raceAhead: Chasing John Coltrane, Twitter Verifies a White Supremacist, A More Inclusive Yelp

I was introduced to Trane later in life. Eight years ago in fact.

He was the new, part-time doorman in our low-key uptown apartment building. He was barely nineteen. Outfitted in a spare uniform, some two sizes too big and cinched at his waist, he looked a good deal younger, like a boy cosplaying a man who signed for packages and, if he remembered, held the door.

“I’m Trane,” he said by way of introduction. “But most people think it’s Train.”

“Trane, Like Coltrane? I asked. He burst into a smile and then we were friends.

Trane’s story was like so many young, black men with extremely limited means but high hopes. He was the next generation after the Great Migration, and he liked to tell stories about the times when things got sideways, he’d get sent down to stay with his Southern cousins, where they’d fish for crappies using Skittles as bait. The village that was raising him also included a blur of pastors, some teachers, social workers, street corner philosophers, government uplift programs and now, a bunch of random renters on Manhattan’s Upper West.

But tough as things may have been at times, he had a mother who so believed in the transcendent power of John Coltrane, that she named not one but two of her sons after him. Cole, Trane’s minutes-older brother, was his identical twin. I was transfixed by the notion. What was this black boy magic?

Meeting Trane triggered in me an eight-year quest to understand all things Coltrane, a satisfying if incomplete journey into the life of a man who was rarely interviewed or filmed, but who had come to represent a type of black intellectual and artistic excellence that inspires people to this day.

I listened to his music obsessively. I collected first-hand accounts. I watched every documentary I could find. I made a spiritual pilgrimage to his home in Dix Hills, Long Island. I even developed a nerd-level interest in the mouthpieces he used and tinkered with to change his sound.

So, naturally, I was drawn to Chasing Trane: The John Coltrane Documentary, which premiered this week on PBS. It’s definitely worth your time.

While true jazz insiders will undoubtedly find flaws somewhere in the thesis, it gave me what I was looking for. The filmmakers rely largely on Coltrane’s own words, read by Denzel Washington, to help explain his development as an artist, and tap people who knew him and loved him — like jazz great Sonny Rollins, Cornell West, and Coltrane’s own children — to help put the artist’s work into a broader context. Their love for him is a gift.

Coltrane himself was a miracle. He was a sensitive child of the Jim Crow South, who lost most of his immediate family before he was twelve. He was a late bloomer, musically, and he white-knuckled his way out of a crippling addiction into a spiritual awakening that transformed the way he played. He was nurtured by and then outgrew Miles Davis, and through ascetic dedication and intellectual honesty, developed into an artist who made music the world had never heard before. He died of liver cancer at the peak of his career, and yet his records can still makes you feel … something real.

But the true thrill of the film is the previously unreleased photos and video, showing Trane as a shy and gentle man, living his life and loving his family and friends. While he may be best known for his seminal work, A Love Supreme – a musical declaration that his sound was now a fully spiritual expression, completely intertwined with God – the revelation of Chasing Trane is of a man capable of deep love of a personal variety, fully present, untempted by fame or other childish things. Something anyone could be or want.

It was then that I finally saw the complete picture of the Coltrane magic that compelled a troubled new mother to lay his name upon her twin sons.

My first Trane has since moved on, and his Facebook has gone quiet, which makes me worry from time to time. He is on a short list of souls I think specifically about when I hear of a police shooting or other incident involving a young black man. And I often wonder what the original Trane would think of the world as it feels lately, supremely unloving in ways both familiar and strange.

I think John Coltrane would say to pray, do your serious work, and stay positive. “You know, I know that there are forces out here that bring suffering to others and misery to the world,” he once said. “But I want to be the opposite force. I want to be the force which is truly for good.”

I want to believe that his name will be enough to protect sweet Trane and his brother, I really do. But being a small part of a greater opposite force seems like the only hope. It may not always feel like magic, but it keeps me doing the work.

On Point

Twitter has verified Jason Kessler, the white supremacist who organized the Charlottesville rally
Kessler’s new blue checkmark is odd timing for Twitter, who a short time ago had promised to redouble their efforts to curb violent speech and eliminate hate groups. Kessler had deleted his account last August, after a backlash for a series of tweets in which he said that Heather Heyer, who was killed at Kessler’s “Unite the Right, rally” was “a fat, disgusting Communist,” and called her death “payback time.”
The Daily Beast
Meet Ashley Bennett, a brand new legislator who is not here for your misogynist humor
Bennett was just living her life when a Facebook meme mocking the Women’s March was posted by John Carman, a local legislator in Atlantic County, New Jersey. She was so insulted, she decided to run for his seat. And she won! The psychiatric emergency screener had never run for office before, but she sounds prepared. “I am beyond speechless and incredibly grateful to serve my community. I never imaged I would run for office.” The knee-slapper that got him ousted? “Will the woman’s protest be over in time for them to cook dinner?” People were seriously pissed.
Vox
A new platform aims to train underrepresented company founders who are building start ups
It’s not an incubator or a boot camp. Instead, Founder Gym, co-founded by Mandela Schumacher-Hodge and Gabriela Zamudio, plans to offer four-week training programs that will help emerging entrepreneurs get smart about fundraising, pitching, user growth and problem validation. Bold faced names will offer classes, and while the duo doesn’t take an equity position, there is a $395 participation fee. Click through for details. And take note: Applications for the first cohort just opened and will run through November 30. The first four-week program begins January 8, 2018.
Techcrunch
Inside Yelp’s methodical quest for diversity
An all-star team wrote this case study detailing Yelp’s diversity efforts to date, including Rachel Williams, Head of Corporate Recruiting, Diversity & Inclusion at Yelp and Michael Luca, an associate professor of business administration at Harvard Business School. They’ve had some real success, but one of the most refreshing aspects of their analysis is that they do more than just benchmark. They also share their thinking behind the strategies they’ve tried and are transparent about what didn’t work. Turns out blinding résumés and having candidates use a voice disguiser in first-round phone interviews was a complete dud. “This cuts to the heart of the problem in 2017, which is that increasing diversity at tech companies isn’t about finding a silver bullet,” they say. Have a process, be transparent about what’s happening, and evaluate the policies you implement. Boom there it is.
HBR

The Woke Leader

Jay-Z wrote and narrated a film decrying America’s ‘War on Drugs’
Last year, Beyonce’s husband stepped from the shadows to lend his words and voice to a short art video that describes the history of draconian drug laws in the U.S. that exploded the prison populations and disproportionately targeted black and brown people – even though white people sold and used more crack cocaine than anyone else. (It’s a caste system, whispers Isabel Wilkerson.) Oh, and he mentions the legal marijuana industry, which leaves out black and brown entrepreneurs. The video features the artwork of Molly Crabapple, and remains an essential primer on one of the most divisive issues facing black communities today.
New York Times
Out at work in 2017
It’s not so easy being queer for lots of people who work, explains Fast Company’s Rich Bellis. For starters, “[t]he Justice Department rolled back protections for LGBTQ workers in July, and it remains legal to fire someone for being gay or transgender in 28 states,” he explains. In a poignant essay, Bellis introduces the “Out At Work” package, which includes an ambitious survey of the working lives of LGBTQ people, including more than 3,000 responses from all 50 states and a dozen countries. The stories are rich and varied, some “coming out” stories resulting in more open workplaces (and better benefits) while others are utterly heartbreaking. There are some bold-faced names in the mix as well. This future award-winning package deserves your full attention. A full tip of the hat to Bellis and the team.
Fast Company
Johnstown, Pennsylvania still loves Trump
Though they are clear, despite his promises, that no help is coming to depressed former steel town. While this is part of the “first year of Trump” wave of stories which will revisit the rust belt fans of 2016, this story is notable for a couple of important reasons. One of them is the true cognitive disconnect between what people believe the president is doing and what he is actually doing. (And I only mean golfing a lot.) And the next is the true level of abandonment and despair that certain Americans are experiencing, that no next wave is poised to address. And finally, writer Michael Kruse finally found someone willing to tell the truth about what they really feel about all those knee-taking millionaire football players. Even though you know it’s coming, it takes your breath away.
Politico

AT&T ready to fight U.S. on Time Warner deal: CEO

WASHINGTON/NEW YORK (Reuters) – AT&T Inc (T.N) will not sell cable network CNN to win antitrust approval of its proposed $85.4 billion purchase of media company Time Warner Inc (TWX.N) and will fight the government in court if a negotiated settlement is not reached, the wireless company’s chief executive said on Thursday.

