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Technology Stocks : ACTM $100 Million Cable Modem Contract with MOT -- Ignore unavailable to you. Want to Upgrade?

To: j rector who wrote (259)	10/22/1997 7:25:00 PM
From: Rob Preuss	Read Replies (4) \| Respond to of 1250

I just got off the conference call and then found the press release on my fax machine. I haven't found any on-line news reports yet. The fax I have quotes Pino as saying: "We expect to return to a profitable level of operations in the fourth quarter of 1997 and to historical levels of profitability in 1998. We are continuing our strategy of diversification of customers, markets, and geography and remain excited about the future and look forward to the continued addition of new customers as well as the expansion of business with our existing customers." The conference call basically echoed these sentiments. Some notes (hopefully I got the info right): + The top five customers accounted for about 75% of revenue in Q3. (Bay Networks, EMC, Cognix, Cascade/Ascend, and Motorola) + The top customer, Bay Networks, accounted for about 40% of Q3 revenue. EMC accounted for over 10% of Q3 revenue. No other customer individually accounted for more than 10% of Q3 revenue. + Despite this concentration in terms of customers, they have a broad product mix; this broad product mix means they have a significant focus on materials acquisition and partnerships with many "distributors" (aka suppliers). + No customers were unhappy because of the delay in shipping $10M worth of orders; the great majority of those orders have now been shipped. + Part of the delay in shipment was due to differences in forecasting the mix of products (a different mix requiring different materials) and because the orders came late in the quarter. + ACTM uses a significant "temp" workforce that grows and shrinks with the ebb & flow of their orders. As they finished shipping the recent $10M in orders, and order processing has returned to more normal levels, they reduced their workforce by about 120 full time temp workers... they anticipate adding many temp workers again toward the end of Q4. + 1997 revenues are expected to be around $265-275M with a growth rate of about 30% thereafter. Gross margins are expected to return to the 12% level and SG&A expense is expected to return to around 4% of sales. + One question noted that this means about $66M in revenues is expected for Q4 and, with the $10M in delayed orders, why isn't this $10M higher? The response was essentially to say that its not clear they could work off their order flow at a significantly faster rate in Q4 (so they're near full capacity?) and to imply that they'd be more comfortable with a forecast that was too low than one that was too high... they said the $10M is "not necessarily additive" to Q4 revenues. + The "softness" in orders seems to be related to Motorola and to Cascade/Ascend. Motorola has been one of their biggest customers; they indicated that there is no problem with their relationship with Motorola and that they expect orders from them to return to a higher level (commensurate with Q2CY97) by Q1CY98. For Cascade they're building new products related to ATM technology; they indicated Cascade needed to burn off inventory they'd built up but they expect orders to return to a higher level by Q1CY98. + They summarized by saying they're back on course, that they will see growth from their existing customers, and that they expect to see growth and diversification by from new customers. In general they painted a pretty decent picture of the future and gave the impression that their current problems were temporary... a brief, one-time, stumble and not a sustained problem or downturn. The new Atlanta operations were said to be moving along well toward the 30% growth range in the high margin medical products area. The new Ireland operations are coming along more slowly but are quite promising and are expected to contribute about $20-25M to revenue in CY98. The biggest items on the balance sheets were: LIABILITIES stockholders equity $59M (about $6.50/sh) accounts payable $34M long term debt $37M ASSETS accounts receivable $49M inventory $61M Most notable in the Q3 operations was: + flat sales revenue ($62.3M) vs year ago ($63.9M), + higher cost of goods ($58.9M) vs year ago ($55.8M), + higher SG&A ($3.9M) vs year ago ($2.7M), + for an operating loss ($0.5M) vs year ago gain ($5.4M). Thus they were hit by lower margins of around 5% (vs year ago margins of around 12.5%) along with higher SG&A of around 6% of sales (vs 4% of sales a year ago). The reasons were due to a temporary change in the product mix to lower margin products and due to temporary softness in demand, respectively. Remarks: Lets see. If CY97 revenue is $270M and we saw only 25% growth then CY98 revenue would be about $340M; with a gross margin of 11% we'd see CY98 gross profit over $37M and with SG&A at 5% (or $17M) we'd see a CY98 operating income of $20M and a net income in the vicinity of $12M or $1.33/sh. Assuming ACTM is worth at least a forward PE of 25 means we should be fairly valued around $35/sh or about twice the current market price. Rob