Other than noticing that the stock had retreated significantly from the peaks of late 99 ... in which it was not alone, I haven't followed the stock or the company very closely for a while, but a few days ago I received the Annual Report and decided to take a look at it to see where things stood. Frankly, I was a little shocked.
Memory serves that about six months back I posted a little discussion about the numbers and raised some caution flags, the most significant of which seemed to be the fact that license revenue looked likely to fall *short* of the prior year, even though overall revenue was still climbing due to maintenance and services. Well, folks, turns out my projections were too optimistic! License revenue came in at $109M, down from $131M in 1999 and down even from $113M in 1998. In fact, while higher than 1996 and 1997, license revenue was actually *lower* than in 1995. Ouch.
Maintenance revenue continues to climb as the installed base continues to grow, although by only 9% compared to 25% in the prior year. Consulting revenue was actually *off* 4% from the prior year so that total revenue was off 5% from the prior year. Only once previously has PSC had a lower total revenue YoY and that was in 1996 when they hit the wall of slow adoption of the newer technology and that was by only 2% and the dip in license revenues YoY was greater in 2000 as well.
This shortfall was blamed in part on the fact that only 39% of the revenue is now coming from North America so currency variations have been working against them for the bulk of their revenue. My enthusiasm for this as an explanation is tempered by the 2.8M they made in foreign currency exchange contracts, but the real point is that we should be seeing at least the good old 20-30% YoY gains, not 17% declines in license revenue if we want to see the company as healthy. The claim was that more favorable exchange rates would have meant a 1% gain instead of a 5% drop in overall revenue, but that would still have meant a substantial drop in license revenue at best.
The other explanation for this shortfall was slowed sales through ISVs, particularly those in the ERP sector. Rather than seeing this as an explanation, I just want to know why. To be sure, QADI has been going through some lumpy times, but the claim has long been that their contribution to the bottom line was not really all that large.
The significance of this drop is all the greater when one realizes how much broader the product line is today than it was in 1995 -- the product is a more credible solution in some fairly significant ways, there are more components to sell people for more complex architectures, and there are new products and revenue sources like SonicMQ, Actuate, and ASPEN that should be adding to the revenue base. If these other products account for as much as 10% of the revenue stream, 4GL and DB license revenue might actually be off by as much as 10-15% from 1995.
PSC has always been very good at fiscal management; I would classically describe them as a company with a gold plated balance sheet, whatever was going on. This tight fiscal management was demonstrated well in later 1996 and 1997 when the dramatic shortfall in license revenue occurred by returning to profitability within the quarter by the end of the year and for the year in the following year. One expects that this same kind of fiscal management is going on now, but the challenge may be greater.
For example, PSC has always had a very strong cash position fueled by strong positive cash flows from operations, trimming spending if necessary when revenue shortfalls occurred to maintain this positive cash flow. Nevertheless net cash from operations dropped from $61M in 1999 to $43M in 2000 and total current assets rose by under $4M. Positive cash flow and asset increase is a lot better than negative cash flow and asset decrease, but it is a bit scary to see the cash engine slow down that dramatically.
Aside from the numbers themselves what I find concerning in terms of the look forward is that there seems to be a very strong emphasis on SonicMQ and ASPEN as the areas to look to for revenue growth. It has always been true that the latest new thing has been touted for its potential revenue gains ... although that has yet to happen with any of these products to any significant degree, from what we can tell. It seems to me that built into this pitch there is an acceptance that the 4GL and DB products are *not* a source of revenue growth, i.e., a sort of giving up.
Now, to be sure, none of this points to immanent collapse. It seems highly likely that adjustments will be made, but the problem is rather different than it was the last time. Last time the revenue shortfall meant a short period of net loss, which naturally was very scary to one and all, notably the investment community. This time the bottom line is OK, or at least not that bad, but the real problem is the decline in licensing revenue. If one keeps selling new licenses and manages to retain customers well, then maintenance revenue will continue to climb, but if one is not selling new licenses and existing customers are leaving the technology for the same reasons that people aren't buying new licenses, then even the maintenance stream would begin to taper. One could go on for years and years this way without being in any immediate financial peril, but it might not be the most exciting company with which one might pick to associate. |