The AT&T logo is seen on a store in Golden, Colorado United States July 25, 2017. REUTERS/Rick Wilking

Justice Department staff recommended that AT&T sell either its DirecTV unit or Time Warner’s Turner Broadcasting unit, which includes news company CNN, a government official told Reuters on Thursday, on the grounds that a combined company would raise costs for rival entertainment distributors and stifle innovation.

The two sides are still in talks on approving the deal, which was announced in October 2016, but have disagreed on whether asset sales are necessary to gain approval.

“If we feel like litigation is a better outcome then we will litigate,” AT&T CEO Randall Stephenson told the New York Times DealBook conference on Thursday. He said the company had been ready to go to court the day the deal was announced.

AT&T has signaled it would not agree to sell DirecTV, which it acquired for $49 billion in 2015, leaving CNN and other cable TV assets as the main sticking point in negotiations.

The antitrust regulator is worried the combined company could make it harder for rivals to deliver content to consumers using new technologies, the official said. AT&T has said it wants to disrupt “entrenched pay TV models.”

FILE PHOTO: The CNN building (L) in Dubai Media City Park March 17, 2016. REUTERS/Russell Boyce/File Photo

Stephenson said several times on Thursday that a combined AT&T and Time Warner will create a data and advertising company whose competitors will be the newest and most disruptive entrants into the media sector, Amazon.com Inc (AMZN.O), Facebook Inc (FB.O), Netflix Inc (NFLX.O) and Alphabet Inc’s (GOOGL.O) Google, not other wireless phone companies.

The Justice Department’s desire for asset sales has raised concerns about political influence on the $85.4 billion deal, given U.S. President Donald Trump’s frequent criticism of CNN. As a candidate, Trump vowed to block the deal shortly after it was announced, but has not addressed the issue publicly as president.

The head of the Justice Department’s antitrust division, Makan Delrahim, said in a statement late on Thursday that he has “never been instructed by the White House” on the AT&T deal.

Raj Shah, a White House spokesman, said in a separate statement that Trump “did not speak with the Attorney General about this matter, and no White House official was authorized speak with the Department of Justice on this matter.”

The deal is opposed by an array of rivals and consumer groups worried that it would give the combined company too much power. Opponents are pushing for conditions that would limit AT&T’s ability to charge media rivals higher prices to carry Time Warner content.

Shares of Time Warner were down nearly 1 percent in afternoon trading at $87.85. AT&T shares rose 1.6 percent to $33.97.

Reporting by David Shepardson and Anjali Athavaley; Additional reporting by Subrat Patnaik and Aishwarya Venugopal; Writing by Anna Driver; Editing by Bill Rigby

Our Standards:The Thomson Reuters Trust Principles.

Former Yahoo CEO apologizes for data breaches, blames Russians

WASHINGTON (Reuters) – Former Yahoo Chief Executive Marissa Mayer apologized on Wednesday for two massive data breaches at the internet company, blaming Russian agents for at least one of them, at a hearing on the growing number of cyber attacks on major U.S. companies.

”As CEO, these thefts occurred during my tenure, and I want to sincerely apologize to each and every one of our users,” she told the Senate Commerce Committee, testifying alongside the interim and former CEOs of Equifax Inc (EFX.N) and a senior Verizon Communications Inc (VZ.N) executive.

“Unfortunately, while all our measures helped Yahoo successfully defend against the barrage of attacks by both private and state-sponsored hackers, Russian agents intruded on our systems and stole our users’ data.”

Verizon, the largest U.S. wireless operator, acquired most of Yahoo Inc’s assets in June, the same month Mayer stepped down. Verizon disclosed last month that a 2013 Yahoo data breach affected all 3 billion of its accounts, compared with an estimate of more than 1 billion disclosed in December.

In March, federal prosecutors charged two Russian intelligence agents and two hackers with masterminding a 2014 theft of 500 million Yahoo accounts, the first time the U.S. government has criminally charged Russian spies for cyber crimes.

Those charges came amid controversy relating to alleged Kremlin-backed hacking of the 2016 U.S. presidential election and possible links between Russian figures and associates of President Donald Trump. Russia has denied trying to influence the U.S. election in any way.

Special Agent Jack Bennett of the FBI’s San Francisco Division said in March the 2013 breach was unrelated and that an investigation of the larger incident was continuing. Mayer later said under questioning that she did not know if Russians were responsible for the 2013 breach, but earlier spoke of state-sponsored attacks.

Former Yahoo Chief Executive Marissa Mayer waits to testify before a Senate Commerce, Science and Transportation hearing on “Protecting Consumers in the Era of Major Data Breaches” on Capitol Hill in Washington, U.S., November 8, 2017. REUTERS/Kevin Lamarque

Senator John Thune, a Republican who chairs the Commerce Committee, asked Mayer on Wednesday why it took three years to identify the data breach or properly gauge its size.

Mayer said Yahoo has not been able to identify how the 2013 intrusion occurred and that the company did not learn of the incident until the U.S. government presented data to Yahoo in November 2016. She said even “robust” defenses are not enough to defend against state-sponsored attacks and compared the fight with hackers to an “arms race.”

Yahoo required users to change passwords and took new steps to make data more secure, Mayer said.

Slideshow (2 Images)

“We now know that Russian intelligence officers and state-sponsored hackers were responsible for highly complex and sophisticated attacks on Yahoo’s systems,” Mayer said. She said “really aggressive” pursuit of hackers was needed to discourage the efforts, and that even the most well-defended companies “could fall victim to these crimes.”

The current and former chief executives of credit bureau Equifax, which disclosed in September that a data breach affected as many as 145.5 million U.S. consumers, said they did not know who was responsible for the attack.

Senator Bill Nelson said “only stiffer enforcement and stringent penalties will help incentivize companies to properly safeguard consumer information.”

Thune told reporters after the hearing the Equifax data breach had created “additional momentum” for Congress to approve legislation. He said Mayer’s testimony was “important in shaping our future reactions.”

The Senate Commerce Committee took the unusual step of subpoenaing Mayer to testify on Oct. 25 after a representative for Mayer declined multiple requests for her voluntarily testimony. A representative for Mayer said on Tuesday she was appearing voluntarily.

Reporting by David Shepardson; Editing by Susan Thomas

Our Standards:The Thomson Reuters Trust Principles.

