In this issue:

• Little Profit Potential for Varonis
• The Case for Exoskeleton Stocks Just Got Stronger
• ATIS Update

Little Profit Potential for Varonis

While Varonis Systems has made some incremental gains lately, especially after another quarter of big revenue gains, it has been dealing with stiffer competition since it was added to our portfolio in November 2014.

By Benjamin Shepherd

Varonis Systems (VRNS) provides products that allow users to manage and secure unstructured data, analyzing everything from spreadsheets, text documents, videos and emails that are created by using and extracting the relevant data. That process creates searchable data, which allows managers to classify it, see who has used it and better determine who actually needs access to the data.

Those are important capabilities in today’s digital world since many data breaches are believed to be the result of too many people having access to digital data systems. By figuring out precisely who needs access and limiting access to just those people, there are fewer opportunities for hackers to get in. It’s also easier to figure how they got in and keep it from happening again when there are fewer avenues of access to look at.

Given the clear need for security products like those Varonis offers, it’s no surprise that the company’s revenue is growing pretty quickly. In the first quarter, total revenue shot up 33% year-over-year to $30.5 million, license revenue was up 36% to $13.8 million and maintenance and services revenue rose 30% to $16.6 million. Those kinds of revenue gains aren’t one-offs, either, with Varonis consistently turning in those sorts of numbers.

So what has the stock been stuck trading in a range between $15 – $20 for the better part of a year now? You would think any company able to grow sales at that clip, quarter in and quarter out, would be a ten bagger by now.

The real problem at this point is scale. With a market capitalization of $535 million, Varonis is a very small fish in what’s becoming a pond filled with sharks. As data breaches have become increasingly common over the past few years (or at least more frequently reported) and more and more expensive, a lot of other companies have begun offering similar products. Far from the least of those competitors is Symantec (NSDQ: SYMC), one of the best known names in computer security, with a market cap of nearly $11 billion and more than $2 billion worth of cash on its balance sheet.

By comparison, Varonis has seen its cash on hand fall from a recent high of $126 million in the third quarter of 2014 to $54 million in the first quarter. Spending on research and development has been growing fairly steadily as new features are developed and added and general expenses have been rising in order to reach more customers, hoovering up cash.

As a result, profits are pretty rare for the company. Over the past ten quarters, there has only been one in which earnings per share were actually positive. In the first quarter, Varonis lost $0.40 per share despite its rapid revenue growth. Looking at estimates going out several years, I only found one particularly optimistic analyst who thought the company might actually turn a full-year profit in 2019.

With the problems of scale and growing competition, analyst targets for the company’s earnings and share price have been grinding down pretty much since the company went public. So while Varonis may offer innovative products that consumers clearly want given the company’s revenue growth, it’s pretty tough to envision the shares moving much higher anytime soon. A takeover might actually be about the best thing that can happen for shareholders, but there doesn’t seem to be one on the horizon.

Sell Varonis Systems.

The Case for Exoskeleton Stocks Just Got Stronger

Since making “The Case for Exoskeleton Stocks” just last week, the two companies featured have posted positive news.

By Jim Pearce

Last Thursday ReWalk Robotics (RWLK) released its quarterly earnings report, which showed strong revenue growth in the last year. During the first quarter of this year the company generated $2.1 million in sales, compared to only $635,000 during the same period last year, and $1.3 million in the last quarter of 2015. That 60% jump in revenue over the prior period improved ReWalk’s gross margin to 23.9%, since its fixed costs remained about the same.

However, of greater long term significance was the announcement that the U.S. Department of Veterans Affairs (VA) bought 20 additional units of ReWalk’s body suit equipment for use with veterans who have suffered spinal cord injuries. Since the U.S. Food & Drug Administration (FDA) approved exoskeleton equipment for medical use late last year, this type of treatment is gaining acceptance within healthcare at an accelerating rate.

ReWalk’s share price jumped more than 4% on the day this news was released, and is up nearly 8% since the beginning of May. However, at less than $10 a share, it is still well below the $16 level reached last December when the company first announced a deal with the VA to test its equipment. It appears investors may have overreacted to that news last December, but with our other exoskeleton company also reporting good news we think last week’s relatively tepid movement in its share price creates a near-term buying opportunity.   

Later that same day Ekso Bionics announced a 1 for 7 reverse stock split to push its share price above the NASDAQ mandated minimum of $4 so it can begin trading on the more liquid Capital Market Exchange. For the first twenty days it will trade under the symbol ‘EKSOD’ to differentiate it from its usual symbol ‘EKSO’, before reverting back to its original symbol.

This transaction will reduce the number of shares understanding to one-seventh its prior amount, while increasing the share price by seven times so it will have no net impact on the company’s stock market capitalization. The conversion will be made automatically for EKSO shareholders, and is a non-taxable event since there is no net gain or loss associated with the terms of the transaction.

However, already the stock market is reacting favorably to this development. Today, EKSOD opened at a price of $6.50, which is equivalent to a pre-split price of $0.93, a 10% increase above its May 4 closing price of $0.85. The company is due to report Q1 earnings after the stock market close on Tuesday, May 10^th, which may also include some favorable forward looking statements given last month’s announcement that the FDA approved Ekso’s robotic skeleton for certain spinal cord injuries and stroke patients.

Not mentioned in last week’s article is our third exoskeleton stock, Parker-Hannifin (PH), which is a corporate behemoth compared to RWLK and EKSO, with a market cap of $15 billion. For that reason, sales of its exoskeleton product are immaterial to the company’s sales at this point. On April 26 PH released quarterly earnings which reflected total sales of $2.8 billion, of which revenue from its exoskeleton equipment is estimated at well under 1% of total sales (the company does not release sales figures for each product line within its Medical Systems Division).

