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Thursday, July 24, 1997
Data
Race HOW DID IT FIND TROUBLE? Data Race was off and running in the latter half of 1996 when its stock quadrupled in price. However, like many a racehorse, the stock has faded in the back stretch, and it now trades for less than half of its January highs. While there is considerable excitement about the Be There! Personal Multiplexer system, the product has been a bit slow to come to market. The company missed earnings estimates in the last quarter and brokerage downgrades followed. Short interest expanded smartly during the fall, increasing from 100,000 to almost 1 million shares. In spite of a positive article in the June 2 issue of Forbes and impressive product reviews, the stock continues to sputter. The company simply isn't selling the units profitably. Sales of $14 million over the past nine months have resulted in losses of $4 million. If a hot new technology gets off to a lukewarm start, enthusiasm often cools, and that is trouble for a high flying stock. Negative cash flow, balance sheet erosion, and mounting losses have caused investors to head for the exits. BUSINESS DESCRIPTION San Antonio-based Data Race is in the business of helping telecommuters and traveling workers tap into their home offices in a unique way. The Be There! multiplexer allows the user to fax, e-mail, surf the 'net, make phone calls, and communicate with the home computer all through a single phone line. It does this through the multiplexer, which basically carves up the bandwidth into parts for each function. Slick idea really. This obviates the need for additional phone lines at home or on the road. The company also makes custom modems for laptop computers, but this business has faltered over the past year. The loss of IBM as a major customer has significantly decreased the importance of this product line. FINANCIAL FACTS Income Statement 12-month sales: $19.3 million
12-month income: ($8.6 million)
12-month EPS: ($2.06)
Profit Margin: N/A
Market Cap: $47.7 million
Balance Sheet
Cash: $6.4 million
Current Assets: $10.3 million
Current Liabilities: $3.8 million
Long-term Debt: N/A
Ratios
Price-to-earnings: N/A
Price-to-sales: 2.5
HOW COULD YOU HAVE SEEN IT COMING? The real question with Data Race is not how it got from $24 to $9, but rather how it got to $20 in the first place. A look at the 10-K last fall would have given the prudent investor all of the knowledge needed to avoid the entire debacle. Revenues had declined over 40% in the prior year, losses had widened, cash flow was significantly negative, and shareholder's equity had been cut from 16.1 million to 7.9 million. This clearly wasn't the fodder for a huge run up in price. The company's custom modem business was clearly faltering. Then Data Race introduced its Be There! product, sparking renewed enthusiasm for the company. There was promise of big deals ahead. However, the potential for the product is limited. First of all, it's not cheap, costing $800-$2,000 per user. Second, although Data Race has patents pending on its multiplexer, there are evidently many ways to skin this cat, making a bulletproof patent unlikely. In a recent Frost and Sullivan report on the private line equipment market, over 100 companies were listed as players. Any success by Data Race will be met with competing products. The three 10-Q reports subsequent to last fall's 10-K continued to paint a bleak picture. Cash flow continued to be significantly negative. In the most recent quarter, the company burned $2.5 million on an operating basis. Losses widened. The company had to go to the capital markets for a line of credit and it issued convertible preferred stock for $5 million in a private placement. Data Race had all the ingredients for a short-seller's dream stock. WHERE TO FROM HERE? Let's let the company help you decide. This statement comes from the April 424B3 registration: "In February 1997, the Company launched its teleworker products business. The business represents a new line of business for the Company which is significantly different from the Company's existing network multiplexer and custom modem businesses, and presents a unique set of risks and challenges for the Company. The Company has not recorded any significant revenue from the products." The bottom line for this Fool is that without sales, the company is headed for further trouble. The custom modem business appears to be in decline and losses continue to mount, as does the cash burn. The company will need to continue to go to the capital markets to fund its business unless earnings turn positive in the near future. The communications industry is one of the most competitive in today's marketplace. Right now, Data Race appears to be in a race against time. -Mark Weaver, MD ([email protected])
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