Tesla Shorts Are Too Short-Sighted

Intro

Tesla (TSLA) reported earnings Wednesday, November 1st, with the entire call and much of the quarterly letter focused on the Model 3. One of the most prominent pieces of information that came out was that the vehicle faces a 3 month delay to reach a 5,000 a week run-rate. For those paying attention, this was not a complete surprise, as a supplier already announced a 3-month postponement of higher volumes for a part for Tesla, and Panasonic admitted delays in the production lines at the Gigafactory.

The stock reacted negatively the next day, dropping nearly 7% by Thursday’s close.

In this article, we will take a walk down memory lane and examine the Model S and X releases, and see if there is any clues about potential outcomes for the stock at different points in the Model 3 ramp.

Model Releases & Stock Effect

2012: Model S

A very long time ago in Tesla time, Model S was just about to be released. The supercharger network concept had just been introduced, and the only vehicle Tesla had ever sold was the Roadster, an amalgamation of IP from the company Tesla had grown from, and the Lotus Elise.

People were skeptical Tesla could produce a compelling, reliable car in any sort of volume. The automaker was aiming to produce 20,000 a year of the car. News eventually broke from Tesla they were having trouble ramping some variants of the Model S. The stock lost ~21% of it’s value from the news before bottoming out.

Chart
TSLA data by YCharts

As Tesla proved their ability to manufacture a vehicle designed in-house from the ground up and slowly ramp production, investor confidence soared to new highs as can be seen in the chart below:

Chart
TSLA data by YCharts

The stock posted gains from July 1st, 2012 ($29.02) to July 1st, 2013 ($117.18) of over 400%. This does not include gains had from the bottoming-out of the stock near ~$20 that occurred from the temporary delays.

2015: Model X

After many delays of the final reveal and official delivery as opposed to the initial reveal in 2012 seen here), the Model X finally started rolling off the assembly line in September 2015. The stock had gotten over-hyped pending the release of the model and had gone to new-highs of $280 in July.

Since it’s initial release, the Model S had improved in reliability significantly, had undergone range and performance enhancements, and had gone on to sell 50% more than the planned ~20,000 a year from 2012 in 2014 with 31,655 deliveries.

The Model X then began rolling off the assembly in line in severely low numbers, with shorts calling the beginning of deliveries “fake” and the share price being tested. From September to February, the share price of Tesla fell from around $250 the time of the Model X delivery ceremony to $151 as the Model X failed to be produced in significant numbers.

Chart
TSLA data by YCharts

Just a couple month later, as it was proven that the Model X ramp was salvageable and the production rate (and reliability of the vehicle) was brought up to speed with Model S investor confidence once again returned, propelling the stock near new highs.

Chart
TSLA data by YCharts

This rally would continue due to many catalysts other than the Model X (like growing anticipation of Model 3, Merger with SolarCity, Gigafactory progress) until the Model 3 delivery ceremony.

All in all, the stock had dropped 47.37% from the highs reached before deliveries began, only to recover almost 70% from the bottom once the Model X situation had been remedied. Looking at the gains from the high pre-Model X deliveries to pre-Model 3 deliveries, the gains were approximately ~37% above previous highs.

Chart
TSLA data by YCharts

2017: Model 3

Tesla stock saw the return to new-highs, like leading into the Model S and X ramp, as anticipation of the Model 3 worked up to feverish levels. Shortly before the highly anticipated launch of the model, the stock reached a peak of $383 in June (and again when it achieved $385 in September).

In keeping with the past, as the hype has worn off and volumes of the vehicle have failed to materialize, the stock has slowly slid to present levels of the low $300’s, or a little more than a 20% decrease from previous highs.

Chart
TSLA data by YCharts

Now that we are brought up to speed with the past performance of the stock in relation to the ramps, and have identified the trend seems to be continuing with the Model 3, let’s look at implications for the share price going forward. Below is a table looking at the changes as different sentiments regarding the ramp have been achieved.

Gains and Losses in Relation To Ramps & SP Lows/Highs

Model SP Loss from High Due To Delays SP Gain from Previous High On Successful Ramp SP Gain Over Ramp Related Low
Model S ~21% ~225% ~432%
Model X ~47% ~37% ~70%
Model 3 ~20%* ? ?

*20% As of publishing

Thoughts On The Trend

I believe that as the ramp gets worked out, whether it be in a month or in 6, the stock will rebound quickly to the previous upwards resistance level around $385 and surpass it be a fairly large margin. As long as reliability is average or above when reviews do start coming out in earnest, (or even if they do not as Model X showed) I think investors will be very pleased whenever the Model 3 run rate of 5,000 is achieved. Obviously, the sooner the better, but I would expect investors would prefer a knock-out product later rather than one that could jeopardize the vast log of reservations sooner.

It definitely seems that each model ramp has had a significant impact on investors, with worries from delays creating tremendously attractive buying opportunities. If the share price increases over the previous high in a similar to manner to the Model X rally, the new high would be over $500.

Before we conclude with a summary of the above and our stance on the stock, I believe it is worth taking in a point about the nature of ramps at Tesla.

A Point About The Ramp

One point Musk tried to really drive home, as he has done in the past, is that the ramp is really a “stepped exponential”. What this means essentially is that it does not follow a linear path. I wish to illustrate the point further than he was able to on the call with a scenario as outlined below:

linear vs exponential graph

(Image Source)

Suppose the assembly line has 100 process steps to complete the product. 90 of the steps are capable of creating 1000 of the product a day, the companies desired run rate. 5 of the other steps are able to do 1,200, which is actually above the companies goal. The other 5, unfortunately, are only able to do 100, 200, 300, 400 and 500 a day, respectively.

The company fixes the step that is only able to do 400 a day and makes it 500, however they can still only do 200 a day, as that is the bottleneck of the entire production process. Then, they make that one able to do 1000 a day. Now, they can only do 300 a day. Even if they fix the two that can do 500 a day, they will still be limited to 300 a day.

What this lengthy hypothetical demonstration above shows is that they could be making vast improvements to various processes on the line each day, however they will not reflect in the daily, weekly, or even monthly production levels unless they were able to increase the rate of whichever process was causing the biggest slow-down. This could be equated to the buffalo herd theory.

What this means for us is that if people begin extrapolating based off how much they were able to improve the run-rate in a certain amount of time, they could be blown away by sudden improvements that occur seemingly overnight. This is also why management is not guiding for certain levels by quarters end, but in slightly broader time frames.

Additionally, it is worth noting that they have been planning for “volume deliveries in second half of 2017” since before Q3 2016. This seems to be relatively on track, although it will only be somewhere below 3,000 until March and not the full 5,000.

Other Effects of The Delay

Of course, the delay will impact Tesla in a very real way besides investment sentiment. These include possible customer dissatisfaction (or lack thereof), and increased duress on their financials.

Customer Satisfaction

If the delay is underestimated and expected delivery dates get repeatedly pushed back (something already occurring as documented here) they could see a mass influx of cancellations. While I expect demand to remain quite healthy for several years to come for the Model 3, unhappy customers can be a nightmare for companies. For more insight into how important customer satisfaction can be, consider looking at my recent article about google(GOOG) (GOOGL) and customer service here.

While there will likely be many customers to take the place of those who do cancel, it will certainly not be good for Tesla. The even bigger impact will be on lost or deferred revenue, however.

Financials

If the Model 3 is delayed beyond the initial 3 month estimate, Tesla’s financials will start to deteriorate rapidly. Investors were more than happy to expedite the production of Model 3 when the company last raised capital, but this will not hold true if they must repeatedly raise more and more money to accomplish the same task.

