CSFB: Initiating Coverage with STRONG BUY and $75 Price Target
Wendell H. Laidley
Marie A. Kluth
· We are initiating coverage of VITR with a STRONG BUY rating and 12-
month price target of $75, which suggests 61% upside from current
levels.
· Since the IPO, VITR has made significant progress with 3rd
party
partnerships, added several new blue-chip customers that validate the
“killer app factory” strategy and backlog is through the roof.
· The Company is capable of delivering revenue growth of 70%-plus for
the next 3-5 years.
· Our 12-month price target of $75 (44x our conservative 2000 revenue
estimate of $50 million) is consistent with comparable “best in class”
Internet & eBusiness infrastructure companies.
We are initiating coverage of Vitria Technology Inc. (VITR) with a STRONG BUY
rating and 12-month price target of $75 (44 times our 2000 revenue estimate of
$50 million). Vitria is the leading provider of eBusiness infrastructure software to
help companies streamline and manage eBusiness processes across the
extended enterprise. The Company's software suite, BusinessWare, represents
a real-time eBusiness infrastructure platform that enables members of the
extended enterprise (customers, partners and suppliers) to integrate,
communicate, automate and analyze their increasingly complex business
processes and by so doing create significant competitive advantage. Vitria has
established virtual dominance of the telecommunications vertical and is poised to
leverage that success into similarly large markets (supply chain, financial
services, etc.) through strategic partnerships with large, blue-chip system
integrators as well as application providers. The Company's monster deal with
Sprint for more than $10 million is indicative of BusinessWare's compelling value
proposition and penetration opportunity as eBusiness infrastructure spending
explodes. We believe Vitria's business model not only gives the Company a solid
revenue foundation in the short term, but also positions it well to deliver strong
revenue growth and margin expansion over the next 3-5 years.
Founded in 1994, Vitria is led by an impressive management team (awarded
“Best Management Team” in July 1999 by Red Herring Magazine) with stellar
academic and private research credentials, as well as a proven track record in
leading high-tech businesses. The Company's CEO, JoMei Chang, and Chief
Technology Officer, Dale Skeen, previously co-founded Teknekron Information
Systems, a financial information systems management provider, which
represented the technology foundation for Trader Workstation, one of the most
widely deployed products on Wall Street. In 1994, the Company was sold to
Reuters for $125 million and has since been renamed Tibco Software, a recently
public company (NASDAQ: TIBX). After selling Tibco, Chang and Skeen set out
with a new mission to build a company with next-generation products that would
have an even broader impact on the marketplace and had the potential for
widespread market penetration. Accordingly, with Vitria these two have
succeeded in their latest venture by creating an eBusiness product suite that
goes well beyond the functionality associated with middleware messaging and
application integration solutions to solve the challenges of real-time eBusiness,
particularly business process automation and real-time analysis for the extended
enterprise of customers, partners and suppliers. We believe the Company's
achievements today are a modest sampling of better things to come and Vitria
becomes a more established provided of eBusiness infrastructure software.
The advent of the Web as the de facto enterprise information platform is forcing
companies to introduce new business models that leverage the Internet and
create competitive advantage. As companies move to eBusiness, they begin to
recognize the importance of business interactions and how they define the
relationships between customers, partners and suppliers. To the extent
conducting business in a Web environment is characterized by rapid change,
there is greater demand placed on real-time information availability and
transaction processing. However, with proper infrastructure software, the
business processes and communications within the extended enterprise can be
streamlined, managed and enhanced to produce real-time control and visibility
that can be transformed into competitive advantage across the extended
enterprise. We believe the business-level benefits associated with an eBusiness
platform of this nature are extremely compelling in the ability to produce the
following results for all aspects of the extended enterprise: 1) reducing cost, 2)
improving the agility and efficiency of operations, 3) developing closer ties to
partners and customers, and 4) responding more quickly to changes in business
conditions.
