| To: Joe Sabatini who wrote (915) | 7/2/1998 3:18:00 AM |
| From: JC Reddy | Read Replies (3) of 3638 |
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COPIED FROM YAHOO BOARD
HOOFBEAT 980702 - Parametric Technology
Ensconced behind the fortress walls, I furiously review my Parametric Technology files and my notes from this evening's Conference Call. Joe Kernan on CNBC shows an Instinet price of 17 for PMTC but my calculations show that level is too low. To briefly sum up, Parametric Tech PMTC gave an earnings warning after the bell today, after 40 straight quarters of improving revenues and earnings. The streak is broken, the price will fall. Class Actions will be filed (as usual). But, if anything near 17 becomes available, it will represent one of the better 12-18 month prospects and would be added to my Next 100% list. The Conference Call replay is available @ 888-562-2792 until 7/6 @ noon. It is approx 30 minutes long and many details will only be discussed on 7/16 when the company releases full earnings. My notes from the CC:Revenues will be 15% below the previous estimates of 292-300M (247M vs. 264M in Q2)
EPS will be about 0.08 to 0.09 below the estimates of 0.26 (0.17 vs. 0.24 in Q2)7/16/98 will be the official results and CC
Windchill product rollout, which is going well, nevertheless defocused our sales people from selling Pro/E (the companies main product, the best MCAD solution available and the market leader) During the quarter we repositioned approximately 1/4th of the sales force to concentrate on Windchill sales and Major Accounts Sales, thus temporarily interrupting productivity and entering longer sales cycles with Windchill
As a result, Pro/E sales were disappointing in USA/Europe and negative year over year in Japan, due to ongoing Japanese economic difficulties The quarters number came as a surprise to management since traditionally a greater percentage of sales are closed in the final month of the quarter. In this case, 2 large Windchill transactions, which we had hoped would close in Q3, won't close until Q4. Assume a 34% tax rate
Windchill product is experiencing a lot of success and we are happy with it's progress. Windchill sales this quarter (the first quarter available) were made to: Hewlett Packard, John Deere, Sun Microsystems, Lucent, BMW, Rolls Royce, Airbus, Lockheed Martin and these deals represented licensing revenue of approx $10M, service revenue associated with that will not be recognized until Q4 Windchill foundation allows a company to easily port their apps onto platform and assists them by providing a Y2K compliant foundation Goldman Sachs - asking about Q4 and 1999 guidance: Q3 is not yet over until Saturday and we don't yet have all the numbers available. Our Oracle ERP application does not yet have all the numbers up to date and not good enough for reporting purposes. Due to this, we would approach Q4 and beyond cautiously and would err on the side of caution until we know more. ((((Comment: Last quarter Tellabs bitterly complained about their SAP ERP implementation, could this be the new corporate excuse?)))) Merrill Lynch - Our best sales reps migrated to the Windchill and Major Accounts platforms from Pro/E sales. We have accelerated our Major Accounts Sales group ramp up. Windchill and Major Accounts have a longer and more lump Sales Cycle. ASP's for Pro/E should be about the same as last quarter (Average Selling Prices) Donaldson,Lufkin,Jenrette - Revenue shortfall will come out of Licenses as would be expected.MCAD - will get less attractive over time MCAD - getting to be low growth market as a stand alone product, that is why we are moving upscale to Product Data Management Systems to provide more encompassing and more lucrative Solutions to our clients instead of simply Pro/E point systems. The synergy between Windchill and Pro/E combined will have a higher growth rate
Robertson Stephens - Are less expensive NT modelers causing a problem? No, not really a problemThis quarters shortfall was due to execution issues in the sales force.
The Parametric management team is very focused on growing the business in the right direction. Throughout the years, growth came easily in the point product MCAD market with their superior Pro/E solution, but license growth is beginning to mature and the real opportunities lie in providing the larger solution to a whole PDM system that can utilize all the information generated by all these MCAD schematics and more efficiently allow everyone to share and work together and have better access for better workflow, configuration and change management and documentation management. That is where the real money is nowadays and PMTC is aggressively redirecting it's sales force to pursue these larger more lucrative deals with its new Windchill product. There should be a certain amount of easy sales into the traditional PMTC and ComputerVision customer base and these should become apparent in Q4. The market is changing and they are responding to this change at full throttle. As the market leader, and very highly respected management in CEO Steven Walske, I personally feel they are well suited to make a successful (if not smooth) transition to this new breed of opportunities. It is essential for PMTC the company to make this transition and to get the ball rolling as soon as possible. As in all product transitions, this introduces greater execution uncertainties and the stock price gets naturally lowered to reflect these uncertainties. This lowering will be pretty apparent come tomorrow, but I believe this will represent a fantastic 12-18 month BUY opportunity if it comes anywhere near the 17 instinet quote. Walske has always come through in the past, and runs a tight ship there with low overhead. Obviously, there are many factors that are out of his (and the company's) control, but I feel he is the right one and Parametric is the right company for the job. As the uncertainties begin to be answered over the next quarter or two, the price will naturally rise to reflect the progress that I'm forecasting they will make.
Certainly, Asia and Japan has posed a problem for Parametric ever since 6/97 and will continue to be a drag on earnings as I forecast no dramatic increase in Asian fortunes over the rest of calendar 1998. European Windchill sales will be nearly impossible over the summer months and won't kick in until Q1 99 (due to long sales cycle and European summer vacations). So, I would expect Q4 to be better than Q3, but nothing to set your pants on fire.
Realistically, a price of 17 and EPS of 0.17 in Q3 would be a current looking PE of 25 which is a discount to the software sector, discounted due to uncertainties. I believe these uncertainties will be favorably resolved over the ensuing 2 quarters.
I believe Steven Walske is a quality CEO who was hoping to make the numbers this quarter even with the sales force disruptions but didn't get the 2 Windchill deals signed yet. After realizing they would not go into Q3, the company ran the numbers without those deals and deciding to tell the Street about the results. Additionally, very little Insider Sales took place this quarter and nothing inconsistent with other quarters. I calculate somewhere around $7M total for the quarter which is near inconsequential.
So, PMTC will drop to reflect the increased uncertainties and the near term difficult issues with the Windchill strategy. I feel any price below 20 is very good and anything below 18 is a steal, if someone is willing to hold through the uncertainties and their eventual (hopefully positive) resolution. |
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