Posted this on Yahoo... watch the smoke and mirrors continue next quarter.
Here is another fearless prediction
by: markox5 (27/M/Metro Detroit, Michigan)
10/20/00 5:05 pm
Msg: 28203 of 28221
and the magic behind the accounting....
CPE is killing Westell.. they are basically selling product with no profit this Q. I did a study and I figure they were selling CPE at 2% gross margin 6 months ago, 11% in their "huge CPE quarter", and back down to around 1% in this most recent Q. [compared to respective 20%,27%,33% for leader EFNT]
So now they are going to lose even more of this very low gross margin business apparently.. down to say $33M CPE. Lets see what affect this will have on their next Q EPS and how people who are naive will be tricked into thinking its an improvement.
Im going to make the following assumptions:
1) WSTL makes $95M in total revenue next Q
<only 10M less than this Q>
2) they grow their DSLAM yet again 50% sequential to $22M (from $15M)
3) they lose some of their low margin CPE sales...lets put it down to say $33M (mid range of MZ's estimate)
4) Im going to use similar gross margin assumptions I have for the past 3 quarters in trying to make sense of these numbers
5) WSTL will do everything in its power not to increase any cost of sales, RD, administration in the hope of making EPS "look good"
... This is what will happen and how it will look and how investors (naive ones) will be tricked into thinking "back on track"
Revenue:
TAP $30M
Transport (mostly DSLAM) $22M
CPE $33M
CPI $10M
Total: $95M
So with this product MIX (selling LESS of the very low gross profit margin CPE; the very product that truth be told their increase in stock price to $40 resulted from, and concurrent hype of mid 2000, and "future guidance" was based on) the Gross Margin on Equipment will improve to 22% (from 17% this Q). WSTL will tout this as "success" when all they did is lose sales of their lowest Gross Margin product.
So 22% Gross Margin on the Equipment Sales = $18.7M
Throw in the CPI Gross Profit of roughly $4M
and you have $18.7M + $4M = $22.7M Gross Profit
Hold ALL EXPENSES steady .. (i.e. dont put any more money into Research and Development to keep up with competitors,
and dont put any more money into sales to try to compete with peers) (further they are getting to such a dangerous cash level they will have to toe the line even if they WANT to sacrifice earnings for long term investment in themselves on the sales and r&d front) and you have
Sales: -$6.2
RD: -$7.5
GA: -$6.5
Total Expenses: -$20.2M
So take away Gross Profit $22.7M - Expenses $20.2M and you are left with $2.5M in PROFIT. (if WSTL dares to increase R&D spending or Sales spending than the profit is shot)
$2.5M / 62M shares or so = .04 EPS
Up from .01 this Q
MZ will tout this as progress and many of you Yahoolians will buy into it....
Progress meaning
1) We dont have cash to spend on added expenses such as R&D which would help us develop new products at rates like our
peers
2) We dont have cash to spend on sales/marketing initiatives to penetrate new customers like our peers
3) We told you we are the leading CPE vendor but we are cutting our CPE sales out like crazy and are replacing them with ultra competitive (but higher margin) DSLAM sales. What do you mean we change our business focus every damn 9 months? Have YOU ever run a business? No of course not, just trust ME.
4) We will tout our "higher gross margins" even though they are only due to loss of CPE business
5) We will tout our higher EPS of .04 and you will buy it.
6) Our EPS is to save face; if we were run like a good company we would be investing much deeper in R&D and on the Sales Front ... our CEO talked about the "need" to get more than 3 customers (duh), something every 2nd year business student can figure out.
7) VoDSL? Ummm... well that looks like its going to hit in some volume in the March 2001 Q, and commercial in June 2001, but we dont have the money to deal with it right now, so we will start way behind the 8 ball on the real money maker (potential 60%+ Gross Margins) but just trust us.. once it becomes commercial we will BE THERE WAITING.
8) You can trust us now.. its all going to be ok. I have repriced my options now and we are ready to rock n roll. I also got my yearly $300K bonus. What for? No one has ever asked me. The Board just gives it to me... I deserve it. I am MZ.
9) And if all else fails we are going to spin off our CPI division for $1 Billion. Trust ME.
This is how it will go down, Im telling you know 3 months in advance. |
