GT Interact Tumbles; 3Q In Line, But Cash Levels Low
By Thomas Granahan
NEW YORK (Dow Jones)--GT Interactive Software Corp.'s (GTIS) third-quarter earnings met expectations, but concerns about the company's balance sheet sent the shares spiraling lower.
In particular, analysts cited the company's cash position, which showed a decline of about $50 million from the second quarter, to about $21 million.
"The quarter was good, although revenues were a little light," said Oppenheimer & Co. analyst Leonard Brecken. "But they did burn a quite a bit of cash in the quarter, and I think that cash levels are down to where it's starting to worry people."
Late yesterday, the company posted net income of 13 cents a share for the quarter, in line with expectations, on sales of $86.2 million, compared with sales of $63.8 million a year earlier. The year-ago per-share results aren't comparable, as the company went public in December 1995.
Net income for the quarter was $8.7 million, including merger costs of $1.1 million, compared with net income of $3.76 million a year ago.
GT shares recently were off 4 1/4, or 24%, at 13 3/4 on Nasdaq volume of 2.7 million shares, compared with average daily turnover of 297,000.
GT Interactive publishes interactive entertainment, edutainment and value-priced software. Its products are marketed under the GT Interactive, Humongous Entertainment and WizardWorks brands. Among its titles are Doom II, Mortal Kombat 3 and Duke Nukem 3D.
The New York concern pays developers up front to co-fund projects, and needs cash to continue purchasing titles that it eventually distributes.
"Investors are beginning to realize the risk associated with the company funding the acquisition of titles for them to distribute," Brecken said. "They pay very high royalty rates to distribute these titles."
Brecken also said the latest numbers from PC Data, a market research firm, show slipping growth in domestic entertainment software, which has investors nervous about an industry slowdown.
"The company has been successful in buying a lot of top-selling properties, which will help them sustain a growth rate above the market, but even if you have top-selling titles, you're still not completely shielded from a decline in the demand for PC software," Brecken said.
Michael Wallace, who covers GT Interactive for UBS Securities, said the selloff in the stock reflects Wall Street earnings estimates that were too high.
"People were looking for a better quarter," he said. "The earnings expectations weren't well managed."
But Jeff Matthews, a fund manager at Ram Partners in Greenwich, Conn., called the quarter "lousy."
"The balance sheet would indicate that they stretched mightily to hit (the earnings estimate)," he said. "Sales were up about $14 million (sequentially), and receivables were up $25 million. They clearly pushed a lot of product into the channel that they did not get paid for."
The company recently filed to offer 15.5 million shares, with GT selling about 4 million of those shares. The company plans to use the proceeds for working capital and for potential acquisitions and investments related to its business.
"To continue to fund the business, they need cash to buy titles," said Oppenheimer's Brecken. "That's why they're doing a secondary."
Brecken reduced his 1997 earnings estimate to 76 cents a share from 80 cents, and his 1998 estimate to 91 cents from 99 cents, primarily to reflect the increased number of shares following the offering.
A spokeswoman at GT Interactive said the company had no immediate comment on the stock activity.
"We believe we are well positioned as we head into the holiday season with a strong portfolio of titles," the company said in its earnings release. |
