The deal with Glenayre
Glenayre is a big iron company in the wrong market, with old technology.
Over the past two years, the paging market has declined, shrunk by 50%.
GEMS revenue has correspondingly shrunk. The stock took a
dive last year and was down from previous highs
languishing at the 2 to 3 mark for a long time.
Justifiably so, as margins declined, expenses flatlined and revenues shrunk.
In early 1999, management was holed up for a week long
session discussing poison pill tactics to avoid a takeover.
Possible reason for the takeover per street gossip? GEMS personnel
particularly its excellent R & D outfit in the Vancouver area.
Now in 2000, the R & D arm in Vancouver has been
emasculated, manufacturing in Guangzhou, Vancouver and
North Carolina replaced by the Quincy IL facility and pared to the bone.
The question remains, if the dumb paging market suddenly booms,
will GEMS be able to scale up manufacturing? GEMS HR problems are a running joke. The
parking lot and Vancouver premises extension are a white
elephant.
But these are general criticisms. Many companies make
mistakes and recover. GEMS is not one of them
PRODUCTS LACK APPEAL
The AccessLinkII pager is a good move but is it too little too late.
Still no input ability, no widely adopted extensions -
no attractiveness compared to one succesful product
- RIMM's Blackberry pager. See the Wireless Messaging product
portfolio at glenayre.com for
GEMS products. Would you buy them, given the other
choices in the market?
REVENUE GROWTH IS NOT THERE
Enhanced Service Platform systems are the bright light with
some revenue growth. See
glenayre.com.
Will there be enough revenue to rescue GEMS? Lets look at
some historical numbers:
2000 Q1 Quarterly
----------------
Q1 2000, Wireless Messaging sales were approximately $30.5
M; compared to $45.2M in Q1, 1999 (Net DECREASE of
33% over the year).
Enhanced Services Platform were $ 28.1M compared to $
16.1M (Net INCREASE of 74% over the year) . I need
hardly mention that GEMS total revenue declined from $58.6
M from $61.3M.
1999 Q4 Quarterly
------------------
There is no breakdown between Wireless Messaging and ESP
for 1999 as GEMS only started differentiating in 2000.
However, a look at the breakdown for Q4 1999's report is
illuminating:
Paging in Q4 1999 is $40.7M and $92.6 M in Q4, 1998 a net
DECREASE is 57% over the year)
Mobile and Fixed Network (which includes what is now
known as ESP) is Q4 1999 is $ 20.5M and $ 24.8M in Q4,
1998 - net DECREASE is 18% over the year)
Management hinges a lot of faith in the ESP numbers growth.
From the Q1 2000 report:
"The decline in net sales resulted from the
contraction of the traditional paging market which the
Company believes has stabilized at a level comparable
to the second quarter 1999 and the decrease in paging
device sales as the rollout of the two-way ReFLEX 25 devices
did not begin until late in the first quarter 2000. This decrease
is being partially offset by a robust market demand in North
America for the Company's enhanced services platform MVP(TM) product.
However, the Company believes that the wireless messaging market,
driven by the two-way wireless internet and enhanced services
platform market, driven by a robust growth in core customer base,
will both yield sales growth for the Company in 2000. "
Are these numbers the kind of numbers that fill you with
confidence? Watch the ESP numbers and the growth thereof
very carefully this quarter. There's obviously no hope
for the Wireless Messaging market.
GLENAYRE CANNOT GET PAID
Let's look at one more nail in the coffin. GEM's ludicrously
sloppy receivables management.
According to the Quarterly report in Q1 2000; accounts
receivable, net was $ 87M; in Q4 of 1999 it was $ 88.7M.
According to the Quarterly report in Q4, 1999; accounts
receivable, net was $ 98M; in Q4 of 1998 it was $ 153.7M.
This means that almost $ 10 M in revenue was WRITTEN
OFF between the final quarterly in 1999 and the first quarterly
in 2000. Why do GEMS's customers have so much problems
paying? Could it be that these customers are in the
(rapidly shrinking) paging market - could it be that they can't
pay because they have cash flow problems?
This excerpt from the Q1 2000 report explains a little more:
"Approximately $3 million of trade accounts and interest
receivables and $36 million or 56% of the gross notes
receivable balance of $64 million as of March 31, 2000 was
due from Conxus Communications, Inc. ("Conxus"), which
was engaged in the buildout of a major narrowband personal
communications services network in the advanced voice and
text paging market.
In August 1999, Conxus filed for bankruptcy liquidation
under Chapter 7 with the United States Bankruptcy Court
for the District of Delaware. The Company expects that
substantially all of the receivables from Conxus will not
be collected and as a result recorded additional bad debt
reserves of approximately $38 million as of June 30, 1999.
The Company also holds $9.5 million in subordinated notes
from Conxus, which were fully reserved, as no additional
amounts are expected to be collected.
….. in addition to the Conxus bankruptcy, several other
events occurred or continued with more intensity in 1999
including (i) a bankruptcy filing by another U.S. customer,
(ii) a South American customer seeking debt restructuring
and (iii) increased resource requirements to collect
receivables from customers in certain international countries
where currency valuation issues could also affect the
Company's ability to collect its notes and accounts receivable.
As a result of these and other deteriorations in the paging
infrastructure market, the Company changed its estimates for
the allowance for doubtful receivables as discussed in Note 4
to the Company's Consolidated Financial Statements as filed on
Form 10-K for the year ended December 31, 1999. The Company
recorded an increase to the Accounts Receivable and Notes
Receivable reserves of approximately $65 million inthe aggregate
in the second quarter of 1999. "
No kidding. How about restating revenues while you're at it??
MANAGEMENT CANNOT ADD VALUE
Oh, what the heck, lets also question management's decisions.
In 1999, GEMS divested itself of 95% of Western Multiplex ("MUX").
Net proceeds were $ 37M after accounting for some possible charges
associated with the divestment.
"1. DISCONTINUED OPERATIONS The Company signed an
agreement dated as of September 30, 1999 for the sale of 95%
of the equity interest in its microwave radio business, Western
Multiplex Corporation ("MUX"). MUX markets products for use
in point-to-point microwave communication systems and was
acquired by the Company in April 1995. The transaction closed
on November 1, 1999 and the Company received cash of approximately
$37 million. The transaction is recorded as the disposal of a
segment of business in the fourth quarter 1999. Accordingly,
the operating results of MUX have been classified as discontinued
operations for the three months ended March 31, 1999 presented
in the consolidated statements of operations. Additionally, the
Company is contingently liable for MUX's building lease payments
and up to October 31, 2000 for certain key employee severance
benefits should the buyer not offer such key MUX employees a
similar position with substantially the same or greater
responsibilities and the same or greater compensation. The
maximum contingent liability as of March 31, 2000 related to
these obligations is approximately $4.1 million. "
MUX has since applied for an IPO. Let's see the numbers on
MUX.
hoovers.com
1999 Sales (mil.): $44.8
1-Yr. Sales Growth: 36.0%
1999 Net Inc. (mil.): $1.2
1-Yr. Net Inc. Growth: (42.8%)
Their offering price is $ 10 to 12. Total shares
outstanding after the offering 51,744,123 giving them
a market cap of between $ 517.4 M to $ 620.9M.
But GEMS sold them for $ 37 M. Does anyone see anything
wrong with this picture? |
