An excerpt from article in Information Week online
New Era of Networks Inc. (NEON-Nasdaq) is another company that
belongs in this "fallen angel" category. It recently missed its
second-quarter earnings and had a revenue shortfall--and was
punished quickly: Its stock price declined from $78 to a recent low
of $12; its price at press time was about $16.
But there's a lot on the positive side of the ledger for New Era. It
develops and markets a suite of enterprise application integration
software and is a direct beneficiary of the need for IT services to
address the expansion into E-commerce and Web applications.
Though revenue from licenses and services grew 48% and 52%,
respectively, in the second quarter, weakness in revenue from its
IBM channel resulted in disappointing revenue growth. The
relationship with IBM is strong, but New Era is dependent on IBM's
sales force. IBM represented one-third of the 120 deals New Era
closed during the quarter.
In addition, royalties from IBM were below expectations, coming in
below 30%, the low end of the royalty range. New Era receives
between 20% and 40% of IBM indirect sales for MQSeries
Integrator.
In the near term, the recent Sun Microsystems-Fort‚ Software deal
may help New Era. Fort‚ has an enterprise application integration
suite that also must use New Era's MQSeries Integrator as the
underlying integration engine.
But let's face facts. With revenue growing this quickly, New Era is
bound to have lots of competition. The company faces the same
issues as many other software and services companies:
Buying-decision timetables continue to expand, and Y2K is
affecting corporate IT purchase decisions.
New Era is also greatly dependent upon IBM, causing greater risk
to revenue predictability. It doesn't help that the company has made
quite a few acquisitions.
New Era had revenue of $65.8 million in 1998, generating earnings
per share of 23 cents. Operating margin went negative this quarter
as operating expenses exceeded revenue of $26.1 million by
$500,000. In the prior year, operating margins were at 8.5% and
had increased to 11.8% in the first quarter of fiscal 2000. Revenue
projections are for roughly $120 million in 1999 and $170 million in
2000. Earnings-per-share projections for 1999 and 2000 are
minus-27 cents and plus-21 cents, respectively.
I wouldn't be surprised to see New Era's stock glowing again in
2000.
William Schaff is chief investment officer at Bay Isle Financial
Corp. in San Francisco, which manages the InformationWeek 100
Stock Index. You can reach him at bschaff@bayisle.com
Regards
Neil |
