Some comments from the CC and the earnings report. This is a best efforts to report what I heard. Where I have an opinion I will note that it is such.
I walked away from the CC with mixed feelings since the earnings (or lack thereof) were significantly below the consensus of negative .02 coming in at negative .33 cents per share. Though the revenue for security products is growing rapidly it is still a small percentage of total revenue and hardware revenues are declining. Some orders were deferred from 1999 into 2000 but that does not explain away the issue. I believe (opinion)that there were probably a concerted effort to write-off as much as possible against whatever they could, in particular the reorganization of ODSI into two divisions; security and supercomputer networking. There may be similar write-offs this quarter too since they indicated on the CC that they intend to start selling their ATON shares on or about February 21st when the lockup expires. They are also not participating in the ATON secondary per a Q&A asked later. The ATON windfall is taxable and by taking these write-offs now they have a tax loss carryforward to offset the gains protecting cash from the tax folks (opinion, not an accountant). If correct, they are positioning themselves to be in a very good financial position going into the second quarter. Cash and equivalents is a very strong part of the balance sheet. Stated they had no long term debt or bank debt. Around 21 million in cash and liquid assets and 67 million in ATON stock. To put this in perspective, today's ATON move was probably worth over 10 million to them and when you compare that to their financials from operations we should be ecstatic that somehow they got this ATON deal. That said, MSFT got hammered when their earnings showed that there may have been a miss if earnings were only from operations and what saved the day was their investment performance. Investment performances get discounted since they are one time events, especially in ODSI's case since they declared their intent to sell at least some of the ATON position. How will they use this money? Probably on security product development since that is where (opinion) they feel the future is going to be. They stated that investing in the security products is what caused the loss and the hardware business is profitable. A Q&A probed this asking when ODSI would be profitable. The Q was dodged by saying that the security division would be profitable 4Q 2000 and maybe in 3Q. If the hardware division is profitable and represents a huge percentage of sales then they should be profitable sooner in my opinion. The only conclusion I could draw was that ODSI itself would not be profitable until sometime in the 2H 2000 time line which also means the hardware division profitability must be on very thin margins (opinion).
Backlog coming in was about 14.7 million. Ok, but not great (opinion).
Shareholder value: Emphasized the two divisions and better focus, development, etc. Asked if one would be spun off and did not appear that was in plan. The real positive was the number of alliances and deals they have been putting together. Expect announcements this quarter. (opinion) I think they are probably doing as best they can to line up resellers, use contacts from SAIC and the new deal for new opportunities, and so on. Mentioned that they intend to be complimentary to companies like Cisco and Checkpoint, not a competitor. But networking still very important since it is going to take huge security growth to offset the declines in hardware. To fix the hardware issue they are looking to see how they can port over the supercomputing technology into commercial applications sector. If they can do that it would be huge but they are very different with architectural hurdles to overcome. (opinion) To me the future lies with security products but they are truly reinventing themselves and are incurring revenue downsizing in the process.
Q&As were rather dull. Did not hear of one speaker mentioning that he/she represented a brokerage firm. Could have been all private investors. If so, not good from a visibility standpoint.
---Asked about large contracts: Yes, several over the next several months plus more alliances.
---Share repurchase, status: Authorized a 1 million share buyback in October 99, bought back only 40K shares to date. Will do more in next nine months.
---Share holder value: Felt stock was underpriced. Again reiterated that networking was profitable, that the earnings issues were investment driven due to security product development, that marketshare, mindshare, momentum, alliances, etc. were very key and worth the investment and intermediate earnings shortfalls.
Thats about it. Anyone want to make corrections or add their own opinions, all input welcome. As for current stock price, I was surprised it didn't sell off today because it has had that pattern and instead finished very strong. There is a lot to chew on and next week will give a better indication of where sentiment is going.
|
