AST Challenges the Skeptics : Computers: Analysts had written off the Irvine PC maker after its series of setbacks. Now the revitalized company is entering the tough Japanese market.
U.S. companies have been about as successful selling personal computers in Tokyo as the Japanese were at selling Hondas in Detroit 20 years ago. Even deep-pocketed Apple Computer has had little success selling a Japanese-language version of its Macintosh machine in Japan.
So when AST Research announced April 10 that it would become the first U.S. company to sell a clone of NEC Corp.’s popular PC in Japan, many on Wall Street expressed skepticism about the venture.
But others said the surprise move exhibits the kind of boldness that may set Irvine-based AST apart from the pack of upstarts chasing the PC industry’s “Big Three”--International Business Machines, Compaq Computer and Apple.
“This is a gutsy move to take on NEC,” said Bruce Stephen, an industry analyst with International Data Corp. in Framingham, Mass. “But clearly, with a U.S. market that is maturing, you have to move international to break away from other computer makers.”
AST co-chairmen Safi U. Qureshey and Thomas C.K. Yuen, two immigrant engineers who have helped build it into America’s ninth-largest computer maker, say they’re determined to break into a market dominated by NEC and seize a chunk of the fast-growing, $5.6-billion personal computer market in Japan. And they note, with just a bit of cockiness, that the skeptics on Wall Street have been dead wrong about the company before.
Fifteen months ago, analysts and investors had pretty much written off the small Irvine PC maker after it suffered a series of setbacks:
* The abrupt resignation of co-founder Albert Wong, AST’s chief technology officer, in November, 1988.
* A slowdown in AST’s sales as it and other PC makers were hit by an industrywide slowdown.
* The announcement in January, 1989, of the company’s first-ever quarterly loss, a whopping $8.9-million deficit.
* The layoff of 6% of AST’s work force, the firm’s first job cut.
But 18 months after Wong resigned, AST has executed an impressive turnaround that has the investment community singing its praises again. Its stock price has surged from about $6 per share in January, 1989, to more than $23 this week. AST’s stock closed Friday at $21.25. And while industry titans like Compaq are reporting haphazard quarterly results, AST last week reported its highest quarterly sales and earnings ever, outperforming analysts’ expectations for the fifth quarter in a row.
“When Albert left, it provided us with a golden moment to re-examine ourselves and why we went through a slump,” said Yuen, chief operating officer and one of the company’s founders. “I suppose that 1 1/2 years has been a good test of the departure.”
AST’s recovery is attributed to a number of moves that have slashed corporate overhead and cleaned up the firm’s balance sheet. The company has sold off two product lines, pushed new products out the door faster and placed its computers in the hands of more retailers.
Qureshey and Yuen say these efforts are part of their goal to join the industry’s top ranks and someday challenge Compaq as the leading alternative to industry giant IBM.
But in an industry ripe with examples of companies that have a hot product one day and end up in bankruptcy court the next, the going may be difficult.
Analysts are not overly optimistic that AST can break into the industry’s top rank. After all, they say, AST was a late entrant into the PC market in 1986 and remains a small, relatively unrecognized player. It commands only 2% of the $35-billion personal computer market in 1989, according to Dataquest, a San Jose market research firm.
But AST appears to be on the right path toward separating itself from the pack of PC also-rans, said Jay Vleeschhouwer, an analyst for Bear Stearns & Co. in New York. The departure of Wong is no longer any cause for concern, he said.
After he quit the company, Wong criticized AST for rushing a new computer to market. But analysts say that getting products out the door quickly is one of AST’s strengths, especially as product life cycles have shrunk from several years to about one year.
During 1988 and 1989, AST trotted out a number of PCs based on the Intel Corp. 386 and 386sx microprocessors--a move that shifted its emphasis away from the market’s low end, where competition is plentiful and profits are thin. At the same time, AST preserved its lower-priced Bravo 286 line of computers to give it a stable revenue stream.
Only a few months after Intel announced its super-fast i486 microprocessor in early 1989, AST was the first maker of IBM-compatibles to announce a PC that would use the chip, which enables PCs to perform like larger, more expensive machines known as minicomputers. Other computer firms are taking as much as a year to announce machines using the new Intel chip.
Qureshey, the company’s executive officer, credits the feat to AST’s architecture, which builds a computer around a microprocessor--the brains of the computer--that is installed on a replaceable circuit board. To upgrade the computer, the circuit board can be quickly replaced without redesigning the entire machine.
Since customers can upgrade their computers quickly and inexpensively, they need not worry about obsolescence, Qureshey says. To further emphasize speed, AST built a new manufacturing plant in Fountain Valley that can be set up to handle new products within 90 days.
The shift to high-performance machines is also based on a strategic vision. Qureshey sees opportunity to make inroads into the weakening $30-billion minicomputer industry, which is being squeezed between supercomputers and ever-faster PCs. Minicomputer customers who need to replace their equipment are ripe for the picking, he says.
Many business users are replacing older PC models with more powerful versions. AST could benefit from this trend since those users might prefer inexpensive upgrades, said Stephen Smith, analyst at PaineWebber in New York.
AST hasn’t always been the fastest to market. It has been slow to break into the rapidly growing portable laptop market, now dominated by Toshiba Corp. and Zenith Data Systems. AST says it is developing a laptop model and hopes to bring it to market within the next year.
AST hopes to move faster in building its name overseas.
The company is building a computer factory in Europe in preparation for the liberalization of Western European trade in 1992. And company officials have been crisscrossing the globe to develop markets in the Far East, Eastern Europe, the Soviet Union, Pakistan, India and Mexico.
