Qualiport

A Misys Snapshot

By Bruce Jackson (TMF Googly)

Kilburn, London -- There have already been reams of newsprint and bytes of cyberdom taken up with writing about Compaq's (NYSE: CPQ) shock profit warning of late last Friday. Understandably, the warning impacted the share price of our PC manufacturer, Dell Computer Corporation (Nasdaq: DELL). The investment world, and much of the technology world, is still debating whether the warning is Compaq-specific or the previously rampant PC market is finally slowing.

Although I'm a little biased, courtesy of my shareholding in Dell, I think that we may find it is Compaq that is facing the bigger problems. Digital was a big chunk of company to chew, and no doubt the integration is still taking its time. Compaq's PC business model also leaves it more vulnerable to changing market conditions than does Dell's. Compaq sells PCs into the retail and distribution channels, usually on a sale or return basis. Immediately, because PCs are extremely quickly depreciating products, Compaq is at risk. If Dixons (DXNS) has a computer sitting unsold on its shelves for a month, the price will have to be slashed so that it sells. Compaq will take most of the hit for this.

In contrast, Dell largely makes its computers to order. That means, in comparison to its sales, Dell has tiny stock levels. This is preferable in any business model, but even more so in the deflationary climate in which PC manufacturers operate. Dell also runs low accounts receivables, because the company receives money from many customers before the goods are actually delivered. If the ideal operational scenario is to buy on credit and sell for cash, Dell is a better than ideal company.

Compaq's version of the health of the PC market, because it sells into distribution channels, could well be different from that of the direct sellers. The good news for twitchy Dell investors is that we won't have to wait too long to get word from the horse's mouth, thanks to US companies' quarterly reporting requirements. The fiscal first quarter ends at the end of April, so in about a month's time we'll get to know how fast Dell is growing.

There is little doubt that the PC market is tough. It is highly competitive, there is vicious price deflation and the products are becoming more and more commoditised. Some commentators, and people posting on the Qualiport message board, are predicting the demise of the PC as we know it. I read an interesting article recently saying that the PC is too complex, because it tries to make a single device do too many things. Do you want to use a computer to access the Internet? No -- you want to find out what's on TV tonight or smirk at the latest Qualiport woes. This is the vision of Larry Ellison, Oracle boss and one of Microsoft's (Nasdaq: MSFT) archrivals, and his thin client device.

Me, I can't see us having one device to write letters, another to access the Internet, another to whip up a spreadsheet and another to read CD-ROMs. Perhaps we'll have a device solely to access the Internet, which will live in parallel to the PC. Most of the population still hasn't discovered the Internet, yet the PC market has been growing healthily for many years. It should be able to continue to do so -- Larry Ellison or not.

Qualiwatch

Misys (MSY) is the biggest IT company in the country. The 1998 annual report starts with this sentence: "The Group's philosophy is based on enhancing shareholder value, measured by the growth and stability of long-term cash flows." It was largely that sentence alone that first seriously attracted me to the company. Rentokil Initial (RTO) starts its annual reports with a mission statement, although Rentokil's bold 20% growth target beats every other company in the country for focus, challenge and ambition.

Over the past 4 years, Misys' sales have increased by a compound rate of 48% per annum. In the same period, its adjusted earnings per share (EPS) have risen by over 20% per annum. Operating margins for the year ended May 1998 were 21.8%. Cash earnings easily outpaced accounting earnings. The company has grown through a successful combination of canny acquisitions and pure organic growth.

Misys serves two key market areas -- financial services and healthcare. Here's a very brief overview.

Financial Services

In banking, Misys is the world's largest independent supplier of software products, and supplies software solutions and services to over 1600 customers in 100 countries. Products include systems for treasury, portfolio valuation, risk management, regulatory reporting, cheque processing, mortgage lending and electronic banking. In insurance, Misys provides a raft of software and related services and transaction processing to the insurance and life assurance markets. It also continues to develop its own Internet based direct insurance site at www.screentrade.com (external site).

Both the banking and insurance industries are rapidly consolidating. The urge to merge is done almost exclusively to cut costs. IT systems such as the ones Misys provides to those sectors have the same effect -- to enable companies to do basic functions better and more efficiently. The end result should be reduced costs and higher profitability, something the banking and insurance industries are constantly striving to achieve.

Healthcare

This division sprang to prominence following the acquisition of US medical software company Medic for £573m in 1997. Its core software product is focussed on the billing and administrative functions of primary care and specialist physicians. It is the largest vendor of IT in this market. The challenge for Misys is to sell its three main products into the growing managed healthcare market.

Misys Snapshot

Recent share price: 560p

Fiscal 1998 Sales: £447.7m
Fiscal 1998 EPS: 13.2p

1999 EPS Estimates: 16.7p
1999 EPS Estimates: 20.1p

Market Capitalisation: £3.153b
Market Capitalisation to Sales: 7.0

Current P/E: 42.4
Forward P/E: 33.5 on 1998 estimates, 27.9 on 1999 estimates

Long-Term Expected Growth Rate: 18%

On Friday we shall delve a little more deeply into Misys' valuation. On the surface, it doesn't look cheap, but then nothing is, in this market. In the meantime, feedback to the Qualiport or Misys message boards is encouraged.

Company  Change    Bid
DELL   -$1.51   $40.30
EMA     -0.09    12.62
IIG     -0.07     2.43
MKS     +0.14     4.40
PIZ     +0.05     8.62
RTO     -0.10     3.77
ULVR    +0.08     5.98

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