Vitria's BusinessWare product suite is the next generation platform for real-time
eBusiness, enabling companies to drive the top-line and be more responsive to
change. BusinessWare is the only platform that combines what we regard as the
four essential elements for an eBusiness solution: 1) application integration, 2)
Internet-based communication, 3) business process automation, and 4) real-time
analysis. Importantly, while other vendors provide one or two of these elements,
Vitria is the only vendor to combine all these elements in a single solution -BusinessWare.
BusinessWare gives organizations end-to-end visibility and control of their
eBusiness processes and relationships across the extended enterprise. Using its
process modeling capabilities, BusinessWare can provide a graphical
representation of the complex decisions and procedures that determine the flow
of information throughout the extended enterprise of customers, partners and
suppliers. Once deployed, these models can be dynamically altered to reflect
changes in the business processes. BusinessWare then automates the
processes by coordinating the flow of information within the IT infrastructure and
between applications. This eliminates the need to manually enter data into
multiple IT systems and manually exchange information between sales
personnel, customers, partners and suppliers via phone, fax, or mail.
BusinessWare can thereby substantially reduce errors that can result from
incorrectly entered data or information that was lost or never received.
BusinessWare's functionality also includes connectors that can provide out-of-the-
box interconnectivity with message queuing systems, database systems and
packaged applications such as SAP, PeopleSoft, Clarify, Vantive, Kenan and
Remedy. In addition, BusinessWare gathers critical business and process
information throughout the enterprise, and provides real-time monitoring and
analysis capabilities. For example, Federal Express utilizes BusinessWare's
query and decision-support functionality to proactively monitor its systems, and
then uses the information to automatically re-route resources such as planes,
handling equipment and personnel to address constant fluctuations in package
and destination volumes.
Underlying Vitria BusinessWare platform is a communication platform that utilizes
publish-subscribe technology, the efficient and preferred communication method
for enterprise application integration (Vitria's CTO, Dr. Dale Skeen, is the
principal author of multiple patents for this technology). Using publish-subscribe,
BusinessWare allow independent applications to share information
asynchronously and anonymously in a distributed architecture, thereby
maximizing efficiency and decreasing the need for systems overhead.
We believe Vitria's robust eBusiness infrastructure solution has a compelling
advantage relative to other players in the marketplace, including middleware
messaging software and Enterprise Application Integration (EAI) vendors. EAI
vendors are primarily focused on integrating the communications aspects of IT
systems, such as connecting a sales application to an Enterprise Resource
Planning (ERP) application, and are less focused on provide the business
process modeling and real-time analysis functionality found in BusinessWare.
With most EAI solutions, therefore, any changes in business processes require
extensive involvement of IT personnel which involves increased costs. Vitria is a
pioneer in developing and commercializing technology for designing and
manipulating business processes through the use of graphical models. As well,
the Company is a pioneer in the development of a general-purpose tool to
execute real-time queries against business process data. Within an EAI system,
analysis of business and process information must be analyzed after the
processing is complete, and therefore cannot support real-time decision-support.
In addition, many EAI and messaging technologies do not support Internet
communication standards such as XML and HTTP, which are prerequisites for
any eBusiness infrastructure platform. EAI also may not support the scalability
necessary for high-transaction environments due to limitations in its “hub and
spoke” architecture designed primarily for integrating internal IT systems at a
single site. Messaging technologies, meanwhile, are primarily focused on
providing high performance, but essentially are unintelligent communications
mediums which are not focused on extracting any intelligence from the movement
of information within these “pipes” and require extensive customization in order to
perform real-time process automation and analysis. We believe Vitria's
BusinessWare platform has demonstrated meaningful differentiation relative to
alternative approaches and in doing so finds itself in an envious position relative
to the competition.
