AST Sees Sales Jump as Vindication of Decision to Take on PC Giants

Not long ago, market analysts shook their heads when Irvine-based AST Research Inc. plunged into the fiercely competitive personal computer market with its own line of IBM-compatible machines.

The industry was already swarming with about 20 manufacturers of IBM compatibles, and few observers believed that AST could elbow its way into the crowd aggressively enough to make its “Premium/286” machine a success.

While some analysts remain skeptical, AST feels vindicated.

The company will report today that it achieved record sales of $206 million during the fiscal year ended June 30, up 20% from $172.3 million a year earlier. The revenue increase is attributed to soaring sales of AST’s new computers late in the year.

AST’s profits are another story. Squeezed by high start-up costs and lower profit margins for the new computer line, AST’s net income fell 52% to $13 million in fiscal 1987 from $27.2 million in fiscal 1986.

For the fourth quarter, AST reported sales of $63.2 million, up 37% from $40 million a year ago. Final-quarter profits were $2.9 million, down 30% from $4.1 million in 1986.

Dismissing the earnings decline as a temporary problem, AST President Safi Qureshey said the revenue increase provides proof that AST’s foray into the personal computer field was the right move at the right time.

Only seven months after the first Premium/286 computer rolled off AST’s assembly line in Irvine, the machines currently account for more than half of the company’s total sales.

Sales of AST’s traditional lines of add-on circuit boards and other computer components were essentially flat in 1987. While the company has no plans to abandon the components business, personal computers are seen as the engine that will drive AST’s future growth.

“When Honda wanted to get into the automobile business, everybody in Japan was against that,” said Qureshey (pronounced Ku-resh-ee). “Honda surprised the hell out of everybody in Japan.”

In Qureshey’s view, AST’s computers are to its traditional products what Honda’s first cars were to its motorcycles back in the 1960s.

“We have gone from the computer enhancement business to providing total solutions,” Qureshey said. “That was very difficult for many outsiders to understand.”

Some outsiders remain unconvinced.

“I think their systems line is a mistake,” said New York market analyst Richard Shaffer, editor of the Technologic Computer Letter. “It still isn’t a factor in the market. The top players are the same top players as six months ago. AST is not among them.” The market is dominated by IBM, followed by Compaq and Tandy.

Shaffer said he believes that AST will fare better by continuing to develop enhancement boards for other manufacturers’s machines, rather than by making its own computers. He noted that enhancement products typically have a 50% profit margin, contrasted with about 30% for personal computers.

Other observers, impressed with the robust sales figures, are more upbeat.

“AST is in a transition period,” said Benny Lorenzo, an analyst with the investment firm L.F. Rothschild, Unterberg Towbin in New York. “For the company to maintain its growth, it had to diversify beyond its traditional components business into computer systems. It’s a strategy that’s fraught with risks, but I think it has been a good move for AST.”

Candace King Weir, an analyst with the securities firm of C.L. King & Associates in New York, said she believes the company’s move into the systems market was sound.

“Their product is very competitive,” King said. “It’s price competitive, it’s very strong on features, and it delivers a lot of bang for the buck.”

Founded in 1980, AST specialized in developing add-on circuit boards designed to upgrade the memory storage and other performance capabilities of computers made by IBM and other manufacturers.

Its initial growth was rapid, but by late 1986, AST was faced with the prospect of declining markets for its original products. IBM was upgrading its computers to incorporate many of the features contained in AST’s add-on boards, and other computer makers were following suit.

Last October, AST announced that it would begin manufacturing its own line of personal computers comparable to IBM’s AT model, which uses a high-performance “286” microprocessor chip. AST began shipping its Premium/286 computers in January.

Sales of the machines exceeded even AST’s most optimistic expectations. Premium/286 sales accounted for 25% of AST’s revenue during the three months ended March 31. The figure jumped to 42% during the fourth quarter.

Since their introduction in January, AST has sold 20,000 of its personal computers, producing more than $40 million in revenues.

Currently, the computers account for about one half of AST’s sale.

AST is currently shipping Premium/286s at a rate of about 8,000 per month and is running eight weeks behind in filling orders. The company expects to sell at least 120,000 personal computers this year, capturing as much as 5% of the market for AT-compatible machines.

Some analysts believe that the new computers will account for as much as 60% of AST’s fiscal 1988 sales, which are expected to exceed $350 million. They are also projecting higher profits ahead as the heavy start-up costs that depressed 1987 earnings begin to pay off.

“Fiscal 1987 marks what we view as the company’s most significant diversification move with the entry into the computer systems market,” said AST Chief Financial Officer Jerry Ulrich. “The company has made a major transition.”

Later in the year, AST plans to introduce a new computer using the super-fast “386” microprocessor chip contained in the latest generation of high-end personal computers, such as the recently introduced IBM Model 80.

The market should become less skeptical in about six months, Ulrich said, when AST “will begin showing up on the pie charts” that measure manufacturer market share.

Some AST personnel believe that personal computers have the potential to transform AST into Orange County’s “cornerstone” technology company, with annual revenue in the range of $500 million to $1 billion within the next five years. Qureshey, a native of Pakistan who founded AST with two other foreign-born engineers, is reluctant to peer too far into the future, at least publicly.

“People would laugh, the same way they laughed when we told them our last five-year projection,” he said.

In 1983, Qureshey declared publicly that AST “will become a $200-million company . . . and also manufacture our own computers.”

They laughed at that one four years ago, but not any longer.