Qureshey journeyed to the Soviet Union in February as part of an exhibition of U.S. computer systems. The marketing effort was a shotgun approach to getting new business, but Qureshey said the trip “planted some seeds” in a market with huge potential.
While domestic PC sales are expected to grow 13% this year, international sales will grow faster. International sales accounted for 38% of AST’s revenue last year, and Qureshey would like to see that figure pass 50% within a year.
AST is not the only firm to pursue overseas sales. Most computer firms are diversifying into international markets and companies such as Compaq already derive half their revenue from abroad.
Given the lack of acceptance of U.S. products in Japan and the falling yen, which makes U.S. products more expensive overseas, AST’s venture in Japan is risky, said JoeAnn Stahel, president of Storeboard/Computer Intelligence, a Dallas market research firm.
But Qureshey and Yuen are proud to be carrying the flag of American computer manufacturing to Japanese soil, noting how U.S. trade officials have described the venture as a test of Japan’s willingness to accept competitive imports.
AST, which spent two years and millions of dollars researching the project, isn’t betting the company on the success of the Japanese venture. With $77 million in cash on its books, AST can wait for long-term results.
Closer to home, AST has always struggled to get its product on retailers’ shelves, where space is scarce and where IBM, Apple and Compaq are dominant. AST has been part of the pack of companies competing to be the “alternative” brand.
In the past year, however, AST has signed up such major retailers as Computerland, Micro Age and Sears Business Systems Centers to carry its products. Its sales through computer stores have doubled in the past year, Stahel said.
“The company is no longer sales-driven,” said Wong, who earlier this year started a small computer company in Irvine. “They look at the bottom line a lot more, and that’s a credit to Tom and Safi. The loss in 1988 forced them to look at the financial side.”
Much of the recent cost savings has been invested in new capacity. Besides building the Fountain Valley plant, AST moved into a new $30-million headquarters complex in the Irvine Spectrum Business Park.
AST’s plants make computers for Tandem Computer and Texas Instruments, which then sell the machines under their own brand names, and will likely add another agreement in the near future. Qureshey said such agreements further distinguish AST in the marketplace.
Qureshey likens AST’s strategy in the PC market to the one that Honda pursued in automobiles. By selling high-quality, moderately priced products, AST hopes customers will return to buy its higher-priced models. Although AST may not unseat IBM, Apple or Compaq, Qureshey hopes to give them a run for their money.
“Our goals are ambitious, but we are pursuing them in a wise way,” he said.
AST STOCK--TURNAROUND TAKES OFF
Here are the month-end closing prices for common shares of AST Research Inc. From a low of $6.75 in March, 1989, the stock reached a 1990 high Thursday of $23.25
Source: AST Research Inc.
AST--The Upstart Start-Up Enters Its Second Decade
July, 1980: AST Research Inc. is founded during a series of lunches at a Carl’s Jr. restaurant in Irvine by three Asian-born engineers: Pakistani-born Safi U. Qureshey and Thomas C.K. Yuen, and Albert Wong of Hong Kong. Pooling their assets, which include $12,000 in cash and $28,000 in office equipment, they set up shop in the garage of Yuen’s home.
August, 1981: International Business Machines Corp. announces its first personal computer.
December, 1981: AST introduces a circuit board kit that boosts the memory storage of IBM’s new PC.
June, 1983: AST’s revenue for the year reaches $12 million.
December, 1984: AST raises $19.32 million in an initial public stock offering.
May, 1985: AST raises $23.8 million in a secondary offering.
June, 1985: The boards and other PC-expansion products generate $138.6 million in revenue.
October, 1986: AST announces its first family of personal computers and starts gradually shifting its product mix from expansion boards and data communications equipment to computers.
June, 1988: Sales reach $412 million.
November, 1988: Co-founder Albert Wong resigns from AST, shaking the company’s romanticized image as a harmonious high-tech computer company founded by three entrepreneurial immigrants who shared a Three Musketeers philosophy.
January, 1989: AST announces an $8.9-million loss for its second quarter, ending Dec. 30, 1989. The company starts a cost-cutting program and lays off 120 employees, about 6% of its work force. AST’s stock dips below $7 per share on the news.
July, 1989: AST is the first IBM-compatible manufacturer (a week behind IBM itself) to announce an upgraded computer based on Intel’s high-speed i486 microprocessor.
December, 1989: AST moves into new $30-million headquarters in the Irvine Spectrum.
April, 1990: AST announces it will sell a clone of NEC Corp.’s dominant computer in the Japanese market, a first for a U.S. computer company. The company reports record net income of $9.7 million on revenue of $137.2 million.
U.S. PC--COMPATIBLE MARKET
Annual sales Other: 52.02% IBM: 17.64% Zenith: 6.25% Tandy: 5.14% Compaq: 4.55% NEC: 2.79% Epson: 2.60% Hewlett Packard: 2.43% Toshiba: 2.28% AST: 2.18% (182,845 units) Packard Bell: 2.12%
AST’s SHIFTING PRODUCT MIX
These figures illustrate AST’s rapid evolution from a maker of PC add-on boards and data communications equipment to a personal computer manufacturer.
Percentages as of the end of each fiscal year, June 30
Computer Systems PC enhancements Other 1986 0 91% 9% 1987 21% 71% 8% 1988 68% 28% 4% 1989 74% 23% 3% 1990* 87% 13% NA
* estimates
Source: AST Research Inc.
