I apologize for the delay . . .
The conference call was extremely upbeat.
1) The $0.14 reported beat analysts expectations by 17% (not to mention growing 30% YOY). I am estimating that VARL could have reported as much as ~$0.03 higher if the India sanctions had been resolved during the quarter. You may recall that our government has halted exports to India due to nuke testing. This has held VARL's revenues down for two quarters now (thus a total overhang of around $0.03). Management was upbeat about the situation being resolved.
2) VARL's Gross Margin continues to impress. During the first quarter it was 55.5%. For the first time, Management did not seek to reduce analysts assumptions for future quarterly gross margin to ~49%. Instead, they said that they were comfortable with ~55% assumptions for the next few quarters. The only caveat thrown in was that WHEN the handset orders roll in, gross margins should recede a bit (this is understandable – the volume will more than make up for the margin compression from pricing issues with very large orders). They said that they have even been amazed with the efficiencies of the new production lines.
3) Their core base station business was very strong. Apparently, VARL continues to gain quote wins in new base station generations (indicating that existing customers are very pleased with past product). Of interest, on an annual basis VARL enters into ‘Global Supply Agreements' with the likes of MOT, NOKA and ERICY. As of the end of the quarter, one of these three had drawn down most of its Global agreement. This is significant because these agreements are meant to be drawn down OVER THE ENTIRE YEAR. Also, it was indicated that MOT and NOKA were well on their way to drawing down their agreements.
4) Military Aerospace is roaring ahead. This caught several of us off guard. The business has been slipping for the past few years due to the US government (READ CLINTON) slashing military budgets. However, as indicated in the news release VARL experienced a 43% surge in firm orders during the quarter. Importantly, these firm orders did not even come from the US government. This is important because all of the advanced weaponry that has been used against Iraq and the Serbs has VARL's components in them for targeting and communications. As you may have heard, our stock piles are rapidly being depleted . . . we should see VARL get some new orders for these military applications later in the year (3rd to 4th quarters). This is exciting because per unit pricing for military applications is ~$1,600, While handset VCOs are around ~$2.
5) Quoting activity (a favored gage of interest and business climate) is also roaring. Management stated that quoting activity for handset ‘million piece' (this denotes high volume) orders have rocketed 400% to 500% over the same period last year. No less that 8 companies have quotes out to VARL at this level. I believe that it is just a matter of time before VARL hauls down one of these monsters. I have been assured that timely capacity expansion will not be a problem down the road. Think in these terms . . . 220 million handsets will be produced in 1999 alone. Each handset needs 2 VCOs. That makes ~440,000 VCOs to meet demand. If VARL gets just 2.5% of this market, they will double their entire top line revenues (assuming ~$1.625 paid per VCO – this is a very low estimate). Due to their technological advantages for higher bandwidth applications VARL would have to fall all over themselves not to get business.
6) Some tantalizing folks ended up on this call:
Oppenheimer – could indicate large institutional following
Heartland Mutual Funds – they have a number of small cap funds.
Lord Abbott – they have a microcap fund that has been sniffing around for some time.
This should make things interesting . . . no guarantees though
7) Management stated that Pricing across all segments has not been a problem. VARL continues to enjoy pricing above that of their competitors. It appears that the markets continue to believe that the superior attributes of VARL's products are worth a premium.
8) CHINA! Management says they are near to finalizing a distribution agreement with a subsidiary of the Chinese government. This will allow VARL to seamlessly provide product to other companies operating in China. The President of VARL has been invited to lunch with the Chinese Premier (and his entourage). All of this is important because as of this writing, if a Chinese company or a Chinese joint venture provides telecommunication components (such as VARL's) and you want to produce base stations and such in China, the government will force businesses to purchase from the local company. It appears that VARL will be a beneficiary of this ‘rule'.
9) VARL's market cap is only ~$40MM. The base station market alone is $715MM (estimated very conservatively) |
