Revenue growth blows through estimates
April 16, 1999 - 8:27am
Credit Suisse First Boston Corporation
Investment Summary
RATL reported strong Q4 results with revenue and EPS of $125.
1 million and $0.23 ahead of our estimates of $118 million
and $0.22 respectively. Consensus was $114 million and $0.21.
License revenue of $84 million handily beat our $73 million
estimate and grew to a higher than expected 67% of total
revenue. We expect this trend to continue will continue for
the next one or two quarters before trending to the target 60-
40 mix between license and service revenues. We believe the
strength in license revenues was driven by several factors:
robust demand for the recently introduced Rational Suite
products and Performance Studio, and sustained endorsement by
customers for RATL tools for developing and testing Web
applications, as well as greater pressure to improve software
quality and increase time to market. This is a clear
demonstration of how RATL's product and technology strategy
is resonating with customers and generating strong top line
growth, despite a market environment where new technologies
and events such as Y2K are creating some level of uncertainty
among corporate buyers. We believe RATL's product strategy is
helping customers to deploy the new technologies such as the
Internet quickly and more effectively thus reducing the company's
exposure to the slowdown attributed to Y2K and ERP.
Services revenue was down slightly sequentially due to
several factors. Service reps were engaged in pre-sales
rather than service delivery due to the higher than expected
demand for the new Suite and Performance Studio products, a
number of service reps were trained on the new products, and
service capacity was below the required levels as product
demand was higher than expected.
Revenues were strong across all regions with each of the
three major geographies finishing the year at above 100% of
booking quota, according to management. The revenue mix was
Americas 65%, Europe 30% and Asia Pacific 5%, which is
similar to past quarters.
The company's business reflected demand across all platforms (
Windows NT and various UNIX flavors), with Windows NT based
products contributing over 50% of revenues, consistent with
past quarters. RATL's strategy of supporting all the major
platforms has served the company well as enterprise IT
environments are increasingly becoming "melting pots" of
computing platforms.
Solid margin improvement
The company reported improving margins - GM as well as OM -
in the context of strong top line growth, strict expense
control and infrastructure leverage. Gross margins improved
for the fifth consecutive quarter, increasing by 80 basis
points sequentially while operating margins improved 200
basis points sequentially. Operating margin improved as a
result of lower sales and marketing expense (120 basis points
sequentially) and lower R&D expense (40 basis points sequentially).
Strong balance sheet
RATL reported a solid balance sheet with cash balance of $260
million, deferred revenue of $76 million and DSO of 66 days.
The company generated $38 million cash from operations during
the quarter demonstrating strong expense control and strict
asset management. Deferred revenue increased by $9.2 million (
13.7%) sequentially as a result of strong license renewals,
favorable macroeconomic environment and strong forward
visibility. DSO is relatively constant sequentially (65 days
in the December quarter) and remains below management's
target range of low- to mid-70s.
Record mix of customers and deals
The company closed a record 12,000 transactions (up from 11,
000 transactions in the prior quarter) with over 5,000
customers which is also a record, while closing 10 deals
greater than $1 million. Approximately 20% of revenues came
from the top 10 customers, 45% from the top 50 and 60% from
the top 100 which is relatively consistent with prior quarters.
While RATL has closed record number of transactions for each
of the past three quarters, the concentration of the deal mix
is not changing significantly, and maintaining. RATL's deal
mix during the quarter included more than 10 deals that were
greater than $1 million, more than 25 that were greater than $
500,000, more than 200 that were greater than $100,000 and
more than 400 deals that were greater than $50,000.
Increasing penetration of mission critical IT
RATL continued to increase sales into mission critical IT
deployments on a sequential as well as YoY basis,
demonstrating that the company is increasingly being
perceived as a strategic vendor for key applications related
to internal operations as well as core product offerings.
Strong rollout of new RATL Suite and Performance Studio products
The Rational Suite products which became available on
February 11 (Analyst Studio, Development Studio, Test Studio
and Rational Enterprise) received strong endorsement from
customers, exceeded the company's internal plan by a factor
of two, and contributed to above expected license revenue
growth. In all, the Suite products had over 300 customers
with more than 15 orders for Suite products that were greater
than $100,000.
The strength in the Suite products did not appear to
cannibalize sales of point products which showed strong
bookings momentum across all the product areas including
modeling, test and quality, and change and configuration management.
Continued strength in Performance Studio demand
Performance Studio which started shipping in September,
reported similarly strong customer demand with 100% growth in
bookings, and appears on track to achieve triple digit growth
through the next year. The next release (GA in June quarter)
will support the secure socket layer (SSL) protocol for
secure Web applications. During the March quarter, sales of
Performance Studio involved significant enterprise caliber
customers such as Ericsson, Fujitsu, Sun Microsystems, France
Telecom, Fidelity, Chase Manhattan Bank, america Online, IBM,
Nokia, Sallie Mae, Ernst & Young, Southwestern Bell, 3M and Hewlett Packard.
Stock Opinion
We reiterate our Buy rating with a slightly revised price
target of $38. We are raising our FY00 estimates to $535
million and $0.91 (from $530 million and $0.90) and
introducing FY01 estimates of $702 million and $1.15
(reflecting YoY growth of 31% and 26% respectively).
RATL continues to demonstrate an unrelenting focus on
executing its product, operating and market strategies, which
is resonating with customers and driving increased market
penetration, particularly into mission critical deployments.
At current prices, the company is trading at 26x our CY00
estimate, which we believe is an attractive entry point
valuation considering our 35% growth rate assumptions over
the next 3-5 years.
Another Solid Quarter, Record Number of Transactions
Credit Suisse First Boston Corporation
April 16, 1999 - 8:27am
Summary
RATL reported strong Q4 results with revenue and EPS of $125
million and $0.23 ahead of our estimates of $118 and $0.22 respectively.
The company reported improving margins - GM as well as OM -
in the context of strong top line growth, strict expense
control and infrastructure leverage.
The company closed a record 12,000 transactions (up from
11,000 transactions in the prior quarter) with over 5,000
customers which is also a record, while closing 10 deals
greater than $1 million.
We reiterate our Buy rating with a slightly revised price
target of $38.
At current prices, the company is trading at 26x our CY00
estimate, which we believe is an attractive entry point
valuation considering our 35% growth rate assumptions over
the next 3-5 years.
ROIC NA
Total Debt (3/99) $0.03
Book Value/Share (3/99) $3.15
Common Shares 93.473
Est. 5-Yr. EPS Growth 35%
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