Kentek Info's Q1
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Kentek Info's Q1
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(FOOL CONFERENCE CALL SYNOPSIS) Randy Befumo (MF Templar)
KENTEK INFORMATION SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: KNTK)") else Response.Write("(NASDAQ: KNTK)") end if %> ALEXANDRIA, Va., October 21, 1996/FOOLWIRE/ --- Kentek Information Systems booked $14.052 million in revenues in its fiscal first quarter compared to $17.7 million in the same period last year. Sales of printers were $2.2 million, down from $4.5 million in the comparable period. Revenues from consumables (supplies and spare parts) were $11.8 million, a drop of $1.4 million from the $13.2 million the company notched up last year. After a number of one-time charges for the sale of some real estate in Japan, the company earned $0.16 EPS compared to a pro forma $0.17 EPS in the same period last year. (The reason it is called pro forma is because last year's earnings were not taxed, but for comparative purposes the company has stated last year as if it were taxed at the 40% ongoing rate it anticipates for its operations. By doing the comparison on a pro forma basis, it makes the comparison much more meaningful.)
WHY WERE REVENUES SLOW? For Kentek's original equipment manufacturers (OEMs) such as NCR and Unisys, orders remained "a bit slow." For Kentek's value-added resellers (VARs), now mainly Genicom and Mannesman Tally, they are essentially frozen right now for a few more weeks as everyone is waiting to see the Hewlett-Packard D6-40, a new 40 page-per-minute printer. Customers want to get a sense of what the H-P product offers for its price to compare it with other offerings and are holding off on the purchase of any mid-range printers. Finally, supply sales were very strong in the second half of last fiscal year and in fact so strong that they have caused the first quarter supply sales to be weak as the customers work off their inventory. Kentek expects supply sales to remain a bit soft next quarter and believes it will resume its normal supply sale pace in the second half of this fiscal year.
NEW PRODUCTS, NEW CUSTOMERS. Kentek has gotten Standard Register as a new customer and expects between now and Christmas that Standard will sell 30 to 40 printers, although Standard's sales force says they have orders already for 15 to 20. Kentek believes that Standard is a 200 printers a year account, a pace which Standard should hit next summer. Standard also will introduce Kentek's new magnetic ink character recognition product. Kentek completed the training of Standard's sales force in the Southeast, Northeast and they are excited about where this business will go over the coming months. In order to accelerate the stagnant OEM business, Kentek has also hired a new Vice President of Sales, an OEM sales guy with a strong sense of systems integration and the VAR channel. They do not believe that they will get any more OEMs or VARs as new customers in the next 90 days, however.
GROSS MARGINS. In the first quarter, Kentek had 45% gross margins versus 34% last year. This margin shift was driven by three factors; the mix of product, the dollar-yen ratio and their continued efforts to build stuff in the United States. The mix affected the gross margin because it shifted towards consumables, which carry higher margins. The yen has considerably weakened over the past year, moving from 95 yen to the dollar to 109 to the dollar. As Kentek has Japanese operations, this affects its overall profits. Finally, Kentek has continued to build its products in the U.S. cheaper than they did in Japan. It was the increase in margins that allowed Kentek to post basically flat earnings per share on a 38% increase in the base shares outstanding.
RESEARCH & DEVELOPMENT AND THE KW-60. Research & development spending this year was $2.3 million versus $1.2 million last year. This is all due to the continued effort on the KW-60, Kentek's 60 page-per-minute printer that it is developing. Kentek is in the testing phase for the print engines, with four engines printing in Japan, one in the U.S. and then a second new engine not ready to print yet, but assembled more out of U.S. parts than the first five. The engines they have pass paper well and the engineers feel that the registration is already more accurate than their existing product line. Kentek has a lot of work to do in the controller software area and the engine is clearly ahead of controller and software. Kentek's schedule is for customer evaluations next September/October, final production in late November/early December and ready to order in January/February of 1998.
SELLING THE TAMA, JAPAN PROPERTY. On the tax-line, they recorded a 40% tax rate -- however, they have to pay a Japanese tax on the sale of the Tama, Japan property. Kentek owns this property because it bought a company called Halfstar in 1988. When Kentek bought the Tama property as part of the Halfstar acquisition, it paid more than the underlying book value of the company. As they have sold the property now, the purchase price that they selling it for is higher than the initial purchase price and the tax basis in which Halfstar had on the land therefore it is a taxable gain. However, Kentek has a book loss. That is how they have an $871,000 loss and yet have a taxable event in Japan. This will result in a net cash outflow of $300 to $400 thousand.
STATUS WITH OCE AND PRINTRONIX. Oce is a European company that bought out one of Kentek's customers. Concern was that all business would stop with the customer as Oce made mid-range printers. However, Oce sent Kentek a price that it was willing to pay for Kentek printers and Kentek agreed, as the margins were still fine to the company. Kentek sent the contract amendment but has not received it back yet. As for the pending lawsuit with Printronix, Kentek believes that they are just arguing over the amount of the settlement right now and this will have no impact on future results.
LOOKING FORWARD. On the balance sheet, Kentek has $26 million in cash, or $3.74 per share. Their current book value is $6.63 per share. The underlying assets and liabilities have not changed dramatically from year to year. For next quarter, they expect revenues of Revenues of $11 to $12 million and marginal profitability. They are forecasting margins in the low 30s due to volume of sales versus fixed costs. They see a recovery in the business in the first quarter of calendar 1997 as the H-P situation clarifies and their OEMs start firing on all cylinders. The market will begin to look forward to the KW-60 sales. Kentek anticipates the H-P is overblown and they will be limited to the UNIX reseller channel because they are not providing the VARs with rich enough margins, given their pricing. The company is considering both acquisitions and a share repurchase currently, but will likely do nothing until the November 15th meeting of the Board of Directors.
Transmitted: 10/21/96 * A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. |
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Copyright 1996, The Motley Fool |