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Been pondering the last several days on the events. A lot of news and information has been presented and a lot of speculation about where Edusf goes from here. I didn't wanted to respond until I had an opportunity to hash over the data.
First, i'd say many short term speculators looking for a trading event on earnings have existed. The sell off was no surprise. I guess the question now is, "Is Edusoft a buy at present levels". Since I still retain a sizable position, I can only offer my observations and opinions. I suspect trading volume as well as thread participation will wane.
warning! much of the following opinionated
the good
I would say first that i believe there are many more good aspects for the future of EDUSF then poor ones
1. What i deem the most important aspect of Edusoft is their CEO Menachem Hasfari. The impressive results of 97 with gross margin improvement to 80+ percent and net profit margins in the low 20's are as good as any of the larger premier software companies. This proves Hasfari has the business savvy to efficiently navigate Edusoft back and grow the company. He is also a master at the business. His knowledge of ESL, courseware and Multimedia software is a result of numerous years experience, this broad based expertise has been demonstrated to me during numerous conversations with Menachem as well as during the C call.
2. They have positioned themselves in a growing global niche market. The expertise required for ESL, early childhood and multi-language releases of education, vocational titles have somewhat shielded them from sincere competition. This situation still remains.
3. The marketing expansion and diversity improves the quality of revenues and their growth. Although Asian revenues were flat year over year, rev. generation came from 6 Asian countries in 97 as opposed to basically one in 96 (Taiwan). The Latin American comeback resulted again from expanded markets. This broadening of markets is critical for more stable revenues.
4. An expanding product line will accelerate growth. The greatest potential for growth lies on the horizon. The release of "My First English" is due in July. Response to early Beta releases have been excellent. Revenue potential exceeds that of the successful "English Discoveries". SIGNIFICANT revenue increases are projected for q3 and q4 98 as a result of this release.
5. General expansion of revenues are expected in all the geographical areas. From the C call. Sales managers reported from Asia, Latin America, Europe and the US.(Europe and US per Hasfari).
L Amer. sees 98 as only the start of an upward trend. Asian prospects remain high with no visible signs that sales are suffering. Expansion to even more countries likely.
6. Internal margin expectations and goals remain at high levels. 20 percent profit margin and 80 percent gross margins are obtainable 98 goals. Development costs will be proportionately higher.
7. High margin licensing appears to be the trend. Edusoft licenses the software to companies who modify the software to customize and cultures it to match the focused geographical domain. This minimizes Edusoft development costs and exposure. They (Edusf) receive royalties on sales in addition to the fees. Expect a growing number of these agreements to emerge. This I think will be the catalyst for increased exposure of Edusoft to the investment world. Edusoft in implanting a global network of relationships that will support expansion and aid in other endeavors.
8. one of these is Compu Lingual. Announced and discussed during the c call, this is a new concept that Edusoft has begun to develop.
Take Edusoft proprietary software, combine it with the computer language lab that they possess, franchise it as an English Learning Center focused toward foreign non English professionals. Minimal onsite instruction by expensive bi-lingual instructors. Look for the first in 98. I suspect it will be in their backyard (Israel)
9. Valuations remain good. (I think excellent) Of the 24 million in shareholder equity, 46 percent is support by cash, equivalents and receivable. (the first question I asked during the C call was how good are the receivable.) Although high, virtually the entire amount 11 mil is backed by irrevocable letters of credit from institutions, central banks and government entities. Presently market cap 32 mil.
1.3 x book. PE 10.5. Dramatically below software peers. Someone tell me why?
10. Institutional ownership is actually and presently quite high.
Although Bentley Capital Management sold out their entire position (35k) before the end of 97, Kennedy Capital Management opened a 79k position prior to 9/30/97. Their position appears to be unchanged. The real surprise is that Fidelity Management (by way of the Low Priced Stock Fund) increased their position by 98k to a combined total of 430k. ( reported Feb 12 1998) Although I don't think any house will pickup Edusoft and start coverage (due to the size), institutions are definitely looking and buying. What's more,
When a fund like Fidelity takes a 430k position ; that's 9 percent of outstanding; in a small microcap it can't be short term. The liquidity is not there to get rid of the stock. Further, 9 percent of the outstanding is 28 percent of the float. They obviously have seen, commited to and then committed to again a long term substantial position in Edusoft. It's somewhat reassuring to me
I think i could go on with more but there's time, next
the bad
(tomorrow, and it ain't that bad) |
