Nice mention of Citrix in Barron's Weekday Trader tonight.
interactive.wsj.com
Software Companies Wave the 'Net Flag
By CAROLYN WHELAN
DATELINE: SAN FRANCISCO
Not all software companies are created equal. But until recently Wall Street has acted as if they are -- equally bad.
Preannouncements and earnings warnings from Oracle and other software vendors like PeopleSoft, Edify, and Network Associates set off an avalanche of sell orders across the sector as investors assumed business was slowing because of customers' preoccupation with solving the Year 2000 problem.
"Investors got tired of the whole group and lumped them together," explains John Ekoniak, an analyst at BankBoston Robertson Stephens. "Unless you can prove that you're not going to be affected, you're going to be hit," echoes John Puricelli, an analyst at AG Edwards.
But sentiment may be changing. Some Wall Street pros already have started looking at software stocks that facilitate e-commerce and the Internet (see Weekday Trader: "With Y2K 'Over', Software Spending Hits the Web2," March 4). A few of those even appear to be reasonably priced--after handily beating earnings expectations last week.
Among them: Siebel Systems and Citrix Systems. In separate presentations Monday at the Hambrecht & Quist Technology Conference here, managements of those companies clearly distanced themselves from the severely damaged Enterprise Resource Planning (ERP) software group -- with which they are sometimes lumped. Instead, they touted their exposure to the exploding e-commerce arena.
Spin control? Maybe, but e-commerce is definitely the place to be these days. It's expected to grow more than 30 times over the next four years, to a total of $13.1 billion in 2003, from 1998's paltry $440 million, according to Albert Pang, an e-commerce analyst at the International Data Corporation.
And software companies are responding to the new opportunities by moving from applications for accounting and human resources "to commerce, customer support, distribution, and supplier relations, over the Web, "Ekoniak explains. Siebel Systems makes software to automate sales and marketing, customer support and invoicing processes, which Timothy J. Dolan of BT Alex Brown calls this year's biggest area of incremental IT spending.
Ed Bierdeman of Moors & Cabot Dakin, who has a Strong Buy rating on the stock and a price target of 56, calls Siebel a "market leader...with excellent technology and top notch management." Equally bullish are Ekoniak and Patrick Mason of Preferred Capital Markets, who both have Buy ratings on the stock.
"These products are really hot: CEOs want to buy [them]," says Mason. "It's a stepping stone to the Internet and interacting with customers."
In his presentation Monday, CEO Tom Siebel cited analysts' projections that the customer management market will grow to $315 billion in sales next year from $1 billion in 1997. He also made the bold claim that Siebel had become the world's second largest application software company (behind SAP but ahead of Oracle) as measured by license revenue. Siebel's share of the front office software market is currently twice that of its next two competitors -- combined.
Ekoniak thinks Siebel is in the right place at the right time. "We're really in the embryonic stage of applications being delivered over the Web -- and Siebel has a headstart," he says.
Others clearly agree. Last week two firms upgraded their ratings on Siebel to Strong Buy -- SG Cowen from Neutral and SoundView Technologies from Buy -- and Morgan Stanley Dean Witter initiated coverage with an Outperform rating.
Another notable niche software vendor also is attracting investors' attention.
Citrix Systems makes software to manage servers that connect "thin" clients, or "dumbed-down" PCs and other devices. Over half of the Fortune 100 companies use software from Citrix, according to Citrix's CEO Mark Templeton, who spoke here Monday.
Thin clients are economic alternatives to PCs in that they enable simpler computing, large-scale deployment of applications and upgrades across networks -- because the processing power sits on the server. Being on the cutting edge of a highly desirable market should shelter Citrix from Y2K problems as well, Puricelli believes.
That's why he upgraded his rating on Citrix stock to Buy from Accumulate last week, with a 12-month price target of $62, compared with its closing price of 44 3/16 on Tuesday. Needham & Co. also upgraded Citrix, to Strong Buy from Buy.
"They've clearly executed. The results speak for themselves," says Paul Dravis, senior software analyst at Nationsbanc Montgomery, who also has a Buy rating on the stock.
Right now, these two companies look pretty attractive. At Tuesday's closing price of 40 7/16, Siebel is around 26% off its high of 54 1/2. And based on estimated earnings of $0.76 for calendar 1999 and $1.04 for 2000, the stock changes hands at 53x and 39x -- a slight discount to its 45% long-term growth rate, according to First Call.
At Tuesday's closing price of 44 3/16, Citrix Systems is also nearly 20% off its high of 53 3/4. It also trades at 37x First Call's 1999 earnings estimate of $1.18 a share and at 29x 2000 estimates of $1.53 a share -- a nice discount to First Call's consensus long-term earnings growth rate of 40%.
These companies face challenges, of course.
Siebel will eventually face competition from the likes of Oracle and SAP -- but "not until they can prove that they have a product," says Mason. Upgrades to new software versions can take months or years -- an old way of working that today's customers won't tolerate. To counteract that, Siebel plans to upgrade over the Internet, instead of PC by PC.
As for Citrix, its licensing relationship with Microsoft has some investors worried that the Redmond, WA software behemoth may bail out when licenses expire in November, leaving Citrix high and dry. But since Citrix gets only 10 percent of its revenues from Microsoft-related business (vs. 90% a few years ago), Puricelli says it's less of an issue today.
And of course, though the effects of Y2K on these companies has probably been exaggerated, its potential danger hasn't gone away.
But Siebel and Citrix are looking past 2000 to position themselves as leading e-commerce software players of the future.
"Dust anybody with the e-commerce glitter and they all seem to get some up tick," says Julie Tylman, an analyst at Merrill Lynch.
More and more people on Wall Street seem to expect e-commerce to have just that effect -- and turn these stocks into gold dust for investors. |
