Will Sizzling Software Firm Crack the Vault?
Sanchez Computer may make its 238% gain in '97 look like small change if it defies
critics and lands a big U.S. customer.
By Aaron Task
Proving that not all tech stocks are created equal -- or are equally exposed to the slowdown
in Asia -- shares of banking-software concern Sanchez Computer Associates (SCAI) surged
64% in the fourth quarter. Meanwhile, the S&P 500 is up a meager 2.5% over the same time
period, while the tech-heavy Nasdaq has slid 7%.
Sanchez's recent gains come amid heightened expectation that the firm is about to land a
major contract with Citicorp (CCI), the second-largest bank in the United States and the No.
1 issuer of credit cards in the world. Such speculation, founded primarily on the fact that
Sanchez does business with Citibank Canada, has enabled the Malvern, Pa.-based firm to
overcome the ironic fact that it generates more than 50% of its revenues overseas and has yet
to establish a significant presence in its home country.
Sanchez officials, whose shares have steadily risen to a recent high of $28 from a low of $5 in
April, acknowledged in an interview that a major deal announcement is near, but declined to
name their new customer. "I'm signing the contract (this week), but they won't sign on their
side until mid-January, because we're caught in a holiday schedule," said Frank Sanchez,
president of the firm that bears his name (and that of brother Michael, the company's
chairman). "I can't go further because we haven't formalized an agreement and I don't want to
put anything in jeopardy."
While supporters of the company crow that it has won contracts from Malaysia to Trinidad
to Poland with superior technology and service, critics complain that it's an unprofitable
venture that has inflated its net worth with overly aggressive accounting. Detractors also
claim that a company that had a market capitalization of less than $60 million a year ago is
unlikely to land a deal with a $57 billion giant of Citicorp's kind.
But Sanchez, now sporting a market cap of $300 million, will have the last laugh if the big
contract does come to pass, supporters say. An agreement with a high-profile player like
Citicorp, or a similar firm, will open up doors domestically that have so far only been
swung free in smaller or less-mature banking systems. Two of the company's most recent
contracts were signed with Credit Union Central of Saskatchewan and Credit Bank of
Poland. Not exactly household names.
Frank Sanchez, president, said a deal has been struck but the details can't yet be divulged.
The key is for them to get a large domestic bank that domestic investors will recognize. -- Chip Whitman
On the other hand, the company has inked a worldwide deal with Dutch financial services
giant ING Groep N.V. (ING) that gave it credibility on the international front. And the
company has partnered overseas since its founding in 1981 with software giants Digital
Equipment Corp. (DEC), Hewlett-Packard (HWP), Oracle (ORCL) and International
Business Machines (IBM) and, more recently, with Price-Waterhouse.
But a deal with the likes of Citicorp could make the company a much bigger player at home.
Analysts who follow the company say such an agreement would lead to income gains -- and
stock price appreciation -- that will help shareholders overcome their chagrin at missing out
on the 238% generated by Sanchez's stock in 1997. Citibank officials could not be reached
for comment.
"The potential for earnings to increase and for new business to come in makes the stock so
attractive," said Chip Whitman, an analyst at Wheat First Butcher Singer, who has
recommended the shares. "The key is for them to get a large domestic bank that domestic
investors will recognize." Wheat First underwrote Sanchez's initial public offering in
December 1996, along with J.P. Morgan.
Signing up a big U.S. bank would also be a major stepping stone in helping Sanchez reach
its goal of taking a dominant position in the software market for the world's top 1,000 global
banking institutions -- a market Frank Sanchez estimates to be around $20 billion. Through
its main product, PROFILE/Anyware, and auxiliary programs, Sanchez claims his company
can offer banks a multi-currency, multi-language bank production system that supports a
broad range of customized personal banking functions on a variety of platforms, including the
Internet.
Sanchez's products seem to be perfectly placed to take advantage of both the globalization of
banking and the advent of electronic commerce. In addition, the firm's products are
client-server based -- rather than mainframe-based -- and compliant with the "Millennium
Bug" issue that could wreak havoc on computer systems worldwide when Jan. 1, 2000, rolls
around. The coming European monetary union is also expected to heighten demand for
PROFILE/Anyware.
But some naysayers believe an agreement with a major U.S. bank will prove elusive.
People who make bets based on that type of logic deserve to lose money. -- hedge fund manager
"I'm not sure Citicorp lawyers are burning the midnight oil to convert their entire global system to a company that did less than $20 million in revenues last year," said one
hedge-fund manager who claims to be shorting Sanchez stock. "People who make bets based
on that type of logic deserve to lose money."
