Optimus falls out of investor favor with focus on low-margin business
The reason? Its core business isn't profitable enough, analysts said.
"Year by year the situation repeats itself. The company generates almost nothing at the operating level," said Benita Mikolajewicz, equity analyst at ING Barings, which removed Optimus earlier this summer from the list of Polish stocks it covers.
"The company was trying to diversify production and switch to more profitable businesses, but without any success," Mikolajewicz said.
While publicly-traded IT peers such as ComputerLand and Prokom Software focus more on high-margin services such as systems integration, Optimus generated 74% of consolidated revenue in 1997 from relatively low-margin computer hardware sales.
Optimus retains a leading 17.4% share of the Polish PC market, but is feeling the squeeze like other producers as the sector becomes increasingly competitive. "Basically, the sector they're in is not an attractive business. I don't think they have much chance of a decent return on equity by assembling computers, said Pawel Lubecki, an equity analyst with Erste Securities Polska, who also doesn't include Optimus in his coverage universe of tech stocks.
Optimus, the parent company that specializes in computer hardware sales, generated a zl. 2 million ($571,000) operating profit on sales of zl. 321 million ($91.7 million) in the first eight months of this year, Mikolajewicz said. That gives a wafer-thin operating margin of 0.6%.
Although not directly comparable, this compares to a 2.9% operating margin for 1997 on a consolidated basis. This margin would include results from subsidiaries that are in businesses other than computer assembly.
In a written reply to Business Journal questions, Optimus' management said "a major portion" of the margin on computer sales is going toward investment in "new technological solutions." Management said it expects "a substantial rise" in operating profit from this September as sales increase, although it did not give revenue and profit forecasts for 1999 and beyond.
With operating margins so thin, Optimus' net profit largely comprises financial income. The parent company reported a zl. 41.3 million ($11.7 million) pre-tax profit for the first eight months of this year, driven largely by dividends from cash-register subsidiary Optimus IC and the sale of a call option on a 14.9% stake in Netia Telekom, which has a license to build and operate local telephone services in Krakow, Gdansk, Poznan and Opole.
Optimus will receive $10 million from the sale of the Netia option and spread the income across its 1998, 1999 and 2000 profit and loss accounts, Mikolajewicz said.
Investors seem to share analyst's worries about Optimus' core operations, judging by the stock's performance in recent months. Although the WIG all-share index had fallen 27% from the start of the year to last Tuesday, Optimus' stock lost 58% of its value during the same period and closed last Tuesday at a 1998 low of zl. 39. The stock had risen as high as zl. 125 in 1997.
And because investors aren't calling their brokers to ask about Optimus, many analysts are concentrating instead on more sought-after tech stocks like ComputerLand, Prokom and software company Softbank. (See related story, page 7.)
Analysts said they won't resume coverage of Optimus until the company shows clear signs that it's shifting its sales mix toward higher-margin activities such as systems integration, internet services and data transmission.
"I don't believe in the company long term, with the exception of systems integration. But moving to systems integration is a different business to the one they have now, and it requires a change in the company culture," Lubecki said.
Optimus' current hardware emphasis reflects the company's origins - it was founded as a computer assembler in 1988 by current CEO Roman Kluska.
Although management would not forecast how the group's future revenue will be divided between hardware sales and value-added services such as systems integration and internet projects, there are signs that Optimus is starting to change its business mix.
The company is betting heavily that it can increase its systems integration presence through a cooperation agreement with Lockheed Martin Corp. The joint venture aims to secure IT and integration contracts for government and economic projects in Poland and Central Europe - including, analysts said, the job of computerizing Poland's armed forces.
The exact size and timing of the military tender are not yet known. But Marcin Sadlej, an equity analyst with Societe Generale Securities Polska, said the Polish armed forces have an IT budget of about $600 million for the next few years. And a successful bid by the joint venture could enable Optimus to receive its first revenue from the contract by the end of next year, analysts said.
"Such news might dramatically change the view on the company. It's a very large contract, and sales from it could be comparable with sales from hardware activity," Sadlej said.
That's providing, of course, that the Optimus joint venture will see off stiff competition at the bidding stage.
"Lockheed Martin is a very good partner, but this market is very competitive. There are a lot of companies existing on the market with much more experience than Optimus" in this area, Mikolajewicz said, referring to players such as Prokom and ComputerLand.
Optimus said in the second quarter of this year that it planned to list Optimus IC and also systems integrator Optimus Comfort on the WSE in the long run. While this would be a way of raising external equity financing for subsidiaries, company management said last week that current trends on major world stock exchanges are inappropriate for IPOs.
