Forbes repeat of CFRA Report. Same bad logic.
Here is the Forbes piece. forbes.com
Forbes is repeating the CFRA report from 3 months back, which was refuted fully. Not one new thing in that article. Let us examine the facts about ESST R&D compared to ZRAN that CFRA was uncomfortable with.
(1)ESST revenues are more than 2.5 times those of ZRAN. ESST controls the market-share (40%+). This is the crux of CFRA report (quote from WSJ article in May): “ESSTechnology said in its annual report that R&D expenses were 10.3% of net revenues last year, and 9.2% in 2000. At Zoran Corp. a Santa Clara, Calif., maker of chips of DVD players, R&D expenses were 21.5% on revenues last year, and 23.4% in 2000.” So CFRA suggests that ESST is hiding R&D expenditure to increase earnings (even if CFRA were right and ESST’s R&D should be 20% as they suggest, ESST still is a good and profitable company, but not going to go into that calculation because CFRA’s analysis is clearly flawed). CFRA does not challenge ESST revenues.
(2)ESST and ZRAN both make DVD chips. Yes, it takes a certain amount of money to update the chips and both ESST and ZRAN came out with new chips recently. Let us assume both ESST and ZRAN spend about the same amount of R&D cash to develop the newer chip. But once ESST gets out a new chip they sell 2.5 times more of them. That means ESST’s Revenue to R&D Ratio should be 2.5 times that of ZRAN, which is about where it is. So where is the inconsistency?
(3)ESST was into making DVD chips long before ZRAN, a relative new-comer. Who spends more on R&D – the guys who have been doing it or the newcomer who comes in to challenge? The answer is obvious.
(4)ESST is sticking with DVD chips and making almost all their revenue from those --revenues from old things like PC stuff are close to zero. ZRAN is going into Digital Camera Components in a big away. And they made another recent acquisition that had nothing to do with DVDs. So they have their foot in many other fields and need to do R&D for diverse products.
Or if you want to compare numbers not percentages of revenue, here are the numbers.
ESST 1st quarter 2002. Research and development 6.35 million (http://www.esstech.com/IR/Pr_2002/04_24_02.pdf, see p.6)
ESST 2nd quarter 2002 Research and development 6.76 million (http://www.esstech.com/IR/Pr_2002/07_24_02.pdf, see p.5)
ZRAN 1st quarter 2002 Research and development 5.52 million (http://www.sec.gov/Archives/edgar/data/1003022/000110465902002500/j3652_10q.htm)
ZRAN 2nd quarter 2002 Research and development 5.52 million (http://biz.yahoo.com/prnews/020718/sfth069_1.html)
(yes, same number for ZRAN Q1 & Q2, not my typo). And finally:
Company already responded to CFRA report. esstech.com |
