This is from Individual Investors website. www.iionline.com. they also publis the Special Situation reports that recommended Romtech.
Romtech: More than an Internet Play (1/21)
Individual Investor Online Analysis
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Analyst: Glenn Curtis 1/21/99
With just over $10 million in sales over the past 12 months and a market capitalization of just over $21 million, it's easy to overlook microcap Romtech (NASDAQ: ROMT). But a closer look at its operations reveals a host of catalysts which could soon propel the shares northward.
RomTech makes personal computer software for entertainment and home-office applications such as clip art, fonts, etc. Most of the company's products sell for under $15--a very attractive price point for PC users.
The company distributes roughly 85% of its 60 software titles through Slash Corp., a division of GT Interactive Software Corporation. Slash, in turn, then sells the software to a variety of office products, software, and discount stores nationwide.
Retailers that stock RomTech's products include Best Buy (NYSE: BBY), Comp USA (NYSE: CPU), Target, K-Mart (NYSE: KM) and Wal-Mart Stores (NYSE: WMT). As computer hardware prices drop, Romtech execs expect software prices to follow suit.
The company isn't looking to offer hundreds of titles just for the sake of having a large roster of products. Instead, it will "maintain the present number of titles, and retain only the top selling, highly regarded products," says CEO Gerald Klein. The company plans to shed 20 or 30 lagging titles every year and replace them with new ones to keep the pipeline of products fresh.
Intriguingly, the company has begun to record sales over the Internet via its website (www.romt.com). According to management, internet sales are approaching $400 per day. A modest figure to be sure. But a just-inked agreement with Digital River Corp. (NASDAQ: DRIV), a supplier of software delivery on the Internet, should boost web sales sharply. As Internet revenue becomes a larger percentage of total revenue, margins should increase markedly.
That's not all. Management plans to eventually begin marketing directly to some of the larger retailers such as Best Buy, Comp USA, Target, K-Mart, and Wal-Mart. The potential of this channel of distribution is huge. Since these large retailers often order in high volume, direct sales may be the best route for the company in the long run.
Management appears convinced of its growth strategy as it retains 30% of the outstanding shares. Even so, insiders have been steadily purchasing stock since July. In fact since the end of the summer alone insiders have purchased 96,100 shares at prices ranging from $1.41 to $1.94 per share. The stock closed Wednesday at $2.50.
This type of insider activity gives management a tremendous incentive to unlock shareholder value. Also, the company has begun to repurchase some of the $1 million worth of stock that the board authorized it to buy. So far, the company repurchased well less than one-half of the targeted amount.
Management has openly stated that it intends to grow revenue by 50% (from $9.2 million to roughly $13 million) in fiscal (June) 1999 and double earnings (from $0.12 per share to $0.24 per share). At present they are on track to achieve their goals.
In the first quarter ending September 1999 the company grew revenues by 63% to $2.5 million. It also earned $0.04 per share, quadruple what it reported in the same period last year.
For the full year ending June 2000 management has targeted $20 million in revenue and earnings in excess of $0.40 per share. However, this growth is predicated upon a few factors.
First, and foremost Romtech must continue to expand sales on the Internet. Also the company must continue to maintain an excellent relationship with its distributor, Slash.
At the same time, the company must be able to execute its goal of establishing deals to sell its products through large retailers, like the ones already mentioned. Orders from retailers are often sizeable and could lead to accelerated growth rates should the company obtain an agreement with even just one.
Finally, the company must continue to kick off solid cash flow from operations. In the September quarter the company generated $179,474 in cash flow from operations. During this same period the company reported roughly $1 million in the bank. What's more, in the next two months the company is likely to secure a much-needed line of credit.
Bottom Line:
Although the market cap and overall size of this company is a stumbling block for a few, the opportunities are sizeable for this company going forward if management is able to execute its gameplan.
Tell us what you think in ROMT's Board.
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