Small caps paused this week to digest a few wild weeks. The S&P 600 Small Cap Index is essentially unchanged since I last wrote, which I think is a victory at this point.
I don’t have the data to support this statement, but it appears to me that we’re seeing a lot of stocks rally by more than normal when they report decent earnings. This is likely due to the fact that many of these stocks sold off prior to reporting earnings. But even the stocks that didn’t fall much in early-February, such as Apptio (APTI), Instructure (INST) and Everbridge (EVBG), have continued to rise after reporting. This suggests to me that there is still hunger out there for quality stocks.
I still wouldn’t rule out a test of the early-February lows once earnings season winds down, especially if 10-year Treasury rates keep going up through the 3% threshold (at 2.92% now). It feels like we’re marching toward something of a showdown, with interest rates on one side and economic/revenue/EPS growth on the other, so let’s continue to take things week by week, and on a stock by stock basis.
Today I have no rating changes, but I have two earnings-related updates, for Everbridge (EVBG) and BioTelemetry (BEAT).
The action will continue next week, with AppFolio (APPF), Axogen (AXGN) and U.S. Concrete (USCR) all set to report.
Updates
AppFolio (APPF) will report on Monday. Not surprisingly, shares have been strengthening over the last week heading into the earnings report. As I wrote last week, “… from the SaaS reports I’ve seen… I think AppFolio has a good chance at jumping after it releases its earnings report ... This assumes the company executed in Q4 and guides at or above expectations for 2018, of course. But at this stage, I don’t have any specific reason to believe it won’t.” There are many cloud software stocks out there that are posting terrific growth numbers quarter after quarter, and I expect growth-oriented investors will continue to add exposure to AppFolio. BUY.
Earnings: February 26
Apptio (APTI) keeps chugging right along and will remain at Buy until this trend breaks. The company reported a couple of weeks ago, delivering revenue growth of 18% and a record quarter in terms of upsells. Forward guidance also came in above expectations, partially because of the acquisition of Digital Fuel, an L.A.-based provider of IT business management tools. BUY.
Earnings: DONE
Arena Pharmaceuticals (ARNA) hasn’t released any trial results data yet, but we’re getting closer. We’re awaiting etrasimod ulcerative colitis (UC) Phase 2 Data in late-February or early-March (should be a major event), and Q4 2017 results in the second week of March (these two events could be combined). Shares continue to look strong. Expect a significant move (either up or down) on the UC Phase 2 data release. BUY.
Earnings: Estimated March 14
Asure Software (ASUR) isn’t likely to do too much until earnings are released. Recall that after the last report shares rallied from $11.50 to $15. I think the business continues to do well and has years of growth ahead of it as Asure rolls up small service bureaus that are using its software. I suspect there’s a significant amount of upside once the report is out. BUY.
Earnings: Estimated March 19
AxoGen (AXGN) stepped back above its 50-day line this week, and after eight days of consecutive gains, is now within striking distance of its all-time high set in the beginning of the year. Earnings are out next week, but since it already pre-announced, the focus is likely to be more on product-related updates and the trend in EPS than on top-line growth. BUY.
Earnings: February 28
BioTelemetry (BEAT) reported a great Q4 yesterday with revenue of $91.7 million up by 70% (beating by $3.4 million) and EPS of $0.32 up by 39% (beating by $0.08). A good portion of that growth was due to the LifeWatch acquisition (closed July 2017), but even if we strip that out, organic revenue growth was solid (up 10%). The big topics of discussion with BioTelemetry are: (1) progress on the LifeWatch acquisition, (2) the new patch form-factor products and (3) the Apple and Onduo partnerships. Let’s take these in order.
On the conference call, management talked at great length about how well the integration of the two companies is going and how well the entire team is pulling together. It sounds like synergies are tracking ahead of plan, and they put out initial guidance for around $380 million in revenue in 2018, which is essentially in line with consensus estimates (I expect a fair amount of conservatism in that guidance). Management said sales of the flagship Mobile Cardiac Outpatient Telemetry (MCOT) product line have been accelerating since the acquisition, and business within the company’s top 500 accounts (50% of the healthcare business) continues to grow. This is good.
The newest product additions to the MCOT line are the extended-wear Holter products, the CardioKey (which has been on the market for a little while), and the highly anticipated ePatch, which is a form factor going up against the ZIO patch/service from iRhythm (IRTC). There was much more talk than usual about iRhythm, and there is clearly some tension between the two companies, who are beginning to throw a few stones back and forth. On its Q4 call, iRhythm’s management made some comments about limited reimbursement rates for MCT products, which they said are typically limited to a narrow set of indications and are not covered by many health plans. BioTelemetry management said that is is patently false. They went on to explain that iRhythm’s product has been selling with a temporary Current Procedural Terminology (CPT) code since it came out, which means there isn’t enough clinical evidence to support a permanent reimbursement code, which BioTelemetry’s main product line (but not its new extended wear Holter, yet) has had for around a decade. Bottom line: expect competition between these two companies to become incredibly fierce. BioTelemetry is a much more established company and has a lot of ground to defend (with more products to defend it with), whereas iRhythm is more of an upstart with a relatively new product line and more limited clinical evidence. I think there is room for both, and don’t expect either company to go anywhere.
