Q1:14 HIGHLIGHTS

• Revenues were slightly ahead of our forecast and up more than 56.5% YOY on a non-GAAP basis due to a 94% increase in non-GAAP subscription revenues.
• Gross margin of 36.6% was below our estimate of 38.0% as a result of higher content licensing costs, offset by improved mobile monetization from increased ad loads and higher pricing.
• GAAP EPS was two cents below our estimate, while pro-forma EPS of $(0.13) was below consensus of $(0.08), but a penny ahead of our estimate thanks to higher than projected stock-based compensation.
• Listener hours increased almost 13% YOY in the quarter, and active users of 75.3 million were up more than 8%.
• We expect a premium valuation will be difficult to maintain in the face of continued losses and increased competition.
• We reiterate our SELL rating and maintain our $17 price target.

RISKS

• Pandora may improve its mobile monetization faster than anticipated, in particular by gaining share in the market for radio advertising.
• The company may successfully penetrate the automobile market where almost 50% of radio listing in the U.S. takes place.

Q1:14 HIGHLIGHTS

• Revenue increased 0.2% year-over-year to $285.6 million in Q1:14 and was above our forecast of $279.3 million primarily due to higher than expected revenue in the U.S. Marketing & Events business.
• EPS of $0.36 was in-line with our estimate as the revenue beat was offset by higher than expected corporate activities expense.
• The soft opening of the Glacier Skywalk in Jasper National Park has received positive feedback and is on schedule to open next week (May 2014).
• Management announced the completion of the company’s strategic review process and has determined it would not be in the best interest of shareholders to separate the M&E and T&R businesses at this point in time. The company will continue its focus on improving operating efficiencies and pursuing organic and external growth opportunities.
• In light of management guidance, we lower our Q2:14 revenue estimate to $243.9 million from $250.8 million and lower our EPS estimate to $0.40 from $0.50. Our FY:14 EPS estimate of $1.60 remains unchanged as we raise our Q3:14 and Q4:14 estimates by $0.05 each.
• We maintain our BUY rating and $34 price target for the shares. We will revisit our forecast and provide more discussion after the release of the company’s 10-Q filing.

Q4 HIGHLIGHTS

• Q4 EPS was a loss of $(0.05) per share vs. $(0.07) in Q4:12 and our estimate of $0.00. Q4 net revenues grew 23% to $9.6 million from $7.8 million LY but were shy of our $9.9 million estimate.
• Q4 gross margin rose 160 bps to 27.5% (vs. our 32.4% est.) but would have been 29.2% had promotional spending & discounts been kept to Q4:12 levels.
• Q4 SG&A expenses grew 11.5% to $3.1 million but fell 250 bps to 32.4% of revenues as net revenues increased 23%.
• A key focus in 2014 will be reducing the amount of promotions & discounts which reduce gross margins. Such costs ballooned to 12% of gross revenue in 2013. Over time, the goal is to reduce them back to the 9%-10% level.
• Reflecting reductions to our sales and gross margins estimates and less expense leverage than previously forecast, we are reducing our 2014-15 EPS estimates. Our FY:14 estimate is reduced to $0.01 from 0.08 per share, while FY:15 is trimmed to $0.12 per share from $0.18.
• Our $8.50 price target (previously $9.50) is based on an EV/Revenue multiple of 2.5x applied to a revised FY:14 revenue estimate of $46.9 million.
• Despite Q4 results and reductions to our estimates and price target, we believe our thesis remains intact and that REED can deliver annual revenue growth of 15%-20% with improving profitability as the company begins to leverage its operating model. Accordingly, we maintain our BUY rating.

RISKS 

• Failure to successfully grow the kombucha probiotic tea product line.
• Failure to generate consistent and improving profits on strongly rising sales.
• Quality and depth of management team and recent management turnover.

