To ALL: Hambrecht & Quist comments from meeting ......Looking good
Hambrecht & Quist
November 12, 1998 - 11:32am
Company: Informix Corp.
Price: 6.46
Recommendation: BUY
Notes: a, b,f
Firm: Hambrecht & Quist
Department: Technology
Industry: Computer Software
Date: 11/12/98
Estimates Q1 Q2 Q3 Q4 FY
Curr '98 EPS 0.00A $0.05A $0.07A $0.10E $0.21E
Prev '98 EPS $0.00A $0.05A $0.07A $0.10E $0.21E
Curr '98 Rev $161.0A $174.2A $185.2A $200.0E $720.4E
Prev '98 Rev $161.0A $174.0A $185.2A $200.0E $720.4E
Curr '99 EPS $0.07E $0.08E $0.10E $0.13E $0.38E
Prev '99 EPS $0.07E $0.08E $0.10E $0.13E $0.38E
Curr '99 Rev $187.0E $198.0E $212.0E $235.0E $832.0E
Prev '99 Rev $187.0E $198.0E $212.0E $235.0E $832.0E
52-week Price Range: $4 - $12 7/16 ** F99Y/Y Sales Growth: 15%
Cash per Share: $0.86 ** Market Value: $1,179.5 M.
F99Y/Y EPS Growth: 79% ** Current Book Value $0.69
P/E FY98; FY99: 31x; 17x ** LTM Revenue: $701.6 M.
DSO: 74 Days ** FY98 Market Value/Sales:1.6 x
Shares Outstanding: 182.3 M. **
1/2: Informix- Upbeat Investor Session. Market Positioning; BUY Rating.
* Investor meeting focuses on strategy review and outlook; no major news events
announced.
* Management's tone was upbeat, pragmatic and confident--conservative, steady,
credible progress is the game plan.
* Three core market areas defined and detailed--high-end transaction processing,
data warehousing, and Web/E-commerce information management.
* We believe Informix's technology strengths must now be supplemented by focused
but visible marketing and proof-of-concept validations.
* Maintain BUY rating on attractive valuation ahead of strong potential for
expanding profitability over the next several quarters.
Informix is a leading provider of parallel processing databases and extensible
data management technology.
Summary. At its first investor meeting since launching a major
restructuring one year ago, Informix management yesterday hosted a session
focused on defining its market positioning for the financial community, as well
as providing recent customer success stories to back up its positioning claims.
Although no major news events were announced at the meeting, the tone of
management was confident, upbeat and pragmatic about the company's current
status and future growth opportunities. The company has defined three primary
markets for what it products, defined as value-added database
solutions--high-end transaction processing, data warehousing and Web/E-commerce.
Although this positioning does not stake out a unique slice of the database
market map, we believe that the company has prudently selected to focus on
high-growth markets in which it does have unique capabilities and proven
customer success. We also believe that investors should not focus exclusively on
the relative revenue and market shares of Oracle and Informix, because in our
view the market is large enough to sustain both companies. Instead, in our view,
investors should focus on the fact that Informix is at a very interesting
turning point in its financial evolution, where profitability can accelerate
noticeably on fairly modest revenue growth expectations. As one highlight of
this trend, sales have grown 15% from the first to the third quarter this year,
while expenses have remained flat, and thus operating margins have grown from 2%
to 11%. Based on current valuation levels, which place a PE of about 12 times
our projected 1999 earnings power for the company and a cash-adjusted market cap
to 1998 revenue ratio of about 1.3, we are maintaining our BUY rating on
Informix.
NEW MANAGEMENT CREATES SOLID FINANCIAL FOOTING
We believe that the financial turnaround executed by the company over the last
three quarters is both substantial and sustainable. Moving from a position of
dangerously low cash, uncertain revenue streams, negative shareholder equity and
mounting quarterly losses, the company now has $200 million in cash positions,
steady revenue growth on conservatively recognized revenue and growing backlog,
shareholder equity of $127 million, and three quarters of profitability. At the
same time, the company is increasing headcount, and maintaining a very healthy
commitment to research and development spending. Although the company is not
likely to sustain this rapid rate of progress as it approaches a more
steady-state version of its financial model, our published estimates assume an
80% earnings growth rate for 1999, and we believe that the company clearly has
the earnings power in place to double EPS next year.
