (BPL) is finally starting to make significant progress. Regulatory decisions by the FCC and some state utility commissions, especially California, have cleared the path.
There are two parts to this market: BPL over utility power lines to compete with cable and telephone Internet service providers, and BPL inside the building to compete with cabling and wireless. In the utility market, Texas Utilities will deploy BPL to two million homes and 250,000 businesses by the end of 2008. They are working with Current Communications, a private company that is 10% owned by Google, to install 400,000 smart meters in their distribution system this year. They will be able to read the meters remotely, diagnose distribution network problems and provide Internet access.
In the suburbs of Paris, the French utility company SIPPEREC plans to offer BPL service to 1.5 million homes and apartment buildings. Other trials in the U.S. and Britain continue.
BPL at the utility level has some technical issues, such as getting around the step-down transformers that sit on poles outside your home or office and reduce the voltage to 110 for consumer use. It also carries about 100 megabits per second on a medium-voltage cable that is divided among customers, yet in a city there could be 15,000 people sharing a cable. I think broadband starts at one megabit (most DSL is not really broadband, and not suitable for real-time video), so more than 100 customers on line at once could be a problem.
These are not problems for in-building BPL. In-building BPL has other challenges, such as widely varying loads as devices plugged into the wall start and stop. There often is no up-to-date wiring diagram for the buildings where BPL makes the most sense -- older structures with ornate décor that would be brutally expensive or impossible to remove and replace for a cable installation. Many of these buildings have walls of plaster over metal lath, which stops most wireless signals cold. A single-point BPL connection on the building side of the electric meter plus a single-point connection to the Internet, which could be coming over a fiber cable, a copper wire, a wireless connection or even a utility BPL connection, solves the problem. That's what Telkonet does better than anybody.
For the March quarter, they reported $1.2 million in revenues, split about 50/50 between outright sales and rentals. That was down from last year's $1.9 million because they booked over $1.5 million in sales in that quarter. They lost nine cents a share, the same as last year, but on more shares outstanding. The dollar loss was $5.4 million versus $4.2 million last year, and they finished the quarter with $3.5 million in cash. That's tight, and although they had $1.3 million in accounts receivable, they also had $3.9 million in accounts payable.
Management's response to tight cash has always been three-fold: Pay for things with stock ($508,000 this time), sell stock ($9.6 million this time), and make an acquisition that has cash on its balance sheet. The latest buys in March were Smart Systems International and Ethostream. The company thinks that they have enough cash and access to cash to get through 2007, although they would have to raise money to do any more acquisitions.
Smart Systems provides energy monitoring, and Ethostream focuses on installation services in the hospitality industry, so these fit with Telkonet's BPL business to provide a complete package to hotels, which is a major market for TKO.
But the Microwave Satellite Technologies acquisition, which sells voice, video and Internet services, was a mistake and needed to be sold. MST has to lease equipment to customers, which consumes cash, and it is not a contributor to earnings. Telkonet just spun off 37% of this operation by doing a $9.1 million private placement and reverse merger with a shell company, now renamed MSTI Holdings. Telkonet converted $5 million in debt at $1.00 a share, while new convertible holders come in at 65 cents a share and equity holders at $1.00. The stock symbol is MSHI on the Bulletin Board, and it closed today at $1.43, down 17 cents.
I received a question from Lew about this: "Please explain the TKO spinoff of FITX and your opinion on why this is good for us TKO shareholders." (FITX was the symbol for the shell company, now changed to MSHI.)
This is good because it gets them out of managing an unrelated business, even though they will have to consolidate financial results until they can reduce or get completely rid of their 63% holding in the new company. It also focuses their story for Wall Street and potential strategic partners on BPL.
Subscriber Michael asked: "What is it the short sellers are saying about TKO that you disagree with? How risky is this investment at current levels?"
The shorts are saying that the company will not be able to raise money on attractive terms, and it is not focused on its major opportunity in BPL. I think now that they are exiting from MST, they can get a strategic partner to put in money at an attractive valuation for the BPL business. Of course, any microcap stock is risky, and TKO certainly is not the place for all your retirement funds. But the flip side of this risk is the very high rewards that we can bank as BPL takes off.
Alan asked: "My concern is that despite all the hype with contracts, I have yet to see this translate into any significant revenues for the company, and Ron Pickett's letter to the shareholders suggesting $25 million in 2007 is starting to look like a pipe dream to me. Now I find that he is not an on-site CEO. Forgive me but I'm starting to get nervous. Help me out here."
Telkonet won't do $25 million in 2007, although they could exit the year at that run rate by doing $6.25 million in the December quarter. Depending on how fast EDS proceeds with the contract to install BPL at Army and Marine bases all over the world, that could happen. But Pickett was counting on MST revenues, so even he would back away from that projection now. I strongly agree with you about the on-site CEO issue, and this may be the biggest problem the company has.
Joseph said: "First, I am concerned about management's lack of strategy to penetrate the available market for Telkonet products in European countries that build homes and business using concrete slab. I would think that Telkonet's products would be a hit with consumers in those countries like Albania, Montenegro, Italy, Slovania, Hungry, Kosovo, Macedonia, Bosnia, Turkey, Croatia, etc., that are hungry for broadband technology but cannot afford a cable solution."
TKO does have distributor partners in Europe, who have won some good-sized contracts. They are looking for more partners to cover some of the countries you listed, but they need very qualified systems installers selling at least to the hospitality industry. And if there is no cable at the curb or high speed point-to-point wireless available, it doesn't make sense to install an iWire system.
Joseph then added: "I note that Quest Communications seemed to recently suggest that it would be using exiting power lines to provide a triple play solution for its customers. As such, I am wondering if Telkonet has approached the likes of Quest Communication to provide them with a quick answer to its competitor's cable build-out advantage."
Telkonet does not do the utility distribution part of BPL, only the in-building part.
And finally: "Third, I am concerned that Telkonet has not secured any investment infusions to be able to execute on its marketing, distribution, and research & development plan."
They have raised some money, including $9 million in the March quarter. My issue is the number of shares that they have to give up to get money at this level, which is why I would be glad see them sell the rest of their MSHI shares and any other extraneous operations, and get a strategic investor/partner.
While I am uncomfortable with the absentee CEO issue, TKO is the leading company in one of the best growth markets around. With EDS as a partner and MST off their plate, more or less, they have a chance to show us what they can do in broadband-over-power lines. TKO remains a buy up to $5 for my $15 target.
Telkonet
