September 02, 1994
Boston Technology
NASDAQ: BSTN
TYPE: Small-Cap Growth
Phone: (617) 246-9000
Closing prices, September 1st, 1994: Bid $12 5/8, Ask $12 7/8
Trailing 12-month revenues: $76.3 million
Trailing 12-month EPS: .39
Last quarter reported: July 1994 (FY: January)
Next quarter report date: About November 17th, 1994
Consensus EPS estimate for quarter: $0.14e vs. $0.07
FOOL ratio: .69
TRADE: Buying 380 shares, September 2nd
OVERVIEW
Boston Technology, based in Wakefield (not Boston), Massachusetts, is a telecommunications technology leader in network-based enhanced services systems. Boy, is that jargon, or what? Took us about 15 minutes of steady reading through the company's annual report to really fix on what that meant. What it means is that BSTN sells systems to regional Bell companies that enable them to offer you neat gadgets like Call Answering (the one that replaces your answering machine), Call Forwarding (the one that reroutes your calls), and the automated greetings that we all know and love so well. ("Welcome to International Consolidated Widget! If you have a rotary phone, please hold the line. For Widget Customer Service, press. . . ." Blub, blub, blub.)
Anyway, the voice-mail services now available for average phone customers like you and me have been big hits for the regional Bells. Subscribers to Call Answering service can rid themselves of their old answering machines, and let the phone service operate a voice mailbox for them for a few bucks a month. The service has some clear advantages over most commercial answering machines: for one, if you're on the phone and an incoming call comes in, your voice mailbox receives it and takes a message even with your line engaged. And retrieving messages from remote positions is extremely easy, circumventing the difficulties many people have trying to figure out how to dial from long distance and access messages from their AT&T answering machine. Most convincing of all, perhaps, we use the technology in Fool Headquarters, and we like it!
The strong success Boston Technology has already had in developing such systems for the Bells makes its aggressive, recent international expansion very promising. The U.S. is far ahead of most countries in "voice processing." This is a strong-growth, global market.
We think these shares are worth the low-to-mid $20's in the next 12 months.
BUSINESS
A BIG SLICE OF PIE. Considering its status as a relatively small upstart, Boston Tech. has quickly earned an impressively large portion of the industry pie by finding a niche.
The entire market for "voice-processing systems" (systems featuring voice mail and other enhancements) is $1 billlion. 80% of that market comprises systems bought and sold by individual corporations for in-house service. This market, which BSTN does not address, is the fighting ground of Octel Communications, Centigram Communications, and Comverse Technologies. The 20% left represents the so-called central office segment (CO), "central office" referring here to the service PROVIDERS, the phone companies. Its nearly $80 million in trailing revenues show that Boston Technology has garnered a full 40% of this market, largely based on sales of its CO ACCESS systems to three Bell companies: Bell Atlantic (44% of fiscal 1994 total revenues), BellSouth (16%), and Southwestern Bell (14%).
As you can see, these three customers together accounted for three-quarters of Boston Technology's sales last year. For some companies, such a high percentage of sales to a handful of customers might be considered a weakness. . . after all, if one of these sugar daddies were to pull out, the event might register as seismic activity in eastern Massachusetts. . . and the stock would certainly topple. However, we look at things differently: 74% of company sales are to excellent and reputable customers who represent no credit risk and strongly value the company's technology. Indeed, Boston Technology's excellent work for the Bells has enabled it to inflate sales and earnings growth domestically for the last several years while still maintaining enough freedom to pursue potentially lucrative international business.
GOING ABROAD. Fully 20% ($14 million) of Boston Tech.'s sales in fiscal 1994 (ended in January) were to foreign companies. Again, very impressive for a company this size. BSTN's biggest foreign customer is Nippon Telegraph and Telephone of Japan (NTT), the world's largest telecommunications carrier. The two companies signed a development contract for network enhanced services worth $10 million over 12 months. Combined with another contract signed with NTT prior to that one, Boston Technology now owns 80% of the Japanese voice-messaging market. Other significant business comes from South America, where the company has sold several of its systems in Brazil, including another new contract announced yesterday. BSTN has established minor business in a few other countries, but the company is still looking at a largely untapped world market.
FINANCES
While we like the company's record of past success, its current position in the marketplace, and its future prospects, we do have some concerns about the state of Boston Tech.'s finances. We're not talking debt, at all, which is minimal. Rather, the concern is with BSTN's unimpressive recent declines in cash flow from operations.
