We have a fool doubter, too.
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eMachines: Less Than Meets the Eye
By Richard McCaffery (TMF Gibson)
April 28, 2000
Low-end PC provider eMachines (Nasdaq: EEEE) got a boost today after
reporting stronger-than-expected first-quarter revenue and earnings growth.
Shares of the Irvine, California company, which recently went public, jumped
more than 40% to $8 3/4 in early trading after reporting that revenue jumped
82% to $137.4 million, and net income (minus amortization of intangibles and
other non-operating charges) jumped to $737,000, or $0.01 per diluted share.
Analysts expected the company to post a $0.05-per-share loss.
Don't get too excited about the 40% price jump. It's still below the company's
March 23 initial public offering price of $9. Nevertheless, with today's goosing,
eMachines has a market cap that tops $1 billion.
The company's original strategy made a big splash: sell computers at unheard
of pricepoints (below $400), outsource manufacturing to keep costs down, and
bundle contracts for Internet services with its boxes to entice first-time
computer users. eMachines sold its first computer in November 1998 and
rapidly, I mean rapidly, became the third-largest seller of desktop PCs through
retailers in the U.S. The company has sold over two million units so far and has
solid distribution selling through companies like Costco (Nasdaq: COST) and
Best Buy (NYSE: BBY) .
Problem is, it's hard to make a living at those price points, so eMachines is now
focusing more on its (relatively) higher-priced boxes. The average gross selling
price jumped 15% to $566 in the first quarter from $492 last year because of
sales of its higher-priced eMonster PC and eSlate notebooks. Together, the
models represent about 27% of total dollar sales.
Despite a profit on the income statement, the company's real profitability
hinges on inventory management, and it's at a big disadvantage since it
doesn't build its own computers. This may remove operating costs, but it also
means the company has to rely on market forecasts to predict PC demand.
That's tough to do, and a big reason why Dell (Nasdaq: DELL) has been so
successful selling computers directly to end users. Dell's build-to-order model
means it waits for customers to buy computers before manufacturing them, a
practice that allowed it to turn inventory 16.5 times last quarter, compared to
3.5 times for eMachines.
Whether a company builds its own computers or not, it really needs to keep
assets such as receivables and inventory low enough so that these items,
which represent cash outlays, are essentially being funded by accounts
payable. This boosts the amount of cash at a company's disposal and gives it
an operating model that can thrive. So far, that's not happening at eMachines.
Last quarter it had roughly $189 million worth of receivables and inventory and
just $164 million worth of payables and accrued rebates. The $25 million
difference has to come from somewhere since it isn't coming from operations.
While the company still has $303 million in cash and equivalents, mainly
proceeds from its IPO, it still needs to demonstrate a sustainable business
model. eMachines officials say that Internet revenues are vital to its long-term
success; however, Internet sales represented just 1% of total revenues last
quarter. The company has a long way to go before it will turn me into a
believer.
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