ALR’S ADVANCE : O.C.’s Other PC Maker Is Busting Out of the Pack of No-Name Clones
IRVINE — This town has not always been big enough for the two of them.
But slowly Gene Lu, chairman and chief executive officer of Advanced Logic Research Inc., has shed his war paint and donned a more tolerant attitude toward his highly successful rival, AST Research Inc.
“I think it’s quite a compliment to be compared to AST,” says Lu, 36, a humble engineer-turned-executive who has gained confidence with the growth of his own company. “We’re less defensive about ourselves the bigger we get.”
For the year ended Sept. 30,ALR’s sales more than doubled over the previous year, to $172 million, and earnings rose to $11.7 million. Nevertheless, the company has lived in the long shadow cast by its larger cross-town rival.
AST reported sales of $533 million and earnings of $35 million for its last fiscal year.
It did not start making computers until 1986, but AST has managed to establish itself as a brand name in the eyes of consumers, corporate computer buyers and Wall Street analysts.
Now ALR is finally getting some recognition too. Analysts, impressed with the company’s continued growth despite an economic slowdown, compare the firm to a young AST and no longer dismiss it as a member of the pack of no-name “clone makers.”
Along with AST, ALR is making Orange County known as an emerging technology center. Safi Qureshey, co-chairman and chief executive of AST, says the market is big enough for both companies to be successful. This is not to say the companies are at peace.
They compete almost machine for machine in each business category, from low-end consumer products to high-end machines that serve networks of computers for companies. They have also adopted virtually the same product strategy in their endeavors to grab market share from larger computer companies such as Compaq Computer Corp. in Houston.
“I personally have a goal to one day be larger than the other computer company in Orange County,” Lu said. “There’s a certain amount of rivalry from our side, but I think it’s healthy.”
ALR still has a long way to go before making Lu’s goal a reality. ALR stock rose initially but has fallen to about $9 a share, 31% below its initial public offering price of $13 a share in April. AST stock, meanwhile, soared 259% during 1990 to more than $35 a share.
“I don’t think the ALR story is known as well as the AST story,” said Stephen Smith, analyst for PaineWebber in New York. “In a lot of ways it’s the same story. They (ALR) came out of nowhere in the last year and are not just offering plain-vanilla generic products. They’re offering innovative, low-priced products.”
Consider these accomplishments over the last 18 months:
* During 1990, ALR won converts among analysts by introducing low-priced products at a rapid pace. It has 20 computer lines on the market that support a variety of industry standards and differing levels of markets, from low-end consumer to high-end business network.
* ALR computers gained shelf space in some major retail chains, and the company has secured the crucial distribution agreements at home and abroad that enable its computers to be sold by many small computer dealers.
* ALR’s high-end machines, which accounted for more than 40% of sales in the fourth quarter ended Sept. 30, have won a number of technical awards from trade magazines. The line will be expanded during 1991.
* It entered Canada, which accounted for 10% of overall sales. International markets now make up 33% of total sales, a cushion against the possibility of a further slowdown in U.S. computer sales.
* The company went public in April to raise cash for its continuing expansion. Wearnes Bros., the Singapore-based computer-components firm that owns 41% of ALR stock, continues to finance the company’s operations without interfering in management.
* The company has built up its cash reserves, strengthening its balance sheet so that it is likely to weather a recession better than some competitors, analysts said. it ended the 1990 fiscal year with $31.4 million in cash, compared to $636,000 a year earlier, thanks to $36.8 million in proceeds from the public offering.
alr will not escape unscathed should the national economy enter a deep recession that drags the computer industry down with it. it is an ironic twist that alr, which was born during the computer slump of 1984-85, could see a recession bring it greater market share, analysts said.
“Over the next 12 months, people who formerly bought PCs based on the brand name will review that practice and make decisions on value,” said Liz Buyer, computer analyst at Needham & Co. in New York. “In a recession, ALR will have a better chance because people who wouldn’t have considered them before will stop and take a look.”
Not that ALR computers sell on price alone. Rather than duplicating the machines of market leaders such as Compaq and International Business Machines Corp., ALR shed its clone image by taking the lead in introducing products with features that are new to the marketplace.
