To the Bow Wows:
There is so much confusion on this thread about IDT and its business prospects, I can't take it any more. Someone has to set the record straight and I guess it has to be me. So here we go.
1) Long-term Outlook: Please read the latest annual report and talk with IDT management for a clear definition of IDT's business strategy. In summary they are targeting the communication sectors of high technology as their areas of primary focus. This segment offers huge growth potential (30% to 50% per year) and it is this segment where IDT can best leverage its competitive advantages (technology leadership, strong customer relationships and the ability to integrate functionality across their product lines including microprocessor, logic and memory on a single chip). This area is also best suited for the development of proprietary technologies which offer higher gross margins. The PC, workstation, office automation and distributed computing segments will supplement this communications focus, but will clearly be "second tier" opportunities, since these segments are being increasingly relegated to commodity status and the growth rate is slowing. A final key element of this strategy is to continue to diversify by developing new product segments such as ATM products, specialty DRAM products (based on fusion technology) and other new product categories that have yet to be announced. They want to be the leaders in the development of these new product areas, so they can set the standards and dominate these niches much like they do the specialty memory and high speed logic areas. Again these are areas where IDT's core strengths can be leveraged to develop a broader portfolio of proprietary products.
Anyone who has spent any time at all in trying to understand this company as an investment opportunity should realize that this is NOT a commodity chip company (like MU, ISSI or ALSC). They have exposure to commodity businesses, but a substantial majority of their business is proprietary in nature and that is also the focus of their new product development efforts which are substantial. This will become apparent when people start to see just how strong bookings are currently, even though commodity SRAM pricing is still at all time lows (the movement by IDT's end customers from carrying 20 weeks of inventory in 1995 to only 1 to 4 weeks currently is the thing that hurt IDT sales the most in 1996, now that orders are matched with true end customer demand, they will return to 1995 levels very quickly). So please lets not talk about PC cache anymore, Intel is not what is going to make IDT. Sure, if there is a surge in this business they will take it, but they are not going to have this segment determine their future. Web TV isn't the answer either, its a one-percenter. It will likely have a limited future, but it does have one huge benefit...advertising. It is a highly visible form of advertising for IDT because it emphasizes the position of IDT's microprocessor portfolio by highlighting superior performance at an aggressive price. Instead lets focus the discussion on how they can leverage their existing strong communications products (specialty memory, microprocessors, logic and specialty SRAM like ZBT) combined with the introduction of new products in new product categories that also serve the communications market. These are the things that will determine the success of IDT. This will become increasingly apparent as a steady flow of new products is introduced over the next 1 to 6 months.
2) Near term outlook -
First the facts:
Dec Qtr sales 131M
Dec Qtr book-to-bill >1.1 to 1 (per conference call)
Dec Qtr orders >= $145M (derived from above)
Mar Qtr Sales estimates (per ANALYSTS) $137 to 145M
Mar Qtr EPS estimates (per ANALYSTS) -0.10 to 0.00
IDT company comments on these estimates; "we are comfortable with this range"
IDT comments on Mar orders: "orders continue to strengthen versus Dec Qtr and are generally up month-to-month for six straight months"
Personal interpretation of these facts (possibly over optimistic):
Assuming that the "orders continue to strengthen versus Dec QTR" quote translates into 10% growth in sales and 15% growth in orders in Mar qtr versus Dec qtr would, in turn, result in about 145M in sales and 167M in orders which is high end of analyst estimates. The key piece of information coming from the April earnings announcement will not be sales levels, but what happened to orders and backlog. Growing backlog is a sign of increasing strength because as backlog grows, order lead-time is likely increasing as well which implies the beginning of a shift from a customer controlled environment (as in 1996) to a more balanced environment and eventually (2+ years) to a supplier controlled environment (as in 1995). It also allows IDT to manage revenue and earnings growth in future quarters because they can add to or reduce backlog to meet earnings and revenue targets. In addition, it provides greater visibility into future quarters so they can speak more confidently and openly about future expectations. For example, I think IDT could have broken-even last quarter (before one time charges) if they would have simply shipped all the orders they received. They chose not to do this because, given normal seasonal weakness in Jan to march, they may have had a reduction in revenue in the march quarter if orders didn't continue at these solid levels. By putting 15M in backlog, they ensured themselves of revenue and profit growth in the current quarter. I think they will do the same thing this quarter, to ensure consistent growth next quarter (which is why my revenue projections may be too optimistic, but if bookings are there that is the key). As a result, if book-to-bill is still high in the current quarter (i.e. backlog is again increasing) we know that sales growth will follow. When lead-times are this short, orders almost certainly translate into shipments. If order levels are approaching $170M before the impact of any new products, watch out $700M in revenues in their fiscal 98 could be possible and the stock price will move very quickly as people finally understand that this is not a commodity SRAM company.