"Year by year the situation repeats itself. The company generates almost nothing at the operating level," said Benita Mikolajewicz, equity analyst at ING Barings, which removed Optimus earlier this summer from the list of Polish stocks it covers.
"The company was trying to diversify production and switch to more profitable businesses, but without any success," Mikolajewicz said.
While publicly-traded IT peers such as ComputerLand and Prokom Software focus more on high-margin services such as systems integration, Optimus generated 74% of consolidated revenue in 1997 from relatively low-margin computer hardware sales.
Optimus retains a leading 17.4% share of the Polish PC market, but is feeling the squeeze like other producers as the sector becomes increasingly competitive. "Basically, the sector they're in is not an attractive business. I don't think they have much chance of a decent return on equity by assembling computers, said Pawel Lubecki, an equity analyst with Erste Securities Polska, who also doesn't include Optimus in his coverage universe of tech stocks.
Optimus, the parent company that specializes in computer hardware sales, generated a zl. 2 million ($571,000) operating profit on sales of zl. 321 million ($91.7 million) in the first eight months of this year, Mikolajewicz said. That gives a wafer-thin operating margin of 0.6%.
Although not directly comparable, this compares to a 2.9% operating margin for 1997 on a consolidated basis. This margin would include results from subsidiaries that are in businesses other than computer assembly.
In a written reply to Business Journal questions, Optimus' management said "a major portion" of the margin on computer sales is going toward investment in "new technological solutions." Management said it expects "a substantial rise" in operating profit from this September as sales increase, although it did not give revenue and profit forecasts for 1999 and beyond.
With operating margins so thin, Optimus' net profit largely comprises financial income. The parent company reported a zl. 41.3 million ($11.7 million) pre-tax profit for the first eight months of this year, driven largely by dividends from cash-register subsidiary Optimus IC and the sale of a call option on a 14.9% stake in Netia Telekom, which has a license to build and operate local telephone services in Krakow, Gdansk, Poznan and Opole.
Optimus will receive $10 million from the sale of the Netia option and spread the income across its 1998, 1999 and 2000 profit and loss accounts, Mikolajewicz said.
Investors seem to share analyst's worries about Optimus' core operations, judging by the stock's performance in recent months. Although the WIG all-share index had fallen 27% from the start of the year to last Tuesday, Optimus' stock lost 58% of its value during the same period and closed last Tuesday at a 1998 low of zl. 39. The stock had risen as high as zl. 125 in 1997.
And because investors aren't calling their brokers to ask about Optimus, many analysts are concentrating instead on more sought-after tech stocks like ComputerLand, Prokom and software company Softbank. (See related story, page 7.)
Analysts said they won't resume coverage of Optimus until the company shows clear signs that it's shifting its sales mix toward higher-margin activities such as systems integration, internet services and data transmission.
"I don't believe in the company long term, with the exception of systems integration. But moving to systems integration is a different business to the one they have now, and it requires a change in the company culture," Lubecki said.
Optimus' current hardware emphasis reflects the company's origins - it was founded as a computer assembler in 1988 by current CEO Roman Kluska.
Although management would not forecast how the group's future revenue will be divided between hardware sales and value-added services such as systems integration and internet projects, there are signs that Optimus is starting to change its business mix.
The company is betting heavily that it can increase its systems integration presence through a cooperation agreement with Lockheed Martin Corp. The joint venture aims to secure IT and integration contracts for government and economic projects in Poland and Central Europe - including, analysts said, the job of computerizing Poland's armed forces.
The exact size and timing of the military tender are not yet known. But Marcin Sadlej, an equity analyst with Societe Generale Securities Polska, said the Polish armed forces have an IT budget of about $600 million for the next few years. And a successful bid by the joint venture could enable Optimus to receive its first revenue from the contract by the end of next year, analysts said.
"Such news might dramatically change the view on the company. It's a very large contract, and sales from it could be comparable with sales from hardware activity," Sadlej said.
That's providing, of course, that the Optimus joint venture will see off stiff competition at the bidding stage.
"Lockheed Martin is a very good partner, but this market is very competitive. There are a lot of companies existing on the market with much more experience than Optimus" in this area, Mikolajewicz said, referring to players such as Prokom and ComputerLand.
Optimus said in the second quarter of this year that it planned to list Optimus IC and also systems integrator Optimus Comfort on the WSE in the long run. While this would be a way of raising external equity financing for subsidiaries, company management said last week that current trends on major world stock exchanges are inappropriate for IPOs.