Inveterate Fools know we like companies that generate positive cash flow from running their businesses. . . companies that "spin off" cash. In the first quarter of fiscal 1995 (ended 4/94), Boston Technology sunk $6 million of operational cash flow down the drain. That was mainly due to an increase in accounts receivable from $15.3 million to $23.8 million. The company attributes that rise to many orders filling at the end of the quarter that didn't receive initial full payments, as well as a looser credit policy with some foreign partners, to help build foreign business. We'll take the company at its word.
Fortunately, that cash-eater of a quarter still left the company with $25 million in liquid investments on its balance sheet. Now, although second-quarter earnings have been reported, the 10-Q has not come out yet. But having talked with the company we have reason to believe that cash flow was basically flat for the second quarter. . . in other words, the cup stoppeth running over. That's good.
Indications from management point to continued cash-flow neutrality over the next few quarters. So although the first quarter was a setback, and although we'd prefer BSTN to be cranking out cash from operations, we're not terribly worried about the cash-flow situation, since the company continues to sit on a mound of cash reserves off of which it could draw if need be. The company would gladden Fooldom should it ever decide to break out its operational cash flow in its financial statements. Heretofore, it has not, and does not plan to. "It's a corporate decision," The Fool was told.
Getting back to that bad first quarter, it also featured revenues and earnings below projections. Earnings per share growth still showed 10 cents vs. 5 cents in the previous year's first quarter, but that was on only 18% revenue growth. The stock took a hit from the new high of $14 3/4 that it had recently established down into the mid-$8 range.
Second-quarter numbers (ended 7/94), reported August 17th, were back on track. Revenues grew 27%, and net income rose 169%. That translated into a per-share earnings gain of 13 cents, vs. 5 cents in the second quarter of fiscal 1994. That performance exceeeded analysts' consensus estimates of a dime by 30%.
With the cash-flow situation apparently under control, revenues moving forward at a healthy pace, and margins briskly improving, we see every likelihood of more large earnings gains. Third quarter consensus estimates, for example, currently call for 14 cents per share vs. 7 cents in fiscal 1994.
THE STOCK'S PERFORMANCE
The 52-week low on this stock of $6 3/8 was one year ago, last September. From there, these shares rose steadily and strongly to a peak of $14 3/4 during the NASDAQ top in mid-March. The disappointing first quarter, as mentioned above, threw BSTN down below $8 in a matter of a few weeks. After bouncing around $9 through July, these shares made a strong go of it back up the mountain in August, to their present close of bid $12 5/8, ask $12 7/8. A quarter-point spread on this stock is normal.
The relative strength now stands at 90.
Average daily volume runs 210,200 shares right now, equating to a daily dollar volume of about $2.6 million. Pretty liquid. Management, by the way, owns 27% of the company's stock.
Nevertheless, due to recent volatility in these shares (a rise from $11 5/8 to $12 7/8 over the last two days), you may wish to sit back and catch BSTN under $12. Then again, maybe it'll never go back. Remember, as William O'Neil has said, "Nobody ever got rich off eighths and quarters." We'll be purchasing tomorrow.
Limit orders advised.
PROSPECTS
We expect to make money in Boston Technology. The current P/E off of trailing 12-month earnings of 39 cents per share is 33. Our conservative 18-month growth rate for BSTN is 48%. That puts the Fool Ratio at .69. Of course, we would've been delighted to buy the stock at $9 1/2, but The Motley Fool Online didn't exist then. And we would've loved to buy the stock at $11 5/8, where it sat just two days ago, but we didn't have our report written up yet and the dang thing heated up on us.
No matter. We try always to take the long-term view in Fooldom. We think the company is highly likely to beat its earnings estimates of 47 cents for this year and 74 cents for next, making our estimated growth rate a potential undershoot. And as trailing earnings ramp higher, the Market will take more and more notice of the stock. Additionally, telecommunications remains a darling industry, even after the drubbing it took earlier this summer. BSTN's recent rise of better than 40% suggests that Wall Street likes phones again.
Of the various Boston stocks, which include such dubious picks as Boston Celtics (NYSE:BOS) and Boston Chicken (NASDAQ:BOST), we're quite sure we've picked the best. We think Boston Technology will be a Foolish winner.
Finally, keep in mind that as always, The Fool WILL be buying these shares tomorrow, but not necessarily at market opening. We commit only to "getting in" by the end of the day. You can check back tomorrow evening to see where we purchased our shares and get the weekly close on The FOOL. Fool on!
