Zomax ZOMX
March 15, 2002 - 3:01pm EST by
2002 2003
Price: 7.60 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 252 P/FCF
Net Debt (in $M): 0 EBIT 0 0

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Zomax (NASDAQ: ZOMX) is a leading international outsource provider of
process management services. The Company's fully integrated services
include "front-end" e-commerce support; customer contact center and customer support solutions; DVD authoring services; CD and DVD mastering; CD and DVD replication; supply chain and inventory management; graphic design; print management; assembly; packaging; warehousing; distribution and fulfillment; and returned merchandise authorization (RMA) processing. A vast majority of their business is CD and DVD replication. The other services are small parts of their business. The company's customer base is concentrated but includes blue-chip clients such as Microsoft, Novell, HP and Gateway. The Company is an authorized replicator of Microsoft, which allows the Company to replicate Microsoft products for any authorized distributor. A large part of their business is also replicating and distributing software that is being developed by large software companies (i.e. distributing the latest "test version" of Windows 2005 to Microsoft programmers across the US).

Though customer concentration is a risk, I believe it is mitigated by the
fact that they have had a long-standing relationship with many customers and especially Microsoft, which several years ago, attempted to squeeze their predecessor company's margins to the point of insolvency. I believe they've learned from their mistakes.

Financials are as follows as of 12/31/01:

2001 Revenues: $217 million (down from $240 million in 2000)
2001 EBITDA: $29 million (estimated - no CF statement yet; $48 million in
2001 EBIT: $18.14 million (excl. XO charges; down from $38.0 million in 00)
2001 EPS: $0.27 (vs. $0.74 in 2000)

Shares Outstanding: 33.2 million
Equity Value: $252 million
Net Cash: $68 million
Enterprise Value: $184 million.

.85x Revenues
20.7 P/E (net of $2.05/share in cash) - a bit misleading

The Bull Story:
The company is the largest independent CD/DVD replication company in the
world. They are operating at 50-60% of capacity because of the current lull in tech/software spending, and pricing dynamics are currently not in their favor. The company also recently doubled capacity by acquiring iLogistics, an Asia-based competitor, out of bankruptcy. iLogistics will double their revenue in 2002 and Zomax (which gives little to no guidance, said the deal would be accretive to earnings). They paid approximately $37 million ($24 million in cash, $13 million in assumed liabilities) for a business that generated $220 in revenues in 2001.

Obviously, this is a high fixed cost business that is hurt by a downturn in
software development and the industry being down. That being said the
company produced free cash in 2001 and had approximately $50 million of FREE CASH FLOW in 2000. (or $1.51/share on a $7.6 stock). However, margins are stabilizing and with the acquisition of iLogistics, they will benefit from any upswing in the economy or increased software spending. Assuming revenues stay flat to 2001 (conservative), the new company can do $430 of revenue and applying a 10% EBIT margin (margin was 8.4% in 2001 and above 15% in 1999,2000) the company could possibly do $43 million of EBIT if they clean up iLogistics. Taxed at 40%, that's $0.78 EPS using conservative assumptions (still comparable to the $0.79 and $0.74 they made in 1999 and 2000, respectively.). At a 12-15x P/E multiple, the stock could be worth $9.33-11.70 share in 6 months (plus over a dollar of net cash per share they currently have on the balance sheet)

- Customer concentration
- Lack of analyst coverage (which may be viewed as a positive)
- Continued deterioration of margins (not likely, as MSFT, HP, others don't
have the infrastructure to do it internally)
- Lengthy downturn in software spending


- Stock is just cheap
- Successful integration of iLogistics
- Increased software spending
- Continuing shift to DVD's from CD's (higher margin business)
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