Corrected
2
n Computer Services, Stephen T. McClellan
e-commerce Internet consulting is an emerging trend,
gaining steam with an array of recent IPOs. IDC predicts
this market to reach $6.5 billion in the U.S. alone by next
year from $3.5 billion in '98. IPOs, as well as still private
firms like Lante are grabbing a position in this emerging
area. Established professional services consulting firms like
IBM Global Services (IBM, B-1-1-7, $138), EDS (EDS,
B-2-2-7, $61 3/16), Computer Sciences (CSC, B-1-1-9,
$68 3/4), and Andersen Consulting also have major thrusts
here. Computer Sciences has just announced that the
president of its consulting group will now shift over to head
up CSC's e-business strategy, giving it more emphasis and
clout. EDS has done the same thing. This will become a
major new market, where no one can afford to be left
behind. We discuss this trend in our in-depth industry
report, Making IT Happen in the New Millennium, dated
July 1 st .
Computer Services Quarterly Review
Our Computer Services quarterly review, dated July 8 th ,
emphasizes how the group has outperformed consistently,
12 out of the last 15 years. The group is ahead 20% year to
date. Our investment thesis is based on a number of
attributes: visibility, predictability, stability with recurring
revenue, healthy growth, the trend toward outsourcing,
strong finances and high cash flow, little international
exposure or risk, the potential for more M&A activity, and
still reasonable valuations. Our strongest
recommendations are Computer Sciences (CSC, B-1-1-9,
$68 3/4), Convergys (CVG, C-1-1-9, $23 5/16), DST
Systems (DST, B-1-1-9, $68), and Fiserv (FISV, B-1-1-9,
$32 7/8). These, and several others, should benefit from
robust June quarter results to be announced shortly.
Computer Services stocks normally move ahead materially
during the summer so that PE multiples discount the year
ahead estimates by the autumn. We expect this
phenomenon to occur again this year.
n Server Hardware & Appliances
Steven Milunovich, CFA/Robert Hansen, CFA
eBay's (EBAY, Not Rated, $123) database server and web
site went down again last Saturday following three highly
publicized outages in June. eBay has pointed the finger at
Sun Microsystems (SUNW, B-2-1-9, $72), however, Sun
contends eBay's rapid growth and failure to upgrade to the
latest version of its Solaris software are responsible. Forbes
jumped on the bandwagon describing eBay's technology
blunders in its July 26 article “E-blame.” eBay's Meg
Whitman said the company has seen no appreciable
customer attrition due to it's problems and Sun thinks its
relationship with the web-based auction house has actually
strengthened due to its proactive response, which included
sending in a strike team of seven engineers.
n Technical & Design Software,
Jay Vleeschhouwer
MetaCreations (MCRE, $7 3/16, D-3-1-9) has formed
with Computer Associates a joint venture company—
MetaStream.com—which will develop and deliver
MetaStream solutions and services to the e-commerce
market. MetaStream is a streaming, scaleable file format
developed by MetaCreations (with assistance from Intel-INTC,
$65 3/8, B-1-1-7) for the delivery of 3-D on the
web, which we believe will become, as we have noted
previously, a viable and important capability on the web (it
is currently available within Windows 98 or by download).
The joint venture will focus on two main initiatives: the
licensing and integration of MetaStream technologies (by
CA and others) for specific e-commerce visualization
solutions, and fee-based professional services for
implementing 3-D solutions. The latter is an interesting
model as it will entail services engagements for
implementing e-merchandising projects with more
advanced product-viewing capabilities than have been
available to date, thereby becoming an important element of
web site differentiation. Related to this effort,
MetaCreations has formed its Web Services Group, based in
New York, and is in the process of building its application
engineer staff. Individual projects, one of which is already
underway for a consumer electronics customer, are
expected to take as little as a couple of weeks to complete,
to a few months, depending on the scope of the project.
In terms of what it means financially for MetaCreations—
which recently exited the consumer imaging market to
focus on its commercial and professional designer
opportunities—the company seems to believe it can ramp
the new venture up to at least a multimillion revenue run-rate
by fiscal 2000. In the meantime, however, the
company will be largely dependent on its remaining base of
2D and 3D applications, the success of which in turn is
dependent on their respective product cycles.
[HWP] MLPF&S or one of its affiliates was a manager of the most recent offering of securities of this company within the last three years.
[IIXL, EDS, CSC, CVG, AOL, SEEK, LCOS, BRCM, LU, STM] MLPF&S was a manager of the most recent public offering of securities of this company within the last three years.
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[CSC, EK] An officer, director or employee of MLPF&S or one of its affiliates is an officer or director of this company.
Opinion Key [X-a-b-c]: Investment Risk Rating(X): A - Low, B - Average, C - Above Average, D - High. Appreciation Potential Rating (a: Int. Term - 0-12 mo.; b: Long Term - >1 yr.): 1 - Buy, 2 - Accumulate, 3 - Neutral, 4 -Reduce,
5 - Sell, 6 - No Rating. Income Rating(c): 7 - Same/Higher, 8 - Same/Lower, 9 - No Cash Dividend.
Copyright 1999 Merrill Lynch, Pierce, Fenner & Smith Incorporated (MLPF&S). This report has been issued and approved for publication in the United Kingdom by Merrill Lynch, Pierce, Fenner & Smith Limited, which is
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