Boring Portfolio

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APC Call, Part 1
Management Comments

By Dale Wettlaufer (TMF Ralegh)

ALEXANDRIA, VA (July 30, 1999) -- I'll begin reviewing American Power Conversion's (Nasdaq: APCC) second quarter conference call tonight and finish up next week. Here are the Q2 Results, and here's my summary with some quotes from the company's officers:

Don Muir, CFO

International business was robust in the second quarter, led by very strong growth in Asia. For the quarter, revenues increased 8% in the Americas, including a 5% increase in Latin America, 46% increase in Europe/Middle East/Africa, and 46% in Asia. As a percentage of revenues:

Americas: 59%
EMEA: 28%
Asia: 12%

Despite the Americas' 8% second quarter revenue growth rate, demand for APC's products in the U.S. remains very healthy. Year-over-year revenue growth on a sales out of the channel basis for the company's major national distribution partners was up over 25% during Q2. Year-over-year sales-out growth particularly strong for both Ingram Micro and Tech Data. "We did continue to see a reduction in distribution channel inventories, with the second quarter ending at approximately three weeks' supply on hand, down from about four weeks in the first quarter. As we saw in the first quarter, our distributors' sales of APC products out of the distribution channel exceeded APC's sales into the channel (APC recognizes revenues based on sales into the channel)."

"European revenue growth was fueled by continued healthy demand in Western Europe and the incremental contribution of Silcon. As expected, we continued to see softness in Russia. Our Asian business continued to benefit from the improving economic conditions in that region and showed greater than 40% growth for the third consecutive quarter."

"Gross margin for the quarter was 43.9%, representing a 20 basis point sequential decline and a 150 basis point decline year-over-year. The year-over-year gross margin erosion continues to reflect the incremental contribution of Silcon and strong growth in Symmetra products, which in total represented about 10% of APC's Q2 revenues. Sales of Symmetra during the quarter continued at a rapid pace, nearly doubling year-over-year and showing approximately 40% sequential gains from Q1."

"APC's second quarter operating expenses were $79.9 million, or 25.3% of sales, and represents a 250 basis point improvement versus last year's second quarter ratio of 27.8% of sales. The decrease in year-over-year operating expenses-to-revenues ratio resulted primarily from our ongoing forward focus on improving productivity and efficiency. Excluding the one-time acquired R&D charge for the Q2 1998, APC's Q2 operating profit grew 28%, to $58.6 million. Operating profit as a percentage of sales improved 110 basis points to 18.6% compared to 17.5% last year. Operating profit increased sequentially by 170 basis points compared to 16.9% in Q1. The company's effective tax rate remains at 29.5%, where we expect to remain for the balance of 1999. This reflects a 100 basis point decline from the tax rate in Q2 1998."

"We are very pleased with the quarter-end balance sheet, which remains extremely liquid. The company continued to generate a very healthy cash flow, as cash balances in the quarter increased $44 million to $272 million from $226 million in Q1 1999, despite retiring approximately $8 million of Silcon short-term debt during the quarter. We also saw some improvement in our Q2 inventory position. During the quarter, the inventory-to-sales ratio decreased sequentially to 74% versus 88% in the first quarter of 1999. Absolute inventories decreased $11.6 million sequentially, to $231.9 million from $243.5 million in the first quarter."

"Additionally, our return on invested capital improved by about five [percentage] points sequentially. The company's fundamental philosophy related to inventories is unchanged. That is, taking advantage of our products' low level of obsolescence, we have opted for availability and low-cost production to help fulfill our share growth objective. As we have seen in the past, we will continue to focus on optimizing our inventory position without risking the loss of revenue that results from dissatisfied customers."

"Capital expenditures during Q2 were $11.5 million, making total capital expenditures year-to-date $15.8 million. This spending continues to primarily fund expansion of global manufacturing efforts, and in line with this, we expect to begin shipping from our facility in Bangalore, India early in this quarter [Q3]."

"The quality of APC's receivables portfolio remains high, with outstanding balances over 60 days under 10%. Second quarter days sales outstanding decreased by five days to 57 days [sequentially] and was down from 58 days in Q2 1998. DSO [days sales outstanding] continues to reflect the growing contribution from international markets as well as large system enterprise sales, both of which tend to carry longer terms."

Roger Dowdell, CEO

"Our business model continues to reflect our core emphasis in the network and enterprise space." Revenues from APC's networking, datacenter, and high-end enterprise solutions grew approximately 23% versus the second quarter of 1998, and represented over 66% of quarterly revenues. "We did some rebound in the desktop area during the quarter, which consists of APC's surge protection and Back-UPS offerings, with revenue growth in the high-teens... year-over-year in the quarter. During the past quarter, we took some major steps in completing our enterprise offerings.

"First, we announced the worldwide availability of the Silcon VP300E, up to 80 kVa. These are the next generation of Silcon solutions which use the delta conversion online technology, providing industry-leading operating efficiencies which translate into true cost savings for the end-user. The full range of solutions, which extends up to 500 kVa, is available in Europe and we have been unveiling new products in other geographies on an ongoing basis. We will continue to roll out these solutions until a full line of products is being sold globally."

"Also during the second quarter, we introduced our new services organization, APC Global Services. With our entry into the enterprise UPS market, the opportunity and necessity to provide comprehensive service programs is clear. Traditionally, APC has been a leader in service and support, not only in the UPS industry but in the IT industry as well. Our programs are made to fit the characteristics of the market we serve. Our entry into the enterprise space coupled with the trend toward high-availability of networks and systems, helped define the need for a comprehensive global service offering. Capitalizing on both our extensive experience and Silcon's experience in servicing UPS installations, we created a services focus that includes not only the traditional break-fix services, but proactive diagnostic and installation services that help prevent problems as well as fix them.

"Additionally, there is a revenue generating opportunity here. In fact, some players in the enterprise UPS space make up to 20-30% of their total revenues in service. Presently, we do not have any material revenue stream from services but believe we have an opportunity to grow this piece of our business into being a positive contributor to our top and bottom lines."

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07/30/99 Close
Stock Change   Bid
APCC  +  3/8   20.75
BRKb  -44      2127.00
CSL   -  9/16  45.75
GTW   -1 1/4   76.13


                  Day     Month   Year  History
        BORING   -0.84%   0.36%   4.28%  40.02%
        S&P:     -0.92%  -3.21%   8.67% 121.61%
        NASDAQ:  -0.06%  -1.76%  20.33% 153.47%

    Rec'd   #  Security     In At       Now    Change
  8/13/96  200 Carlisle C    26.32     45.75    73.79%
  4/20/99  460 American P    14.48     20.75    43.33%
   2/9/99  100 Gateway 20    72.38     76.13     5.18%
 12/31/98   12 Berkshire   2276.17   2127.00    -6.55%


    Rec'd   #  Security     In At     Value    Change
  8/13/96  200 Carlisle C  5264.99   9150.00  $3885.01
  4/20/99  460 American P  6659.25   9545.00  $2885.75
   2/9/99  100 Gateway 20  7237.50   7612.50   $375.00
 12/31/98   12 Berkshire  27314.00  25524.00 -$1790.00


                             CASH  $18177.16
                            TOTAL  $70008.66


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