<ITEC> ANALYST REPORT...does not include todays earnings
SEE: www.imagetechcorp.com formore info or call: Bruce Ahern at 619-613-1300 or the conf call today at 1pm PST: 415-904-7359
*********** ANALYST REVIEW OF ITEC ****** HIS PRICE TARGET $10 based on a PE of just 23
THIS IS *** NOT *** UPDATED WITH TODAY'S EARNING NUMBERS: FYI ONLY
IMAGING TECHNOLOGIES CORP. Johnny Svoren
RCR RATING: A
INDUSTRY: COMPUTER-COMPONENTS
EXCHANGE: NASDAQ
SYMBOL: ITEC
RECENT PRICE: $4 1/16
LONG-TERM TARGET: $10
TRAILING P/E: 15x
REPORT DATE: 2/24/98
1998-EPS EST. 1999-EPS EST.
Q1..... $0.06A Q1..... $0.10
Q2..... $0.08A Q2..... $0.10
Q3..... $0.08 Q3..... $0.11
Q4..... $0.11 Q4..... $0.12
Total.. $0.33 Total.. $0.43
COMPANY OVERVIEW: DIGITAL IMAGING
Imaging Technologies Corp. (Nasdaq: ITEC), through its
divisions, has established itself as an integrated provider
to the digital imaging market with a focus on printer
technologies, color and monochrome printer products, and
image storage products. PCPI Technologies is a developer of
laser-printer controller technologies and one of only four
authorized Adobe PostScript third-party codevelopers. It
negotiates contracts with leading manufacturers of printers
and imaging devices and is paid engineering fees for the
custom development of a controller solution. When the
products go to volume production, PCPI either sells
controller boards or receives a royalty stream based on unit
sales volume.
NewGen Imaging Systems (NewGen), acquired in February 1997,
develops and markets monochrome and color proofing devices,
color servers, digital imagesetters, and related software
solutions for the prepress and publishing markets. NewGen
has a network of manufacturers' representatives,
distributors, OEM's and dealers in more than 90 countries.
ITEC's newly acquired Digital Storage Products Division
manufactures digital memory products, while ITEC's
distribution subsidiary, Prima International, is a value-
added provider of digital imaging products. Newly acquired
Color Solutions provides color management software.
CURRENT STATUS: PRODUCT LINES STRENGTHENED THROUGH ACQUISITIONS
2Q98 Meets Estimates:
ITEC's earnings for 2Q98 more than tripled to $1.1 million,
or $0.08 per share, compared with $293,000, or $0.03 per
share, in the same period last year. Total revenues grew 30%
to $9.8 million. We estimate revenues from existing
operations grew 20%, versus our estimates of 15%, while the
remainder resulted from two acquisitions. Color Solutions,
Inc. was merged into a wholly owned subsidiary of ITEC
effective November 30, 1997. It was accounted for as a
pooling-of-interest transaction, which means historical
operations have been consolidated with ITEC's. McMican
Corporation (doing business as New Media Memory) was
acquired in a purchase transaction, effective November 24,
1997, and contributed only one month of revenues to 2Q98.
Gross margins, which tend to fluctuate substantially based
on the product mix, decreased in 2Q98 due to the end-of-life
sell-out of NewGen products as well as increased shipments
of lower-margin consumables. This was more than offset by
reductions in operating costs resulting from consolidation
of sales and marketing efforts within its subsidiaries as
well as by reduced use of outside consultants, which were
used in the early stages of developing new printer
controllers.
Complementary Acquisitions:
Color Solutions is a rapidly growing provider of automated
software tools with its ColorBlind software for color
management. Its annualized revenues approximate $2.5
million, with earnings around break-even. ITEC issued
850,000 new shares for all the shares of Color Solutions.
New Media Memory is a manufacturer of digital memory
products for handheld personal computers, digital cameras
and printers. It will operate as the Digital Storage
Products Division of ITEC. Annualized revenues approximate
$3-$3.5 million with net income of a few hundred thousand.
