Please read the Infoblox (BLOX) earnings call transcript yourself. There is great information, and it will make this article go smoother. I am discussing it and some points I found interesting, but it is packed full of information and this article is by no means complete. I am also talking about broader topics than just Infoblox.
Diving into Infoblox Results
Having read the Infoblox earnings call transcript it might be easy to hand-wave the decline as being instigated by the downgrades. That is if the decline had not been so substantial and instant. I dislike analysts despite aspiring to be one in a sense. I just do not like that their statements become self-fulfilling prophecies, and for the most part that is not their fault. It is the fault of the people who react and overreact to statements. If everyone was making their own conclusions I doubt even justified drops in share price would occur in a flash.
The market such as it is treats upgrades and downgrades as directional triggers. What I mean is that it does not matter what the destination is, but rather the direction that led to the destination. A downgrade from Strong Buy to Buy triggers massive sell-offs just as one that goes from Hold to Sell. I’m sure everyone has seen this occur if they’ve spent any significant amount of time with the market and following the upgrades and downgrades.
Another truth of the market is that down means far more than up. Having the rating go from Hold to Buy means far less than going from Hold to Sell, or even Buy to Hold. I realize that analysts use many different kinds of ratings, and Buy/Sell/Hold ratings are actually far less useful in my opinion than the ones that are overweight/underweight/market weight. Buy/Sell/Hold probably sounds more understandable to the retail investors, though the appellation probably does more harm than good.
With that in mind let us consider Infoblox’s recent drubbing. After reading the earnings report, I believe that this is just an issue of people reacting to analyst news and some impatience on the part of some investors. I want to stress that this is how I see it in my head and you should draw your own conclusions.
My biggest assumption is that management is not lying. They specifically stated that the deals remain in the pipeline. At least the two big deals are in the pipeline. It seems that those big deals were a big concern if I judged some of the negativity I saw. There is concern that these deals will never occur. I just don’t believe that it’s an outright lie. Some of the smaller deals might have been passed on as companies deploy their resources on other IT projects as stated during the call.
Warning: Legal Gibberish Ahead
On a related note, I want to mention that the suit that was filed after the earnings report will probably be dismissed. There is even a new Supreme Court opinion that applies to shareholder class action suits. No longer is it assumed that every bit of information is relevant to the share price. However, the burden of proving it is on the defendant. That means the presumption is still that the statements were relevant and class certification is granted. However the defense can offer up evidence that negates class certification.
Such evidence might include things like intervening causes of a share price drop, but even this new development is probably not going to matter. My cursory, and probably inaccurate, interpretation notwithstanding cases like this usually have no grounds or settle for cheap. Spin is not really cause for a suit. That management tried to put an optimistic spin on results does not make them guilty of false statements. We’ll have to see how it plays out.
The one issue of interest is the claim that management did not disclose the steep discounts they use to close deals. However, management cited delays in closing deals as the reason for revenue shortfalls. If management can show (really claim even with fuzzy math) that their revenue projections took the discounts into account and the shortfall in earnings was caused by delays, then the case would probably not stand. I do see discounts as standard practice especially for new technology that needs to make inroads. I can’t divulge the source of my knowledge, but I have seen invoices with steep discounts on hardware if it was a large invoice or there were multiple ones from the same company, and combined with an initial discount on the service contract. The renewals were at higher rates though discounts were still given if there were a large slew of renewals or the company was an important customer. I believe the catalog price is set high as a matter of course, and I think that discounts are common. That is just my personal experience, which considering my age is decidedly shorter than many of you out there.
None of this was legal advice or an actual prediction. I’m just vamping. I did go to law school, and again not giving any advice here, legal, specific investment advice, or otherwise.
Back to Our Regularly Scheduled Programming
So if the sales are in the pipeline and management is not lying, then what happened? Cutting guidance for one. I would not say the guidance is raising the red flags and sounding the sirens, but it’s not good news by any stretch. That it caused a scorched earth reaction is not really a surprise. In the recent market I have seen it happen so often. I used to think that dropping 20% or more in a day as uncommon, but now it appears to happen after every neutral to poor earnings report.
I honestly do not like to invest that way, and more and more I am coming around to the idea of smaller positions or just investing in pooled assets like ETFs and mutual funds. However, I still like to take individual positions if I feel the stock is undervalued, turnaround candidate, or just a solid small company. The bulk of your assets should probably be in the pooled assets, usually equities and fixed income. This is if you’re looking at more than lets say $10k. It just gets unrealistic for people who are doing other things for a living to manage their portfolios after that. Unless you are very staunchly buy and hold, but want to choose your own positions.
