Y2K Focus: Alydaar
Daily commentary for Sep 12, 1997
Alydaar (ALYD) President Robert F. Gruder is fond of letting you know that his company is named after the famous race horse, Alydar. "This horse came in second, by a nose, in all three Triple Crown races [in 1978]. But it was the most productive breeding horse over the long run. We are in this for the long run." While it isn't clear that Alydaar the company has even been in a top-notch race yet, it is clear that the Year 2000 marketplace bears a lot of similarities to a horse race.
For one thing, there is a definite finish line. This game ends at or shortly after the year 2000. There are a limited number of entrants, though the field is large. And the entrants range from total unknowns
to established giants.
Alydaar falls in the previously unknown category. Although in business since 1992, the company has made little progress in prior years. It's 1995 revenues were just $240,000. In 1996, after investing nearly $6 million in research, it introduced a Year 2000 conversion product called SmartCode and became solely focused on the Y2K market.
How's this for growth?
In 1996 the company had 10 employees and only $37,000 in revenue. By the end of 1997, the company expects to bring in $10 million in revenue, and have 250 employees. By the end of 1998, the company projects revenue of $50 million with nearly 500 employees.
That's pretty fantastic growth. But where are the earnings? At $10 million revenue with 250 employees, the revenue/employee is only $40,000, certainly not enough for profits this year, and only one-tenth of Computer Associates revenue/employee figure. If projections are accurate and next year brings in $50 million for 500 employees, Alydaar might see a revenue/employee figure of $100,000, certainly possible for earnings, but still substantially below the standard for technology companies.
Alydaar's Technology
Alydaar's SmartCode product is an automated conversion tool for COBOL mainframe software. Alydaar's claim is that their technology is better because it is not a simple "string search and replace" technique, not a "pattern matcher." It is an AI engine based technology, which is capable of interpreting multi-use variables. Multi-use variables are a problem in mainframe code because a variable, perhaps named "DATE" might mean different things depending upon what part of the software refers to it. Alydaar claims that many other Y2K technologies do not handle multi-use variables and therefore require a great deal of human intervention.
Alydaar claims empirical data of being able to automatically fix millions of lines of code each day, with a manual fix rate of only 1 line in 100 million lines of code. This is a fantastic success rate as other companies claim automated fixes of only 85 to 90% of all code.
Alydaar's Business Model
Alydaar's business model is based upon a conversion-outsourcing model. A client company "turns over" millions of lines of code to Alydaar, which converts the code on their system and then returns it to the company. Significantly, Alydaar does not perform the testing of the code on the mainframe system for the customer. This responsibility is left to the customer. Because of this model, Alydaar is able to base their pricing at $0.40 per line of code (LOC) rather than the $1.00 to $2.00 LOC charge charged by others which include testing.
To meet the testing requirements that are necessary for some clients, Alydaar has partnered with Compuware, an established company with over 11,000 installed base users. Compuware's FY97 revenues were $813MM with earnings of $97MM Market capitalization is $5 billion. With a growth rate of over 30%, this is a powerful company. The alliance with Compuware allows Compuware and Alydaar to represent themselves as a complete Y2K solution. It also allows Compuware to position themselves as a complete Y2K solution. How alliance revenue is split between Compuware and Alydaar is not currently known.
Alydaar does not license its software to others for distribution and/or use. A customer cannot buy or license the SmartCode software to install and use in their own technology department. This would seem to limit Alydaar's upward potential, if human intervention is necessary for code conversion.
The Customers
Alydaar certainly has some established companies as clients. Nabisco, 3M, and McDonnell Douglas have all signed contracts with Alydaar. McDonnell Douglas' contract is for conversion of code at their Long Beach and St. Louis facilities, and not for the entire company. Nevertheless, success with these customers could lead to work with more Fortune 500 companies.
Alydaar claims to be the only Y2K company that has converted code and returned it back into operation at the customer's site. While Briefing is not aware of all the efforts of all the Y2K companies, the other companies presenting at the Cruttenden Roth conference did seem to be making reference primarily to "pilot" projects. Alydaar also claims to have "in hand" 21 signed contracts totaling over $50 million in revenue.
After the Party
Of course the big question for all pure Y2K companies is, "What happens on January 2, 2000?" Alydaar's answer, unlike most Y2K companies, is "acquisition." Using revenues from the Y2K business they will acquire, probably with stock, an outsourcing company, and convert Alydaar into a complete outsourcing company.
The Lingering Questions
The Alydaar story is certainly intriguing. But Briefing is still puzzled by several questions.
If the system is so automated and works so well, what are all those people needed for?
Does adding additional people increase the capacity for throughput? If people are needed, how does this limit the company's ability to handle such incredible growth, particularly in North Carolina,where talented programmers are not as plentiful as other parts of the country.
Where are the earnings going to come from?
Can management handle a growth curve of ten times annually, with all new people, and find a company to acquire and successfully shift over to a new business, all in three years time?
Where are the earnings going to come from?
With a market capitalization of nearly $407MM, is Alydaar already overvalued?
Where are the earnings going to come from?
Stock Info
Alydaar is a bulletin board stock, traded on the so called "pink sheets." There are 16 million outstanding shares, with a float of 8 million. At $25 per share, this puts Alydaar at a market capitalization of over $400 million. President Gruder owns 7 million shares, for a net worth of $175 million. In August, he sold 50,000 shares for just over $1 million in proceeds.
ALYD has applied to become a NASDAQ listed stock. Until this happens, Briefing.com readers can obtain quotes by preceding the symbol with a "BB:" designation, for example: BB:ALYD.
PS: For Horse Fans Only
Alydar, the race horse, did narrowly lose all three Triple Crown races in 1978, to Affirmed, the last winner of the Triple Crown. Alydar did go on to be one of the most successful breeding horses of all time, at Calumet Farm, in Kentucky. However, Alydar died in November 1990 under suspicous circumstances. The official verdict was that he kicked his own stall door so hard that it sheared the bolts holding it closed, and it swung back and broke both front legs. No charges were ever brought, though doubts ran deep and a $36 million insurance policy was paid. Calumet Farm, deeply in debt from wanton mismanagement, went bankrupt shortly thereafter and was sold at auction in 1991 after 60
years of dominating horse racing. |
