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Technology Stocks : Hyperion Solutions (HYSL) - An Analytical Gorilla? -- Ignore unavailable to you. Want to Upgrade?

To: Exacctnt who wrote (282)	12/10/1998 12:40:00 PM
From: Grabs	Read Replies (1) \| Respond to of 471

Details of BT Alex Brown report: HYSL: DECEMBER QUARTER LOOKING MORE BACK-END LOADED--LOWERING REVENUE ESTIMATES AND DOWNGRADING INVESTMENT RATING TO "BUY" Bankers Trust Research/BT Alex. Brown Research W. Christopher Mortenson,Michael Shea December 10, 1998 <Picture> <Picture> <Picture> Mortenson, W. Christopher 212-237-2432 12/10/1998 Shea, Michael 212-237-2437 BT Alex. Brown Incorporated --------------------------------------------------------------------------- ---- HYPERION SOLUTIONS CORPORATION [HYSL] "BUY" December Quarter Looking More Back-End Loaded, Lowering Revenue Estimates And Downgrading Investment Rating To "Buy" --------------------------------------------------------------------------- ---- Date: 12/09/1998 EPS 1997A 1998A 1999E Price: 26.25 1Q 0.11 0.17 0.28 52-Wk Range: 51 - 12 2Q 0.14 0.21 0.31 Ann Dividend: 0.0 3Q 0.10 0.21 0.30 Ann Div Yld: 0.00% 4Q 0.35 0.63 0.75 Mkt Cap (mm): 780 FY(Jun.) 0.70 1.22 1.65 3-Yr Growth: 38% FY P/EPS 37.5X 21.5X 15.9X CY EPS 0.83 1.43 1.81 Est. Changed Yes CY P/EPS 31.X 18.3X 14.5X --------------------------------------------------------------------------- ---- HIGHLIGHTS: -- Stock down sharply on 12/9 based on concerns of the December quarter being more back-end loaded and potential revenue shortfall. -- We believe that recent softness in the sales of applications products could lead to a modest revenue shortfall in the F2Q (Dec.). We believe the key issues relate to merger integration and transition problems. -- HYSL's stock has struggled since May when the Arbor/Hyperion merger was announced. Revenue softness and concerns about merger integration could keep a lid on stock price appreciation for the next 6 months or so. As such, we are lowering our investment rating on the shares from "strong buy" to "buy". -- We are lowering our revenue estimates as well but expect, that over time, Hyperion can achieve at least 35% top and bottom line growth. DETAILS: Hyperion Solutions stock lost roughly 21% of its value on 12/9 due to a variety of rumors regarding a weakening business -- at least one of which was true. As best we understand it, the Company's CFO, in meetings with investors on 12/8, was somewhat cautious about the current quarter's revenue outlook. Specifically noted was that, as in the September quarter, applications sales were somewhat below plan and that, overall, the quarter was more back-end loaded than expected. EPS appears not to be at risk given the continued realization of cost benefits from the Arbor/Hyperion merger that are better then expected. Weak application revenue (and greatly better than expected EPS) occurred in the September quarter and was attributed primarily to temporary merger-related issues. While we do not believe that more fundamental problems exist, it is disconcerting that the weakness has carried over for a second quarter. We are lowering our revenue estimates for the F2Q and beyond to reflect this trend. Given the ongoing investor concerns about issues like merger integration and given ongoing cautious comments from management, we now believe that HYSL's stock could remain under pressure for at least another quarter or two. While we remain positive about the Company's longer term opportunity and by its relatively low valuation, we are lowering our investment rating on the shares from a "strong buy" to a "buy". We have been positive about the outlook for Hyperion Solutions since the merger of Arbor and Hyperion Software was announced last May. The combined Company is a leader in OLAP technology (EssBase) and analytic applications (Enterprise and Pillar). The merger was completed in August and September (F1Q) quarter results were a bit light of our revenue estimates while dramatically exceeding our EPS estimates. The revenue shortfall was in the applications area and was attributed by management to merger-related transition issues. Management also noted that the license revenue flow during the quarter was more back-end loaded than the model which Arbor had prior to the merger (the merged company's CFO is from Arbor) -- a point which has continued to be emphasized in the current quarter. While we lowered our total revenue estimate for the F2Q (Dec.) back in October (from $124 to $119 million), we now sense that our estimate is still too high and results could end up being closer to $115 million. The issue appears to continue to be in the applications business and the cause seems to be related to sales execution during the merger transition. With 3 weeks left in the quarter, it is hard to be more definitive. However, we are more concerned about the softness in applications sales and the apparent lack of sales synergies to date. We belive that the Company can get back on track, but that it could be the June quarter at the earliest. Given the level of uncertainty about the business and management's cautious comments, we do not expect significant upside potential for Hyperion's stock price near term. As such, we are lowering our investment rating on the shares from "strong buy" to "buy". We are also lowering our revenue estimates as follows: EPS REVENUE New Old New Old F1999E 2Q 0.31 0.31 115.0 119.0 3Q 0.30 0.30 120.0 124.0 4Q 0.75 0.75 160.0 165.0 Total 1.65 1.65 500.0 513.0 F2000E Total 2.25 2.25 690.0 710.0 Source: Company data, BT Alex. Brown Incorporated estimates