William - Back in December, Par outlined what his expectations were for gross margins going forward. At that time, he didn't expect any gross margin improvement in Q4 and I believe that the 1.42% drop can probably be explained away by operating effects, but I do not expect to see further deterioration in Q1. The improvement should began in this current quarter, Q1, and then pick up more steam in Q2 and Q3 as Par has outlined on the conference call.
Reasons why I expect increased gross margins are as follows:
Gross margins should increase due to economies of scale from an increased level of sales.
-Each subsidiary's products will be introduced into each other's distribution channels. The bulk of BWAI's (a company Osicom acquired last fall) sales were in the Far East and Europe, so the Builders gives Osicom reach into the European market, which should boost international sales as a percentage of revenue. Conversely, Osicom's sales are mainly domestic, with about half being comprised of OEM type customers. The combination will boost Osicom's international sales and Builder's domestic sales, allowing the two to leverage their core technologies and to achieve further penetration of important market segments worldwide.
-Also consider the 4 distribution agreements that Osicom has signed in the past 6 months.
Prior to the merger with BWAI, Osicom had gross margins in the low 40% range, while gross margins at BWAI were in the 15% range, mainly due to inefficient use of its Uni Precision manufacturing subsidiary as well as a lower margin product line. The merger between BWAI and Osicom will increase BWAI's margins by: 1)utilizing their Chinese manufacturing facility more efficiently (much cheaper labor costs), since production of Osicom's products will be shifted to this overseas facility, and 2)utilizing and incorporating Osicom's advanced technology and solutions into products which are currently inefficiently designed by BWAI. Osicom is confident that the shifting of U.S. production to their newly acquired China plant alone will reduce costs of goods sold by as much as 20% over the next 2 years. |
