The stars get all the attention, and it has been no different in the stock market lately. The talk has been about the stellar performances of Yahoo and eBay, up about 85% and 50%, respectively, since the beginning of the year.

Not all tech stocks have had such a spectacular run and some, in fact, are still suffering greatly in the aftermath of the Great Big Technology Bubble. One such company is Iona Technologies.

Iona focuses on the integration of disparate systems and applications within an organization. This means enterprise application integration as well as Web services. The Orbix line of products is Iona's mainstay, though it also offers several products that address other aspects of integration.

Iona benefited from the integration needs of telecom and other large companies during the heyday of the tech bubble. Results for 2001 were excellent, with revenue for the year topping $180.7 million. Business conditions, however, started to sour, and the company saw revenue decline almost 32% during 2002 to $123.2 million. The first two quarters of 2003 aren't showing much improvement. During the first quarter, revenue declined 57% year over year, and in the second quarter, it was down 38% year over year. In a cyclical business such as technology, one of the trends that I look for is sequential revenue growth. Iona's revenue fell 3.6% from the first quarter of 2003 to the second quarter.

Iona's second–quarter results surprised investors by falling short of earnings expectations. Particularly troubling was poor license revenue. Though services might prop up revenue for a while, software companies eventually must sell their software. Product revenue declined 47% from last year to $7.1 million, which was well short of expectations.

Like many small technology companies, Iona's cost structure has been geared toward growth. As revenue declined, costs didn't fall at nearly the same rate and, as a result, operating margins not only declined but turned negative. Research and development spending last quarter was 45% of sales; sales, general, and administrative expenses amounted to 80% of sales. Both ratios are much too high. Despite restructurings and layoffs, I believe Iona remains bloated given its revenue.

In the midst of this mess, a good chunk of the senior management team has been shown the door. CEO Barry Morris resigned along with chief operating officer Steve Fisch and David James, who was responsible for corporate development. Chris Horn, a co–founder, was brought back as CEO, a position he previously held until the arrival of Barry Morris in 2000.

The good news is that Iona still has a reasonable amount of cash on the balance sheet, $58.6 million in cash and equivalents, or $1.78 per share. This should provide some floor under the stock, as management says cash burn should be minimal going forward. However, Iona must still rein in costs in the face of a much different reality. Most important, revenue, and license revenue in particular, must show growth again before my interest is piqued.

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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