Remember two things when looking at current earnings performance:
1) IDT is spending 2.5 times the industry average in R&D and nearly twice as much as Cypress (a reasonable benchmark). This can only have a positive implication on earnings in the long-run. Either this spending will result in the introduction of new products /configurations which will grow revenue substantially above the industry average or should the new products fail IDT can reduce R&D to be more in balance with revenues and current industry norms which would immediately improve profitability (if IDT spent at Cypress levels, they would have earned 0.11 in Dec qtr even with all of their excess capacity).
2) IDT has significant excess capacity which represents state of the art technology. Assuming we are back in a revenue uptrend, this offers significant earnings leverage moving forward as a large percent of sales increases will fall to the bottom line.
What does all this mean? For me it means each investor needs to focus on getting the facts and then interpret those facts in a reasonable way. When you see data posted on this or any other message board don't take it at face value (including this post). 90% of what is posted here is either purposefully misleading or flat out wrong. Trust no one but yourself, and always verify the information with more than one source. And yes sometimes you can even get conflicting information from within IDT, that's the way life works (how many times have you asked the same question to your significant other and gotten different answers). It stresses the importance of seeking multiple sources or asking the same question in a different way. Good information is not easy to get, you have to be willing to work for it. However, I do think this is one of the biggest opportunity areas for IDT, they have to improve their communications to the investment community. Currently, Brian Bosserier has both treasurer and investor relations responsibilities. Anyone in the financial field knows that each of these areas of responsibility are full time jobs by themselves and when push comes to shove the operating priorities (i.e. treasury responsibilities) will always win out and that's why Brian is so difficult to track down. As a result of these time limitations IDT tries to target their messages through the analyst community. This has two short comings 1) at times like this (when profit is low and speed of recovery is uncertain) the analysts don't spend any time on IDT, they have too many other companies to follow and they would rather focus their attention on companies with strong very near term momentum. They certainly are not going to work to get the best information on IDT or spend any effort promoting the long-term value of the company. 2) All the news comes out at one time (usually the conference call and sometimes at analyst conferences). This makes the underlying stock more volatile, reacting sharply to this dumping of information and between "dumps" people have no data so they speculate (as is often the case on this thread) on what might be happening which only adds to the volatility. If IDT had a more disciplined approach for communicating with the investment community on a more ongoing basis, a clearer more consistent message would result which in turn would reduce volatility (to the extent it can be reduced in a highly volatile industry) and ensure the point in time stock price is more representative of long-term value (ex. Cypress should NEVER be trading at a 40% premium to IDT, if anything it should be the other way around). As an investor I would certainly be willing to invest 1/10th of a penny per share per year behind a dedicated investor relations director who could focus all his or her energies on marketing IDT's strengths to the broader investment community (i.e. not just the analysts). For the record, this is not a reflection on Brian at all, in my opinion he is one of the most knowledgeable, insightful and straightforward people I have talked with in this industry, he just doesn't have the time to do two jobs.
3) investment implications - Our decision is to take these facts and our personal interpretation of them and answer three simple questions:
a) Is the strategy sound
b) Can IDT execute against it
c) Are current prices attractive and trending positively
Continued on next post |