Like AST, ALR was an early manufacturer of computers that can be upgraded to accommodate newer technology by adding a single module that contains the microprocessor or engine of the computer. Lu and three other ALR employees have applied for a patent for the upgrade concept, as have their competitors at AST.
The upgrade feature appeals to consumers who do not want to invest in a machine that will soon become obsolete. Kirkey, ALR’s vice president of marketing, said 30% of entry-level buyers eventually upgrade their machines, contrasted with only 5% two years ago, when the machines first came out.
Since the modular computers use many of the same parts, ALR can simplify its inventory and devote less of its resources to technical support, thereby lowering its overall product costs, said Michael Murphy, editor of the California Technology Stock Letter in San Francisco.
In addition, the modular design makes it easier for ALR to mix and match components, allowing it to support a wide range of models using a small number of building blocks. This kind of innovation has given ALR its reputation as an engineering company.
From the outside, the shells of ALR PCs look like any other IBM knockoff. But under the hood, the company has set itself apart by designing the engine of the computer to run like a Ferrari, Kirkey said.
Although a lot of computer makers use the generic logic components created by semiconductor design houses, ALR still designs much of its own hardware in-house. The customized equipment can achieve better performance levels than generic products.
It also means that ALR does not always have to wait for the chip houses to design a component before it introduces a fast-track product. The streamlined design process, as well as the fact that ALR has a small staff of six executive officers, has enabled the company to move fast in the marketplace.
For instance, George White, president of Irvine-based Corollary Inc., tried to license to ALR his company’s multiprocessing technology--it boosts computer speed by enabling a personal computer to use more than a single microprocessor--for several years.
White finally succeeded last spring when Lu phoned him and told him that ALR would build a computer based on Corollary’s technology. To White’s surprise, ALR put its engineers to work and was shipping a product within three months. AST is not expected to announce its own multiprocessing machine until the middle of next year.
ALR was equally fast in launching its customized desktop computers for the Intel i386 and i486 microprocessors. Quick decision-making is so important to getting products out fast that Lu has an unwritten rule prohibiting internal meetings from lasting more than an hour.
The company has not reported a quarterly loss since it was founded in 1984, but it does stumble on occasion. During the summer, sales for the third fiscal quarter were lower than expected.
The reason: ALR did not accurately forecast a rapid rise in demand for products based on the Intel 80386SX microprocessor, a mid-range computer workhorse, and Intel could not produce the chips fast enough. As a result, ALR’s allocation of the chips was small, company revenues were depressed for the quarter, and ALR’s stock price took a dive. Lu quickly shifted strategies to place more emphasis on high-end machines based on the 80386DX microprocessor, a more powerful chip.
“It could have been a disaster if they had waited for the chips,” said Richard Martin, analyst at Prudential Bache Research in New York. “But Gene switched immediately to the DX strategy, and that’s the decisiveness you want to see.”
In the fourth quarter, gross margins, the difference between selling price and costs that analysts view as a measure of price competition and manufacturing efficiency, fell to 24% from 28% in the third quarter, below the 30% that analysts consider ideal.
“At times, we sacrifice margins to gain market share,” Lu said.
James T. Richardson, chief financial officer for ALR, said the company is working to improve its gross margins during the next year.
At the Comdex trade show in November, ALR appeared to be falling behind the rest of the industry without its own entry in the notebook computer market, the category of six- to eight-pound compact machines that is growing faster than the desktop computer market.
But ALR surprised the industry later by shipping its own seven-pound notebook computer with a high-performance processor priced at $2,795, less than half the list price of its competitors’ products. By the company’s delaying the announcement until after Comdex, Kirkey said, the product received more media and industry attention.
Analysts estimate that during the first quarter of 1991, ALR can sell 3,000 to 5,000 of the computers, partly because they will be shipped before many of what Kirkey calls “vaporware” products--those announced with great fanfare in November at Comdex but not due to be shipped until February or later.
In getting the product out fast, ALR has relied largely upon overseas designers and manufacturers for the first time. Lu said the move was simply a business decision that took into account factors such as Japanese liquid crystal display technology and market timing.
“They clearly sacrificed the in-house engineering strategy,” California Technology Stock Letter’s Murphy said. “It’s a very tricky packaging job, and they would have had to dedicate too many resources to it. But they needed a notebook line because some customers won’t buy from you if you’re desktop only.”
