Notable IPO of the day: Optio Software Inc. (NASDAQ:OPTO)
Shares: 5M Price Range: $8-$10, final pricing $10. Trading will commence on the late morning of Dec 15.
Lead Underwriter: Merrill Lynch Pierce Fenner & Smith Inc.
Business and technology: Optio Software develops and implements software that works in
conjunction with existing applications and operating systems to distribute information to end-users both internal and external to the business. This software package allows customized reports and
other content to be distributed through a variety of channels, including fax, email, printers, wireless devices and the Internet. Optio has developed two products, each specifically designed for
different end users. The Optio Enterprise Suite is targeted towards general business users whereas the Optio Healthcare Suite has been tailored for the specific information and reporting needs for the
healthcare industry.
Optio's software has been designed to be extremely flexible and scalable to meet virtually any enterprises needs. Because the software works with existing legacy and ERP systems, there is no
need to invest valuable time and money replacing these systems or developing comprehensive and costly customized solutions. ERP stands for Enterprise Resource Planning and signifies software that
attempts to standardize information flows throughout an organizations different departments, e.g. human resources, accounting, marketing, etc. Investment in ERP systems is expected to continue for the foreseeable future: AMR Research projects ERP expenditures to grow from $16.7 billion in 1998 to $66.6 billion in 2003, representing a 32% growth rate. While these expenditures aren't directly on Optio's products, they do ultimately mean more demand for Optio's products. ERP applications are great for
internal, off-line communications, but don't extend externally or to the Internet. Once business have standardized their internal communications processes through ERP implementations, they will look
to extend this communicating outside the enterprise and to the Internet; this is exactly what Optio's products facilitate. This is a powerful and pivotal evolution as it standardizes reporting and
information delivery throughout the supply chain, thus making it a more efficient process ultimately at a lower cost.
Main competitors: QSFT, EPAY, LEAF
Underwriting Team Merrill Lynch & Co.; Bear, Stearns & Co. Inc.; The Robinson-Humphrey Company; fairly strong team.
Stratetic Alliances: Oracle, BAAN, SAP, JD Edwards, HBOC - very impressive
optiosoftware.com
Client List: OPTO already has 3,000 clitents, including Home Depot, Reynolds Metals, JFK Medical Center, across different sectors, testament to the flexibility and versatility of the company's software product.
Investment Analysis There are several factors leading to my position that Optio
Software will be a strong performer, including:
1. Strong Market Demand: The advent of the Internet has revolutionized the ways business
conduct their operation, both internally and externally. Billions of dollars in equity market capitalization have already been created over the expectation that the Internet can drastically cut operating
costs, increase productivity and improve profit margins. The market for business-to-business (B2B) e-commerce is expected to explode over the next few years: IDC estimates that B2B e-commerce will
grow from $50 billion in 1998 to $1.3 trillion in 2003. To facilitate this tremendous level of e-commerce transactions, companies will also have to spend billions to upgrade, extend or even replace systems to integrate effectively with these new Internet technologies.
2. Broad Client Base: Optio currently has over 3,000 customers
using its software packages -- a strong endorsement of the
effectiveness of its products. One item that is important to point
out regarding Optio's software is that it was initially an off-line
solution. However, the software has always been structured to be
flexible enough to incorporate new technologies -- a characteristic
demonstrated through its rapid integration with the Internet. Accordingly, many of these customers do not yet use the Internet component of the software suite. The large and diverse client base
does provide Optio an immediate and low-cost avenue through which to
sell its product. Customers are already comfortable with Optio as
an organization, so it should take little convincing on Optio's part
to up-sell these customers to new products and services as they are
created. Unlike fledgling Internet companies that often derive the
majority of their revenues from only a handful of customers, Optio's
revenue streams are spread out nicely among its client base: no
single customer accounted for 10% or more of total revenue during
the nine months ended October 31, 1999. This broad base of clients
also provides a significant amount of revenue from professional
services for maintenance on existing contracts.
3. High Demand for Product: As the level of B2B e-commerce
transactions soars over the next few years, so will the demand for
infrastructure products that can scale to meet this demand. IDC
estimates that the market for e-commerce applications will grow from
$444 million in 1998 to $13 billion in 2003. With a flexible
architecture and the use of leading edge technologies, Optio has
positioned itself to be a significant player in the competition for
these application dollars.
4. Strong Strategic and Distribution Partners: 15 consulting firms
have partnered with Optio to provide value-added services for its
software solutions. In addition, ERP giants such as Baan, SAP,
Oracle and J.D. Edwards, as well as the leading healthcare solution
provider, McKesson HBOC, have agreed to refer select clients to
Optio. From a distribution standpoint, Optio has relationships with
over 100 resellers to incorporate Optio's software suites into their
own products. These strong strategic and distribution relationships
should keep a steady flow of clients and revenues coming and also
serve to reduce quarter-to-quarter earnings/revenue volatility.
5. Strong Financials: How many IPOs priced at $10 report 45% annual growth in revenues and actual earnings?
hoovers.com
Expectations and Final Analysis It's fairly clear that MLCO misprices this issue as they did with NTRO months back. I expect OPTO to open in the teens and to close in the 20s
Company's potential weaknesses
While Optio is profitable -- it posted Net Income of $525k for the
most recent quarter ending October 31, 1999 -- its revenues only
increased by 6%....very low for an Internet firm. This is a result
of Optio just entering the e-business market. Optio has been around
for some time with roots reaching back to 1981. Its first e-
business product was just launched in September of 1999. The slow-
down in revenue is likely due to this product transition; expect to
see revenues ramp back up in early 2000. Also, because Optio's
revenues are on a fixed-fee basis for each license sale and not on a
recurring/subscription basis, revenues are highly dependent on
attracting new business on a monthly basis. The type of revenue
model is not as attractive as other e-business revenue models in
which fees are earned either on a transactional basis or on a
recurring monthly basis.
