Updates From Stanphyl

Some of the latest from Stanphyl’s letter sent to investors on 9/29/2017 – tickers and data redacted for regular users but available for premium members below. Enjoy and let us know if you have any questions.

I added a bit in September to our position in REDACTED REDACTED after it reported a decent FY 2017 Q3 with year-over-year revenue up 6% and operating income roughly flat. REDACTED has hired an investment bank to “explore strategic alternatives”—in other words it has put itself up for sale, and thanks to its 52% (full year) gross margin and potential for large SG&A eliminations if it weren’t an independent public company, I think REDACTED should be sell-able to a strategic buyer at a significant premium to the current price; for example, an enterprise value of 1.25x 2016 revenue would be over $12.50/share, while a “worst case” scenario of 1x revenue would still be around $10/share. The company reports that the sale process is REDACTED .

We continue to own REDACTED REDACTED company with approximately REDACTED of annual 56% gross margin revenue and approximately a zero enterprise value. In August REDACTED reported slightly improved Q2 2017 revenue of REDACTED vs. Q1’s REDACTED and guided to a flat Q3, with operating cash burn continuing at around $1 million per quarter. REDACTED is now focusing its growth on “smart” commercial & municipal LED lighting as its fab-less chip business has long been in gradual decline, and if the lighting business accelerates (and it could, due to recent sales force hires and new products), I think there’s a chance it can hit a break-even annualized revenue run-rate of $40 million by late 2018 (pushed back from my earlier hoped-for timeline) at which point—assuming REDACTED of remaining net cash (vs. $21 million today) and REDACTED , an enterprise value of 1x revenue on this 56% gross margin company would put the stock at around $12/share. Additionally, Echelon has approximately $255 million in federal NOLs and $127 million in state NOLs, worth tens of millions of dollars if it can utilize them. So if it can pull this off (and theoretically, the market for the REDACTED should be huge between the U.S. and Europe), this stock can be a home run for us. So far though (as noted above) there seems to be little sign of improvement, although revenue at least seems to have stabilized and that flush balance sheet does give it a long runway to succeed. In September the company hired a new REDACTED ; let’s see if he does any better than the last guy.


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