Regarding relative valuation - see below:
07:21am EST 20-Jan-00 Hambrecht & Quist
Strong Upside in Core and Acquired Business: Raising Estimates
Company: Sagent Technology, Inc.
Price: 25.75
Recommendation: Buy
Date: 1/19/00
Strong Upside in Core and Acquired Business: Raising Estimates
* SGNT reports $9M in core license revs; 13% above estimates and up 150% y/y
* Raising revenue estimates in 2000 to $85M and starting 2001 at $126M
* CMRC & new OEM agreements create major rev. potential; not projected in model
* Integration of QMS Software acquisition is progressing smoothly
* Pipeline remains very healthy; Reiterate BUY rating on attractive valuation
FY Ends Dec Current Price $25.75
52-Week Range $6-31 Market Cap (M) $706
Shares Out (M) 27.4 Book Value/Share $1.51
Cash/Share $1.39 DSOs 62
LTM Revenue(M) $48.0
Summary
Sagent reported a strong fourth quarter, closing out a stellar 1999 year in
which it beat every top-line and bottom-line estimate since going public. For
the quarter, the company grew total revenues 110% year-over-year, excluding
results from QMS. The growth is attributable to strong demand for the
company's Web analytical platform solution. We expect demand for the
company's products to continue to very strong going forward, as businesses
purchase more robust analytical solutions to sort through the massive amounts
of customer data being collected on the Web. The company continues to expand
its global presence with the acquisitions of its two international
subsidiaries in Germany and France, and recently formed a partnership with
eGlobal Technology Services, which has a strong presence in Asia. The company
also added two new OEM partners, Interpath and the Boeing Credit Union,
bringing the total to four including their alliances with Commerce One (CMRC,
$177, NR) and Siebel (SEBL, $83.94, B). These OEM agreements create several
new revenue opportunities in the form of royalty payments, which are not
currently forecasted in our model. Commerce One in particular offers the
greatest upside potential to Sagent, given the extremely large contract CMRC
has signed with General Motors. Management indicated that integration with
QMS Software is on track, and we expect the company to start to derive
benefits from the acquisition in the near-term (refer to our December 13, 1999
research note for further details). Based on strong demand trends, enhanced
product offering with the addition of QMS, expanding global presence, and
significant OEM agreements, we are raising our 2000 revenue estimates from
$63.1 million to $85 million and initiating a 2001 estimate of $126 and
enthusiastically reiterate our BUY rating.
Fourth Quarter Highlights
During the quarter, Sagent completed the acquistion of QMS, a third-party data
syndicator and software provider. Sagent reported strong results in all the
areas of its business. License revenue grew 150% year-over-year to $9
million, 13% above our $8 million estimate excluding results from QMS. The
impressive product revenue growth continues to be driven by Sagent's Web
enabled end-to-end data transformation, analysis and reporting solution. In
fact, the company added 155 new customers in the quarter and released version
4.1 which contains additional reporting and analysis functionality. Operating
expenses of $12.9 million were somewhat higher than our $9.2 million estimate
due to increased investments in sales and marketing and research and
development, as well as the additional costs from QMS. The company currently
employs 42 direct sales reps. We expect total expenses to increase in 2000,
as a result of heavier investments in marketing programs, ongoing sales hires,
and additional resources devoted to the joint development Web application
initiative with Commerce One, which is expected to start in Q1'00. While the
increase in expenditures and the higher tax rate (due to the completion of use
for tax loss carry forwards) will modestly impact earnings per share, we feel
these are important strategic investments. We are very comfortable with the
increase spending plan given the company's accelerating revenue growth. On
the bottom line, the company met our $0.03 EPS estimate. Including the QMS
acquisition and the one-time charge for $6.8 million, earnings per share came
in at a loss of ($0.22).
The balance sheet remains healthy with cash balances decreasing to $38.2
million due to the QMS and international subsidiary acquisitions. Deferred
revenue increased to $5.9 million and DSO's moved up just slightly to 62 days,
still well below industry norms.
OEM Agreements Offer Major New Revenue Opportunities
We remain extremely optimistic about the potential for synergy and
differentiation from the QMS agreement, and believe there is upside to our
revenue model given the smooth integration of the two companies. QMS, with its
massive array of demographic, household and business information, provides a
unique source of market information that can be blended with internal customer
transaction data and processed through the advanced analytical capabilities of
the Sagent platform. Sagent signed two important new OEM partnerships in the
quarter with Interpath and Boeing Credit Union. Interpath, an ISP and
application service provider for SAP, will embed Sagent's solution into its
offerings for its Web reporting capabilities. Boeing will use Sagent to offer
additional Web services to affiliated credit unions. Sagent will realize
revenue on a transaction basis from this agreement. We believe this new
revenue stream adds higher forecasting visibility. Equally important are the
company's existing OEM agreements with Commerce One and Siebel. We believe
these partnerships represent significant revenue opportunities and expect
Sagent to begin to realize revenue from them starting in second half of 2000
(refer to our December 13 research note for further details). The company
will begin a joint application development effort with Commerce One this
quarter. While no launch date has formerly been set, we believe the company
will deliver the new Web-based solutions within the next two quarters.
Despite the Recent Stock Run-up, Sagent Remains Largely Undervalued
Relative to many of its peers, Sagent's stock remains relatively cheap. The
company is growing at a much higher rate than many of its competitors and
continues to post impressive financial gains. The large discrepancy in the
market capitalization in relation to its industry group is unwarranted, and
given the strong historical performance and optimistic outlook we would be a
buyer of Sagent at these stock prices.
Table 1: Market Capitalization Analysis
Company Market Cap./
(in millions) '00 Revenue
Sagent 8.3
Brio Technology (BRYO $42.44, BUY) 9.9
Broadvision (BVSN $137.75, NR) 73.8
Vignette (VIGN $194.00, BUY) 80.7
Informatica (INFA $90.00, NR) 16.7
Actuate (ACTU $49.88, NR) 21.3
Broadbase (BBSW $86.00, NR) 69.4
Given the strong momentum in Sagent's business, synergistic acquisitions,
expanding distribution channel, low valuation, and the healthy spending
outlook for Web-based analytical applications, we enthusiastically reiterate
our BUY rating.
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