Vtel Offers Growth Prospects
Once It Finishes Transition
By JONATHAN WEIL
Staff Reporter of THE WALL STREET JOURNAL
In the five months since Vtel bought Compression Labs, investors have
taken a wait-and-see attitude toward the Austin company. But the wait
might soon be over.
By acquiring its chief competitor, Vtel became the world's second-largest
manufacturer of videoconferencing equipment, more than doubling its
customer base and securing a 25% share of a market estimated to be
growing about 20% a year.
Vtel Corp.
Business: Videoconference equipment
Fiscal year
(July 31)
1997
1996-a
Revenue
$191,023,000
...
Net income
-52,054,000
...
Per-share earnings:-b
-2.45
...
Fourth quarter
Per-share earnings:-b
-1.56
...
Trailing P/E: N/A
Dividend yield: Nil
a-figures not comparable because the company changed its fiscal year end
to July 31 from Dec. 31 and restated previous financial results.
b-Includes per-share losses from discontinued operations of four cents for
the fourth quarter and 35 cents for the year.
The company is still in the midst of a transition. Vtel reported a loss for the
year ended July as it digested the acquisition. But, thanks to the acquisition,
Vtel is essentially the only game in town at the high end of the market with
its personal-computer-based systems. Once it finishes phasing out
Compression Labs' products, which command lower margins than Vtel's,
and establishes its videoconferencing lines with the newly gained clientele,
the company will begin to report strong earnings and command a higher
share price, analysts say.
In the meantime, the stock is cheap. At $7.38 apiece, the shares are 38.5%
below their 52-week high of $12 in November 1996.
"You should buy now," says Jeffrey Dabbs, an analyst at Arneson
Kercheville & Associates in San Antonio, "because once you start to see
those earnings, it's going to be too late."
Mining the High End
The vast majority of Vtel's PC systems range in price from $25,000 to
$50,000. They feature built-in teleconferencing capabilities that allow users
not only to see and speak to each other, but also to exchange documents
and use computer-generated visual aides during their conversations.
(By comparison, most of the videoconferencing equipment sold by
PictureTel, of Andover, Mass., which has a market share of about 40%, is
in the $10,000 to $15,000 range but can't be integrated with PCs without
using external devices.)
Vtel has room to grow. Analysts estimate that fewer than 5% of the 2.5
million conference rooms in the industrialized world have videoconferencing.
Other growing markets include distance learning, which allows students to
interact with teachers outside their geographic areas, and telemedicine,
which allows patients to consult with far-away doctors.
Meanwhile, the company is making forays into more-affordable products.
Under an agreement announced last month with Gateway 2000 -- the Sioux
City, N.D., direct marketer of PCs -- Vtel will begin selling a conferencing
product called WorkGroup 500. The system, priced at $10,000 to
$15,000, will be aimed at small businesses.
Of course, the big concern for investors right now is integrating
Compression Labs. For the fiscal year ended July 31, the combined
companies reported revenue of $191 million and losses of $2.45 a share,
which includes $1.78 in merger charges and losses from discontinued
operations.
Vtel has warned analysts to expect revenue to remain flat for the fiscal first
quarter ended Oct. 31, compared with the prior quarter. And analysts
expect losses of three cents a share, according to First Call.
Still, analysts and the company agree that earnings and revenue will pick up
once Vtel completes the transition and phases out Compression Labs'
products.
Vtel projects that in the first 12 months after the transition, it will generate
$240 million to $260 million in revenue, and 60 cents to $1 a share in
earnings.
A Matter of Time
Just when the transition will end and the growth will begin is the question.
Vtel says it should be up to full speed by the end of April. But Arneson
Kercheville's Mr. Dabbs says the company is being too conservative with its
timeline.
He expects the transition to be completed by the end of January and
anticipates the company will at least hit the lower target of 60 cents a share
in earnings for the following 12-month period. Based on his expectation that
the company should trade at 20 times earnings, that translates into at least a
$12 stock by January 1999.
Mr. Dabbs notes that Vtel has already shut down manufacturing at
Compression Labs' San Jose plant. It also cut the combined companies'
payroll to 700, from 900. In addition, the company ended its last fiscal year
with $25 million in cash and virtually no debt. And because it has another
$25 million in tax-loss carry-forwards on its books, Vtel will pay nominal
income taxes during the next two years.
Mr. Dabbs says all that helps make it a "strong buy."
"It's a show-me stock," he says. "And I really don't have any doubt they'll"
produce the expected earnings growth.
Mr. Dabbs also says Vtel's executives have told him they won't receive their
full bonuses for fiscal 1999 unless the company exceeds its stated
projections and hits $300 million in revenue and earnings of $1.44 a share
that year. Vtel officials decline to discuss the incentive plan, which will be
outlined in the company's annual report.
Another fan is David Corbin, president and chief investment officer at
Corbin & Co. Capital Management in Fort Worth, who says his small-cap
fund holds more than 482,000 Vtel shares, or a 2% stake.
"You've got a management team that is really incentivized to do something
with this firm," he says. "They've gotten all these charges behind them. The
earnings outlook is improving. The stock is cheap."
Even so, at least one other voice says investors may want to take their time.
Jim Stone, an analyst at Preferred Technologies, a securities firm in San
Francisco, says he is concerned the videoconferencing market's growth may
be slowing from its 20% rate.
The Long View
He projects only seven cents in per-share earning for the fiscal year ending
next July, compared with Mr. Dabbs's 42-cent estimate. Mr. Stone is less
optimistic about how quickly Vtel can integrate Compression Labs, plus he
notes that since Vtel went public in 1992, the stock has bounced around,
climbing from $12 in April 1992 to $26 in September 1995 and then falling
to $5.25 in July.
"I don't think the stock is going anywhere near term, but I like it long term,"
says Mr. Stone. He says Vtel is a buy at or below $7: "Don't rush in. Buy it
on the dip." Over the next 12 to 18 months, though, Mr. Stone predicts,
Vtel will jump to between $15 and $20 a share.
Vtel's chief executive, Dick Moeller, says he is just focusing on gaining
market share. "The merger really positions us to take on a stronger role in
terms of the leadership in the industry," Mr. Moeller says. "This gives us the
critical mass we need to be a long-term contender."
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