A must read article M-sys
Spoiled rotten
24.10.2000 | 11:57
Jonathan Nassie
The capital market did not receive the third quarter results of M-Systems Flash Disk Pioneers (Nasdaq:FLSH) well. M-Systems stock opened the Monday session on Wall Street with a 15% dive to $29. The stock cut its losses somewhat as trade wore on, but it was still $11 off after the company’s traditional conference call with analysts.
A swoop on opening after the publication of periodic reports is a blow in the gut to executives. But M-Systems CEO Dov Moran could view the drop as a compliment, in a twisted kind of way.
If American investors slam M-Systems for a 230% jump in sales compared with the third quarter of 1999, if they punish the company for boosting sales by 25% from the previous quarter, apparently they had decided that M-Systems is one of the shiniest rising stars in the technology universe.
If its stock dives after M-Systems trounced analyst forecasts with its third-quarter net of $3.9 million, then American investors have evidently written off the years the company strived to achieve profits, however symbolic. They apparently view the flash-disk maker as a growth company that should spring serial surprises a la Check Point Software Technologies (Nasdaq:CHKP).
Ungentle on their minds
The truth is, to remind our readers, that the market greeted M-Systems’ astounding second-quarter performance with a 40% drop to a share price of $25. Investors had several things on their minds. Shrinking flash memory prices. Few announcements by new manufacturers about design wins that might incorporate its DiskOnChip in their Internet access products.
Moran pooh-poohed investor fears in a special conference call after the second quarter. He insisted the company was growing extremely fast and that its biggest problem was fulfilling the flood of orders. And lo, the stock rallied, rising toward $30 – only to fall back to around $30 later on.
Two moves the company made in the last month are more indicative about Moran’s confidence in M-Systems' future than any statement to analysts or resulting report. The company announced the purchase of Fortress U& T for $8 million, and a $10 million investment in Saifun Technologies.
Both deals are strategically important for M-Systems. Fortress brings M-Systems a security solution for the memories of Internet access products. It will secure e-commerce and other activities carried out over cellphones incorporating M-Systems memory chips, although they aren’t marketed yet.
Saifun brings M-Systems a unique technology to manufacture flash memories at much lower cost, mainly bigger memories on smaller silicon areas, significantly improving the chip’s functioning as well.
Great expectations
Strategic contribution or not, Moran hasn’t forgotten the cash crunch the company suffered but two years ago. The famished company was forced to hold a private placement at $2.5 per share (split-adjusted) in order to survive. Moran wouldn’t have forked over hard cash to buy Fortress or to invest in Saifun, whose technology he could obtain without buying any of the startup’s equity, unless he felt very confident in his company.
With $120 million in the cash register, and mainly with profits that are looking more significant every quarter, Moran feels he can make investments that assure the company will continue to grow in the coming quarters too.
The company’s real test will be to continue growing, including at the level of sales. In the third quarter M-Systems surpassed $25 million for the first time, bringing its rate of sales to $100 million a year. Multiplying sales by three times, as M-Systems did this year, is an amazing feat when talking of a few millions of dollars. When sales increase from $33 million to $100 million, it’s almost unprecedented.
The problem is that, as even M-Systems concurs, its market is slowing a tad. Long-term commitments are out of fashion, and it shows up in stock prices. “Companies feel less secure, and so do we,” Moran says. But he has zero intention of directing analysts to lower their expectations for the fourth quarter. He promises M-Systems will continue to grow from quarter to quarter.
“Maybe we spoiled the market,” he says, led it to expect too much, “so there is some disappointment with the company's results today.” But in the long run, the company and its stock will grow accordingly, Moran is confident, noting that M-Systems directs itself to long-term investment. The long-term goal is to achieve sales of a billion dollars in five years. If M-Systems meets that target, as it met its goal of $100 million, a dip after publication of its quarterly results will seem trivial indeed. |
