Feltl and Company Research Department. Please see important disclosures at end of report.
120 South Sixth Street, Suite 2600Minneapolis, MN 55402 1-866-655-3431
Enterprise / Communications
September 25, 2003
Financial Summary
*
pro forma, tax-adjusted estimates**
preliminary, pending expected divestitureCompany Description
Captaris, Inc.
(CAPA - $4.65)
Adjusting Model for MediaLinq Sale, Preliminary FY04
BUY
Key Points:
· Reiterate BUY recommendation and maintain 9-12 month price target of $6, based on a multiple of 1.0x EV/Sales (implied cash per share equals $2.95).
· Estimates adjusted to reflect the sale of MediaLinq, with revenue contribution only for the first two months of Q303. As a result, we have lowered Q303 revenue from $24.5 million to $22.5 million (MediaLinq business assumed to be running at $2 million per month) and Q403 revenue from $25.6 million to $20.3 million. For the full year FY03, revenue estimate reduced from $95.8 million to $88.5 million.
· We assume MediaLinq had been contributing approximately $0.01 per share in earnings per quarter. Given the elimination of one month in Q303, our adjusted EPS estimate remains unchanged at $0.04. Additionally, our adjusted Q403 EPS estimate remains unchanged at $0.05 based on a slightly higher revenue assumption for RightFax. · We have also provided a preliminary view for FY04 based on the assumption
CallXpress is sold prior to the end of FY03. For the year, we believe Captaris can grow its RightFax business base by nearly 20% from approximately $62.1 million in FY03 to $73.9 million in FY04. By factoring out the large losses associated with CallXpress in FY04, we arrive at an adjusted EPS estimate of $0.34. (Note: Growth rates shown in Model for FY04 reflect actual or expected results for RightFax business in FY03). · Captaris recently announced that it has completed the sale of its MediaLinq subsidiary
to Ptek Holdings, Inc. (PTEK - $8.55) for approximately $16.9 million, including a cash payment of approximately $15.3 million and assumption of $1.6 million in liabilities. · We believe strategic moves by Captaris have positioned the Company to show a
long-term growth rate in the range of 20% over the next several years. CallXpress had been in a long-term downtrend for several years and MediaLinq (while a profitable business) was expected to show annual growth in the range of 5%.
· The Company ended Q203 with approximately $76 million in cash. Adjusting for the MediaLinq sale and expected sale of CallXpress, we anticipate the Company could end FY03 with over $100 million in cash or a per share range of $3.00 to $3.30.
Investment Recommendation / Valuation Methodology:
We reiterate our BUY recommendation and 9-12 month price target of $6, based on a multiple of 1x EV/Sales applied to our FY03 estimate of $88.5 million. Again, we believe Captaris is well positioned to show sustained growth in excess of 20% over the next several years and look for the Company to continue to expand its technology partnerships / product offering around its Business Information Delivery capabilities.
Source: Reuters.
Joseph P. Sullivan, CFA
[email protected]
(612) 492-8849
Price: $4.65 52-Week Range: $6.23 - 1.50 Target: $6 Rating: BUYShares Outstanding: 30.8 mil
Float: 30.0 mil
Mrk. Capitalization: $143.2 mil
Ave. Volume: 386,000
Instit. Ownership: 54%
BV / Share $3.24
Debt / Tot. Cap.: 0%
Est. LT EPS Growth: 20%
Exp. Next Rpt. Date: 10/15/03
Captaris is a leading provider of unified communications and mobile business solutions that allow businesses to improve all channels of communication. The Company’s products address the unified messaging, voice messaging, fax server, document delivery and mobile wireless markets. The Company maintains relationships with several leading technology vendors and channel partners, including Alcatel, Cisco, Ericsson, IBM, Microsoft, Oracle and Xerox.
