Ancor Communications Q2
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Ancor Communications Q2
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(FOOL CONFERENCE CALL SYNOPSIS)* By Dale Wettlaufer (MF Raleigh)
Ancor Communications (NASDAQ/SC: ANCR) BUFFALO, N.Y., Aug. 28, 1996 /FOOLWIRE/ -- Ancor Communications, Inc. announced on August 14, 1996 financial results for the second quarter ended June 30, 1996.
Sales for the second quarter were $2,095,982, an 88% increase from sales of $1,113,371 in the 1995 second quarter. Sales for the 1996 first half totaled $3,511,748, an increase of $1,724,902. Fibre channel sales were up nearly 150% in H1 1996 as compared with H1 1995. The net loss for the quarter was $849,170, or 10 cents loss per share, compared with a net loss of $872,197, or 12 cents loss per share, for the second quarter of 1995. The net loss for the first half of 1996 was $1,705,957, or 20 cents loss per share, versus a net loss of $1,932,529, or 27 cents loss per share, for the 1995 first half. Gross profit in the second quarter of 1996 improved to 45.5% of sales, compared to 40.4% of sales in the comparable 1995 quarter. Gross profit in the 1996 first half improved to 45.7% of sales, compared to 37.1% of sales in the first half of 1995. The gross margin improvements are due to sales of higher-margin switches and volume efficiencies.
Operating expenses, as a percentage of revenues, continue to decrease even though total operating expenses are higher due to programmed increases in expenditures for sales, marketing, and engineering personnel. The primary changes in the balance sheet last quarter involved increases in receivables and inventory. These increases (extended terms for payment and loaned evaluation inventories) support the company's aggressive efforts to penetrate markets. Long-term debt was almost entirely eliminated through the retirement, in June, of the $1.5 million note to IBM. Additional paid-in-capital of ~$1.9 million was realized through the exercise of warrants and options on ~465,000 shares. Through the end of Q2, nearly two-thirds of the March Reg. S Preferred Stock offering has also converted into common stock with no net cash impact.
Shares outstanding equal 9.6 million. More than half of the company's liquidity is represented by cash and short-term investments. Non-cash invested capital turnover dipped somewhat to 1.3 turns with higher quarter-end receivables and inventory, compared with 1.4 turns in Q1. Inventory turned 1.8 times vs. 2.2 in the previous period due to almost one-third of that inventory being placed with customers for product evaluation. A/R DSO's high number is due to the granting of extended terms for international customers to introduce the company's product and create goodwill with early adopters.
Stephen O'Hara, Ancor's president and chief executive officer, said the revenue growth in the second quarter and year-to-date periods reflects growing market acceptance of Fibre Channel (FC) as a high performance data communications technology. "Customers in our target markets--high performance storage I/O, client/server and networking--are increasingly recognizing the performance, scalability and interoperability advantages that Ancor's Fibre Channel products offer," said O'Hara. "We're particularly pleased with recent reference accounts in all three of our target segments: Sequent in high performance storage; Kobe University in high performance backbone networking and Pacific Ocean Post, the production company responsible for compositing special effects for the movie Independence Day, in high performance client/server." Ancor now has reference accounts to further penetrate this industry.
"We are on our operating plans for 1996." Expenses are increasing, as expected, to support the company's plans for growth in H2 1996 and FY 1997. "Our plans forecast the rate of revenue growth for the second half of the year that will enable us to absorb planned expense growth while steadily diminishing our net losses." The company would like to achieve a net profit in the coming two quarters but will be satisfied to break into the black in early FY 1997.
Milestones for H1 1996 include: Signing a major OEM, expanding Ancor's salesforce, penetrating two major applications (storage and the movie industry), expanded product marketing efforts, enhancing internal processes, and preparing for a major market education and promotional campaign. New product development continued on schedule in Q2 and new, comprehensive interoperability test procedures have been implemented. Ancor also completed requirements for its NASDAQ/NMS filing as of the Q2 earnings release date.
The company's H2 plans include: strengthening its marketing efforts; expanding its customer application area; increasing international channel partners; expansion of domestic salesforce; introduction of new products; continuing process improvements; and increasing revenues. The company will hire a VP of marketing and increase personnel in marketing communications and product marketing areas. Ancor is committing $1 million over the next 12 months to a program of public relations, advertising, and seminar programs aimed at key customers and influential user groups. Where possible, the company will leverage the efforts of the Fibre Channel Association and the Gigabit Ethernet (GE) Alliance. The company plans to continue to market to the movie industry, which represents a multi-million dollar opportunity and which is comprised of decision makers who move quickly and who have almost insatiable needs for bandwidth.
The company also plans to penetrate three new markets: broadcast, oil & gas, and the financial services industry. Ancor has identified specific applications and has held preliminary discussions with both potential customers and channel partners in each of these markets. "We expect to have successful test implementations in H2 1996 with volume sales in 1997." The company also expects its international channel partners group to expand with the addition of integrators in the U.K., Germany, and Asia. Additional sales representatives in the domestic markets will be focused on prospects in the South, Southwest, and Southern California. The company also plans to introduce two new products in H2 1996. One will involve a high-performance WAN interface and the second will involve high-performance ethernet connectivity. "We now have a roadmap which will allow customers to have high-performance networks for ethernet and fibre channel desktops through the wide-area."
Process improvements, leading eventually to ISO 9000 approval, will continue with product development and customer service processes being the main targets for the rest of 1996. All of the above are intended to increase revenues, reduce costs, and improve quality.
