M-Systems Flash Disk Pioneers

(Nasdaq:FLSH) yesterday reported its tenth consecutive quarter of growth, but mere hours later, warned of a sea change in 2001. Salomon Smith Barney didn't hang around. Analyst Victor Halpert downgraded the company from Buy to Outperform and savaged the price objective, lowering it from $80 to $18.

The company announced results for the fourth quarter of 2000 and for 2000. All per-share results for prior periods are adjusted to reflect the company's two-for-one stock split effected on September 21, 2000.

For 2000, revenue increased by 204% to $92.6 million compared with $30.4 million for 1999. The company reported net income for 2000 (excluding a one-time charge due to in-process R&D) of $12.5 million, or 45 cents per share (diluted), compared with a loss of $1.7 million or 8 cents per share for 1999. Including the one-time charge of $6.2 million due to in-process R&D in connection with the company's acquisition of Fortress U&T, M-Systems reported a net income for the year of $6.3 million or 22 cents (diluted) per share.

For the fourth quarter of 2000, revenues increased by 165% to $29.4 million compared with $11.1 million in the corresponding quarter of 1999. The company reported net income for the quarter of $4 million or 14 cents per share (diluted), compared with a loss of $26,000, or nil per share, for the same period in 1999.

This was the company's tenth sequential quarter of sales growth.

Concerns about 2001

In a conference call M-Systems held with analysts today, its management predicted that first-quarter 2001 revenue will drop to $20 million and that earnings per share will be nil. In the fourth quarter of 2000, revenue came to $29.4 million.

The company predicts that 2001 revenues will rise to $120 million, 30% higher than in 2000. But 2001 EPS is expected to drop by 33% to 30 cents. The company blames the discrepancy between the rising revenues and dropping net on a need to spend more on marketing and R&D during 2001.

But M-Systems predicts its EPS will remain positive in 2001 largely thanks to income from financing. Several months ago M-Systems raised $150 million in a secondary offering. Its cash reserves and short-term asserts are today worth $116 million. Based on financing income of $1.4 million per quarter, the company's revenues in 2001 are expected to generate 25 cents for its EPS.

The company's operating profit in 2001 is likely to be very slim indeed. In the first quarter M-Systens will probably post operating losses of $1.5 million.

M-Systems president Dov Moran said that M-Systems will be affected by the overall slowdown in the technology sector. He added that the company's customers are either canceling or delaying orders, and that new orders tend to be minimal in the short term.

Company to expects $1 billion revenues in five years

Given these forecasts, the company's prediction that revenue will reach $1 billion in five years seems far-fetched. But Moran remains optimistic. He explains that this estimate depends on improved profit margins.

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M-Systems is expected to achieve a 30% profit margin in 2001, which Moran hopes to expand to 60% in order to achieve the billion-dollar revenue goal.

The company has high hopes for its DiskOnKey, which is being marketed by

IBM Corporation

(NYSE:IBM). M-Systems plans to develop a DiskOnKey for the 3G cellular market and is courting

Samsung

,

Nokia

, and

Ericsson

(Nasdaq:ERICY). It hopes that these firms will start marketing its products in 2003.

M-Systems notes that cancelled customer contracts do not mean that clients have gone over to M-Systems' rivals. They are a factor of the general market decline. Next year, the company hopes to increase its OEMs with firms such as

Nortel

(NYSE:NT).

With Business Wire