TSI Profits as Software Peacemaker

SAN FRANCISCO -- TSI International Software (TSFW) just wants everyone to get along.

It's a fact of our technological age that competing software companies often produce incompatible applications. Enter middleware, which gets software applications on a computer system to exchange information. It's the grease that helps square pegs fit into round holes. TSI takes that a step higher: Its software, called enterprise applications integration, links middleware and other software programs and helps them communicate even better.

"It's like you and I talking to each other," TSI CEO Connie Galley explains while sipping a cup of Earl Grey tea at the San Francisco Ritz-Carlton Hotel. "We may be able to hear each other, but it's pointless if we don't speak the same language and understand each other. That's what our software does. It's the difference between just hearing and understanding."

Recently, Galley and other executives at the Wilton, Conn.-based company have been fanning out to whip up enthusiasm among investors. And Wall Street seems to be listening. As of Thursday's close, TSI's stock is up 11% since the closing bell on Monday, the day the company presented at the BancBoston Robertson Stephens Investing in Innovations conference. Not bad given the recent weakness in technology issues.

Galley says the ability to make disparate applications work together is a key in building e-businesses. Companies not only have to make old back-end systems work with newer Internet-based applications, but they need to make applications work with software from other firms as more businesses link up to do business via the Internet.

Research firm IDC forecasts this market to grow about 80% in 1999 from last year, thanks to more demand from e-businesses. TSI has already outpaced that growth this year. Revenue increased 123% to $40.9 million in the first half of 1999 from the same period in 1998.

And TSI's revenue is expected to continue growing. Salomon Smith Barney analyst Neil Herman, whose firm has not done underwriting for TSI, projects the company will have 100% revenue growth for 1999 and at least 50% growth for next year. "In fact, [those forecasts] may prove to be too conservative and provide a potential upside to our EPS numbers," says Herman, who initiated coverage on TSI in July with a buy rating. Since June, SG Cowen and Seidler have also initiated coverage of the company with buy ratings.

That kind of solid revenue increase at a time when many software companies have been stung by the Y2K bug has captured the attention of some investors. "I think the sales growth is what caught my attention," says Morris Ruggles, president of Ruggles Capital Management, who doesn't own any TSI stock.

And TSI may still be at an attractively low price, having fallen 30% since June 30. The stock tumbled after New Era of Networks (NEON) warned in early July it would lose between 12 and 22 cents a share in its second quarter, down sharply from the First Call consensus of a 12-cent gain. The following morning, shares of New Era lost more than half their value and dragged down TSI and other software companies that focus on the same area.

"Clearly, the shares have been negatively impacted by New Era's recent earnings disappointment," Herman says, but he thinks this is a buying opportunity for TSI. New Era's "stumble presents a window of opportunity for TSI to snatch a piece of the market during the turmoil."

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