TechWeek: Growth by the Numbers
Bill Snyder
09/16/05 - 06:11 PM EDT
Hard as it may be to think of
Computer Associates(CA Quote) as anything but a case study in irresponsible management, it's worth remembering that the Long Island-based giant was the
Oracle(ORCL Quote) of its day in the mid-1990s. It dominated its sector, mainframe and system management software, it was headed by a hard-charging, controversial CEO, and most importantly it swallowed competitor after competitor during its rise.
Why wander down memory lane? Because CA, according to A.G. Edwards analyst Kevin Buttigieg, illustrates how the market values companies that attain most of their growth through acquisition, while evidencing limited organic expansion. The answer: not as well as you might think.
In CA's heyday -- 1995 to 1998 -- its stock traded at a 23% discount to the software industry's relative price-to-earnings ratio and at an approximate 10% premium to the valuation of the
S&P 500.
Now look at Oracle, which this week agreed to fork over $5.85 billion in cash for struggling
Siebel Systems(SEBL Quote), the latest course in a nine-company takeover binge that has cost the company more than $17 billion if all deals close. Oracle, the database and enterprise applications software giant, is now trading at about 18 times estimated 2005 earnings, while its peers are trading at about 26 times earnings -- which equals a 31% discount -- and the
S&P 500 is at 16 times earnings.
All in all, Oracle offers a much lower premium than most tech stocks are awarded vs. the broader market.
Likewise, says the analyst, Oracle stock is getting more expensive on a basis of enterprise value-to-cash flows, since the acquisitions are draining cash on the balance sheet as well as cash flows for restructuring expenditures. "Either way, despite the merits of the Siebel transaction, it is not likely to drive Oracle's stock out of its trading range." he says.
Indeed, with a few relatively brief exceptions, shares of Oracle have traded between $12 and $14 for the last two years, appreciating by just 10%. Still, that's a better performance than other tech bellwethers;
Microsoft(MSFT Quote), for example, has been essentially flat in the same time period, losing 3% of its value, while
Cisco(CSCO Quote) lost 14% of its value, and
Intel(INTC Quote) dropped 16%.
Buttigieg, whose company does not have a banking relationship with Oracle, added that his analysis does not imply a downward valuation for the stock.
Although the acquisition has met with plenty of
buy-side cricitism (and some support on the sell side), it's worth noting that one of Oracle's major talking points is Siebel's installed base of some 4,000 customers, which in the second quarter pumped $122.8 million in recurring maintenance revenue onto the top line. Services and other revenue added another $112.5 million. PeopleSoft, of course, delivers even more maintenance revenue.
Moreover, those customers aren't defecting, despite major campaigns by arch-rival
SAP(SAP Quote).
But then the PeopleSoft deal closed less than a year ago. As time goes by and maintenance agreements expire, the loyalty of customers thrust under the Oracle umbrella will be much easier to gauge. My bet: The vast majority will stick around. Ripping and replacing enterprise software is a painful, expensive proposition that few will undertake unless Oracle is so careless, or so arrogant, that it makes its new customer base utterly miserable.
Looking forward, there's sure to be a lot more discussion of the acquisition after the closing bell Thursday when Oracle reports earnings, and late next month at the company's analyst day in New York.
Making Cognos Loony?
If you blinked, you might have missed what
Cognos(COGN Quote) called the biggest product launch in its history. Despite a showy Webcast to 12 cities, the launch of its Cognos 8 business intelligence software, the Canadian company's best hope to fend off Microsoft, didn't get a lot of attention outside the trade press.
Even so, the success -- or lack thereof -- of the flagship product will do much to determine the shape of the business intelligence software market for the foreseeable future.
Like the rest of the software world, the business intelligence companies are under pressure to consolidate as customers tire of buying from -- and paying high maintenance fees to -- a multitude of vendors. The big dogs, such as Oracle, Microsoft and SAP, have been moving onto their turf, offering at least rudimentary (in the case of SAP,
very rudimentary) BI capability. But now the world's largest software company is poised to make a serious dent in the $4.7 billion market with the release of its new database -- SQL Server 5.
Cognos 8's claim to fame is a new architecture that combines the functionality of nearly all of its products into one package. Although that sounds like a simple bundling tactic, it's actually quite a bit more sophisticated.
IDC analyst Dan Vesset says Cognos "did a great job with Cognos 8 and have they are very good at executing on new products." Even so, the product is not "game changing," and we'll likely see a similar move when rival
Business Objects(BOBJ Quote) updates its major products later this year. Although few analysts expect Microsoft's product to be as robust as those offered by the "best of breeds," it certainly has the ability to offer great prices and a lot of convenience for companies already running its database.
Vesset, added that Cognos' ReportNet, a product that shares the underlying technology in Cognos 8, has been an exceptional money maker, driving some $100 million in revenue last year,
Cognos 8 won't be available until sometime in November; the company won't give an exact date, so it isn't likely to have a large impact on revenue in the current quarter. How quickly it will, isn't clear.
That's because the best targets -- existing customers who already are paying maintenance fees -- will get the upgrade for free.
But CFO Tom Manley says that Cognos 8 contains a variety of features customers will want to deploy after the initial upgrade -- and those cost money.
Cognos has had a tough year on Wall Street. Despite a run-up of about 10% in September, the stock is still down about 8% for the year, while Business Objects has appreciated by 38%.
This month's action is likely in anticipation of the company's second-quarter earnings release next week and hopes that Cognos 8 will be a home run.
TechWeek Scorecard
|
| Index |
Closing |
Change |
| Nasdaq Composite |
2160 |
-0.7% |
| Philadelphia Semiconductor |
475 |
-1.5% |
| Goldman Sachs Software |
168 |
0.0% |
| TSC Internet |
203 |
-0.5% |
