[ Perle Conference Call ]
Thanks everyone for waiting. As you can see, the stock activity for PERLF has leveled off considerably after the earnings report and conference call, which in my opinion was on the favorable side.
The CC started off by stating facts already mentioned in the earnings press release, which included the following key points (I am only including the more significant topics; the CC was about an hour long):
1) Higher sales in the RAS products, up 23% for the Perle 833.
While the sales increase for the 833 was acceptable, I found that it did not quite meet my expectations for the growth rate necessary to increase RAS sales from 10% of total sales to 20% for the following year. Under such growth assumptions, we would be talking about growth in excess of 100% from last year's period to this year's.
Institutions, based on this figure I assume, had also expressed their concern about PERLF coming in "too light" to the market. For reasons explained below, I think the "lightness" is being addressed by the Company.
2) This was offset by lower sales in their x94 product line (the AS/400), which was down by 5%, which was purely attributable to the economic difficulties of the Asian region (they determined this by comparing region by region sales growth--they're not just passing the buck Asia's way, like I've seen some companies do come reporting time).
I was expecting AS/400-related sales to be flat to negative; correct me if I'm wrong, but it appears that the AS/400 market has matured, which leaves involved players little room in expanding market share, which includes improving functionality of the products, price cuts and other promotions. Perle is doing a good job of diversifying away from this business, by investing the proceeds of this profitable division into the emerging Remote Access market, which is projected to grow to about $4.9 billion by the year 2000. There is room in this market for opportunity, but the challenge I see is that PERLF has to leverage their AS/400 presence to get into the RAS market.
For the quarter, they completed the development and roll-out of their new key product, the Perle 833AS (for Access Switch), which is a higher capacity RAS that expands to 48 to 60 ports, instead of the lower capacity 8-port model, the 833. According to the Chairman and CEO, Joseph Perle, the 833AS was attracting good interest coming off the starting gate, with the first two weeks of the quarter already shipping 12 units.
Being a heavier-duty unit, management felt that the introduction of the 833AS would have synergistic benefits that would trickle down to improving the sales of the 833 ("...your needs might actually be better met with our 8 port model, the 833...")
3) R&D as a percentage of sales remained at 13% of sales.
Good. I like to see Management continue to invest a significant portion of their revenues toward increasing the company's product stream. New products mean more future growth ahead.
4) Margins improved markedly to 71% of sales, up 5 percentage points than the previous third quarter period last year.
This was attributable to (1) better purchasing contracts with their suppliers and (2) the continued reduction of SG&A expenses, down to 51% of sales vs. 56% of sales. I congratulate the management team's ability to continue to expand margins in the face of flat sales growth. Of course, management cautioned that margins were expected to level off to the mid 65% range, so don't base your expectations on this extraordinary period the company is experiencing. However, with margins like this, any growth in the top line will be quite visible on the bottom line.
Oh yes, about the SG&A expenditures. The trend of reduced SG&A was attributable to the company refocusing their marketing effort from focusing on the end-user (us) to focusing on VAR's. About 250 resellers world-wide had been initially identified, was brought down to 180, and was focused even more to 58. These 58, management felt, were the ones most likely to sell the most product and have the greatest interest in selling PERLF to their customers. The VAR target number is 75, and will eventually bring it down to 50 (don't ask me why).
It is this reduction in SG&A expenses that has contributed mostly to the re-establishment of profitability for the Company.
5) The balance sheet remains strong, with about $4.3 million (in US dollars, assuming a multiplier of 0.71 US per Canadian dollar) in the coffers. In Canadian terms, the cash position was at $6.1 million. So in US terms, based on today's closing price, PERLF has a market cap of $13.4 million, of which 32% is all cash!
Their plans? Management is actively looking for opportunities that will add to the company's technology and revenues. Two opportunities have been examined, but were passed on by management. In addition, the Company has appointed an Investment Banker to help them out in their search. Seeing as how diligent management has been in the past with the application of company funds, I am willing to venture the opinion that they will continue to apply that diligence into the future.
6) Looking ahead, Management has expressed its comfort with the $11.6 million (Canadian) revenue forecast, as set by current analyst estimates.
I'm wondering though: if the ratio relationship of Gross Margins (71%), SG&A expenses (51%), R&D (13%), Amortization (2.6%), Interest Income (~0.3%), and US/Canadian exchange rates ($0.71 US per Canadian) continues on for the next quarter, then based on that projected CN$11.6 million revenue, we would get an expected EBIT of 4.7%, which would translate to CN$0.08 per share, or US$0.05.
This is only slightly higher than last quarter's numbers. Forward expectations are set for US$0.09 next quarter. There may be revisions to this number, but Management noted that due to the favorable (and early) sales rate of the new Perle 833AS, there was a possibility that there would be some upside to the quarter. We'll see.
Also, don't forget the considerable tax-loss carry-forwards the company has accumulated. That could perhaps affect the earnings picture if Management decides to apply it to future quarters.
7) It appears that a new product called the Perle 594e has been released last quarter. It is called a Network Controller, which apparently has no direct product to product competition in the marketplace; it seems though that other solutions exist (LAN servers with routers) that address the product's functions. Management felt that there was a large need for this type of product in the marketplace.
It is the combination of two new, key products that will drive the expected future growth: the Perle 833AS and the Perle 594e. For an explanation of the Perle 594e, please click on the following link (Adobe Acrobat is necessary):
perle.com
Given the early response rate for the new products, it does seem that the platform for revenue momentum is being built successfully.
Conclusion
The company continues to maintain and expand profitability, but the company can only tighten its belt for so long. Despite Management's excellent ability to keep costs tight, the next business issue that needs to be addressed is the expansion of revenues (They actually told me that was what they were working on now). Given the recent rollout of two new, key products, I believe the platform for future growth has been built and is now in place.
The balance sheets continue to be strong, and based on the market capitalization of PERLF, the company still remains a compelling value, as the price continues to sit below book value. Also, the market cap for this company only represents about a third of sales, which is a valuation that is almost unheard of for other Remote Access players: Cisco, IBM, Shiva, 3Com, and now, Compaq (two portfolio managers I have spoken to about this company have looked with interest at this company's valuations as well).
The TA for this issue continues to gain strength on a weekly-chart basis, and appears to be reflecting the improved prospects of the company's future.
I continue to recommend Perle Systems for its value, growth, and TA characteristics.
Rainier Trinidad |
