Replies to post #10836 on United Communications Partners Inc (UCPA)

[naturalborninvestor]

On a positive note, the company significantly decreased operating costs while revenues almost tripled! This is probably due to the sale of Nyheter and its associated cost structure and is a good sign.

Q3 2014 operating costs: 859k (on 11.6m revenues)
Q3 2013 operating costs: 1.3m (on 4.1m revenues)

Q2 2014 operating costs: 1.7m (on 12.6m revenues)
Q1 2014 operating costs: 1.5m (on 11.6m revenues)

So, they cut operating costs in HALF this quarter as compared to the first 2Q's of 2014 despite very similar amount revenues generated each quarter of this year. And they cut operating costs by 35% compared to the same quarter in 2013 despite tripling the revenues.

- Is this all due to Nyheter? Did this business unit that created a fraction of revenues make up 50% of the operating cost structure?

Unless the company reclassified costs from costs of operation to costs of revenues (which I doubt), this is a noteworthy improvement. Yet, at the same time, the gross margins decreased from 20% in (the first nine months of) 2013 to a meager 4% in Q3 2014 (and 7.5% in the first nine months of 2014). So gross margins continued to decrease during the year as expansion of the new business services progressed. As a consequence, any positive effect from lower operating costs is nullified, and in fact worsened. Had UCP generated the same margins as in 2013, the company would be very profitable today. At these levels, UCP's current business is not sustainable.

I'm missing an explanation in the management discussion section about these two items: the effect of Nyheter on operating costs and the decrease in margins. To me, gross margins appear to be the single most important aspect of valuation and validation of the UCP business right now. Yet, no word from management.

- Why are margins declining? If the traditional media buying business generates the same margins as last year and is still part of the revenue mix, while margins sharply declined, the new business services must be offered basically at cost or even below cost. Is this interpretation correct?
- Why do you enter these markets in the first place if there is no profit potential?
- Is the margin decline temporary? Why do you think they would improve in the upcoming months?
- How else do you intend to improve profitability?

Before discussing new clients, tell us how you are supposed to make a profit from doing business. Frankly, new clients are pretty worthless if you can't offer a service above cost.