Soundview report from today:
Aspect Devlopement preannounced a huge 1Q miss, with indicated revenues in
the range of $14M-$15M, with net income of break-even to $1M, including a
one-time gain from a joint venture (EDTN) transaction of $3M. The miss is
attributed to several large deals, which did not close during the quarter.
New estimates for F99 are $98.5M and $0.23, from $130.4M and $0.69. F00
estimates are $136.8M and $0.65, from $181.4M and $0.95.
Limited details, but in our conversations with management over the weekend,
the miss is attributable to several very large deals, which had been
expected to close, which for no identified reason did not.
We believe that the aggregate value of these deals exceeded $25m, and that
approximately 50% of the value of these deals would have been recognized in
1Q. None of these deals were being worked on in conjunction with SAP. One
slipped owing to an acquisition, another due to a corporate reorganization,
and the third due to complications in the signing process.
The problem in 1Q is being attributed to management's focus and certainty
that these larger deals were done, combined with a comparative lack of focus
on the continued buildout of the salesforce, and management of the broader
pipeline of smaller and average sized deals. Currently the salesforce
stands at 65-plus, with plans to grow it by 30%-40% -- 1Q saw only a couple
of additions and was below plan.
Management is not specifically citing Y2K as the principal factor in the
delays, however, undoubtably Aspect's miss will be seen as evidence of
further problems in the applications space due to Y2K.
On an operating basis, we expect Aspect to post a loss, which should be more
than offset from a one-time gain from the joint venture EDTN.
While we understood that Aspect's deal sizes were increasing, we never
imagined that the degree of concentration had grown to this extent. Two
years ago close to zero reliance on large deals, 1Q it was close to two
thirds of license revenue. Overdependence on large deals is something the
company will work to reduce, goal is less than 50% of license revenues from
deals greater than $1M-$2M in size.
Aspect has no plans to cut back its hiring plans. Pipeline of SAP business
looks good for the June quarter.
The dramatic miss will also revive questions as to what degree is the
Internet impacting the business in terms of lengthening the sales cycle.
Management acknowledged that there is some commodization beginning to occur
at the low end of the market (which Aspect does not address) where the focus
is solely on classification and search, as opposed to a variety of other
metrics (quality, delivery, and others) that part of the broader
capabilities of Aspect's solution.
Estimates - preliminary revisions assume a gradual recovery.
Shares - expect the shares to trade off sharply. We consider the stock a
buy under $8.50 (2-times revenues, plus $80m of cash or roughly a $280m
market value.) |
