By Krishna Roy
Steve Gardner, the president and CEO of self-styled infrastructure resource planning (IRP) vendor, Peregrine, is bullish about his company’s prospects in the asset, infrastructure and application management market he claims to have coined and created. We’ve no end-to-end competitor in IRP. The only area in which we face competition is problem and change management where we see Network Associates and Remedy. But even there the competition isn’t that intense. Remedy is still offering a tool kit largely based on 16-bit code and Network Associates is dealing with Y2K issues, to say the least, he says.
Painting an incredibly bright picture of Peregrine’s financial outlook for the coming year, Gardner has forecast that company revenues and net income will increase by 50% in fiscal 2000. There’s no evidence of a slowdown in our growth rate related to millennium factors, Gardner told investment analysts on a fourth quarter earnings conference call. Infrastructure management is a compelling market that’s growing at 40% a year.
While Gardner may see a competitor-free future for his company, Peregrine’s executive team has yet to turn its perceived technological lead in the fledging IRP market into profit. When the company reported year-end numbers last week, the revenue growth rate to which Gardner had alluded earlier was evident. Fiscal 1999 revenues were up 123% at $138.1m, license revenues had increased 125% to $87.4m, and service revenues had grown 120% to $50.7m. However, while revenues were rapidly escalating, the company’s profits were moving just as quickly in the other direction. Losses, which had stood at $616,000 in fiscal 1998, increased to $23.4m for 1999.
When compared with Peregrine’s rivals, an altogether different picture emerges. Remedy, for example, may not be growing at such a clip but it is profitable and has shown consistent growth with $19m in profits and $157.7m in revenues for fiscal 1998. Network Associates, which has been subject to SEC investigation, has built itself a $990m powerhouse through acquisition, although its strategy has been fraught with difficulty.
Over-ambitious pooling of interests accounting for the fervent acquisition spree it embarked upon 18 months ago is wholly to blame for the trail of red ink that now mars Peregrine’s balance sheet. Having embarked upon a M&A maiden voyage in August 1997 with the $29m acquisition of French asset management house Apsylog, Peregrine then went on to buy Innovative Tech Systems to further its facilities management ambitions for $76.6m the following May. Earlier it had taken out US privately-held transportation asset management outfit, Prototype Inc, for $25.5m in March 1998. And it bought UK desktop inventory and asset management company Fprint, for $27.5m in cash and stock, just a month later.
But while the company was building an impressive set of products through acquisition, its cavalier accounting treatment of the Apsylog and Innovative Tech purchase has only offset any technological lead it had. In March the company was burnt by an SEC crackdown on the practice of writing down large sums in research and development for technology that would never come to market. This method of accounting is a popular but soon to be outlawed tack for companies wanting to avoid the drag an acquisition might have on future earnings per share.
To comply with SEC rulings, Peregrine was forced to re-state its financial results back to the second quarter ending September 1997. The restatement had a devastating effect on earnings helping to reduce EPS from $0.74 cents for the fiscal year to March 31, 1998 to just $0.02. Peregrine suffered the fourth largest reduction in previously recorded charges for purchased R&D in the technology sector behind far larger and more acquisitive vendors like Cadence, Avid and Motorola. It was forced to reduced R&D charges by $97.8m.
Undeterred by the negative effect the restatement has had on its P&L – and on investors’ and shareholders’ opinions of the company’s prospects – Peregrine will still use acquisitions as an element in its growth strategy, according to Gardner. That said, it will use purchase accounting procedures – the route taken to buy Fprint and Prototype. And the mid-range service desk market looks likely to be an area it will want to buy into. There’s a real void of leadership in this market right now. We’re not blind to this opportunity because it’s a good feeder to get into a company at the departmental level and move up the enterprise. Stay tuned, he says.
In the meantime, the company is concentrating on consolidating the purchases it has made so far and developing the products into an end-to-end IRP suite. Peregrine is now in the second phase of integrating ServiceCenter, the service desk suite it acquired via Apslog with AssetCenter, its core asset management product through an Active-X based tool. AssetCenter will also have a Java-based client in addition to the HTML client it has already. The development of a more user-friendly version of ServiceCenter is also about to reach fruition and should hit the market later this quarter.
Product releases may keep Peregrine ahead of the competition in IRP but that edge can only be maintained if it is backed by growth in the top and bottom lines. And this is something Peregrine has yet to demonstrate to investors. That said, Peregrine does have a seasoned management led by chairman, John Moores, who hired executives from BMC to head-up the company. And with a 28.1% stake in the company, Moores stands to loose as much as anybody if Peregrine does not move into the black.
