>Do you still own SystemSoft stock?
Absolutely. Excuse me everyone, Mark is ribbing me about SYSF. Since he is off-base in everything he implied, I find it necessary to address the issues he raised. Actually, SYSF and WIND have something interesting in common, which makes at least part of my response relevant to this thread. Sorry for the other part.
First some history. I liked SystemSofts franchise on the PC-Card system software business, and early indications of SystemWizard, caused me to take an noticeable position in February 1996 at $12. After the H&Q Conference in May 1996, I confidently watched the stock climb to $35 after splitting 2 for 1. However, by early fall the lack of big-name OEM sales of SystemWizard was telling, and the stock began to show signs of weakness. Noting the risk, I took profits, selling almost all my holdings, with a five-fold return in slightly more than six months.
The company has continued to disappoint the Street ever since, mostly because of the extreme difficulty the company seems to be having enticing paying OEM customers of SystemWizard. During the last nine months, SYSF endured an assault by an analyst challenging their policy for booking revenues and capitalizing costs, and they were led (possibly naively) by HP and Intel into paying dearly for Radish, a software company, to better integrate SystemWizard into call support centers for PC makers. Finally, they just disappointed the Street and themselves by missing their last earnings badly, and having to admit to a more prolonged, expensive marketing strategy for enlisting big-name customers, involving give-away pilot programs. And it should be noted that SystemWizard is not the only auto fix-it software available to consumers, with competition stemming particularly from Cybermedia aided by PTEC (Mark's favorite company next to Radisys).
This last spring, SYSF post-split stock price broke down to around $7, worked its back up to the $12 to $14 range, only to get tanked again, ending Friday at $8 5/8. Mark thinks the stock will sink to $4 before recouping, if it does recoup.
What do I think. Well, after the stock completed its major sell-off, I started re-establishing my position. When the stock broke down seriously in the spring, I bought more. Why do I like the stock after it was blatantly hyped by management, with disappointment followed by disappointment?
By far and away, the number one reason why I like SYSF is Angelo, the CEO. He saw the gold ring and went for it. His moves were as aggressive (albeit na‹ve) - but he was, and is, absolutely right. Angelo never hyped the stock; he simply couldn't contain his almost childish excitement when he brought out a product even money-managers could understand. Angelo obviously misinterpreted the Intel cum DEC cum HP commitment to SystemWizard (easy to do since Intel paid for it, and DEC was bubbling with enthusiasm and they both contributed scads of intellectual property -- remember DEC spent millions in the eighties developing and maintaining an computer configuration expert system). In his close-in dealings with Intel, DEC and HP, Angelo obviously got carried away with the connections he thought he would be bringing to the sales table.
So what happened? The original concept proved to be insufficient. No one thought about how SystemWizard on the client would impact the call support technician. Lots of complications needed to be addressed, including: getting the technician to interact with the client machine as well as the client person (Radish needed here); encapsulating solutions and moving them to a server knowledge-base, and in general numerous call support software integration issues. These problems are huge with details varying from call support center to call support center.
So what happens now? By now SYSF has done most of the work necessary to implement SystemWizard successfully (thanks to Radish) in a growing number of call support centers, many on pilot products. Early results are surprisingly positive, suggestive of continued expansion of SystemWizard across product lines and call support centers. Micron Electronics surveyed their own clients experiences with SystemWizard, and was impressed with 84% of respondents preferring a PC pre-installed with SystemWizard. Since their customers experienced a 70% problem-resolution success rate using SystemWizard, Micron Electronics will begin shipping SystemWizard on all platforms by September. Apparently Compaq made noises publically about beginning to use SystemWizard, and we know that Dell is starting a pilot program, with Michael Dell reversing himself after previously labeling the tool inappropriate for his business.