Vitria's products are uniquely positioned to dominate a market opportunity that
IDC projects will grow from $300 million in 1998 to over $5 billion in 2003 (76.5%
CAGR). The demand side of this market will be driven by increased adoption of
eBusiness models within the enterprise, as well as the desire for many
organizations to leverage their extensive investments in ERP and other
applications (sales force automation, supply chain, etc.) that have been made
over the past decade. BusinessWare creates competitive advantage for
companies focused on eBusiness due to the real-time automation and analysis
capabilities the solution can provide, enabling greater visibility and control over
the activities and interactions throughout the extended supply chain. In addition,
the overall value a company can extract from investments made in IT systems
and applications increases if the infrastructure elements can talk to each other
and share information in real-time, providing true business process automation
that results in decreased costs and increased customer satisfaction. Vitria's
products provide a complete solution in terms of process automation,
communication infrastructure and scalability that is very well-positioned for
success in the market.
The Company has had particularly strong penetration in the telecommunications
market as well as supply chain and financial services, with initiatives in place to
expand into other verticals. Vitria's products are a natural fit for the
telecommunications market due to the large breadth of technologies that make up
the highly heterogeneous infrastructure of a telecommunications company and its
extended enterprise. More importantly, however, telecommunications companies
are at the heart of the Internet revolution through the delivery of high-speed
bandwidth that is enabling extended enterprise communication as well as the
delivery of new Web-based services. Telecommunication providers are rapidly
introducing these new services as a means of differentiating themselves in a
highly competitive environment, and are thereby increasing the amount of money
spent on infrastructure technologies in order to ramp these services quickly. In
the June quarter, Vitria closed a $10+ million deal with Sprint, indicative of the
strategic value of Vitria's solution within the telecommunications market as well
as the increasing size of Vitria's sales. We believe that Vitria's success in the
telecommunications market bodes well for success in other markets, and the
skills and technology the Company has developed are highly transferable.
Vitria's strategy is to introduce vertically-focused solutions for
telecommunications, supply chain, financial services and other markets that will
leverage its success in a particular vertical market through a combination of
strategic partnerships as well as internal development. We believe these new
markets represent meaningful incremental revenue streams for the Company
going forward.
The ‘viral effect' of Vitria's solution throughout a customer's extended enterprise
is another strategy to further penetrate the market by leveraging its installed base
and vertical market presence. As BusinessWare is adapted as the integration
platform for a company, there is significant incentive for the company's partners
within the supply chain to adopt Vitria's solution to lower costs and communicate
seamlessly with each other. For example, from Vitria's initial sale to Covad, Vitria
sold its product to its partner Flashpoint within a week, and made sales to
Covad's remaining partners over the next 3-5 months. Vitria has found that the
subsequent sales to surrounding partners can be greater in value than the sale to
the initial customer.
Vitria's high rate of add-on sales (approximately 33% of purchases), shorter sales
cycle and increasing average deal size are examples of the increasing
momentum of the Company's products in the marketplace. Vitria's sales cycle is
only 2-9 months (average 17 weeks), and the Sprint deal, despite its size, was
closed in only 100 days. The average deal ranges from $500K - $2 million and
while the value of initial purchases is steadily increasing -- the more significant
statistic is the fact that ASPs for follow-on sales have consistently exceeded the
value of initial sales. Customers are purchasing deployment-size licenses of
Vitria BusinessWare to solve strategic problems and create meaningful
competitive advantage, and these follow-on purchases reflect the value being
produced by the Company's solutions.
Vitria is now expanding its sales efforts overseas after initially focusing on the
U.S. market. A new office in the United Kingdom is expected to be open by the
end of October, with subsequent expansion planned for other European countries
over the next few months. The Company expects to have sales offices opened in
France, Germany and Asia by Q499, further adding to revenue opportunities
through presence in relatively untapped markets for eBusiness infrastructure
software.
In July 1999, Vitria announced its partnership with Andersen Consulting, one of
the largest systems integrator companies in the world. To date, more than 200
Andersen consultants have been trained on Vitria's solutions, and the two
companies will work together on the implementation of Vitria's products for Sprint.
