SEMI-ANNUAL REPORT ELSA AG 1998
SEMI-Annual Report ELSA AG 1998
Since the early days of the PC Market in the mid 80‘s, ELSA has offered PC peripheral products for Computer Graphics and Data Communications. Today, ELSA is one of the worldwide leading suppliers in these segments. In Computer Graphics, ELSA develops, manufactures and markets 2D and 3D graphics boards and color monitors. Data Communications consists of high-speed modems, ISDN adapters, Internet access routers and videoconferencing systems. Both business segments offer products for professional users and demanding consumers.
The PC Market
The current PC market situation is marked by strong pressure on PC hardware prices and reduced unit sales volumes, especially in the US, resulting from demand which is lower than expected, a continuing transition between product generations, and the general industry trend to restore volumes by entering the low cost segments of the market. Major US OEMs have prepared for this through inventory reductions. These general trends of the PC market have, as expected, also influenced the markets for computer graphics and data communications products.
Company trends
During the first six month of 1998 a variety of new products have been successfully introduced by ELSA into the market. With it’s latest Data Communications product, the Internet access router LANCOM, ELSA addresses the remote access (RAS) needs of small and mid-size companies and workgroups, a growing market only recently tapped for the use of the Internet. Furthermore, ELSA’s existing OEM-relationships with the largest PC manufacturers have been expanded by entering into new business agreements.
In furtherance of ELSA’s high-end strategy, unit sales within the professional workstation space were increased during the first half of the year. ELSA’s recently announced new application of workstation graphics boards for the financial market enjoyed its first commercial sales during the second quarter of 1998.
Revenues
During the first six month of the current year, ELSA AG achieved revenues of 137.7 million DM, increasing its revenue by 3.6% compared with the same period in 1997 (132.9 million DM). Computer Graphics revenues amounted to 98.3 million DM (71%) and Data Communications revenues contributed 39.4 million DM (29%).
Earnings
ELSA went public on June 15, starting the trading on the Neuer Markt in Frankfurt. Since January 1, 1998, ELSA reports according to the US-GAAP accounting standards. As the previous years were reported under German statutory standards (HGB), comparability of the financial figures is limited.
As announced during the IPO, ELSA posted losses in the first half-year. According to DVFA/SG the group results amounted to a loss of 2.5 million DM. Additional one-time charges incurred in the first half of 1998 in connection with the Company’s IPO amounted to 5.2 million DM. According to US-GAAP the six month 1998 results amounted to a loss of 6.3 million DM.
The results were negatively impacted by an internationally weak market for PC products, price erosions of memory chips, continued high investments in R&D and planned startup costs from ELSA’s recently incorporated Asia sales organizations. Earnings of the US subsidiary were impacted by costs occurred in conjunction with establishing new sales channels, as well as by delays in product introduction caused by a supplier of high-end graphics chips.
Employees
On June 30th, 1998 the Company had 563 employees (1997: 486), an increase of 16% compared with the same day the previous year. The new positions mainly expanded the R&D capacity and thus strengthened the Company’s technological core competence.
The IPO
The ELSA shares successfully started trading on June 15, 1998, offered to the market by a banking consortium consisting of Dresdner Kleinwort Benson as lead manager, ABN Amro, WestLB and Sparkasse Aachen. Institutional as well as private investors showed great interest in the 600.000 shares offered, so that the 100.000 shares greenshoe was additionally exercised during the month of July. Through the IPO, including the greenshoe, the Company’s nominal capital was increased from 14 to 17.5 million DM. The total proceeds to ELSA were 86.1 million DM. This substantially improved ELSA’s balance sheet structure with an improved capital to total asset ratio of 69.4% by June 30th, 1998.
Business Outlook
Contrary to the previous year’s experience, the PC market remains weak early in the 3rd quarter of 1998. ELSA is expecting the market to revitalize after the CeBIT HOME exhibition and while retailers and distributors prepare for the Christmas season business. This expectation is supported by the positive feedback from trade press and customers about the newly introduced products.
Newly generated additional ELSA business with existing OEM customers in the workstation market will provide increases in unit and revenue sales.
The already announced initial breakthrough in the Asian market with leading PC-OEMs will provide increased revenues in the second six months of the year and thus help limit the initial losses incurred by both Asian subsidiaries. Those business wins are, at the same time, milestones in the process of establishing the newly founded subsidiaries, so establishing ELSA’s cooperation with almost all internationally important PC manufacturers. This is a direct result of a long term orientation towards quality and highest technological standards. The OEM partnerships also provide the basis for establishing new sales channels.
The competitive situation, especially in the high-end graphics market, is increased by consolidation among the Company’s competitors and chip suppliers. The planned acquisition of Hercules, Inc., California, USA, a pioneer and inventor of the first PC graphics card, will accelerate the expansion into new international sales channels, without ELSA having to pursue the capital intensive and long term process of establishing its own brand. The combination of Hercules and the US subsidiary, ELSA, Inc., will provide overhead cost reductions and long-term synergies.
The Company’s IPO will furthermore increase its products’ worldwide visibility and brand recognition.
On the basis of an excellent market position, innovative products and its industry partnerships, the executive board sees unchanged growth opportunities for the Company. The fundamentally positive growth trends of the PC industry and the Internet warrant expectations for further increases in revenue compared to last year. Even if ELSA is unable to escape the current market conditions, its long term expectations remain unchanged. As evidenced by the Hercules acquisition, ELSA expects to play an active and leading role within the ongoing market consolidation phase..
Aachen, August 1998
The board
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ELSA AG
Sonnenweg 11
D-52070 Aachen
Internet www.elsa.de
ELSA, Inc.
2231 Calle De Luna
Santa Clara, CA 95054
USA
Internet www.elsa.com
ELSA Asia, Inc
7F-11, No.188, Sec. 5
Nanking East Road
Taipei 105
Taiwan, R.O.C.
Internet www.elsa.com
ELSA Japan, Inc.
Mita Suzuki Building 3F
5-20-14 Shiba, Minato-ku
Tokyo 108-0014
Japan
Internet www.elsa.com