LATEST REVISION (4/15/99) HAL CAMPBELL'S SUMMARY OF AMPEX –Incorporating Gus's History of AMPEX CORP (AXC)
It looks like the long-suffering shareholders of Ampex Corp (Redwood City, CA) have finally caught a break.
Holders of Ampex Corp stock who saw their shares slowly drift down from a high of 15.75 on 5/24/96, to a low of .688 on 10/8/98, have, in the last few months seen their shares rise dramatically.
Ampex Corporation, headquartered in Redwood City, is one of the world's leading providers of technologies for the acquisition, storage and processing of visual information. The company is further expanding its presence in image-based markets by building an early presence in Internet video. Ampex's strategy is to increase the range, content and quality of its video offerings over the world wide web in line with future increases in the availability of high-speed Internet access.
THE LAST TWO YEARS -- PRICE DECLINE TO BELOW A DOLLAR
Hit on three fronts, Ampex Corp. failed to sell “keepered media” to the hard drive industry and ended the development program for that technology, it lost an important patent infringement case against Mitsubishi (it actually won at trial but the judge overturned the verdict and AXC lost the appeal -- and recently settled with Mitsubishi for an unspecified lump sum on two other patent disputes), and DCR sales dropped dramatically primarily due to a curtailing of government spending. That, added to index fund and tax loss selling, spawned a decline in share price to a low of 69 cents per share in the fall of 1998.
A NEW STRATEGY IS MET WITH A DRAMATIC RISE IN SHARE PRICE
What's causing the dramatic price rise?
Some would say a “full-court press” to bring the 50-year-old pioneer of Audio and Video recording and storage devices into the Internet Age.
Growth of Core Products and Growth by Acquisition.
CEO Ed Bramson, has recently completed the transformation of Ampex into a holding company which will operate primarily through subsidiaries and affiliates. He states his strategy this way:
“As Ampex's commitment to new markets expands, our business units increasingly have differing needs and strategies. This new organizational structure helps to focus the plans of each unit and to execute them faster. Our growth strategy for Internet video envisions additional internal projects, strategic investments and acquisitions, which makes a holding company increasingly appropriate,”
SUBSIDIARIES AND AFFILIATES
AMPEX DATA SYSTEMS – headquartered in Redwood City, is one of the world's leading providers of technologies for the acquisition, storage and processing of visual information. Ampex designs and delivers extremely high-capacity, high-performance digital image storage solutions for large-scale corporate, government, network, entertainment and telecommunications applications.
Core Products
19mm tape drives and libraries.
DST and DIS.
+ Finest commercially available in the world for storage of mammoth amounts of data. Cheapest by the gig ...fastest...far and away the most space efficient. And the best most particularly for visual storage. This is no exaggeration.
- Very expensive in terms of up front costs. To now a limited number of prestigious customers have both needed and been able to afford Ampex systems, but the market for terabyte storage on several fronts seems to be growing rapidly. And Ampex has the product to best meet that new demand. But a selling job looms (the newly announced alliances with TEK and HP will help considerably). Price cuts of these very high margin (45% and up) products a likely part of new attempt to gain market share.
DCR Instrumentation Recorders
+Also excellent. Prestigious customers. For flight testing and collecting satellite data. Very high margin (over 50%)
- DCR sales highly dependent on large government contracts. Sales fell precipitously in the last 18 months with budget cuts on defense spending.
Customers include such leading organizations as AT&T, the Federal Aviation Administration, Fox Television, HBO, Netcom, and Prevue Networks.
MICRONET TECHNOLOGY INC -- Raid and Datadock storage products primarily aimed at the SAN markets. Mr. Bramson got the troubled company for a few million shares and a few million in cash, and is revamping its product line entirely. Although there are little revenues at present (5 million), the growth potential is explosive for this market.
TVontheWEB, Inc. – Ampex has purchased a 20% ownership stake (with a 3 year option for a 51% stake) in this rapidly growing DC area startup which narrowcasts to special interest groups - underwriters pay costs and share revenues. Includes GradyMcGrath production company that had 4 million in revenues last year. Adding new channels by the week (500 in the works). Tight federal government connections. Potential IPO.
ALTERNATIVE ENTERTAINMENT NETWORK – Ampex bought 20% stake. (again with majority option) Private west coast video delivery company. Company recently voted one of ten best video sites on the web. Also potential IPO.
REITER ASSOCIATES -- Purchased 51% stake in this web hosting company.
Royalty Stream
In addition it's subsidiaries and affiliates, Ampex derives revenue from it's Royalty Stream which is about 10 million per year. The ongoing stream ( as opposed to one time settlements) grew by 26% last year. Ampex has over a thousand active patents in digital processing and many other areas. Still receives royalties related to Ampex's invention of the helical scan head. Sony, for instance, licenses a bundle of their patents for use in a variety of products from 8 millimeter camcorders to feedback joysticks.
HISTORY
Ampex Corporation , one of only a few of the pioneering Silicon Valley companies still left standing. In the field of data recording, Ampex has been a major player since the end of WWW2 when among the war booty taken from the Germans were the magnetophones which jumpstarted the magnetic recording industry in this country which while developing independently and along parallel paths as the Germans was considered inferior. Ampex was among the first to port that German technology into a series of orders from the Armed Forces.
Even today, Ampex data recorders continue to be used in the fastest planes, boats and submarines. The Russians have even been using the DCRsi in the MIR space station after having been stuck with their 2-inch bootlegged data recorder technology during the Cold War.
These applications use AXC's data recorders in complex data acquisition systems that include the most sophisticated sensors (cameras, microphones, thermometers, fiber optics, etc) in the world. The Department of Defense and the Department of Commerce have been arguing about the pace of migrating this type of technology (and many others) from the classified world to private industry since the end of the cold war. Chances are that Big Business will continue to win out, for, after all, to quote one dead white guy, the business of America is business.
