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Technology Stocks : Zitel-ZITL What's Happening -- Ignore unavailable to you. Want to Upgrade?

To: Blue_Horseshoe who wrote (16483)	7/10/1998 10:49:00 AM
From: James Rembar	Read Replies (5) \| Respond to of 18263

Z's prior track record provided little useful information to evaluate its future potential. Z remains a story stock, though some of the initial chapters have been sketched out. Recent information gives us an opportunity to think about what could develop in the future: 1. Through FDC, Z has begun to remediate code for NIH and, interestingly, NIH is offering conversion services to all federal government agencies for $1.12 and $1.05 per LOC (for larger contracts). This suggests that Z will receive over .50 per LOC. The figures most often cited for NIH indicate about 120 million LOC. I have spoken to NIH recently and they report that they are "very happy" with the initial renovated applications. There is a potential here for business to Z of over 100 million LOC at something more than .50 per LOC. Thus revenues may exceed $50 million from this one contract? 2. There is a second government contract for Z through FDC, rumored from different quarters to be the State Dept. I don't know any estimates on State's LOC, but it is not a small Dept. Perhaps the potential here matches that of NIH. These two contracts could bring huge revenues to Z. What are their costs and profit margins? Z's Solution Services Division has 10 employees and even it further hires are made, costs are a minimal part of the picture, with the exception of whatever they pay to MD (whose profit ultimately benefits Z). What about MD? 3. The significance of the alliance with Keane is not fully known at this point. However, Keane has been far from satisfied with work done by Peritus and Viasoft. This seems to have set the stage for Keane, with its 45 offices and massive amounts of code (estimates are on the order of one billion LOC being brought to remediation stage), to turn to MD to help them with conversion services that they have been unable to provide as yet. It is not far-fetched to speculate that Keane could send this much code to MD. And this does not include code that will continue to be brought to Keane (they seem to have stopped announcing the number of contracts after they passed 500!). Possibly Keane has no choice other than MD, given the growing evidence of MD's speed and accuracy. 4. Less is known, at least on this side of the Atlantic, about Logica. However, it is known that they are a very substantial company, perhaps approximately the size of Keane. The same line of reasoning can be applied here in terms of massive amounts of code going to MD's technology ("a quantum leap ahead of anything else in the market," according to Logica). 5. We have not heard from NG about a subsequent contract with the Army. However, Government agencies are not known for moving fast. For example, rumors about NIH contracting with Z go back to last year. Certainly the possibility exists that large business can come from this direction. 6. Much has to be left out because so little data is available. What might come from Japan, South Africa, or from the many other TA's MD has signed? It is clear that the federal government, foreign governments, and foreign businesses lag far behind US business and it is not clear how far along even US businesses are. So, multiple possibilities exist for MD, and for Z, to develop business in the range of 100's of millions of LOC and even in the range of billions of LOC. Profit margins for MD could be 80% or 90% because of the effect of their automated process. MD currently has about 150 employees. If large amounts of code come in, their costs will be a tiny fraction of revenues. There are many possible scenarios. Let's pick one: MD does a billion LOC at .50 per LOC and generates $500 million in revenues, perhaps $400 million or more in profits. Z currently owns more than 1/3 of this. What happens if production is significantly higher? What happens if the "tidal wave" so many expect in Y2K business finally hits? What if, not only huge numbers of LOC comes along, but pricing is indeed forced up? What has been left out altogether is MD's potential for post-Y2K business. The strength of their technology was developed for code maintenance, a very large ongoing business opportunity. Their current focus on Y2K is only a specific application of this technology. MD's "quantum leap" advantage should serve them well as they transition past the bonanza of Y2K business as it tapers off in SEVERAL years. Clearly, these possibilities are filled with imprecision and speculation. However, based on emerging information,there has never been so much good reason to engage in such projections about revenues and profits for MD/Z.