The revenue run rate is likely to grow to $4-$4.5 million
for calendar 1998. ITEC paid for the acquisition with
200,000 shares of common stock.
*N.B.-Excludes all nonrecurring, extraordinary items in
FY93, FY94, FY95, FY96 and FY97. Adjusted for a 1-for-5
reverse stock split that was effective February 25, 1997.
Numbers prior to FY97 are not adjusted for the pooling
merger with Color Solutions.
FUTURE PROSPECTS: LARGE SYNERGIES IN INTEGRATED SOLUTIONS
Sound Positioning Strategy:
Through its three acquisitions, ITEC has established a broad
and differentiated focus on the large and rapidly expanding
digital imaging industry, which encompasses three large
market segments. First, it has established a strong position
with its core printer technologies. It is just starting to
reap the rewards of the new printer controller designs it
has developed as large printer, copier and multifunction
product developers increasingly outsource this work because
of their need to accelerate time to market for new products.
ITEC does not disclose many details on the potential royalty
stream from these products because of confidentiality
agreements and uncertainties surrounding the timing of
product shipments by its OEM partners; however, we know MITA
demonstrated a multifunction product with a PCPI controller
at the November Comdex and ITEC has started to ship beta
controller boards for the product. This contract alone is
expected to generate $18 million in controller board
revenues over 30 months. ITEC's second focus is on the high
end, $7.2 billion segment of the color printing market.
Leveraging off its printer technologies, NewGen recently
started selling its first, higher-margin products that
incorporate PCPI controller solutions. A third focus is on
image storage products where ITEC has primarily distributed
third party products, but it is now introducing its own
higher-margin proprietary products through Prima's extensive
distribution channels.
Software Brings Added Value:
The purchase of Color Solutions represents a smart strategic
move that should allow ITEC to further differentiate its
products in all three target market segments by
incorporating value-added software. Based on ICC color
standards, ColorBlind solves a large problem in the digital
imaging marketplace by allowing for improved reproduction of
color images by peripherals such as scanners, monitors,
digital cameras, printers, and copiers. It therefore
represents large revenue potential from direct sales as well
as from the future integration into ITEC's entire product
solution. The ICC standard will be adapted by Microsoft
Windows '98, which we believe will further accelerate the
growth potential for ColorBlind.
INVESTMENT CONCLUSION: LARGE BUT UNRECOGNIZED POTENTIAL
ITEC has met or exceeded our estimates with strong EPS
growth over the last two quarters, but the stock has been
pressured because larger players in the digital imaging
market have reported large shortfalls. The completion of
product transitions for each of its target market segments,
combined with the integration of acquired products and
technologies, should further accelerate revenue growth. New
proprietary products should allow for gross margins to
return to higher levels, while integration of acquired
subsidiaries should reduce operating cost as a percentage of
sales. We have raised revenue targets due to recent
acquisitions and have maintained EPS estimates, but with an
increased potential for upside surprises. In recent days,
ITEC shares have endured fierce downward pressure, which
increases the dilutionary effect of the preferred stock
financing entered into last August. Even at this depressed
price, the dilutionary effect is nominal. Our model
incorporates generous (conservative) compensation for this
potential dilution. We believe the stock is priced at an
attractive discount, trading at 13x FY98 estimates and 10x
FY99 estimates, a fraction of its earnings growth-rate. We
are maintaining our "A" rating, but have moderated (to
compensate for potential dilution) our 12-month target to
$10 based on a 23x P/E multiple of the $0.43 projected EPS
for FY99.
The Red Chip Review (tm)
Copyright 1998 Crown Point Publishing, Inc.
1099 SW Columbia ST.350, Portland OR 97201
Phone: (503) 241-1265 Fax: (503) 241-5067
Toll Free: 800-838-9248 (in the U.S.)
redchip.com
Information is obtained from sources believed to be
reliable, but its accuracy and completeness are not
guaranteed.
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