Tech Stocks - Great Plains IPO - 6/25/97
Great Plains (GPSI) spectacular IPO is the first inkling that Wall
Street is beginning to pay attention to mid-range financial
applications companies using NT/SQL Server technology.
The other major companies focused on this market are State of the Art
(SOTA) and Platinum Software (PSQL).
Microsoft's NT/SQL Server sales have exceeded even the most optimistic
industry expectations. NT Server, Microsoft's network operating system,
has grown over 100 percent per year over the last two years and is
rapidly replacing Novell's Netware operating system in business
networks. Sales of Microsoft's relational database, SQL Server,
grew 100 percent last year and are projected to double again in 1997.
The next obvious step is explosive growth in NT applications software.
This market is expected to grow from $100 million to well over
$1 billion by the year 2000. In addition, the "Year 2000"
software problem is increasing pressure on users to upgrade to new
systems and technologies. According to the Meta Group, some
80 percent of companies are expected to upgrade their financial
applications by the year 2000.
In particular, there has been a gap in the financial applications
market between mid-range LAN systems and expensive high-end
client/server systems. Rapidly growing small companies are
outgrowing their LANs. Many larger companies want to update
legacy minicomputer systems. Even Fortune 500 corporations want to
off-load divisions running on their mainframes to more cost-effective
and flexible client/server systems. NT/SQL is creating a new market
opportunity several times larger than the market for mid-range LAN
systems.
GPSI's spectacular IPO then, should not be too surprising. Interestly,
there is a big difference in valuations between SOTA and GPSI.
They are almost equal in revenues with products aimed at the same
market. GPSI is valued at a $390 million market capitalization or 7
times revenues. SOTA is valued at about $130 million or a little
over 2 times revenues.
SOTA and GPSI compete with three different products. Great Plains'
Dynamics for Windows competes with SOTA's MAS 90 for Windows.
Dynamics C/S+ which came out three years ago competes with SOTA's
just released MAS 90 CS running on NT Server, and Dynamics C/S+ for
SQL Server which came out one year ago competes with SOTA's Acuity
which has been out for six months.
How do they stack up? MAS 90 for Windows, which was released last
summer, outsold Dynamics entire installed base in its first 6 months
on the market. Dynamics had been on the market for three years. In a
shoot out at a recent accounting trade show MAS 90/W won by a
30 percent margin over every other Windows accounting product
in the mid-range market.
MAS 90 CS has all the modules of the MAS 90/W but is an NT
client/server implementation that runs 5 to 10 times faster and
supports 5 times as many users as MAS 90/W. A significant portion
of the MAS 90 customer base has been waiting for this product.
It will shift MAS 90 from a LAN product to a client/server product
and boost sales growth of MAS 90. SOTA plans to compete aggressively
for new customers with Dynamics C/S+.
Acuity was built from scratch using all Microsoft technology
including Visual Basic development tools and optimized for SQL Server
and NT. Microsoft has recently acknowledged this in a video
presentation on Acuity by Microsoft's Group VP of Sales and
Marketing. He stated that Acuity is the only accounting application
that makes full use of Microsoft technology including an architecture
based on Microsoft's Component Object Model, an object-oriented
component methodology that allows seamless integration with
Microsoft Office and BackOffice. This led to Acuity winning a
Microsoft sponsored shoot out for "Best Technology Integration"
between mid-range NT/SQL Server financial applications in the
mid-range market.
In contrast, Dynamics C/S+ for SQL Server was built on the original
code base used in their LAN product. Dynamics C/S+ was also developed
with their proprietary tools, Dexterity. While this has allowed them
to retain a broad offering of modules, it compromises on performance
and ease of integration with in-house or third-party applications.
Nor will Dynamics C/S+ be able to take advantage of all the features and functionality of Microsoft NT/SQL Server or BackOffice. These will be key issues as this emerging market develops. Some Great Plains VARs have reported they charge a minimum of five days service to install Dynamics C/S+ compared to several hours for Acuity.
GPSI's IPO success could be a catalyst to call attention to this
sector. When SOTA begins to develop sales momentum, SOTA ahould
deserve a similar valuation. That could come as soon as Q3 when
SOTA's revenues are expected to show 40% growth. After heavy spending
on development and marketing expenses over the last 12 months, there
will be tremendous leverage in earnings growth as well. If the new
CFO demonstrates good cost controls, earnings could grow over 100
percent this year to $0.60. With 20 percent operating margins next year, earnings could grow another 60 percent to $1.00.
PSQL is also about the same size in revenues but with 25 million
shares out gives them a market cap` of about 250 million - about
5 times revenues. PSQL has the most mature product on the market
but has gone through a difficult turnaround led by new management.
They appear to be returning to profitablity and should grow 30 to
35 percent in revenues over their next year with $0.35 to $0.50
in earnings.
Among the three SOTA is the cheapest, with newer technology and
at the beginning of a new product cycle. But all three should
participate in the rapidly growing NT applications software market. |
