Stream, I'm still contemplating BVSN. I did come across the following comentary on NEON and I think it's of interest as it applies to the software group in general
interactive.wsj.com
I've decided to avoid NEON in the near term, even given the prospect of it being oversold. They'll announce what's behind their their problem on July 20th.....that'll give us some tea leaves to read as it applies to NEON's problem and may provide some insight into sector related issues. As we talked before I think the software sector that caters to the corporate IS sector will be very choppy for the next 18 months, particularly as it applies to companies that have previously demonstrated strong growth. The million dollar question is how much growth is due to the acceleration of demand fueled by corporations need to upgrade systems in advance of Y2000, as compared to companies whose growth is pegged to emerging software tools pegged to e-commerce etc.. Certianly I think the prospect exists for some potentially high fliers to falter that have excellent prospects (eg supply chain mgmt and e-commerce facilators) due to decisions being delayed and effected due to the roll of the milleneum calendar. Sorting out the difference in these two groups, finding the gems (or good shorts in advance) can offer some good profit potential.
July 12, 1999
Contract Players Could Be Stars; NEON Dimmed
By Mark Veverka
Whew. It was a big week for gearheads with the tech-happy Nasdaq at full throttle. But what's a technology-minded investor to do when things start to get a little hot under the hood?
[Note: deleted portion unrelated to NEON]
Last week's Plugged In presented New Era for Networks as the poster child for successful IPOs in an obscure software niche known as enterprise application integration, or EAI. And for the better part of two years, that was basically true.
But something funny happened on the way to the year 2000. New Era blew up Wednesday after warning investors that its second-quarter results weren't going to meet analysts' expectations.
New Era, which goes by the ticker symbol NEON, revealed that it plans to report a quarterly loss of 12-22 cents a share -- a far cry from the 12 cents in earnings that the Street had anticipated.
What's more, that bombshell was accompanied by the disclosure that revenues would come in around $25-$30 million, a tad short of earlier projections as high as $35 million. A year ago, NEON posted second-quarter sales of $11.5 million.
Needless to say, shareholders got whipsawed on the news. NEON's shares took a one-day shellacking, diving 56% to around 19. And, in what has sadly become routine when tech companies miss quarters, a spate of class-action shareholder lawsuits were filed against NEON before the market even closed on Wednesday.
So -- what the heck happened?
In a statement, NEON's chief executive, Rick Adam, blamed higher expenses and the failure to close deals that were supposed to be in the bag. Adam wouldn't comment to Barron's, but a company spokesman said that the CEO would offer a more detailed explanation when the company reports official numbers July 20.
Of course, almost immediately after the pre-announcement, several sell-side analysts dropped their bullish recommendations like hot potatoes. And before you could say "Auld Lang Syne," the analysts were surmising that the earnings miss was caused by Y2K spending vapor-lock. Conventional wisdom proclaimed that middleware companies such as NEON, which sell applications integral to doing business on the Internet, would skirt Y2K fears, but NEON's implosion undermines that thesis.
"I think some of the software companies that said they were going to get through it, like NEON, are finding out differently," says Walter Price Jr., a managing director of Dresdner RCM Global Investors in San Francisco.
Price says there was very little indication before last week that middleware firms were in any immediate peril. NEON "thought they were okay going into June, but they're starting to see some deferral of decisions and some Y2K stuff starting to hit," Price says.
Of course, when a software company suffers a meltdown such as NEON did, it's difficult to dismiss categorically the potential impact of Y2K. Still, there are rumblings in Silicon Valley that NEON's woes might be less industry-related and more specifically geared to the company. In particular, there are rumors that NEON's key partner, IBM, may not be pushing NEON's middleware. NEON relies on IBM to sell a significant amount of its software under IBM's MQSeries branding.
And according to NEON's first-quarter 10Q, the firm's fate is tied to IBM more than ever. "We expect IBM will account for an increasing percentage of our software license revenues in the remainder of 1999. Accordingly, we are more dependent on IBM's management of the MQSeries Integrator product, and any delay or shortfall in revenues from IBM, or in our ability to report revenues, could have a material adverse effect on our business and operating results," the filing stated.
For his part, a NEON spokesman would not comment on whether IBM's efforts or lack thereof contributed to his company's disappointing second quarter. Meantime, an IBM spokesman said there hasn't been any fundamental change in the business partnership between the two companies. "We still have a good relationship with NEON," he said.
But will investors retain a good relationship with fledgling middleware companies? Determining whether NEON's troubles are isolated to IBM or a harbinger for an industry-wide middleware slowdown could have a big impact on the anticipated initial offerings of two of NEON's top rivals, Active Software and Vitria Technology.
If the entire EAI niche is, indeed, destined for a second-half slump inspired by Y2K fears, then the timing of the two August IPOs appears more curious.
It could be that Vitria and Active are rushing to go public before their respective chances pass them by. For now, Active and Vitria have relatively strong financials. If they wait to go public and the software market tanks during the fourth quarter, their income statements probably would deteriorate and it might take several quarters to reposition themselves for an offering, says Dresdner's Price.
"They're saying, 'Let's go while we have the numbers, and let the public take the risk,' " Price says.
To be sure, NEON's stock plunge has become a blinking yellow light of caution for those eyeing the middleware offerings. Neither Active nor Vitria would comment regarding the timing of their IPOs, or whether they are immune to NEON-like symptoms, because they are in quiet periods. Stay tuned.
Copyright © 1999 Dow Jones & Company, Inc. All Rights Reserved.
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