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Sarine Technologies Ltd’s Latest Earnings: Tough Times Experienced with Revenue Halved

Sarine Technologies Ltd (SGX: U77) reported its fiscal first quarter earnings yesterday evening. The reporting period was for 1 January 2015 to 31 March 2015.

The company considers itself as a worldwide leader in the manufacture and development of precision technology products for the planning, processing, evaluation, and measurement of diamonds and gems.

You can read more about the company here and catch up with its third quarter earnings here.

Financial highlights

Here’s a rundown on Sarine Technologies’ latest financial figures:

  1. Overall revenue for Sarine Technologies for the quarter was down a hefty 50% year on year, coming in at around US$12.2 million.
  2. As a result, quarterly net profit fell off a cliff; to be precise, net profit for the quarter had declined by some 90% to US$0.9 million.
  3. Sarine Technologies’ earnings per share (EPS) followed suit with a 90% fall from 3.55 Singapore cents in the first quarter last year to just 0.34 Singapore cents in the reporting quarter.
  4. Cashflow from operations came in at US$1.5 million for the first quarter of 2015 with capital expenditures clocking in at just US$310,000. This gives Sarine Technologies a positive free cash flow of a little under $1.2 million for the reporting quarter. This is a positive note, but a far cry from the US$9.7 million in free cash flow that the firm generated in the same quarter a year ago.
  5. As of 31 March 2015, the company had US$22 million in cash and equivalents and no debt. Including short-term investments (bank deposits), its total cash balance would be US$47.3 million.

In all, the dour results from Sarine Technologies were in line with the profit guidance issued by the company on 12 April 2015. There is no way around the fact that it has been a tough quarter for the company. On a brighter note, the firm had managed to eke out positive cash flow while remaining debt free.

Operational highlights and future outlook

In its earnings release, Sarine Technologies had laid out three major factors for the negative business environment it had experienced during the quarter:

  1. Margins for its customers (the diamond manufacturers) were squeezed due to disproportionately high rough diamond prices and marginally lower polished diamond prices.
  2. Stifled demand from most markets ex-US: The anti-corruption drive by the Chinese government has reduced demand for polished diamonds in Hong Kong and China. Elsewhere, the devaluation of the Russian ruble in relation to the US dollar has also significantly affected demand for polished diamonds.
  3. Reduced working capital credit line available for second-tier and third-tier Indian diamond manufacturers.

On a geographical basis, the fall in revenues from India and Africa were particularly sharp, down 55% and 56% respectively compared to the first quarter last year. As I noted before, India is an important geographical market for Sarine Technologies. As such, changes in the business environment in India can certainly impact the company in a significant way.

Elsewhere, the shift to smaller rough diamonds also meant that recurring revenues for the company fell 20% year over year. (Recurring revenue made up about 50% of Sarine Technologies’ overall quarterly revenue.) This could be an important trend to monitor, as the presence of recurring revenue can help the company tide over tough times.

On a brighter note, five Galaxy systems were delivered during the first quarter of 2015, bringing the total installed base for Galaxy systems to 195.

Uzi Levami, the Group Chief Executive Officer of Sarine Technologies, had given some comments in the earnings release on the reporting quarter’s results:

“Despite the prevailing challenging business conditions in the immediate term, the Group remains optimistic about the prospects of our new products and services based on Sarine Light and Sarine Loupe.

In view of the increasing popularity of digital trade visualisation solutions to complement traditional marketing methods, both online and in stores, we continue to expect growing demand for these technologies from manufacturers, gemmological laboratories, wholesale and retail traders across the polished diamond value chain in 2015”

Looking forward, management is carefully monitoring the overall business environment including potential competitors to its product offerings. Management at Sarine Technologies feels that the dynamic of disproportionately high rough diamond prices in relation to polished diamond prices remains the primary impediment to its sales and to its industry.

Foolish summary

At its opening price today of $1.96, Sarine Technologies traded at around 28 times its trailing earnings and has a trailing-12-months dividend yield of 3.4%. As a reminder, Sarine Technologies had tweaked its dividend policy back in the final quarter of 2014 to increase its semi-annual dividend from 2.0 US cents per share to 2.5 US cents; the policy remains unchanged in 2015 so far, though the actual dividend that will be recommended is subject to “relevant business considerations” among other factors.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.