ODSI's earnings have been released and they beat the street. A consensus of analysts had a negative 2 cents with the whisper number the same. Actual performance was positive 1 cent including certain one time write-offs. Excluding one time write-offs, it was positive 3 cents. Click on NEWS for the earnings release details.
One of the key issues over the past few years has been management credibility and their inability to meet or exceed quarterly objectives which left the street always skeptical of their outlook. In the 1Q management said their objective was to turn the corner and breakeven or be a bit positive with regards to earnings and revenue and they have come through. The recent runup obviously is the result of new believers bellying up to the bar and placing their bets.
Some of the highlights from the CC which ended a few minutes ago. It was available to anyone and the comments were very candid. Any opinion on my part will be in brackets. The rest is a fair attempt to relate what I heard.
Financials: Tim Kinnear
----Turned the corner on earnings with $.01 per share. Revenue increased from 1Q by over 4 million dollars. Gross Margins increased from 44% to 50% (probably due to a higher software component), emphasized improving cash position up to 23.4 million from about 19 million.
----Security products fastest growing area. Enterprise security is a hot issue and they are taking advantage of it. They announced new products in May and just a few days ago.
----Alliances and partnerships are going well. Signed recent OEM deal with HP. Current deals with SGI, SUN, and Compaq going well. Working to expand alternate channels.
----Investing in new software enhancements. Also people. Brought in Billy Austin for increased marketing focus.
Strategy: Ward Paxton
----Fastest growing area is with their Data Security Solutions. It is a rapidly emerging area. Mentioned that CMDS is best of breed, and very optimistic with regards to SecureCom 8000 (this appears to me to be a bundled package that addresses a number of technical issues).
----High Performance Network Solutions is the area where they partner with SGI, SUN, and Compaq and will OEM to HP. (I think this too is a high growth area. One application that has never been mentioned is data mining or business intelligence. This is a hot area and I think an entire new application area for their products. Certainly SGI is in that space now and could expand their systems capability with the ODSI switch).
The prepared text was excellent and very positive. The only possible roadblock would be data center stalls in 4Q for Y2K initiatives which they touched on briefly. (I am quite involved with Y2K and it is not clear yet how vendors will be affected. Major software installations could very well be deferred but installations of security software may be viewed as non-disruptive and not be affected. Later in the Qs and As, an analyst brought up Y2K and Joe Head, ODSI Exec VP, offered the opinion that there may actually be an opportunity here and they may not see any stall at all. I really think it is too early to know the impact, if any. The security software may actually increase and the switch business is going into applications that are new, highly parallel, sophisticated applications that are most likely new and Y2K ready at the time of development so that area too could dodge any Y2K stall.)
Qs and As: Did not get names clearly and only Prudential caught my attention.
----What is the backlog going into 3Q? A= 9 million dollars but it was quickly noted that they do most of their quarterly business on a sell and install basis so backlog going in is not a particularly important number as it often is with semiconductor book to bill ratios. The average order cycle is only four weeks from order to delivery and they book and ship 85% of their business within the quarter. (This is not unusual even with mainframes today.)
----What is the status of inventory on hand? A= 7 million in on hand inventory but there are no concerns with obsolescence. Consider their inventory status as being in good shape.
----What about competition? A= in very good shape. Described CMDS as a unique product. Positioned other products within niches such that they owned the space they were in. (I think a lot of what they said was true but the issue of competition is always more complex than addressed by a company so my take is there is more competition out there when you get deeper into the computing environments they are selling into.)
----Status of accounts receivables? (Real question here is bad debts. Are they going to get paid for what they shipped and billed in 2Q or will they have to reverse revenue at some point). A= we are in real good shape. The receivables number was a bit higher than usual due to increased quarter ending shipments but already that number has been reduced by receipts and it is not a problem.
----2H outlook? A= very optimistic. Anticipating good growth in their security products. Used example of 500K 1Q revenue versus 3 million 2Q revenue in this product area. Only glitch is the Y2K issue. Other than that it was a positive outlook across the board with even the old legacy offerings being only flatish.
----What is the status of all the pilot programs (aka beta test sites) you had with potential customers? A= many converted to business already but many more are anticipated to conclude their testing and place orders in 3Q. On the Y2K issue, one positive is that these tests also prove ODSI products are Y2K ready which is very key. They again emphasized the alternate channels and that sales are expected to increase through this area.
----The last question was most intriguing. On the rumor front, there is speculation that there is some pending relationship with Microsoft. Would each of the officers on the call please comment either positively or negatively to the rumor (or words to that effect). I think it was Tim Kinnear who answered for all by saying that it is ODSI policy to not confirm or deny rumors so they would have no comment. (I would not be surprised by this kind of alliance. MSFT will do an alliance with anyone who can add to the broadening and acceptance of MSFT's products).
All in all, and excellent CC and the stock has enough reasons to move higher. We'll see tomorrow how everyone else views the news. |
