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Technology Stocks : Emulex, What Prospects?
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To: Greg Jung who wrote (120)3/27/1998 9:03:00 PM
From: Thomas Scharf   of 788
 
I think the key is that about half the write-down is a write-off of excess and obsolete inventory. That has both bad and good (or at least not so bad) aspects. The bad side is the obvious hit on earnings. The better side is that it doesn't have any effect on the cash on hand or credit line because that stuff was already paid for. They are just admitting that they can't sell it so they quit carrying it as a current asset. This causes the current ratio and book value of the company to drop. I think they chose to do this now in combination with the factory closing to get all the bad news out of the way at one time.

I usually look for things like too much inventory hanging around. I don't know how I missed it when I first bought emlx. It was right there in the balance sheet. I'm also a little concerned about the fact that they are carrying a whole quarter's revenue worth of accounts receivable. Does this mean they are shipping product to a lot of startups that can't pay their bills? Does this represent channel merchandise that was taken on consignment by distributors? If so, it is subject to return and if it matches up with the afore mentioned obsolete inventory they will have to take further write-downs and possibly re-state some earnings (depending on how conservative their accounting methods have been). I may call investor relations next week to ask a few hard questions.

I'm in this at around $15.50 so I'm not too happy to see it under $9 today, but I still like the long term prospects for fibre channel so will probably hang on for a while to see what happens.

Thomas
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