Dec 15 1999 10:00AM CST
Why Applix Is Fundamentally Overvalued
by Charles Rotblut, CFA
Senior Analyst/Contributing Editor
Although Applix, Inc. {APLX} has generated a very strong
performance during 1999, its rapid appreciation in price is has
been more attributable to industry sector strength than to actual
growth prospects. Although the stock continues to show
underlying technical strength, investors may want to take a
closer look at the company before considering it as a long-term
investment.
Multiple Platform Applications
Applix develops front office and decision support applications
that run on Windows (98 and NT), Unix, and Linux platforms.
Thin-client customer relationship management (CRM) and
business intelligence tools comprise the company's front office
product line. Internet-architected Applix Enterprise is the CRM
suite and is comprised of sales/contact management, customer
service, and help desk applications. In addition, several smaller
products that add functionality are included, such as WinBeep -
a wireless messaging product. The company's business
intelligence products, the Applix TM1 product line, are designed
to aid decision-making by providing analysis of data from either
multiple databases or live feeds. The TM1 product line includes
both servers and applications. Decision support products
include Applixware - a group of products that provide customers
with the ability to access, analyze and publish data from various
sources including news services and databases. Product
support is offered through multiple maintenance plans that range
from 12-18 percent of the license fee for the covered product.
During 1998, license revenues accounted for 66.6 percent and
service revenues accounted for 33.4 percent of total revenues.
The company's target market is midsize companies within the
financial services, manufacturing/engineering,
telecommunications, healthcare, and government sectors.
APLX utilizes an internal sales force and relies on marketing
relationships with various value added resellers, hardware
vendors, software vendors, and systems integrators. The three
largest customers, including resellers, accounted for a
combined 12 percent of 1998 license revenues. Competition is
intense with publicly traded competitors including, but not
limited to, Clarify {CLFY}, IBM {IBM}, Onyx Software
{ONXS}, Oracle {ORCL}, Remedy {RMDY}, Siebel Systems
{SEBL}, Vantive {VNTV}, Hyperion Solutions {HYSL}, Corel
{CORL}, and Microsoft {MSFT}.
Financials
Revenues grew strongly from 1994-1996, before pulling back
5.35 percent in 1997 to $48.4 million from $51.2 million in 1996.
Total revenues rebounded in 1998, increasing 3.5 percent to
$50.2 million. Although service revenues, which are primarily
comprised of maintenance contracts, grew 12.2 percent in 1998
and 5.5 percent in 1997, sales of software licenses fell 0.4
percent in 1998 and 9.5 percent in 1997. Lower Applixware
sales to the government sector caused the reduction in license
revenues. Gross margins were 77.7 percent in 1998, down from
79.7 and 85.3 percent in 1997 and 1996, respectively. Although
license margins have fluctuated within a small range, service
margins fell to 49.4 percent in 1998 from 62.7 percent in 1996.
The lower margins resulted from the addition of new support
employees and an increase in the cost of outside consultants.
Earnings per share totaled $0.11 in 1988 compared to a loss of
$0.04 in 1997. An increase in product awareness and channel
development marketing costs caused the loss in 1997. Cash
flows from operating activities were $2.2 million in 1998, down
slightly from 1997 figures.
During the nine months ended September 30, total revenues
rose 11.4 percent to $41.7 million from $36.9 million, but license
revenues fell 1.9 percent because of lower sales of Applixware.
Service revenues were strong, however, rising 30.2 percent
because of expansion in the company's CRM customer base
and consulting service offerings. Gross margins continued to
worsen, sliding to 72.9 percent as service margins dropped to
44.1 percent from 50.0 percent for the same period a year
earlier. The decrease was due to a higher proportion of
consulting revenues, which are less profitable than other
revenue streams. Continued decreases in selling and marketing
expenses resulted in lower operating expenses and helped
earnings per share to rise to $0.16 from $0.05. Cash flows from
operating activities increased to $6.2 million compared to $0.6
million. The September 30 balance sheet showed cash and
cash equivalents of $11.3 million ($0.92 per share) and no
long-term debt.
Risks and Rewards
The stock's 430 percent twelve-month gain is truly remarkable
considering that license revenues are on pace to decline for the
third straight year and gross margins are deteriorating.
Although the two analysts covering the stock project earnings
growth for next year at a consensus estimate of 58.2 percent,
their five-year growth forecast of 15 percent significantly lags the
industry average of 26.9 percent. Even more notable is that
neither analyst ranks the stock a "strong buy", and one ranks
the stock as "hold". Given the lack of strong topline growth over
the past few years, the deteriorating margins, and the
sub-industry average five-year forecast, the current forward
looking P/E of 51.1 is not justifiable.
Fundamentals have not been driving this stock, however.
Strength in the software, business-to-business, and, in
particular, the Linux stock groups is the engine behind its
ascent. In other words, this is simply a case of momentum
within a group combined with growth in earnings fueling the fire
that moves a stock. That momentum is very impressive. Over
the past three weeks, shares of APLX have appreciated 53.7
percent on strong volume. Given the Wilder RSI score of 63.6,
the stock is likely to continue to appreciate over the short-term
should market conditions remain favorable. However, the
intermediate to long-term prospects are susceptible given the
company's inability to accelerate the rate of revenue growth. |
