How can this stock be going up?...Will we see a big drop tomorrow....?... Cash is virtually gone and $20,000,000 of Credit line is used. The bleeding doesnt seem to be subsiding....Is there something I am missing here? Or are these results as bad as I see them?...
Lets start out by giving Scott and David Kudos for not pushing "strong financials" statement. Revenues are about 400k less than a year ago. So this says that INOC revenue has not rebounded from the post 9/11 enviroment that they were touting a year ago. This is in keeping with their statements of last quarter that they are not looking to bring on new clients and pretty much shows that there are no new clients on board. What is interesting is that they have managed to *almost* sustain a level of revenue given losses of clients. This says that their existing clients are providing more business opportunities.
Moving on, what is disheartening is to see that they have managed to trim some of the direct costs of revenues, but have lost that to SG&A that is 1.5 million higher than a year ago - this with reductions in headcount. To me this is indicative of a company that is very heavy on the G&A end. My bet is that the remaining headcount is very heavy on the management and executive end. Rumor has it that at one time INOC had "5 managers for every worker". This is borne out when you look at total operating expenses being 10.8 million versus 8.5 million a year prior.
This gives us a picture of a company that is sustaining revenue, but operating expenses are much higher than before. Looking at cash flow and expendatures, it appears that cap ex is significantly down, however since they have a net loss, any cash expendatures are going to hit the line of credit. This is shown by the 5.9 million in cash USED by operating activities. Therefore operating activities were USING cash and not providing cash. Hence the reason we did not hear the mantra of being cash flow positive.
So, we have determined that INOC is not cash flow positive and that they have hit the line of credit for an additional 5.6 million to cover operating expenses (which are 2.6 million higher than previous year). This is interesting since margins are up 11% from previous quarter. On one hand you have margins looking higher, yet this does not flow through to higher net profit. Doesn't take a rocket scientist to figure out that there is something wrong if you are making more margin but losing money. SG&A is down to 9.3 million (from 9.5 million previous quarter and from 12.4 million in sept.) however this is still higher than the 7.7 million of a year ago. Still a ways to go in trimming SG&A.
So here is my take on the financial end.. INOC is doing better than they have over the past quater in cutting costs, however they are far from where they were before. It seems that during the june-september 2002 timeframe, SG&A took a 5 million dollar jump- presumably in IT headcount to implement a "new" system. However it appears that not only had IT grown, other areas, presumably account teams and managers have grown also. Bottom line, there is still a lot of SG&A that needs to be trimmed to return to profitability. Scott needs to revisit his "productivity and efficiency" of his staff and take a look at ALL areas.
Now lets look at the mix of clients 42% of revenue is linked to telcos (Telco and DSL). These numbers are combined because - who else other than telcos provide DSL? Yes there are competitors using TELCO lines, but it all boils down to telco related activities. Though this is historically lower than Innotrac has had in the past, it is still a high mix. Hopefully if they can push the direct marketing division (or dump it), this will help the mix.
I do take notice of Scotts statement of growing existing client operations organically, thus significantly reducing the start up costs. Many times existing clients come up with new promotions orservices that require a totally new process for servicing them. This is especially true for the telco;s who change their favorite marketing methods every couple of years. Remember, years ago caller Id units were the rage and renting these units was the norm. Then came free units, just pay for service, after that -rebates; and now we have something totally different.. DSL modems. Each of these was an "organic" growth that requires MAJOR systems changes and implementation costs. Hopefully the business and revenue requirements that Scott spoke of apply to existing clients as well as new clients.
So after this long dissertation, here is the bottom line. INOC is heading in the right direction, but will they be able to reduce expenses and raise revenue while sustaining margins before the credit line runs out. They currently are burning 2 million a month on average. This gives them a max time of 10 months before the credit line is exhausted. They are predicting profitability in the next 6 months, so it will be tight.