The RagasReport on Sat, 8 Sep 2001 01:01:51 +0200 (CEST)


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[Nettime-bold] THE RAGAS REPORT - Inside the World of Integration Software Stocks


Title: RagasReport
Knowledge Capital For Next Economy Architects
Editor: Matt Ragas
"Now read by over 25,000 next economy leaders"


In This Issue  
  Commentary: Inside the World of Integration Software Stocks
More Knowledge Capital: Hewlett-Packard, Compaq and ValueClick
Quote of the Week: "Still Confused" About HP-Compaq Deal
RagasReport Watch List: Adds CrossWorlds and ValueClick


This Week's Commentary

Inside the World of Integration Software Stocks


There's money to be made over the next decade in glue stocks and I'm not talking about Elmer's.

Say what? Let me explain.

Throw away your concerns about decreased IT spending killing enterprise software stocks for a second and peer into the big picture with me.

Forget market timing and think long term.

A relatively young sector of the software universe known as Enterprise Application Integration [EAI] is definitely an area that tech investors should now be monitoring for investment opportunities.

EAI companies essentially provide "the glue" -packaged software- that helps provide the foundation for integrating a company's disparate applications and databases running on different computer systems.

In other words, EAI companies help best of breed applications; say a Siebel CRM system and an Oracle or IBM database all integrate nicely together, giving companies a much richer, real-time view of their business processes.

Of course, in a world where companies and customers are increasingly using more applications and more devices to communicate, the amount of new work for EAI firms continues to rise as well.

In fact, analysts expect the EAI market to grow from $600 million back in 1999 to over $5 billion by 2003.

With this in mind, we decided to take a look this week at EAI players Tibco Software, CrossWorlds Software and Vitria Technology.

Let's see what we found out.


TIBCO Software [TIBX]

Every sector has its gorilla, and Tibco Software is as close as it comes to one for the integration software business. Tibco's flagship product, The Information Bus or TIB, now helps enable the real-time distribution of information for well over 1,000 heavyweight clients. While Tibco's technology was first used to digitize Wall St., the integration king now works with everyone from Yahoo and Cisco (both minority shareholders) to GE Capital, Enron and Sun Microsystems.

While Tibco's stock has been quickly turned on its head and beaten over the past year, Tibco- the company- continues to do a relatively good job of weathering the IT spending depression. These guys are survivors. Second quarter sales surged 55% to $83.7 million as Tibco posted pro forma net income of $7.6 million. While sales grew an eye-popping 160% last year, this growth is expected to slow down to around 50% for 2001. On the earnings front, EPS is expected to decline 22% to $.18 per share this year from $.22 per share in 2000.

Bottom line, Tibco remains a great company, but even after seeing its stock drop over 90% from its old high to around $8 bucks now, this is not an ultra-cheap play at this point. TIBX currently trades for roughly fives times this year's expected sales and still sports a pricey forward PE of 44. Further, we are also somewhat disappointed to see TIBX majority owner Reuters still unloading Tibco shares in the $9-$10 range. The company's cash stockpile of over $600 million or $3 bucks per share is a big plus, but not enough for us to buy TIBX right now.

RagasRating: NEUTRAL


Vitria Technology [VTRA]

Where's the beef- err, we mean growth! That's the question that Vitria investors and management are asking themselves these days. While the company continues to be well-regarded by systems integrators and has a very high end customer list (AT&T, BP, American Airlines, Deutsche Bank etc), Vitria now finds itself scrapping to show top line growth. On the plus side, Vitria has done a very good job over the past few quarters over better diversifying its customer list. Telecom companies have traditionally been the majority of Vitria's business.

While Vitria has been profitable previously, the company posted a pro forma loss of $12.3 million last quarter. Sales rose 8% to $34.4 million during the period, but actually fell slightly on a sequential basis. Vitria hopes to return to profitability during the first half of 2002. We shall see. For the upcoming quarter, the firm expects sales to remain essentially flat in the $34-$35 million range. Back in April, Vitria scooped up privately held XMLSolutions, in a move to become more aggressive in the new XML market and hopefully help jumpstart sales.

At a recent price of $2.30 per share ($300 million market cap), we like Vitria's sizeable $193 million cash cushion, which works out to almost $1.50 per share in cash. What makes us pause, however, is slowing top line growth from a firm that is trying to figure out how to get back in the black during a drastic slowdown in IT spending. While I suspect Vitria will get there sometime next year, it doesn't make sense trying to fight the overall negativity surrounding the stock right now. 5 of 10 analysts have a HOLD rating right now. We'll pass.

RagasRating: NEUTRAL


CrossWorlds Software [CWLD]

While much smaller then rivals like Tibco and Vitria, CrossWorlds has managed to carve itself out a nice solid (and growing) position in the business integration software business. Of course, one wouldn't know that by taking a quick look at the company's stock price. CrossWorlds shares are down 90% over the past 52-weeks to a lowly $2.77 per share. Beyond the crippled stock price, though, CrossWorlds has locked down a blue chip customer list, which includes the likes of Sony, DuPont, Whirlpool and The Dow Chemical Company.