Q2:14 HIGHLIGHTS

• Revenue increased 52.1% year-over-year to $12.5 million in Q2:14 and was above our forecast of $10.9 million, largely attributable to higher-than-expected Engineering sales.
• EPS of $0.05 was below our $0.06 estimate primarily due to a combination of the larger than expected contribution from low-margin Engineering sales and modestly higher SG&A expense.
• Backlog as of March 31, 2014 stood at $80.9 million versus $87 million at December 31, 2013 with net orders of $6.7 million for the quarter.
• Initial production deliveries related to the Delta Airlines contract are expected to begin later this fiscal year and are expected to result in increasing Production revenue.
• Geoffrey Hendricks, Founder, Chairman and CEO, announced he will be retiring at the end of calendar year 2014. Shahram Askarpour, President, will become the company’s new CEO.
• We are trimming our FY14 estimate to $0.22 from $0.25 to account for (1) the Q2:14 EPS shortfall versus our estimate and (2) the higher than previously expected contribution from Engineering sales for the year which will result in lower relative margins. We maintain our FY:15 EPS estimate of $0.43 at this time but will revisit our forecasts after release of the company’s 10-Q. We maintain our Buy rating and $10 price target for the shares.

Q4:13 HIGHLIGHTS

• ARSD reported Q4:13 diluted EPS of $0.13 vs. $0.08 LY (restated), consensus of $0.15, and our $0.16 estimate. The performance was driven by a 40% rise in petrochemical volumes, partially offset by lower petrochemical margins coupled with lower AMAK equity income of $1.1 million.
• Q4 revenues rose 33% to $66.6 million vs. $49.9 million (restated) in Q4:12 and were above our $55.7 million estimate due principally to higher sales volumes and toll processing fees, partially offset by lower product prices.
• Volumes rose 40% to 19.7 million gallons from 14.1 million in Q4:12, well above our 15.5 million gallon estimate. North American volumes rose 35% to 15.7 million gallons due to the increased deliveries to a Canadian tar sands customer and a 60% increase in international sales to 4.0 million gallons.
• Gross margins (excl. D&A) were 16.3% vs. 15.5% LY but below our 17.8% estimate. The shortfall vs. our estimate was due to larger than expected sales volumes of by-products at lower margins. The by-product volumes arose from higher sales of prime products to the Canadian tar sands customer.
• We previously revised our FY:14 estimate to $1.03 from $0.86 and our FY:15 estimate to $1.23 from $1.02 to reflect higher petrochemical volumes partially offset by lower margins, as well a reduction in estimated AMAK earnings. We maintain our BUY rating and raise our price target to $19.50 from $18.50.

RISKS

• Continued volatility in the company’s product selling prices and feedstock (natural gasoline) could pressure margins and profitability.
• Delays in signing new customers could restrict revenue and earnings growth.

Q1:14 HIGHLIGHTS

• Revenues and EPS beat consensus. Revenues came in at $219.5 million versus our estimate of $208.0 million and slightly ahead of consensus at $218.4 million. EPS came in at $1.39, beating our estimate of $1.25 and consensus at $1.32.
• Revenue guidance was provided at $915-940 million (mid-point of $927.5 million), raised slightly versus previous guidance of $910-940 million (mid-point of $925 million), but still below consensus of $932.1 million and our estimate of $915.67 million. EPS guidance was lowered to $5.10-5.28 (mid-point $5.19) versus prior guidance of $5.10-5.35 (mid-point $5.22), well below consensus of $5.36 and our estimate of $5.29.
• We lower our FY:14 EPS estimate to $5.20 from $5.29 and maintain our SELL rating and a target price of $76.00

RISKS

• BPO and IT Spending could strengthen further as the US economy continues to strengthen, and/or firms look to outsource to save costs.
• SYNT and other IT firms could successfully lobby Congress to exclude the outplacement provision (15% visa cap) in the next version of the Immigration Reform Bill, removing the overhang.
• Rupee appreciation gets fully priced into consensus and the currency does not appreciate further.

KEY POINTS

• We are terminating coverage at this time.

NOTES

• EDGW shares have performed very well in recent days, topping our price target.
• Recent trading activity is not due to any material news that we are aware of, nor do we see any justification for an increase to our price target at this time.
• With EDGW shares above our previous price target of $8.10, we are closing out our coverage as we do not maintain “neutral” or “hold” rated recommendations.
• We include our most recent financial model in this report for reference purposes only.

RISKS 

• Company has completed its high-margin PI2 contract and does not have a replacement on the horizon.
• Revenue trends are volatile and change rapidly.