Any minor dilution is not a cause for concern for many bulls due to the fact that if Tesla succeeds it will generate massive returns for shareholders so dilution should negligibly effect returns. However, they may have issue being lent more capital if their share price deteriorates significantly, which may continue if the ramp struggles for much longer than currently expected.

An inability to raise capital on favorable terms (as a result of a lack of investor confidence) could compound the problems and create the perfect storm the shorts are waiting for. I would assert that this is the single biggest threat to Tesla right now (other than their execution itself).

Conclusion

Since the news broke of the delay, Tesla has retained support above the $280 level, and recovered 2.5% to $306 to close-out the week, less than $15 below where it was heading into Earnings.

The historical data shows repeated dips in the stock around model ramp delays, with investors getting spooked about Tesla’s ability to execute. Once the delays had been overcome, the stock soared to new all-time highs over 1/3 higher than previous.

Tesla is not a conventional company, and they do not do things in conventional ways. Although their ramps may differ in style and timeliness from industry norms, they are capable of doing so and will reward investors when they do ultimately deliver. Tesla has delivered 250,000 cars since it’s inception over a decade ago. Next year they plan to deliver 500,000 (and I think they will deliver at least 275,000). Regardless of where they fall in that range, they will double the number of Tesla’s on the road from today in one year.

It seems that there is not much additional downside for Tesla in the near-term with the stock already dropping 20% off the news of the delay and possible removal of the tax-credit. However, it’s worth noting support levels of around $220 is the stock does drop further. Regardless of short-term movement, a year from now after the ramp is considered a success, I believe the stock will likely be at new highs in the $400-$500 range.

Investor Take-away

With significant milestones achieved in the recent quarters, the Model 3 ramp delayed (and who can say they are honestly surprised) but on track and the Semi reveal slated for this month I only see positive catalysts in the near-term for Tesla, besides a potential capital raise and confirmation of the removal of the tax-credit.

If you are long the stock, holding is definitely the recommended position at this time going into 2018. I think the stock is bottomed out for the next several months and shorts should cash out if they are in the money.

If history is anything to go by, this may be the last opportunity to pick up Tesla shares in the low 300’s for quite some time.

If you found this article informative, are interested in Tesla or other disruptive technological companies I cover such as Amazon, Google and Apple, please consider following me by clicking the button at the top of the page.

Disclosure: I am/we are long TSLA.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Mobile bank N26 sees customers tripling within two years: CEO

LONDON (Reuters) – The smartphone-based bank N26 expects to peel away 5 to 10 percent of retail customers aged 18 to 35 from established banks in its core continental European market in the next two to three years, its chief executive told Reuters.

FILE PHOTO: Valentin Stalf, Founder and CEO of the Fintech N26 (Number26), poses for a portrait in Berlin, Germany, August 19, 2016. REUTERS/Axel Schmidt/File Photo

The Berlin-based fintech start-up has been signing up 1,500 to 2,000 customers a day in recent months, putting it on track to triple in size to around 1.5 million clients within two years from its current 500,000 users, Valentin Stalf said in an interview in London on Friday.

The company, which counts Chinese billionaire Li Ka-shing and Silicon Valley investor Peter Thiel among its backers, is competing with traditional branch-based retail banks by offering a suite of mobile banking services that customers can use entirely from their smartphones.

It also faces competition from other digital banks such as Revolut and Monzo, and even French telecom operator Orange (ORAN.PA), which launched its own banking service last week.

Since its launch in Germany in 2015, the company has expanded rapidly into 17 European countries including Austria, France, Spain and Italy. It recently said it will start operating in Britain and the United States next year.

“We see the U.S. as a big opportunity because digital banking is underdeveloped,” Stalf said. “There are no clear rivals for us there.”

The regulatory environment is also becoming more favorable, Stalf said.

In 2018, new European Union rules will start to force banks to allow customer data to be made available to other companies if the customers agree. That will help the likes of N26 identify potential customers and offer them better deals than their current lenders.

Stalf said that within three years N26 expects to have a 5 to 10 percent share of the market in the main countries where it operates.

N26 offers a free current account, its “anchor product”, but makes most of its money through card usage, savings, credit and insurance services.

The company made its name taking on traditional banks but came under scrutiny itself last year after a security researcher found that its apps exposed users to potential account hijacking. N26 then implemented fixes to prevent such problems.

Stalf said the main advantages of being an app are having daily interactions with customers and as a result being able to better understand their needs and offer tailor-made, value-added services.

“If I happen to book a trip and hire a car with my N26 card, my app would instantly use that information to offer me travel and car insurance.”

With marketing costs of 5 to 10 million euros per year – far lower than those of traditional banks – and customer data gathered via payments, N26 has been able to either make a profit or break even from each newly acquired customer.

Stalf said that excluding marketing costs, the company could be profitable in about a year.

Acquiring a banking license has also helped keep costs down, and the company is now betting that word-of-mouth and good Apple Store ratings will help it contain its marketing costs and help it move along the path to profitability.

“Today you can create a trusted brand much faster because everything is more transparent,” said the 32-year-old Vienna-born entrepreneur.

(In the first paragraph, company corrects to say .. retail customers aged 18 to 35 ..not.. all retail customers)

Reporting by Sophie Sassard in London; Additional reporting by Eric Auchard in Frankfurt; Editing by Hugh Lawson

Our Standards:The Thomson Reuters Trust Principles.

BP, Shell lead plan for blockchain-based platform for energy trading

(Reuters) – A consortium including energy companies BP and Royal Dutch Shell will develop a blockchain-based digital platform for energy commodities trading expected to start by end-2018, the group said on Monday.

The logo of BP is seen at a petrol station in Kloten, Switzerland October 3, 2017. REUTERS/Arnd Wiegmann

Other members of the consortium include Norwegian oil firm Statoil, trading houses Gunvor, Koch Supply & Trading, and Mercuria, and banks ABN Amro, ING and Societe Generale.

Blockchain technology, which first emerged as the architecture underpinning cryptocurrency bitcoin, uses a shared database that updates itself in real-time and can process and settle transactions in minutes using computer algorithms, with no need for third-party verification.

Mercuria has been a vocal advocate of implementing blockchain technology to significantly cut costs in oil trading.

“Ideally, it would help to eliminate any confusion over ownership of a cargo and potentially help to make managing risk more exact if there are accurate timestamps to each part of the trade,” said Edward Bell, commodities analyst at Dubai-based lender Emirates NBD PJSC.

Similar efforts for an energy trading platform have failed to take off, Bell said, but added this latest bid with backing from BP and Shell and the banks, “may have more success than if it were an independent party trying to convince oil and gas companies to make use of it.”

The new venture is seeking regulatory approvals and would be run as an independent entity, the consortium said in a statement.

“The platform aims to reduce administrative operational risks and costs of physical energy trading, and improve the reliability and efficiency of back-end trading operations…,” the statement said.

(This version of the story was refiled to make clearer in headline that platform is tool for trading, not a trading platform)

Reporting by Arpan Varghese in Bengaluru; Editing by Manolo Serapio Jr.

Our Standards:The Thomson Reuters Trust Principles.

Toyota seeks more investments in Israeli auto tech, robotics

TEL AVIV (Reuters) – Japan’s Toyota Motor Corp is seeking more investments in Israeli robotics and vehicle technologies after its venture arm led a $14 million investment in Intuition Robotics in July.

