This fleshes out the previous blurb by RH:
Mon Sep 18 07:15:32 2000
(F.C. INTL) B4: OPMR - Update on Positive Developments Following Visit With
B4: OPMR - Update on Positive Developments Following Visit With Management
07:15am EDT 18-Sep-00 Robinson Humphrey Intl (SMITH 404 266-6288) OPMR
--SUMMARY-------------------------------------------------------------------
** Initiating new estimates given recent assumption of coverage from prior
analyst. High confidence in new Q3 EPS estimate of $0.12 - assumes 195
system installs and 25.4% gross margin. Potential upside on installs.
** Importantly, after visiting OPMR's facility in Plattsburgh, we are
confident it is on track to bring production in-house.
** OPMR's U-Scan carousel product is performing extremely well, and has
significant potential, in our view. Early statistics from pilot stores
and first-hand observation confirm enthusiasm for this product.
** OPMR is in final testing phases with a major-non grocery retailer -
could develop into significant source of growth over time, in our view.
** Upside to new 2001 estimate of $0.95 exists on gross margin line as
company benefits from internal production. Affirm strong Buy rating.
--EARNINGS------------------------------------------------------------------
FYE 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year
Actual 12/99 EPS $(0.08)A $0.05A $0.12A $0.03A $0.12A
Previous 12/00 EPS $0.06A $0.11A $0.11E $0.03E $0.30E
Current 12/00 EPS $0.06A $0.11A $0.12E $0.02E $0.31E
Previous 12/01 EPS $N/A $N/A $N/A $N/A $0.90E
Current 12/01 EPS $N/A $N/A $N/A $N/A $0.95E
Previous 12/02 EPS $N/A $N/A $N/A $N/A $N/A
Current 12/02 EPS $N/A $N/A $N/A $N/A $N/A
Footnotes:
--FUNDAMENTALS--------------------------------------------------------------
Current Rating......:1 Price (9/15/2000)....:$40.25
Risk Rank...........:Speculative 12-Mo. Target Price.:$50.00
P/E 12/00...........:129.8x 52 Wk Price Range...:$49.00 - $16.00
P/E 12/01...........:42.4x Proj. 5yr EPS Grth..:50.0%
Technical Rating....:1 Book Value(a).......:$2.62
ROE/LT Dbt-to-Cp....:17.80%/0.00% Dividend/Yield......:$0.00/0.00%
Revenue.............:$55.65 mil Latest Report Date..:May 12 1999
Shares Outstanding..:15.40 mil Convertible.........:No
Mkt. Capitalization.:$619.85 mil Hedge Clause(s).....:U
Comments............:
--OPINION-------------------------------------------------------------------
Note on estimates:
Due to a transition in analyst coverage, we are initiating a new set of
estimates that differ slightly from prior estimates. We caution investors
not to misinterpret apparent changes from prior estimates.
1. QUARTERLY UPDATE
** We are initiating our Q3 EPS estimate at $0.12
OPMR is on track for the third quarter to at least earn $0.12 per share,
in our view. Our estimate includes a projection of 195 systems installed,
which amounts to roughly $19.6 million in total revenue including $1.1
million for development and maintenance fees. We sense there may be some
measure of upside to our estimate of 195 installs (a metric investors in
general seem particularly sensitive to as it is a visible indicator of
progress), which could drive earnings upside, the magnitude of which will
depend on realized margin expansion. We have forecast a 150 basis point
increase in gross margin to 25.4%.
We expect Optimal to continue to build its inventory position in the third
and fourth quarters in advance of bringing production of U-Scan in-house.
Recall at the end of Q2, inventory levels were higher than anticipated as
the company opportunistically took advantage of favorable terms offered it
by its current supplier, PSC. Therefore, we believe it is likely that
inventory will be comparable to the end of Q2 or perhaps higher.
Strategically, this is important to facilitate a smooth transition to
internal production, and we do not believe it indicates any degree of
deterioration in demand, but rather a strengthening of buffer stock
intended to ensure delivery capability.
