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Technology Stocks : FirstWave Technologies (FSTW) -- Ignore unavailable to you. Want to Upgrade?

To: Bob Trocchi who wrote (7319)	12/27/2002 3:23:45 PM
From: Bob Trocchi	Respond to of 9677

An interesting review of MSFT "snipped" from today's WSJ. FYI Bob T. >>Microsoft: Increasing Revenue In the 1990s, Microsoft's revenue grew largely in step with personal-computer sales. Not so lately. Last year, PC sales fell for the first time in 16 years, but Microsoft's revenue increased 13%. This year, the disparity has grown. In the third quarter, Microsoft estimates that PC unit sales increased 4% from a year earlier. But revenue at the Redmond, Wash., software maker increased 26%; revenue of the Windows group grew even faster, 33%. Net income more than doubled and Microsoft generated more than $6 billion in cash from operations. Revenue is outstripping PC sales largely because Microsoft has been driving users to more expensive versions of Windows. Nearly two-thirds of PCs are now sold with the "professional" version of Windows XP, which costs PC makers roughly $85, rather than the $45 "standard" version. A year ago, fewer than half of PCs carried the professional version, which is typically bought by businesses. Microsoft has further boosted revenue with a new licensing program that charges businesses an annual fee to get product updates. Many users grumbled, but analyst Rick Sherlund of Goldman Sachs estimates that two-thirds of large businesses ultimately signed up for the program. Microsoft says it was merely simplifying its previously confusing upgrade options, but analyst Robert Schwartz of Thomas Weisel Partners calls the program a price increase. He says many businesses will in effect pay twice for Windows by paying a license fee and then buying new computers since the upgraded software package isn't transferrable from the old machines. He estimates that this "double-billing" will eventually produce an additional $350 million in annual profit. Unlike most tech companies that have been furiously cutting costs, Microsoft is increasing spending. Microsoft plans to hire an additional 5,000 people this year as it seeks deeper inroads in the software that businesses use to run day-to-day operations. It continues to invest billions in its money-losing Xbox video-game console and MSN Internet service, two businesses it doesn't dominate but which it has identified as crucial to future growth. For years, Microsoft said its large cash pile was in part a reserve for the numerous lawsuits against the company. But some big legal threats, such as the U.S. government's antitrust investigation, are now largely resolved. Mr. Schwartz calls the $40 billion hoard "overkill" and says it is driving Microsoft to risky investments, such as Xbox and MSN, with "unacceptably low returns." Without directly acknowledging the complaints, Microsoft seems to have increased the pace of its stock repurchase program. In the third quarter, the company repurchased $3.5 billion of its shares, compared with $6 billion for the fiscal year ended June 30. Mr. Sherlund thinks an even bigger buyback program is likely, perhaps as much as $20 billion. <<

To: Bob Trocchi who wrote (7319)	12/27/2002 3:52:10 PM
From: Oeconomicus	Respond to of 9677

Bob, while I'd agree generally that license revenues should carry much higher gross margins than services (prof. svcs, maintenance, support), services for any kind of sophisticated business application vendor (mid & upper end accounting, CRM, ERP, etc.) are likely to produce significantly larger revenue numbers, so the contribution from them in dollar terms may be comparable or in some cases greater. I haven't done an extensive survey, but an enterprise player I know fairly well typically shows services revenues running about twice license revenues. For them, gross margins on licenses are upper 90% range while for services it is about half that. So, for every $100k of licenses, there is about $200k of services, together producing about $190k of gross profit - half from each. FSTW, as one might expect ;-), it an entirely different story. Take a look at the latest financials to see: firstwave.net YTD 2002, professional services and support produced about 5x the revenues from license fees. In addition, services margins ran about 68% while on licenses is was only 48% (31% in Q3). In Q3 a year ago, the margin on licenses was actually negative. So, what does that tell us? 1) margins on services are not likely sustainable, even if the revenue number is - and it's probably not either unless license sales pick up greatly. 2) license volume sucks. it barely covers the relatively fixed costs associated with it (amortization of capitalized software development costs being the biggest). Bottom line is, for whatever reason, services have juiced FSTW's revenues and margins this year. That doesn't make a lot of sense for a product where "ease of implementation" is one of the key selling points and is almost surely not sustainable. Furthermore, considering that .NET and the workflow tools are supposed to make things even easier, it makes even less sense to expect it to continue. JMO, of course, and you know how bitter I am. LOL, >VBG<, etc. ;-) Bob

To: Bob Trocchi who wrote (7319)	12/27/2002 6:02:38 PM
From: TEDennis	Read Replies (1) \| Respond to of 9677

Mr. T: re: Without the volume of SW licenses, SW profits will not offset services that are bound to drop Bingo !! Which means that revenues will decrease. Which is something that nobody wants to happen. Particularly now that the stock has risen so far so fast. I'm really curious what the sales force has been telling their prospects lately. "Our new .NET version is available now. Sign here on the dotted line." ? I don't think so. According to that rather strange email that RTB read at the RedChip conference, the "Wildcat IDE" was still being developed. Without that IDE, implementation customization will be difficult, if not impossible. Perhaps the new version is in Beta (or, Alpha ... or, pre-Alpha?). Would a salesman put his commission on the line for a Beta product, or would he sell the older version to be safe? Would a buyer go to the hassle of installing the older version if he knew a completely new version was "almost ready", when he knows that he'll want to upgrade as soon as the new product is released? If not, there's a good chance they'll delay their buying decision. Which means revenues for the quarter won't be as robust as hoped, assuming that projections were made based on the "availability" of the "best product ever" and the "best pipeline ever". Yet another reason not to pre-announce new versions. Particularly when you only have one product in your market basket. From an R&D perspective, having multiple new customers out there on various versions of the Beta product would be a nightmare. Any time they made a change to the root data structures, they'd have to do a mini-conversion of each of those Beta sites. That means scheduling a time that is convenient for the site. Which disrupts the ongoing installation and implementation activities. Hey !! Maybe that's what RTB meant when he said this new release was a true "disruptive technology" !! Anyway, these are trying times for the FSTW tech staff. I'll bet they'll be glad when life returns to "normal" ... meaning only 10-12 hour days instead of 16. Unless, of course, ALL the work is being done by the EL staff. In which case there's no knowledge transfer taking place from the EL staff to the FSTW staff ... which means extended involvement of EL staff after the product release ... which means lower consulting margins ... which means ... oh, never mind. [pause ...] Hey, wait a minute. You said something that wasn't glowingly positive. You better watch out. Somebody's gonna' claim you're bitter. Regards, TED