Hello, is this Vyyo?
Joe: Hello, I am Joe Segal, and unlike the other callers I am an investor in Vyyo (Nasdaq:VYYO), not an analyst covering the share.
Davidi Gilo: Hello Joe.
Joe: I am a little concerned with the general and administrative expenses. The management of your balance sheet seems very impressive, but the items I mentioned suddenly soared to $1.7 million in the fourth quarter.
DG: Yes, that's true. We are simply looking for new business opportunities. Like we've said in the past, we plan to make a strong comeback in the Chinese market, and we see it as an excellent opportunity.
Joe: I am not sure that's good use of the money. What was that money used for anyway? Globetrotting? I think I should get some of it.
DG: Yeah, well, it was mostly used to finance lawyers, consultants and travel in search of business opportunities.
Joe: Can this number be expected to become more reasonable?
DG: Yes, it will drop from quarter to quarter, but it's important to understand we are looking for new business opportunities.
Joe: Look, I don't see how with almost $85 million in your till you spend so much on looking for new business opps. It's a buyers market. With $85 million they should be coming to you. I am surprised you pay such a great big sum on general and administrative expenses. As a shareholder I call it a waste. And by the way, now that I have you on the phone, are you planning to distribute any dividends to your shareholders?
DG/Arnon Kohavi/Michael Corwin: We see your point. Next question please.
At this point Joe Segal, the man who asked too much, is respectfully kicked off the line.
Though that last part might sound a little imaginary, it's not. It is taken from the conference call held last night by broadband communication firm Vyyo, with its three top executives, Davidi Gilo, chairman and CEO, Arnon Kohavi, senior VP strategic relations and Michael Corwin, president and COO, all present.
Who¿s got something to hide?
No public company is required to hold conference calls on the Internet or the phone with investors and analysts, which makes one wonder why they kicked Joe Segal off the line like they had something to hide.
Kohavi also couldn't provide us with a satisfactory reason why Joe was so crudely disconnected.
To be truthful, the company didn't provide details generously. Its press release was short and laconic. Though the details could have been derived from its balance sheets and loss and profit reports, the trends and the reasoning usually provided in the press release were hard to deduce.
In the five minutes it took the analysts to join the questions and answers section of the conference, the management of Vyyo shared with the audience its vision of the Chinese market it was planning to enter in high gear.
Worldcom (Nasdaq:WCOM) was responsible for 6% to 7% of Q4 revenues, the Chinese market constituted 21% of the revenues, and the rest came from small companies, mainly in the American market. "It's important to remember no one in the U.S. is necessarily committed to broadband," they explain a Vyyo.
A handsome portion of the sales
It does look like with only three workers in China the company manages a handsome portion of its sales there. The company¿s 40 workers are divided into 21 in R&D and 14 in marketing and sales, and the rest in management and administration. "We are pleased with what's been happening in China, but insallations there sometimes take time," they explain at Vyyo.
Kohavi today tells us the Chinese market could turn out to be "not real", forcing the company to announce the fact in six or nine months time. Yet he hopes he will be able to meet the forecast of one analyst, who spoke of how 70% of Vyyo¿s Q1 revenues will come from the Chinese market. "Today we know there is no market besides the Chinese market, but who knows if things will ever get back to normal," he wonders.
Gilo explained that because of consolidation there is less competition in the market, take for example the shutdown of Spike Broadband Systems, "We are selective in the choice of our market, in order to make sure we don't go on some wild goose chase. We have no intention of working hard and chasing customers, and then finding out the contract is for one little system, which we have to give away as well," he said. Beyond that Gilo explained the comapny is still making its initial entry into the Chinese market, which is why it could reveal little more.
The blurry projections affect the company's attempts at providing a revenue forecast for the next few quarters, and Vyyo said first quarter revenues will drop to the $1.7 million to $2.5 million range. The company gave no guidance regarding its bottom line, but its managers did say that Q2 forecast will be made at the end of Q1, and so on and so forth.
Everything's cool, until¿
It was all fine and dandy until management was asked about its general and administrative expenses. Even if you listened to the whole thing you didn't feel it was satisfactory. The item went up from $895,000 in Q3 to $1.7 million in Q4, and totaled $7.1 million in the entire year.
Revenues in these periods were $3.3 million in Q3, $2.9 million in Q4 and $8.2 million in the entire year. Since the company reacted aggressively and gave no alternative explanations, we can think nothing other than that this money went to the controlling shareholders, or at least this is what sources in the capital market say.
Is Davidi Gilo, with a 40% controlling stake in the company and in its well-padded till traveling around the world and looking for business opportunities, and getting paid for the pleasure as well? Though it makes sense, in light of the fact he has a top position in the company, the sum does seem a little excessive considering the company's recent results.
"Our goal is to create maximum value for our shareholders, and unlike a management which holds a very small percentage of the company, we will never sit still and just collect salaries," he says.
Kohavi attributes most of the cash went towards legal counseling and due diligence examinations in which the company took part. "We are selective," he says. "We were asked before why it was us who sought out other companies and not the reverse. I can say that the offers the company gets are not as good as the ones it seeks." The company was involved in a number of due diligence examinations that never materialized into deals.
Hate to raise expectations
The company should hurry up with the biz opps, as Goldman Sachs analyst Shimon Levy estimates it will end the year with $73 million in its cash till, reflecting a cash burn rate of $2.5 million to $3 million per quarter, according to its own publications. The cash till is the company's biggest asset, which trades at a $51 million market value.
"Vyyo was always ahead of the curve, in good things and in bad," says Kohavi. "We were the first to fall and the first to cut back. It may have been expected we will make some new announcement faster, but we are still working on it. We may do something more drastic, which is why we are taking as long as we are. I think our thoughts about what direction we need to take are different from the thoughts of other companies," he says, hinting at Netro Corporation (Nasdaq:NTRO) and Ceragon Networks (Nasdaq:CRNT), both of which announced reform, but never made a step in its direction.
"Acquiring assets, as in the case of Spike, is illogical, because Wall Street does not give such companies value beyond the cash. If it takes another six months at $2.5 million to $3 million a quarter, it's better than the burn rate we used to have. As long as, of course, we end up actually doing something about it."
In the meantime, it seems the relative calm the company has maintained recently is very possibly the calm before the storm. With this much cash in its till, it could do a 180 in much the same way Gilo did when the company was called Phasecom, and was in the business of cable modems. "We hate to raise expectations in vain," Kohavi ocncluded.