Rev (mil) 2002 2003E 2004E**
Mar $21.5 $21.6A $16.7E
Jun $22.7 $24.0A $17.8E
Sep $23.1 $22.5E $19.0E
Dec $27.2 $20.3E $20.4E
FY $94.6 $88.5E $73.9E
P/Sales 1.5x 1.6x 1.9x
EPS* 2002 2003E 2004E** Mar ($0.02) ($0.02)A $0.06E
Jun ($0.01) $0.04A $0.08E
Sep $0.00 $0.04E $0.09E
Dec $0.01 $0.05E $0.11E
FY ($0.02) $0.11E $0.34E
Fiscal Year Fiscal Year Mar-02 Jun-02 Sep-02 Dec-02 Fiscal Year Mar-03 Jun-03 Sep-03 Dec-03 Fiscal Year
2000A 2001A Q1A Q2A Q3A Q4 A 2002A Q1 A Q2 A Q3 E Q4 E 2003E Revenue 100,537 91,939 21,543 22,748 23,087 27,223 94,601 21,610 24,048 22,500 20,300 88,458 Year-over-year growth % -8.6% 5.5% -3.4% -2.7% 12.4% 2.9% 0.3% 5.7% -2.5% -25.4% -6.5% Cost of Sales 33,408 34,646 8,164 8,184 8,920 10,340 35,607 7,902 8,583 7,943 7,105 31,532 Gross Profit 67,129 57,293 13,379 14,564 14,167 16,883 58,994 13,708 15,465 14,558 13,195 56,926 Operating Expenses S,G & A 45,796 55,916 12,093 12,970 11,581 13,722 50,366 12,146 11,140 10,500 9,200 42,986 R & D 10,223 13,878 2,698 2,749 3,088 3,434 11,969 2,805 2,858 2,675 2,225 10,563 Other 972 4,448 389 (555) (247) (413) 539 679 700 725 2,643
Total Operating Expenses 56,991 74,242 15,180 15,719 14,114 17,403 61,922 15,490 14,677 13,875 12,150 56,192 Operating Income 10,138 (16,949) (1,801) (1,155) 53 (520) (2,928) (1,782) 788 683 1,045 734
Other Income (expenses) 5,629 3,344 374 508 506 858 2,246 412 351 450 500 1,713
One-Time Items 4,341 2,790 5,119 7,909
Pretax Income 15,767 (17,946) (4,217) (5,766) 559 338 (8,591) (1,370) 1,139 1,133 1,545 2,447
Income Tax 5,086 (5,944) (2,109) (2,018) 196 (446) (4,377) (480) 399 396 541 855
Tax Rate 32% 33% 50% 35% 35% -132% 51% 35% 35% 35% 35% 35%
Net Income 10,681 (12,001) (2,108) (3,748) 363 784 (4,214) (889) 740 736 1,004 1,591
Diluted Shares Outstanding 31,987 32,039 31,826 31,890 32,047 31,579 31,836 30,220 30,816 31,000 31,000 30,759 EPS (as reported) 0.33 (0.37) (0.07) (0.12) 0.01 0.02 (0.13) (0.03) 0.02 0.02 0.03 0.04
Net Income (excluding extraordin.) 10,681 (9,109) (714) (421) 2 380 (752) (540) 1,182 1,191 1,476 3,308 Fully Diluted EPS (pro forma) 0.33 (0.28) (0.02) (0.01) 0.00 0.01 (0.02) (0.02) 0.04 0.04 0.05 0.11 Income Statement (% of Rev)
Gross Profit 66.8% 62.3% 62.1% 64.0% 61.4% 62.0% 62.4% 63.4% 64.3% 64.7% 65.0% 64.4%
S,G & A 45.6% 60.8% 56.1% 57.0% 50.2% 50.4% 53.2% 56.2% 46.3% 46.7% 45.3% 48.6%
R & D 10.2% 15.1% 12.5% 12.1% 13.4% 12.6% 12.7% 13.0% 11.9% 11.9% 11.0% 11.9%
Operating Margin 10.1% -18.4% -8.4% -5.1% 0.2% -1.9% -3.1% -8.2% 3.3% 3.0% 5.1% 0.8%
Pretax Margin 15.7% -19.5% -19.6% -25.3% 2.4% 1.2% -9.1% -6.3% 4.7% 5.0% 7.6% 2.8%
Net Margin (Fully Taxed) 10.6% -13.1% -9.8% -16.5% 1.6% 2.9% -4.5% -4.1% 3.1% 3.3% 4.9% 1.8%
Balance Sheet Data
Cash and Equivalents 88,423 77,172 74,433 73,990 70,645 74,089 71,773 75,674 Accounts Receivable 16,010 14,597 14,137 14,303 15,967 17,811 15,570 15,218 Inventories 6,249 5,022 4,816 5,881 5,175 2,928 2,187 2,023 Working Capital (deficit) 98,317 82,120 80,882 79,445 78,921 56,105 48,385 38,990 Total Assets 130,244 135,360 133,281 124,509 122,620 121,277 117,538 120,210
Captaris Corp.
