>>> US Gapping up

Gapping up
In reaction to strong earnings/guidance: SIGM +7.6%, SURG +7.5%, OXM +7.4%, APIC +4.6%, TSM +0.9%, (May sales)

M&A news: HCC +36.1% (to be acquired by Tokio Marine Holdings for $78.00 in cash per share), CSG +5.2% (Bloomberg reporting CSG is considering sale and has received some interest in the company), JCI +5.1% (to explore strategic options for separation of automotive business)

Select metals/mining stocks trading higher metal futures up ~1% in pre-mkt: RIO +3.7%, GFI +3.1%, AG +2.9%, GOLD +2.9%, BHP +2.8%, CLF +2.8%, MT +2.5%, MTL +1.6%

Select oil/gas related names showing strength with crude and nat gas futures up 2% in pre-mkt: RIG +2.5%, EXC +2.4%, TOT +2.3%, WLL +2.3%, SDRL +2.2%, PBR +2.2%, FE +2.2%, SM +1.8%, RDS.A +1.7%, BP +1.6%

Other news: CYTX +10% (preclinical data for the Treatment of Thermal Injury published in the Journal Burns), CTIC +8.1% (disclosed an amendment to the Development, Commercialization and License Agreement with Baxter (BAX); milestone payments from BAX were accelerated), UACL +7.9% (announced the commencement of a modified "Dutch auction" tender offer to purchase up to 1 mln shares of its common stock), CANF +7.8% (announces a Notice of Allowance from the US PTO for a manufacturing method patent for its drug candidate CF101), BLDP +7% (signs a framework agreement with Tangshan Railway Vehicle Company for development of a new fuel cell module), WETF +5.8% (to replace QRVO in the S&P MidCap 400), OGXI+5.8% (FDA has agreed to the co's proposed amendment to the Phase 3 AFFINITY protocol and statistical analysis plan), XOMA +4.2% (treatment of congenital hyperinsulinism granted Orphan Drug Designation), QRVO +3.2% (to replace LO in the S&P 500), LBIO +3.2% (treatment of malignant melanoma Stages IIb to IV (tumor-inflitrating lymphocytes; LN-144) granted Orphan Drug Designation), STO +3% (elects Oystein Loseth as new Chairman), SPAN +2.9% (co has been selected as a supplier of consumer bedding products for the a major retailer's seasonal promotion in the fall of 2015), UVE +2.6% (announces the repurchase and retirement of Series M convertible preferred stock), UBS +2.6% (announces shares of UBS AG's to be delisted from SIX Swiss Exchange in H2 of 2015), FLT +2.5% (announces the signing of a contract with Uber to provide the Partner Fuel Card ), TTM +2.4% (Indian stocks to be included in MSCI EM Index in 2016), DB +1.6% (strong mkts in EU overnight), ABB +1.4% (strong mkts in EU overnight), ING +1.4% (exchanges EUR337.5 million notes of NN anchor investors into NN shares), ARIA+1.4% (granted Paladin Labs, an Endo International (ENDP) company, exclusive rights to distribute Iclusig in Canada for its newly approved indications), APAM +1.3% (announced May 2015 AUM of $111.6 bln), TGT +1.1% (confirms a 7.7% increase to its quarterly dividend to $0.56/share and a $5 bln expansion of its share repurchase authorization), NFLX +1.1% (investor group approves share split and associated additional shares, according to reports)

Analyst comments: CL +1.5% (upgraded to Hold from Sell at Societe Generale), HOV +1.4% (upgraded to Mkt Perform from Mkt Underperform at JMP Securities), NTAP +1.3% (upgraded to Outperform from Sector Perform at RBC Capital ), FGP +0.9% (upgraded to Neutral from Underweight at JP Morgan), JBHT +0.8% (upgraded to Outperform from Sector Perform at RBC Capital ), DG +0.8% (upgraded to Outperform from Sector Perform at RBC Capital)

(UBS) Diebold for Wincor


FROM UBS

 

Wincor Nixdorf AG

Diebold approach?

