MARKET COMMENT
Psion: The Good, the Bad and the Ugly

By James Carlisle
March 1, 2001

After two profit warnings, no one expected Psion's (LSE: PON) final results to be a pretty affair and they weren't. Although headline sales of £220m exceeded forecasts and the overall loss was as expected at £1.4m, the market didn't react well to what lies underneath and it sent the shares down around 15% to 131p. They have now fallen about 75% since the first profit warning last October, before which they'd already halved since their highs a year ago. So what's the problem? Unfortunately for Psion holders, there are quite a few of them.

First of all, there were foreign exchange losses, caused by "extreme fluctuations" between the US dollar, the pound and the euro, which affected the whole group. This had the effect of reducing gross margins by 3% and gross profits by £5.9m.

Psion Connect, which makes PC Card modems, has been affected by a change in its sales mix towards more lower-margin, embedded "OEM" modems. Whereas last year the division made an operating profit of £7.8m on sales of £57m, this year it broke even on sales of £52m.

Psion Computers, which makes the palm-top computers most closely associated with the company, had problems with the rising prices of memory chips. This was masked, though, by the division's 47% increase in turnover to £102m, thanks to strong sales of the Revo and the Series 5mx. Overall, profits increased to £6.8m from a £0.6m loss. Further doubt had been cast over Psion Computers' future following Motorola's decision in January to withdraw from the "Odin" development joint venture. Psion has now decided not to go it alone and has terminated the project.

To cope with all of this, the Connect, Computers and Infomedia divisions are being merged into one unit to be called Psion Digital Solutions. This will involve a substantial reduction in staff levels and a restructuring charge for 2001 of £11m. This charge and some large forecast cost savings, of £17m in 2001 and £7m per year thereafter, demonstrate the severity of the action that's being taken.

The good news is that Psion Teklogix, which provides wireless logistics solutions for industrial users and was acquired last summer, is performing relatively well. It contributed £39m of sales in the fourth quarter and is expected to contribute about 45% of ongoing Group sales. Announcements today include the installation by Teklogix of a new wireless LAN system for Volkswagen's German warehousing facilities.

The key to valuing Psion, however, is still Symbian, the joint venture with Nokia (NYSE: NOK), Ericsson (Nasdaq: ERICY), Motorola (NYSE: MOT) and Matsushita, which makes the EPOC operating system for mobile computing devices: a market which it looks as likely as ever to dominate. There have been delays in the roll-out of 2.5G (and 3G) mobile technologies and Symbian is undoubtedly a high-risk proposition. However, if you believe in the future of mobile computing, then Psion's problems in other areas look like they are providing a very cheap way into Symbian.

More: recent Rule Shaker analysis of Symbian | Psion discussion board