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To: tonyt who wrote (38454)	2/7/1999 11:16:00 AM
From: Glenn D. Rudolph	Respond to of 164687

17 In an effort to deliver greater reach and more branded content, the opening of the Network should prove to be a real boon to advertisers/agencies who liked working with DCLK, but needed more flexibility and options. New non-exclusive Network members include: USA Today, Prevue Online, Internet Movie Database, Court TV and the Daily News. Our initial take on these developments is quite positive and we will be meeting with DCLK early next week to discuss it further. Look for an update in the next Internet Capitalist Netscape (NSCP) Marc Andreessen, currently Cofounder and EVP - Products at NSCP, will join AOL as CTO once the merger closes. Though the exact role he will play at the firm is somewhat cloudy, the important point here is that AOL values Netscape's software assets dearly, an idea embedded somewhere in the CTO offer. Sterling Commerce (SE) Sterling Reports An OK December Q Sterling Commerce reported Q1 (Sept FY end) results in-line with consensus estimates last night after the close, posting EPS of $0.33 (up 25% y/y) on total revenue of $141mm (up 39% y/y). Revenue slightly beat our estimate (by $1.6mm). Internet related revenue was $39.6mm, representing 28% of revenue (and up 40%y/y). While management was pleased with this number, we think e-commerce is likely to start experiencing such hyper growth that we would expect to see Internet related revenues even higher in the coming quarters. Software and Services Were At the Low End of the Range, Impacting Gross Margin Software and services revenues were both at the lower end of the range . Software revenue was $49.7mm; services revenue ($57.4mm) was also lower than expected ($1.2mm below our estimate). When pressed on what the weak link this quarter was, management explained that the XcelleNet acquisition had not ramped up as quickly as they expected (a salesforce re-org and compensation plan change caused some defections, all of which have been replaced), but did anticipate that it would be on track next quarter and for the rest of 1999. The lower-than expected software sales negatively impacted gross margin, which came in at 78%, down slightly from 81% last year. Guidance continues to be for gross margin in the low 80s for the rest of the year. SE's Other Metrics Remain Stable International revenue continued to grow as a percentage of total revenue. Over the last few quarters, it has predictably, albeit not spectacularly, inched up from 20% to 21% and now to 22% of total revenue. Product support provided the greatest up tick this quarter. At $33.7mm, it grew nicely to 24% of revenue (up 53%y/y and 11%q/q). SG&A came in at 40% of total revenue (matching our estimate). Likewise, product development slightly beat our estimate (by 500 basis points) at $9.2mm, 7% of total revenue. The capitalization rate was 38% and the tax rate was slightly below our estimate at 36.5% - tax rate guidance continues to be in line with our estimates for the rest of FY99 at 37%. According To Management E-Commerce Spending Trends Continue to be Positive According to management, Y2K issues have not slowed EC development. SE's clients want to take advantage of the Internet as an opportunity to broaden trading relationships throughout their enterprise, and as such are adopting IP-based EC solutions (that is, Internet-based) en masse: Sterling stated that all of the trading partners that they are adding to their large customer's trading hubs (communities) are IP-based and that 50 of SE's top customers are “committed” to being fully IP-based within the next year. SE's Internet revenue stands to benefit nicely from such client demand and added significant new customers in the December quarter including Deutsche Telecom,