Bankers Trust opinion (8/17/98:
Open Market Inc.
Bankers Trust Research/BT Alex. Brown Research
Kathleen Brosnan,Barbara Coffey,Mary McCaffrey
August 14, 1998
McCaffrey, Mary A. 212-237-2441 08/14/1998
Coffey, Barbara L. 212-237-2039
Brosnan, Kathleen 212-237-2475
BT Alex. Brown Incorporated
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OPEN MARKET INC. [OMKT] "MKT. PERFORM"
Review Of The June 10-Q
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Date: 08/14/1998 EPS 1997A 1998E 1999E
Price: 13.0 1Q (0.23) (0.18) 0.02
52-Wk Range: 29 - 9 2Q (0.24) (0.16) A 0.03
Ann Dividend: 0.0 3Q (0.20) (0.09) 0.04
Ann Div Yld: 0.00% 4Q (0.09) 0.02 0.07
Mkt Cap (mm): 426 FY(Dec.) (0.77) (0.41) 0.16
3-Yr Growth: 30% FY P/EPS NM NM 81.2X
CY EPS (0.77) (0.41) 0.16
Est. Changed No CY P/EPS NM NM 81.2X
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HIGHLIGHTS:
We have continued to receive very positive customer reviews for Open
Market's Transact product and the catalog products. For the past 3 years
the Company has been in the business of creating and selling electronic
commerce software, as such we believe Open Market understands the market
better than many of its competitors.
Open Market continues to be on track to be profitable in the December
quarter. To retain flexibility the company has taken advantage of
financial opportunities.
As the Street already knows, Open Market factored receivables to the tune
of $3 million dollars in the quarter. This had the effect of lowering DSO,
Accounts Receivable and increasing cash.
The June 10-Q also highlighted some other financial transactions, which
have added or will add to the Company's cash position. These include an
investment by Intel of $5.0 million in the spring, the mortgaging of a
building in Utah for $2.8 million, and an investment of $20 million or 4%
by CMG Information Services and Heights Capital Management. Importantly
the investments in the Company occurred at or close to market rates.
Looking solely at the financial impact of these transactions on the June
quarter -- These transactions added $7.8 million in cash in the
quarter and the company reported $23.2 million ending June 98. The
Intel arrangement is more than just an equity arrangement.
We continue to be very impressed with the technology and know that the
Company has stated goals to have cash on hand to address and be ready for
any opportunities. As the Company is still in a negative operating cash
flow position we also believe that it is important for the Company to take
advantage of financial opportunities.
The information discussed is all public - we have taken the opportunity to
present it here in one place - to serve as a review of the financial impact
of the different business transactions.
We are not changing our estimates and are comfortable with our revenue and
EPS expectations and continue to have a "market perform" investment rating
on the shares. The Company's growth rate has been impacted by
acquisitions, divestitures and a product upgrade cycle.
DETAILS:
Open Market's electronic commerce software continues to win customers with
important accounts like Disney (upgraded to Transact 4 last quarter)
and Ingram Micrco (a new account this quarter.) They also are winning
accounts in system integrator space with the recently announced deal
with Fujitsu in Japan. We believe the Company software addresses a
new and growing market -- applications software for the e-commerce
market.
Open Market has entered into a number of financial transactions that add to
the company's cash position. Specifically in the June quarter was the
factoring and the Intel investment.
The following analyzes each transaction separately and then the final table
puts it all together.
-- The factoring of receivables - the Company entered into an arrangement
whereby it could factor up to $8 million of accounts receivable. In
the June quarter the Company sold off $3 million. This has the effect
of increasing cash, decreasing accounts receivable and decreasing
DSOs. The Company has a stated goal to reduce the DSO's to the 95-105
day range.