I am fine with the latter, but give the stock time to prove your thesis. And do not let small contrary pieces of information shake you. Really dig into the position and stay steadfast in your belief. I made a mistake with SIRI, which I bought for under $1. I sold far too early after a few months, because I had some gains and I let some posts on message boards sway me. Had I trusted myself I’d be sitting on substantial gains. Though I probably would have sold at some point in the last 1 year period, because the stock has not done much in the last year and there have been far better positions out there.
It sucks for the people who already bought Infoblox, but all hope is not lost. Look at GMCR for a stock that got destroyed and at some point became the next “it” stock again. Alcatel-Lucent (ALU) is one of the stocks I like, though I personally no longer have positions in any stocks for now, and it has had a good return. Recently it has stagnated. I remember writing about Sprint (S) when it was in the $2 range, now its at $8. The internet is full of pricks, and even back then people though Sprint was a dead company and we were “days” from it being below $1. How wrong they were? You have to trust your research and give the company time to deliver, but at the same time you need to ask yourself when enough is enough.
Infoblox was and is an extreme risk. I would say that the recent decline in the share price mitigates the risk some what, but without improving top line revenues it would be hard to see the share price rise to previous levels. However, if they start closing those big deals they were talking about they cold have some quarters where they surprise big time on earnings. What would you expect from the share price then? I’ll be a pessimist and say not much change. It will take some consistent healthy earnings reports to make a difference I think. Burned investors will probably not forget, and Infoblox was never in the spotlight to begin with. The recent decline did not help in that regard.
I do not think the people who think Infoblox is immediately obsolete are right. They cite VMWare and the like, when really the main competitors are some other small companies and ALU. Even ALU has a particular niche and I have not yet read anything that says it is a growth area for ALU. That company needs to be careful in how it deploys its resources. Infoblox’s services work with VMWare. They are technology partners. I think the focus on VMWare handling all things comes from a lack of understanding about the cloud. Even a virtualized networks needs IP management, and that is where Infoblox comes in.
I am not an expert, but it is only people on message boards and comment boxes that claim obsolescence. Despite my incredulity regarding analysts they are not morons. The focus is not on the technology being obsolete, but things like questionable top line growth. The earnings call made specific notice that as far as they know none of the deals were lost to competitors. Maybe they are defining competitors extremely narrowly, and do not count business lost to newer technology. That just opens the company and management up to so much liability. The company is not on the pink sheets, I do not think they are playing it as fast and loose. The internet has a habit of turning people into alarmists. Everyone is evil and out to get you apparently. At the very least BLOX is not going into immediate bankruptcy.
As I said before, Infoblox was and is an extreme risk. Risk does not mean it is teetering on the edge. It means that there is a substantial probability of major loss. However, those are the companies with the highest reward as well. Most investors have heard of risk-reward. Traditionally to have the chance at greater returns you have to chance more risk. If you though Infoblox would preserve your capital you need to go back to investor education. It belongs in the portion of your portfolio earmarked for the most volatile investments.
Departure of CEO
There could be lots of reasons a CEO wants to leave after 10 years. It does not seem like he is leaving on negative terms. He will stay on for almost 2 quarters while a new CEO is found. I’m sure many of you have stayed at your jobs longer than 10 years, but I haven’t. Neither have most people I know, especially in the tech industry management or not.
Also, if people are concerned the company is not doing so well, then a CEO change might work. Look at ALU’s Shift Plan that is going along pretty well under the new CEO. New management can help a company out of a rut. It might not be the old CEO’s fault or anything, but sometimes a change works. Especially because a company that went from private to public changes quite a bit. It can be difficult to shake old thought processes. Now I am just riffing. The point is that I do not like knee jerk reactions to something that can be best characterized as “I ‘unno,” because no one knows the effect of a new CEO on the company.
To Sum Up
I do not give recommendations to buy and sell. I think that Infoblox’s situation did not change so much as to justify the drop, but I also understand the fear that went into such a drop. If it was institutions I can understand that to an extent. You would have to go into the reported trade history to figure that out though. Maybe consider giving the company 2 quarters to close these deals, or at least to judge if they are at least generating leads. If forward guidance keeps declining it would be a red flag. Then the people who sold early would be proven very correct. Wish I had good news, but it is up to the Infoblox sales team to close more deals.
I did leave out all the insider transactions. The company went public in 2012. It’s not uncommon to see insiders selling, because stock makes up a part of their compensation. If you take a look you’ll see exercised options at far below market price. Wouldn’t you sell after however many years of working at the company if you had the chance? You’ll sell some and might keep some. Remember that Infoblox is new, and I don’t think that insider transactions need to be looked at right now. Especially not with torches and pitchforks.
Oh yeah, and Infoblox was declared the market leader in its industry by Gartner and IDC. Without more revenue we just need to hope the whole industry grows. Market share is not getting the job done.
Leave a Reply