AST Posts $135-Million Loss
Still searching for a rip cord that might end a perilous financial free fall, AST Research Inc. on Thursday reported a $135-million loss for the third quarter, continued erosion of its share of the computer market and another financial rescue from Samsung Corp.
Executives at the Irvine-based company said they have mapped out changes in strategic direction, pledging a return to AST’s traditional emphasis on engineering and reversing some of the price-slashing policies of former Chief Executive Ian Diery, who was pushed out in August.
“Numbers do not tell the story at AST right now,” said Chief Executive Y.S. Kim, who succeeded Diery in August. “AST is coming back.”
That remains to be seen, but for now, the numbers are staggering. AST has posted 10 consecutive quarterly losses totaling $682 million.
AST’s latest loss of $135 million, which amounts to $2.41 per share, compares with a loss of $96 million, or $2.36 per share, a year earlier. The latest loss includes a $21.6-million write-off of goodwill associated with the company’s 1993 acquisition of Tandy Corp.’s computer manufacturing operations.
Third-quarter sales rose slightly, to $408 million from $403 million a year earlier, but sales actually fell 26% from the second quarter. Trying to highlight the good news, AST pointed out in a press release that its PC shipments were up 11% from a year earlier. However, the PC market grew by about 17% during that time, meaning AST’s share continued to shrink.
For the first nine months of the year, AST reported a loss of $350 million on sales of $1.47 billion, compared with a year-earlier loss of $135 million on sales of $1.74 billion.
With losses piling up, the company was forced yet again to turn for financial help to Samsung, a Korean electronics giant that rescued AST with a $378-million cash infusion last year and now holds nearly half of AST’s stock, plus top management positions.
Samsung agreed to guarantee another $200 million in credit for AST, having guaranteed a similar amount late last year. In return, Samsung will be issued shares of nonvoting, preferred AST stock. Samsung has been careful to keep its stake in AST under 50% because crossing that threshold could have expensive consequences for AST, including the repayment of more than $100 million in bonds that are not otherwise due until 2013.
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Until the new credit guarantees are completed, Samsung also is providing AST with an emergency $50-million loan due Dec. 19. Analysts said that if AST continues to post such huge losses, Samsung can probably expect to dig even deeper into its pockets.
“How long is $200 million going to last? Two quarters?” asked Jim Poyner, an analyst at Oppenheimer & Co. in New York. “You’ve got to be concerned, because [AST’s] cash-burn rate is onerous.”
Poyner and others said that AST is simply being squeezed out of an increasingly crowded PC market. “The water has dropped in the pool and more guys have gotten in,” Poyner said, referring to the entry of Sony, Hewlett-Packard and others. “It’s a lot harder to get wet.”
That clutter has exacerbated one of AST’s most pressing problems: making its PCs stand out from the crowd in terms of technology or price. Even Kim acknowledged that giving consumers and companies a compelling reason to buy AST is “where we fall short.”
With that in mind, Kim said, the company will boost its advertising budget by 25% in the upcoming quarter. He also said AST has brought in about 35 engineers from Samsung in recent months in an attempt to return to the strong engineering heritage that helped push AST to the highest ranks of the industry in the late 1980s.
N.B. Park, vice president of product development, said the company must be a leader in the convergence of computers with other consumer electronics, including DVD, or digital videodiscs, a new medium for movies and entertainment being developed by Samsung and others.
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Executives also said they are no longer committed to some of the price-cutting initiatives of former CEO Diery. Analysts said that AST’s price-slashing over the past year eroded its margins and failed to boost sales adequately.
Kim said there are signs of improvement at AST. As part of a recently signed agreement, AST computers will soon be available for the first time in Best Buy electronics stores. The company has also recently signed a few large corporate clients, including Allied Signal and Bristol-Myers Squibb Co.
One of the key questions surrounding AST in recent months has been how patient Samsung is willing to be with the money-losing company. Kim, who helped arrange the initial Samsung investment in AST, said the Korean giant is committed to the company for the long term.
“They promised to support me,” Kim said. “Our goal is to turn this thing around as soon as we can. It may take a few quarters, but it’s going to turn around, and I will get support from Samsung. That’s why I’m here.”
AST’s stock price barely budged Thursday, falling 12.5 cents per share to close at $4.3125 on the Nasdaq market.
In a separate announcement, AST also said it has appointed Roger W. Johnson, former chairman of Western Digital Corp. and top official for the U.S. General Services Administration, to the company’s board of directors.
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Red Sea
AST Research Inc. reports its 10th consecutive quarterly loss Thursday. Calendar-year quarterly sales and net income/loss in millions:
SALES
1996: $408.5
NET INCOME/LOSS
1996: -$135.3
Source: AST Research Inc.
Researched by JANICE L. JONES / Los Angeles Times
