Australia’s leading whitebox system builder is facing tough times as the company fights off aggressive pricing from big branded PC manufacturers in a margin war that is leaving everyone bruised and battered.
Optima Technology Solutions, a $130 million dollar hardware provider has found good business over the years selling well into a number of small and medium sized reseller outfits, but more importantly the company has garnered a fair share of the big contract tenders from Government and Education.
Notably in the past few months Optima has announced major supply and maintenance deals with the NSW Roads and Traffic Authority, and the NSW Department of Education and Training. It is already preferred supplier in the public school sectors of
Optima Chairman Cornell Ung says even more announcements of this stature are likely to be announced in the coming months as the company works hard to secure deals in the growing management and maintenance outsourcing space.
The RTA deal announced in late January is potentially worth $5 million over the two year term of the contract. While the NSW Department of Education and Training deal is worth a healthy $16 million over three-years, but Optima must share that with another supplier.
It’s deals like this that have enabled Optima to achieve the number one position as Australia’s largest PC manufacturer, a daunting challenge when you look at the history of PC hardware in Australia. Similar competitors have been closed down, swallowed up, or just faded away, as multinationals prospered through large Government accounts despite what appeared to be legislative controls to give them a fair chance.
But in the last fiscal year, ending June 30 2005, Optima grew strongly in what was admittedly an improving market. Its results showed an 11 per cent revenue growth off the back of a 12 per cent rise in unit shipments. While this evidenced some margin squeeze occurring in 2004/5 it was nothing compared to the fall in average sale price and margin compression that was to come.
In its latest half yearly results announcement, the rot that is affecting the PC business set in at Optima, putting a big whole in the company’s earnings and signalling hard times ahead.
In the first six months of this financial year the PC business, if it were possible, got even harder with a rush of new entrants into the pro/consumer notebook market. The expansion in the number of brands was countered by a significant discounting war assisted by even greater efficiencies form manufacturers in
Speaking to the June 30 2005 fiscal results, Optima Chairman Cornell Ung pointed to consolidations in the PC industry and growing pressure from multinational vendors, lower prices and squeezed margins as the main challenges facing his company. In response Optima identified the Digital Home space as a new growth area, so far protected by healthy margins, growing consumer interest and disinterest from multinationals.
But Optima’s support and enthusiasm for Microsoft Windows Media Center is not matched by the wider consumer population and with Microsoft showing little interest in promoting the platform on the Australian market, this ploy failed to ignite the company’s revenues.
So a new initiative from Optima, announced recently, focuses its consumer push via a new business under the listed company’s domain. The 3CShop is something of a buyer’s cooperative, and takes a slightly different approach of leveraging the offerings of many vendors to a shortlist of reseller organisations.
Even Optima acknowledges that the Digital Home “is not quite there yet” as a market force and Ung reports that consumer electronics sales, which “slowed significantly in the last quarter of 2005”, prompted the company to review its channel strategy and launch 3CShop. Even so, despite last year’s enthusiasm, Optima now believes this market segment will not make a significant contribution to the business in the coming six months.
In the PC space, Optima’s Chairman admits the company didn’t have the product it needed to take advantage of the high growth experienced by the rest of the PC industry last year. So while unit sales grew by some 6 per cent according to Ung, the sell price fell by 20 per cent leaving a 9 per cent whole in the company’s revenues.
Ung told SmartOffice News that the company needs to increase its unit shipments by as much as 20 per cent to make up for the lower margins and average selling price, just to maintain acceptable earnings levels.
But with the focus increasingly on fully-featured low-cost and entry level notebooks, Optima’s existing range, while admirable, is just not cutting it in the heated grab for marketshare over the past nine months.
To that end Ung says the company plans to introduce several new models into a low price point Optima range of notebooks over the next two of three months beginning in April.
Apart from new low-cost notebook offerings, Optima is working hard to build its services business which showed a growth rate of 40 per cent for the first half. Though Ung admits this is still not a significant revenue generator for the company, desktop management services designed to help reduce total cost of ownership for large fleet buyers will become an increasingly important part of the Optima business.
Ung said this new product set will help it re-capture some of the market it is currently missing out on and with new Government business in the pipeline, he is confident of getting the company back on track.
That confidence wasn’t enough to stop Optima ICM Director Scott Brown quitting his stock in the company following the March announcement of last year’s second half results.
Optima ICM, the ASX entity, currently has only three directors, Cornel Ung – Executive Chairman and chief executive; Pip (Pipvide) Tang, a non-executive director and company secretary, a finance guy of 30 years experience and Scott Brown, another non-executive director with a finance background.
On the sixth of March, the same day Optima Technology Solutions announced a net loss of more than half a million for the first half of fiscal ’05/’06 Scott Brown offloaded 288,387 shares at $0.068 cents, nearly the entire portfolio owned by himself and his wife. Brown kept only 3750 shares in the company. The last time he disposed of shares was following the crisis in the company’s management structure last year when he sold 100,000 at a price of $0.115.
Similarly Pipvide Tang one of the company’s three directors sold down his own holding in the company’s share register last April reducing it by two thirds to just over 2 million shares.
Ung points out that Optima has 100 million shares in the market and the decision by Brown to sell down is his own. Ung says the company’s major shareholder, a private owner other than himself, is not selling their shares. Ung himself owns more than 32 million shares in the company.
At the December cut-off for the half year financial figures Optima Technology Solutions had only $2 million in the bank, not a significant amount for a large manufacturer turning over $130 odd million a year. Ung reassured SmartOffice News saying the company has no debt other and a debt facility in place which it has not yet used.
“We are in a healthy cash position,” said Ung.
But the company’s trading position is not as healthy as it once was. Characteristic of its major trading sector in government and education, Optima traditionally performs better in the second half of the fiscal year than in the first, so as Ung points out this current half should redress some of the losses made in the first half.
Ung has also moved to mitigate the loses by attacking the costs base leading to a reduction in total overheads by more than 10 per cent already. More recently the company reduced its marketing expenses by firing its outsourced consultants and bringing the function in-house.
It all spells tough times for Optima. Whether the company can reverse its position remains to be seen, but when you look at the second half results from 2003 to 2005, it’s easy to see that fundamental changes have occurred in this business.
Optima’s Second Half Results
|
Period |
Revenue |
After Tax Profit (Loss) |
|
2nd Half 2003 |
$56.1 millions |
$1,319,000 |
|
2nd Half 2004 |
$55.5 millions |
$198,000 |
|
2nd Half 2005 |
$45.2 millions |
-$659,000 (loss) |