At the moment Parker-Hannifin is primarily a play on global demand for industrial equipment, which continues to be weak, and should be viewed as a potential acquirer of a much smaller exoskeleton manufacturer such as ReWalk (market cap: $119 million) or Ekso Bionics (market cap: $106 million) once it believes buying would materially boost its income statement.

We continue to recommend that you buy Ekso Robotics (EKSOD) up to $9, and ReWalk Robotics (RWLK) below $15, to participate in the rapid growth of exoskeleton technology. Parker-Hannifin (PH) is recommended up to $123 for conservative investors with a long-term time horizon seeking dividend income (current yield of 2.2%).

ATIS Update

We’re changing our buy limit for Medidata Solutions, but keeping the rest of the portfolio as if for now.

By Joe Duarte on May 9, 2016

The financial markets remained in a funk last week, as the strange political season, signs of a slowing economy, and other external factors are causing a lot of head scratching.  But closer to home our ATIS portfolio is holding its own fairly well.  Here is the only change this week:

• Alert: Medidata Solutions (MDSO) – Change in recommendation.  Buy $40-$43.  Sell Stop changed to $39. The stock has dropped in price after a nice rally on its recent earnings.  It looks as if it’s offering an entry point near the $40-$43 area.  We like MDSO based on its niche as the leading cloud provider of research tools and data storage for pharmaceutical companies that are conducting clinical trials.  See the Portfolio Update Section below for more details.

Details on outlook for the entire ATIS portfolio can be found at the bottom of this article.

In Focus: CERS – Buy on the Dip – Why we like it for the Long Term

Trade Update: We issued an alert (4-30-16) on Cerus to buy before and after earnings (5/3/16) in expectations of a drop in price in the short term to be followed by gains in the stock over the next six weeks. The stock fell in price, as we expected, but by the end of the week was showing signs of consolidation.  It could still drop some more in the short term, but that does not change our recommendation at this point.  So, if the post earnings pattern on CERS holds up, our target is around $8 per share on or around June 15^th. We’ll be monitoring this trade. 

Cerus Corp. reported a loss of 17 cents per share and $7.6 million of revenues on May 3^rd, 2016.  The numbers were below analyst consensus estimates of a loss of 16 cents per share and $8.29 million in revenues.  The stock dropped in response.  As we noted last week, a review of the last four earnings reports shows that the stock is nearly 24% higher within six weeks of the release of earnings after dropping initially.  If this pattern holds up the stock may move as high as $8 per share within six weeks of earnings. The stock closed at $5.51 on May 6th, and is still trading well within our $5-$7 recommended buying range.  

And while investors sold the shares, the company had several positive announcements.  First, it reported that the U.S. Army flagship hospital, Walter Reed Medical Center has begun to use the Intercept system.  This, in our opinion, could be a sign that the U.S. military is now interested in Intercept, which could be a very lucrative contract for the company, especially in the current geopolitical environment.  More important, during the earnings call, the company’s CEO Obi Greenman noted that there is likely to be a big jump in revenue over the next few quarters as the recent buyers of the Intercept system implement new FDA guidelines for platelet processing and the Intercept system starts to be rolled out through the numerous blood bank and Red Cross networks which have signed contracts for its use over the last few months. 

Specifically, Mr. Greenman noted that the Red Cross, the largest blood products provider in the U.S., which has recently purchased the Intercept System, will be rolling it out starting in Q2, with the full rollout expected nationwide in the U.S. by 2017.  This will increase revenues as the Intercept kits start to sell in larger numbers.  The goal is to start moving the Intercept system from distributor hubs, such as the Red Cross, regional blood banks, and other central locations into hospitals.  In other words, the revenue stream is far from being fully tapped.

Familiar readers also will remember that the Intercept system, Cerus’ flagship product has been given FDA approval for pathogen neutralization in the ongoing Zika virus situation, another possible revenue stream for the company.  This is a special situation for a stock that remains a long term holding in our ATIS portfolio.  I own shares in CERS.

Portfolio Summary

This Week’s Changes:

Alert: Medidata Solutions (MDSO) – Buy $40-$42.  Sell Stop changed to $39. Bought on 3/7/16 at $36 –  5/6/16 closing price $41.56.  Dr. Duarte owns shares in MDSO.

No Changes in the following positions:

Biorad Laboratories (BIO) – Bought 5/16/15 at $146.25.  5/6/16 closing price $141.63– Sell Stop $132.

Celldex Therapeutics (CLDX) – Buy $4-$7.   5/6/16 closing price $3.49.  Dr. Duarte owns shares in CLDX.

Cerus Corp. (CERS) – Buy Range $5-$7. This stock was initially recommended 11/16/15. Bought 11/16/15 at $5 – 5/6/16 closing price $5.51; Dr. Duarte owns shares in CERS.

Meridian Biosciences (VIVO) – Buy $20-23 – 5/6/16 closing price $19.16 .Stock initially recommended on 6/29/15.  Dr. Duarte owns shares in VIVO

Novo Nordisk A/S (NVO) – Buy  $55-59 (4/7/16).  Sell Stop to $49.  Recommended 12/21/15.  Bought at $55 on 12/21/15 –  5/6/16 closing price $53.35.   Dr. Duarte owns shares in NVO.

Opko Health Inc. (OPK) – Buy Range $8-$11. Bought 2/1/16 at $8. 5/6/16 closing price $9.73. Sell Stop raised to $9.  Dr. Duarte owns shares in OPK.

Rollins Inc. (ROL) – Buy at $27-29. Bought 2/22/16 at $27.38. 4/29/16 closing price $26.87. Sell Stop at $22.  Dr. Duarte owns shares in ROL.

White Wave Foods Company (WWAV) – Buy up to $44.  5/6/2016 closing price $41. Dr. Duarte owns shares in WWAV.