A logo of Toyota Motor Corp is seen at the company’s showroom in Tokyo, Japan June 14, 2016. REUTERS/Toru Hanai/File Photo

The startup, which makes robots for the elderly, was the first Israeli investment for Toyota AI Ventures, a new $100 million fund investing in artificial intelligence, robotics, autonomous mobility and data and cloud computing.

“We will see more involvement of Toyota in the Israeli market in the future,” said Jim Adler, managing director of California-based Toyota AI Ventures, which is part of the $1 billion Toyota Research Institute.

“There’s more in the pipeline,” he told Reuters during a visit to Israel, adding that technologies dealing with perception and prediction and planning were of particular interest to Toyota.

Perception technology enables a self-driving vehicle to understand the world around it while prediction and planning can help a car interpret situations such as whether a child at an intersection might try to cross at a red light.

“There’s a tremendous amount of innovation happening in Israel as cars become more produced by data,” said Adler, who is in the country meeting companies whose technologies interest Toyota.

Israel is a growing center for automotive technology. Earlier this year Intel Corp bought autonomous vehicle firm Mobileye – one of Israel’s biggest tech companies – for $15.3 billion.

On Friday Germany’s Continental AG said it was buying Israel’s Argus Cyber Security, whose technology guards connected cars against hacking.

Toyota AI Ventures has made five investments and expects to invest in at least 20 companies worldwide.

Regarding its investment in Intuition Robotics – which plans to begin trials of its robots with older adults in their homes early next year – Adler said there were many common features between robotics and autonomous vehicles, which he referred to as “big robots with wheels”.

Japan’s population is aging, with 40 percent expected to be over 65 in 20 years, he said, and there will be demand for technologies that help the elderly stay in their homes, rather than have to move to assisted-living facilities.

“We think Toyota will have a role there,” he said.

Editing by Keith Weir

Our Standards:The Thomson Reuters Trust Principles.

Omega Healthcare Investors: Sometimes Short-Term Bad Can Be Long-Term Good

This article is about Omega Healthcare Investors (NYSE:OHI), a REIT, and why it’s a buy for the income investor long term, even when OHI has a short-term problem with one of its operators. I believe that the management of OHI is good and has already outlined the steps to be taken to get the Orianna properties to new operators with reduced rents.

Omega Healthcare is one of the largest operators of skilled nursing care properties and assisted living properties. OHI is a full position at 6.0% in The Good Business Portfolio. OHI’s position will be left to grow over time and added to whenever a dip like this happens. The company has at many times been under pressure and gotten down to $28 range, and each time it has bounced back, so this is another chance to buy into a good company with a very high yield.

When I scanned the five-year chart, Omega Healthcare Investors has a poor chart going up and to the right for 2013-2014, then down slowly for three years ending behind the market. In 2013, OHI had a good year when the market was up 27%; the company came in at a 30% increase.

Chart

OHI data by YCharts

Fundamentals of Omega Healthcare Investors will be reviewed in the following topics below:

  • The Good Business Portfolio Guidelines
  • Total Return And Yearly Dividend
  • Last Quarter’s Earnings
  • Company Business
  • Takeaways
  • Recent Portfolio Changes

I use a set of guidelines that I codified over the last few years to review the companies in The Good Business Portfolio (my portfolio) and other companies that I am taking a look at. For a complete set of the guidelines, please see my article “The Good Business Portfolio: Update To Guidelines And July 2016 Performance Review“. These guidelines provide me with a balanced portfolio of income, defensive, total return and growing companies that hopefully keeps me ahead of the Dow average.

Good Business Portfolio Guidelines

Omega Healthcare Investors passes 9 of 11 Good Business Portfolio Guideline, a fair score (a good score is 10 or 11). These guidelines are only used to filter companies to be considered in the portfolio. Some of the points brought out by the guidelines are shown below:

  1. Omega Healthcare Investors does meet my dividend guideline of having increased dividends for seven of the last ten years and having a minimum of 1% yield, with 10 years of increasing dividends and a 9.3% yield. Omega Healthcare Investors is therefore a good choice for the dividend income investor. The average five-year payout ratio is high at 82% because of its REIT designation. After paying the dividend, this leaves cash remaining for investment in expanding the business by buying bolt-on properties to the 1,000 it already owns or leases.
  2. I have a capitalization guideline where the capitalization must be greater than $7 billion. OHI fails this guideline by a small amount. OHI is a mid-cap company with a capitalization of $6.2 billion. Omega Healthcare Investors’ 2017 projected total yearly AFFO flow at $646 million is good, allowing the company to have the means for growth and increase dividends.
  3. I also require the CAGR going forward to be able to cover my yearly expenses. My dividends provide 3.2% of the portfolio as income, and I need 1.9% more for a yearly distribution of 5.1%. The one-year forward CAGR of 7.0% meets my guideline requirement. This good future growth for Omega Healthcare Investors can continue its uptrend benefiting from the continued growth of the senior citizen population.
  4. My total return guideline is that total return must be greater than the Dow’s total return over my test period. OHI fails this guideline since the total return is 64.33%, less than the Dow’s total return of 78.53%. Looking back, $10,000 invested five years ago would now be worth over $18,700 today. The total return in the good year of 2013 was 29.6% compared to the Dow gain of 27%, a small beat. This makes Omega Healthcare Investors a fair investment for the total return investor that has future growth as the senior citizen sector continues to grow. As an added plus we have President Trump cutting corporate taxes (both domestic and foreign) which will increase earnings slightly.
  5. One of my guidelines is that the S&P rating must be three stars or better. OHI’s S&P CFRA rating is three stars or hold with a recent calculated target price to $35.4, passing the guideline. OHI’s price is presently 25% below the target. It is under the target price at present and has a low price to AFFO of 10.8, making it a good buy at this entry point if you are a long-term investor that wants income with an above-average dividend yield.
  6. One of my guidelines is would I buy the whole company if I could. The answer is yes. The total return is weak, but an above-average yield makes OHI a good business to own for income with moderate growth long term. The Good Business Portfolio likes to embrace all kinds of investment styles but concentrates on buying businesses that can be understood, makes a fair profit, invests profits back into the business, and also generates a fair income stream. Most of all what makes OHI interesting is the potential long-term growth, as more skilled nursing care facilities are required and the income for the income investors is great.

Total Return And Yearly Dividend

The Good Business Portfolio Guidelines are just a screen to start with and not absolute rules. When I look at a company, the total return is a key parameter to see if it fits the objective of the Good Business Portfolio. Omega Healthcare Investors misses the Dow baseline in my 56.0-month test compared to the Dow average. I chose the 56.0-month test period (starting January 1, 2013, and ending to date) because it includes the great year of 2013, and other years that had fair and bad performance. The fair total return of 64.23% makes Omega Healthcare Investors a fair investment for the total return investor who also wants a steady increasing income. OHI has an above-average dividend yield of 9.3% and has had increases for the past 21 quarters, making OHI also a good choice for the dividend growth investor. The dividend has recently been increased to $0.65/Qtr., from $0.64 or a 1.6% increase for the quarter.

Dow’s 56.0-month total return baseline is 78.53%.

Company Name

56.0-month total return

Difference from Dow baseline

Yearly dividend percentage

Omega Healthcare Investors

+64.23%

-14.3%

9.3%

Last Quarter’s Earnings

For the last quarter, on October 30, 2017, Omega Healthcare Investors reported AFFO of $0.79 that missed expectations by $0.06 and compared to last year at $0.82. Total revenue was higher at $194 million, up 4.4% year over year and missed expectations by $44 million. This was a poor report with the bottom line missing expectations and the top line increasing. The next earnings report will be out in late January 2018 and AFFO is expected to be $0.82 compared to last year at $0.82. The company guided AFFO for the year to $3.27-3.38, but this assumes it will be able to fix the problem with one of its operators. Earnings will most likely be very volatile over the next six months.

