Rimage earnings skip off track

Rimage Corp., the Edina-based CD and DVD duplicator firm, saw its stock drop nearly 25 percent in a day after a major earnings disappointment last month. But it still has believers on Wall Street.

Rimage, which sells both disc-duplicating equipment and consumables such as discs and ink, disappointed Wall Street on April 23 by reporting first-quarter earnings of 18 cents a share, missing its own guidance to analysts of 21 to 26 cents a share. It blamed slower-than-expected sales of its equipment, which meant that quarterly revenue came largely from less-profitable consumables. Revenue of $22.7 million was within the range analysts were expecting.

Rimage stock sank from $23.40 to $17.70 the day its earnings were announced. The shares haven't recovered much since then, trading Friday at about $18.

Some analysts say the company has never been good at meeting Wall Street expectations for individual quarters, but on an annual basis has been a good growth company. Others say that the company needs to more carefully manage its expenses as the economy slows down but is making the right moves by using its cash reserves to buy back its own stock at a time of weakness.

Rimage wasn't the only Twin Cities technology firm to run afoul of Wall Street in the most recent earnings season.

Hutchinson Technology Inc., a maker of disk-drive components, unexpectedly lost $6.2 million, citing seasonal factors and loss of market share. Digi International Inc., a Minnetonka maker of wired and wireless networking devices, blamed the economy for causing its earnings to come in 20 percent below Wall Street expectations.

Entegris Inc., a maker of computer chip manufacturing equipment, reported earnings above expectations, although they were down 87 percent from a year ago. The Chaska company blamed reduced capital spending by customers and other company expenses.

In Rimage's case, executives said the company is faced with a slowing national economy that makes it hard to predict sales of its equipment, its highest profit margin product. Predictions are complicated by Rimage's two-tier distribution system, in which the company sells to distributors, who in turn sell to value-added resellers, which then sell to retailers, corporate copy centers, hospitals and large government agencies. Rimage believes the distributors are the sales bottleneck because they are hesitant to replenish their inventories of Rimage gear at a time when it may not sell very fast to corporate customers.

In a conference call with analysts last month, CEO Bernard Aldrich said the weakening economy "caused some distributors to adopt a more cautious approach to their purchasing decisions."

And the distributors may be right, said Robert Wolf, Rimage's chief financial officer.

"We're seeing end-user companies that now require a sign-off on capital expenditures not by one person but by two or three," Wolf said. "That is contributing to a lengthened sales cycle for equipment."

As a result, Rimage's sales are increasingly made up of lower-profit consumables, such as blank CD or DVD disks or ink for making disk labels.

Rimage is 30 years old and has 230 employees, including 170 in the Twin Cities. Its disc duplication machines sell for $4,000 to $40,000 based on the number of disc burners, speed, the ability work around the clock and software features. While the company believes it has fewer than half a dozen direct competitors worldwide, it also competes with alternative ways of storing data, such as finger-sized flash memory devices and Internet data repositories.

But, Aldrich said on the conference call, "our first-quarter results are not indicative of any fundamental problem with Rimage's operations." The company's business prospects were encouraging, he said, even though it might have to deal with longer selling cycles due to national economic conditions.

"Their business is notoriously hard to predict on a quarterly basis, but it has had nice growth on a yearly basis," said Gerry Heffernan Jr., an analyst at Lord Abbett & Co. in Jersey City, N.J. "I think their prospects are very good longer-term. Management believes their equipment revenues will get better sooner rather than later, and I'll take them at their word."

In addition to having a popular set of disk-copy products -- essentially a computer controlled rack of DVD burner units -- Rimage has lots of cash on its balance sheet, Heffernan said.

Another analyst, Greg McKinley of Minneapolis-based Dougherty & Co., said Rimage had cash equivalent to $9.15 per share at the end of 2007, "positioning the company to be active in share repurchases."