Channel Check Indicate Strong Business Momentum
(Dain Rauscher, May 17)
We had the opportunity to speak with several
Rational VARs and salespeople and believe business
continues to be strong. As expected after Rational's
seasonally strong year end, VARs reported that
April slowed slightly from March, but business
momentum in May has returned to previous strong
levels. We have accounted for this seasonality
as our fiscal first quarter estimates of $110.8
million in revenues and EPS of $0.16 are sequentially
significantly lower than fiscal fourth quarter
results of $125.1 million and EPS of $0.23.
Suite Strategy Continues to Gain Acceptance
Recall that 300 Rational customers purchased a suite
in the fiscal 4th q., significantly exceeding
expectations and resulting in an increase in ASPs.
Our concern that this was a one-time event due to
attractive upgrade prices (we believe the sliding
Suite pricing scale for exisiting customers is now
at 75% of list price) for exisiting Rational customers
has been relieved as the sales channel did not see
a rush to upgrade and that customer interest in
Suites continues to grow. Suites began shipping
Feb 11, and large customers for which the Suite offerings
make the most sense often are decentralized and do not
have the flexibility of making changes to make multi-
departmental purchasing decisions quickly. This
leaves a large base of exisiting Rational customers
that will likely be evaluating the attractive value
proposition of the Suite offerings over the next
several quarters as new development projects are
started.
Furthermore, we believe the Suite offerings will be
attract the attention of new customers that struggle
with the alternative of multi-vendor point product
approach to software development, although we believe
sales cycles will lengthen given the larger dollar
figure involved, but once signed, will provide better
recurring revenue streams.
Suite customers are reporting that the benefits of data
sharing and communication during a software development
project due to the integration of Rational's major point
products brings the never before ability to approach
software development with a formal planning process,
significantly reducing complexity and increasing the
chances of successful projects.
SSL Support For Performance Studio
VARs report that customer interest in Performance Studio,
a Web-based multi-tier testing solution that integrates
functional and load testing capabilities, continues to
accelerate. This quarter, Rational introduced Secure
Socket Layer Support for Performance Studio, enabling
the product for testing of e-commerce applications, a
highly sought after feature given the obvious importance
of ensuring commerce-related Web performance and security.
Given the large amount of Internet related software
development projects, we believe this product will
continue to sell well throughout the next several quarters.
VARs also reported that there is strong customer demand
for TeamTest 7.1 as the new release importantly supports
Visual Basic 6.0, which has been widely adopted by
programmers for Web-related development.
...We are please that Rational is ramping its services
organization to support the strength in product licensing.
Stock Opinion
We believe Rational has an enviable position in the
software tools market and is well positioned to be a
leading beneficary from the expansion of e-commerce and
Web-related programming efforts. The company is executing
its plan to offer product development suites, and the company
is ramping services to support its strong product sales...
(usual disclaimer follows of do your own diligence, etc.)
Any further thoughts, Hans?
Regards, Peter.
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