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PW PW PW PW PW PaineWebber PW PW PW PW PW
Rating=1 (OMKT)
Closing Price=$14 1/4
Current FY EPS EST=$-0.29
Next FY EPS EST=$0.25
FY End=December
August 12, 1998
OMKT: DSOS STILL NOT A MAJOR CONCERN
KEY POINTS
1. Recently, OMKT released its SEC 10-Q for 2Q98.
2. The 10-Q disclosed one well known issue, rising DSOs and one new
piece of information, that OMKT factored approximately $3m in accounts
receivable.
3. We believe both issues are typical and not particularly troublesome
due to the blue chip nature of OMKT's customers, as well as its current
cash position due to recent investments.
4. We reiterate our Buy (1) rating for OMKT with a 12-month price target
of $25.
INVESTMENT SUMMARY
THE 10-Q DISCLOSED ONE WELL KNOWN ISSUE, RISING DSOS AND ONE NEW
PIECE OF INFORMATION, THAT OMKT FACTORED APPROXIMATELY $3M IN ACCOUNTS
RECEIVABLE
The 10-Q disclosed one well known issue, rising DSOs and one new
piece of information, that OMKT factored approximately $3m in accounts
receivable.
-- We believe both issues are typical and not particularly
troublesome due to the blue chip nature of OMKT's customers, as well as
its current cash position due to recent investments.
-- OMKT's cash position last quarter was approximately $20m and for
financing reasons decided to exercise a pre-existing factoring agreement
in place of $8m. In order to manage cash and fund receivables, OMKT
factored $3m of its accounts receivable for cash.
-- As any normal enterprise software business, OMKT allows favorable
extended payment terms to its customers, especially ones
internationally. Note, 26% of OMKT's sales are international (Pacific
Rim 4%, Japan 3%, Europe 17%, and other 2%). In order to sell
internationally, attractive payment terms are typically used in the
software industry. Furthermore, Open Market has a blue chip client base
with extremely reliable credit.
-- More importantly, OMKT's recent investment by CMGI and Heights
Capital Management have improved OMKT's cash position to $43m, which
alleviates any pressure to factor any more receivables. OMKT now has
the cash on hand to more cheaply manage its cash position and fund
receivables.
-- We believe the recent weakness in the stock is a buying
opportunity.
WE REITERATE OUR BUY (1) RATING AND OUR TWELVE-MONTH PRICE TARGET OF $25
We continue to estimate approximately 50%+ yearly total revenue
growth for 1999. The peer group is trading at approximately a 7x
multiple that provides a price target of approximately $25. Therefore,
due to the defensibility of the recently granted patents and the
continued growth in CSPs (and recurring leverage they provide), we are
using a one-year price target of $25 and maintaining our Buy (1) rating.
RISKS
Open Market has limited operating history, and no operating
profits. The stock should be considered for high risk tolerant
investors. Open Market competes in a highly competitive as well as
rapidly changing marketplace. Any failure in execution could
dramatically impact its revenues. The company could potentially compete
with a number of larger competitors such as Microsoft, IBM, Oracle, and
others, who all have significantly larger resources, sales
organizations, and customer bases. In addition, electronic commerce in
general and electronic commerce software is a nascent market with little
forward visibility. In additional, Internet stocks have high betas, and
high volatility, and should be considered for risk tolerant investors
only.
Prices of companies mentioned as of August 12, 1998:
CMG Information Services CMGI $79.25
International Business Machines IBM $128.50
Intel 1 INTC $84.56
Microsoft 1 MSFT $103.44
Open Market 1,2 OMKT $14.25
Oracle 1 ORCL $24.50
1 PaineWebber, Inc. makes a market in this security.
2 PaineWebber, Inc. has acted in an investment banking capacity for this
company.
The information contained herein is based on sources we believe to
be reliable, but its accuracy is not guaranteed. PaineWebber
Incorporated and/or Mitchell Hutchins Asset Management Inc., affiliated
companies and/or their officers, directors, employees or stockholders
may at times have a position, including an arbitrage or option position,
in the securities described herein and may sell or buy them to or from
customers. These companies may from time to time act as a consultant to
a company being reported upon. Copyright 1998 by PaineWebber
Incorporated, all rights reserved
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