Diebold reported to be interested in taking over Wincor

Reuters reported that Diebold is in talks about a possible acquisition of Wincor. Both

companies are being advised by investment banks, Reuters stated, also citing another

report from FAZ newspaper. Both companies declined to comment. We think Wincor

would seem likely to be against a takeover given earlier statements from it. However,

we also think that its protection against a potential takeover is weak. A bidding war

with the other major industry player NCR seems rather unlikely to us on the grounds of

a too-dominant market position. However, Wincor's low share price combined with its

restructuring potential and cash generation capabilities could still attract other potential

suitors.

Diebold's market cap is 2x Wincor's these days

Due to Wincor's underperformance and the US$ appreciation, the relative sizes of the

companies has moved into Diebold's favour. Wincor has a market cap of €1.0bn vs

Diebold's €2.0bn and the EVs stand at €1.2bn and €2.3bn (based on Reuters)

respectively. We expect Wincor to achieve an EBIT of €107m in CY15 and consensus

expects €159m for Diebold. Hence Wincor trades on 11.2x EV/EBIT based on our

estimates and Diebold on 14.5x based on consensus data.

Wincor does not have much protection against a potential takeover

We obviously expect a very favourable Wincor share price reaction. We think that after

Wincor's major share price fall and previous press reports that Wincor could be for sale,

it is not surprising that such a report comes up. Wincor has denied that it has put itself

up for sale at the recent Q2 report in April. While it could be interested in assembly

partnerships for certain hardware parts it also stated that it is not interested in a merger

with a large peer. Therefore, a takeover approach could be denied. Nevertheless, given

its high free float, Wincor does not have much in the way of protection. In our view a

potential merger with a major peer would not solve Wincor's strategic issues such as a

further major structural decline in hardware sales and increasing its software and

cashless reach.

Valuation:

We value Wincor on a target EV/EBIT multiple of 9.7x.

WSJ : As Brokerage Preps for IPO, the Negatives Are Lacking

As Brokerage Preps for IPO, the Negatives Are Lacking
Sidoti & Co. doesn’t allow analysts to issue any ‘sell’ ratings on the stocks they follow

A small New York brokerage planning to sell shares to the public is pitching an unusual business model: It doesn’t allow analysts to issue any negative ratings on the hundreds of stocks they follow.

To some, including a former employee who has filed a whistleblower complaint with the Securities and Exchange Commission, Sidoti & Co. Inc.’s business strategy is the latest illustration of how Wall Street research firms may be marred by conflicts of interest and their work influenced by other financial incentives.

Sidoti’s outside lawyers said the firm’s ratings system is “unconventional,” but that the company has “carefully vetted policies and procedures” to ensure quality research and analyst independence.

The Wall Street Journal reviewed internal emails and other documents that in some instances support the whistleblower’s criticisms, including that Sidoti executives have at times pressured employees to maintain more positive assessments of companies in published reports. More broadly, the emails provide a window into Sidoti’s struggles to compete with bigger Wall Street rivals in a tough business environment.

Sidoti, based in New York, filed paperwork in October with the SEC outlining plans to raise some $35 million through an initial public offering. Sidoti executives declined to comment, citing the regulatory quiet period around an IPO.

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A number of Wall Street firms have faced scrutiny over their research in recent years. Morgan Stanley, Citigroup Inc. and other big firms have paid more than $100 million in fines to settle regulators’ allegations of conflicts of interest related to research about companies including Facebook Inc. and Toys “R” Us Inc. In those two settlements, Morgan Stanley and Citigroup didn’t admit or deny wrongdoing.

Formed during the height of the 1990s technology boom, Sidoti, with 100 employees is tiny compared with many of its Wall Street rivals. It doesn’t have a big investment-banking business that generates fees from corporate clients. “At most firms, research is an add-on,” founder Peter Sidoti said in a 2013 video interview. “For us, research is where it all begins and it ends.” Sidoti’s clients include hedge funds, mutual funds and pension managers both large and small. The firm’s analysts focus on small companies.

