Gus,
Thanks for the info. Re the Bramson letter, I think the conclusion regarding KM research and development costs is not that he will cut non-KM research but that he will lower KM research costs unless revenues are generated for KM specifically, so that money can be used to pursue their other technology initiative.
Ed Bramson's letter to shareholders, in my opinion, has several goals. Foremost is communication to shareholders concerning the year to date and the status of keepered media and the other businesses. It also was a look toward what Company strategy will be. It also underscored the core valuation of the Company. Essentially, Ampex has earned 21 cents per share for the year to date. This is after spending 8 cents for the Mitsubishi litigation, as well as spending 25 cents per share for Research and Development year to date. On an annualized basis, earnings per share, in my opinion, will approximate 27-30 cents. Again, this is after spending about 36 cents a share for R and D, of which keepered is about 9 cents.
Also, the cash and equivalents position at 9/30/97 is about 37 million dollars or about 80 cents per share. Therefore the present price earnings is about 10 times the last 12 months eps. It would seem at such a discount to the market and their peer group that the downside is limited.
Regarding his comments on keepered media, it is my opinion that the intended audience is not only shareholders but the disk drive companies as well. I believe that it has been documented that keepered media has several benefits. The primary benefit of increasing storage capacity at a low cost is the here and now focus. The transition to MR heads has created uncertainty concerning revenues in the near future for keepered media. In the lab, Ampex has seen promising results with MR heads. However, the process of developing for a production drive makes the timing of revenues for MR drives an uncertainty.
Another important benefit for the future is ability of the keeper layer to reduce the probability of information degradation and stabilizing high-density information storage. Research sources indicate a belief that this comes into play as recording densities approach 10 Gb/in2.
I believe that Ampex is employing a "pay me now or you'll pay me later approach." I believe the Company is serving notice to the disk drive companies that they will not continue to work for free and make large investments on technology that disk drive companies will not only want but will need in the next 2-3 years without some revenues flows beginning in the near future. When component costs become an issue (could be soon; witness the sales of sub$1000 PCs with a rate approaching 40% of PCs sold); when thermal decay and information stability becomes an issue; when the finance guys are making the decisions in a cost cutting environment, disk drive companies could find themselves in a bidding war for keepered media, which is a proprietary, patented technology.
I think also, again, in my opinion alone, Ampex is conveying to the parties negotiating with them for keepered media, that the Company is perfectly willing to put up with shareholder complaints and pain and suffering and that they will not be maneuvered into cutting a lowball deal for the sake of a press release with a major disk drive manufacturer.
Regarding future products, there is some important advice contained in a quote by Phil Fisher in his book, Common Stocks and Uncommon Profits. Ironically, the first edition of this book was in 1957 and Ampex is featured prominently as one of his big wins, having gone public in 1953 and appreciating 700 % over the next 4 years. Anyway, the quote relates to the ability of a Company to generate profit form its' Research and Development efforts: "A simpler and often worthwhile method is to make a close study of how much in dollar sales or net profits has been contributed to a company by the results of its research organization during a particular span, such as the prior ten years. An organization which in relation to the size of its activities has produced a good flow of profitable new products during such period will probably be equally productive in the future as long as it continues to operate under the same general methods."
Applying such advice to Ampex yields the following: from May 1, 1987 to present, the cumulative amount of royalty income alone is 201.5 million. For the last 5 years, royalty income alone is 59.6 million.
It might important to note also that Ampex is a key partner in development of recording technology for military applications. Another thought on that is government research dollars help fund development of technology in recording that probably has application in Ampex's non-Defense product areas.
In thinking of what future other products can be created for mass commercial markets, I don't think anyone need look further than page 6 and 7 of this year's annual report. This is where the graphic display of the DCT machine is located with the detailing of the core technologies involved in the design of the machine. These are as follows: Recording and play back heads, recording media, digital image compression, digital audio and video processing and channel electronics. The first thing that comes to mind as a potential mass markets are DVD players, advanced enhanced compression systems, P.C. based multimedia etc. Recall that California Video Center, a wholly-owned subsidiary of Time Warner Entertainment selected the Ampex DCT tape drive as the input source for the production of DVD disks. Or, in other words, to record full motion video at the highest quality resolutions on disk. Seems to me that technology can be applied to DVD-ROM as it is employed on TV sets and PCs. Maybe it already is licensed to DVD manufacturers. It is interesting to do a patent search and see how many Ampex patents are referenced in the patents of Philips, Sony and others related to their DVD patents. I have seen estimates for the DVD market as being anywhere from a 2 to 10 billion dollar market by the year 2000.
Digital television broadcast means digital TVs for the home and digital broadcast equipment for the programmers. The FCC estimated during the hearings regarding digital TV standards that consumers will spend 100 billion dollars over a 7-10 year period. Who knows.
Ampex is at the forefront of a market that is finally beginning to gain size and has enormous growth potential.
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