Stuart,
From the Minneapolis Star:
webserv1.startribune.com
Reinventing business turns loss into gain
Dick Youngblood / Star Tribune
In 1993, little Ciprico Inc. reported revenues of just $9.2 million and a loss of $1.8 million from a specialty line of controller boards that was rumbling inexorably toward obsolescence.
Four years later, after virtually reinventing its business to exploit the emerging field of so-called visual computing, the company ended fiscal 1997 in September with revenues of $36.4 million and earnings of $4.2 million, or 79 cents a share.
Not only that, the change in business focus and quadrupling of sales came without accumulating any debt, short-or long-term.
"No debt at all?" an incredulous visitor asked Ciprico CEO Robert Kill.
"Well, we do have four lease cars in Europe," he said with a grin.
The source of his good humor is a line of specialized data storage equipment, called disk arrays, used in the growing field of image storage and manipulation, including movie animation and special effects, processing of satellite telemetry and interpretation of seismic geologic data for the oil and gas industry.
In fact, if you're willing to sit long enough, you can actually spot the company's name near the end of the credits for the animated feature "Anastasia." (Alas, there was no similar credit for its equipment used on the special effects for "Jurassic Park" and "Independence Day").
All of which leaves one nagging question: Given all the good news, how come those ingrates on Wall Street have bid Ciprico's stock down by more than 25 percent in the past seven months?
The answer could serve as an object lesson for any small company that suddenly finds itself basking in the warmth of unaccustomed investor approval: Even in a raging bull market, you can't afford to stumble even once.
In 1994, Ciprico introduced its RAID disk arrays, a collection of high-speed disk drives packaged with a proprietary software and hardware combination for use in processing and manipulating high-resolution images and graphics in full motion.
Long experience ÿ
The product line had been built on the company's long experience in data storage, involving 15 years of producing unique controller boards for computers going into engineering work stations. That market, however, had peaked and begun to slide, and the company was facing a change-or-else future.
When an effort to penetrate other controller-board markets was turned away by entrenched, lower-cost competition, Ciprico began developing the RAID line in 1989, introduced an early version in 1992 that was less than successful and finally brought the current line to market in 1994.
The Ciprico disk arrays quickly won the affection of such Hollywood notables as Industrial Light & Magic, the king of computer-generated special effects, and studios such as Sony Pictures and Warner Bros., all of which wound up as key customers.
The entertainment industry promptly became more than 40 percent of Ciprico's business, including a growing market for storage of TV graphics (ads, film clips, etc.) on interactive disk arrays rather than on traditional tape arrangements.
That set the stage for the tumbling stock price: Perhaps in reaction to the huge budgets attending recent movies, Hollywood orders for Ciprico products slowed dramatically late last year.
Then Silicon Graphics, which uses Ciprico disk arrays in its visual computing systems, stumbled with a recent product introduction, costing Ciprico both sales and some guilt-by-association problems on Wall Street.
The upshot: After growing at a 40 percent clip for four years, Ciprico's revenues slowed to a 15 percent gain in the last quarter of fiscal 1997 and declined by 15 percent in the first quarter of fiscal '98. Earnings fell 6 percent in the fourth quarter and 54 percent in the first.
"The other areas of the business were growing, but not fast enough to take up the slack," Kill said.
Whereupon the company's stock tumbled from a high of $18.37« on Sept. 23 to a low of $11.12« on Dec. 30. The price has bounced between $11.50 and $14.75 since then, closing Friday at $13.56¬ a share.
The slack was taken up a bit in the second quarter, however, the company reported last week: Sales for the second quarter ended March 31 rose 17 percent and earnings, although pinched by the company's continued investment in sales, marketing and engineering, increased 5 percent.
The improvement represented a whole lot of slack being taken up by the non-movie market segments, Kill said.
For example, sales into the oil and gas market quintupled in the first half of fiscal 1988, to $5 million or 28 percent of the total. That business actually was helped by Ciprico's partnership with Silicon Graphics, which has identified the petroleum industry as an important target.
Telemetry sales jump ÿ
Meanwhile, sales into the satellite telemetry market jumped 55 percent in the first half of fiscal 1998, to $6.7 million or 38 percent of the total. That market, involving the processing and playback of ultra high-resolution imagery captured in space, includes NASA, government defense agencies and a variety of scientific organizations keeping track of such things as the deterioration of rain forests.
Combine those growth trends with Ciprico's expectation that the movie production market will turn around late in fiscal 1998 and you can see why five of the seven securities analysts following the company are carrying at least a long-term buy recommendation on the company.
"The movie industry got ahead of itself" in signing up for Ciprico products before it had figured out how to make the most efficient use of it, said securities analyst Clinton Morrison of John G. Kinnard & Co.
"Ciprico is still the product they'll wind up buying, but they're taking more time before making the decision," said Morrison, one of the analysts with a long-term buy recommendation.
In the interim, he sees "significant opportunities" in the newer satellite, petroleum and TV markets, Morrison said. |
