3/23 earnings surprise may be followed by yet another big upside surprise in april
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when witc report their jump to $85m+ revenue (report due week of april 17th), there is good reason to believe they may also report profit in the order of $5-$20m. that's another huge upside surprise when compared to the current break even estimates (which have themselves just been upwardly revised, from earlier estimates of a 5 cent loss, in response to the 3/23 report).
i believe that at most $5m or so of witc's surprise increase in revenue for q1, reported 3/23, comes from increased business activity over and above their existing projected growth.
i believe the real story is equity gains. when witc underwrite, they often get potentially valuable warrants as part of their payment package. i think this is where most of the $30m "surprise" comes from.
these equity gains have no signficant associated cost. such gains go straight from the top line to the bottom line. hence the prospect of a relatively big profit surprise.
a more detailed look at this follows:
financials analysis
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witc consists of the original witc plus the newly merged soundview.
1. soundview. i can find only limited data about soundview and its financials. the best i can glean is: private, formed in 1979, 175 employees, $100m rev first 9mos of 99, bought for $300m.
from the info i have, especially the valuation and age of the company (which together suggest growth that's less explosive than witc's and profitability that's in keeping with such a size and type of private company), my guess is that conservative projections were that they would earn about $28-$32m, with a profit in the order of $2-8m, for q1 2000.
2. witc without soundview. they did $15.5m in q4 99, excluding a (highly significant) $5.5m equity gain. they lost about $9m, ignoring the one time write off of their aborted after hours trading project, and ignoring the equity gain. from this and earlier data, my guess is that conservative projections were that they would earn about $18m, with a loss of about $11m, for q1 2000.
3. put soundview and the original witc together and one gets projections of about $46m - $50m revenue and $3-9m loss, excluding equity gains. assuming one allows something for an equity gain in keeping with witc's q4 $5.5m gain, i'd say these figures approximate fairly closely to consensus analyst estimates prior to the 3/23 news.
deals analysis
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a good indicator of both witc's and soundview's core business activity is IPO deals.
1. witc. thru at least the last 3 qs of 99, witc did about 30-40 IPO deals per q, co-managing (as against merely being a syndicate member) about half of them (no lead deals afaict), and getting about 5-7 million shares per q. the number of deals, the percentage that were co-managed, and the shares allocated to witc, were all relatively stable throughout those 3qs.
2. soundview. soundview appears to have done about half the deal numbers during the first 3qs of 99. i can't find clear data on the details, but there's a few signs that they have been involved at about the same or perhaps slightly higher levels, ie. leading a few deals, having a lower percentage of deals where they were merely a syndicate member, and getting a greater number of shares allocated per deal.
3. so what happened in q1 2000? afaict, the combined witc/soundview has done 44 deals, leading one. this is *less* than one might expect given the figures for the separate concerns.
conclusion
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witc's surprise revenue increase can not easily be explained away as increased business activity over projections.
an alternative explanation is that witc's surprise revenue increase comes principally from equity gains. i believe this accords well with the text of their 3/23 press release, data available in their sec filings, and a common sense understanding of their business.
if the equity gains conclusion is correct, then, when witc report their jump to $85m+ revenue (report due week of april 17th), they may also report a profit in the order of $5-$20m. |
