Risk-Taker AST Research Now Trying to Turn Big Sales Into Big Profits

AST Research is an aggressive company that doesn’t shy away from risk. So, it stands to reason that aggressive investors, willing to take some lumps, would be most likely to buy into the Irvine-based computer maker that had the nerve, and, critics will say, the audacity, to enter the personal computer market in December 1986.

Back then, many PC clone manufacturers were getting the chips beat out of them in price wars that left several companies, such as Tandon and AT&T;, in serious trouble.

But against all odds, AST has succeeded in establishing itself as a serious player in the PC marketplace, competing against the behemoth IBM and other well-entrenched PC manufacturers, such as Compaq, Epson, NEC and Tandy.

AST, founded in 1980, originally made a name for itself by tapping the large demand for PC add-ons, such as clocks and extra memory and multifunction boards, that were were not included in the earlier versions of personal computers.

During its glory years of 1984 and 1985, AST piled up hefty sales and profits from the sale of its SixPakPlus and Advantage enhancement boards. In November, 1985, the company’s stock hit a high of $32 per share. Then, in 1986, with the add-on market shrinking, the company made a big bet that it could sell its own high-end personal computers and work stations.

Low of $7

That idea was not well received. AST stock price suffered a long and protracted nose dive, hitting a low of about $7 after the October stock market crash.

The poor stock performance was part of a downturn for technology in general and clearly reflected investors’ doubts that AST could gain a foothold in the the PC market. Since the Oct. 19 crash, AST stock had climbed back to $10.125, although it closed Friday at $9.25.

“We were told that there wasn’t any need for one more computer,” said AST President Safi U. Qureshey. “But we’ve proven there is a market for our products, which are neither IBMs and Compaqs, nor low-priced clones, but something in-between.”

Last year the company shipped more than 80,000 of its PCs, called the Premium/286. By the fourth calendar quarter, PC sales accounted for about 70% of the firm’s total revenues.

The machine, generally given high marks for quality by personal computer reviewers, sold because it was loaded with extras and because AST slashed prices to undercut IBM and Compaq products, according to analysts. The machine is comparable to the IBM AT and also runs software written for OS/2, the new operating system employed by the latest IBM machines.

Impressive List of Clients

For its efforts, AST has an impressive list of corporate and government clients, including Chemical Bank in New York, Wells Fargo Bank, MCI, and the government of Hong Kong.

In the six months ending last December, the company had sales of $171 million, with a net income of about $2 million. In fiscal year 1987, which ended last June, the company had revenues of $206 million with a net income of $13 million.

In December, 1987, the company introduced a new line of machines, the Premium/386, which uses the new and faster 80386 Intel chip. Early indications are that sales are going “very well,” according to Qureshey. The company has also launched an all-out advertising campaign, including full-page ads in the Wall Street Journal in January and February, declaring the company’s good health.

But big sales so far haven’t turned into big profits, and some analysts still have doubts that AST can turn their new machines into moneymakers. “So far they have done a remarkable job for a business that a lot people gave no hope for at all. But there’s still a lot of risk out there,” said Richard Schaffer, editor of the Technologic Computer Letter, an industry newsletter published in New York.

“You can see revenue growth, but it doesn’t necessarily follow that AST made a wise choice. It’s one thing to buy shelf space for your product with profits from other product lines--and I think that’s what AST is doing. I could sell dollar bills for 98 cents all day long. But you can’t do that forever.”

Many Obstacles

AST still has many obstacles to overcome, according to Schaffer. First the company has to walk the fine line between aggressive pricing to get new sales and keeping margins high enough to earn some money.

That may be difficult, because of an industrywide shortage of memory chips that has caused AST to raise prices twice in the last three months, once in December and again in March. The company is charging from 5% to 15% over last year’s prices for its products, which range in price from about $2,000 to $8,000. Qureshey said that sales so far have not been adversely affected.

In fact, AST boasts a large backlog. As of early March, AST had a backlog of more than 14,000 personal computers, contrasted with almost no backlog a year ago, according to Blake Childs, an analyst with Bateman Eichler, Hill Richards in Los Angeles. Childs said the level of backlogs is “a testimony to the popularity of the machine” but added that backlogs can turn into a double-edged sword if customers have to wait too long for the computers. They are now waiting about six weeks, which Childs said is longer than customers would have to wait for an IBM or a Compaq but is still acceptable.

Childs is recommending the stock as a speculative, capital gains play for aggressive investors “who don’t mind taking on some risk.” He looks for AST to have sales in excess of $100 million for the quarter ending in March, with dividends of 30 cents a share. That contrasts with sales of $55 million, and a dividend of 29 cents, for the same period a year ago.

However, in the last two quarters the company only paid a dividend of a penny and 17 cents respectively, a reflection of the cost of entering the PC market, according to Childs. “But I think the dry spell is now over,” said Childs, who is looking for annual dividends of $1.25 per share.

The company’s stock movement has looked good since the beginning of the year. Still, the stock hasn’t reached its December, 1986, level of $12.875, while Schaffer’s computer index has increased in value by 14% since then.

Said Schaffer: “AST is a bum or a hero, depending on when you bought the stock.” That’s usually the way it is.