In the field of broadcasting, Ampex won the race to develop the first practical video tape recorder in the mid-fifties using what is now known as rotary head or helical scan recording (just like your VCR). Ampex VTRs were dominant during the early days of television (this company made Bing Crosby and his family which owned Ampex extremely rich by 60s and 70s standards) and its equipment was the standard in the professional broadcasting industry until the early 1980s when its core set of pioneering patents started to expire and became part of the public domain.
At this point, the Japanese, who invested heavily in the development of the manufacturing base for the consumer electronics industry that it now dominates, were using the bountiful cash flow from the mass market to go after the profits to be found in the niche markets. This resulted in Ampex being punted from one ownership group to another. Before the current ownership group took over, it was part of Signal then it became part of Allied-Signal during the merger.
A lesson taught by history. Why is it that certain innovative companies never make it to the big time? In the case of the old Ampex, it never crossed over and made it to the consumer market. In the early sixties Ampex was a go go stock. In the a-go-go sixties it was owned by the likes of Ned Johnson (Magellan) and Philip Fisher, the legendary father of the Forbes money manager and columnist. At that time also, Ampex was generally acknowledged to be one of the top-notch engineering outfits in the world. It had a reputation for brilliant systems design, but never developed the capability for mass manufacturing (the foundry and outsourcing industries weren't big enough at that time).
As it perfected its video recording technology, it decided to retain control of its technology by focusing on what it did best, the design of high performance systems in the professional broadcasting arena. It licensed its technology to the Japanese manufacturers of transistor appliances like Sony and Victor (JVC). Ampex also decided that it was feasible to let the Japanese take the financial hits involved in single handedly building a manufacturing base and consumer market for video tape recorders, and to participate eventually in the mass market by using its high-performance systems design expertise to dominate the tape media market.
Ampex was among the first American companies to feel the sting of the time-to-market speed and ferocity that the Japanese (now joined by the Koreans and Taiwanese) continue to show in going beyond the bend of the manufacturing learning curve and using price to gain market share.
The present day Ampex continues to generate a decent royalty stream ($8-10 million a year, over $200 million over the last 10 years) from its video and audio recording technology but it never had much of a chance to enjoy the bountiful mass market profits of its pioneering tape recording technology because of that one fateful decision made to eschew the mass market in the early sixties.
The Company did enjoy the financial applause of the stock market -- which dreaded the cap-ex hits on earnings that small Ampex would have had to shoulder to develop both a manufacturing base and a consumer market. This showed up in its stock price in the early sixties, but that was a phyrric victory that has been sandblasted many times over into the financial record of this company.
It is very easy today to say of the new venture that it is simply a strategy to use the internet as a lever to get the stock price up, but those loyal shareholders who have been following this stock for a while now are slowly being persuaded that Ed Bramson (CEO) really wants to turn his substantial stake in the company into something bigger and kick it to the next generation of major corporations.
DEVELOPMENTS, SPECULATION AND DUE DILLIGENCE
>>If Ampex exercises its majority options on TVontheWeb and AENTV, the total price paid for the last three acquisitions will have been only 12.7 million.
>>Ampex is opening production facilities in Hollywood and NYC, which will be used by these companies and others. Intend to produce content. Hired a seasoned advertising exec to re-establish the Ampex brand name (still revered in many circles) in these efforts. Hired Imagio to help publicize their storage products.
>>Ampex announced on April 14, 1999, Ampex Data Systems and Hewlett-packard will team up to provide high performance Video server archives for the broadcast industry.
>>Ampex announced on April 12, 1999, that Marc Chalom was appointed Vice President of Programming: he will be responsible for establishing a new group of focused-interest Internet video channels to be produced in New York, where the company's Internet video group is headquartered. The new channels will be complementary to those already offered by the Company's existing affiliates: TVontheWeb and the Alternative Entertainment Network.
The market responded to this appointment with enthusiasm, boosting the price more than 2 points on the news.
Addenda
>>Manufacturing had a net negative cash flow last year (nominally perhaps -- a fair portion of their R&D spending is discretionary). Due to intense cost control and high margin products their breakeven point is extremely low -- but they fell below it.
>>If they achieve sales growth, the return to profitability is likely to be rapid.
>>High...very high...degree of insider ownership. Also Credit Suisse took a position in excess of 5% recently. FMR has had a 5% position for quite awhile.
Potentials
>>Sales growth in core products due to increasing markets for massive storage and the makeover to digital broadcasting.
>>Potential IPOs of majority stakes in the web host and two net TV companies.( Yahoo's purchase of Broadcast.com for 5.7 billion raised the value of, and interest in, this entire sector).
>>In addition, the production and content business they are entering (and are well equipped for) has very high margins.
>>More acquisitions if the balance sheet justifies the attempt.
>>Growth in royalty stream.
Risks
>>Negative cash flow and the customary market uncertainties seem the main three-year risk.
>>An inability by MicroNet to get a sales growth foothold would be one possible risk.
>>The likely continued decline of TV aftermarket sales from 11.8 million dollar levels (in 98) another.
>>Profits will vanish for awhile with their new investments, but probably not to a drastic degree.
>>If they exercise their majority options they will still have ample cash as a safety net + whatever millions Mitsubishi will pay on the infringement settlement.
So investors see no icebergs on the immediate horizon and many potential pluses. They view the holding company structure is a flexible platform to maneuver through any perils.
COMPANY CONTACT:
Karen D. Schweikher
650-367-4111
Links:
ampex.com
aentv.com
tvontheweb.com
reiterassoc.com
micronet.com
datadock.com
gardy-mcgrath.com
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