LEHMAN BROTHERS INC.
Headline: Jacada Ltd.: Reiterate Buy on Recent Price Weakness
Author
Rating: 1
Company: JCDA
Country: COM CUS
Industry: DATAPR
Ticker : JCDA Rank(Old): 1-Buy Rank(New): 1-Buy
Price : $24 1/2 52wk Range: $37-8.00 Price Target (Old): $40
Today's Date : 03/01/00 Price Target (New): $40
Fiscal Year : DEC
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EPS 1999 2000 2001 - -
QTR. Actual Old New Old New Old New
1st: -0.04A -0.03E -0.03E - -E - -E - -
2nd: 0.00A -0.02E -0.02E - -E - -E - -
3rd: 0.00A -0.02E -0.02E - -E - -E - -
4th: 0.02A 0.00E 0.00E - -E - -E - -
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Year:$ -0.02A $ -0.07E $ -0.07E $ 0.01E $ 0.01E $ - $ -
Street Est.: $ -0.08E $ -0.08E $ 0.11E $ 0.11E $ - - $ - -
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Price (As of 3/01): $24 1/2 Revenue (00): 23.2M
Return On Equity (00): N/A Proj. 5yr EPS Grth: 35%
Shares Outstanding: 18.9 Mil. Dividend Yield: N/A
Mkt Capitalization: 450.01 Mil. P/E 2000; 2001 : N/M; N/M X
Current Book Value: N/A Convertible: None
Debt-to-Capital: N/M Disclosure(s): C, A
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*Before bouncing off lows yesterday, Jacada down nearly 30% since reporting
earlier in month, despite solid earnings report and accelerating business
prospects. Strongly reiterate our 1-Buy and $40 price target. Believe
current valuation is appropriate time for establishing or adding to positions.
*Believe decline in price has little relevance to fundamentals. Lack of
liquidity and sexier B2B, I-infrastructure companies appear to be lowering
attention spans. We remind investors that Jacada fills important
infrastructure niche in providing Web interfaces to mainframe applications.
*Jacada's backlog and visibility are at record levels. As a result, we
expect a significant uptick in the growth rate of higher margin license
revenue from our forecast of 60.8%. We also expect upside of several million
to our FY00 estimate of $23.2M. Current quarter is in excellent shape.
*At 18 times FY00 revenue, believe Jacada is under-appreciated and
undervalued, particularly compared to companies related to the application
integration space, which are trading in the 60-100 times range. We believe
Jacada could trade to 30 times on improving fundamentals, business execution
and new product releases. We see little possibility of a revenue and
earnings disappointment over the coming quarters.
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Summary:
Investment Thesis: We continue to view Jacada as a unique B2B play occupying
an important and growing niche in the area of mainframe integration.
Jacada's Jacada for Java conversion engine gives new life to mainframe
applications by converting a green-screen user interface into a versatile Web
page that can be accessed through a browser. The implication is significant
for large companies and governments who can now extend their fully functional
legacy applications to suppliers, partners, customers and employees via the
Web. Demand for Jacada's e-business products are at record levels, growing
in excess of 80% and product license revenue is showing strong acceleration.
We expect license revenue growth to considerably exceed our 60.8% forecast
for FY00. Unlike most early stage companies, Jacada operates near
profitability and losses (currently -$0.07 FY00) could decrease as a
result of this greater concentration of license revenue.
Market Opportunity: IDC has sized the Web to host market (mainframe) at $1.2B
by 2003. Corporations and governments have just completed a $100B+ Y2K
upgrade of their primarily mainframe systems. Most of these mission critical
applications will continue to be used for years to come. The challenge for
many IT managers is how best to utilize these applications in a Web
environment without having to do expensive and time consuming code rewrite.
Jacada provides the products and services that address this challenge.
Demand should continue to be strong as corporations move their legacy
applications to the Web.
Recent Events: Jacada recently reported 4Q99 results, with revenue and EPS of
$4.4M and $0.02, exceeding our $4.1M and ($0.01) estimates. The stock has
since traded down 30%, despite record backlog and visibility. We cite two
factors for the decline: 1) short attention spans with some investors who
have become enamored with 10-20% daily price moves in the B2B and I-
infrastructure areas and 2) liquidity. The stock over the past week has been
under pressure on little volume. We also believe that coming out of the
quarter that some investors expected greater than 7% upside in the quarter.
We remind investors that Jacada is a very conservative company focused on
building a business with strong earnings visibility. We also believe that
business is improving to the point where we may see a significant increase in
the product license revenue growth rate (currently 60.8%). This reflects a
maturation of the primary Jacada for Java product, which is beginning to move
from trial deployments to full-scale deployments. The product is also
requiring less consulting support and we may see slight services revenue as a
result.
Catalysts: Near-term catalysts include the release of Jacada Innovator over
the next few weeks. This product is two quarters ahead of schedule and the
beta has already resulted in firm orders. Jacada Innovator's addressable
market is the six million developers who continue to develop applications in
their native programming languages (i.e. COBOL). Innovator allows developers
to continue to write new applications and extend them to the Web. The
distinction here is new vs. legacy apps. Jacada Innovator has been co-
developed with IBM, one of Jacada's largest partners. Little contribution is
baked into our FY00 model, though we expect this product to potentially
represent a significant source of upside over time. We also will be looking
for announcements in the rapidly growing wireless and XML areas over the next
couple of months in addition to new customer wins in the very near term.
Valuation: At 18 times FY00, we view Jacada as undervalued, particularly when
compared to high flying application integration companies which are trading
in excess of 60-100 times. While not directly in the same space, Jacada
provides products and services that facilitate and bridge the gap of moving
applications to the Internet. We believe Jacada could trade in excess 30
times revenue, nearly twice current valuation, yet a still a significant
discount to other high flyers in this space. Strongly reiterate our 1-Buy
and $40 price target. |