MARKET POSITIONING STILL EVOLVES, BUT IS PRAGMATIC & FOCUSED
The company presented its strategic market positioning, which concentrates on
the three areas of high-end on-line transaction processing (or OLTP, the
prevalent usage mode of relational databases over the last 10 years), data
warehousing and Web/E-commerce information processing. Although deployments can
mix these three uses, currently, about 75% of the company's business comes from
OLTP, 20% from data warehousing, and 5% from E-commerce. In the data warehousing
and e-commerce areas, consulting services also play a strong role in current
market activity, and the company is seeking to productize more of its service
offerings at the same time it is adding services capacity and expecting services
to move up in the revenue mix. In its presentations, the company focused on the
two higher growth opportunities among its target markets, data warehousing and
electronic commerce.
Data Warehousing.
About 90 days ago, the company formed a dedicated division to pursue the data
warehouse market opportunity. The company has pegged the growth rate in this
market at about 35% over the next several years. Although this has been a highly
fragmented market, and one that has been quite treacherous for small companies,
we believe that the demand drivers in the market remain substantial. Informix's
strength in this market include its inherent capabilities for handling large
data sets, and new packages of complementary tools to provide a more complete
offering to solve the multi-faceted data warehouse problem. In data warehousing,
the company is focused on three primary verticals--retail, telco and financial
services. In its general terms, this positioning is also not unique--companies
such as Oracle and IBM have delivered similar messages to the market. The proof
points come from recent market wins, in highly competitive situations, at such
customers as General Motors, MCI, Fleet Bank, Hana Bank and GTE. To gain
customer awareness, the company must still fight the fallout from the financial
turmoil of the last years--current market surveys indicate that buying
intentions and vendor rankings place Informix well behind both Oracle and IBM.
Two weeks ago, the company released its Decision Frontier Suite, a package of
directly offered and re-sold products designed to simplify the purchase of
large-scale data warehousing implementations. In addition to the core
capabilities of the suite, the company is seeking to deliver a third-party
market in analytical applications using the suite as the technology foundation.
In addition, the pending Red Brick acquisition is designed to supplement current
strengths in data warehousing by adding 1) expertise and staffing in
development, consulting and support 2) a solid customer base of data
warehouse-savvy customers 3) complementary technology for a portion of the data
warehouse space. Despite the depth of the data warehouse market opportunity, we
believe that the primary challenge for the company will be to break through the
considerable noise and confusion in the market, capture the attention of key
market influencers, and back up its message with customer-validated proof points
Web/E-Commerce.
Informix has been very active on a number of fronts related to the build-out of
the business-centric Internet. Four key primary target segments have been
identified by the company's newly formed division focusing on this market:
web-enabling applications, corporate document and content repositories,
e-commerce with a focus on customer relationship and analysis, and specialized
media asset management. To date, many of these initiatives have originated from
the company's consulting services organization, which has used various versions
of the company's Universal Data Option technology (derived from the Illustra
object-relational product line) to implement content management applications for
a variety of customers. In addition, the core technology products for these
initiatives, such as the Universal Data Option, are currently growing at about a
30% revenue growth rate. The consulting organization has executed a number of
rapid, fixed-price implementation projects to demonstrate the strengths of these
products. By early next year, a wider array of product packages will be made
available based on these early consulting engagements. Customers for these
projects to date have included Lucent Technologies, Trans World
International/International Management Group and Tandem.
Another key theme for the company is that e-commerce is not just about recording
transactions, but is even more about customer relationship management and the
analytical requirements involved in understanding the transactions recorded on
e-commerce sites. E-commerce customers must publish information to attract
customers, but must also engage customers throughout the transaction process and
analyze and promote more specifically to retain customers for future revenue. In
a number of deployments, Informix has assisted customers in connecting
electronic store fronts to a range of call center and sales applications,
external demographic data, order management, and financial systems. Notable Web
commerce sites using Informix products in these contexts include biztravel.com
(one of the largest independent travel sites on the Web), Security First Network
Bank (the first on-line bank) and Service Merchandise (who is opening up its
retail and catalog operations for Web commerce).