Mar-04 Jun-04 Sep-04 Dec-04 Fiscal Year Q1 E Q2 E Q3 E Q4 E 2004E 16,700 17,800 19,000 20,400 73,900 25.0% 15.3% 18.8% 17.9% 19.0% 5,912 6,230 6,593 7,018 25,752 10,788 11,570 12,407 13,382 48,148 6,400 6,435 6,475 6,550 25,860 1,800 1,825 1,860 1,895 7,380 700 700 700 700 2,800 8,900 8,960 9,035 9,145 36,040 1,888 2,610 3,372 4,237 12,108 475 500 525 550 2,050 2,363 3,110 3,897 4,787 14,158 827 1,089 1,364 1,676 4,955 35% 35% 35% 35% 35% 1,536 2,022 2,533 3,112 9,202 32,000 32,000 32,000 32,000 32,000 0.05 0.06 0.08 0.10 0.29 1,991 2,477 2,988 3,567 11,022 0.06 0.08 0.09 0.11 0.34 64.6% 65.0% 65.3% 65.6% 65.2% 38.3% 36.2% 34.1% 32.1% 35.0% 10.8% 10.3% 9.8% 9.3% 10.0% 11.3% 14.7% 17.7% 20.8% 16.4% 14.2% 17.5% 20.5% 23.5% 19.2% 9.2% 11.4% 13.3% 15.3% 12.5%
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Analyst Certification
I, Joseph Sullivan, certify that the views expressed in this research report accurately reflect my personal views about the subject company and its securities. I also certify that I have not been, am not, and will not be receiving direct or indirect compensation related to the specific recommendations expressed in this report. Disclosures:
Feltl and Company Rating System: Feltl and Company utilizes a four tier rating system for potential total returns over the next 12 months, and a three-tier system for risk assessment.
Potential Total Return Assessment
Strong Buy: The stock is expected to have total return potential of at least 30%. Catalysts exist to generate higher valuations, and positions should be initiated at current levels.
Buy: The stock is expected to have total return potential of at least 15%. Near term catalysts may not exist and the common stock needs further time to develop. Investors requiring time to build positions may consider current levels attractive.
Hold: The stock is expected to have total return potential of less than 15%. Fundamental events are not present to make it either a Buy or a Sell. The stock is an acceptable longer-term holding.
Sell: Expect a negative total return. Current positions may be used as a source of funds. Related Risk Assessment
Speculative: Business and financial risks are significantly greater than the market risk. The company has an inconsistent operating history and the share price may have significant volatility.
Aggressive: Business and financial risks are higher than the market risk. The company has a history of revenue growth and/or operating profits. The share price may be more volatile than the general market. Market: Business and financial risks are in line with the general market.
