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senior analyst: Garrett Bekker 11/3/99
On Technology?s (NASDAQ: ONTC - Quotes, News, Boards) underperformance of the past few years has partly been due to a series of poorly integrated acquisitions.
Lately, however, the company has been on a winning streak, seeing its share price nearly quadruple to $8 from just north of $2 in early August.
Tuesday, the shares closed down $0.44 to $7.50.
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We think the best is yet to come for this provider of desktop management and configuration software.
On Technology?s flagship On Command CCM product allows technology network staff to install, update, configure and maintain PCs and remote computing devices from one central site. By simplifying the process of installation and maintenance, firms can reduce the total cost of ownership (TCO) for their corporate networks.
The downside is that they may have to invest in fitness training for their IT managers, since they won?t be running around the office as frequently.
Corporate computing devices are increasingly linked through networks, creating a large market opportunity for On Technology?s services. According to market research firm International Data Corp. (IDC), the percentage of PCs that are connected via a local-area network (LAN) has risen in the past decade from 15% to approximately 70%. Other networking arrangements such as wide-area networks (WANs), the Internet, intranets and extranets are also on the rise.
As noted in a report by the Aberdeen Group, interconnected network PCs are in a constant state of repair or upgrade. For example, as companies migrate to Windows 2000 in the upcoming year, every PC and computing device will need to be updated and configured for this new software.
On Technology is one of the few companies that offer this capability. Management estimates the total market opportunity to be in excess of $1 billion, but less than 10% of it has been tapped, leaving a tremendous opportunity for companies in this space.
In the recently concluded third quarter, the company?s revenue grew 60% from the year-ago period, to $8.2 million, and the net loss per share declined to $0.02. There was also an increase in deferred revenue of nearly 25%.
Revenue has been growing an average of nearly 11% for the past five quarters. Management guidance is for revenue growth in the mid double-digits. Conservatively assuming that revenue grows 10% each quarter, we estimate 2000 revenue of $42 million.
But there are plenty of good signs that bode well for this firm.
With the rise of remote-access computing devices such as laptops and personal digital assistants (PDAs), the demand for networking products should increase dramatically. According to IDC, the remote system management category will reach nearly 36 million users by the end of this year in the U.S. alone.
The On Command CCM product can be especially helpful in the current corporate atmosphere, where companies are merging at a frenetic pace in an effort to stay competitive in the global marketplace. Newly combined entities are faced with integrating the often disparate computing systems of merged units.
For example, On Command CCM customer AutoNation (NYSE:AN - Quotes, News, Boards) absorbed more than 600 smaller companies in the process of becoming the nation?s largest auto retailing chain. Such a rapid rate of growth can leave a corporate enterprise with just about every piece of computing hardware in existence on its system.
Next, consider Deutsche Telekom (NYSE:DT - Quotes, News, Boards), which manages more than 100,000 desktops through 148 locations. These units include PCs operating in Microsoft Corp.?s (NASDAQ: MSFT - Quotes, News, Boards) Windows 3.11, Windows 95 and Windows NT environments.
DT is now capable of updating over 8,000 PCs per weekend! Perhaps most importantly, the ability to perform this function from a central location enabled the company to reduce its computer support centers from 30 to six and lowered staff by 9%.
Even companies that are experiencing rapid ?organic? growth face enormous integration issues. For example, different units of the same model of computer might not all be the same if they were purchased on different days.
Computer manufacturers often source the cheapest products available at the time. So even if you have the same model of computer, it might have different drives, motherboards, etc.
Even small changes in these components can lead to problems with integration and will prevent some software from working properly.
On Command CCM also keeps track of the updates it makes so that it can rebuild the computer exactly as it was in the event of a crash.
On Technology competes with Novadigm (NASDAQ: NVDM - Quotes, News, Boards) and Marimba (NASDAQ: MRBA - Quotes, News, Boards). Briefly put, Novadigm and Marimba are simpler, lower-level configurations, more appropriate for less complicated integration and updating tasks.
On Technology is better suited for more complicated tasks that have heavy integration issues with older ?legacy? systems. Companies with a lot of recent acquisitions may require more sophisticated integration needs to make older legacy systems work.
We think this market focus could be beneficial in the upcoming year. Many companies with older ?legacy? systems have put spending freezes in place in the face of Y2K, and will wait until after the first of the year to install and upgrade to new equipment and software. This could play directly into On Technology?s hands.
And with no slowdown in merger activity in sight, On Technology could be well positioned to exploit this trend.
A case in point is MCI WorldCom?s (NASDAQ: WCOM - Quotes, News, Boards) recently announced acquisition of Sprint (NYSE: FON - Quotes, News, Boards). MCI WorldCom is already an On Technology customer, which could drive further revenue growth as the newly formed company is forced to integrate its disparate PCs.
The company is well-positioned to reap the benefits of an exploding market for desktop and remote appliance management. At a price of $7.50, On Technology is trading at less than 2 times revenue vs. 13.4 times for its closest public comparable, Marimba.
Bottom Line:
We think On Technology is a good value at current levels.
P.S.
CTPH KIDE DITC.. regards... Ike
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