interesting pvsw article from forbes.com...
11.22.99
By Lisa R. Goldbaum
When Ron Harris woke up on the morning of Oct. 22, 1999, the stock of the company he runs, Austin, Tex.-based Pervasive Software (nasdaq: PVSW), was trading at an all-time high of just over $36 per share--and the value of his options totaled roughly $47 million. But by the time the sun set that evening, he and other Pervasive shareholders were significantly poorer. Pervasive's stock had plunged a whopping 67% to $12 a share, virtually erasing the solid gains it had built up since the end of 1998. Harris himself lost just over $31 million on paper in a single day.
What was the cause of this debacle? The evening before, Pervasive announced earnings that were in line with the expectations of Wall Street analysts. Then came a bombshell: It announced that it would boost spending by $13 million over the next four quarters in an effort to capitalize on the exploding growth in e-business and distributed-computing--effectively wiping out a year's worth of profits.
It certainly didn't help matters when the company, in its earnings conference call, admitted an uncharacteristic glitch in execution that kept $500,000 worth of software from shipping during the first quarter. The software sat on the back dock of the company's third-party fulfillment house and never made it onto the truck. Nor did it help that the company partially attributed a slowdown in its core business to transitions within its sales force as it moved from a centralized system to a field-based system, which meant the company had to replace salespeople who didn't want to move.
Although Pervasive had built a solid reputation since its IPO in the fall of 1997 by consistently beating analysts' earnings expectations, Wall Street didn't cut the company any slack, perhaps because the stock was considered by some to be overvalued. Several analysts rushed to downgrade Pervasive's stock after the announcement, and panicky investors starting selling in droves. The shares haven't recovered (they currently hover around the $11 mark), and on Nov. 17 the company was slapped with a class action lawsuit from shareholders accusing it of issuing "materially false and misleading statements" about its business and finances, a typical reaction after a stock takes a beating.
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"People were a little wary of Pervasive getting into a new area, but it was an overreaction."
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But now that the dust has settled, there are some industry pundits who believe the market may have dished out too severe a punishment and that Pervasive's announced moves--while detrimental to its short-term financial prospects--will produce rewards over the long haul. Analyst Joseph Payne of Hoak Breedlove Wesneski & Co. had downgraded the stock to an "accumulate" from "strong buy" after the announcement but recently reinstated the "strong buy" recommendation. In a report accompanying the upgrade, Payne characterized the stock's nosedive as "material overdiscounting."
Analyst Merv Adrian with Giga Information Group agrees. "People were a little wary of Pervasive getting into a new area, but it was an overreaction. This strategy is a very reasonable extension of its core competency."
Pervasive has three basic components to its business. The core component is its Pervasive.SQL database, which the company sells primarily to small- and mid-sized business application developers that embed the database into their own software and sell it to end users. For example, America West Airlines uses an application from David R. Bornemann Associates that generates all the paperwork for pilots before a flight. This information is culled from various systems and stored in the Pervasive database embedded in the application, and the application then compiles the data into usable reports, according to Tom Ashcroft, a systems analyst at the airline.
The company has recently created versions of this embedded database that run on mobile devices, like personal digital assistants (PDAs), notebooks and even smartcards. Another part of Pervasive's business is Tango 2000, a web application server and a big recipient of the company's $13 million investment.
The goal of the $13 million spending boost, according to Harris, is to enable the company to remain a viable competitor in a post-PC world that lives on the web and can be accessed from a variety of devices anywhere at any time. Like most companies these days, it hopes to become a key player in web infrastructure and is trying to integrate its product offerings to provide a single solution for building and deploying web applications. This is especially important since growth in its core database business is slowing.
That's why Pervasive is spending $13 million to focus on a few key areas. It will devote part of the sum to accelerating new feature development for Tango 2000 and Pervasive.SQL. It will also beef up its telemarketing call center to aggressively recruit web developers and is launching an e-business program that unites developers with web integrators.
But the biggest chunk of this investment will go toward a major marketing push, as the company tries to boost brand awareness and win mind-share as an e-business solutions provider. This is important for Pervasive since its database product is embedded in other applications and most people using the software don't even know it's in there, let alone have the ability to spread positive word of mouth. (Is a "Pervasive Inside" campaign on the way?) Since the company doesn't have brand recognition in its core business, it's going to have to virtually start from scratch to win acceptance in the crowded e-business marketplace.
To be sure, the company will face serious challenges with this new strategy. For one, virtually every major technology company seems to have a web application server these days, and Pervasive will face stiff competition in this arena. Competitors include industry powerhouses like International Business Machines (nyse: IBM), Sun Microsystems (nasdaq: SUNW), Oracle (nasdaq: ORCL), Microsoft (nasdaq: MSFT), Sybase (nasdaq: SYBS), Informix (nasdaq: IFMX), BEA Systems (nasdaq: BEAS) and Tibco (nasdaq: TIBX), all of which offer application servers as part of more comprehensive solutions.
There are also some strong "pure play" providers, such as SilverStream Software (nasdaq: SSSW), Allaire Software (nasdaq: ALLR) and Bluestone Software (nasdaq: BLSW), notes analyst Payne. And the company has a lot of work to do to catch up to its chief head-to-head competitor, Allaire. "The fact is [Allaire] had a two-year head start and we have a better product," asserts Harris. "Part of our challenge is overcoming their head start and demonstrating that."
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"Pervasive has been able to dance in the shadow of the Microsoft dinosaur for the last few years because they're very nimble and their technology works."
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Industry research firms estimate the market for application servers could reach between $2 billion and $6 billion in revenues by 2003. That's a lot of pie to go around for players who can execute a coherent strategy--a factor that followers of Pervasive admit is the key to the company's future viability. "The particular programs they're putting in place are the right ones in order to sell the Tango application development tool. It's a lot more of a hands-on sales process, but they have to execute," says Needham & Co. analyst Brent Williams.
While Giga analyst Adrian acknowledges that Pervasive's e-business competition is severe, he notes that the company has weathered competitive onslaughts in the past and is uniquely positioned to emerge as a leader. "It's fair to say that the market is up for grabs; people are likely to go through several products before they settle on one," he argues. "[Pervasive] has been able to dance in the shadow of the Microsoft dinosaur for the last few years because they're very nimble and their technology works."
There are also big potential opportunities in the mobile device market for Pervasive.SQL, which the company recently adapted for use in these types of devices by giving it a smaller footprint. For example, International Data Corp. projects that the market for handheld devices will grow at a compound annual rate of about 35% to about 19 million units sold between now and 2003.
The company is expected to return to profitability in the second quarter of fiscal 2001, when Payne projects it will earn 10 cents a share. The stock's recent slide may make it a relative bargain, especially if it was driven primarily by the shock of the $13 million investment (as analysts like Williams and Payne believe to be the case) and not by a fundamental loss of confidence in the company's future prospects. "I see no reason why it can't return to $36," asserts Payne. "It's a great company that will take a little patience."
forbes.com
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