12:37 ET Chinadotcom (CHINA): 11.01 -0.91: It was only a few years ago that internet portals and internet software names were up 5% - 10% each day. Breakthrough news of a new technology, or application of existing technology, promised to drive revenues all the way up to the moon. The glimmer of earnings prospects were washed away in a sea of press releases that touted ever stronger partners and joint ventures with the potential for future sales and margins to be even higher. Those were the days.
Today, sadly, isn't too much different. Momentum investors have piled into the name that has been running lately and run it has. Enter Chinadotcom (CHINA), which released earnings of $0.04 per share, two cents higher than the First Call consensus estimate. Revenues $21.9 mln were better than the $18.7 mln First Call consensus and up 51% from the previous quarter.
One thing that Briefing.com has learned from the previous bubble is that numbers don't lie. You can mention the great operational achievements and the potential for growth all you want, but when the rubber hits the road, the numbers will tell the real tale. CHINA is no exception to that, and its numbers tell a different story. The release tells us that gross margins were up in the quarter from 35% to 44%, but what it leaves out is that last quarter did not include the 86% gross margin of the business line that was acquired. Take that business out and gross margins fell to 31%. Software margins dropped more than 600 basis points in the quarter and advertising margins dropped over 1000 basis points. Those two businesses accounted for 94% of revenue last quarter, but due to the acquisition, only 72% this quarter.
Some might point to the fact that the Company is profitable, and that this is the third straight quarter of profitability. To that we just need to take a look at the most recent release which shows us this quarter and last quarter. In each of the last two quarters, CHINA posted a negative operating margin, or a loss for its core operations. Profitability came primarily from two lines - interest income and gain on sale of securities. This quarter was also significantly boosted by the gain on disposal from a discontinued business.
The balance sheet isn't helping things either. Cash and cash equivalents went from $164 mln in the prior quarter to $60 mln at the end of this quarter. For those of you who think you can spend money, check these guys out. Looks like they will be selling more debt securities, as the debt securities available for sale line increased by about $95 mln. Also, keep in mind that bonds have tanked lately, so if it was marked to market today, Briefing.com believes that number would be substantially lower.
The overall story here is pretty simple to see. There is some growth in the software business, but it's coming off a very small base. There is negative growth in the advertising and marketing business. The gross margins in each of these units is heading lower. The company is spending cash at a healthy clip and is planning on buying more businesses in the near term. This all adds up to something we saw before - it was called the bursting of a bubble. Valuations are one thing, but you need to have something sustainable to value, otherwise this becomes a roll-up story. Briefing.com can't recommend investors buy this stock. Momentum players and some day traders might do well here, but investors should know better. --Brian Bolan, Briefing.com |