Business Overview

Omega Healthcare Investors is one of the largest skilled nursing care and assisted living facilities REITs in the United States.

As per Reuters:

“Omega Healthcare Investors is a self-administered real estate investment trust (REIT). The Company maintains a portfolio of long-term healthcare facilities and mortgages on healthcare facilities located in the United States and the United Kingdom. It operates through the segment, which consists of investments in healthcare-related real estate properties. It provides lease or mortgage financing to qualified operators of skilled nursing facilities (SNFs) and assisted living facilities (ALFs), independent living facilities, rehabilitation and acute care facilities. Its portfolio consists of long-term leases and mortgage agreements. As of December 31, 2016, its portfolio of investments included 996 healthcare facilities located in 42 states and the United Kingdom and operated by 79 third-party operators. As of December 31, 2016, the Company’s portfolio consisted of 809 SNFs, 101 ALFs, 16 specialty facilities, one medical office building, fixed rate mortgages on 44 SNFs and two ALFs.”

The graphic below shows the type of facilities required today. With seniors remaining active into their 80s, 90s and beyond, skilled nursing facilities continue to evolve to meet the higher expectations new generations of seniors and their families want with regards to amenities, décor and care.

Source: Omega Healthcare Investors Web Site

Overall, Omega Healthcare Investors is a good business with a 7% CAGR projected growth as more skilled nursing care facilities are needed going forward. The good AFFO provides OHI the capability to continue its growth by increasing revenue as it buys bolt-on properties and increases dividends.

Also as a tailwind, we have President Trump wanting to lower corporate taxes on income. As the corporate tax rate is lowered, earnings of OHI should increase slightly.

The economy is showing moderate growth right now (about 2.9%), and the Fed has raised rates in June 2017, with future rate increases dependent on the United States economy and inflation. The Fed projects for one more increase in 2017. I feel the Fed is going slowly; it doesn’t want to trigger a slowdown in the economy.

From October 30, 2017, earnings call, Taylor Pickett (Chief Executive Officer) said:

Adjusted FFO for the third quarter is $0.79 per share. Funds available for distribution, FAD for the quarter is $0.73 per share. The reduction in adjusted FFO and FAD is primarily related to converting the Orianna portfolio to cash basis accounting with no adjusted FFO or FAD recognized for Orianna in the third quarter.

During the third quarter, we cooperatively completed the transition of Orianna’s Texas facilities to another Omega operator, and we completed the sale of the Northwest facilities to two buyers. Unfortunately, the remaining portfolio continues to underperform and Orianna continues to apply free cash flow to pay down past due vendors and other obligations.

We are in active discussions with Orianna’s owners and consultants regarding the potential transition and/or sale of certain assets versus a federal or state court restructure. We are hopeful, we can develop an out-of-court plan, which if successful, would likely result in cash rents of $32 million to $38 million per year, as compared to the current annual contractual rent of $46 million.

“We remain confident in our ability to pay our dividend, increasing our quarterly common dividend by $0.01 to $0.65 per share. We’ve now increased the dividend 21 consecutive quarters. Our dividend payout ratio remains conservative at 82% of adjusted FFO and 89% of FAD, and we expect these percentages will improve as the Orianna facilities return to paying rent. Our revised 2017 guidance reflects the impact of Orianna’s cash accounting and our anticipation that no cash were received for the balance of the year. “

This shows the feelings of the top management for continued growth of the business and shareholder returns and the action being taken to fix the problem with Orianna.

From October 30, 2017, earnings call Daniel Booth (Chief Operating Officer), said:

“Turning to new investments. During the third quarter of 2017, Omega completed two new investments totaling $202 million, plus an additional $36 million of capital expenditures. Specifically, Omega completed $190 million purchase lease transaction for 15 skilled nursing facilities in Indiana and as part of that same transaction simultaneously completed a $9.4 million loan for the purchase of the leasehold interest in one skilled nursing facility with an existing Omega operator.”

This shows that OHI is still growing even with an operator in trouble.

Takeaways

Omega Healthcare Investors is a great investment choice for the long-term income investor with its high yield and a fair choice for the total return investor. I take this downturn as a long-term opportunity to get a great income stream at a bargain price. Omega Healthcare Investors is 6.0% of The Good Business Portfolio and will be held as we watch it grow over time. If you want a growing income, OHI may be the right investment for you, but it will be volatile for the next six months and you should be a long-term investor.

Recent Portfolio Changes

  • Increased the position of Omega Healthcare Investors to 6.0% of the portfolio. I wanted a little more income and to take advantage of the recent dip in price.
  • Recently, on October, 16 trimmed Boeing (BA) from 11.3% of the portfolio to 11.0%. A great company, but you have to be diversified. The Paris Air Show was great for Boeing, and it easily beat Airbus (OTCPK:EADSY) in orders by a mile.
  • Wrote some L Brands (LB) November 17 strike 42.5 calls on the part of the holding. If the calls remain in the money near exercise time, they will be moved up and out.
  • Increased the position of L Brands to 3.2% of the portfolio; I believe the downturn in LB is well overdone.
  • Increased position of GE (NYSE:GE) to 4% of the portfolio, a full position. GE has now become a value and income play.
  • Sold the Harley-Davidson (HOG) position from the portfolio and will watch it see if President Trump cuts corporate taxes or brings foreign profits back at a low tax rate. This sell gets rid of an underperformer and makes room for a company with more present growth.
  • Added a starter position of 3M (MMM) at 0.5% of the portfolio. It has a good steady dividend history, a dividend king with 58 years of increasing dividends, and great total return. Please see my article “3M: Dividend King With Great Total Return“.

The Good Business Portfolio generally trims a position when it gets above 8% of the portfolio. The four top positions in The Good Business Portfolio: Johnson & Johnson (JNJ) 8.8% of the portfolio, Altria Group (MO) 6.8%, Home Depot (HD) 8.6%, and Boeing 11.0% of the portfolio; therefore, BA, JNJ, and Home Depot are now in trim position with Altria getting close.

Boeing is going to be pressed to 11% of the portfolio because of it being cash positive on 787 deferred plane costs at $316 million in the first quarter, an increase from the fourth quarter. The second quarter saw deferred costs on the 787 go down $530 million, a big jump from the first quarter. The second-quarter earnings were fantastic with Boeing beating the estimate by $0.25 at $2.55. The third-quarter earnings were $2.72, beating expectations by $0.06 with revenue increasing 1.7% year over year, another good report. Recently S&P Capital IQ raised its one-year target to $272.

JNJ will be pressed to 9% of the portfolio because it’s so defensive in this post-Brexit world. Earnings in the last quarter beat on the top and bottom line, and Mr. Market did like the growth going forward. JNJ is not a trading stock but a hold forever; it is now a strong buy as the healthcare sector remains under pressure.

For the total Good Business Portfolio, please see my article on The Good Business Portfolio: 2017 2nd Quarter Earnings And Performance Review for the complete portfolio list and performance. Become a real-time follower, and you will get each quarter’s performance after the earnings season is over.

I have written individual articles on JNJ, EOS, GE, IR, MO, BA, PEP, AMT, PM, LB, OHI, DLR and HD that are in The Good Business Portfolio and other companies being evaluated by the portfolio. If you have an interest, please look for them in my list of previous articles.

