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Holding Analysis - PPD Q3 Conference Call

Contributed by mm | October 29, 2003 2:59 PM PST

I listened to PPD's Q3 conference call today. Some of my takeaways:

- The company is apparently accumulating a large cash pile now. It has $30M on hand, and is committed to withdrawing all of the $25M credit line for stock buyback. If it is to use only $30M to repurchase shares in Q4, it will be able to retire at least 1 million shares while still having a good enough cash coffer. My wide ass guess is the company withheld share repurchase in Q3 in attempt to conduct a mass repurchase in a short period of time to force a short sequeeze. (In the extreme case, if they use $55M to buy stocks in one month, it will mean almost 2 million shares that amounts to 50% of normal daily volume.)

- The company says paying dividend is a question of when, not if. In the clauses of the credit line, the company can pay up to $1.8M/quarter in dividends. This amounts to $0.10-0.11/share quarter, or a dividend yield of 1.5%. (It is not much indeed.) Company says they are balancing options and trying to allocate money to the best resources. It looks like the company thinks PPD is still at attractive price for repurchase.

- The company explained some of the surprises in the financial statements. The loss in associate P&L is mainly due to some new programs. Also noticably, company expects $1M less cash flow in tax payment in Q4.

- The new Identity Shield program is a success. Introduced in August, the program already has close to 40,000 subscribers, mostly paying $9.95/month. If the company can push this to 10% of the total active memberships (or 140,000 subscribers, 10% seems to be reasonable expectation), it can generate $16.7M annual revenue. It should bring much-needed top-line growth to combat the short sellers. On the flip side, this program means PPD needs to buy credit information AND provide legal assistance on identify theft, which should means less margin for PPD. (For example, the major credit agencies are selling credit information subscription for $60-$80/year. I don't PPD can keep cost of goods at 33%-34% for this service.)

- The company will move into new facilities in December and this may translate to higher working efficiency.

This conference call makes me feel there is certain short-term opportunity for the stock. I am also more convinced that the management is still committed to returning value to shareholders in the means of buyback or dividend. I'm raising my price target from $28 to $34.

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