Mark and others, I'd appreciate some help interpreting the numbers
from yesterday's press release.
I'm a growth stock investor, trying to get a handle on SYSF's long
term sustainable growth rate. I used the quarterly results that Mark
posted to do a few calculations.
I believe R&D expenses are an excellent indicator of long-term growth.
Relative to last year, the quarter's R&D expenditure PER SHARE increased
+42.4%. This is great. Although R&D hurts the bottom line, it really
would be best if all profits were plowed back into R&D. A 42% R&D
growth implies something in the ballpark of 42% revenue growth at some
point in the future.
Sales and marketing expenses are a good indicator of near-term
revenue growth. Per share, these expenses increased +56.3%, which is
also excellent. This implies near-term revenue growth reasonably
close to 56%.
Finally, the current revenues tell us where SYSF stands today. The
sales per share increased +44.1%.
Thusfar, everything points to annual revenue growth near 50%.
However, I'm having trouble with the detailed breakdown of the
revenue stream. I understand that SYSF is in the software business.
Revenues from software licensing fees increased +16.5%, which is okay
but not great, for the core business. Most of the revenue increase
is from sales of "engineering services", which increased +317.1%
per share. Now for some questions:
What are these "engineering services"? Was it a one time service,
or is engineering services a new product line? How might this
revenue source increase in the future?
Next, I subtracted the cost of revenues from the revenues to calculate
growth of gross profit. For the core business of software licensing,
gross profits increased by only 9.1% per share. This occurs since
the revenues increased by +16.5% per share but the cost of revenues
increased by +173.5%. This is not so good. At this rate, the gross
profit on software licensing will be negative in less than 3 years.
What is happening? What is the driver behind this increasing cost
of sales?
On the positive side, the engineering services revenues increased
+317.1% while the cost of sales increased only +55.4%, per share.
This is excellent, so long as SYSF gets out of the old software
business.
This idea of SYSF changing its business is worth consideration.
A year ago, 73% of SYSF's business was selling software. This year,
software is down to 59% of the business. Most of the growth is from
the new "engineering services" product. Next year's growth is
supposed to come yet another new product, SystemWizard. Maybe this is
not a growth stock in the traditional sense, where they continually
improve a product and increase sales. Instead, every year SYSF comes
out with an entirely new key product. In this case, there is no way
to predict long term growth. Sales five years from now depend on
whether in three years from now the R&D engineers can develop a great
new product. Of course, this is impossible to predict. However, the
high P/E implies many people believe the growth will increase or even
accelerate. Can anyone provide some basis for growth estimates around
100%, which would justify the 100 P/E?
Finally, it occurs to me that I may be mistaken when I assume others
have quantified their growth estimates, as they might simply have paid
the P/E based on SystemWizard being a "great" product. In this case
SYSF is a "concept stock" rather than of a "growth stock", and I'll
move on to the next prospect.
Thanks for your feedback,
Fred |
