Business & Finance
Commentary
11/14/2003
11:30 AM
William Schaff
William Schaff
Commentary
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Taking Stock: Old-Line Company Reinvents Itself

What makes people go to conferences and attend 20 meetings a day for three days? It's the hope that we may glean some rare nuggets of information. But I also use conferences, most recently the American Electronics Association conference in San Diego, to catch up with some of the old-line companies undergoing transformation.

One such company is Ascential Software, an enterprise software vendor focused on systems that manage and integrate large amounts of data. Its expertise is in its products' ability to extract, transform, and load data effectively into downstream applications for business intelligence and analytics, which is especially important in a world of disparate and complex data that's being refined into today's business decisions.

Most IT professionals remember Ascential as the leftovers from the sale of most of Informix's database products to IBM in 2001 for roughly $1 billion in cash. Ascential has spent about $300 million on share buybacks since then and $270 million on acquisitions, including the recent Mercator Software deal, which closed Sept. 12. With operating cash flow and the cash left from the Informix deal, the company still has $524 million in cash on the balance sheet ($8.75 a share). Given its high cash level and the high current share price, Ascential is likely to continue making discreet acquisitions based on the ever-present strategic-fit argument and accretion to earnings per share in one year or less.

The company believes that long-term license revenue will provide 60% of revenue and services 40%, though the latest quarter showed license revenue being slightly below 50%. Some 65% of its sales are direct; the balance is through resellers such as IBM and SAP. Traditionally, about 60% of its total revenue comes from current customers, but in the most recent quarter, 75% of its license revenue came from new customers. Its average selling price last quarter for new direct business was $220,000, with a typical sales cycle of three to six months.

The stock trades at about $25. In the third quarter, ended Sept. 30, the company reported revenue of $45.9 million and operating earnings per share of 6 cents. With 59.9 million shares outstanding, the equity market capitalization is $1.5 billion. Operating margins were 4.3% in the latest quarter, a long way from the company's stated long-term goal of 17% to 25%. I project that operating margins are likely to expand to low double digits next year.

Roughly one-third of the current share price is in cash and equivalents. Book value is roughly $12 a share. There is no debt. Consensus First Call earnings-per-share estimate for 2004 is 47 cents, with expectations that the company can increase earnings per share by 15% per year over the next three years. It's nice to see that some old-line companies know how to reinvent themselves and get new technology valuations.

William Schaff is chief investment officer at Bay Isle Financial LLC, which manages the InformationWeek 100 Stock Index. Reach him at bschaff@bayisle.com. This article is provided for information purposes only and should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security. Bay Isle has no affiliation with, nor does it receive compensation from, any of the companies mentioned above. Bay Isle's current client portfolios may own publicly traded securities in one or more of these companies at any given time.


To discuss this column with other readers, please visit William Schaff's forum on the Listening Post.

To find out more about William Schaff, please visit his page on the Listening Post.

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