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4/19/2002
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Taking Stock: Insight Into Technology Investing

Sybase remains a keeper because of price and cash flow.

Whatever happened to Sybase Inc.? The database company was doing well in the early '90s, but then it disappeared from most investors' radar screens after Oracle crushed the competition. Sybase's history, however, is the story of a company's rise, fall, and revival. The question is whether Sybase (SY?NYSE) can capitalize on its vision.

The company, founded in 1984 with a focus on database software, did relatively well until the marketplace standardized on Oracle's database technology. While Sybase secured a strong position in the financial industry with a number of the largest Wall Street firms running its databases and related software, its financial performance started to falter as Oracle gained traction. By 1997, Sybase sales declined and it posted net losses.

It's noteworthy that during this downturn, Sybase continued to generate cash flow, except for two years. However, as business soured, the then-CEO was replaced by John Chen, who had previously run Siemens Nixdorf's Open Enterprise Computing division. Chen refocused the company on profitability and leveraged existing strengths. He's done a commendable job. Today, Sybase is focused on the management of business data across multiple computing environments.

Sybase has five divisions: Enterprise Solutions, e-Business, iAnywhere, Business Intelligence, and Financial Fusion.

The Enterprise Solutions Division, home to the company's legacy database business, is the largest, accounting for 86.8% of 2001 revenue and 140% of operating income. (Yes, 140% is right--this division is supporting several others.)

The e-Business division (9.1% of revenue and-33.5% of operating income) offers an enterprise portal, as well as an app server and enterprise-integration software. The third division, iAnywhere (9.7% of revenue and 26.1% of operating income), focuses on providing customers with a mobile database for users with notebooks and handheld devices. Part of the U.S. military uses this app for inventory tracking.

The two remaining divisions, Business Intelligence and Financial Fusion, accounted for 2.5% and 3.4% of revenue, respectively. They're both generating substantial losses.

Sybase's strength is its installed base. The company already has a relatively strong position in e-Business, iAnywhere, the health-care and government markets, and particularly in the financial-services market. Growth will come from the e-Business division, iAnywhere, and each of the vertical markets.

The telecom and the financial industries are suffering significant downturns. That might hamper Sybase's growth, although

if growth materializes in one to two years, the company should do fine.

If growth doesn't happen for several years, though, shareholders are stuck with a low return on the cash flow reinvested in the business. Sybase has been accelerating its buyback program of shares, which is positive.

Competition is fierce in each of Sybase's markets.

It faces BEA Systems, Business Objects, IBM, Iona, Microsoft, Oracle, and webMethods, to name a just few, and is viewed as a jack of all trades--but a master of none.

Last year, Sybase revenue declined 7.2% relative to 2000, which isn't too bad, considering how much technology spending in general has been curtailed. Operating margin was 11.7%, down from 13.6% in 2000 before various charges. However, Sybase still felt that it was necessary to take a $48.8 million restructuring charge.

The company's balance sheet remains solid with about $392 million in cash and equivalents, and no long-term debt. Last week, Sybase announced pro forma first-quarter earnings of 21 cents per share, in line with Wall Street's expectations, on revenue of $211.0 million, down from $229.7 million in the year-ago quarter.

I find Sybase appealing at the current valuation, and there's an upside to slightly more than $20 per share. Few tech companies can claim they're generating cash and not trading on a mind-boggling valuation.

William Schaff is chief investment officer at Bay Isle Financial LLC, which manages the InformationWeek 100 Stock Index. Reach him at bschaff@bayisle.com.

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