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No. of Recommendations: 3
Q4 2007 Review and Looking Forward
ERES had a great final quarter to 2007. The question for me as always is what to do now?

Back in Feb 07 I said:
“That is what I'll be watching closely over the coming quarters.
- 20% growth in revenue
- Greater than 20% eps growth
- Improving margins.
- Continued cash flow positive.”

A month later management reiterated its guidance for revenue of between $95 million and $103 million and earnings per diluted share of $0.25 to $0.30 for 2007.
So how have they done?

2007 RESULTS http://us.biz.yahoo.com/prnews/080226/netu109.html
- Net revenues for the full year 2007 were $98.7 million. This is important as it shows the not so new management are able to deliver, that is a significant change from past management.
- Gross margins improved to 50.7%
- Pre-tax margin 24.8%
- Diluted eps was $0.29, which was at the upper range of their guidance and as their revenue was at the middle range, this illustrates they are controlling costs and managing the company appropriately.
- Booking and backlog increased 43% and 45% respectively.

As Michael McKelvey, President and CEO of eRT said. "For the year, we grew net revenues by 14.3% and the bottom line by 83.5%, demonstrating the leverage of our operating model…” With bookings and backlog so hitting new heights this leverage bodes well for the future.

So going back to my measurement sticks
- 20% growth in revenue. They grew at just over 14%. The mid point of their 2008 revenue guidance, $133M, would be a 34% increase. So I’ll give them a pass on this.
- Greater than 20% eps growth. They blew that away, growing diluted earnings from $0.16 to $0.29, an 81% increase. With the mid point of their forecast for this year being $0.46 they are looking to grow eps 55%. Excellent stuff, demonstrating a great business model.
- Improving margins. Yup margins improved all round.
- Continued cash flow positive. Structural free cash flow (owners earnings) came in at $19,308k for 2007. giving ERES an EV/SFCF ratio of 27.5, which is a tad pricey.

2008 Guidance
“The Company issued guidance for the first quarter of 2008. eRT anticipates net revenues of between $31.0 million and $33.0 million and net income per diluted share of $0.08 to $0.10 for the first quarter ending March 31, 2008. For the full year ending December 31, 2008, management anticipates net revenues of between $130 million and $137 million. Management anticipates earnings per diluted share of between $0.42 and $0.46 for the full year ending December 31, 2008”

Q1 2008 Preview
ERES have not yet announced when they will report; earnings.com has it slated for 28-Apr-08 - 8-May-08
Analysts’ consensus is $0.09 eps on $31.6M revenue. The three analysts covering ERES all agree on $0.09 eps. Not surprisingly analysts’ figures are simply the mid point of company guidance.
2008 EPS estimates have recently been raised two cents to $0.44 (gee what a surprise, right in the middle of company guidance), while 2009 estimates have been lowered one cent to $0.57.
FWIW, which is little, the next five years growth is still slated for 12%

The price has been hitting new highs of late, $12.93 on April 7. With the new highs and ERES share price outperforming my targets it is time to re-forecast.
There has been little news flow from ERES this quarter, which is fine by me, just get on with the job.

My valuations all point to ERES being at the top of my value range, over fully valued. The greed that keeps me from selling right away is the prospect of ERES beating their guidance. With the leverage of their operating model, current managements obvious ability to play the guidance game and the growth in their market I see earnings as likely to come in at the near the top of their guidance. However, I have to input excellent growth prospects to justify the current price and would not buy at this price.

Cheers
Dean
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