This player, who spoke on the condition of anonymity, and said he's not working in
collusion with other hedge funds, also accused the company of bad accounting and of having
a hard time collecting its debts. Here's a rundown of the "inconsistencies" this arbitrageur
sees in the Sanchez accounting:
Receivables: The backlog of money owed to the firm has grown to 162 days' sales
outstanding at the end of the 1997 third quarter from 119 days at the end of the
June quarter, and up from 98 days in the third quarter of 1996. This short-seller
claims the problems are due to the inability of one of Sanchez's largest clients,
Poland's PKB Warsaw, to make payments.
Aggressive accounting. In December 1996, Sanchez signed its first Asian
contract, with BBMB of Malaysia. The deal accounted for 79% of the $4.92
million in revenues reported for the December 1996 quarter -- and contributed 22%
of the $17.7 million in revenues booked by the company in all of fiscal 1997. The
hedge-fund manager also claims that Sanchez "front-end loaded" three years' worth
of service revenues in a job booked with PKB Warsaw in December 1996.
Lackluster results. Excluding the $1.8 million in revenues from the
Saskatchewan deal signed in the third quarter, Sanchez's revenues from software
licensing in the past four quarters are as follows: $2.4 million in the third quarter;
$2.8 million in the second; $2.3 million in the first; and $1.9 million in the
fourth quarter of 1996. Save for a strong 10-cent-per-share performance in the third
quarter of this year, the company's earnings per share have been mired in a range of
between 3 and 5 cents per share for the past three years. "That trend is not evidence
of strong growth," the hedge-fund manager said.
Show me the money. Sanchez's cash position stood at just over $14 million at
the end of its third quarter, down from $15.4 million at the end of its fourth quarter
1996. "I'm telling you, this company is cooking the books, burning cash,
reporting phony profits," the hedge-fund manager said. "A software company with
90% gross margins should be printing cash, but they are losing money. The
company is unprofitable."
Sanchez executives refuted the fund manager's charges, declaring that the rise in receivables
stems from a "mismatch" of its contracts, leading to "contracted but uncollected bills."
Company officials concede that some Asian customers are having trouble making payments.
But Frank Sanchez said the contract problems will be "cleaned up" in the fourth quarter,
adding that he is working with Asian customers to develop new pay schedules. "We've had
zero bad collections," Sanchez said.
CEO Ronald (Zap) Zlatoper denies his company has cooked the books.
As for the quarterly profits, Sanchez chief executive officer Ronald (Zap) Zlatoper retorts that
Sanchez has bested analysts' expectations in each period since it came public and produced
revenues of $19 million in the first nine months of 1997 -- outstripping its take for all of
1996. Zlatoper, whose job prior to joining Sanchez in April was as commander of the U.S.
Navy's Pacific fleet, denied any accounting impropriety. "I am very comfortable with the
nature of the books we're keeping," he said. "If I felt we were pressing aggressively, I'd rein it
in, because I'm looking for long-term growth."
The CEO said the company's cash position has dwindled because it spent heavily this year
to increase its staff and open a second building at its suburban Philadelphia headquarters.
Frank Sanchez added that the company has contributed about 30% of its revenues to product
development, which includes research and development, as well as increased spending on
sales and marketing.
"If you wait around for fourth-quarter results, our cash position will go up," Zlatoper said.
"The nature of our business is that we tend to get money in large chunks. We get 40% of a
licensing fee the day we sign the contract."
Which brings us back to the big banking contract Sanchez officials hint is all but a done
deal, and sources close to the negotiations say could be worth upwards of $30 million.
If the contract is signed, Sanchez will book a portion of the fee for its fourth
quarter, likely leading to results far above the 10 cents per share analysts are
currently expecting.
Beyond that, a deal with Citicorp or another player of its size and prominence will
give Sanchez credentials that likely will drive its profitability substantially higher
for many years to come.
For investors willing to take the risk, now could be a great time to get in on a technology
that some say is the future of banking. Sanchez insiders hold 23% of the company's stock,
while 24% is owned by Safeguard Scientifics (SFE) -- a Pennsylvania firm that acted as a
sort of venture capitalist for the young firm. Institutions own less than 5% of Sanchez stock.
According to U.S. Securities & Exchange records, none of the insiders have made major
sales of their stakes during the recent run-up in price.
For the more squeamish, on the other hand, there's no harm in waiting for the
announcement. After all, if it doesn't materialize, much of stock's gains in 1997 will likely
erode in the coming year. You can bank, at least, on that. |
