Low Tech Blog

6 Mar 2005

Well, there's still no 10-K from SCOXE and it's the weekend, so I thought I'd try my hand at computing an intrinsic value for SCOXE based on its recent record selling software. I checked out a copy of Streetsmart Guide to Valuing a Stock by Gray, Custasis and Woolridge from my local library, did my best to follow their model and started plunking numbers into OpenOffice.org Calc. Here's what I came up with.

Assumptions		Comment
Revenue	42,809	As reported for the last 4 Quarters
Revenue Growth	-18.37%	Annual Compounded Rate from 2002 to 2004
Net Operating Profit Margin	-66.75%	As reported for the last 4 Quarters
Tax Rate	-4.88%	As reported for the last 4 Quarters
Share Price	$4.03	Close on 4 Mar 2005
Shares Outstanding	17,436	As reported for the last quarter of FY2004
Investment Rate	0.77%	As reported for the last 4 Quarters
Working Capital (as a % of Revenue)	-152.1%	As reported for the last 4 Quarters
Depreciation Rate	6.66%	As reported for the last 4 Quarters
Beta	4.848	As reported by Yahoo! Finance
Short Term Assets	48,240	As reported for the End of Year 2004
Short Term Liabilities	32,827	As reported by Yahoo! Finance
Long Term Debt	343	As reported for the last quarter of FY2004

Not surprisingly, my analysis of the future value of SCOXE as a software company found -- a complete lack thereof. I expect there to be a negative Free Cash Flow to the Firm for the foreseeable future. I see no intrinsic value in this stock and can only assume that it trades above zero due to speculation on the IBM lawsuit or due to speculation on market action having nothing to do with the company's value as a producers of software and related services.

Here are the results as calculated by my attempt at the ValuePro model:

	Year 1	Year 5	Year 7	Year 10
Estimated Revenue	34,976	15,518	10,341	5,625
Estimated Net Operating Profit	-23,325	-10,358	-6,902	-3,755
Estimated Taxes	1,139	506	337	183
Estimated Net Operating Profit	-24,464	-10,863	-7,239	-3,938
Change in Investment	-2,058	-914	-609	-331
Estimated Working Capital	11,960	5,311	3,539	1,925
Free Cash Flow to the Firm	-34,366	-15,261	-10,169	-5,532
Discounted FCFF	-29,005	-6,536	-3,103	-1,015

Period of Excess Return	1 Year	5 Year	7 Year	10 Year
Residual Value	-132,374	-58,782	-39,172	-21,309
Discounted Residual Value	-111,726	-25,177	-11,952	-3,909
Corporate Value	-92,491	-55,719	-50,100	-46,683
Value to Common	-125,661	-88,889	-83,270	-79,853
Estimated Share Price	-$7.21	-$5.10	-$4.71	-$4.58

Positive revenue growth does nothing to improve this situation, and in fact exacerbates it. And raising the Net Operating Profit Margin to break-even doesn't bring the intrinsic value of the company to $0.40/share -- and the only reason that it's positive is that the Current Assets are a bit bigger than Current Liabilities. SCOXE absolutely must start being profitable in order to establish a positive intrinsic value. And given their history of losses, coupled with the fact that they have been viewed as The Most Hated Company In Tech for over a year now, I think that the barriers to profitability are too high for SCOXE to overcome.

You can find the spreadsheet with my calculations here. If you don't have OpenOffice.org, you can get it for free here.

References

http://www.valuepro.net/ with whom I am in no way affiliated.

End of Fiscal Year 2004 8-K

10-K for Fiscal Year 2003

Yahoo! Finance SCOXE Key Statistics