1998 Copyright Hambrecht & Quist LLC. All rights reserved. The information
contained herein is based on sources believed to be reliable but is neither
all-inclusive nor guaranteed by our firm. Opinions reflect our judgment at this
time and are subject to change. We do not undertake to advise you of changes in
our opinion or information. In the course of our regular business, we may be
long or short in the securities mentioned and may make purchases and/or sales of
them from time to time in the open market, as a market maker, or otherwise. In
addition, we may perform or seek to perform investment banking services for the
issuers of these securities. Most of the companies we follow are emerging and
mid-size growth companies whose securities typically involve a higher degree of
risk and more volatility than the securities of more established companies. For
these and other reasons, the investments discussed or recommended in this report
may be unsuitable for investors depending on their specific investment
objectives and financial position. This report is not a recommendation or a
solicitation that any particular investor should purchase or sell any particular
security in any amount, or at all.
2/2: Informix- Upbeat Investor Session. Market Positioning; BUY Rating.
COMPETITION: A MAJOR ISSUE, BUT NOT A FIGHT TO THE FINISH
We believe that Informix has a differentiated product advantage that provides it
with a sustainable competitive position if it can be successful in becoming a
more effective sales and marketing company. On the technology front, Informix
CTO Michael Stonebraker has long been advocating the "thin client/thin
application server/thick database" model for Internet deployment. With the new
Oracle 8i positioning, we believe that Oracle has moved closer to the core
positioning of Informix with respect to the use of the database as the
centralized repository and management vehicle for all forms of data and
information content. Our own direct research, as well as conversations with
third-party developers who work with the full range of database products, lead
us to conclude that in core transaction processing, the Informix engine makes
more efficient use of hardware resources and delivers higher throughput for more
users for a given level of server and network capacity. These product advantages
must be turned into demonstrable proof points for new prospects however, and
Oracle brings a vastly higher level of marketing resources and customer
references to each engagement. However, we believe that recently published
reports of major losses within the telco vertical to Oracle are at best
exaggerated; Informix signed its biggest deal of the third quarter with GTE, and
we believe that substantial progress is being made within the Siemens account,
at MCI and a number of other telco accounts. The long-term task for Informix is
both to overcome this Oracle advantage with smarter sales and marketing, and to
demonstrate that it can claim enough of its target markets to sustain a growing,
profitable market position. Over the next 3-4 quarters, we believe that Informix
is in an excellent position to show solid growth while gaining ground in this
longer-term battle.
Outlook. During the quarter, the company will also launch the beta of its
next major database release, which will include more tightly integrated Java
support within the data server. We also believe that in the next few weeks, the
company will launch its next generation graphical development tool suite for use
with the Universal Data Option and multi-media content extensions of the core
database. We also expect to see a continuation of the company's new advertising
campaign, the first general-business press advertising it has conducted in about
18 months. Based on the tone of the analyst presentation and our own field
checks, we believe that there is upside to our $0.10 EPS (fully taxed) forecast
for the December quarter, with some additional risk emerging in the form of the
macro-economic conditions in Latin America, where the company derived about 7%
of its revenue in the last quarter. Based on this outlook, we are maintaining
our current forecast model at the present time, as we reiterate our BUY rating
on the company's shares.
1998 Copyright Hambrecht & Quist LLC. All rights reserved. The information
contained herein is based on sources believed to be reliable but is neither
all-inclusive nor guaranteed by our firm. Opinions reflect our judgment at this
time and are subject to change. We do not undertake to advise you of changes in
our opinion or information. In the course of our regular business, we may be
long or short in the securities mentioned and may make purchases and/or sales of
them from time to time in the open market, as a market maker, or otherwise. In
addition, we may perform or seek to perform investment banking services for the
issuers of these securities. Most of the companies we follow are emerging and
mid-size growth companies whose securities typically involve a higher degree of
risk and more volatility than the securities of more established companies. For
these and other reasons, the investments discussed or recommended in this report
may be unsuitable for investors depending on their specific investment
objectives and financial position. This report is not a recommendation or a
solicitation that any particular investor should purchase or sell any particular
security in any amount, or at all.
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