Interpoint Corp. Q3
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Interpoint Corp. Q3
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(FOOL CONFERENCE CALL SYNOPSIS)* By Debora Tidwell (MF Debit)
Interpoint Corporation <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: INTP)") else Response.Write("(NASDAQ: INTP)") end if %>
UNION CITY, Ca., August 28, 1996/FOOLWIRE/ --- Interpoint Corporation released Q3 1996 earnings on August 19, 1996. Aggregated earnings were $2.3 million or $0.28 per share on sales of just over $29 million. Sales grew about 55%, earnings more than doubled bringing their trailing 12-month revenues to around $97 million and $0.68 per share.
They are very pleased with the results representing strength in virtually all segments of their business. ADIC (Advanced Digital Information Corporation) led the way with 79% revenue growth versus Q3 last year and 10% growth sequentially. Earnings for ADIC went up almost 5 times, from $196,000 to about $933,000. On the Microelectronics side, they experienced also an exceptionally strong period with revenue up approximately 35% versus Q3 last year and on that 35% revenue growth they achieved approximately 56% earnings growth. The Microelectronics strength is characterized by full production on some key medical and custom programs resulting in very high utilization at capacity and very strong growth in their Power Products business.
UPDATE ON COMPANY RESTRUCTURING -- SPIN-OFF AND MERGER
The company announced transactions on July 1st where they are going through multiple steps to achieve a significant restructuring of the company. The first step is a capital contribution to ADIC in the form of forgiveness of debt and the provision of working capital. The magnitude of that contribution is around $10 million. Subsequent to that capital contribution, ADIC will be spun off on a share-for-share basis to existing ADIC shareholders as a debt-free company and they do not expect any tax consequences, that is the spin-off will be on a tax-free basis.
Subsequent to the spin-off of ADIC, they will merge the remaining Interpoint business, which at that point is fairly heavily laden with debt incurred to make the capital contribution to ADIC. They will merge the remaining Interpoint business into Crane Co, a New York Stock Exchange listed company under the symbol CR. That merger will be a tax-free exchange of stock in which existing Interpoint shareholders can expect to receive approximately $4.00 per share of Crane stock.
The deal is progressing normally. They fully expect the deal to close at this point. The major relevant documents have been submitted to the SEC. The timing of the closing of the transactions, and they will all close essentially simultaneously (the spin-off and the merger -- one is a pre-condition of the other), will be determined by the approval of documents by the SEC which they expect to occur in the first week of September or so. The shareholder vote, there is a 20-day required notice period. Assuming they achieve a 2/3 shareholder vote, they would expect the closing to occur during the first two weeks of October. That is a week or two later than their previous announcement and it is not indicative of any particular problems, it just takes a long time to file the documents associated with a fairly complex transaction of this nature.
They expect one more press release, although there is no earnings announcement between now and their anticipated closing date. They expect one more press release related to the deal, probably occuring around 10 days before the deal closes, which will confirm their early estimates with regard to the amount of cash that will be on ADIC's balance sheet (currently estimated at $1.5 million in documents filed with the SEC) and confirming the Crane payment (currently estimated at $4.00 per share). Both numbers depend on the cash and debt levels available at the time.
Due to this pending transaction, Interpoint has released ADIC's numbers separately, as a separate entity because it will be a standalone separately trading entity, for the first time in a quarterly press release. The level of detail is comparable to that contained in the documents they have submitted to the SEC. This writeup will focus on ADIC's results because it is the surviving entity. The terms of the Crane deal are set and the actual results of the Microelectronics business are significant to the value that will be received by Crane shareholders only in that they may affect the cash generation that occurs between now and closing time because the price is a function of the debt level assumed as well as the purchase price as defined.
ADIC RESULTS
They are extremely pleased to report continued excellent market trends. They did see 10% sequential growth as well as the 79% comparable quarter growth. During the period there were several significant milestones regarding penetration in the UNIX markets, which offer a great opportunity for them, in addition to strength in their more traditional Windows NT and Novell Netware based markets. They saw continued acceptance of the new products that were introduced over the last several months as well as persistent strength in their older products. There was continued progress in development of new products about which they are excited.
The operating leverage in the results is very apparent as their SG&A dropped from about 23% of sales to around 16% of sales comparing Q3 this year to Q3 last year. Last year they made heavy expenditures in Europe and domestically to get their sales and marketing as well as other areas of the business because they saw an opportunity developing that was very significant. They made those expenditures up front, so their SG&A climbed. They are now seeing the pay-off from those expenditures. Although SG&A as a percentage of revenue dropped from 23% to 16%, that is much more a function of revenue growth than it is a flat SG&A. In fact, their SG&A expenses on a dollar basis climbed 24% quarter over quarter and they have every reason to expect that they will continue to climb.
