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Peerless Systems Corp. (PRLS)

January 19th, 2011
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Peerless Systems Corp. (NASDAQ:PRLS) licenses imaging and networking technologies for use in printers and multifunctions. In 2008, it sold substantially all of its operating assets to Kyocera-Mita Corp., but retained the intellectual property which it now licenses. The company is trading at a slight (5%) discount to its NCAV, but the interesting story of PRLS relates to its EPV.

Several months ago, the company offered to repurchase up to $45 million in common stock at $3.25 per share. (It appears this transaction may have been at the behest of an investment firm that, subsequent to the completion of the tender, had its representatives resign from the board and tendered its own shares). The tender was undersubscribed by approximately 5% and the company repurchased 13,214,401 shares, leaving just 3,357,519 outstanding as of November 10, 2010. The company financed this ~$43m repurchase with cash on hand, leaving the company with $12m cash remaining. Using TTM earnings of $7.639m and the new shares outstanding, this translates to EPS of $2.28. But the company is trading at just $3.20, representing a P/E of 1.4x. What gives?

One possible explanation (as always) is that the future is not expected to be the same as the past. In PRLS’ case, that would seem to be a possibility, as the company notes (emphasis added)

The technology we license has addressed the worldwide market for monochrome printers (21-69 pages per minute) and multifunction printers (“MFP”) (21-110 pages per minute). This market has been consolidating, and the demand for the technology offered by us has continued to decline since fiscal year 2008. The document imaging industry has changed. Lower cost of development and production overseas as well as increasing complexity of imaging requirements makes us unable to effectively compete in this environment. … We are currently pursuing other potential investment opportunities. The strategy calls for aligning our cost structure with our current and projected revenue streams, maximizing the value of our licensed back technologies and expanding our business through investment opportunities.

From this, we may conclude that, without extensive R&D to remain competitive, the company should be treated as if it were in secular decline, with future revenues substantially lower than past revenues. Furthermore, the company has extremely concentrated revenues, with greater than 70% of revenues coming from less than three customers in any given quarter. Thus, the loss of just one or two customers could prove catastrophic. The decline is likely to come quickly, rather than a slow petering out. It could be that the market is discounting this information and that is why the price has not climbed subsequent to the repurchase. What do you think?

Talk to Frank about Peerless Systems.

Author Disclosure: No position.

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  • Ahaynes

    Just looked at this company briefly today (and, behold, you’ve already written an article on it).
    Almost all of the company’s Net income over the last year are concentrated in a single quarter (Q1 2011–a quarter in which the company actually posted negative operating earnings), which was due entirely to their ownership of Highbury Financial common stock. During Q1 2001, Peerless received $3.1 million in dividends from Highbury, and Highbury was bought out (so they also recorded a gain on sale of securities of approximately $2.7 million, excluding dividends).

    Essentially, almost the entirety of the company’s cash generation during the last few quarters has been as a result of dividends/disposal proceeds from Highbury stock. Totally non-recurring. Exluding these one-time events, the company had operating earnings of about 67 cents a share. However, not its operational earnings are of the recurring variety; essentially all of its operating earnings were in the last reported quarter (Q3 2011)–operating earnings were on average negative for the 3 preceding quarters. And the revenue and earnings increase in that quarter was due to a $2+ million increase in product licensing revenues when compared to the same quarter in fiscal year 2010. To quote management:

    “The increase in product licensing revenues was primarily the result of a non-recurring increase in product licensing during the current quarter”

    Essentially, the company has not made ANY money at all (by my estimates, excluding both 1-time factors that buoyed up results over the past year, operating earnings would actually have been negative.
    I’m not taking any position, unless someone points out an error I’ve made–the company may trade at a slight discount to its cash holdings, but its organic operations seem to actually burn cash. I’m not sure how long the cash discount will last, given cash burn.

    • Frank Voisin

      Hi Alex,

      Take a look at the update I published a few minutes ago. I think you and I were making the same mistake and considering the company’s licensing operations only. As another person pointed out, there is a much better way to think about this company.

      Take care,
      Frank

  • http://www.eriksencapital.com Tim Eriksen

    Most of Peerless’ earnings were from using their cash to invest in Highbury Financial, which they tried to buy, but were thwarted by Highbury’s management. Peerless did force Highbury to be sold to AMG at a nice profit. I was a shareholder in both companies. Peerless is probably running at breakeven, with recurring revenues of less than 1 million per quarter. The company does have about $3.50 per share in cash. It really is just a play on their ability to invest the cash. I am no longer a shareholder.

    Tim

    • Frank Voisin

      Hi Tim – Thanks for the comments. I have just published an update. Clearly I was thinking about the company all wrong!

      Take care,
      Frank

  • Pingback: The Finance Cooler | Blog | Selecting the Right Mental Model: Peerless Systems (PRLS)

  • Pingback: Selecting the Right Mental Model: Peerless Systems (PRLS) | Frankly Speaking

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