Sequent's Numa Q product is on schedule and they have shipped the first unit to Oracle while Intel expects to take delivery on the second system. Ancor will commence switch shipments to Sequent in Q3. Sun has been a disappointment for the company even though Sun is making a strong move into fibre channel. The company will continue to work with Sun; Ancor participated in Sun's systems August, 1996 engineering conference. Ancor has lowered its 1996 revenue expectations from Sun, though they don't expect this to impact their overall FY revenue target. The AT&T installation continues and the two companies are discussing expansion of the system. This multimedia system is expected to show significant growth in 1997 and 1998: "We are currently developing relationships that could have OEM potential in the future."
Q&A
Sun Microsystems is primarily developing a class-2 implementation on their FC card, which is a 266 Mb card and not gigabit. Ancor's focus has been on gigabit and its class-1,2, and 3 switches. The company will continue its focus on the more comprehensive, higher-performance switches and hopes that Sun will work with them on those products in the future. Sun is not backing away from FC, though.
For now, Ancor is shipping products to AT&T for internal use and evaluation, not for an OEM contract. They have been in talks with television networks and expect to have a test implementation, network-owned broadcast facility FC network in place by the end of 1996. As soon as there are commercially-priced optics and parts that can handle it, Ancor will move to 2 GB switches. At the moment, it would cost $5,000 per port, which the market wouldn't support at this time. The standard has been approved, so it's a matter of pricing right now. Ancor does not know why IBM is supporting its proprietary SSA technology while 9 of the 10 top storage companies are supporting FC.
OCS/Pixel worked on the movie "Independence Day" using FC, but the biggest win for Ancor during the quarter was with Lockheed-Martin, where they installed a FC test-bed in the middle of Q1. The test ran through the middle of Q2, when they purchased a $250,000 system for data backup. This is a shadow network that allows L-M to complete their data backup in the limited time during the day when their network is not online or being serviced. O'Hara commented that he thinks they can move horizontally into other industries to fulfil similar needs. Ancor is now bidding on other, unrelated network projects, with Lockheed-Martin following the good reviews they received with the storage implementation.
In the re-seller market, Ancor is changing its focus on the type of re-seller they're looking for. In the oil & gas industry, Ancor is looking at a multi-hundreds of millions in revenues re-seller, which is the prototype of what they are looking for elsewhere. O'Hara responded to a question on competition by saying that he doesn't think there are any other companies with comparable products. Other companies doing class 2-3 backplane switches will help expand the FC market but do not compete with Ancor's performance systems. There are other companies implementing non-switched, non-intelligent hubs which do have good FC applications at the low-end before customers are ready to move up to switching. The company is not aware of having competed with Hewlett-Packard on any switching systems contracts.
Kobe will start installing their network in Q4 and will become a reference account, though they are not at the moment. This is a multimedia account which may lead to wider applications. As Kobe continues to rebuild from its earthquake, more and more infrastructure is being based on fiber optics, which presents opportunities for Ancor.
Ancor's FibreLink product is a gateway (non high-performance) product which supports 10 and 100 Mhz ethernet, FDDI, Token Ring, and ATM. Ancor has already announced a high-performance product for ethernet and WAN gateways but has not yet released details, which may be coming in H2 1996.
The GE alliance has approved the FC-0 and FC-1 layer of FC, which is a fiber optic interface. As for the differences between GE and FC, that is why Ancor is on the steering committee for GE. Gigabit ethernet has many issues to be resolved, such as flow control and quality-of-service, which have already been solved for fibre channel. Until there are GE standards, it is hard for Ancor to say what the differences will be between FC and GE. With FC volumes increasing while costs come down, and the smaller amount of silicon that is used in FC, FC may be a "great solution for the gigabit arena."
Capital expenditures on fixed assets amounted to $500,000 in H2 1996.
Ancor is working with the Society of Motion Picture and Television Engineers (SMPTE) right now to develop the FC standard for the broadcast industry. The company's seminars and presence at the recent SIGGraph (Special Interest Group Graphics--a high-end group working with high-power workstations in TV and film) show were successes. At the April National Association of Broadcasters show, Silicon Graphics, Hewlett-Packard, Panasonic, Tektronix, and Avid all announced support for FC and pronounced it "the technology of choice for the broadcast industry." Ancor continues to work with these companies and others to enter the broadcast market.
The NASDAQ/NMS application should take a few weeks, as of August 14.
The Sequent order will start shipping in Q3 but the company doesn't comment further on backlog. The first part of that order, in the "couple of millions of dollars range," should ship through Qs 3 and 4.
It is Ancor's contention that ATM is not a strong LAN technology, having been developed in part by the telcos for the WAN, which is comprised in part by SONET, which has synchronous and asynchronous transfer modes. "If ATM were going to be the backbone, there would not be such a thing as gigabit ethernet or FC being looked at in that arena now. FC has pushed out ATM in the backbone world." The company does not expect FC to become a WAN technology though O'Hara believes that its reach can extend beyond the current 10 km. to 20-30 km. with new optics, repeaters, and fiber. They are currently working with a major telephone company on a wide-area interface; O'Hara believes there can be a very strong accommodation between FC and the local and metropolitan-area networks connecting to ATM on the WAN for long-haul transmission. The company's FibreLink product can interface with ATM networks as there is a Fore Systems card in that device. Additionally, the company's communications server can interface with ISDN on the WAN.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ * 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.
* 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 |