Vitria announced another blue-chip partnership with EDS in June 1999. EDS is a
major player in electronic supply chain and enterprise systems consulting with
over 20,000 consultants in its E.Solutions business unit worldwide. Both of these
partnerships should help greatly extend Vitria's market position, especially within
larger, Fortune 500 companies and into other vertical markets beyond
telecommunications. Vitria has also formed partnerships with a number of other
key industry players, including leading application resellers (ERP/Supply Chain,
CRM, Telco, Energy, Financial Services, eCommerce), smaller system
integrator/consulting partners (DMR, Sapient, etc.), and complementary
technology providers (Clarify, IBM, SAP, Portal Software, etc.). The breadth of
partners is further evidence of the flexibility, interoperability and intrinsic value of
Vitria's infrastructure solution within the market.
We believe Vitria is capable of delivering revenue growth of 70%-plus for the next
3-5 years as the eBusiness infrastructure market explodes, BusinessWare
emerges as leading real-time platform, the Company successfully executes its
sales & marketing strategy and management demonstrates strong control and
leverage of the financial model. While near term growth rates will clearly exceed
our long term target growth rate, our estimates represent aggressive expectations
and reflect our confidence in Vitria's ability to deliver results consistent with other
emerging industry leaders.
Vitria has established a business model that emphasizes revenue visibility and
predictability with the goal of creating long-term value rather than maximizing
short-term profits. Thus, we believe the Company's reported revenues (both to
date and going forward) are considerably lower than actual bookings and
therefore underestimate the actual revenue growth being generated by the
current infrastructure. We are strong supporters of this approach to financial
management and would expect investors to appreciate this characteristic more
fully over time, as has been the case with other companies in our universe such
as CTXS, MUSE and VRTS which have consistently beaten expectations and in
the process earned premium valuations.
For Vitria's September quarter, we are estimating revenue of $7.0 million and
fully-taxed EPS excluding amortization of deferred compensation of ($0.16). For
the fiscal year ending December 1999, we believe the Company can deliver
revenue of $27.4 million and EPS of ($0.45). Our preliminary estimates for 2000
are $50 million and ($0.34) followed by 2001 estimates of $90 million and $0.00.
At this time our expectation is that Vitria will begin generating operating profits in
Q3:01, or roughly 8 quarters from now, which is consistent with the operating
plans of many other recently public high growth eBusiness infrastructure vendors.
In our opinion, Vitria has demonstrated an impressive track record of growth and
currently possesses all the ingredients necessary to become an industry-defining
company. Accordingly, we believe the Company's valuation should determined in
the context of three primary categories of comparable companies: i) recent high
growth software IPOs, ii) Internet & eBusiness infrastructure, and iii) high growth
system software vendors (see attached comparable company valuation
spreadsheet).
Consistent with many other eBusiness companies, Vitria's valuation is based on
market capitalization:revenue multiples that reflect investor interest in future
revenue growth rather than near-term operating profits. The valuations of Vitria's
comparable companies are currently measured based on 2000 revenue
multiples, which based on prices as of yesterday's market close (10/11/99) result
in mean multiples of 27x, 44x and 9x (respectively) for the three categories
mentioned above.
Our 12-month price target of $75 is therefore based on a multiple of 44 times our
2000 revenue estimate of $50 million, which we believe is conservative, and
leaves room for plenty of upside potential. Based on Vitria's share price of $46
9/16 at yesterday's close, this price target suggests 61% upside in the shares
from current levels. Assuming the Company executes the business strategy and
delivers meaningful revenue upside relative to our published estimates, we
believe Vitria shares are capable of maintaining a premium valuation consistent
with other “best in class” eBusiness infrastructure providers that have established
meaningful differentiation and are expected to deliver explosive revenue growth
over the next several years.
We are therefore initiating coverage of Vitria with a STRONG BUY rating to
reflect the Company's premier product positioning, unique value proposition,
demonstrated track record of execution and potential to deliver strong revenue
and earnings growth over the next 3-5 years. In our opinion, the Company has
the potential to define an important slice of the exploding eBusiness market and
therefore believe the shares represent a core technology holding for growth-oriented
technology investors. |