--> Summary
The advent of the Internet has revolutionized the ways business
conduct their operation, both internally and externally. Billions
of dollars in equity market capitalization have already been created
over the expectation that the Internet can drastically cut operating
costs, increase productivity and improve profit margins. The market
for business-to-business (B2B) e-commerce is expected to explode
over the next few years: IDC estimates that B2B e-commerce will
grow from $50 billion in 1998 to $1.3 trillion in 2003. To
facilitate this tremendous level of e-commerce transactions,
companies will also have to spend billions to upgrade, extend or
even replace systems to integrate effectively with these new
Internet technologies.
Optio Software develops and implements software that works in
conjunction with existing applications and operating systems to
distribute information to end-users both internal and external to
the business. This software package allows customized reports and
other content to be distributed through a variety of channels,
including fax, email, printers, wireless devices and the Internet.
Optio has developed two products, each specifically designed for
different end users. The Optio Enterprise Suite is targeted towards
general business users whereas the Optio Healthcare Suite has been
tailored for the specific information and reporting needs for the
healthcare industry.
Optio's software has been designed to be extremely flexible and
scalable to meet virtually any enterprises needs. Because the
software works with existing legacy and ERP systems, there is no
need to invest valuable time and money replacing these systems or
developing comprehensive and costly customized solutions. ERP
stands for Enterprise Resource Planning and signifies software that
attempts to standardize information flows throughout an
organizations different departments, e.g. human resources,
accounting, marketing, etc. Investment in ERP systems is expected
to continue for the foreseeable future: AMR Research projects ERP
expenditures to grow from $16.7 billion in 1998 to $66.6 billion in
2003, representing a 32% growth rate. While these expenditures
aren't directly on Optio's products, they do ultimately mean more
demand for Optio's products. ERP applications are great for
internal, off-line communications, but don't extend externally or to
the Internet. Once business have standardized their internal
communications processes through ERP implementations, they will look
to extend this communicating outside the enterprise and to the
Internet; this is exactly what Optio's products facilitate. This is
a powerful evolution, because it standardizes reporting and
information delivery throughout the supply chain, thus making it a
more efficient process ultimately at a lower cost.
--> Investment Analysis
There are several factors leading to my position that Optio
Software will be a strong performer, including:
1. Broad Client Base: Optio currently has over 3,000 customers
using its software packages -- a strong endorsement of the
effectiveness of its products. One item that is important to point
out regarding Optio's software is that it was initially an off-line
solution. However, the software has always been structured to be
flexible enough to incorporate new technologies -- a characteristic
demonstrated through its rapid integration with the Internet.
Accordingly, many of these customers do not yet use the Internet
component of the software suite. The large and diverse client base
does provide Optio an immediate and low-cost avenue through which to
sell its product. Customers are already comfortable with Optio as
an organization, so it should take little convincing on Optio's part
to up-sell these customers to new products and services as they are
created. Unlike fledgling Internet companies that often derive the
majority of their revenues from only a handful of customers, Optio's
revenue streams are spread out nicely among its client base: no
single customer accounted for 10% or more of total revenue during
the nine months ended October 31, 1999. This broad base of clients
also provides a significant amount of revenue from professional
services for maintenance on existing contracts.
2. High Demand for Product: As the level of B2B e-commerce
transactions soars over the next few years, so will the demand for
infrastructure products that can scale to meet this demand. IDC
estimates that the market for e-commerce applications will grow from
$444 million in 1998 to $13 billion in 2003. With a flexible
architecture and the use of leading edge technologies, Optio has
positioned itself to be a significant player in the competition for
these application dollars.
3. Strong Strategic and Distribution Partners: 15 consulting firms
have partnered with Optio to provide value-added services for its
software solutions. In addition, ERP giants such as Baan, SAP,
Oracle and J.D. Edwards, as well as the leading healthcare solution
provider, McKesson HBOC, have agreed to refer select clients to
Optio. From a distribution standpoint, Optio has relationships with
over 100 resellers to incorporate Optio's software suites into their
own products. These strong strategic and distribution relationships
should keep a steady flow of clients and revenues coming and also
serve to reduce quarter-to-quarter earnings/revenue volatility.
--> Cautionary Point
While Optio is profitable -- it posted Net Income of $525k for the
most recent quarter ending October 31, 1999 -- its revenues only
increased by 6%....very low for an Internet firm. This is a result
of Optio just entering the e-business market. Optio has been around
for some time with roots reaching back to 1981. Its first e-
business product was just launched in September of 1999. The slow-
down in revenue is likely due to this product transition; expect to
see revenues ramp back up in early 2000. Also, because Optio's
revenues are on a fixed-fee basis for each license sale and not on a
recurring/subscription basis, revenues are highly dependent on
attracting new business on a monthly basis. The type of revenue
model is not as attractive as other e-business revenue models in
which fees are earned either on a transactional basis or on a
recurring monthly basis. |
