Last week, Orsus Xelent (ORS) reported its third quarter results. The headline referred to an 8% year-to-date drop in annual revenues. But this is an exceedingly useless headline, for several reasons.
First of all, the first two quarters of the year have already been reported. As such, it would make more sense to headline third quarter data. But third quarter revenue was down 34%. The headline suggests a lack of candor from management and a will to sweep the latest numbers under the rug.
Still, for most value investors, I suspect the third quarter income data changes little in their valuations of the company. The mobile market in China was down some 30% this quarter, so the company’s numbers are fairly consistent with an industry suffering from a cyclical issue. While infrastructure spending in China has kept GDP numbers high, consumer spending has left retailers dry, slowing down distributor orders.
Those who have read our previous discussions of Orsus Xelent will know what we are looking for: the management of its receivables balance. The company trades for just $20 million, but it carries receivables of $93 million contributing to shareholder equity of $55 million. The company has earned 20 cents per share in the first nine months of this year, but the stock trades for just 70 cents!
However, the profit numbers are rather deceiving: while the company continues to churn a “profit”, it is not seeing the fruits of that profit in the form of cash from its main customer, which is a concern. And as a result of the slowdown in the mobile market, the receivables balance is going in the wrong direction. While the company sold $16 million worth of phones to its largest customer, the receivables balance to this same customer increased by $9 million! Not a great sign.
Of course, management assures shareholders that it believes it will collect on the full balance. If this is true, the company is deeply undervalued. The problem is, that’s a big “if”. The uncertainty of the situation going forward is a major reason why investors should be diversified; not every scenario with high upside potential will pan out.
Do these results lead me to give up on the company? Not quite. The company trades very cheaply compared to its assets and earnings (assuming, of course, you believe management is genuine), and the insurance the company took on the receivables does help mitigate some of the risk. Having said that, the risks to this company have increased with the increase in receivables, as the company’s cash flow situation has become rather serious.
Disclosure: Author has a long position in shares of ORS
