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Technology Stocks : SYQUEST -- Ignore unavailable to you. Want to Upgrade?

To: Dale Stempson who wrote (5211)	1/11/1998 4:12:00 PM
From: Joon Song	Read Replies (1) \| Respond to of 7685

>>>> Joon, I would think that Syquest spent a good deal of money in Q4-97 to ready manufacturing for the SparQ. I'm not an accountant but I would suspect that even without sales, many of the associated costs would appear in the COGS number. Perhaps someone else here could provide a definitive answer. <<<< No, cost of goods sold (COGS) is really cost of goods SOLD. Costs for developing the SparQ would appear in R&D and SGA. The build up of inventory for the SparQ launch would appear as inventory. If you disagree with Q4 then what about Q3. They still had overall gross margin of about zero - meaning significantly negative gross margin on their drives. We can disagree about the future, but my original point which I think is irrefutable is that given the 50-50 split in disk and drive sales, and zero overall gross margin for fiscal 1997, whatever POSITIVE gross margin SyQuest had on their disk sales, SyQuest had equally NEGATIVE gross margin on drive sales. I believe SyQuest's gross margins on their disk sales exceed 30%. (Tell me if you disagree here.) Then their gross margins on drive sales must be worse than negative 30%. And this is with drive sales in 1997 over $60 million which is already fairly substantial. Increasing volume from that level isn't going to bring their cost of goods down enough to improve their margins from worse than negative 30% to break even. (I would concede the point about increasing volume helping a company achieve profitability if we were talking about NET margin since then you're spreading R&D and SGA costs over greater sales and gross profit from each incremental sale goes almost straight to the bottom line. But in SyQuest's case with GROSS margin on drives being so deeply negative on already substantial volume, SyQuest isn't going to bring down cost of goods enough to break even simply by increasing volume.) >>>> A supporting argument for potential profitability here would be to look at what Castlewood Systems is expected to come out with. Their Orb product is very similar to and improves on SparQ, and yet it's proposed price is incredibly low as well. I find it hard to believe that two different companies would both be introducing these drives without a strong belief they could turn a profit. <<<< Sy Ifkitar(sp?) of Castlewood never had a problem with selling products significantly below cost when he was running SyQuest. Remember the EZ-135 that nearly took SyQuest into bankruptcy? They were selling that in much higher volumes than anything they are selling now and they were selling it at significant losses. I'm sure Sy thought SyQuest could somehow turn a profit on it as well. Joon