AEA Conference: The Day's Hottest Stock and a Poll Winner

Visual Networks' success materializes, while Pervasive Software experiences systemic problems.
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SAN DIEGO -- Every time Visual Networks (VNWK) speaks, the stock gets a little pop. It's not that CEO Scott Stoffer tells a slick story, it's just an impressive story to tell. But at this year's American Electronics Association Classic, the stock may have finally attracted the momentum its institutional holders have been waiting for.

At last year's meeting, I was well impressed with the story of Visual Networks, a Rockville, Md.-based company that sells software that acts as a sort of traffic cop on the nodes of networks. There was a buzz in the hallways about this one, and the story seemed solid. I've kept an eye on the company, watching it execute on its business plan, manage a conservative balance sheet and still beat its numbers every quarter.

When I wrote about it at

last year's AEA Classic, the stock was at 28 1/4. When I saw these guys at the February

Montgomery Securities Technology Conference

(or whatever they called that firm back then), the stock had risen to 35.

The stock has been strangely volatile. As of last Friday, it had nudged up 71% since the last AEA show. "Our institutional investors buy the stock and hold," says Stoffer. "If you look at our down days, they've been on really light volume. So I think one seller can sometimes knock our stock down pretty hard." The thing that stuck out about this company was that it laid out a simple plan for growth and then executed.

But the whole story changed a few months ago. Visual Networks acquired

Inverse Network Technology

for $192 million in stock. The acquisition was not in the frame relay market but rather a software company focused on ATM and Internet Protocol networks. Overnight, Visual Networks went from having a handful of telcos for customers to adding

America Online

(AOL)

,

Mindspring

(MSPG)

,

Netcom

(NECS)

,

MSN

,

Prodigy

(PRGY)

and every other ISP.

"Nobody else even comes close to this," says Stoffer. "And with the Inverse acquisition, we acquired an asset -- customers -- that is much harder to get than any other product. It makes it an almost impenetrable barrier to entry."

Visual also notes that a new wrinkle to its story will be frequent acquisitions. The company has added a team dedicated to mergers and acquisitions in order to bolster its dominance of the network services software management market. Investors seem to like the new story, and with a 26% rise since Monday, it looks like Visual could be the big winner from this conference.

Readers Choice Award: a Tale of Pervasive Software

As you might expect, a lot of the presentations here are chipper and upbeat. CEOs boast of massive market opportunities, CFOs put up charts where all the lines go up to the right. Even the money managers chatter about great picks and undiscovered gems.

So the mood in the

Pervasive Software

(PVSW)

presentation was striking. CEO Ron Harris was glum and shaky. CFO James Offerdahl was despairing. The corners of his mouth turned down as he told the Pervasive story to an audience of just two investors and a reporter.

Harris tried to sound upbeat, but the attempt was halting. "We have an excellent track record of execution and accomplishment," he said. "And we're getting a lot of recognition -- uh, especially in the last 30 days." In the last 30 days, of course, shares of Pervasive Software nose-dived 75% from 36 1/8 to as low as 8 7/8.

On Oct. 22, the Austin, Texas-based company announced solid earnings. But in a conference call shortly thereafter, Harris told analysts that domestic sales of Pervasive's database client server software, called Pervasive.SQL, were slumping badly. The company had a host of excuses -- problems with a third-party distributor that left $500 million worth of product on the shelf, a recent move of its sales staff and a shortage of shrink-wrapped product. But Wall Street punished the shares.

The concern is that the company, which

Robertson Stephens

just brought public in the fall of 1997, peaked about six months ago. Indeed, Harris practically admits that. "The client server space is growing at a slow pace, just 12%," says Harris. "We're growing much faster than that, but in a slow-growing space. That's why we're repositioning ourselves into a market that's growing faster. Web software will be growing at 98% a year, at the same time we're making R&D investments in mobile and wireless, which will be growing at 50% a year."

But as it stands now, Pervasive sits solely in a dead market. The wireless products, Harris says, may produce revenue as soon as the first half of next year. Seventy percent of its current revenue comes from database software. And short of hiring more marketing people, the company doesn't seem to have much of a plan to save that product. "It's not dying," says Harris. "But I think in a macroeconomic level, client-server software has probably peaked."

The stock rallied in early trading today (perhaps

TSC

readers hoping I'd write a nice piece? Fat chance), but not everyone at AEA was convinced by the story. "I don't know how they're going to get their main database business working again," says one fund manager, who attended the presentation Monday. She has no position in the stock and asked not to be named. "And management isn't really exuding much confidence."

Harris is trying. "I think internal issues have been our biggest inhibitor. Getting our sales force deployed and to get them productive is in progress," he says. "We've had to jump a few big hurdles. A lot of our domestic performance has a lot to do with our internal issues, not the macro issues of client server."

Investors seem to agree with that tautologous irony; the problems with Pervasive are pervasive indeed.

Cory Johnson files weekly from TheStreet.com's San Francisco Bureau. In keeping with TSC's editorial policy, he neither owns nor shorts individual stocks, although he owns shares of TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. Johnson welcomes your feedback at

cjohnson@thestreet.com.

For more columns by Cory Johnson, visit his column

archive.