AIM's Scavone Finds Y2K-Immune Software Stks
By Maria V. Georgianis / June 2, 1999
NEW YORK (Dow Jones)--Trying to find a software company
that's immune to a year 2000-related spending slowdown
is no easy task. But AIM Management Group Inc.'s Charles
Scavone believes some small-cap software names fit the bill.
Software comprises about 6% of the $303 million in assets
in the AIM Small Cap Opportunities Fund, which Scavone
oversees as lead manager along with three colleagues.
Technology is the fund's largest sector, at 37% of assets.
The fund is up 10.2% year-to-date.
Scavone's software picks include Macromedia Inc. (MACR),
Clarify Inc. (CLFY), Rational Software Corp. (RATL) and
Mercury Interactive Corp. (MERQ). While each targets
different markets, they share above-average earnings
growth.
Macromedia, Rational and Mercury are all estimated to
have a secular earnings growth rate of 35% through 2002,
above the 23.4% growth estimated for the software sector,
according to First Call Corp. Clarify's secular growth
is estimated at 50%.
In addition, "all of these companies in the most recently
reported quarter commented that the year 2000 (issue) is
not slowing their business down," Scavone said. The
approaching millennium has posed difficulties for many
software companies as it leads their customers to defer
spending on new products in favor of Y2K remediation.
The senior portfolio manager likes Macromedia, a core
holding since the fund was started last June, for its
"very solid position" in creative tools for the World
Wide Web. Macromedia's products "put them in a position
to do well as the Internet continues to proliferate,"
Scavone said.
Macromedia, of San Francisco, beat earnings estimates
for the last seven quarters, and has more than 61% earnings
growth projected for its fiscal 2000 ending next March 31.
Rational Software was the fund's second largest holding,
or 1.71% of total net assets, as of April 30. The company
has "the best suite of products for software development,"
according to Scavone. Rational's products allow businesses
to write custom software quickly by reusing lines of code.
Rational, of Cupertino, Calif., beat earnings views in the
last three quarters and is targeted to increase its earnings
by about 41% this year, according to First Call.
The year 2000 computer glitch could actually be a plus to
Rational, according to Scavone. After customers are complete
with their year 2000-related projects, there will be "an
enormous pent-up demand in new software development," he
explained.
Clarify, Rational and Macromedia all have outperformed
Scavone's year-to-date 10.2% return, gaining, respectively,
30.4%, 20.3% and 19.9% year to date.
Scavone is short on several software stocks, however,
including Lernout & Hauspie Speech Products N.V. (LHSP),
a developer of speech technology software, and i2
Technologies Inc. (ITWO), which focuses on supply-chain
management software.
Lernout & Hauspie, of Belgium, risks having its products
"commoditized" by others, Scavone said. Earnings estimates
on the company have also been coming down, he noted.
i2 Technologies, of Irving, Texas, runs the possibility of
its growth being slowed by the year 2000 glitch, Scavone
said. The company's software is a high ticket item and as
such could be prone to a Y2K-related slowdown, he said.
-By Maria V. Georgianis; 201-938-5244;
maria.georgianis@dowjones.com
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