What to look for from here
Although the results do indeed confirm that the company has turned around and is now operationally profitable, I am disappointed with the revenue and earnings in Q1. When the company was trying to sell integrated software packages to CEO's and CIO's last year, it was doing something that it had never done before, and it screwed up. But in Q1/00, it had reverted to a LAN-administrator point-product sale, which is something it certainly used to do very well. Further, the company's product peers such as CHKP, ISSX, and SYMC, have clearly continued to grow their businesses at a good rate, even while NETA has shown no sequentail growth over Q4/99. If this business was running properly "on all cylinders", I would have expected revenue of closer to $250m, with expenses of roughly the same amount as they showed. With a 50% tax rate (rough number), this would have resulted in about an additional $36m in net earnings, or about an additional .25/share. The company would have reported .45/share, and would have had a much better profit margin. It may also have been able to reduce its DSO number back into the 50s. Note that this is what would happen if the company was operating properly. Clearly it has not yet reverted to being able to sell software properly the way it used to. What is the problem? It could be that the competition is forcing lower prices per unit of software. But in that case, NETA's peers should have had the same problem, and they didn't. It could be that the sales force was still getting used to the new selling format after a year of doing it the "integrated" way. If that is the case, it certainly says something about the company's ability to turn on a dime - but what it says is not complementary. Q2/00 will show us whether or not this is the issue. If it is, then Q2/00 should show us substantially better numbers than Q1. If it does not, and if the competition still continues to do well, it is an extremely damning statement about company management.
The good news? The good news is that because the peers have done well, the company can grow at a rate greater than the growth of the market as a whole, simply by stealing market share from the competition. This is certainly something that the company knows well how to do. But will it be successful? Does Bill have what it takes to turn this into a growth company again? Is Bill even running the company in anything other than name at the moment, or has he backed away, letting Peter Watkins take over? If only we know.
Q2 will see the annual shareholders meeting, which should be extremely lively, given the company's very unstellar performance in 1999 at a time when other companies in the field have exploded upwards in value.
The company still has good products and a great vision. But can they execute? Q2/00 will tell. |
