You ask a lot of questions, but I suppose I asked for it.
He said more than once that he believes in the future growth of the ECM business and, in response to a separate question, would stop plant expansion on a dime if he developed any doubts. So plant expansion continues.
I asked about whether there was any increased balance sheet stress
and he said no - but that $9 million should show up as increased inventory, I would guess - which would probably be back down by the 10/22 call.
As to Greenlaw misleading me 10 days ago, it seems that this company (and tech businesses generally it seems) have a hockey stick sales pattern in a quarter. Greenlaw expected both a larger hockey stick effect than the $9 million and a better margin mix of business.
I think we will know better what to expect for 1998 after the 10/22 call. I personally do not think that both a sales and margin problem will
be a one quarter impact thing. I see it affecting the 4th quarter as well, but with better results. Note that they had a much more serious hiccup in 1995 when a 50 % customer, Chipcom, suddenly stopped ordering because they got into general trouble - and they recovered quickly then. I think that it is possible that they could be back on track by the first quarter of 1998 and make 1998 numbers - tune in 10/22 - but at the moment I am not sure.
The best thing we have going for us is Pino's 5 million shares. Also, CFO Greenlaw has never sold a share and I know from talking with him is also in it for the stock potential. If it can be done it will be done.
With the industry expected to be strong for some time to come, I expect that it will eventually be done. The main issue in my mind is how gradual the recovery will be. (Even if we "skip" a year and they make 1.60 next year and 2.00 the year after, the stock is probably a
buy here, but the Street may not think so.)
He would/could not answer at this time my questions as to whether this was only a one quarter problem, or would recovery be gradual,
or what a reasonable estimate of the future growth rate would be.
He plans to address those issues at the 10/22 conference call,
after customer by customer analysis. He did add that they have all the customers they had a quarter ago (except 3Com, as we know) and are adding new ones all the time. Of course, the deferred $9 million
sales gets the fourth quarter off to a good start (with normal type margins - I confirmed I was right here on accounting).
Margins were down because the mix apparently deteriorated in the quarter, with the sales decline concentrated on higher margin customers. I neglected to ask if the deferred $9 million was concentrated in higher margin lines. I asked your specific question
whether to get the sales they had they had to cut margins, and he gave me the above answer.
The stock reaction did not surprise me - there is no tolerance of disappointment in this market.
(Somehow the intended order of the above got changed when I submitted it.) |
