BAD NEWS ON SYQUEST "THE MOTLEY FOOL"
SYQUEST TECHNOLOGY (NASDAQ: SYQT) IS A Fremont, California-based
maker of removable storage devices
whose EZ-135 drive has been pushed as a legitimate competitor to Iomega's
(NASDAQ: IOMG) Zip drive. Many who view
themselves as latecomers to the "Iomega Party" are clambering onto the shares as a
way to play on the success of removable
storage in a way that they believe might have been overlooked by the Street. In an
ironic, reverse parody of what has come to
be known as the "Iomega Story", SyQuest surged $2 1/8 to $11 5/8 after a similar rise
yesterday merely on unschooled talk in
print, on the phone and online that somehow the EZ-135 is a good product.
THE CORE OF THE IOMEGA STORY was consumer research. People who
bought the Zip drive and found it to be an
excellent product started to look over Fooldom's most famous stock early in 1995 and
began to debate the relative merits. The
most common comment about SyQuest? Shoddy products that many were forced to
buy because they had no real alternative.
Specific comments about the EZ-135? In the words of one Washington-based radio
commentator, "it sucks". Tune into the
message board and you will see a litany of complaints about the product that is causing
investors to jump in today.
CAUGHT WITH ITS PANTS DOWN LATE LAST YEAR by the rapid consumer
adoption of the Zip, SyQuest managed to
squeeze out the EZ-135 after a few hasty weeks of development. The company's
research and development department
essentially slapped a hard-drive into a plastic case and called it removable storage.
SyQuest EZ-135 disks are very fragile as a
result, much like your hard-drive. The slightest bump or speck of dust could render the
entire back-up worthless, negating the
very reason why many users buy removable storage devices in the first place.
SYQUEST IS A COMPANY IN SERIOUS FINANCIAL TROUBLE. In the last
reported quarter, the company had a net
loss of $51.1 million on revenues of $47.4 million. Revenues decreased from the same
period a year ago by a whopping 38%.
Ponder all that for a moment. SyQuest essentially lost more money than they had in
revenues because they were selling the
EZ-135 at a loss in order to be able to compete with Iomega. And even that did not
enable them to compete very well.
CASH-FLOW CRUNCH IS A' COMING. The company clearly stated that they did
not expect a return to profitability in the
next quarter, even after they slashed 1500 people from the payroll. Despite the
train-wreck on the profit and loss statement,
SyQuest's sales, general and administrative expenses *increased* 32.6% in the quarter
to a whopping 30.2% of net revenues.
The company has been forced to retain Needham and Company to assist it in
evaluating a debt or equity offering to fund itself.
Major suppliers are willing to make payment arrangements that convert debt to equity,
but this will dilute the current
shareholders' stake. Cash decreased to $7 million in the quarter from $27 million in the
prior period, while inventories exploded
by 20%. Accounts payable blossomed by almost 100%, leaving the company with
negative working capital.
LET'S BE CLEAR ABOUT THE DIRE FINANCIAL SITUATION. Last quarter's
problems wiped out all accumulated
shareholder's equity. The company has no book value, showing a deficit of $1.5 million
after the disaster that was Q2. And Q3
apparently is not going to be much better. Negative working capital, dwindling cash
reserves, product piling up in the
company's inventories, massive accounts payable that could be converted into equity,
diluting the value of current shareholders
-- this is a major disaster in the making here.
WHY ARE INVESTORS JUMPING IN? In the mindless search for the "next"
whatever, it appears a substantial group of
investors have latched on to SyQuest as the Great White Speculation for their
portfolio. From a Foolish fundamental
perspective, it looks like an enormous mistake. UnFoolish investors scanning the
markets with a mind toward opportunities lost
and not the new opportunities to be had tend to jump on "also-rans" -- the companies
that seem to be in the business of a
winning stock. These companies tend to be disasters, as Peter Lynch has aptly noted in
his first two books on investing. Fools
would be well advised to take that advice to heart when examining the shares.
ANOTHER FOOLISH THING |
