Pinnacle Data Systems Q3 Revenues Grow by 69% to $8.8 Million

10/22/2004 - Pinnacle Data Systems, Inc. (PDSi) (AMEX: PNS) announced continued sales growth for its third fiscal quarter of 2004, the thirteen-week period ended September 25, 2004.

Sales for the third quarter of 2004 totaled $8.8 million, an increase of 69% over sales of $5.2 million reported in the comparable period of 2003. Year-to-date sales through September 25, 2004 totaled $27.1 million, an increase of 79% over $15.1 million for the comparable period of 2003.

Gross profit was $1.5 million for the third quarters of both 2004 and 2003 due to sales mix. Year-to-date gross profit through September 25, 2004 was $6.5 million, an increase of 48% from $4.4 million in the comparable period of 2003.

The Company benefited from its targeted growth strategy in both the 2004 third quarter and the year-to-date, and has continued to increase investment for its future growth as well. For the third quarter of 2004, operating expenses, including sales, general and administrative (SG&A) expenses, totaled $1.5 million compared to $1.3 million in the comparable quarter of 2003. In the third quarter of 2004, these operating expenses were 17% of sales compared to 25% in the third quarter of 2003. Year-to-date through September 25, 2004, operating expenses were $4.9 million, a 35% increase over $3.7 million for the comparable period of 2003, and 18% of sales in 2004 compared to 24% of sales in 2003.

Net income for the third quarter of 2004 was $1,000, or $0.00 per diluted share, compared to net income of $122,000, or $0.02 per share, for the third quarter of 2003, as the Company followed through and remains on schedule with its earlier-reported strategic plans to continue investing in future growth. Year-to-date net income through September 25, 2004, was $860,000, or $0.14 per diluted share, an increase of 129% over net income of $376,000, or $0.07 per diluted share, for the comparable period of 2003.

John D. Bair, Chairman and CEO, said major growth in product sales generated by the Company’s engineering and manufacturing services was offset at the gross profit line by a seasonal decline in repair services that was larger than anticipated. “Overall, we are pleased with the sales results of the quarter. Our year-to-date sales of $27 million surpass our previous annual sales record of $25 million set in 2000,” Bair said. “To grow this company to the next level, we must continue to invest prudently in a sales and marketing organization that can bring in new business and a scalable organization that can continue to deliver the quality and service our Fortune Global 500 customers demand. As a result of these investments in future growth, we expect quarterly earnings to be particularly influenced by sales mix. We are adhering to our strategic plan focused on long-term growth and will continue to measure our success on:

  1. the quantity and quality of the customers, partners and programs we win each year
  2. year-over-year sales growth
  3. being profitable on an annual basis
  4. progress toward building infrastructure that can achieve increased operating leverage.”

Highlights of the Quarter
During the third quarter of 2004, PDSi

Additional Operating Results
For the third quarter of 2004, product sales totaled $7.6 million, an increase of 114% over product sales of $3.5 million for the third quarter of 2003. This improvement was due to increases in commercial imaging, medical diagnostic, hardware management service and remote management diagnostic product sales. The gross profit margin percentage on products decreased to 15% in the 2004 quarter from 28% in the 2003 quarter, as higher volume, lower value-added and lower margin products dominated the product mix for the quarter. However, gross profit on product sales for the 2004 quarter totaled $1.2 million, up 18% compared with $1.0 million for the same period in 2003.

For the third quarter of 2004, service sales totaled $1.2 million, a decrease of 26% from service sales of approximately $1.7 million for the third quarter in 2003, due to the larger than anticipated seasonal decline in repair services. The gross profit margin percentage on service sales was 30% in the 2004 quarter compared to 32% in the 2003 quarter due to the lower volume. Gross profit on service sales for the 2004 quarter totaled $365,000, compared to $536,000 for the same period in 2003, offsetting the gross profit gain from the increased product sales.

In the year-over-year quarterly comparison, the higher operating expenses combined with similar gross profit resulted in a breakeven third quarter for 2004 compared to the $0.02 earnings per diluted share comparable quarter of 2003.

