Hey, Don. I finally got a chance to review the materials, and I have a lot of comments/questions.
From what I've read in the recent pr's, the co. is now allied w/ AT&T, which is always a good sign to have a partner of that caliber. Does this (and some of the other pr's) signal a turnaround? In trying to weigh the evidence, I don't know one way or the other.
In looking at the '95 annual report, as well as the pr accompanying the 1Q '96 quarterly report, to say that I'm concerned would be putting things mildly. Concentrating on the 1Q report:
- Computer software and hardware sales were down approx. 60% compared to same qtr last year, while cost of goods was up over 100%. It isn't clear how such an inverse relationship would occur. If it is just a matter of sales not recognized due to the delays mgmt. cited, one would think related items purchased or developed for sale would not be costed until the sales were consumated, so that shouldn't be the cause.
- Similar question as to support revenue: Support revenue for the quarter was down about 8%, but costs associated with the support were up over 100%. Obviously, you have to recognize most of these expenses when incurred, but the question here being, why are they being incurred to that extent when there's a drop-off in revenue? Keep in mind here that increased sales and R&D staffing would not be accounted for here, so that's not the cause. If anything, I'd think that staffing here would be temporarily reduced (read, downsizing) until the co.'s much-touted "business model refinement" bears fruit.
- SGA expenses were up 20%. Once again, reduced business should be translating to reductions here, not in increased costs. Mgmt. went to great detail describing the large SGA expenses they incurred in '95, saying that many of the costs were of an isolated nature and were intended to bring the co. up to speed w/ competition and to meet future challenges. In the same discussion, they said that such expenses could be expected to be reduced due to the costs being incurred in '95. But we see that's not what's happening, at least thru the first quarter.
- R&D was up quite a bit, but this makes sense based on mgmt.'s stated need to increase their staffing in this area.
Another thought on controlling expenses (mainly SGA): mgmt. goes to great lengths talking about reducing costs. But did you look on the back of the annual report and notice that the co. has offices/facilities in Seattle (2) (maybe 5-6 miles apart), Arlington, and Snohomish? Don, I don't know what part of the country you live in, but I live about 90 miles north of Seattle, and I can tell you that these four offices/facilities can't be more than 45 to 60 minutes apart from eachother. Okay, the co. says on hand that they're trying to control costs, but what would all this be about (once again, look at the growth in SGA expenditures)? I truly would have a problem understanding why the co. would need more than 2 locations (offices and/or research/production facilities) in the entire Seattle-Tacoma-Everett area. But 4? Especially when no more than one office is listed for Chicago, L.A., San Franciso, etc., etc., each. At the face of it, this is not logical in the least.
Looking down the road over the next 3-4 quarters, what if the co. finds the turnaround to take longer than anticipated (based on the first quarter, I'd say it could happen)? The co. does not have deep enough pockets to repeat the first quarter results too many times. Where would operating funds come from? Further financing, whether in the form of ther debt or equity markets, does not do a lot for shareholder value. That is, of course, unless mgmt.'s master plan works like a charm and sales skyrocket.
One further thought: you make think this is petty on my part, but I was not impressed in the slightest w/ mgmt.'s discussion of their corporate strategy in their pr's or earnings report. Enough hay was made of 'refining business models', 'realingning ... efforts to support core sales opportunities', and other cliche's and euphenisms that I thought I was reading a bad undergraduate term paper. Mgmt. appears to go a long ways to appear to be hip to all the latest business terms and catchphrases, but are lacking a great deal of substance in their comments, to the point that I was just short of being offended in their lack of addressing and/or discussing their current problems and operating results. Please re-read above comments concerning the operating results to further drive this point home. There's no way such glaring and obvious deficiencies in mgmt.'s comments could possibly exits unless mgmt. is consciously avoiding the issues.
Now that I've been extremely negative in comparison to your comments (which contained a fair amount of more positive thoughts), just watch the price of the stock go to $6 by next spring. Stranger things have happened. Believe or not, I do like the concept behind the co. and many of their products, but until I see a little more of what I would call 'quality' here and until mgmt. chooses to be a little more candid w/ their shareholders, I'm pretty sure I'll be staying on the sidelines. I'm anxious to read any feedback you may have.
Thanks,
Khris
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