Their operating leverage went from 2.9% (operating profit as a percentage of sales) in Q3 last year up to 10.2% this year. A similar pattern was found in net income from 2.3% of sales to 6.1% of sales in Q3. They want to caution that this operating leverage improvement, while very significant, they think extremely meaningful relative to the overall health of the business. They think it is extremely significant that they are reaching a level of maturity where they can report strong operating results. They want to caution people not to expect operating leverage to continue to show this kind of trend in improvement. As they get validation of the market strength, their penetration is very strong in that market, they expect to increase expenditures to maintain share.
The press release points out that they expect sequential growth in Q4. The trends indicate that they will see sequential growth. Again, they want to caution people that while they would expect sequential growth in revenue in Q4 is typically fairly strong, they do not necessarily expect the same year-over-year comparative growth. As the numbers get bigger the comparisons get tougher and they do not, by any means, expect to report year to year growth rates at the rates they reported in the last three quarters. The company also wanted to remind people, because when results are extremely good people tend to have short memories, that ADIC has a clearly documented history over the last 12 quarters or so that Q1 is typically seasonally a little softer. They have nothing in their trend that suggests any deviation from that normal seasonality. That does not mean that they see any particular diminution of the growth, only that the seasonal pattern historically would suggest that they won't see sequential growth from Q4 to Q1.
ADIC's trailing revenues are now over $50 million and they are extremely excited about the broad potential offered by the specialized data storage market. They think it is an extremely exciting place for them and their shareholders to have their resources focused.
QUESTIONS AND ANSWERS
The company was asked what percentage of the business at ADIC is on tape libraries versus just on reselling DLT drives. The company responded that they don't break that specific product mix down due to competitive reasons, but thought it was fair to say that the majority of revenue is out of the library business. They also wanted to make it clear that they don't just resell DLT drives. They don't have any significant business at all, nor would it be strategically in their interest, to simply take the box from Quantum and resell it. All of their products are branded ADIC products where they, if it is a standalone tape drive, it is repackaged with their own power supply and in many cases a display. Various value-added elements are added to that product, they are not trans-shipping Quantum drives on the DLT side. They have the broadest library line in the industry and go from libraries that have full robotic mechanisms in a single list price $1200 DAT drive. In a product like that where you have a robotic content in a single DAT drive that can make up a significant portion of the total cost or in a DLT library that has a $2000-3000 DLT drive in it, there is gross margin pressure because in that library a single very expensive component is resold. As you move up the family of libraries (into ones at the $75,000+ range), the drives sometimes become a less-significant portion of the total cost so they can get a higher gross margin. Therefore, it is probably not appropriate to compare their gross margins to other companies with a much narrower product line.
The company was asked to talk about Hewlett-Packard and Exabyte with their Mammoth product which looks like it will be competition for DLT, and then to update where the DLT 7000 stands. The company responded that Hewlett-Packard has announced that they are going to make, at least for Interpoint, a higher-end DLT library -- a unit nominally with 4 drives. Certainly HP is a very well recognized brand name and a great company and Interpoint has to take that seriously as a new entry to the market and they do. HP is really overlapping and competing with Interpoint on one area of a very broad product line they have in terms of both DLT and other drive technologies, so that mitigates it a little bit for them. A second thing is that, as far as Interpoint understands from HP's press releases, HP is originally going to focus the product into their HP-UX marketplace and into the Open Systems marketplace. While Interpoint is beginning to enter into Open Systems and UNIX more broadly, their core market has traditionally been NetWare and NT. Nevertheless, Interpoint is very much aware of HP's entry and are monitoring it closely. With regard to Exabyte's product, it is not 100% clear to Interpoint where Exabyte is on shipping the Mammoth product. They have had some issues getting that product to market in any sort of volume. Interpoint's understanding is that logjam is beginning to break to some extent now but not completely. Interpoint thinks the product is a competitor to DLT, at least the DLT 4000 drive product. However, Interpoint thinks that DLT has had a good 6-9 month run here and has built a lot of market share. Interpoint is not convinced that people will switch back as aggressively as they switched to DLT -- that remains to be seen. The 8mm Exabyte product certainly has some installed base out there, but Interpoint thinks that the window of opportunity has been shut a little bit on that. DLT 7000 is moving forward nicely and they anticipate having a product based on that technology shortly.
The company was asked if there were any large ADIC orders during the quarter that might have distorted the revenue growth upward. The company responded that the short answer to that is no. They cannot say that there are any non-recurring, one special effect order -- the underlying diverse business is reflected in these Q3 numbers. They also did not see any change in average selling prices either.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ * 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. Note: Statements made by a company other than historical information may constitute forward-looking statements for which the company can claim protection under the Safe Harbor Act. Please consult the company's filings with the SEC for information on risk factors which might cause actual results to differ materially from the information contained in these forward-looking statements. |
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Copyright 1996, The Motley Fool |