More importantly, CrossWorlds is now well on its way to entering the rarified land of profitability. Applause, please. For Q2, sales jumped 77% to $20.1 million. Pro forma net loss for the period (excluding restructuring charges) was $1.2 million. CrossWorlds expects to be profitable by Q4 of this year. Further, the company actually raised its 2001 sales estimate from $75-$80 million up to over $85 million as part of its second quarter earnings announcement. Looking further out, CWLD's pro forma EPS should exceed $0.15 per share next year.

Clearly, there is much to like about CWLD's valuation right now. For one, this is a company on the brink of profitability with $24.7 million still in the bank (representing 33% of its $74 million market cap). In addition, CrossWorlds is currently trading for less than one times its 2001 sales estimate. Finally, while this is a company that analysts expect will grow its EPS at a 40% clip over the next year, CWLD only sports an estimated 2002 P/E right now of 18 or so. Time to bag this puppy and sit patiently.

RagasRating: POSITIVE

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Buy It Here!
More Knowledge Capital

 

THE RAGAS REPORT ON E-MARKETING: Not surprisingly, we received a number of chastising emails over the past few weeks when we added e-marketer L90 [LNTY] to our WatchList. Clearly, the vast majority of the world thinks we are off our rocker right now even looking at online advertising stocks. Let me be clear. The investment thesis on this group is simple. E-marketing is the future (it is already more cost-effective then traditional adv.) and online marketing WILL end up acquiring its fair share of the overall ad pie within the next few years. Watch.

With this in mind, the nuclear winter the entire group is experiencing right now allows us to very cheaply buy select top players for at or below their cash values. Thus, we are also adding e-marketer ValueClick [VCLK] to our WatchList this week. With VCLK now down at $2 and a $79 million market cap, we're moving in. This is a company that will soon have over $150 million in the bank, is basically break even (EPS loss of $.01 per share last quarter) and should post $60 million in sales for 2001.


Buy It Here!

TWO CRUSTY TECH TITANS HOLD HANDS: We must admit that Monday morning's $25 billion acquisition announcement by Hewlett Packard for Compaq still has us scratching our heads asking "why?" Where are the real strategic benefits to this combo? Don't just tell us cost-savings and magical "synergies." It doesn't matter how much HP chief Carly Fiorina tries to spin it, but two slow-to-no-growth companies merging just equal one REALLY BIG slow-to-no growth colossus. Excuse us if we're not particularly excited.

Besides this being a lousy environment for trying to pull off a merger of this size in the first place, this deal doesn't address HP and Compaq's biggest problems - neither company are top three players worldwide in IT services. That's clearly why Compaq bought Digital Equipment a few years back and HP made a half-hearted run at Pricewaterhouse earlier this year. The only thing that could have made the HP-Compaq deal look more moronic is if Fiorina would have announced plans to buy pathetic poor Xerox as well!

Quote of the Week

 

"The market is still confused about the outcome of the merger. As far as the business part of it goes, it looks O.K. Strategically, it's hard to understand, and that's where the problem is.''

-- Comments made this week by Edgar Peters, chief investment office of PanAgora Asset Management, regarding the announcement of Hewlett-Packard and Compaq's planned mega-merger.

The RagasReport Watch List
Company Ticker Date Added Price Then Price Now Gain/Loss
Akamai AKAM 8/24/2001 $4.45 $3.14 29%
provider of global delivery services for content and applications
           
ValueClick VCLK 9/06/2001 $2.18 $2.18
0%
provider of performance based Internet advertising solutions
           
CrossWorlds CWLD 9/06/2001 $2.77 $2.77
0%
provider of enterprise integration application software
           
CacheFlow CFLO 8/24/2001 $3.00 $1.50
50%
provider of caching appliances and content delivery technologies
L90 Inc. LNTY 8/10/2001 $1.77 $1.27
28%
provider of Internet marketing technology and services
Apple Computer AAPL 7/27/2001 $18.96 $17.28
9%
niche designer and manufacturer of personal computers
 
September 7 , 2001

 


 

 


 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Note: All of The RagasReport Watch List's "Price Now" are based on the current Thursday's closing prices.

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About Matthew W. Ragas: Ragas is President and Chief Analyst of Matthew Ragas & Associates, an Orlando, FL based strategic advisory and venture development firm. Ragas is also President of iBrand Marketing Inc., a marketing technology consultancy. He was previously the founding editor of Raging Bull, has worked for a tech-focused venture capital firm, and is the author of the critically-acclaimed new e-business book Lessons From the E-Front from Prima Publishing (2001). He is currently at work on a new book titled The Power of Cult Branding for release in the summer of 2002.


DISCLAIMER:
The RagasReport and Matthew Ragas and Associates, are not a registered Investment Adviser or a Broker/Dealer. Readers are advised that the report is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy. The opinions and analyses included herein are based from sources believed to be reliable and written in good faith, but no representation or warranty, expressed or implied is made as to their accuracy, completeness or correctness. Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report should be independently verified with the companies mentioned. In addition, we receive no compensation of any kind from any companies that we mention in this report.




Copyright (c) 2000-2001, Matthew Ragas & Associates.
(http://www.ragasreport.com) All Rights Reserved.




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