Lastly, on the Apple and Onduo partnerships, there weren’t many specifics, but management stated what’s relatively obvious: that these can turn into meaningful partnerships. Apple’s Watch isn’t intended to be a diagnostic device, but more of a screening tool for hearth rhythm abnormalities in the general population. If the study goes well and Apple Watch is approved for this, it could expand the cardiac monitoring market, and that could work out well for BioTelemetry. Management said it sees itself as a connected health company first and foremost, and that it is in discussions with other significant partners to help build out this business in 2018.
Overall, this was a good quarter and we heard what we wanted to hear. Shares should respond well and there should be numerous catalysts over the coming months to keep investors engaged and the company building value. Keeping at Buy. BUY.
Earnings: DONE
Datawatch (DWCH) slid back to where it was in December after shares hit an air pocket yesterday. The stock needs another catalyst to get moving back in the right direction. Continue to hold. HOLD.
Earnings: DONE
Everbridge (EVBG) reported this week and revenue of $29.2 million (up 37%) and EPS of $-0.02 were essentially in line with expectations. The company has had a big year, with accelerating multi-product deals (up 31%), big deals with New York City, the State of Vermont and the State of Tennessee (announced this week), and an offer to buy Unified Messaging Systems (UMS) to build out its international (mostly European) footprint. UMS has two main solutions: a mass notification solution and a crisis management solution. And with state agencies in Massachusetts, Virginia and Pennsylvania using UMS, there should be opportunities for Everbridge to consolidate products and then cross-sell solutions to these customers. It’s worth mentioning that as more states and large cities move to Everbridge, the incentive for others to do the same goes up as a widely-used platform that crosses state lines is better for everybody (residents, police, 911 centers, etc.).
Based on these factors, management sees 2018 revenue growing by around 30%, to a range of $135.6 million to $137.1 million. That’s well ahead of the 26% growth analysts had previously expected. While much of the difference is due to the proposed acquisition, the bottom line is that 30% growth forecasts should keep attracting buyers of the stock.
Other details from the conference call: Everbridge grew its customer count by 506 over the year to a total of 3,711, and new products accounted for a significant amount of revenue growth, including 300% growth in the Safety Connection solution. In the year ahead, the company plans to integrate more solutions with its Critical Event Management solution to help build out that product. Keep holding on. HOLD.
Earnings: DONE
Instructure (INST) is still gaining altitude after reporting early last week. The company took advantage of the recent jump in its share price to complete a secondary offering for 2.875 million shares (including overallotment) at 39.5, which implied roughly 10% dilution. I expected demand would be high, and thus far that looks to be the case—shares have traded higher since the secondary was announced! The additional capital will likely go toward growth initiatives, which should ultimately overpower the modest dilution. Keeping at Buy, just take it slow. BUY.
Earnings: Done
LogMeIn (LOGM) has fallen from the all-time high it set last week after reporting a good quarter and the acquisition of Jive Communications (for $342 million), which plays in the $25 billion unified communications market. Jive generated around $80 million in revenue in 2017 and grew by about 20%. We’re holding onto the company, which is taking on major initiatives to build itself into a collaboration software powerhouse. HOLD HALF.
Earnings: Done
Materialise (MTLS) doesn’t have a great looking chart and was moved to Hold on Wednesday after it dipped down below 11.5, which is where the stock was trading in the middle of 2016. As I wrote in Wednesday’s Special Bulletin, I expect the stock to strengthen heading into the next quarterly report, which is due the week after next, but moved it to Hold to protect against a deeper decline. Hewlett-Packard (HPQ) reported yesterday, and shares of that stock are rallying today (up 8%). I’ll dig into that report to see if there are any nuggets related to the 3D printing market, and report back to you. HOLD.
Earnings: March 6
Q2 Holdings (QTWO) advanced to an all-time high in the days following last Wednesday’s quarterly report, which highlighted conservative guidance (21% to 22% revenue growth compared to 24% consensus) but more big deals than were expected (four in the quarter, and seven in the last 120 days of the year). These Tier 1 deals come with some execution risk and somewhat longer implementations than smaller bank deals. But they are ultimately more valuable and the move up market suggests Q2 has significant long-term growth ahead as it becomes a strategic partner to large banks. The company also announced a partnership with Acorns, a micro investing company that has over three million users.
This week, Q2 announced an offering of $230 million of unsecured, unsubordinated convertible senior notes, due 2023. The debt can be converted into cash, shares or a combination upon maturity at the company’s election. We saw Everbridge complete a similar capital raise a few months ago, and at the time, I commented that it’s a good way to go since the convertible feature keeps the interest rate down, and the debt offering means far less dilution than a straight-up equity raise. Shares of Q2 have traded in wide intra-day swings on higher than normal volume. I believe the stock will continue to climb after this deal closes. It’s a relatively stable business with excellent long-term growth potential, and it’s also showing itself to be a fierce competitor to well-performing companies like Jack Henry & Associates (JKHY). BUY.
Earnings: Done
U.S. Concrete (USCR) hasn’t done much since July. Shares have oscillated between 70 and 86, and as of now, are trading near 76—exactly where they were in the beginning of August. Talk of infrastructure spending has been relatively uninspiring. But we’ll get an update on the business when U.S. Concrete reports quarterly results next Thursday at 6 a.m. Eastern Time. I’m not opposed to taking profits if the stock isn’t able to get moving in the right direction again, but for now, I’m keeping at Buy. BUY.
Earnings: March 1
