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Sybase (SYBS), the client-server software and database provider that has been around for 15 years without yet threatening Oracle, has had a rough time lately. How rough? Check out the number of analysts who cover the stock. In 1996, 24 analysts followed it, according to research firm First Call. Today, just five.
Unfortunately for CEO John Chen, who arrived 30 months ago to turn the company around, this is a sign that Wall Street is ignoring his greatest triumph. On Apr. 18, the company reported first-quarter earnings of 21 cents a share, before amortization of the goodwill of Financial Fusion, which Sybase bought last year. That was a whole eight cents higher than the consensus expectation of analysts. As a result, several adjusted their projections for this year, boosting the consensus projection for earnings per share to 94 cents, vs. the 75 cents they predicted before Sybase announced its stellar quarter.
Chen is confident that the first-quarter performance portends more good things to come, but many market watchers are doubtful. Sybase has only a couple of businesses that can generate real growth, and neither of those is its core database business, which produces slow if steady gains. Still, Chen claims that his company will hit $950 million in revenue this year, vs. $870 million in 1999. He insists that Sybase's stock is undervalued. But with the company's growth prospects based on two of its smaller groups, investors may not want to take the plunge, unless the stock drops lower than its current price of 24 1/8.
SLIGHTLY UNDERVALUED?
"John Chen has done a good job operationally," says Mark Murphy, an analyst at FAC/Equities First Albany. "Anybody can cut costs, but to do it and grow revenues at the same time is the important thing." Murphy believes that Chen's restructuring of Sybase into five operating units, each accountable for its own profit-and-loss performance, was a crucial move. "It brought accountability down to the bottom rungs of the corporation," he says. But even Murphy thinks the stock is only slightly undervalued at its current price.
Chen's cost-cutting program has its impressive aspects, nonetheless. By the end of 1999, operating profit reached $39 million, vs. a loss of $13 million the year before. This was due in large part to the CEO's reorganization, which eliminated redundant product-development efforts across divisions.
Under the new structure, the company's Internet banking unit creates the software needed to deliver banking services online. What Chen calls "the mobile embeddedness division" creates database chips for use in all kinds of remote database applications. For example, Sybase makes a data chip that can tell bottling companies when to restock soda machines. The business intelligence unit targets banking, insurance, and telecommunications companies with database software and services. The Internet applications unit develops all kinds of Web database products. The Enterprise Solutions division is Sybase's cash cow -- server-based database applications.
"SITTING ON VALUE."
Chen has pinned his growth hopes on the Internet banking, wireless, and enterprise portal divisions. The first largely comprises Financial Fusion, a software company that makes the entire interface between a bank and an online customer. Financial Fusion has an impressive international client base among money-center and investment banks. "It had $4.5 million of sales in the first quarter, and should do a lot more this quarter," brags Chen. "We believe we're sitting on a lot of shareholder value."
Most market watchers agree with Chen on Financial Fusion. What worries them more are Sybase's other businesses. About $800 million of its revenues are generated by Enterprise Solutions, a mature business with single-digit growth prospects. That includes $400 million-plus from the sale and installation of server software, says Bill Schaff, a portfolio manager for the Berger Technology Fund. "The margins in that business are never going to be high," he says.
An additional $200 million or so in revenues comes from annual licensing fees for server software -- a high-margin business, but one that's growing slowly, according to Schaff. "It's not a horrible company," he adds. "It's just hard to get excited about it."
SMALL PORTION.
The most interesting potential growth area for Sybase is its wireless division, which Chen estimates will increase revenues by one-third this year, to $100 million. The fastest growth will be in the mobile database division, which Chen claims will grow from a standing start to $40 million in revenue this year. But that's only a small portion of Sybase's business.
"The company says it will achieve long-term revenue growth of 10% [a year]. That's probably a bit lofty," says Schaff. "I think the stock is expensive for what it is." If Chen can continue to improve revenue growth, Schaff might have to eat his words. But maybe not this year.
Popper covers the markets for Business Week Online
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