On September 25, 2004, accounts receivable were $5.9 million, relatively unchanged from the June 26, 2004 balance sheet after the second quarter’s $11 million record sales, but increased from $5.1 million on December 31, 2003. Almost half of the sales in the third quarter of 2004 were shipped in the third month of that quarter. Overall collection time on the Company’s accounts receivable has remained consistent. On September 25, 2004, inventory increased to $4.4 million from $2.0 million on December 31, 2003. The increase in inventory has been steady throughout the year, first with inventory buys to support record first half and continuing growth in product sales and most recently with inventory buys to support two specific multi-year programs. In the agreements for both of these programs, as in many of our agreements in the past, the customers have given certain assurances and guarantees regarding the program inventory purchased by PDSi, thereby minimizing the risk of obsolescence.

On September 25, 2004, borrowing on the line of credit was $2.7 million compared to $2.5 million on December 31, 2003. Accounts payable were $3.9 million compared to $1.9 million at year-end 2003, reflecting the increases in sales and the inventory for the new service programs. Availability on the line at September 25, 2004, was approximately $2.3 million. An additional $2.0 million borrowed by the Company on a 120-day note in May 2004 to help finance short-term working capital needs generated by first half record sales was re-paid in full in the third quarter.

“With the growing set of lifecycle solutions we offer OEMs, we believe we have the potential to grow beyond $100 million in revenues and continue to be profitable on an annual basis over the next five years. Our challenge is to achieve that level of growth with our ongoing commitment to improving long-term profitability,” said Michael R. Sayre, Executive Vice President and CFO. “We expect that fourth quarter sales will be near last year’s record and that we will be profitable. Assuming the achievement of those expectations, we will report over 40% growth in sales for the second year in a row and earnings growth of over 80% in 2004. In 2005, with favorable economic growth, we are planning to achieve another record sales year and achieve annual profitability, while making significant progress toward building future value in our company.”

Conference Call
PDSi will host a conference call today at 11:00 a.m. EDT to discuss 2004 third-quarter results and the company’s strategic growth plans. The conference call may be accessed by calling (888) 880-1525. The passcode for the conference call is “Pinnacle Data” and the conference identification number is 1267389. Please be prepared to provide both the passcode and the conference identification number to access the call. A slide presentation that will be referenced during the call may be accessed at the PDSi Website at, by clicking on “Company Information,” “Investor Relations,” “Investor Presentations,” and “October 2004 - Investor Conference Call.”

About PDSi
PDSi provides lifecycle service solutions to Original Equipment Manufacturers (OEMs) in the medical, telecommunications, aerospace, imaging and computer equipment industries, among others. PDSi offers a full range of computer and computer-related product development and manufacturing services to increase product speed to market and engineered product life, and to provide service and support to units in the field through comprehensive product lifecycle management programs encompassing depot repair, advanced exchange, contact center support and end-of-life control. For more information, visit the PDSi Website at

Safe Harbor Statement: This release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including, but not limited to, statements regarding the Company achieving the $100 million revenue level and being profitable on an annual basis over the next five years, the Company achieving 2004 fourth quarter sales similar to the comparable quarter of 2003 and being profitable in the 2004 fourth quarter, the Company achieving over 40% annual sales growth and 80% annual earnings growth in 2004, and achieving record sales and being profitable in 2005. The words “believe,” “expect,” “anticipate,” “estimate,” “project,” and similar expressions identify forward-looking statements that speak only as of the date thereof. Investors are cautioned that such statements involve risks and uncertainties that could cause actual results to differ materially from historical or anticipated results due to many factors. These factors include changes in general economic conditions, changes in the specific markets for our products and services, adverse business conditions, changes in customer order patterns, increased competition, changes in our business or our relationship with major technology partners, pricing pressures, lack of adequate financing to take advantage of business opportunities that may arise, lack of success in technological advancements, and risks associated with our new business practices, processes and information systems. The Company undertakes no obligations to publicly update or revise such statements. For more details, please refer to the Company’s Securities and Exchange Commission filings, including its most recent Annual Report on Form 10-KSB and quarterly reports on Form 10-QSB.

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