If the business model for SYSF makes sense, then the SystemWizard product promises to be exactly what the seasoned investor prizes. The longer it takes to get SystemWizard to win broad acceptance for PC/laptop products and companies, the higher are the barriers to entry by competitors. The Intel and DEC support, the time and effort, the intellectual property - in combination, these things cannot easily be duplicated. Every time novices show impatience with SYSF and squeal inanities about Angelo's ill-fated decisions, I buy more. Angelo lacked maturity, granted, but it is unwise to turn negative on a manager moving aggressively in a direction you believe makes sense - even if it turns out to be a mistake. Only aggressive managers will make you money in the long term. Take away a high-tech manager's ability to be aggressive and you are left with mush, which is worth less than what the word sounds like. (I want to emphasize that I never turned negative about SYSF, even when I sold most of my position. With high-tech stocks, you regrettably should protect yourself when you see a major down turn looming as inevitable.)
But is the SYSF business model sensible? This last, bad, quarter showed revenue growth of 39%, and was profitable, even though the new CFO took a receivables write-off charge of about $1 million. If you ignore Related Party payments (grant payments from Intel), then year-on-year revenues were up over 45%. The adjusted view by the Street shows SYSF making 25 cents this fiscal year ending January, and 45 cents next fiscal year, and growing EPS by 45% annually thereafter. The last few years, SYSF has been growing revenues and earnings from operations at greater than 50%, and has PC Card software agreements with every major laptop manufacturer. USB promises a new arena to play in, and PC Card-based portable devices, or similar things, will be sprouting up all over - even on desktops. Even if the reduced estimates understate future earnings, SYSF is still worth a multiple of the current price.
In short, SYSF is made to order for the seasoned investor. Great existing business model. Slow, development of a franchise tangential to its existing PC Card franchise (synergistic use of deep-down system knowledge), aggressive but now more experienced management. Value based on analysts reduced estimates a multiple of current price.
Now lets turn things around. First, how does SYSF compare to WIND as an investment? Answer: nothing beats WIND. SYSF is dependent on the PC paradigm, although it may well adjust to changes in computing configurations expected over the years. WIND is top dog in an emerging paradigm that will last indefinitely, with a minimum of at least many decades. As an example of the relative strength of the WIND management team, I2O hype has been contained to prevent timing of royalty revenues from affecting stock price like what happened to SYSF.
A more difficult question is: Why can't the same forgiveness that I apply to SYSF be applied to INTS and MWAR, making them great investments also.
Don't forget, all three companies had to be sold, whatever you thought about them in the long-term. The only question is whether any of them should be bought now that they have been beaten up. I say SYSF is a buy, but I can't say that yet about either INTS or MWAR. You can argue that INTS management acted aggressively when they acquired five, or so, companies, attempting to pull together a product (pRISM+) with which to challenge Tornado. I say, too little, too late with limited chance for a franchise, the only thing worth waiting for. INTS might make it, indeed they probably will, but why risk being stuck with modest performance when WIND should return 40% plus for years and years.
MWAR certainly was aggressive when it bet the house on Digital TV and got caught in a rain-delay, which turned into a postponement. Motorola kept the company afloat, followed by IPO funding. Since last fall, MWAR has not demonstrated the capacity to grow anything beyond press releases.
The idea is not to reward failure but, on the other hand, not to overly punish management for developing and pursuing an objective that you honestly believe is in the best long-term interests of the company. In my mind, MWAR doesn't yet deserve unqualified support, but certainly someone more knowledgeable or insightful might see it differently.
I know of a number of high-tech companies like SYSF, suffering excessively at the hands of impatient investors, and thereby offering exceptional opportunities to the seasoned investor. Of course, the trick is to be nearly certain, in rough proportion to the size of your investment, that future performance will improve. This is different from classic value investing, which relies on regression to the mean to improve performance, and in which investments are more numerous and each relatively small. Less established companies with problems often don't have the benefit of the time it usually takes to regress to the mean.
>I think the reason Dave Lehenky no longer posts here is that he followed
>your advice and bought SystemSoft.
If something I posted caused Dave to buy SystemSoft, then you should take his action as another indicator that SYSF is an attractive buy. Dave clearly is a competent professional and investor and will make up his own mind about high-tech companies. Curious about this, in a recent exchange of email with Dave, I learned that he, like me, has a nice profit resulting from SYSF trades, and he continues also to be bullish about SYSFs potential.
Dave Lehenky stopped posting because he tired of trying to cope with irrelevant arguments that are founded in bias due to self-interest or obstinacy. I and many others hope he returns soon to the thread.
Allen |