Of course, this is not a recommendation to buy or sell, and you should always do your own research and talk to your financial advisor before any purchase or sale. This is how I manage my IRA retirement account, and the opinions on the companies are my own.

Disclosure: I am/we are long BA, JNJ, HD, OHI, MO, IR, DLR, GE, PM, LB, MMM.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

A Beaten-Down Small-Cap With No Debt, A Growing Business, And 270% Upside

The Company

WidePoint Corp. (NYSEMKT:WYY) is a US company founded in 1997 and headquartered in McLean, Virginia, that grew through acquisitions and mergers of IT consulting firms. It currently has about 300 full-time employees, plus consultants and temporary employees, runs offices in Columbus OH, Fairfax VA, Hampton VA, Fayetteville NC, Dublin, Reading UK, and the Netherlands, and five data centers located in Ohio, North Carolina and Virginia. It is specialized in technology-based product and service management solutions in the fields of wireless mobility management, cybersecurity, and consulting services. Specifically, it offers mobile, telecom solutions and expense management, identity services and Cert-on-Device (a cloud-based service that provides secure digital certificates to all types of mobile devices in order to enhance the information security assurance), analytics and management services, and communication integrated platforms to both the public and private sectors.

The Market

WidePoint operates in a fast growing market. Most of its customers are located in North America, where the service IT market is growing 15%+ per year (see research by Gartner.com), and Europe (Ireland, UK and Holland generate 6% of total revenue, and the share is falling). Some major drivers of growth have been identified by WidePoint as:

  • Mobile workforce expanding faster than in any prior technology cycle
  • Mobile devices forcing IT departments to support multiple, disparate platforms
  • Identity management & assurance has become critical to prevent ongoing network breaches

While the company’s private clients (among them JPMorgan Chase (NYSE:JPM), U.S. Bancorp (NYSE:USB), Cardinal Health (NYSE:CAH), Advanta, Carnegie Mellon Univ., Delta, FedEx (NYSE:FDX)) belong to a multitude of industries (Financial, Healthcare, Education, Retail, Transportation, etc.), WidePoint’s main customers are federal agencies and their contractors. WidePoint sometimes also acts as a subcontractor to large IT corporations (such as AT&T (NYSE:T) which, by the way, recently won a large contract with the US Army). The company’s focus on the public sector (more than 80% of total revenues) is unlikely to be reduced in the future. WidePoint has not been very successful in penetrating large private companies.

The public sector IT market is growing slowly but steadily. Network security concerns above all – a segment where the company is strong – are growing by the day. The Trump administration has asked for $95.7 billion for federal IT in 2018, up from $94.1 billion this year and $90 billion in 2016, most of it for the Department of Defense (source). The overall increase comes as the Office of Management and Budget details plans to move agencies off legacy IT systems that account for more and more of agency IT budgets.

From FY 2015 through FY 2018, government-wide legacy spending as a percentage of total IT spending rose slightly from 68 percent to 70.3 percent. Aging legacy systems may pose efficiency and mission risk issues, such as ever-rising costs to maintain and an inability to meet current or expected mission requirements,” OMB wrote in the IT chapter of the budget request. “Legacy systems may also operate with known security vulnerabilities that are either technically difficult or prohibitively expensive to address and thus may hinder agencies’ ability to comply with critical statutory and policy cybersecurity requirements.”

Government Contracts

WidePoint’s government client base is largely located in the Mid-Atlantic region of the U.S. Most contracts last in principle up to five years but are subject to annual renewal (normally not an issue). WidePoint currently holds major prime contracts with – among others – the Department of Defense, the Department of Homeland Security (“DHS”), the Department of Health and Human Services, the Transportation Security Administration, the Washington Headquarters Services, the U.S. Customs and Border Protection, the Centers for Disease Control, the Department of Justice, the FBI, as well as many government contractors. Recently, the company added some new important customers, such as the US Coast Guard and (as announced on November 1) the Federal Emergency Management Agency, and now provides TLM support to all of the major components of DHS.

Competition

Due to its diverse market capabilities, WidePoint has competitors in many different fields, including “publicly and privately held firms, large accounting and consulting firms, systems consulting and implementation firms, application software firms, service groups of computer equipment companies, general management consulting firms, offshore outsourcing companies”. Key competitors currently include Tangoe, Inc. (NASDAQ:TNGO), Calero, KEYW Holding Corporation (KEYW), VeriSign (NASDAQ:VRSN), IdenTrust, SureID, DigiCert, and Entrust, and in cybersecurity as well as consulting, Lockheed Martin Corporation (NYSE:LMT) and Northrop Grumman Corporation (NYSE:NOC).

Competitors often offer more scale, which in some instances enables them to significantly discount their services in exchange for revenues in other areas or at later dates. Pricing pressure is endemic in the industry. Because of WidePoint’s small dimension, significant fixed operating costs structurally lower its competitiveness and profitability potential. Fixed costs may be difficult to adjust in response to unanticipated fluctuations in revenues, but the company is doing its best to manage resources such as personnel and facilities (not much can be done about depreciation) in a flexible way.

Although operating in a highly competitive sector with rapidly evolving technologies and no barriers to entry, WidePoint has arguably demonstrated through the years an ability to dynamically upgrade and preserve its “technological advantages” through a decent level of R&D expenditure, product innovation, acquisitions, and attracting and training highly skilled professionals such as engineers, scientists, analysts, technicians, and support specialists. Its annual expenditure for internal software development is about $0.6 million. Current development activities are focused on the integration of WidePoint software based platforms, enhancements to improve the delivery of information technology services delivered through these platforms and Cert-on-Device. The company’s technology is “production available, scalable, and affordable” – in one word competitive – and so should remain for the foreseeable future.

Federal agencies have a lot of inertia. They are slow to move but once they award a service contract, they tend to perpetuate it. Incumbent service suppliers develop big competitive advantages over potential entrants for they become “insiders”, develop relationships, have access to immaterial knowledge (including the likely terms of renewal of service contracts) while not having to face learning entry costs. As the company states in a recent presentation: “Many of our professional staff work on-site or work in close proximity with our customers and we develop close customer relationships.” Indeed. Thus WidePoint’s business – especially with the US public sector – is rather stable, and revenues are rather predictable. However, due to the relative size of certain clients and contracts – the Department of Homeland Security provided 61% of total revenues in 2016 and its share is growing – the loss of any single significant customer can adversely affect year-end results of operations.

An Improved Governance

After years of disappointing results, WidePoint suffered a period of governance instability that was well described by SA author One Other Fool (you can read the details there). As a result, the company’s main shareholder (15.4%), Nokomis Capital, began to have an active role, and was awarded two seats on the Board. Although not a panacea, this has improved shareholders’ supervision on management actions. Lately, WidePoint completed its transition with Jin Kang, 53, now “firmly in place and fully in charge” as Chief Executive Officer and President of WidePoint Corporation. The old generation of managers – Steve Komar, Executive Chairman of the Board of Directors and former CEO, and Jim McCubbin, Executive Vice President and CFO – resigned effective October 31, 2017, after guiding the company for 20 years.

Management Ownership

Managers have been adding small amounts to their stock of shares recently; their overall ownership is not bad.

