Earnings estimates for RACE- improving though not too good for Q4
The fourth quarter of 1997 (ended June 30, 1997) is not going to be
pretty. The company has warned that its expenditures on the Be There! product line are (and must be) out in front of the corresponding revenue. But the 4th Quarter is already OVER! The 1998 fiscal year prospects for the company and its markets look better. In case anyone is looking for some earnings estimates for RACE, here is my summary.
This number crunching is based upon the companies press releases, recent 10Q and 10Ks. As always- I welcome critical analysis and discussion of my estimates. It is the only way to improve upon them.
My most recent updated earnings estimates are based upon the following & checked against the 3rd quarter earnings report:
Gross profit margin was 30% for the quarter ended March 31, 1997. This gross profit margin is up from 28% for the prior quarter ended December 31, 1996, and down from 36% for the comparable quarter of the prior fiscal year. See DR earnings release of April 30, 1997. Custom modem shipments were primarily responsible for this fluctuation. On PRNewswire on June 12, 1997, DATA RACE announced that it had made a 40 percent price reduction on all servers in the Be There!(TM) Personal Multiplexer product line. This did not include all equipment associated with the system- only the servers. At this price, the servers are likely to have a markup comparable to existing margins. However, the equipment used by individuals accessing the Be There! system will probably have a profit margin comparable to other unique technology- ie approximately 70% gross margin. Hence, for Be There! system sales- [assuming an average of approx one server and 50 individual Be There! client kits (modems, handsets, cards, etc)] it is likely that the overall gross profit margin will be about 50-55% rather than the 30-35% which they have been achieving recently. This should bring the company sales margins up to 45-50%.
On April 30, 1997 DATA RACE reported revenue of $3,903,000 and a loss of $1,882,000 for its third quarter ended March 31, 1997. This represents a 12% decline in revenue from the prior quarter due to decreased revenue from both custom modem and network multiplexer products. According to the 10Q dated May 14, 1997, the custom modems are approaching the end of their anticipated market life. Hence it is probable that non-Be There! revenues will drop significantly while this company devotes its attention almost exclusively to its flagship product. Hence, I would anticipate that revenue for the 4th Q ended June 30, 1997, probably fell out of bed. It would be unlikely that they achieved more than $2,000,000 in non-Be There! sales for the quarter. I would expect that level to drop even a bit more in the 1st few quarters of 1998's fiscal year and probably level off about $1,000,000 per quarter in non Be There! sales. This is a 30% margin business.
On the other hand the Be There! sales will be rapidly ramping up during fiscal 1998 (although there were probably no significant Be There! revenues for 4th Q of 1997). Estimates of revenue have to be comparable to what Data Race has been making historically or they would not have been able to attract the management people that they presently have. Let us assume a very conservative total combined revenue for fiscal 1998 of $16,000,000 (4 times 3rd Q 1997 revenue). Of this we will assume $4,000,000 is the historical 30% margin business and the rest is Be There! revenue.
During the third quarter of fiscal 1997, operating expenses increased
21% to $3,140,000 from $2,600,000 in the second quarter. Research and development expenses remained essentially unchanged from the prior quarter (-5%), and general and administrative expenses decreased slightly from the prior quarter (-17%). However, sales and marketing expenses increased significantly (+26%) from the prior quarter due to costs associated with the launch of the Company's new Be There!(TM) Personal Multiplexer product line. This trend is likely to continue. Although some of the costs have now been transferred to third party vendors of the product, it is likely that operating expenses will average about $3,000,000 per quarter.
Crunching the numbers:
l.) $4,000,000 sales * .30 - the historical gross margin (before SG & A)
$12,000,000 sales * .50 - the Be There! estimated gross margin
(ie. for the 1998 $16,000,000 sales...gross margin $7,200,000.)
2.) Subtract SG & A ($12M)
Estimated loss = $4.8M
3.)Tax rate 0%- see 10K for year ending June 30, 1996.
4.) Divide by 5.0M shares.
1998 loss is estimated to be $.96 per share, but this will improve by $.10 for every additional $1M in Be There! sales which is achieved above the $12,000,000 estimated- up to the break even point. After that further improvement will depend upon the tax rate and the ability to carry forward prior tax losses & credits.
This result does not seem very bullish for the stock (at first). But let me assure all doubters that it is extremely bullish. When Micron bottomed recently at $.17 its earnings estimates had been cut back from $12.00 per share to nil. It is now at $50. |
