Macquarie cuts QStream target in half

If you hang around Starbucks for even three minutes, you’ll undoubtedly bump into members of the accounting profession who’ll be quick to tell you that “things are slowing down.” The audit work is fine, but the rest of the business is getting soft. QuStream (QVC:TSX) designs and produces wideband routing switchers, live news switchers, point-to-point links and compact single-chassis interface processors. Does their Q4 slowdown reflect what the accountants are seeing?

This from Macquarie Research:

“Disappointing 4Q07 results

Event

QuStream reported 4Q07 results below our estimates. The company is not holding a conference call to discuss the results until 22 April 2008.

???? 4Q07 revenue of $6.7m was below our estimate of $7.8m. Revenue declined 2% YoY or 13% QoQ. Adjusted EPS was $0.03, inline with our estimate.

???? Commercial (broadcast) revenue declined to $1.8m from $5.0m in 3Q07. The sharp decline in commercial revenue was offset by strength in US government revenue which grew from $2.8m in 3Q07 to $4.9m.

Impact

???? In 2007, commercial revenue declined 6% to $15.3m (flat on constant US dollar basis) and government grew 78% to $10.6m. However, government is an unpredictable source of revenue and commercial revenue is supposed to be the growth engine.

???? Growth from new signal processing products and expansion in international sales (12% of total in 2007 and 2006) have disappointed while penetration in its traditional US mobile TV production truck market appears saturated.

???? 4Q07 ending backlog was US$1.5m, down from US$3.8m in 3Q07 and US$2.3m in 4Q06. Inventory levels have increased from $6.0m in the beginning of 2007 to record highs of $11.4m in 3Q07 and $12.8m in 4Q07.

???? Cash at the end of 4Q07 was $1.8m and debt was $2.0m. QuStream recently added a $5m revolving operating facility and a $2.0m term loan.

Earnings revision

???? We have reduced our sales estimates in 2008 from $30.2m to $26.5m and in 2009 from $34.8m to $29.1m to reflect uncertainty over commercial growth and a lack of compelling new product announcements ahead of NAB 2008.

Price catalyst

???? 12-month price target: Revised down to $1.10 (from $2.30) based on a reduced multiple of 1.0x (versus 1.5x previously) our 2009 sales estimate of $1.16/share less $0.09 in debt per share.

???? Increased product traction with fixed broadcasters and international growth.

Action and recommendation

???? Lower backlog, increased leverage and higher inventory levels leave us cautious on the stock. We have lowered out rating to Neutral and recommend investors stay on the sidelines until growth initiatives show greater traction.”

Speaking of Macquarie’s Canadian Research group, only 4.22% of all firms under coverage are currently rated “Underperform”. Is that a “buy” signal or a “sell” one?

MRM