Bob,
Enjoyed your post (and Pete's)! We have to be patient for two reasons: First, because of our technical understanding of the Y2K problem, we know the issue is overblown. And second, as value investors, we know that the Company will eventually be valued on earnings or FCF.
Lets look at the Long arguments:
The Y2K problem is much worse than people believe. Fortunately, we know the problem is overblown. Others will come to this realization over the next year or so.
Most companies (and government agencies) are just getting started. Most companies have programs well underway. Also, IMO, the economics of Y2K are poorly understood. Companies tend to postpone, as long as possible, spending money on non-revenue generating, overhead items. The fact that most companies didn't start in earnest until 1997 indicates that the problem is NOT severe.
There will be limited resources in 1999, and Y2K services will come at a premium. Most of the Y2K work will be completed in 1998! We are seeing the peak of the contract signings in Q2 & Q3, 1997. We should see the peak quarterly revenue for DDIM in early 1998, maybe $25M - pretty impressive! In 1999, DDIM will be cutting staff.
Work to date has been mostly front end work. This is myth and is completely wrong. Just review the announced signings last quarter; most are "full cycle" contracts. Of course, IBM & CA don't announce contracts. The Longs keep forgetting that most companies are handling the problem with their internal staff or upgrading/replacing their systems. The Federal Government is replacing 17% of their systems. Private industry is replacing close to one third!
Y2K companies are high growth (including DDIM) and should be valued on growth, not earnings. They are currently being valued on growth. As growth slows, investors will start looking at earnings and FCF. This is why the value investor will do well.
IMO, waiting for "next quarter" is a mistake. DDIM will have another record quarter in Q3 - I originally forecast $12M for the quarter- it may be higher! Patience is required.
Best Regards,
Bill |