2. PROGRESS ON KEY INITIATIVES
** In-house production plans on track, should be orderly transition
** Carousel performing extremely well
We visited the company's production facility in Plattsburgh, New York,
just south of the Canadian - U.S. border. It is clear to us that the
company is preparing adequately for the transition to internal production.
While actual production for shipments of units in 2001 will not commence
until October, OPMR has been conducting numerous, thorough trial ruins to
hone procedures. Further, visiting the facility helped us understand the
simplicity of the production process. The units are assembled from 15
components using simple hand tools, and take less than two hours per unit.
The company has mapped out the exact process flow from receiving the
components to assembly to quality and assurance testing to certification.
Initially, the company will run one shift, staffing for which is virtually
complete. In summary, we believe the company is well prepared for the
transition.
The company's new U-Scan Carousel product (an advanced version of OPMR's
U-Scan Express system that accommodates six grocery bags on a rotating
carousel vs. two for Express) is performing extremely well. We observed a
U-Scan carousel in action at a Kroger in Atlanta. This particular
carousel unit was actually part of a system with three express units.
However, it occupies only a slightly larger amount of floor space than an
Express, yet has three times the capacity. The unit is very easy to use
and we observed a wide range of people using it: young and old, male and
female. Importantly, the entire U-Scan system (three Express' and one
Carousel) was used much more by customers than the regular checkout aisles
or the manned express lane. In fact we estimate 70%-75% of the total
transactions during our observation period took place at the U-Scan
system. Also, the company has measured stores where nearly 60% of total
transactions were U-Scan Carousel transactions. These usage rates,
coupled with our own observations, confirm that OPMR's products are
gaining consumer acceptance at an accelerating rate and that they have
substantial potential. Given that carousel units do not occupy a
significantly greater amount of space, yet have three times the capacity
of an express unit, we believe it will be an ideal "next generation"
upgrade to U-Scan express customers. Over time, we believe this will help
drive margins up further because the carousel is a slightly higher priced
product.
3. Key points going forward
** Expansion into non-grocery retailers likely
** Margin upside on internal production benefits
We believe the company is in the final testing phase to install its system
in a major non-grocery retailer. This retailer has already bought in to
the concept, the focus now from OPMR's standpoint is on integrating its
system with the retailer's POS system. The U-Scan system is clearly
adaptable to numerous venues outside of pure grocery stores, and we think
this will be an substantial source for growth in years to come.
We are initiating a 2001 EPS estimate of $0.95. This estimate assumes 880
units installed, or total revenue of $92.3 million, including $8.7 million
for development and maintenance fees. More importantly, our estimate
includes a 12 percentage point increase in gross margin to 36.6%.
Commencing in January, 2001, the company will begin shipping product
assembled in its own facility. This will have an immediate and
substantial positive impact on gross margin. While we have modeled 36.6%,
we think the effect can be even greater over time. Therefore, we believe
there is upside to our 2001 estimate as gross margin benefits from
internal production. The ultimate benefit to EPS from this incremental
upside, however, will likely be reduced to the extent the company uses
this margin "windfall" to reinvest in support for growth going
forward.
4. Strategy/Focus
OPMR has a product that clearly works for its customers. The financial
benefits cannot be disputed (payback is less than 18 months for retailers)
and the consumer acceptance we have observed first hand has been confirmed
by usage statistics. However, having a successful product does not always
ensure financial success. Knowing this, the company has been focusing on
execution. From its new facility in Plattsburgh to expansion of its
customer support help desk, we believe OPMR is taking the right steps
strategically to position itself for growth and proper execution of its
strategy. We believe this is the right focus and are encouraged that the
company is not taking its eye off the ball in terms of executing the
fundamentals. This focus, in our view, will help ensure a smooth and
profitable growth pattern.
U = Robinson-Humphrey (U) or affiliates of Robinson-Humphrey and their
predecessors (+) managed or co-managed an offering of this company's
securities within the last three years. |