An SEC spokesman declined to comment. It is unclear whether the regulator has examined the former employee’s claims or what impact, if any, the complaint has had.

Sidoti is unusual in that it only publishes “buy” and “neutral” research recommendations. Most firms have at least three ratings, including “sell” or another negative assessment. On Wall Street, research overall is heavily weighted toward positive ratings.

Sidoti’s lawyers said the firm’s analysts typically express changing views of companies by adjusting stock-price targets. In its latest IPO filing May 4, Sidoti added a note saying that it provides “relevant disclosure” in research reports, but noted, “because we do not have a ‘sell’ or ‘negative’ rating, there is the potential for investor confusion.”

The whistleblower, in a complaint filed last summer, told the SEC that Sidoti’s rating system had created issues in the past, according to people familiar with the claims. In the emails reviewed by the Journal, executives repeatedly instructed analysts not to describe “neutral”-rated stocks using “sell” or “short,” but told them “overvalued” was acceptable. A short position is a bet that a stock’s price will fall.

A Sidoti sales executive in an April 27, 2012, morning email to Sidoti sales, trading and research staff noted the firm’s “bearish” position on Micros Systems Inc., a Maryland technology company. The email referred to Micros shares as overvalued, citing multiple business concerns.

In a research note published the same day, however, Sidoti maintained its “neutral” rating on Micros Systems, while lowering its price target from $61 to $56, where the stock was trading. “We argue the shares are currently near fair value,” the note read. The shares fell 10% over the following two months. Micros was acquired in 2014 for $68 a share.

The whistleblower told the SEC that the firm’s pay structure rewards analysts’ marketing efforts, including setting up exclusive meetings between Sidoti’s clients and executives of the companies it covers, more than independent research, according to people familiar with the complaint.

Across Wall Street, such meetings are crucial to generating trading commissions, because clients reward access with trading business, industry participants said. Asset-management clients value such meetings for insights into specific companies and sectors, which can help them profit from timely trades. For small companies, which often have a hard time getting noticed, analyst coverage and asset-manager relationships can generate interest in their business and attract investors.

Last year, Sidoti’s filing said, it arranged 996 “non-deal related management roadshows” and more than 6,000 one-on-one meetings for clients.

The internal Sidoti emails underline how analysts’ bonuses depend on their ability to arrange these meetings.

“At a certain point, you must drop coverage of those names that show a history of not marketing with us and move on to companies that will market with us,” Sidoti’s then-head of marketing, Tiffany Orford, wrote in a June 2012 email to the firm’s analysts. “If you refuse to drop coverage of such names, this will directly affect your compensation.” Ms. Orford, who has left Sidoti, declined to comment.

“Please remember,” Mr. Sidoti told his research and sales staff in an April 2012 email, “our accounts value management visits more than anything else that we do.”

A lawyer representing Sidoti, Anna Pinedo of Morrison & Foerster LLP, said the company doesn’t directly link analyst pay to trading commissions. She said analysts are compensated for quality work, which includes promoting their research and arranging client meetings with corporate executives.

Paul Healy, a Harvard Business School professor who examines Wall Street research and who has studied Sidoti, said the firm is innovative for focusing on small companies and hiring less-experienced analysts to control costs. But he said its financial struggles, reliance on corporate access and constraints on analysts’ ability to rate companies negatively all pose management challenges. “That model is fraught with tension and the potential for conflicts of interest,” Mr. Healy said. “The question is how you manage the risks.”

Sidoti had $25.5 million in revenue last year, a 16% decline from 2013, due in part to a drop-off in trading commissions, according to a company filing. Trading commissions accounted for 70% of Sidoti’s revenue in 2014.

Dozens of small brokerage firms have closed or been bought in recent years, as regulatory costs have risen and banks have poached their trading businesses. “It’s tough going” for small firms, said John Colon with research firm Greenwich Associates.

