The worst feeling for stock exchange investors is to watch the market go up while their investment portfolio keeps going down. Sapiens (SPNS) is a classic example of this feeling. The market has recovered by 20-30%, but every day, Sapiens share finds a new low.
As recently as March this year Sapiens traded at a record $22, but since then it has continually lost altitude. Two days ago the share dropped 8% to $5.7, reflecting a $127 million company value, at 75% below its peak That is a particularly unpleasant surprise, given analysts' encouraging forecasts.
Oppenheimer, for example, is an enthusiastic supporter of the company. In mid-April Oppenheimer covered the company extensively and issued a "Strong Buy" recommendation with a target share price of $22, almost three times the price at that time. The recommendation didn't help, and the share sank another 30%. Oppenheimer's most recent update in May, upon publication of the financial statements, named the same target price, but the share paid no mind. Despite the dramatic fall, Oppenheimer is still convinced Sapiens is a great bargain, albeit with some trepidation. Next week Oppenheimer's analysts are scheduled to meet with the company management, and it will be interesting to see how things develop.
Sapiens executive VP and CFO Lauri Hanover told "Globes" that the company is operating according to its business plan.
"Globes": So what accounts for the collapse in the share price?
Lauri Hanover: "The company is undergoing a number of transitions this year. This process will require large investments and will, of course, harm profitability. We are doing this in order to become the leader later on. You can't be a leader without investing. Some investors in the company shares, on their part, wanted to see profits grow every quarter. When that didn't happen, they decided to sell."
That is also the explanation given by Oppenheimer analyst Ronen Schwartzman: "It is possible that investors, who saw the company earn $0.6 per share last year, expected profits would rise to $0.8 this year. At the same time, in view of the investments in new areas, the company is expected to finish this year by breaking even, or even with a small loss."
According to Oppenheimer, Sapiens will benefit from accelerated growth in the coming years. In their assessment, the company is undergoing a process of repositioning as a growth and technology company, identified with the Internet and B2B. In their estimation, Sapiens will sell $113.4 million this year, compared with $91.8 million last year, and will have a loss of $1 million, compared with a profit of $15.1 million last year. In 2001, in which the company will post its initial revenues in the B2B field, the company will return to profitability, earning about $8 million on a sales volume of $153.2 million, and that is only the beginning. Profits will leap to $22 million in 2002 on a sales volume of $211.9 million. Quite an optimistic forecast.
Sapiens is currently considered a market leader in the transition to a single European currency, the euro, and Oppenheimer is convinced that its domination of this market over the next two years will provided Sapiens with a cash flow that will enable it to realize its planned growth. There is, however, a potential spanner in the works. The field of euro conversion, which constituted 38% of the company's turnover in the first quarter of the year, is scheduled to disappear after the final transition to the European currency at the beginning of 2002. In other words, starting in 2002 the company will lose 40% of its revenues. Oppenheimer, however, is not overly concerned at the forecast drop in the revenues and expects that Sapiens's strong European presence, and good connections with European customers, will contribute to growth in other fields in which the company operates.
According to a META Group report, approximately 70% of the critical databases of organizations are stored on mainframe systems. The solution provided by Sapiens, upgrading and adaptation of these systems, and their conversion for the Internet era, is a cheaper, quicker solution than purchasing new systems and software. Furthermore, Sapiens has a clear technological advantage over its competitors.
Oppenheimer emphasizes that, in recent years, technological progress in computerization has brought about a number of significant changes. Outsourcing in organizations is on the rise, since organizations are becoming more focused, putting an emphasis on their strong points while the weak aspects of the organization, such as salary systems, orders, procurement, and manpower recruitment are being directed to outsourcing - to the benefit of Sapiens. Nevertheless, the fastest-growing of Sapiens areas of expertise is expected to be e-Merge.
e-Merge enables the companies to be integrated into the Internet, by transferring a given company's accumulated years of business data to the Internet. This solution is actually designed for a company interested in working on the Internet through Intranet and Extranet solutions for B2C and B2B. The solution begins at the stage of defining and analyzing the specific requirements, and includes support services, since the site already exists.
According to Oppenheimer, however, the real bonanza for Sapiens will be B2B. At the beginning of the year, the company announced its entry into this field, with a focus on e-Marketplaces. The company set up a US subsidiary named eZoneXchange, which will provide a solution integrating the various networks of suppliers and purchasers with the e-Marketplace. In addition, Sapiens's system will provide logistics handling capability by coordinating between orders from suppliers and delivery companies, while examining various alternatives, optimizing, and finding the cheapest price. Oppenheimer estimates that this field, now burdening the company with quarterly expenses of $2.5 million, will bring $5 million in revenues in 2001 and $15 million the following year. At the same time, even Oppenheimer admits that, at least at this stage, there is no clear business model for the new company, and it is unclear how companies using e-Marketplaces will pay in royalties for each deal.
Published by Israel's Business Arena on June 28, 2000