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Friday, September 26, 1997
Periphonics Corp.
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Phone: 516-467-0500
Price (9/26/97): $10 15/16
HOW DID IT FIND TROUBLE?
It's not likely that you're one of the three million taxpayers who filed a 1040EZ federal tax return last year over the phone using TeleFile, but you might have used Schwab's VoiceBroker to get stock quotes or make trades. Both use Periphonics's interactive voice response (IRV) system. Hopefully, though, you haven't been using Schwab's system to buy Periphonics stock. Investing in PERI has been perilous of late.
From its initial offering in early 1995 to February 1997, the stock quadrupled on exceptional growth. Investor's Business Daily couldn't get enough of the company, delivering not one but two articles on Periphonics in its New America section last year.
Trouble began in late February when these shares dropped from $26 1/2 to $11 1/4 on an announcement that third-quarter results would fall to $0.15 per share, missing the $0.22 estimates. Yet, a week later, a spate of last-minute orders salvaged the quarter and the estimates, and the stock swam back to $17 a share.
The volatility persisted, with the shares sinking back to $11 1/4 before then doubling in anticipation of strong fourth quarter results announced July 16. Earnings were $0.30 per share, two cents ahead of estimates. But the stock plummeted 26% to $15 1/2 because sales grew by just 13%, down from 33% and 27% growth in the previous quarters. Investors took decelerating sales as a bad omen -- and it was.
On Sept. 19, the company said sales fell 3% in the fiscal 1998 first quarter. Higher overall expenses, a sizable shift toward lower-margin service revenue, and high R&D expenses resulted in EPS of just a penny, badly missing the $0.15 estimates. The stock slipped back to that magical $11 1/4.
BUSINESS DESCRIPTION
Periphonics develops automated interactive transaction processing systems, the stuff that allows you to call a company's database and find out what you need to know by using touch-tone signals or, now, simple voice commands. You can check your bank balance, place a stock trade, or request product information to be sent by fax.
In automating certain customer service and sales features, these systems allow Periphonics' customers to operate more efficiently. American Express, for example, is rolling out a Periphonics' system that will allow customers to call its Travel Services computer to check and book flights using voice commands. The system is expected to cut the time and cost of transactions, allowing the Travel unit to boost bookings.
Periphonics' systems run on RISC-based computers using the UNIX operating system and are designed for easy expansion. The company targets mid-sized and large-scale organizations. Its systems are used in more than 50 countries; international sales accounted for a third of revenue last year. Competitors include Brite Voice Systems, Syntellect, and Intervoice, with IBM, Lernout & Hauspie, and Nuance also in the general field.
The company was founded 25 years ago and operated under Exxon's venture capital arm until a management buyout in 1986. The top managers have been with the firm for an average of 15 years. Insiders own about a quarter of the outstanding shares.
FINANCIAL FACTS
Income Statement
12-month sales: $110.5 million
12-month income: $10.4 million
12-month EPS: $0.74
Profit Margin: 9.4%
Market Cap: $152.7 million
Balance Sheet
Cash and Securities: $26.7 million
Current Assets: $69.1 million
Current Liabilities: $13.9 million
Long-term Debt: N/A
Ratios
Price-to-earnings: 14.8
Price-to-sales: 1.4
HOW COULD YOU HAVE SEEN IT COMING?
Small technology firms often see customers delay purchases until the very end of the quarter in hopes of getting a good deal from managements desperate to meet earnings projections. That makes these stocks more volatile and explains the February surprise. That scare plus the decelerating top-line growth should have put investors on notice that more trouble might be on the way.
WHERE TO FROM HERE?
Periphonics' first quarter results showed total sales down 3% as a 30% increase in service revenue couldn't make up for a 13% decline in systems sales. The company had tough comparisons since it had booked a very large order from the Internal Revenue Service in the first quarter of FY97. Still, orders falling out of the quarter plus higher operating costs due to heftier sales and marketing expenses made for dismal results. Indeed, without $369,000 in interest income, the firm would have reported a loss.
In July, Chair and CEO Peter J. Cohen said revenue growth of 20% to 25% was "achievable" this year. That target no longer looks so achievable, though Cohen did say second quarter results would likely match those growth targets.
First Call reports consensus EPS estimates of $1.02 for the year ending next May and $1.25 for FY99, but that was before the first quarter debacle. Assuming the company makes estimates from here on out, it will do just $0.88 for the year, or just shy of the $0.90 reported for FY97. Assume the results run 20% shy of estimates (nearly at FY97 levels) and you're looking at $0.70 a share, for a forward PE of 16 for a company once expected to grow earnings by 21% a year.
The company does have $2 a share in cash and hefty 10% margins when sales are strong. Plus, the overall business seems worth further investigation given that Microsoft recently took a stake in Lernout & Hauspie. But given the shocking earnings surprise, Periphonics shares will likely be in for some further short-term reverberations.
- Louis Corrigan, [email protected]
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