BancBoston Robertson Stephens’ senior e-services and IT services analyst Steven Birer believes that in the same way many hardware vendors give software away to sell their products, services companies, especially ones concentrating on internet-related services will also do that more and more as the business model matures. He cites companies like HotJobs.com, which give away basic human resources software as examples of this growing trend.
PeopleSoft Inc, on the other hand, is a good example of a company that did well initially by supplying vast HR suites. But many companies only require a fraction of the total PeopleSoft system and the company has been slow to react to that trend and has suffered the consequences, which has been reflected in its share price.
Birer believes that the three strongest areas for growth for net services firms are in the areas of recruitment, advisory services and customer retention, or what is generally referred to as customer relationship management.
He believes that companies such as Razorfish, iXL and Modem Media Poppe Tyson , are still heavily technology-led, with about 20% of their value provided by their creative and strategy skills. The other 80% comes from their technology skills. However, he believes that many of these companies are overvalued, and suggests a different way of valuing them based on what he calls implied value. Birer calculates implied value by multiplying the forward earnings estimate by the estimated growth rate for the next five years. He believes that growth rate will be about 50% on average, as he does not think the 100% growth rate many of these companies have enjoyed can be sustained over five years.
Based on this formula, Birer believes that companies such as Scient Corp and Viant Corp are overvalued quite a bit. Scient is trading at between four and five times its implied value, while Viant (a company Birer covers) is trading at 3.2 times it implied value. Razorfish and iXL are trading at about one and a half times, but Modem Media is actually trading at less than its implied value and Birer rates that a strong buy.
Birer says that the offshore programming model that came to prominence with Y2K, whereby programmers in countries such as India are enlisted to cut costs and enable 24 hour-programming for US and European-based companies, will be copied by the application service providers (ASP). As the internet has reduced the penalty for hosting things offshore to practically zero, many of the ASPs will service up their applications from countries all over the world.
And finally, while the more traditional services companies have seen a lot of projects canceled because of Y2K issues – which has not really affected the e-services companies – Birer believes that many of them will have stronger than average first and second quarters next year as ERP spending picks up again. Among the companies likely to benefit from the trend, he believes, are Cambridge Technology Partners, Technology Solutions and RCM Technologies Inc.
