Zomax Expects To Meet 2Q Consensus View Of
30c/Shr>ZOMX
By Scott Scholten
MINNEAPOLIS (Dow Jones)--Zomax Optical Media Inc. (ZOMX) expects to meet a First Call
Corp. consensus estimate of 30 cents a share in the second quarter, Chief Financial Officer Jim
Flaherty said.
Zomax, of Plymouth, Minn., earned 15 cents a share on revenue of $14.5 million in the year-ago
period.
The software publisher's shares, which trade on the Nasdaq Stock Market, have been recently
trading around 25, which is about 44 times 1998 earnings and 17 times estimated 1999 earnings.
Zomax is expected to earn $1.39 a share in 1999, according to First Call, compared with 53 cents a
share, including a charge, last year. Excluding the charge, Zomax's 1998 earnings were 58 cents a
share.
The estimated doubling of earnings over the year-ago quarter is due largely, according to one analyst,
to Zomax's $37.5 million acquisition in January 1999 of Kao Infosystems Co. from Japanese
household chemicals company Kao Corp.
The acquisition, which included Kao Infosystems' North American operations, plus operations in
Germany and Ireland, is one part of Zomax's goal to be a global software publisher, Flaherty told
Dow Jones Newswires. No company has those bragging rights today, which means software
companies have to use more than one publisher to copy and distribute software world-wide, Flaherty
said.
Ostensibly a company that copies software code for companies such as Microsoft Corp. (MSFT)
and Novell Inc. (NOVL) onto CDs and DVDs, Zomax actually does more than manufacture items
that have become commodities, Flaherty said.
Because software companies usually don't want to get involved in the duplication side of the software
industry, Zomax also packages software, ships it, arranges for accompanying manuals and handles
returns for clients, which is how the company adds value to the CD distribution process, Flaherty
said.
Even so, the fledgling DVD medium is shaping up with fatter profit margins than CD production,
Flaherty said, though DVD is expected to become a commodity down the road just like CDs today.
With modest DVD production capacity (some of it obtained by the acquisition of Kao Infosystems,
which already had been copying movies onto DVD), Zomax is preparing for the day when the DVD
medium is run-of-the-mill.
"DVD production is much more capital-intensive than CD is," Flaherty said. "Obviously, there are
more PCs sold today that can use DVD, but there hasn't been a whole lot of demand for DVD
software. It will come. DVD initially will have higher profit margins than CD, but it's a question of
where prices will stabilize."
Shift To DVD Presents Potential Risk For Zomax - Analysts
Despite preparations, a shift in the software industry to the DVD medium will introduce a measure of
risk to Zomax and its share price, said Clint Morrison, a technology analyst with John G. Kinnard &
Co. in Minneapolis.
"It's an opportunity for them, but it's a risk if they don't play it right or if somebody plays it better,"
said Morrison, who rates Zomax stock as a buy with a $37 12-month price target.
Any disappointment could jeopardize the share price, which has had a run-up recently, Morrison
said.
Zomax shares fell to a 52-week low of 3 7/8 in October but rose to 38 1/8 in January - a 52-week
high - after attention was drawn to its one-third stake in privately held Chumbo Holdings Corp.,
which owns software distribution Web site Chumbo.com.
Morrison calculates $8 of his $37 price target comes from Chumbo.com, which has an agreement
with International Business Machines Corp. (IBM) to manage software offerings for IBM's Aptiva
computer.
Zomax positioned itself to exploit the CD software medium, and is smartly doing so with DVD,
according to Ernie Andberg, an analyst with R.J. Steichen & Co. in Minneapolis.
Andberg, who rates Zomax a buy and thinks its shares will trade at $30 before 12 months are up,
said Zomax is appropriately valued in a 20 times earnings neighborhood. Andberg attributes this to
management's ability to ferret out bargain acquisitions (like Kao) and Zomax's positioning for the
DVD software distribution medium. Even with its Chumbo.com stake, the company will be all right if
downloading becomes the preferred way for people to get their software, Andberg said.
Yet, Zomax's Internet exposure poses risks for its share price, Andberg said. Because of Zomax's
stake in Chumbo.com, Zomax is loosely lumped together with volatile Internet stocks. Whether
appropriate or not, that adds to Zomax's volatility, Andberg said.
-By Scott Scholten; 612-335-8893 |