In January, St. Louis-based brokerage firm Stifel Financial Corp. said it planned to purchase about 10% of Sidoti’s shares to be sold in the IPO. Sidoti said it plans to refer clients to Stifel for investment-banking services. Stifel declined to comment.

(Exane) Greek Banks : We reduce our aggregate earnings estimates by 10% for 2015

* We reduce our aggregate earnings estimates by 10% for 2015
Higher than expected provisions in Q1, plus the possibility of a deal now slipping into Q3 will weigh
on asset quality and funding. With a lasting solution to the Greek crisis we continue to believe that
the banks’ share prices would at least double on average and the banks could generate a
normalised RoTE of 13-16%. In this scenario we prefer Piraeus and NBG.

* Are we nearly there yet?
A small spurt of momentum as the EU, ECB and IMF align their views on a potential deal. But the
more important agreement with Greece remains frustratingly elusive. With Greece now bundling its
IMF payments until the end of the month a deal before then seems unlikely. Even missing this
deadline won’t mean the end of the road: If this year has taught us one thing it is that we shouldn’t
underestimate Greece’s ability to circumvent hurdles or find money when needed.

WSJ : How Tech Startups Play the Numbers Game

How Tech Startups Play the Numbers Game
Unconventional financial terms woo investors but deepen worries about valuation; Uber’s ‘bookings’

Hortonworks Inc. Chief Executive Rob Bearden forecast in March 2014 that the software firm would have a “strong $100 million run rate” by year-end. But the number looked a lot smaller after Hortonworks went public and then reported financial results: just $46 million in revenue last year.

It turns out that Mr. Bearden wasn’t talking about revenue, though he didn’t say so at the time. The Santa Clara, Calif., company now says the $100 million target was for “billings,” a gauge of future business that isn’t part of generally accepted accounting principles. Mr. Bearden declines to comment.

As young technology companies jostle for investors who will pour money into the firms as they try to make it big and strike it rich, some companies are using unconventional financial terms.

Instead of revenue, these privately held firms tout “bookings,” “annual recurring revenue” or other numbers that often far exceed actual revenue.

The practice is perfectly legal and doesn’t violate securities rules because the companies haven’t sold shares in an initial public offering. Public companies can use “non-GAAP” financial terms but must explain them and disclose how they differ from measurements that follow strict accounting rules.

When Mr. Bearden made his forecast last year, Hortonworks had just raised $100 million that valued the company at more than $1 billion. It went public in December, now has a stock-market value of about $1.1 billion and is required to abide by accounting rules that include disclosing the company’s actual revenue.

Up-and-coming companies that see themselves through rose-colored glasses are of little concern to many venture capitalists and other investors as long as growth remains strong. Many tech-company executives say nontraditional numbers often are a better barometer of a firm’s progress at luring customers, outrunning competitors and pushing the company’s value higher.

No room for error
Skeptics claim that the practice is yet another sign that the tech sector is plagued with overconfidence and setting itself up for a fall. They say investors who go along with vague, unconventional financial terms are inflating valuations and leaving almost no room for error at fledgling technology companies.

Bill Gurley, a partner at venture-capital firm Benchmark in San Francisco, complained on his blog in February that many large investments in tech startups are sold based on a PowerPoint pitch.

“Investors are assuming that the numbers they see in the fund-raising deck are the same as those they might see” in an IPO filing, he wrote. Some investors “have essentially abandoned their traditional risk analysis” out of fear they might miss out on the next big thing.

Benchmark was one of the earliest investors in Hortonworks. Mr. Gurley says it was transparent about its finances before the IPO.

The Wall Street Journal compared sales figures and projections made by 50 tech companies when they were private with financial results reported later for the same period. Fifteen of those firms, including Hortonworks, reported lower numbers. In at least six cases, the difference was caused by using more conservative accounting measurements when the companies went public.

The combined decline by the 15 companies was about $760 million, or 25% of their original sales or projections, according to the Journal’s analysis. The calculations included the 50 largest U.S.-listed IPOs since 2013 by venture-capital-backed tech companies, based on data from Thomson Reuters Corp. and the National Venture Capital Association.

