NetGuru’s Business Ranges From
Software to Phone Cards
If investors rewarded diversification, then Yorba Linda-based netGuru Inc. would be a darling. But rising losses and falling sales margins seem to have convinced many that spreading too thin is not the best strategy for NetGuru.
The company’s stock has been pulled by gravity as netGuru bought controlling stakes in three more companies early last year and reported larger losses in the recently concluded quarter. In all, netGuru, formerly known as Research Engineers Inc., counts eight subsidiaries and more than 10 businesses with operations spanning engineering software to phone cards.
Despite the company’s recent performance, Amrit Das, chief executive of netGuru, disputes the notion that it is spread too thinly or is over-diversified.
“Beneath our diversification there is a strong synergy,” he said. “If you don’t acquire, you cannot grow fast. For eight or nine quarters we had a double or triple-digit growth.”
With interests in a travel agency, a portal catering to the Indian community, long-distance phone cards, software and other areas, netGuru looks directionless, a perception that the company now is trying to change.
But if its performance for the quarter ended Dec. 31 is anything to go by, then the company could face big challenges,including convincing Wall Street that “the more the merrier” is the right tack for netGuru.
The company had slower sales growth in its fiscal third quarter and much higher losses than in previous quarters. For the three months ended Dec. 31, growth in sales tapered off to 33% from 93% in the second quarter and 111% in the first quarter. The company counted $7.4 million in sales for the period.
NetGuru’s quarterly net loss widened to $1.45 million from the $665,000 it reported in the second quarter and $317,000 in the first quarter. In the year-ago period, the company reported a $444,000 loss.
For the first three quarters of netGuru’s fiscal year, it has accumulated losses in excess of $2.25 million.
Worse still, the company had lower gross margins,or profits on sales before the company pays interest, tax and other operating expenses. NetGuru’s gross margin fell to 42% of sales for the third quarter from 53% for the same period in 1999. This means the company compromised profits for higher revenue or additional sales came from businesses with lower margins.
Rising losses are a result of “diversification in unrelated businesses,” said an analyst who asked not to be named. “The problem with selling phone cards is that it is a 10% margin business.”
NetGuru’s Das said the company is more focused than people perceive it to be. NetGuru is facing an image problem, he said.
“In a public company it’s not how well you do, but it is how well the market perceives you do,” Das said.
Investors are completely misinformed about netGuru’s business, Das insists.
“People (investors) completely abandoned us without knowing what we do. That is the problem,” he said.
Misinformed or not, investors clearly are unhappy with current state of the company.
NetGuru’s stock is down 90% from its 52-week high of 58 hit last spring, and the company has seen a $700 million erosion in its market capitalization. The stock was trading at around 5 with a market value of $87 million last week. Das and 27-year old son Shantanu Das hold nearly 40% of the company.
NetGuru is “no dot-com,” Das said. “We have had solid growth.”
Still, NetGuru’s shares have been battered.
Take Oct. 10 to Oct 12. Back then, the company’s shares fell from 15 to 5, a drop of 66%.
“We were hammered in these three days,” Das said. “(Investors) don’t know the difference between us and Microsoft.”
Microsoft Corp. is facing lower revenue growth and so Wall Street thinks that all software companies are a bad investment, according to Das.
“We have much more potential than Microsoft,” he boasted.
Still, the company will face some major challenges in changing its perception. One analyst said that for netGuru to gain favor with investors it needs to focus on fewer businesses and start making profits soon.
“It should not go in for further expansion at this stage,” one analyst said. n
