Barron's report from the H & Q conference
Weekday Trader
"Service" Is the Magic Word for Tech Laggards
Lisa R. Goldbaum
San Francisco, CA -- While Internet stocks like Yahoo! and Amazon.com have
gotten most of the ink lately, computer services and consulting companies
continue to get attention where it counts -- in the market.
Computer Sciences -- target of an ill-fated hostile bid by Computer
Associates in January -- has soared about 76% in the past year, and other
prominent players like Keane and Cambridge Technologies are up nearly 150%
during the same period. (See "CA's Big Bid May Open the Floodgates for
Small Fry," Weekday Trader, February 12.)
Perhaps that's why so many software companies presenting at the 26th Annual
Hambrecht & Quist Technology Conference this week seem desperate to jump on
the services bandwagon. That strategy is particularly appealing for
struggling companies that have missed Wall Street's party and now are
trying to turn themselves around. The two most notable examples: System
Software Associates and Borland International, whose stocks have definitely
seen better days.
For Chicago-based System Software, those days aren't too distant a memory. The
stock was trading just south of 30 late in 1995, but plunged to its
52-week low of 4 ¬ early last year before bouncing back modestly to a
current price of just over 7.
Things started to get hairy for SSA in 1996. Fixated on IBM minicomputers,
the company missed out on the growing UNIX market, and then scrambled to
make a UNIX version of its core Business Planning and Control System
(BPCS), which automates business processes for manufacturers. But that new
product flopped, and SSA's revenue declined while the company rushed to
develop an upgrade. To make things even worse, the company's auditor,
Price Waterhouse, jumped ship after claiming that SSA misstated its 1994
and 1995 financials. Investors, of course, ran for the hills.
Now, SSA is looking to right itself, and boosting its services business is
a big part of its plans. (The company also makes software in the enterprise
resource planning segment -- a very hot area of the software market.) A
few weeks ago, the company named William Stuek its new CEO, replacing
founder, chairman and CEO Roger Covey, who in 1991 took a three-year
sabbatical to study Chinese art. The less ethereal Stuek is a 30-year
veteran of IBM, which has one of the leading services business. This was
no accident, if his presentation here Monday was any indication.
"We've always been proud of our software business, but we've been indifferent
to services," he told a relatively small group of investors, which got even
sparser as people slipped out in the middle of his speech to make a run at
H&Q's fabled midafternoon popcorn cart. "We have an opportunity to
significantly increase services revenue," he emphasized. By doing so, Stuek
explained, SSA will generate more predictable earnings than it gets from
the cyclical software business.
He's aiming for services to contribute much more than the 25% of SSA's
revenues they currently generate, though he didn't specify how much. Also,
he promised to "restore our credibility in the marketplace, which has been
damaged in the last 12 to 18 months." To do this, the company is building a
new management team that will execute a series of partnerships with service
and consulting providers.
"Promises, Promises" also could have been the title of Borland
International CEO Delbert Yocam's presentation just a few hours earlier.
The Scotts Valley, CA-based company
has been trying to reposition itself as a developer of customized
application development tools, particularly for the enterprise market.
Borland is best known for its largely unsuccessful stint going head to head
with Microsoft in the commoditized database and spreadsheet markets. (Guess
who won?) The company ended up selling its Quattro Pro spreadsheet
business to Novell in 1994 in order to focus on development tool software.
Its mercurial founder and chairman, Philippe Kahn, jumped -- or was pushed
-- overboard.
Since then, Borland has struggled to stay in the black, and last year had
to cut some 30% of its workforce. Now, like SSA, it sees computer services
as a potentially winning hand. Yocam, a former Apple Computer executive who
replaced Gary Wetsel as CEO in 1996 to spearhead a turnaround, told
investors at the conference that later this year the company will form a
new professional services organization to provide better support for its
products.
Moreover, Borland is looking to acquire some regional services companies to
bolster its exposure to this area. In an interview after his presentation,
Yocam told Barron's Online that these moves will likely double Borland's
services business, which he expects to comprise one-fifth of its total
revenues within 18 months.
Surely both these stocks have nowhere to go but up: at their current price
of 11, Borland's shares are nearly 50% lower than they were in early
1996.And that's a 90% drop from their all-time high of about 85 back in
Borland's glory days of early 1992 -- although the stock has gained more
than 40% over the last three months.
Moreover, Borland's price-to-sales multiple of 4.3x and price-to-book ratio
of 5.1x are less than half those of the industry, and its gross profit
margins of about 86% are at a three-year high.
SSA looks like a bargain as well. Its stock trades at about 12 times Zacks'
consensus earnings estimate of 60 cents per share for the fiscal year ended
October 1999 -- a big discount to its expected earnings growth rate for
that year of nearly 40% and to its projected five-year compound earnings
growth rate of 23%.
When stocks trade at bargain-basement prices in a bull market like this,
there's usually a pretty good reason. Even SSA's Stuek admits that the
company's new management team will have to prove it can execute its
strategy, while maintaining enough cash on its balance sheet and
controlling operating expenses. Borland has to integrate new products from
its 1997 acquisition of Visigenic Software, a developer of connectivity
software tools.
If the two CEOs can generate solid revenue and earnings growth from
beefed-up computer services businesses, these Borland and SSA just might
regain their long-lost credibility on Wall Street.
And who knows? At next year's conference they might even get to make their
presentations in the Westin St. Francis's prized Grand Ballroom, where the
likes of Dell, Microsoft and Motorola hold court -- before the popcorn
wagon comes around.
|
