Pinnacle Data Systems Sales Grow by 135% in Fourth Quarter

2/19/2004 - Pinnacle Data Systems, Inc. (PDSi) (AMEX: PNS) announced results for the year and quarter ended December 31, 2003.

For the year ended December 31, 2003, sales totaled $22.9 million, up 46% compared with $15.7 million in 2002, reflecting significant growth in product sales. That growth measurably improved the bottom line for the year, resulting in net income for 2003 of $473,000, or $0.08 per diluted share, compared with a net loss of $19,000, or $0.00 per basic or diluted share, for 2002. The 2003 results reflect a turnaround from 2001 when the Company’s annual sales were $22.7 million and a net loss of $690,000 was reported.

For the quarter ended December 31, 2003, sales totaled $7.8 million, up 135% from $3.3 million for the comparable quarter in 2002, as the Company set a new quarterly shipments record that reflects significant year-over-year growth in product sales offsetting what is expected to be a temporary decline in quarterly service sales. However, lower gross margin percentages on the sales mix and increased selling, general and administrative expenses (SG&A) mostly related to incentive compensation plans resulted in net income for the 2003 quarter essentially the same as the comparable 2002 quarter at $96,000, or $0.02 per diluted share.

John D. Bair, Chairman, President and CEO, said "2003 was a notable year for PDSi. We completed a successful transition through a very challenging economic period when many similarly positioned companies did not, we maintained financial stability and we emerged with increasing sales, profitability and plans for additional growth in the future."

"The strength of our business model and our ability to formulate and execute successful strategies around it were as evident in 2003 as they were in 2002," Bair said. "In 2002, when capital spending on technology was still depressed and our product sales were at the lowest level since 1998, we were able to increase service sales 66% and achieve a near break-even year. In 2003, as the economy improved, we increased product sales 86% and turned in the second most profitable year in our company’s history. We enter 2004 with more large customers actively ordering products, more direct referrals from Fortune Global 500 stalwarts in the computer industry, more in-house experience selling and closing business through our partnerships, and more award-winning technical capabilities than at any other time in our history. We expect that momentum to result in both product and service sales growth and profitability in 2004."

2003 Highlights
In 2003, PDSi

Additional Operating Results
For the year ended December 31, 2003, product sales totaled $15.6 million, up 86% from $8.4 million in 2002. Gross profit margin for product sales in 2003 was 23% compared with 19% in 2002 due to the leverage on relatively fixed costs gained by the additional volume. Gross profit on product sales for 2003 totaled $3.6 million, compared with $1.6 million in 2002.

For the quarter ended December 31, 2003, product sales totaled $6.4 million, up 723% compared with $776,000 for the comparable period in 2002, as capital spending began to rebound in our markets. Gross profit margin increased to 21% in the 2003 quarter from 8% in 2002 as significant leverage on relatively fixed costs was gained with the strong increase in volume. Gross profit on product sales for the 2003 quarter totaled $1.3 million, compared with $59,000 for the same period in 2002.

For the year ended December 31, 2003, service sales totaled $7.3 million, relatively unchanged from 2002. Gross profit margin was 34% for 2003, compared with 41% for 2002 on a more profitable mix of service programs. Gross profit on service sales for 2003 totaled $2.4 million, compared with $3.0 million for the same period in 2002.

For the quarter ended December 31, 2003, service sales totaled $1.4 million, a decrease of 46%, compared to $2.5 million for the same period in 2002. During the second half of 2003, operational changes by the Company’s two largest service customers resulted in temporary increases in repair sales in the third quarter and temporary decreases in repair sales in the fourth quarter. Gross profit margin was 24% in the 2003 quarter, compared to 46% for the 2002 quarter due to a more profitable mix of service programs and higher volume leverage in the 2002 quarter. Gross profit on service sales for the 2003 quarter totaled $325,000, compared to $1.2 million for the same period in 2002.

For the year ended December 31, 2003, SG&A and R&D expenses totaled $5.1 million, compared with $4.5 million in 2002, the overall increase mostly attributable to incentive programs tied to the Company’s growth in sales and return to profitability in 2003.

For the quarter ended December 31, 2003, sales, general and administrative (SG&A) expenses, including research and development (R&D), totaled $1.5 million, compared to $1.0 million in the same period in 2002, the increase mostly attributable to increased operating costs and incentive programs tied to the Company’s growth in product sales and return to profitability in 2003.

Outlook
"We expect sales in both products and services to increase in 2004. With capital spending picking back up, our past marketing and sales efforts, though modest, are paying off. Increased spending in marketing and sales to the growing computer, computer peripheral, medical diagnostic, commercial imaging and telecommunications equipment sectors in 2004 is required to increase the Company’s growth potential for the future. As new technologies emerge from partner companies like Sun Microsystems, Intel Corporation, Agilent Technologies and Advanced Micro Devices (AMD), we see more opportunities to sell the deployment of those technologies in new OEM products. We also see increased opportunities to sell service programs in the technologies they are replacing. So we need the increased market exposure and people to bring those opportunities in the door and turn them into orders," said Michael Sayre, Executive Vice President and CFO. "Our challenges will include the management of rising SG&A costs in advance of the revenues we expect them to generate and some lower margin percentages we have to endure to get larger programs. Because of the size of the programs we provide, year-over-year quarterly revenue comparisons could vary either up or down, as could earnings. We are focused on year-over-year growth in both sales and earnings."

Conference Call
PDSi will host a conference call today at 11:00 a.m. EST to discuss 2003 full-year and fourth-quarter results and the company’s strategic direction. 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 5222876. Please be prepared to provide both the passcode and the conference identification number to access the call.

About PDSi
PDSi provides products and technical services, encompassing the development and production of embedded (built-in) computer systems and components, and the testing and repair of computer systems, components and peripherals, to Original Equipment Manufacturers (OEMs) in, among others, the computer, computer peripheral, data storage, digital-imaging, medical diagnostic, process-control, and telecommunications equipment industries. PDSi offers a full range of 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 www.pinnacle.com.

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