Disclosure Statement
The information contained in this report is based on sources considered to be reliable, but not guaranteed, to be accurate or complete. Any opinions or estimates expressed herein reflect a judgment made as of this date, and are subject to change without notice. This report has been prepared solely for informative purposes and is not a solicitation or an offer to buy or sell any security. The securities described may not be qualified for purchase in all jurisdictions. Because of individual requirements, advice regarding securities mentioned in this report should not be construed as suitable for all accounts. This report does not take into account the investment objectives, financial situation and needs of any particular client of Feltl and Company. Some securities mentioned herein relate to small speculative companies that may not be suitable for some accounts. Feltl and Company suggests that prior to acting on any of the recommendations herein, the recipient should consider whether such a recommendation is appropriate given their investment objectives and current financial circumstances. Past performance does not guarantee future results.
Conflicts of Interest
Investors should assume that Feltl and Company is seeking or will seek investment banking or other business from the companies in our research universe. From time to time, Feltl and Company, or its officers, directors or agents, or members of their families, may have a position in securities mentioned and may make purchases or sales of the same in the open market or otherwise, and may own options, rights or warrants to purchase the same. Feltl and Company may be a market maker and may act as principal or agent with respect to the sale or purchase of securities mentioned, and may have managed or co-managed a public offering of the securities mentioned within the last three years. Additional information is available upon request.
Feltl & Company does make a market in the subject security at the date of publication of this report. As a market maker, Feltl & Co. could act as principal or agent with respect to the purchase or sale of those securities.
As of the end of the month preceding the date of publication of this report, Feltl & Co. did not beneficially own 1% or more of any class of common equity securities of the subject company.
Feltl & Co. has not been engaged for investment banking services with the subject company during the past twelve months and does not anticipate receiving compensation for such services in the next three months. The analyst or any member of his/her household does hold a long or short position, options, warrants, rights or futures of this security in their personal account(s).
The analyst has not received any compensation for any investment banking business with this company in the past twelve months and does not expect to receive any in the next three months.
No director, officer or employee of Feltl & Co. serves as a director, officer or advisory board member to the subject company.
Feltl & Co. has served as a broker, either as agent or principal, buying back stock for the subject company’s account as part the company’s authorized stock buy-back program in the last twelve months. Feltl & Co. may possibly serve as the company’s broker, either as agent or principal, as part of the company’s authorized buy-back program in the next three months.
There is not any actual material conflict of interest that either the analyst or Feltl and Company is aware of.
Risks to Achievement of Price Target
The area of high technology remains volatile and future growth may depend on improvements in the overall economy and IT spending levels in the future. Competitors may also develop competing products that could affect the Company’s future growth potential. In addition, one of the Company’s primary product sets, its CallXpress product line, has seen a significant decline in sales volume over the last several years. Captaris has also had a recent history of losses and while the Company has recently reported profitable results, our assumption of future profitability may be subject to change.
Feltl and Company Ratings Distribution (9/25/03)
Ratings Distribution for Feltl & Co. 9/25/03
SB/Buy 74% Hold 23% Sell 3%
Feltl and Company provided investment banking services for 3% of the Research covered companies over the last twelve months, of which 1 was rated Buy/Strong Buy and none were rated Hold or Sell.
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Date Nature of Report Rating Price Target
11/7/02 Coverage Initiated Buy $4.50
2/7/03 Preliminary Q403 Buy $4.50
4/3/03 FY02 Results Buy $4.50
5/9/03 Q103 Results Buy $5.50
5/22/03 Valuation Analysis Buy $5.50
8/1/03 Q203 Results Buy $6.00
9/25/03 MediaLinq Sale Buy $6.00
Buy Init. (11/7) Target $4.50
Buy (5/9)
I
NSTITUTIONAL
S
ALES
: (866) 338-3522
Thomas Pierce
Senior Vice President – Institutional Sales
(612) 492-8817
Mark Hagen(612) 492-8846
Paul M. Manley
612-492-8853
Ryan Quade
(612) 492-8807
Jo Pihl
Senior Vice President
(612) 492-8859
DIRECTORY
