>Any comments on the earnings released today ???
Investors, analysts and management can all be excused if they show frustration and confusion about SNIC's performance. Once again, and by no means a surprise to the analysts, SNIC disappointed this quarter, loosing more than the consensus estimate, but virtually exactly what H&Q estimated toward the end of the quarter. Actually, given the unimpressive sales, the company executed better than might be expected, with cash, A/R, DOS, etc. all in reasonable shape. R&D declined slightly due to the comforting fact that most of the heavy investment in DVD capability is a thing of the past. For example, I don't believe management's expects they will need to tap more than a third or so of the newly announced $7 million equity source of financing, which is good for current stockholders.
Sales were limited this quarter mostly because of technical and other confusions about the DVD roll-out in Europe and a perverse consequence of the Asian turmoil. The former has been resolved totally, and no longer will factor into limiting DVD sales. The latter is perverse because the Asian currency crisis and related over-capacity, especially in high tech production, will be a net plus for SNIC, but not this quarter.
The expected slowdown in Asian sales of players, forcing a slowdown in the need for authoring systems, ultimately will be more than compensated for by radically reduced prices elsewhere, and even in Asia, which will pump up demand for players. Did anyone notice DVD prices falling in the U.S. this quarter? I looked and I didn't.
Why is it that Asian currencies are roughly half the value today that they were six months ago, and everybody knows they are anxious to cheaply produce any kind of consumer device for export (hence driving prices down), yet DVD player and title prices stayed high? The answer is not that new prices must flow through the channel, taking months. Markets don't work that way. The real answer must be that U.S. retailers and middlemen (U.S. and Asian) must have been satisfied with the volume of sales they were experiencing at established prices, because the excessive gross profit compensated for relatively low volume compared to what might have been achieved by now.
Over 300,000 DVD players were sold into the U.S. channel in the nine months players have been on sale, which is huge when compared to music CDs 35,000 or so after two years. It is also huge when compared to the roll-out of the VCR, or any other significant consumer product. By the end of 1998, something like 10 to 15 million PCs will be capable of playing DVD movies and other rich multimedia uses of the DVD Video Format, along with a million or more DVD players. China loves Video CD players, to the tune of about 12 million of them, so there is every expectation that DVD will successfully supercede Video CD in China, especially since DVD players will be backward compatible with the Video CD.
Meanwhile, SNIC has a virtual monopoly on this SLOWLY emerging market. Even the Divx people are working with SNIC to get that backward compatible version of DVD in the market. (Some studios are holding out for Divx, rather than producing standard DVD titles.)
Beyond Hollywood titles lies the really big markets for DVD Video Format - and of course the DVD Video Format authoring tools. Foremost is what might be called "B-movies", as a euphemism for pornography. Pornographic experiences are enriched through DVD, due to its fidelity and interactive features, which is not being lost on entrepreneurs that operate in this shady realm. In addition, I would expect that pornography is the product of lots of small, low-cost producers and post-production operations - meaning that a larger number of these operations will need to become DVD conversant and equipped.
Meanwhile, the DVDit! product might create the next killer app on the PC. Since DVDit! has a simple UI, unlike most DAW or DVD authoring products, it converts easily to Windows 95/NT, so expect it to be broadly available on most platforms when it debuts later this quarter. With it users will be enabled to create DVD Video Format files from common and popular applications, like PowerPoint. These files can be stored on any medium of sufficient capacity, so corporations will be equipped to invoke DVD presentations, with enhanced fidelity and interaction, from file servers or even writeable CDs. From SNIC's perspective, its the DVD Video Format that's important, not the DVD medium.
The investor should realize that the increased fidelity of the DVD Video Format will set the standard for many corporate uses. For example, DVD will be the preferred medium to provide training material to professionals such as dentists. With it they can see more clearly than before how proposed procedures are to be done.
Company management even fathomed a guess that the ubiquitous businessman playing with spreadsheets (games) on a laptop computer while flying across country soon will be watching his favorite movie on a portable DVD or laptop. Personally, I would guess that portable DVD players or laptops will make obsolete video on demand so popular in all hotel chains. The same portable players will become standard fare for making business presentations, whether the presentation is stored on a DVD disk, CD-ROM or a hard drive.
Further, management expects the DVD Audio Format to finally take root by spring of this year. Once in place, the entire music CD industry will have to upgrade to DVD pre-mastering - and that should drive them into SNIC's open arms, since SNIC dominates the music CD pre-mastering tool business and totally dominates DVD authoring to date.
The final discussion with management dealt with what is happening in the traditional DAW business. It is not secret that this business matured for SNIC a while ago, perhaps aided by the USP screw-up a couple years ago. Since then SNIC has focused this aspect of the business on the high-end, particularly radio broadcasters, who buy systems of DAWs when they purchase. The recent telecommunications act has changed that industry more than even Congress expected when they dropped the ceiling on the number of stations permitted to be owned by any one media organization. The resulting consolidation is mind-boggling, and is leading to conglomerates with large holdings of radio and TV stations. These are the kinds of organizations most willing and financially able to procure new technologies deemed essential.
Add it all up and the story for SNIC is compelling, but confusing. When will these opportunities express themselves in the form of explosive sales? How should the investor react to yet another disappointing quarter? Is SNIC a buy at these low prices, or is it another example of a high-tech company that has lost its footing, unable to cross the chasm from early adopter to infrastructure investment?
The answer is simple, and you should be able to figure it out. (To be perfectly frank, if you don't enjoy this, you should restrict your investments to mutual funds.) This a pure problem of fundamental analysis, and no one is going to help you. All analysts still following the company have a hold on SNIC for the simple reason that the company has a track record of disappointments, and they won't stick their necks out anymore. But if you can figure it out, you will be rewarded handsomely. If you make a mistake, you will be punished, whether you buy and loose everything, or whether you don't buy and discover one day that the stock has skyrocketed.
Enjoy,
Allen |
