Taking Stock: Leading Infrastructure Companies Try To Stay Afloat

What a wonderful rally we had on July 29. It almost made me forget that technology stocks are still in the midst of a very long bear market. The second quarter was originally supposed to show some bottoming out in enterprise software. Unfortunately, the signs remain mixed, and any broad-based improvement within the sector probably won't happen until next year.

In the meantime, there are early indications that some infrastructure software companies are moving in opposite directions.

Vignette (VIGN-Nasdaq), a leading content-management applications provider, continues to see sluggish sales. The company last week reported second-quarter sales of $35.6 million, down 23% from the previous quarter and 57% year over year. The company attributes the top-line decline to the usual culprits: longer sales cycles and smaller deals. There were no deals of more than $1 million, which was surprising. In times of trouble, the bread and butter of most software companies is sell-through into their installed base. The usual follow-up larger deals aren't happening.

Vignette estimates that about 40% of customers have upgraded to version 6 of its Content Suite, but additional sales of add-on options haven't materialized. The company may be lucky to break even by the end of 2003. I expect a loss of 12 cents per share or more in 2002 on $140 million to $145 million in sales.

Another problem shows up in days sales outstanding. It's now 83 days, up from 66 last quarter, a negative trend toward higher receivables and cash consumption. Gross margin came in at 68%, but operating margin was-36%.

At the same time, deferred revenue, an indicator of future revenue, fell $4.1 million from the previous quarter to $42.9 million. Average deal size declined again, to $295,000 from $331,000 last quarter. Vignette's quarterly cash burn is $14 million, and cash and equivalents on the balance sheet remain high at $354 million, so the company isn't likely to declare bankruptcy any time soon. Tom Hogan, the former chief operating officer, was promoted to succeed CEO Greg Peters, who'll remain as chairman of the board.

The timing is a little late. Company guidance was only for the next quarter, with revenue projected between $30 million and $32 million. Expect gross margins to be in the high 60s, with an operating loss of about 5 cents per share. Management expects to reduce costs by another 5% to 10% in the third quarter, with no further reductions planned.

Vignette is still bailing water. The company isn't likely to sink, but it's worth comparing with a similar company that reported quarterly results last week, Interwoven (IWOV-Nasdaq), a leading Web con-tent-management software company.

Interwoven reported second-quarter revenue of $33 million, with a pro forma loss of 5 cents per share. Deferred revenue was down only slightly, to $36 million from $37.1 million last quarter. Average selling price was $250,000, up from $210,000 last quarter and the first rise in the last six months. Sales got a boost from increased sales of new products such as Metatagger, a content-categorization and intelligence product. The company projects third-quarter revenue of $33 million to $35 million, with a per-share loss of 3 cents to 5 cents.

More important, company officials hope to break even in the fourth quarter of 2002, a full year ahead of Vignette. Interwoven should still have more than $180 million in cash by year's end, about $1.85 per share. The stock trades at about $2.45. John Van Siclen, the former chief operating officer, was also promoted to CEO last week. If the recent promotions are any indication, it's clear these companies are emphasizing operational execution over any big corporate strategy changes.

Given the difference in financial reports of Vignette and Interwoven, investors looking for a bargain would be better off with the latter. But neither company is a sure bet yet.

William Schaff is chief investment officer at Bay Isle Financial LLC, which manages the InformationWeek 100 Stock Index. Reach him at [email protected].

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