Press Release Source: NewMarket Technology Inc.
NewMarket Technology, Inc. Releases Letter to Shareholders Addressing Questions Regarding First Quarter 2006 Financial Report
Thursday June 8, 9:07 am ET
CEO and CFO Address Financial Issues
DALLAS--(BUSINESS WIRE)--June 8, 2006--NewMarket Technology Inc. (OTCBB:NMKT - News) today released a letter to shareholders from CEO Philip Verges and CFO Philip J. Rauch. The letter to shareholders is included in its entirety in this release:
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Dear Fellow Shareholders and Interested Investors,
Only four more weeks remain in the second fiscal quarter of 2006. NewMarket is still on track to meet or exceed the recently revised forecast of $65 million 2006 profitable revenue. Continued fundamental financial performance improvement remains our primary focus. We believe NewMarket's share price is considerably undervalued when compared to national exchange listed technology service companies of similar revenue and profitability. We believe quarter after quarter fundamental financial results are the key to shareholders recognizing a healthy investment return as the market begins to value NewMarket consistent with the market value of comparable national exchange listed technology service companies.
As we are approaching the end of the second fiscal quarter, it has become apparent that a number of shareholder questions seem to be recurring regarding the first quarter financial report. Although NewMarket's financial performance in both revenue and income growth continues to convey a message of sustainability and rapid growth, many of the key financial indicators are somewhat subtle.
We encourage shareholders and interested prospective investors to view the first quarter financial report webcast on the Company's website at www.newmarkettechnology.com. If you have difficulty viewing the webcast from the Company's web site please contact ir@newmarkettechnology.com to obtain alternative access to the webcast. The webcast thoroughly covers all aspects of the first quarter financial report.
This letter is intended to address questions regarding the reported reduction in gross profit and other issues related to our first quarter results of operations.
Compared to the same period last year the Company's total gross profit increased 8% from $4.7m in the first quarter of 2005 to $5.1m in the first quarter of 2006. However, gross profit as a percentage of revenue decreased 37% from 46% of revenue in the first quarter of 2005 to 29% of revenue in the first quarter of 2006. This decrease in the percentage of revenue has been the subject of a number of questions.
Understanding NewMarket's maturing business model is important to understanding the nature of the reduced gross profit and how the reduced gross profit is part of an overall substantial financial performance improvement. The core value of NewMarket's business model lies within its continuous acquisition, development and marketing of emerging technologies. NewMarket's approach to marketing emerging technologies is to package emerging technologies with brand name mainstream technologies. To achieve this end, NewMarket maintains marketing partnerships with brand name companies such as Cisco Systems, Microsoft and Sun Microsystems. Within these brand name marketing partnerships, NewMarket sells, integrates and maintains the products of the brand name companies. In order to increase emerging technology sales, NewMarket initially must increase brand name mainstream technology sales. The gross profit margin of the brand name mainstream technology sales is generally lower than the gross profit margin associated with the sale of emerging technology products and services.
The reduced gross profit as a percentage of revenue is a reflection of NewMarket's success in expanding the sale of its mainstream brand name products and services. In conjunction with the reduced gross profit margin, revenue substantially increased 70% from $10.2m to $17.3m. The increased revenue and reduced gross profit as a percentage of revenue demonstrates the successful expansion of mainstream brand name products that will subsequently enable NewMarket to expand the sale of its higher gross profit margin emerging technology products and services. The overall first quarter financial performance is indicative of NewMarket's successfully maturing business model.
Some shareholders have raised questions regarding the results of fourth quarter of 2005 versus the first quarter 2006. Please note that both SEC and GAAP guidelines mandate that we compare quarterly results from similar periods in the presentation of our financial statements. A company is required to provide a comparison of its current results to the comparable financial period in the previous year. Comparing first quarter results of operations one year to fourth quarter results from the prior year represents an inaccurate picture due to seasonal effects on business.
Of relevance in relationship to the reduced gross profit as a percentage of revenue is the apparently counter-intuitive increase in net profit. Net profit increased 326% from $102k in the first quarter of 2005 to $434k in the first quarter of 2006. Net profit as a percentage of revenue increased 150% from 1% of revenue in the first quarter of 2005 to 2.5% of revenue in the first quarter of 2006. While perhaps subtle, an all around increase in net profit when gross profit as a percentage of revenue otherwise decreased is significant. For net profits to increase when gross profit as a percentage of revenue decreased indicates notable operational expense reductions as a percentage of revenue. In fact, general and administrative expenses not only decreased as a percentage of revenue, the general and administrative expenses actually decreased all together from $1.6m in the first quarter of 2005 to $1.1m in the first quarter of 2006. Additionally, it is important to note that net income for first quarter 2006 includes approximately $800k in non-cash expense for such items as inflation effects, amortization, depreciation and deferred compensation.
This decrease in general and administrative expenses is a result of NewMarket's exceptional performance in the integration of acquired companies. The ongoing acquisition of emerging technologies is a central aspect of NewMarket's business model. NewMarket's revenue does not grow substantially from these emerging technology acquisitions. On the contrary, we acquire the emerging technologies in order to develop the value of the emerging technology primarily by achieving the first notable sales of the emerging technology. However, the ongoing acquisition of emerging technologies without notable immediate revenue can amass significant operational expenses. The fact that NewMarket has otherwise reduced operational expenses is another demonstration of NewMarket's successfully maturing business model.
NewMarket's first quarter financial results are positive and demonstrative of a maturing business model. Understandably, a cursory review of a reduced gross profit margin as a percentage of revenue might create suspicion of a business performance problem. However, a broader review of overall increased revenue, increased net profits, reduced operational expenses and improving cash flows should mitigate and overcome any concern relating to business performance. The comprehensive first quarter financial picture is altogether strong and more importantly, is a clear indication of NewMarket's maturing business model.
We hope this letter has helped to further communicate the continuation of NewMarket's maturing business model and the overall positive nature of our first quarter financial results. We encourage shareholders and interested investors to continue to communicate with the company particularly in order to voice their concerns.
