BancBoston Robertson Stephens Analyst still maintain BUY rating,
saying that by year end CATP's price will be significantly higher than
whatever low it may get this time. Enjoy!
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08:26am EST 19-Mar-99 BancBoston Robertson Stephens (Birer, Steven 415-248-409
CATP: Cambridge Pre-Announces Revenue and Earnings Shortfall; ...
March 19, 1999
C A M B R I D G E T E C H N O L O G Y P A R T N E R S
Cambridge Pre-Announces Revenue and Earnings Shortfall;
Estimates Under Review but Maintain Buy Rating
Key Points:
** Cambridge pre-announced results below street expectations for the company's
March quarter. The company expects a revenue and earnings shortfall for the
full year as well. Cambridge expects revenues for the quarter to come in at
$148 million to $151 million and earnings to range from $0.12 to $0.14 per
share. These results fall significantly short of our $165 million and $0.23
estimate.
** The revenue shortfall is largely attributable to transitional issues arising
from Cambridge's ongoing reorganization. We believe it is taking Cambridge
longer than anticipated to build out the organizational structure for its
new service-line focus and move away from its former regional focus which
impacts both the company's ability to generate revenues as well as forecast
results. Poor execution in Customer Management Solutions, continuing
weakness in Custom Software Solutions, and slowing ERP sales contributed to
the revenue shortfall.
** On a bright note: Cambridge's Interactive Solutions unit (primarily Internet
and web enabled solutions) continues to see strong growth and demand. This
unit is growing more than 90% annually and may exceed initial expectations
of $120 million in revenues for the year. To take advantage of this growth
opportunity, Cambridge has been investing in this business and redeploying
personnel from slower growing and less profitable practices.
** We are currently reviewing our estimates. Initial guidance for the year
calls for revenues of $660 million to $675 million and EPS of between $0.72
and $0.74. This is down from our estimates of $763 million and $1.12.
Management will be working with analysts in the coming week, and we will
update our model as we receive additional information.
** We maintain our Buy recommendation. We continue to believe that Cambridge is
a company in transition. While the miss in the current quarter is larger
than we might have expected, we continue to believe Cambridge will end 1999
and start 2000 as a more competitive player in a stronger marketplace. We
expect shares of Cambridge to finish 1999 significantly higher than whatever
low they hit as a result of the current shortfall.
Cambridge Pre-announces Shortfall
Cambridge Technology Partners announced that it expects 1Q-99 and full year
results to fall short of expectations. Based on a preliminary review of the
quarter, revenues are expected to be between $148 million and $151 million, and
earnings per share to be in the range of $0.12 to $0.14. For the year, the
company is projecting revenues of $660 million to $675 million, with earnings
per share of $0.72 to $0.74. These projections fall significantly short of our
expectations of $165 million in revenue and earnings per share of $0.23 for the
quarter and $763 million and $1.12 for the year. Weakness is due primarily to
restructuring initiatives taking longer than expected and reduced demand for
package software implementations in the Enterprise Resource Solutions (ERS)
business.
Restructuring Delays are the Principal Cause
First, Cambridge's restructuring from a geocentric operating model to one that
is focused along service lines has taken longer than expected. Repositioning
personnel according to the new structure has been slower than anticipated, and
as a result many key managers were not in place until February. When combined
with the natural disruption of the reorganization, Cambridge found itself
unable to close sufficient projects during the quarter. Several delays in the
start-up of several new projects only compounded the problem.
Weak ERP Demand also Contributed to Shortfall
Next, weak demand for package software implementations hurt the performance of
Cambridge's ERS business unit. Market demand has dropped as the market has
matured and companies have diverted IT spending towards achieving Year 2000
compliance and other mission critical applications. Unfortunately, Cambridge's
rapidly growing services, such as e-procurement, and web-enabled solutions,
have not been able to offset both the decline in ERS and inadequate sales
execution as discussed above.