The Securities and Exchange Commission usually doesn’t intervene until a company seeks regulatory approval for an IPO. The agency declines to comment but is increasing its scrutiny of non-GAAP terms at young companies.

According to law firm Proskauer Rose LLP, the SEC last year asked 88% of technology, media and telecommunications companies preparing for IPOs questions about how the firms accounted for revenue, up from 79% in 2013. Last year’s average across all industry groups was 46%.

During the dot-com bubble of the late 1990s, some young companies cited runaway growth in “eyeballs,” website visitors and other non-GAAP terms. The current crop of publicly traded tech companies includes some that report two sets of earnings. One is based on generally accepted accounting principles. The other excludes certain charges, especially stock-based compensation for employees.

In the first quarter, Facebook Inc.’s reported net income was less than half of its non-GAAP measure. A Facebook spokeswoman declines to comment.

Some sticklers say the wide gap between the two numbers recently is a worrisome sign of excess. But firms like Facebook, LinkedIn Corp. and Twitter Inc., with a combined stock-market value of about $280 billion, disclose publicly a flood of financial information compared with the private tech companies trying to attract investors. The information released by private firms varies widely.

“The chances of surprises go up a lot more,” says Venky Ganesan, a venture-capital investor at Menlo Ventures. “It’s not to say the numbers are wrong, but that’s when caveat emptor really applies.”

Before the Menlo Park, Calif., firm invests, it insists on seeing individual transactions to make its own judgments about company revenue, Mr. Ganesan says.

Investors keep lining up even though just two of the 13 tech companies that went public so far this year through June 4 made a profit in the 12 months before their IPO, according to Jay Ritter, a finance professor at the University of Florida.

Last year’s rate of 17% was the lowest for a full year since 2000. In 2010, about two-thirds of tech companies were profitable before going public.

Executives at young companies have lots of opportunities to do “whatever they need to do to generate magic metrics, whether they are relevant in the long run or not” says Lise Buyer, an adviser to Silicon Valley companies and former technology investment banker who worked at Google Inc. when it went public in 2004.

In 2010, Rubicon Project Inc. said on an in-house blog that it “achieved profitability.” Advertising volume on the Los Angeles company’s online network “generates over $100 million in revenue annually.”

Rubicon also projected that revenue would “grow to $200 million in 2011.” The blog post’s headline bragged: “MAKING IT RAIN.”
The company filed for an IPO in January 2014. A prospectus showed just $37.1 million in revenue during 2011 and a net loss of $15.4 million.

Rubicon went public in April 2014, and its stock price has climbed 21%. Revenue surged last year to $125.3 million, but that still was far below the $200 million number announced by Rubicon in 2010. Rubicon had a net loss of $18.7 million last year.

Todd Tappin, Rubicon’s chief operating officer and chief financial officer, says it was common in 2010 for advertising-technology companies to cite numbers that reflected all the ad transactions made on their networks.

Since then, Rubicon has worked with the SEC to determine the best way to measure revenue, he adds. In the company’s financial statements, “revenue” includes only the money that flows to Rubicon.

The company still uses the term “managed revenue,” which it defines as a way to track “advertising spending transacted on our platform.” Mr. Tappin says it is “an important metric” to help show “as much visibility as you can.” Managed revenue rose to $667.8 million last year from $238.8 million in 2011.

News Corp, which owns the The Wall Street Journal, has a 12.5% stake in Rubicon, according to a securities filing and News Corp spokesman. The filing also said the companies have “various commercial relationships,” but he declines to comment.

Another ad-technology firm, MoPub Inc., announced on its company blog in May 2013 that it “hit a $100MM annual run rate this month.” Chief Executive Jim Payne added: “We couldn’t have imagined when we launched our Marketplace 18 months ago that we would have a $100M revenue business so quickly thereafter.”

