Ascential Will Recover With Targeted Sales

We hear it all the time: Garbage in, garbage out. But IT professionals know how especially true it is for maintaining data. This is one of the major reasons that Ascential Software, a leading vendor of enterprise-data-integration software, has survived over the last few years. It's no longer at $85, which was last seen on April 10, 2000, but it has slowly risen off its low of $6.08 in October 2002. The stock had appreciated to almost $29 in January before declining again to a low of almost $11. It's back to $14.42.

Ascential's platform is suited to the standardization that most technology managers are looking for to integrate disparate data while maintaining quality. For example, its top-end suite includes ProfileStage, which investigates the quality of the data attributes associated with the master data. Its QualityStage module creates and maintains keys for master data rules as well as validates data from third parties. Then, its DataStage product delivers data throughout the enterprise and via a variety of interfaces, including Web-based services.

Why is Ascential's stock price struggling so much? Software license sales are tough for anyone these days not involved directly in security applications. Even sensible enterprise applications such as Ascential's product suites still need to be sold. Sales lead times are long, as the average sales price still is in the six-digit range. The company is working hard to get its message out and, according to management, there's some receptivity. It has more than 329 out of its 934 people working in sales and marketing, and it has been ramping up quota-carrying sales reps.

Ascential also is still spending on its future. Ascential recently added 60 research-and-development employees from an acquisition in India. This is on top of the 245 R&D-related personnel it already had, or roughly 26% of total employees. With a new product rollout expected in the latter part of 2005 and a commitment to product technology and quality, I believe Ascential should continue to see some recovery in its business, and, hopefully, its stock price.

In the most recent third quarter, the company's revenue was $67.6 million, up 47% year over year. License revenue was $27.2 million, or 40% of the total revenue. This resulted in earnings per share of 7 cents. Because of the higher percentage of revenue from services and maintenance, companywide gross margins were 67%, down 6% from last year. There's still about $7.73 per share of cash on the balance sheet, or roughly 54% of the current stock value.

Wall Street analysts' mean estimates of earnings per share for 2004 and 2005 are 28 cents and 37 cents, respectively. That makes the 2005 profit-to-earnings multiple still a lofty 39 times. But the company also is projected to see earnings growth in the high double digits, and it may actually use the cash to either grow earnings faster through acquisitions or share buybacks. After all, with that much cash on the balance sheet, you might assume Ascential was a bank and value it accordingly.

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

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