Fool Portfolio Report
Tuesday, September 30, 1997
by Jeff Fischer (JeffF@fool.com)
ALEXANDRIA, VA (Sept. 30, 1997) -- The Fool Portfolio beat the S&P, but it didn't take greatness to do so today. The port lost 0.41% while the S&P dropped 0.64%. Amazon helped the Fool the most, rising nearly $4 to above $52 on no news, while Innovex lost $1 on news of an earnings shortfall at Western Digital (NYSE: WDC).
The news of the day is ATC COMMUNICATIONS (Nasdaq: ATCT). Last night the company announced a fourth quarter loss of eight cents per share, against estimates of a positive two cents. Revenues for the three months ended in June declined 30% to $21 million, while net income of $2.8 million last year turned into a loss of $1.9 million this year. Let's take a look at the numbers from the press release and see what we can figure.
Looking at the top of the Statement of Income for the last three months, we see that the company's gross margin (obtained by dividing the gross profit by the total revenue, or $5.6 million divided by $21.4 million) fell from 36% last year to 26% this year, meaning that the cost of sales didn't decrease as quickly as did revenues. For every dollar in sales, a full 75 cents was eaten by the direct cost of the sale -- before we even get to general and administrative expenses.
We see on the next line that selling, general and administrative expenses (SG&A) increased from last year to $7.2m from $5.6m, despite the decrease in sales. This figure does include $1.1 million of non-recurring charges and management transition expenses, but even without this charge this cost increased by $500,000 from last year. Remember at the end of 1996 when management stated that the business had been running "all out" for the year, but new management was going to slow things down and put in place a long-term business model? This may be part of that new model manifesting itself, while sales, unfortunately, haven't been there to support the cost of the change.
We read on the next line that income from operations was a negative $2.5 million for the quarter. When you add back the depreciation and amortization expense (which wasn't a real cash subtraction) we see that the company had negative cash flow of about $1.5 million from operations. Burning that much cash in a quarter while now having only $624,000 in the bank is a bit worrisome. When you add to this $7.8 million in current liabilities and $4.7 million in long-term debt we see a business that has its work cut out for it (and unfortunately we can't see what current accounts receivables are from these press releases). For the year revenues were about flat, increasing only $3 million to $97 million, while earnings per share fell 76%, to $0.06 from $0.25.
The decline in revenues this quarter was again said to be caused by a major client (AT&T) cutting back its business, as well as delaying some business. Perhaps more worrisome is the news that AT&T also negotiated some price reductions with ATCT and with its other teleservices vendors. Meanwhile, ATCT announced several new contracts with many new clients (Countrywide Credit, Qwest Communications, Transamerica, and U.S. West and Western Union Financial, as well as with BigBook, Inc. and Cable & Wireless, plc, and Pacific Bell.) The new contracts should begin to impact revenues in the second quarter of 1998 (the company is in its first quarter now). Unfortunately, only U.S. West and Western Union were specified as long-term contracts. The others may be long term as well, but the press release isn't worded as such. Also, ATCT already had a relationship with U.S. West -- the contract was extended.
The company cites these contracts as a continuing move away from its previous short-term commodity type business to longer-term value-added business. The company said last year that it was in a transition. We've seen that this is certainly true. How large these contracts are and how quickly revenues can grow and the company can move to profitability again is what is most important to shareholders, though. Without positive earnings it appears that the company could need some financing within a quarter or two in order to fund operations. We of course want to hear the conference call, and we'll have more to say about ATCT tomorrow.
In other news, IOMEGA (NYSE: IOM) announced that it filed a complaint in Paris against Nomai S.A., charging the company with unfair competition, parasitism (which actually means, behaving like a parasite), and violations of Iomega's copyright, patents, and trademarks. Iomega states that the disk Nomai is selling in France as "Zip compatible" is a violation of Iomega's property, isn't compatible with all of Iomega's Zip drives, fails to meet Iomega's quality specifications, and can result in damage to Zip drive heads and in data loss -- and not only in loss of data on Nomai disks, but also loss of data on Iomega Zip disks that you insert in your drive after a Nomai disk has damaged the drive head.
Seeing how most Zip owners are on the Internet and how quickly news travels over the Internet, I doubt that many people will be eager to buy Nomai disks even if they did become available in the United States anytime soon. According to Barron's a few weeks ago, Nomai posed a serious threat to Iomega's business (even if the disks were perfect, that claim is quite a reach). Unfortunately, a few weeks ago was not April's Fool's Day, otherwise Barron's might have a good excuse for such a strange claim in its newspaper.
To all of America Online's "6.4 million" subscribers, and however many people are out there on the hyped-up Internet, spreading bad information while the traditional one-way press works to set us all straight... Well... Fool on....
Drip Portfolio --
Johnson & Johnson, part 2.
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Fribble -- A fun lesson from readers.
Stock Change Bid ---------------- AMZN +3 15/16 52.06 AOL + 1/16 75.56 T - 15/16 44.25 ATCT - 1/2 4.06 CHV -1 7/16 83.06 DJT - 1/16 10.31 GM + 1/8 66.94 INVX -1 32.25 IOM - 1/2 26.13 KLAC -3 3/16 67.50 LU - 15/16 81.38 MMM + 1/8 92.44 COMS - 7/16 51.25Day Month Year History FOOL -0.41% 7.85% 25.88% 235.94% S&P: -0.64% 5.32% 27.88% 106.65% NASDAQ: -0.55% 6.20% 30.57% 134.07% Rec'd # Security In At Now Change 8/5/94 355 AmOnline 7.27 75.56 938.96% 5/17/95 980 Iomega Cor 2.52 26.13 936.71% 10/1/96 42 LucentTech 47.62 81.38 70.90% 8/11/95 125 Chevron 50.28 83.06 65.18% 8/24/95 130 KLA-Tencor 44.71 67.50 50.97% 8/12/96 110 Minn M&M 65.68 92.44 40.75% 9/9/97 290 Amazon.com 38.22 52.06 36.21% 8/12/96 280 Gen'l Moto 51.97 66.94 28.79% 6/26/97 325 Innovex 27.71 32.25 16.39% 8/12/96 130 AT&T 39.58 44.25 11.81% 8/13/96 250 3Com Corp. 46.86 51.25 9.37% 4/30/97 -1170 *Trump* 8.47 10.31 -21.77% 10/22/96 600 ATC Comm. 22.94 4.06 -82.29% Rec'd # Security In At Value Change 8/5/94 355 AmOnline 2581.87 26824.69 $24242.82 5/17/95 980 Iomega Cor 2594.53 25602.50 $23007.97 8/12/96 280 Gen'l Moto 14552.49 18742.50 $4190.01 8/11/95 125 Chevron 6285.61 10382.81 $4097.20 9/9/97 290 Amazon.com 11084.24 15098.13 $4013.89 8/24/95 130 KLA-Tencor 5812.49 8775.00 $2962.51 8/12/96 110 Minn M&M 7224.44 10168.13 $2943.69 6/26/97 325 Innovex 9005.62 10481.25 $1475.63 10/1/96 42 LucentTech 1999.88 3417.75 $1417.87 8/13/96 250 3Com Corp. 11714.99 12812.50 $1097.51 8/12/96 130 AT&T 5145.11 5752.50 $607.39 4/30/97 -1170*Trump* -9908.50 -12065.63 -$2157.13 10/22/96 600 ATC Comm. 13761.50 2437.50-$11324.00 CASH $29541.35 TOTAL $167970.98