If these effects were reversed as of June 30
If reversed direction Reported
Cash & Securities 20.2 down from 23.2
Accounts Receivable 28.2 up from 25.2
DSOs 154 days up from 137 days
The DSO issue revolves around accounts receivable. This has been variable
but on the whole has been increasing throughout 1997 and the first half of
1998. Specifically the June 10Q mentioned that the Company has granted
extended payment terms to specific customers. In speaking with the Company
further on this point - it stated that it does extensive work with domestic
and international telcos and large publishers and that these clients are
used to having longer payment terms than some of the Company's other
customers. This is not news as the Company has spoken about this for some
time. Also, we believe that some of the increase and variability is due to
product mix issues. Due to publishing industry standards the Folio
software contracts have longer payment terms than the rest of Open Market's
lines of business. We believe that DSOs of 154 days is very high, and
would like to see the Company bring it down to its target range of 95-105.
-- Intel investment - On June 3, Intel invested $5 million for about a 1%
stake in the company - this was a slight discount to the market close
on that day. From a financial perspective this increased cash,
additional paid in capital and to a very small degree common shares.
However from an industry perspective, we think it is an endorsement of
Open Markets position in the e-commerce software business, and will
accelerate the timetable of porting of the Transact product to the
Intel platform.
If reversed direction Reported
Cash & Securities 18.2 down from 23.2
Additional PIC 159.6 down form 164.6
In total -- If both of these effects were reversed as of June 30: (all
dollar numbers in millions) -
If reversed direction Reported
Cash & Securities 15.2 down from 23.2
Accounts Receivable 28.2 up from 25.2
DSOs 154 days up from 137 days
Additional PIC 159.6 down from 164.6
In the subsequent events section of the June 10Q also mentions that the
company mortgaged a building in Utah, the investments by CMG and Heights
Capital. These two transactions should increase cash further and be used
to fund working capital. There are also some areas, which are of financial
interest not just the recent quarter -
-- July 98 -- Open Market mortgaged a building in Utah for $2.8
million at 8.5% with a balloon payment in 5 years. This has the
effect of increasing cash, increasing debt and increasing interest
expenses. Interest on the mortgage is 8.5% or interest expense on an
annual basis will increase by $0.238.
-- July 98 - Together CMG Information Services and Heights Capital took a
4% stake in Open Market. This was done at the market and represents
$20 million dollars. CMG is a well-known investor in Internet
companies. Together the investors have warrants that would increase
their stake to 5%.
-- Growth rate -- Importantly, the Company has been increasing and
focusing its technology base through acquisitions and divestitures.
This speaks to the need for financial flexibility. However this makes
analysis of the underlying growth rate quite difficult. In 1997, Open
Market sold Axcess, its security software, to Raptor for $6.0 million.
In 1997 the Company also purchased Waypoint for its on-line catalog
and Folio for its publishing software. This growth rate has been
further impacted by the product upgrade cycles.
-- LOC --The Company has a $15 million dollar line of credit secured by
Accounts Receivable. Throughout 1997 and into 1998 the Company has
made use of this LOC for working capital. The Company at the end of
March had accessed $12.3 million of the LOC and this was reduced to
$9.2 million at the end of June. When the Company becomes cash flow
positive the need for a LOC for working capital we believe will
decrease.
-- Deferred Revenues -- For Open Market this line has a number of
parts but does include service and support revenues. The Company
stated that due to timing issues, in Q1 this number declined and in Q2
it was back to historic levels.
Outlook -
We continue to feel that the Company has very solid software and this has
been confirmed by customer checks. This note summarizes the financially
related transactions detailed in press releases and 10Q's that Open Market
has done over the past few months. We believe that the investments with
Intel and CMG have strategic value. While companies always need to stay
financially flexible, we believe that as Open Market becomes profitable and
cash flow positive that the Company's financial flexibility will be able to
be internally generated.
We expect that Open Market will have a loss this quarter and will be
profitable in the December quarter. We are comfortable with our revenue
and EPS estimates for September of $19.3 million and loss per share of
$0.09 and FY 98 estimates of $75.1 million and loss per share of $0.41. We
are maintaining our "market perform" investment rating on the shares. |