But company officials bristle at any suggestion that their own engineers cannot keep up with the technological changes in the market. Dave Kelley, vice president of engineering, said company engineers are now designing a next generation of notebook computers and multiprocessing machines.
In most respects, ALR is making the transition from small company to big company.
“The next stage is making the evolution to managing a slightly larger company which requires more structure and timely information without burdening the decision-making process,” Richardson said.
At its base in the Irvine Spectrum business park, the company has expanded to having three locations where it manufactures and distributes its computers. And company officials are looking for more space. More than 450 people work for ALR, including a growing contingent of workers in Singapore, and there are sales offices in London and Toronto.
The main Irvine plant builds as many as 10,000 computers a month. The assembly line emphasizes flexible manufacturing: It can switch from a batch of personal computers based on one set of standard components to another without a hiccup in production.
Here and there, the company tries to change the dull uniformity of modern streamlined manufacturing with its own twists.
In the assembly, for instance, instead of moving the equipment being made on a conveyor from worker to worker, the equipment stays in one spot and the people move from machine to machine.
The computers sit on rotating disks so that each worker can access any area of the computer as it is put together. Lu lifted the idea from the rotating dishes used to serve food in Chinese restaurants.
In the coming year, ALR can be expected to introduce more high-end notebook computers as well as high-end machines based on a low-cost version of the i486 chip that Intel plans to introduce in coming months, Martin of Prudential-Bache said.
While doing so, the company will have to protect its gross margins, keep its expenses down during the recession and be careful about spreading itself too thin among too many different product lines, he added.
ALR will also try to get more stores to sell its computers and improve its presence in Europe, where the company lost money on its start-up operation last year.
But Lu said much of ALR’s groundwork was laid in 1990, and during the next year the company will build market depth for products such as its Business VEISA, a business computer based on the latest available bus, or pathway for speeding data between components within a computer.
“We’re not panicking by bringing out new products,” Lu said. He said the high-volume products the company “bet the farm on” were introduced during the past year. “We’ve done our homework.”
If competitors such as Everex Systems Inc. continue to falter, Martin says, the company has a chance to break into the second tier of computer makers.
The California Technology Stock Letter’s Murphy, estimates that ALR’s sales will reach $250 million for the fiscal year ending Sept. 30, 1991, a 45% increase over fiscal 1990. He expects earnings to reach between $14 million and $15 million, up 20% to 28% from fiscal 1990.
With that rate of ALR growth, AST needn’t worry about being overtaken by its rival anytime soon, analysts say. And it will be some time before ALR penetrates the ranks of the top 10 computer companies.
“I don’t think AST needs to feel threatened at this point,” Needham & Co. analyst Buyer said. “ALR has something to prove at the moment. There’s opportunity for them, but that does not mean they will be successful. They need to show the difference between them and AST may just be time.”
SALES
In millions of dollars: 1987: $15.1 1988: $37.1 1989: $73.1 1990: $172.0
NET INCOME
In millions of dollars, by fiscal year: 1987: 0.75 1988: 2.48 1989: 2.79 1990: 11.5
OPERATING INCOME
as a percentage of sales, by fiscal year: 1987: 9.7% 1988: 10.7% 1989: 6.2% 1990: 12.2% Source: Advanced Logic Research Inc.
AT A GLANCE
Advanced Logic Research
HEADQUARTERS: Irvine
TOP EXECUTIVE: Gene Lu, president, chairman and chief executive officer
EMPLOYEES: 458 as of Sept. 30
BUSINESS: ALR makes personal computer systems for all segments of the desktop computer market, as well as a notebook computer
FOUNDED: Sept. 1984
KEY EVENTS IN 1990:
* ALR computers gained shelf space in some major retail chains and secured crucial distribution agreements at home and abroad.
* The company’s high-end machines, which accounted for over 40% of sales in the fourth quarter ended Sept. 30, won a number of technical awards from trade magazines.
* The company expanded into Canada, which accounted for 10% of overall sales. International markets now make up 33% of sales.
* A cash infusion of $36.8 million from an initial public offering last April strengthened ALR’s balance sheet, girding it for recession. ALR ended the 1990 fiscal year with $31.4 million in cash, compared to $636,000 a year earlier.
