aatkinson,
I am not saying that other areas are not important, I am just suggesting that gross margins may be the single best indicator whether this company is achieveing its goal in 1998.
The total operating expenses are very important; however, we have been assured by the company that these expenses are going down about $2 million in 1998. So, I put the question to the company if we should expect the total operating expenses to drop below $4 million per quarter and was told we should.
There are four pieces to the bottom line of this company.
1. Gross profit from sales
2. Total operating expenses
3. Other income (expense)
4. Income tax expense
Barring any mergers or acquisitions,I believe that 3 pieces of this puzzle can be either projected with relative certainly or will not play a major role for 1998.
Working in reverse order:
Income tax expense: this should be zero since the company has plenty of operating losses to carry forward.
Other operating income/expenses: In 1998 the major expense in this category should be from interest expense of servicing its loans. This would however be off set by any interest income, minority interest, or other income. I did not take the time to try to determine an exact number for this area because it is a small percent of the overall expenses. In my projections I assigned what I believe may be a high estimate of $400,000 per quarter.
Total operating expenses: This is the area that you bring up in your question. Granted this is an extremely important area, however the company has showed us their hand in this area. This is the one area that the company should be able to project and control so I am taking the company at their word that this area is going down in 1998. We have been told to expect this total to drop below $4 million per quarter in 1998.
Gross profit from sales: This area remains as the unknown part of the puzzle for 1998. Will the company be successful in increasing the efficiency of the manufacturing process? Will the company be successful in enticing clients to order MIC panels and other supplies in lot sizes that can be manufactured most cost effectively? Will the AcCell/TracCell see significant increase in sales for 1998? Will the relationship with Lecia bloom or crash? Will other distrubtor relationships be established in 1998? What impact will developments with AccuMed's other competitors have on AccuMed during 1998?
These are the areas that are difficult for the individual investor to assess because of the confidentiality given to a lot of the sales numbers and potential client lists. We know that analysts and company officials appear comfortable with a break even during the 3rd quarter. But even the company officials and analysts don't know for sure. This is were I believe the gross margins come into play.
Assuming total operating expenses are under control, the two things I am looking for is increased sales and increased gross margins. Where gross margins are as volume sensitive as they are with this company, I believe the gross margin to be the most important indicator.
On sales revenues of $9 million with a gross margin of 48% this company may break even, but with a gross margin of 32.2% as it had last quarter this company would be losing about $1.5 million on the same revenues. At the same time gross margins can't increase significantly unless the over all sales revenues go up because of the indirect and overhead costs associated with expanding manufacturing capacity of the cytopathology division.
What I don't have clear in my mind at this point is what the target gross margin should be for each quarter. I only know that it must go up significantly or sales better soar through the ceiling.
Do you have reason to believe that we shouldn't trust the total operating expense projection of the company for 1998? Have I misinterpreted the company statements as it relates to the total operating expenses?
Cisco |
