Some comments concerning Q2 FY99.
1. It seems like the trendy thing to do is claim an off quarter after a string of brilliantly successful ones, and the market will LOVE you, which is ironic and almost comic ... except that it involves our money.
2. Mr. Poe has given us a VERY good indicator of what he considers necessary to grow the company in line with expectations. He stated the objective is to secure new design wins (solid commtiments) each fiscal quarter that provide an annual revenue stream equal to the total revenue for the quarter in which the design wins are secured.
In other words, if SMTC's revenue for Q2 is say $25M, then the company would like to see new design wins secured in the same quarter that produce annual revenue of $25M. That will allow each successful campaign of design wins to grow and build onto the existing revenue stream.
3. A question in the cc directed to Mr. Poe regarding design talent, and the direct payoff that seems to be taking place now as a result of hirings going back two years was very enlightening. He noted that more and more SMTC designs are being passed the first time through, which means the solution WORKS as needed by the end customer. That is very enlightening in that it suggests SMTC DOES have top notch talent, and that they ARE capable of solving the very tough problems. This is the stuff of becoming a critical solutions provider, and commanding hign margins for products and services.
He also commented that the engineers are beginning to understand each other better, getting to know how they operate and inter-operate amongst themselves. There has been no attrition in ranks, so the group still beleives in the mission they were hired for. Also, all of this design activity has produced more standard cells, which are building blocks for design work. Just as a programmer reaches into a library of routines, an electrical design engineer reaches for standard cells.
It is also important to note that SMTC has applied for 4 patents for the past quarter, an indication that the technology once again will most likely be proprietary (read high margin) products. Does anyone have a problem with this? Yes, competitors do, and this is just the beginning of the cycle. A majority of R&D spending is being focused on the new South Hampton and Raleigh, NC facilities. There must be something to Raleigh, can anyone shed some light on what kind of growth is going on in that geographical part of the country?
4. Turns business. I'm not sure how you want to interpret this, but turns business was 22% of total business for the quarter, as compared to an average 30-35%. I tend to like that figure for these reasons. First, despite turns business accounting for only 22% of revenue (and turns business is becoming a very important and realistic part of the industry), SMTC was able to make a profit, especially if you look past the one-time charge made in the quarter. Second, turns business is like a hidden jewel, it can quickly become 40% of revenues, and since the other portion to a certain extent remains fixed, it usually is a GOOD suprise. That really tends to limit downside risk, while providing a lot of room for upside potential, especially when the current turns business is below the average.
It very well may be that in order to monitor a company such as SMTC, and decide how the stock price may react to business news, will be to to measure current revenue generated by turns business compared to the average turns business per quarter. For instance, if turns business is on average 35% of business, and current turns business for the quarter is 20%, there is a better chance that business will pick up in the future. If current turns business were 50% of total revenue, then a slowing of turns business (hence overall revenue) may be forthcoming. Just a thought!
5. I'm really happy the way they worked the charge into this quarter, rather than letting it linger. The best is yet to come now, since the hard work of accomplising this is behind the company for the most part now.
6. Communications will remain strong. Revenue by category was communications - 18%, computers - 43%, industrial and ATE - 21%, the remainder in foundry, legecy, and other areas. Acapella has not kicked in yet, and many design wins secured almost a year ago are beginning to be called for production only now. That means that solid designs already finalized are just waiting to be put into production, the costly design phase already complete. I consider this analogous to potential energy, it is stored and ready to provide work (cash) at little or no future expense. Like little goodies saved for some rainy day :o)
7. The new 1144 family of power management devices (thats the 4 phase 8MHz controller you were stoked about Sword) is being very well received by many customers. That should bode very well for the future, it's on it's way to the patent office. Oh by the way, the thing provides an excellent potential for higher gross margins, darn it.
8. Turns business (again). All larger OEM accounts will eventually provide more even bookings and shipments within each quarter within an individual quarter. AS such, book-to-bill ratios should become fixed at 1:1 for these accounts, and variations within other accounts becoming the deciding factor on the current bokk-to-bill ratio.
9. The new power management product that was co-developed with DELL makes sense for OEM's to use, since it allows many expensice capacitors to be eliminated from the design. I now know that capacitors are expensive at 60 to 70 cents each, so SMTC can save an OEM many dollars on each board manufactured. This is sure to draw both a large demand, and command a high margin since it saves money when used. That's EAXCTLY the kind of product top notch design engineers provide, and EXACTLY why I like what SMTC has done in hiring them. That has been a consistent part of the company's plans for some time now, the best has only BEGUN to become clear now.
10. Because SMTC acquired Acapella in a pooling of interest, SMTC has been denied the opportunity to buy back any shares until October. That very well may change, since share prices are undervalued with respect to long-term valuation models, and SMTC appears to have hinted that the business model will strongly consider a consistent policy of purchasing equity. In english, I think that means SMTC may be purchasing back shares in the future.
Regards, JB
P.S. Send $5 to that 22 year old greenskeeper who unselfishly gave back the ball to Mark McGwire. He could have been a lot richer than most of us right now, but chose to operate on a higher level. That gesture is as American as Big Mac's 62nd, and in a way probably even more so. |
