Courtesy of Whitephosphorus on RB.
GMGC:B-Spec;GENERAL MAGIC'S 3Q00 RESULTS ABOVE EXPECTATIONS
Dain Rauscher Wessels
a division of Dain Rauscher Incorporated
*((General Magic reported Q3 revenues of $3.1 million, 21.7% more than
expectations;)) the quarterly operating loss of ($0.10) is $0.07 above our
($0.17) estimate.
*Major cost reductions from the phase-out of the myTalk service should result
in sustainable margin improvement going forward.
*Hosting revenue from existing customers should commence during the next
three months, beginning with OnStar. We also anticipate the announcement of a
major new customer by year end.
*We are reiterating our Buy-Speculative rating and $20 price target.
General Magic, Inc.
NASDAQ:GMGC
Rating: Buy
Risk: Speculative
Price Target: $ 20
Nov 2, 2000
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Price: $4.03 | Fiscal Yr Prev EPS P/E
52-Wk Range: $19-$2 | Dec/1999A ($1.27) NM
Tr. 12 ROE: NM | Dec/2000E ($0.84) ($0.63) NM
3 Yr EPS Gr: NM | Dec/2001E ($0.22) ($0.18) NM
Shares Out: 59.70 million | 2000 Q4 ($0.09)
Book Value: $0.35 |
Market Cap: $240.67 million|
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TELEMATICS
Jonathan Lawrence
(212) 230-2987
jlawrence@dainrauscher.com
Mitchell Leung
(212)230-2996
mleung@dainrauscher.com
GMGC:B-Spec;GENERAL MAGIC'S 3Q00 RESULTS ABOVE EXPECTATIONS
Revenue Growth Surpasses Expectations: General Magic's Q3 revenues came
in at $3.1 million, 21.7% higher than our expectation and up 41%
sequentially. The upside surprise in revenues was driven by higher-than-
expected professional service fees attributable to the Virtual Advisor
development. The company reported a Q3 operating loss per share of ($0.10),
easily beating our estimate of ($0.17). We estimate that a higher Q3 share
count, due to the continued conversion of preferred stock, contributed $0.02
of the upside surprise.
Significant Cost Savings Achieved Across the Board: In addition to the
revenue surprise, General Magic surprised on the expense side, beating our
operating expense estimate by 28% (also down 28% sequentially). Cost savings
were achieved in multiple line items, with approximately 50% of the
reductions attributable to the phase-out of the myTalk service. Most
importantly, this represents a sustainable reduction in costs going forward
and frees up additional network capacity for Virtual Advisor and other
customers. This should help delay any required investment for additional
network capacity and help reduce planned capital spending.
Visibility Continues To Grow: Recently, there has been a spate of
press releases highlighting various speech technology alliances. Visibility
of the voice space, and for the explosive prospects for voice ASPs like
General Magic, continues to grow.
We expect the following catalysts to drive stock price performance in
the next three to nine months:
*OnStar's Virtual Advisor has a planned late-Q4 rollout. While the exact
timing of the rollout remains uncertain, we do expect minimal hosting fees
from OnStar subscribers to begin in Q4. OnStar represents General Magic's
most visible customer and revenue stream, and we expect OnStar to drive the
majority of the company's revenue growth in the near term.
*General Magic's alliance with IBM should begin to bear fruit by the end of
Q1. We expect a joint sales force to begin marketing products in Q4, with
customers expected to materialize in 1H01.
*We expect General Magic and Global Services Network (GSN) to begin
offering voice products to GSN customers by the end of 1H01.
*We expect the announcement of an additional customer by year end.
Corporate interest for General Magic's services continues to grow, and we
remain optimistic about the company's prospects for diversifying its customer
base over the coming months.
Revising Q4 Estimates: We are revising our Q4 operating loss estimate
to reflect the upside surprise achieved in Q3, as well as the increased share
count. Our new Q4 operating loss estimate is ($0.09), bringing our FY2000
estimate to ($0.63) vs. ($0.84) previously. We are keeping our Q4 revenue
estimate unchanged until we get greater visibility from GM on the rollout of
Virtual Advisor. We are looking for 40%-plus sequential revenue growth going
forward.
Stock Opinion
We rate General Magic Buy-Speculative with a $20 price target based on a
discounted cash flow valuation that assumes a 17% discount rate and a 10%
terminal growth rate.
Company Description
General Magic, Inc. is a voice application services provider to leading
telematics, telecommunications, and Internet companies.
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