The following is CSFB's report dated 2/19/99:
CREDIT SUISSE FIRST BOSTON CORPORATION
Equity Research
Americas
U.S./Technology/PC Software
BUY
SMALL CAP
Allaire Corporation (ALLR)
Initiating Allaire with a Buy rating; 1999 and 2000 estimates
are ($0.42) and $0.22.
Summary
We are initiating coverage of Allaire with a Buy rating. Our
1999 and 2000 earnings estimates are ($0.42) and $0.22.
The explosive growth of the Internet could cause the market
for Web development tools and Web application servers to grow
by over 40% per year through 2001.
Allaire's leading Web application development tools and
deployment server software are expected to gain share.
Because Allaire's products are very competitively priced,
address the needs of HTML programmers, and are completely open
, we expect it to be one of the dominant players.
We forecast 1999 and 2000 revenue of $33.6M and $51.7M, up 64
% and 54%, respectively.
Price Target Mkt.Value 52-Week
02/17/991 (12mo.) Div. Yield (MM) Price Range
USD 53 NA $574M $34-69
Annual Prev. Abs. Rel. EV/ EBITDA/
EPS EPS P/E P/E EBITDA Share
1/00E $0.22 177 681% -$0.37
1/99E -0.42 NA NA
1/98A -1.51 NA NA
March June Sept. Dec. FY End
2000E $0.02 $0.03 $0.06 $0.10 Jan.
1999E -0.26 -0.16 -0.09 0.02
1998A -0.32 -0.34 -0.47 -0.38
ROIC (12/97)
Total Debt (12/98) $814K
Book Value/Share (12/98) -$2.50
WACC (12/97)
Debt/Total Capital (12/97)
Common Shares (000) 10,833
EP Trend2
Est. 5-Yr. EPS Growth
Est. 5-Yr. Div. Growth
1On 02/17/99 DJIA closed at 9195.5 and S&P 500 at 1224.0.
2Economic profit trend.
Allaire develops, market and supports application development
tools and server deployment software for the Web.
Details
We are initiating coverage of Allaire with a Buy rating.
Allaire develops, markets and supports application
development tools and server deployment software for the Web
. Our 1999 and 2000 earnings estimates are ($0.42) and $0.22
, with the company turning profitable in Q499. Since Allaire
is not expected to generate earnings until Q4 1999, and will
not be at a mature earnings level in 2000, we are valuing it
off forward revenue. There are two potential groups of
compares -- relatively young Internet start-ups or more
mature software tools companies. The market appears to be
viewing the company as being more closely matched to the
former than the latter. Allaire's current market cap to
projected 1999 revenue is 15.9. The Internet group average is
23.5 and the software tools companies average 5.4 (See Exhibit 1).
There are several risks investors face. First, the market
could alter its view and value Allaire more like the lower
multiple tools companies. Second, even if Allaire continues
to be valued more like Internet software companies, that
sector may not retain its current multiple. An offset to
these risks is that Allaire's 64% revenue growth would
support above-market appreciation even if the multiple
contracted. Plus, we believe there is solid upside to
this revenue forecast.
IDC forecasts the number of e-business Web sites to grow from
1.2M in 1998 to roughly 6.4M in 2002. We believe that the 5
million+ client/server and mainframe professional software
developers worldwide will rapidly migrate to developing
applications for the Web. We also expect this base to be
augmented by a much larger group of developers that have grown
-up on HTML, the language of the Web. The latter group will
need to have the proper tools to extend their capability from
development of "static" Web pages. In the future many of
these sites will need to be "dynamic" in order to address
complex applications such as e-commerce.
Web development tools can simplify and speed up the
development process, especially for the more complex "dynamic
" e-business Web sites which integrate such technologies as
databases, messaging servers, etc..
The market for Web application development tools should grow
rapidly as it is tied to the need for an increasing number of
businesses to attempt to interact more directly with clients
and partners through the Web. But this market has additional
larger scale growth opportunity than all prior development
tool markets. Such opportunity arises because of the use of
application deployment servers. These servers facilitate
deployment of Web applications that require connections to
backend databases, messaging servers, etc. Application
development tools are often sold once to a developer and than
used by that developer on numerous different projects - with
no revenue tie-in between the number of projects and the tool
. In contrast, there is a direct correlation with the
revenue obtained from application servers and the number and
scale of the applications deployed. As a result, we project
the market for Web development tools and application
deployment servers will achieve a 40% CAGR through 2001.
Allaire's products aid professional Web developers in
building static Web pages and enterprise-wide, interactive
Web applications. Its entry-level HomeSite product is a
Windows-based, HTML Web page design and site development tool
, which is used to create "static" Web sites that display
information. More than 100,000 licenses of HomeSite
have been sold to date.
Its flagship product, ColdFusion Studio and Server, is a cross
-platform, integrated development environment that gives Web
developers the tools necessary to create "dynamic" Web
applications. ColdFusion is primarily targeted at the HTML
developer who is expanding into more complex, interactive Web
applications. Because the ColdFusion mark-up language (CFML)
is essentially an extension of HTML, minimal time is required
for HTML programmers to become proficient in it. And CFML
supports Internet Rapid Application Development (IRAD) since
it is very efficient at creating Web applications. The
ColdFusion deployment application server is the link between
the front-end client devices (browsers) and back-end
databases and servers. ColdFusion supports virtually every
front-end client and back-end access protocol.
More than 30,000 copies of ColdFusion have been sold to date.
Because the opportunity in this space is so large, a number
of competitors already exist. However, Allaire and Microsoft
are the only companies that appear to have the business
models and products that can achieve mass market penetration
. Allaire distinguishes itself by offering award winning
products that are very competitively priced -- a ColdFusion
customer can be up and running for $2-5K while the more
complex (non-Microsoft) competitor's solutions start in the $
20-50K range. We believe Allaire is well positioned to divide
the bulk of the market with Microsoft. Microsoft will be
particularly appealing to client/server programmers schooled
in Visual Basic, who are now targeting the Web and expect to
limit the back-end interface to Microsoft technologies.
Allaire will have the edge with those already familiar with
HTML or who want to have their applications link to a more
heterogeneous collection of clients and servers. Because the
Web, almost by definition, is heterogeneous, we believe
the Allaire camp will be substantial.
Roughly 80% of Allaire's revenue is from its software with
the remaining 20% coming from Professional and Technical
Service offerings. Like many young companies, Allaire gross
margins are currently negatively impacted by the need to
invest in a services infrastructure. As the company matures,
margins should escalate partly because services will become
profitable and partly due to scaling.
CREDIT SUISSE FIRST BOSTON CORPORATION
Equity Research
Americas
U.S./Technology/PC Software
BUY
SMALL CAP
Allaire Corporation (ALLR)
Initiating Allaire with a Buy rating; 1999 and 2000 estimates
are ($0.42) and $0.22.
Currently, more than half of Allaire's sales are direct. The
company plans to expand its indirect distribution
domestically and internationally through distributors, OEM
resellers and system integrators. During 1998, roughly 30% of
the Fortune 500 were active Allaire customers. We forecast
1999 and 2000 revenue of $33.6M and $51.7M, up 64% and 54%,
respectively. |