Financial Situation

WidePoint has no long-term debt. At June 30, 2017, net working capital was approximately $3.1 million as compared to $5.0 million at December 31, 2016. However, net losses amounted to roughly $2.5 million in the first half of this year, up from $1.5 million in the first half of 2016 (another $0.3 million was spent on an acquisition). WidePoint Corp.’s adjusted earnings per share data for the three months ended June 2017 was -$0.020, the same as the data for the trailing 10 years ended June 2017. The burning rate was high, and given the depressed price of the stock, there’s no margin of error left. To be clear, WidePoint’ s Altman Z-Score is 0.99, indicating it is in Distress Zones, implying bankruptcy possibility in the next two years.

WidePoint has a history of losses. Net losses amounted to approximately $4.1 million, $5.5 million, $8.4 million, and $1.7 million during the years ended December 31, 2016, 2015, 2014 and 2013, respectively. As of June 30, 2017, accumulated deficit was $68 million. Thus investing 10 years ago in WidePoint’s stock would have yielded -51% (the S&P 500 yielded +82%). And it never paid dividends. This negative past increases the dilution risk, should the stock appreciate, or if revenues disappoint again, or there is a need to finance an acquisition: companies such as WidePoint cannot help but grow in dimension and technological capability.

One positive legacy of its disappointing past is that, as of June 30, 2017, the company had approximately $33.4 million in net operating loss (NOL) carry forwards available to offset future taxable income for federal income tax purposes, and approximately $30.0 million available to offset future taxable income for state income tax purposes. These NOL carry forwards expire between 2020 and 2036. Thus the ability to utilize these deferred tax assets depends upon its ability to generate future taxable income.

Outlook and Opportunity

The company has launched at the beginning of this year a fixed-cost reduction program, targeting especially general and administrative expenses, that is beginning to have a positive impact on the balance sheet. Facilities, offices, and disaster recovery sites are being consolidated, and staff and operational personnel are being cut by reducing technology platforms and combining redundant help desk support across functions. More worrisome, sales resources are being reduced too, as well as product and software development expenditures. This may show some “desperation” but as a consequence, third-quarter losses are expected to be minimal.

On the revenue side, WidePoint is attempting new, less aggressive pricing strategies with its own clients, while aggressively targeting competitors’ customers with lower introductory pricing to garner increased market share, and emphasizing higher margin solutions. I don’t know whether this short-term profit-boosting strategy will succeed, without hampering the much needed growth in scale. I estimate WidePoint’s annual revenue in 2017 to be broadly in the $84-86 million range ($78.4 million in 2016). Cost of revenues and operating expenses should reach $84-87 million: net loss should be $1.5 million or less, which implies a clearly profitable Q4.

The new contracts with the Coast Guard and FEMA could realistically boost revenue by at least $6-10 million in 2018 alone, although they will also raise operating expenditures. Furthermore, it is now becoming clear that penetrating the public sector takes a long, long time and translates into profits very slowly. For example Todd Dzyak, CEO of WidePoint Integrated Solutions, declared, “We look forward to expanding our managed services support and to introducing our enhanced TM2 Framework to FEMA,” hinting at how penetration proceeds in steps and takes time. But old contracts with other federal agencies are slowly producing a growing business stream.

Risks

As I suggested, WidePoint is an inherently risky bet. It’s a small cap with a history of losses and limited equity, operating in a highly competitive industry without the economies of scale of some competitors, and with a concentrated customer base. WidePoint has been unable in the past to raise prices to profitable levels. Thus, notwithstanding strong revenue growth, it still has to prove it can turn growth into consistent profits. If pricing pressure continues to adversely affect the bottom line, WidePoint could drag itself for a few years more until an adverse shock or a gradual decline in its technological capability pushes the company toward bankruptcy. A dilution of shareholders in 2018 is also possible if expected revenues and profits are slow in coming.

Having said that, it seems to me that these fears are largely based on a backward-looking perspective. Recent events have substantially de-risked the company’s medium-term outlook. Even in a pessimistic and disappointing scenario, where the revenue growth does not generate all of the expected profits, I have no doubts that 2018 will be in the black, giving the company (and the stock) a breathing space. In the IT services industry, M&As are frequent and as the balance sheet improves, WidePoint could become a target for a buyout. Such consolidation would solve the scale problem and reward shareholders.

Conclusions and Takeaway

Clearly, a turnaround is developing, based on a cost-cut strategy and some major recent contract awards. These awards are not a coincidence but rather the product of a slow, long-term strategy that is now bearing fruit. In 2018, net profit should reach $3-5 million, or $5c. per share (P/E ? 10). Current market capitalization, about $45 million, does not reflect the company’s stockholders’ equity (net assets) of about $28 million and current revenue trends. More than inherent risks, it is past history that weighs on investor confidence, creating an opportunity. The next (Q3) earning release in mid-November and an updated management guidance for 2018 should boost this unloved stock – currently trading at $0.54 – by 35% in the short term and by 90% by mid-February. I expect this stock to price $1.30/1.55 a year from now (+270%), although in a best-case scenario, it could reach $2-2.20 (+380%). As usual, risk and reward go hand in hand: only fools put all their eggs in one basket.

Disclosure: I am/we are long WYY.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

Equifax clears executives who sold shares after hack

(Reuters) – Equifax Inc (EFX.N) said on Friday four of its executives who sold shares before the credit-reporting firm disclosed a massive data breach that wiped out billions from its market value were not aware of the incident when they made the trades.

FILE PHOTO: Credit reporting company Equifax Inc. corporate offices are pictured in Atlanta, Georgia, U.S., September 8, 2017. REUTERS/Tami Chappell/File Photo

A special committee set up by Equifax’s board to investigate the trades concluded that no insider trading took place and that pre-clearance for the trades was appropriately obtained. (reut.rs/2habhk9)

The company’s shares were up 0.2 percent at $109.10 on Friday at midday, around 24 percent lower than on Sept. 7 when Equifax disclosed that cyber criminals had breached its systems and accessed sensitive information on 145.5 million consumers.

The shares slumped as much as 37 percent in the days after the disclosure.

Atlanta-based Equifax had been aware of the breach since July 29, days before some of its senior executives, including its chief financial officer, sold $1.8 million in shares.

After an investigation that included 62 interviews and a review of over 55,000 documents, including emails, text messages, phone logs, and other records, Equifax said the executives had no knowledge of the breach when they sold the stock.

“The conclusion that the Company executives in question traded appropriately is an extremely important finding and very reassuring,” non-executive Chairman Mark Feidler said in a statement.

Former Equifax Chief Executive Officer Richard Smith, who stepped down in September and agreed to forgo his annual bonus, told lawmakers last month that the executives would not have known of the breach because suspicious incidents are detected every day at the firm and take days or weeks to confirm.

The U.S. Justice Department is conducting its own criminal investigation into the share sales.

The hack, among the largest ever recorded, exposed information that included names, birthdays, addresses and Social Security and driver’s license numbers.

It has also prompted investigations by multiple federal and state agencies as well as scores of class action lawsuits.

The exact financial toll on Equifax is still unknown, and as of early Friday, the company said it still had not set a date to release its third quarter financial results. If the company does not release the results by Nov. 9, it will have to seek an extension from the U.S. Securities and Exchange Commission, which gives large companies 40 days after the close of a quarter to report their financials to investors.

Equifax is also still searching for a replacement for former CEO Smith.

Credit monitoring services such as Equifax collect vast amounts of financial information from consumers, working with banks and other lenders, for example, to track the creditworthiness of individuals.

Reporting by John McCrank in New York and Aparajita Saxena in Bengaluru; Editing by Saumyadeb Chakrabarty and Frances Kerry

Our Standards:The Thomson Reuters Trust Principles.