With Managers in Place, Performance Should Sequentially Improve
While the extended period of time required for the restructuring and the
disruption to the organization are disappointing, the appropriate personnel
appear to now be in the proper places. We expect Cambridge to improve its
sales execution now that it is able to get the appropriate teams in front of
clients in order to win business. With the exception of demand for package
software implementations in the ERS practice, demand appears largely healthy in
the other service areas. Utilization should improve as Cambridge rebuilds its
backlog and pipeline, and the company is also transitioning personnel from
slower growing, less-profitable business areas to faster growth, higher-value
service areas such as Interactive solutions.
Our Estimates are Under Review
We are currently reviewing our estimates. Initial view of 1999 calls for
revenues of $660 million to $675 million, representing 8% to 10% revenue growth
over 1998. Earnings per share of between $0.72 and $0.74 will show a decrease
from $0.91 reported in 1998. These projections are down from our 1999
estimates of $763 million and $1.12. Management will be working with analysts
in the coming week, and we will update our model as we receive additional
information. A revenue breakout along business lines is shown below.
Conclusion
Despite the current hiccup in results, we continue to maintain our Buy
recommendation on Cambridge for 2 reasons: price and longer-term prospects.
With respect to price, we believe that shares of CATP may test their 52 week
low today, which would place Cambridge's market capitalization below $1
billion. In our opinion, Cambridge's interactive solutions business as a
separate company would warrant a valuation of about $1 billion based on public
company comparables of 9 times current year revenues. Thus, at a $1 billion
market capitalization, it is like you are getting the rest of the company for
free. In the longer term, we continue to believe that as 1999 progresses,
Cambridge's internal reorganization will have a positive effect on the company.
Concurrently, we believe that the underlying IT services market will strengthen
as Year 2000 uncertainty dissipates. Thus, while there is likely to be
continued volatility in both the company's operating performance and stock
price during the year, by yearend we believe that Cambridge will be a better-
positioned company in an improved marketplace. As such, we think shares of
CATP will experience significant appreciation from whatever low they hit as a
result of the current pre-release.
THE COMPANY
Cambridge Technology Partners, headquartered in Cambridge, MA, is one of the
largest information technology consulting and implementation firms focused on
client/server distributed applications. The company custom-develops and
integrates software applications, closely "partnering" with its clients to
allow for rapid development and implementation of strategic client/server
applications. Cambridge has grown to become a "one-stop" shop with a full
range of IT services such as custom application development as well as packaged
software implementation, business consulting services and educational and
training services across a range of domains, including customer management
systems, knowledge management systems, electronic commerce, enterprise resource
systems, and network management services. Cambridge maintains partnerships with
Sun, HP, PeopleSoft, Scopus, Vantive, Siebel, Baan, and others. The company's
differentiating strategy is to guarantee a solution in a fixed time frame at a
fixed cost through a series of phases, thereby increasing a client's return on
investment. In most situations, Cambridge takes six to nine months to deliver a
usable system to a client.
INVESTMENT THESIS
In our opinion, Cambridge Technology Partners is one of the leading service
providers in the systems integration and IT consulting space. The market for
client/server application implementation is large and rapidly growing; even
most "off-the-shelf" packaged applications require some degree of
customization. We believe Cambridge Technology Partners will be able to
capitalize on this growth and, with its fixed cost and fixed time frame on
client engagements, is positioned to command premium prices from customers.
Cambridge's market dominance, acquisition experience and easy access to capital
puts the company in a favorable position to be the leading consolidator as the
market matures, acquiring smaller, local integrators in order to add to
Cambridge's geographic and product diversity. We believe the company stands out
from many other public client server integration companies due to its focus on
high-end services as well as its strong infrastructure and broad geographic
presence. We expect the company to continue adding 10-20 percentage points to
growth via acquisitions, with one to two non-dilutive acquisitions per year.
In addition, we believe Cambridge has established itself as the brand name in
the client/server systems implementation market and is likely to gain share
based on that reputation.
INVESTMENT RISKS
Among the risks are: (1) fluctuations due to the timing of employee hiring and
project engagements; (2) the company's ability to hire and train personnel in a
very competitive recruiting environment; and (3) successful management of
acquisitions, rapid growth, and risk on larger enterprisewide application
development projects. |
