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3/4/2003
02:07 PM
William Schaff
William Schaff
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Taking Stock: MRO Software Proves A Strategic Manager

The company continues to add to cash on the balance sheet

The IT landscape is littered with small, publicly traded technology companies that have been around for awhile plying their trade with little fanfare. One caught my eye the other day: MRO Software, a provider of E-business products for strategic asset management. The company's applications focus on improving the profitability of assets by managing them through their whole life cycle: planning, procurement, deployment, tracking, maintenance, and retirement. MRO's products improve core operating metrics, such as production reliability and labor efficiency. They also take care of mundane but important tasks, such as software license compliance, lease management, and warranty and service management.

This is a niche area, and MRO has been in it for more than 30 years. It has built a credible base with more than 10,000 customers. Its flagship product, Maximo, is used in almost every industry, from technology to utilities. As most IT professionals know, capital budgets are more constrained than ever. MRO's offerings are a lot easier to justify in today's environment than most; they drive down costs over time. On top of that, most of MRO's executive team has been with the company about 15 to 20 years. CEO Chip Drapeau came up the old-fashioned way, working his way to the top.

Despite having a compelling niche product that can justify its cost to potential customers, MRO isn't immune to the IT spending downturn. License revenue remains flat year over year, and sales lead times have expanded, along with other software sales. Service revenue, which includes professional services, has successfully supported the company during the downturn and represents more than 80% of the total revenue. However, the company said in early April that it would miss its revenue and earnings-per-share forecast for the fiscal second quarter, ending March, and lowered its full-year revenue and earnings-per-share forecast. The company gave updated fiscal 2003 (ending September) earnings-per-share forecasts of 17 cents to 22 cents on about $172 million or slightly lower revenue. This is slightly lower than its reported earnings per share of 22 cents for fiscal 2002. Wall Street analysts' estimate for fiscal 2004 is 36 cents per share, based on First Call estimates.

This stock is in the small-capitalization category as it has only 24.4 million shares outstanding. At the market price of $8.54 per share, total market capitalization is only about $208 million. As most investors know, the small-cap markets can be treacherous and volatile. An interesting side note is that large investment institutions hold more than 72% of the company's outstanding shares. If one of those large institutions attempts to get out of its stock position, it will have a major negative effect on the stock price. Having more shareholders helps dilute the impact of large sellers, as there are potentially more buyers for the stock.

Still, there's a bright side. Net cash flow from operations has been a positive $15 million to $20 million per year over the last five years with the exception of 2000, when operating cash flow hit a modest $6 million. Not bad, considering how fast technology businesses declined over the last few years. Despite the downturn, the company continues to add to cash on the balance sheet ($74.3 million, or roughly $3 per share in cash) and make money. How many small or large technology companies can make that claim?

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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