Tnsplyr,
Looking over the RSYS numbers, the two things that stand out to me are the slowdown in the rate of revenue growth and the reduction of costs so that operating income grew at about twice the rate of revenues. The concern is that the rate of revenue growth will continue to slow. Sequential revenue growth for the June quarter was about 7%. If the sequential growth rate slows to 5% next quarter and then increases to 10-12% for the Dec quarter as someone said was predicted in the conference call, that may mean RadiSys will experience slower growth in earnings. If RSYS grows at the rate of their latest revenue growth, that would be about 31% per year. Very good especially relative to the current price of RSYS shares, but slow in comparison with their recent history.
The SG&A expenses last quarter were 12.6% of revenues; R&D was 9.2% of revenues. Both are slightly below the estimated 13% SG&A and 10% R&D expenses forecast for the rest of the year. My guess is that Myers was probably being conservative in his forecast of SG&A expenses, so there may be some margin improvement there to accelerate earnings growth. I'm not sure whether early development around new designs is expensed as R&D or as a cost of sales, so it is hard to know whether the R&D percentage will increase or not. I think one of the major positives for RSYS has been management's ability to hold costs in line while expanding revenues. I think this kind of cost management is a big plus and indicates management is attending well to the profitability of their operation. What Myers may be lacking in charismatic self-promotion, he more than makes up for in good nuts and bolts management of the company's operations.
The 11 major design wins are of course a very positive leading indicator for RSYS. I can't remember exactly how long it takes to turn a major design win into sales and profits, but I seem to remember something like six months. Perhaps someone can correct that if I'm off. The snowball effect means that existing business creates more credibility upon which more design wins are likely to be established. I think getting a major telecom win is particularly promising in opening a new and potentially big door for RSYS.
On balance, I think the news was very positive, but perhaps a bit tame compared to where RSYS has been. Considering how low RSYS is priced relative to its rate of growth, I'd say it's a bargain and could certainly move up from here. Considering the slowing rate of revenue growth going into the next quarter, there may be sufficient doubt and uncertainty for momentum players to jump ship.
The heavy short position I would say is a blessing, because I don't see much besides additional short selling or a market collapse that is likely to take the shares down much from here. Short covering should provide some lift for the shares whenever the shorts get tired or scared of holding without significant price declines.
Baird |