Twitter acquired MoPub in October 2013 for about $350 million. After the takeover, Twitter said MoPub had revenue of $6.5 million in the first half of 2013.

Mr. Payne, who no longer works at MoPub or Twitter, says the $100 million cited in the blog post represented the total value of ad spots placed on websites by MoPub. “No one is really checking the numbers,” he says.

A spokesman at Twitter says the discrepancy largely reflects the difference between gross revenue and net revenue at the acquired company.

Big on ‘bookings’
Uber Technologies Inc., the world’s most highly capitalized startup, has dazzled investors with its growth in “bookings.” Some investors have been told the number is on pace to reach $10 billion for 2015. Investors recently valued Uber, based in San Francisco, at $41 billion, and the company plans to raise $1.5 billion to $2 billion in new funding that could value Uber at $50 billion or higher.

Uber keeps little of the money from all those bookings. After payments to drivers and discounts on rides, the company gets 20 cents to 25 cents of every $1, say people familiar with its finances. If Uber were publicly traded, it would report the smaller number as net revenue, these people add.

Executives at Uber debated using other terms, such as “gross revenue,” to describe the total fares paid by customers but chose “bookings” because the executives saw that as a more conservative approach, according to people familiar with the matter. Uber declines to comment.

Privately held data-analysis firm Palantir Technologies Inc., valued at $15 billion last November, also emphasizes growth in bookings. At the Palo Alto, Calif., company, the term reflects the long-term value of some software contracts rather than only payments collected in the short run.

Palantir recently told investors that bookings in 2014 exceeded $1 billion, surpassing the company’s internal target, says a person familiar with the company. The company believes traditional measurements of revenue don’t convey Palantir’s growth potential as effectively as bookings do, though company officials also provide revenue figures to investors, the person says.

During a capital fundraising round earlier this year, visual bookmarking site Pinterest Inc. told potential investors that its internal forecasts included possible revenue of $3 billion in 2018, up from less than $25 million in 2014. The figure was cited in an offering document the Journal reviewed.

The document didn’t define “revenue,” and Pinterest declines to comment. According to the document, the projection was based on user growth trends, Pinterest’s ad pipeline and other factors.

In March, Pinterest, based in San Francisco, said it raised $367 million, giving the online site a value of $11 billion and more than doubling the previous valuation of $5 billion in 2014.

Venture-capital firm Andreessen Horowitz, an investor in Pinterest, said in a blog post last year that using traditional revenue gauges for some software firms “can lead to bad investment decisions” because investors ignore other metrics that might be “good indicators of financial health.”

Barrett Daniels, managing partner of Nextstep Advisory Services LLC, an accounting consultant to tech startups, says many of them emphasize nontraditional numbers until they have no choice. Companies often stop using the term “bookings” before going public. “Everyone loves that business metric except the SEC,” he says, adding that it is “easily inflated, and the auditors won’t review it.”

Jet.com Inc., a members-only online shopping club in Hoboken, N.J., that hasn’t opened for business, is valued at nearly $600 million based on a round of financing announced in February.

In April, Jet projected that the value of “gross sales” made through the website would reach $20 billion by 2020, according to a presentation from an investor meeting reviewed by the Journal.

Scott Hilton, Jet’s chief revenue officer, told investors that the estimate was “very conservative,” adding that roughly 420,000 people had signed up for a trial version of Jet’s service.

There’s no way to know how much Jet will make from its “gross sales.” EBay Inc.’s marketplace unit had “gross merchandise volume” of $82.95 billion and revenue of $8.82 billion last year . EBay defines “gross merchandise volume” as the total value of successful transactions.

Jet founder and CEO Marc Lore says in an interview that the $20 billion target is an internal projection that Jet wanted to show investors. The number is based partly on data from his former company, Diapers.com parent Quidsi Inc., which Amazon.com Inc. bought for about $550 million.

He says Jet investors are taking a fair risk for the potential reward if the company takes off. “Nobody is making investments based on a guarantee of making these numbers,” Mr. Lore says.