Wait Till Next Year, AST Tells Stock Followers : Technology: The Irvine-based PC maker is in a rebuilding phase. It looks to turn a profit again in July.
Fans often shrug when coaches speak of a “rebuilding year.”
But those who monitor stock prices tend to worry when Fortune 500 companies use the phrase, which is how Safi U. Qureshey, chairman and chief executive of AST Research Inc., describes fiscal 1995. The Irvine-based personal computer maker has suffered two consecutive quarterly losses and doesn’t expect to be profitable again until the start of its next fiscal year, in July.
The direction that rebuilding should take is an open question. The company has had difficulty coordinating operations at the global network of manufacturing plants it has amassed, while rivals have gained market share, in part, by avoiding the sort of PC distribution companies that AST relies on.
These setbacks, compounded by competitors’ lower prices, have prompted AST to shut its Fountain Valley plant as it shifts production of its notebook computers to Taiwan, where labor costs are lower. At one time the plant employed 440, but after last Wednesday only 50 employees remain, with their work slated to end by the middle of the month.
The manufacturing shift is part of a drive to quicken deliveries, which have frustrated retailers such as Alan Bush, president of Computer City, in Ft. Worth, Tex. AST’s machines sell well--when his company can get them in stock, Bush said.
Though Bush and others praise AST for technical merit, engineering can’t be the chief edge of a computer company these days, when PCs are assembled using similar components from a handful of vendors. And although the company touts its patents and Qureshey’s technical background, the growth of AST’s research and development budget has lagged far behind the growth of its sales, which have more than doubled since 1992.
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Observers consider the reduced research spending to be a sign of a renewed emphasis on the bottom line by Qureshey, company President James T. Schraith, and several new vice presidents. Executives say AST still wants to become one of the world’s top three sellers of PCs.
Yet surpassing its rivals will require AST to address several shortcomings at once, even as price competition stiffens, said Todd Bakar, an analyst at Hambrecht & Quist a San Francisco investment bank.
“They’re going against the IBMs and Compaqs, which means they have to have improved brand recognition and faster (product) development,” Bakar said. AST hasn’t established any of its PC products as leaders in their categories, though its machines and technical support is well regarded by retailers and the trade press, he said.
Qureshey brushes off such comments, saying that his company is focused on long-term growth and still has time to make up its losses.
“AST has always been strong in engineering, and that won’t change,” he said. Comparing spending on research and development to the growth of overall revenue doesn’t show the role of research, which doesn’t pay off unless consumers buy the final products, he said.
In addition to its strong relations with computer dealers, Qureshey said AST’s competitive advantages include its managers’ skill at selecting and developing new products.
“You could say that’s an internal advantage . . . but it’s also external in the sense of whether customers buy from us,” he said.
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Qureshey and Schraith say the turnover of three key vice presidents and other administrative realignments will be enough to restore the company to profitability by this summer.
AST is not the only large Orange County technology manufacturer that has struggled, of course. One of its primary disk drive suppliers, Western Digital Corp. in Irvine, also had to reinvent itself in recent years as competition ate away at its market share.
In fact, Western Digital executives now admit that the company was close to bankruptcy for several years in the early 1990s as it laid off more than 1,500 employees. Its salvation was in correctly predicting that new software would increase the demand for high-capacity disk drives.
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Chairman and Chief Executive Charles Haggerty said one of Western Digital’s most important reforms was to cut management from 11 levels to 6, which helped it implement changes.
“You have to look at the soft side of the business. The quality of the products and the perceptions of the customer are what matter,” he said. “A lot of it is just getting back to basics.”
Communicating with employees is also important, said Haggerty, who holds 90-minute meetings with a dozen randomly selected employees each week, discussing issues ranging from corporate strategy to “I don’t like what’s in the vending machines,” he said.
Though AST had hoped its losses would have been contained to a single quarter, stock analysts are now split on how long it will take AST to return itself to profitability.
Some, like Mike McGuire, an analyst at Dataquest Inc., a market research firm in San Jose, say AST hasn’t distilled its sales efforts for a broad range of models into a coherent marketing strategy.
The company is still digesting the plants it bought from Tandy Corp. in 1993, particularly a large manufacturing site in Fort Worth, McGuire said.
“When they made the purchase, they were also trying to develop a strong marketing presence for the company,” he said. “It seems like the two efforts didn’t track in parallel.
