Got this from Rev Shark at AOL, he's got a fair amount of DD on OMTL on his message board.
Subject: OMTL
Date: Mon, Jun 1, 1998 12:11 EDT
From: Rev Shark
Message-id:
This was out this morning from Needham:
<<
(FIRST CALL) NEED: OMTL fundamentals on track despite shares decline; Buy
NEED: OMTL fundamentals on track despite shares decline; Buy rating maintained
Omtool, Ltd.
Price (5/29/98 -- OMTL): $8.13
Price Range (52 wk.): $15.00-7.13
Shares Outstanding (mil): 13.6
Average Daily Volume (000): 111
Fiscal Year Revenues (mil) Operating Margin EPS* P/E Ratio
12/99E $66.3 (60.5) 20.6 (19.3)% $0.64 12.7
12/98E (1) 40.9 (37.8) 19.4 (18.7) 0.41 19.8
12/97A (2) 19.4 14.8 0.20 40.6
12/96A 8.4 7.7 0.05 162.5
*EPS are taxed at 34%.
(1) Excludes approximately $183,000 in expenses related to the DPSI and TRS
Technologies acquisitions.
(2) Excludes approximately $6.8 million in in-process R&D charges from the
acquisition of CMA-Ettworth.
Investment Recommendation (6-12 months): Buy
Quarterly Earnings*
Q1 Q2 Q3 Q4
12/99E $0.13E (0.12) $0.15E $0.17E $0.19E (0.20)
12/98E 0.07A 0.10E 0.11E 0.13E
12/97A 0.03 0.05 0.05 0.07
12/96A 0.01 0.01 0.01 0.02
Omtool, Ltd. is the market leader in the enterprise fax server market, which is
estimated at $400 million in 1997 and growing at an estimated annual rate of
50%-plus through 2001. Fax servers address the universal need to improve timely
routing of received faxes and to reduce costs for fax sending, which can
approach half a large company's telephone bill. Omtool's software products
automate transmission of individual faxes, broadcast distribution of faxes to
large mailing lists, and provide inbound routing of received faxes.
Investment Opinion
Omtool is attractive because its products are broadly applicable to virtually
any company over 100 employees, and because the quick, tangible cash return on
investment makes it easy for buyers to decide to purchase Omtool's fax server
products. To sell into this large, rapidly expanding market, Omtool's
distribution channel is effective: its telesales strategy reduces the risk of
revenue disappointments because of back-end loading during the quarter.
Summary
* Omtool's shares have declined significantly during May, dropping nearly 33%
from $12 to $8.13, and 44% from the 1998 high of $13.88. While some of this
decline may be due to the overall market for smaller software stocks, we believe
that Omtool has been particularly oversold. We believe fundamentals of this
Company remain on track.
* Recent checks suggest that the quarter is on track, and we remain confident
that the Company will earn $0.10 on $9.3 million in revenue. We believe that
the revenue mix issue last quarter, where license revenue was below our
estimates, but hardware was above our estimates, will not recur in the current
quarter, and we are confident that the license revenue estimate is intact.
* We are fine-tuning our model. On the one hand, we are increasing share count
to reflect anticipated option exercises by employees (though we don't expect
much selling from top management). Offsetting this, we expect that Omtool's top
line will be increased by: a) sales of paging products through new distribution
channels that aren't in our previous estimates, b) continuing strength in the
fax server business, c) expansion of order sizes in corporate deals for larger
customers, and d) stronger distribution for the legal fax products acquired last
quarter. This yields an increase in revenue estimates for 1998 to $40.9
million from $37.8 million, and for 1999 from $60.5 million to $66.3 million.
We are leaving EPS estimates unchanged.
* We maintain our Buy rating on Omtool's shares. At just under 20x 1998
earnings and 13x 1999 earnings, Omtool shares remain inexpensive, trading at a
fraction of our 1998 growth rate estimate of 111%, and the estimated 3-5 year
rate of over 50%. Our $20 price target is a 33x multiple of our $0.64 EPS
estimate for 1999, a significant discount to the growth rate, and a multiple
where Omtool has traded in the past.
* Expectations for the Current Quarter
We believe that Omtool will meet or exceed our $0.10 estimate for the quarter,
and will deliver $9.3 million in total revenue, of which we expect $5.6 million
from sales of software. During the quarter, we believe that Omtool management
will focus on damping out the oscillations that affected gross margins last
quarter, which came from challenges integrating the European acquisition in
December and the two vertical market application vendors purchased in February.
Estimate Revisions
Share count: We are increasing share count to reflect increasing numbers of
option exercises by employees. We note that most of Omtool's shares are held by
a very select number of insiders, including a small number of venture
capitalists, so we are focused only on low-level current and former employees.
Revenue estimate increase: Despite the increase in share count, we believe that
EPS estimate changes are not warranted at this time because we believe there
are growth drivers in Omtool's business that we had not factored into our
previous estimates. The new growth drivers appearing in our planning include:
* Additional distribution for paging products: When Omtool had acquired Desktop
Paging Software, Inc. in February, we believed the product would sell through
Omtool's sales force to end users. We believe that there will be positive
revenue contribution starting in 1999 from sales to paging system operators, who
are ideally poised to create broader distribution channels for Omtool's
products.
* Expansion in order sizes through corporate business: Omtool sells products
through three channels: an indirect distribution channel, a telesales group
focusing on under-$25,000 orders, and a corporate sales group. Our model had
previously assumed that the corporate sales group's average order size would
remain at the low end of the $50,000-and-up range. We now believe that some
growth in average order size is likely, as the increasing market visibility for
this kind of product attracts increasing numbers of buyers who are willing to
adopt the technology quickly.
* Incremental sales of legal fax product: We had modeled essentially flat sales
for the legal fax product, but we believe that the Company will be able to ramp
up sales in the 1999 time frame faster than we had expected, based on several
highly visible contract wins at prestigious law firms.
* Margin expansion: We also believe that margins will continue to expand,
reflecting R&D expense leverage, some sales and marketing efficiency gains, plus
G&A expense leverage. We believe that Omtool can attain a 20.6% operating
margin in 1999 due to these principal drivers, plus additional efficiencies in
the services operation, and a lower percentage of customers buying hardware from
Omtool.
Conclusions/Valuation
We believe that Omtool's shares are inexpensive at these levels. Investors
should remember that Omtool has multiple growth drivers, including a new
on-the-ground European distribution channel, the ability to harness momentum of
the Windows NT platform, a new AS/400 product to serve an under-served market,
and continuing aggressive marketing and sales efforts. All of these factors
combine to suggest a high probability Omtool can deliver revenue and EPS
surprises over the next year.
We maintain our Buy rating on Omtool's shares. At just under 20x 1998 earnings
and 13x 1999 earnings, Omtool shares remain inexpensive, trading at a fraction
of our 1998 growth rate estimate of 111%, and the estimated 3-5 year rate of
over 50%. Our $20 price target is a 33x multiple of our $0.64 EPS estimate for
1999, a significant discount to the growth rate, and a multiple where Omtool has
traded in the past. >
END OF NOTE
[SU SEO.1 MKT.1 OTH.1 TEC.1 EPS.1 CUS.1 CNA.1]
[IN COMPUT.1 DATAPR.1 TELECM.1]
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