Here's the NYT article:
Market Place: A Few Big Winners Seen in
Software Stocks
What is the fastest-growing segment of the software industry? Many
analysts say it is the so-called front-office applications, like sales-force
automation and customer-support programs. Though the field is crowded and the
stocks expensive, some analysts say investors can still share in this growth if they
pick carefully among the contenders.
Companies like Siebel Systems Inc., Vantive Corp., Scopus Technology Inc.,
Clarify Inc. and Remedy Corp. are hardly household words, but that does not
mean they are undiscovered.
Shares in Siebel, a Wall Street favorite, are trading at an astonishing 136 times
projected 1997 earnings. It almost makes Microsoft Corp., at more than 40
times, or Oracle Corp., at a similar multiple, look cheap.
Analysts say investors are not paying for earnings with these companies, however,
but for growth.
They cite studies by Gartner Group and International Data Group projecting that
the market for front-office applications will grow to $3 billion by 2000 from about
$600 million this year. With the inevitable consolidation, the 40 or 50 public and
private companies in this field will be winnowed down to two or three dominant
suppliers that will grow at extraordinary rates, these analysts say.
The big appeal of these companies' products is that in contrast to traditional
back-office applications like accounting packages, they aim not to reduce costs
but to increase revenues.
The products achieve such gains by increasing and improving the kind of
information available to salespeople in the field so that they can complete bigger
and more complex sales more quickly or by improving interaction with existing
customers, resulting in more repeat business.
"All of these products really focus on the customer, which is very different from
the past, where applications all focused on transaction processing and financial
accounting," Eric Upin, an analyst at Robertson, Stephens & Co., said. "Sales and
marketing are the biggest operating expense for most companies, 35 to 40
percent of revenues, and they are also the least automated."
"We believe we're at the very beginning of a very large market opportunity," he
said.
Upin estimates that there are more than 20 million potential users of front-office
programs in the United States, and that the top five front-office companies have
fewer than 2,000 customers among them, representing at most only 200,000
users. So the growth potential is real; what is more difficult is identifying likely
winners.
To find them, Upin said he would look first at management skill, next at the
customer base, then at the company's sales and marketing and ability to install
programs, which are large and complex, and only last at the technology.
Applying these criteria, he currently recommends Siebel Systems, which is
managed by a group of early Oracle executives and counts Charles Schwab,
Compaq Computer and American President Lines among its reference customers.
Siebel started in sales-force automation and has lately been moving into
customer-support and internal help-desk software, which is used to answer
employees' questions about company operations.
Upin also recommends Vantive, which started in help desk and is moving toward
sales-force programs with its own cadre of talent that came from Oracle; it has a
roster of prominent customers similar to that of Siebel.
"This is a multibillion-dollar opportunity and both companies have the potential to
be dominant players," Upin said. Both companies were also brought public by his
firm, Robertson, Stephens.
Edgar Bierdeman, research director at Dakin Securities, applies a similar set of
criteria, but adds, "You really want to invest in companies that have identifiable
and defensible market niches."
Bierdeman, too, likes Siebel and Vantive, but he also favors Remedy, which
focuses on the internal help-desk market and has the fledgling industry's highest
operating profit margins, at 28 percent. "This is an excellent case study in defining
a market niche, developing a well-formulated strategy and sticking to it until the
company achieves market dominance," he said.
"You don't value these companies on earnings," he added. "They're too young for
that. They're expensive, but they're like an Oracle. You need to buy them
judiciously." |
