SAN FRANCISCO -- There's a great scene in the comedy classic
character is on the phone with his broker (hey, it was 1980) and bellows: "Everybody is selling? Then buy, buy! Everybody's buying? Then sell, sell!"
When he talked about "going against the flow" last
Sam Ginzburg evoked that scene, as has
Cramer Berkowitz's Todd Harrison
in recent Trading Diary entries.
With the market's main lava flow heading south again on Wednesday, maybe it's time to consider buying again. Assuming the go-against-the-grain strategy is a prudent one, let's discuss
, a stock with little of what everybody wants these days: momentum. From a closing high of 42 3/4 on Dec. 13, the stock has slowly and steadily declined. On Wednesday, Interact Commerce fell 1% to 13 1/8.
If you're unfamiliar with the Scottsdale, Ariz.-based developer of sales-automation, e-commerce and customer-service software, it could be because Interact Commerce was known as
until April 27, when it changed its trading symbol along with its name. In part because of confusion over the name change and the company's decision early this year to (egads!) delay its profitability until 2001, Interact Commerce has been decidedly out of favor.
But that is about to change, according to Mark Lapolla, a partner at
, a roughly $190 million hedge fund in Scottsdale (yes, it's partly a local angle), which is up 32% year to date, before fees. I previewed this latest offering in Tuesday's
Report Card, which showed Lapolla's previous pick --
-- is up 26.5% since he recommended
it on April 11.
Longtime readers will recall Lapolla also was the source on
, which is up more than 140% since he recommended
it on Aug. 8, 1999.
As with his previous picks (both controversial), Interact Commerce appeals to Lapolla because of a belief Wall Street is either uninformed or misinformed about a company he believes has sizzle.
What Lapolla and others are counting on to put the pop in the company's sizzle is the pending launch of Interact.com -- expected within the next 30 days.
Getting Its ACT! Together
What is now Interact Commerce was founded in 1996 by Pat Sullivan, who remains its president and CEO. Previously, Sullivan co-founded
Contact Software International
, best known as the developer of
, a software program used by more than 3 million individuals at (mostly) small and mid-sized businesses. ACT! was sold to
Interact Commerce (and Sullivan) got ACT! back from Symantec last December in a deal that gave Interact an exclusive four-year license of the program. After which, Interact has the option to purchase the product outright for $60 million (including royalties paid during the term) in cash, plus common stock valued at $20 million.
Interact Commerce pays Symantec about $5 million per quarter for ACT! Additionally, the company absorbed about $33 million of debt as part of the transaction, with a fat 11% coupon. Add another $4 million to $5 million investment to develop Interact.com and you arrive at the aforementioned delay in the company's path to profitability.
Put it off they did: If not for the ACT! deal and Interact.com ramp, SalesLogix would have been profitable in the second quarter, company officials said. Instead, Interact Commerce reported a loss of 70 cents a share vs. 17 cents the prior year even as revenue rose 207%. (Excluding amortization, the quarterly net loss was 44 cents in 2000 vs. 6 cents in 1999.)
"We knew it would cost us in the short term in terms of our stock price, but it all goes to the decision to build Interact.com for the long-term future," Sullivan said in a recent interview. "We're comfortable with those choices
but think we're very much undervalued."
Analysts estimate Interact Commerce will turn profitable in the second half of 2001, and earn 22 cents a share for the year. Company officials don't quibble with those estimates.
CFO John Harbottle, who joined Interact Commerce from
in early May, said the company's cash position -- about $34 million -- will last until profitability arrives. The current cash-burn rate is about $8 million to $9 million per quarter, he said, noting those levels will decrease after spending planned for this quarter and next for the marketing of Interact.com dissipates.
Still, Harbottle said the company is considering a secondary equity offering -- if market conditions allow -- with proceeds used to pay off the debt and generate an "extra cash cushion."
Furthermore, a secondary offering could allow the company to bring in some new underwriters and increase Wall Street coverage. Only three firms follow the stock after
analyst Paul Krieg dropped coverage last week. Kreig said the decision was made because Interact Commerce's burgeoning online strategy diverges from his coverage focus -- not because he is pessimistic about the company's outlook.
A secondary "could be done quickly if the market is ripe," but an offering at current levels would be "too dilutive," Harbottle said. "We need a better share price."
Given the company expects the launch to help its share price, Interact Commerce is betting its future on Interact.com -- literally and figuratively.
That, of course, is the big risk.
Interact.com adds 42 Internet-based features for ACT! users, the most-prominent being the ability to access databases via wireless Internet connections. The service also will be compatible with SalesLogix's enterprise customer-relationship-management software and
Outlook. But the initial focus is to entice ACT! users to spend $19.95 a month for Interact.com.
Cynics say Sullivan & Co. are being overly aggressive in their expectations for how quickly ACT! users will embrace Interact.com. Having ACT! is an advantage, but Interact.com faces direct competition from companies such as
"It's an attractive, valid strategy but the issue is how broadly applicable
Interact.com is," said one observer, who requested anonymity. "It's a question of execution and timing. It's very difficult to get any sense of when they're going to be able to deliver."
Other than predicting "a very significant percentage" of ACT! users will make the shift, Sullivan declined to make projections.
"We intend to be the dominant player in terms of offering applications and systems to that user base," the CEO declared. Demonstrating his old-school mentality, he quickly added: "We do expect to make money. We're not it in for the fun of it."
Working for money and
fun? What a novel concept. Now the company has to make the leap from concept to reality.
Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at
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