EIP Microwave Betting on Work-Station Market as It Digs Its Way Out of Trouble
EIP Microwave has had a winter to forget. But the Newport Beach manufacturer of microwave test and measurement equipment has a shot at eventually coming out of its deep freeze and regaining its niche in the lucrative defense contracting business.
In December, 1987, the company was indicted on federal charges that it illegally shipped its products overseas. In January, the company reported a loss of $729,000 on a 56% drop in sales for the first quarter of fiscal 1988. That compares to a modest profit of $92,000 a year earlier on sales of $5.5 million. EIP’s second-quarter results are due out this week.
EIP also fired 45 workers in January, or about a third of its work force. At the time, the company announced it might “have substantial losses during the next two quarters,” the result of start-up costs from a new product line introduced a year ago. In March, the Justice Department barred EIP from bidding on defense contracts, which in 1987 accounted for about 20% of the company’s $18.8 million in sales.
In mid-April, though, the Justice Department dropped three felony counts that had charged the company with illegally shipping its products by way of England to a third country, and the company was cleared to go after defense contracts. The company, however, pleaded guilty to a misdemeanor violation and agreed to pay a $1,000 fine plus an additional $28,000 to cover the cost of the government’s investigation.
Now that the lawsuit is resolved, the question for EIP management is whether it can muscle its way into a new market--the microwave work-station market--which is controlled by electronics manufacturing giant Hewlett-Packard.
EIP introduced the product last year after putting a tremendous amount of its resources into research and start-up outlays in 1986 and 1987. If it can get even 10% of that market, EIP should be on its way. If not, the company could be headed for serious trouble, according to David Funk, a securities analyst with Alternative Investment in Boston.
“This is a classic Harvard business school case,” said Funk. “It’s a case of high risk and high reward, depending on the execution of strategy. If they can get 10% to 20% of this $200-million market, they’ll increase their total sales by two or three times and could turn the corner.”
But that is a big if for EIP, which had its best year in 1984, with earnings of $2.4 million. In those days, the company had a 35% to 40% market share of an earlier microwave measurement product. But the company’s market share started to slip at about the same time the firm was making a big bet on the microwave work station, according to Funk. The company spent about $3 million in 1986 and $3.5 million in 1987 on research and development expenses associated with that new technology, or about $1.75 per share.
According to Wolfgang Demisch, director of research at UBS Securities, a New York investment bank, it’s critical that EIP’s investment in the new product start making money soon.
“The test and measurement market is always a bit of a roller coaster. It only takes about three or four years before your product becomes obsolete. So you have to make enough money in those years to start spending on research for the next better mousetrap,” he said.
“The problem with small firms is that start-up costs can kill you. Then if the economy goes into a tailspin, nobody buys your product except the guy who wants to copy it. That’s why companies like Hewlett-Packard can increase market share in economic downturns. They have enough fat on their bones during the lean times,” Demisch said.
That roller coaster is clearly reflected in the company’s stock movement. EIP’s stock hit a high of $17.25 a share in 1983, Funk said. Then it plummeted to $5.50 a share in the first quarter of 1986, only to climb back to $10 a share upon the introduction of the company’s new product in May of last year. The stock was down to $4.25 in January on news of the large quarterly loss, and it closed Friday at $4.75.
Funk said one factor in EIP’s favor is the company’s strong management team, which includes Mark Roos, the company’s R&D; director and a former Hewlett Packard staffer, as well as Jon Clen, the company’s chief financial officer and a former General Electric executive.
“They’ve got a heavy management group for a company this small,” Funk said. “If any small company fulfills the corporate requirement for finance, research and marketing, this company is it.”
Demisch said that EIP’s microwave work station should start paying off by late this year or sometime next year if it is going to make money for the company. “It looks like they’re really swinging for the fences,” he said.