“Once they got the additional manufacturing capacity to meet the demands of being a global player, they got snakebit by component shortages and manufacturing snafus that sidetracked the marketing efforts.”
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Former AST vice president of marketing Mike Morand, now president and chief executive of Leading Edge, a rival PC maker in Westborough, Mass., also said that AST hadn’t adjusted its marketing strategy to the Tandy acquisition.
The decision to purchase Tandy’s computer manufacturing operations for $111.7 million “was a very risky business that has obviously stretched their management team and capital,” he said.
Morand said AST might have focused on promoting its well-built, higher-end models instead of trying to expand in all segments of the market at once. “They could have outpaced Compaq back in 1992-1993 had they done so,” he said.
Others analysts, such as Stephen Dube of Wasserstein Perella Securities in New York, said AST’s problems are straightforward manufacturing tasks that company managers should be able to remedy by better coordinating production between plants in Taiwan, Ireland and Fort Worth.
“It’s not a terribly difficult business to participate in, it’s just about getting competitive products into the marketplace. What tripped (AST) up were production and supply problems,” Dube said.
“You can infer those are management problems, but in that sense every problem is a management problem,” he said.
While AST has traditionally had a strong relationship with its distributors, the company must continue to promote its products at retail stores as well, said Arthur Merkin, a marketing director at Merisel Inc., in El Segundo.
“All the major brand names are doing similar strategies, trying to have strong offerings” available both to retailers and to commercial distributors. Merkin said. Difficulties arise when PC makers begin to add features to their lower-priced, lower-profit models aimed at the consumer market, and find they have to compete against their own models with machines that business-oriented distributors have traditionally paid premium prices for, he said.
In contrast to Compaq, he said, AST has done a good job at keeping its offerings distinct, though this will become more difficult as the company reduces the number of models in order to reduce component costs.
David Dukes, co-chairman of Ingram Micro Inc. in Santa Ana, a $5.8-billion distributor of computers and software, said AST’s focus on sales to businesses has been lucrative, but the company must cater to the consumer market as well.
“Designing the product isn’t the hard part, it’s having a business model that allows you to be in both the (corporate) market and the consumer market at once,” he said.
“A lot of PC makers are deceived into thinking that the consumer channel is profitable,” Dukes said. “The reality is that its large volume hides inefficiency sins,” said Dukes, added that he was speaking in general terms and not specifically about AST, whose machines Ingram sells.
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After dropping to a closing price of $13.875 following the announcement of its quarterly losses, AST’s stock climbed back to around $15 after rumors heated up on Wall Street that the company was about to enter an agreement with Samsung Corp., one of its suppliers of memory chips. The stock closed at $14.875 on volume of 385,000 shares in Nasdaq trading Friday.
Samsung executives visited AST’s offices last month, though the company denied reports of an impending deal to buy a minority interest in AST shortly afterward. A Samsung spokesman, reached at the company’s Seoul headquarters, said Samsung has no comment on the reported negotiations.
AST at a Crossroads?
Though AST Research Inc.’s revenue and market share grew dramatically in the early ‘90s, its stock has lately fallen on hard times, particularly compared to that of competing firms. A profile of the computer manufacturer:
* Headquarters: Irvine * Chief executive: Safi U. Qureshey * President: James T. Schraith * Employees: 6,500 * Products: Design, manufacture and marketing of IBM-compatible personal computers, including desktop, notebook and network server systems * Formed: 1980
MARKET SHARE
AST’s share of the personal computer market is smaller than that of three major competitors. However, its growth between 1990 and 1993, the most recent year for which information is available, compares favorably. Market share based on units shipped worldwide:
AST Research, Inc. 1990: 1.15% 1991: 1.50 1992: 1.83 1993: 2.68
Dell Computer Corp. 1990: .58% 1991: .98 1992: 2.25 1993: 3.04
Apple Computer 1990: 7.53% 1991: 8.29 1992: 8.50 1993: 9.43
Compaq Computer Corp. 1990: 3.97% 1991: 3.66 1992: 4.81 1993: 8.06
AS THE STOCK GOES
During the past year, AST’s stock plummeted in value but now appears to have settled at about half its worth one year ago. How AST monthly average stock prices compare with competitors:
January, 1995 AST: $15.00 Dell: 42.63 Apple: 40.38 Compaq: 35.75
Sources: Bloomberg Business News; Dataquest Inc. market research; Researched by VALERIE WILLIAMS-SANCHEZ / Los Angeles Times
