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3 Potentially Hot ASP Stocks to Watch


by Hal Plotkin
Silicon Valley Correspondent

In part one of this two-part story on Thursday, we looked at whether other application service providers (ASP) would be able to match Cobalt Networks Inc. {COBT} success. Now we look at three up-and-coming ASP stocks for your radar screens.

Although powerhouse firms such as Baan Co. N.V. {BAANF}, Oracle Corp. {ORCL}, and SAP Aktiengesellschaft {SAP}, are all targeting the nascent ASP market, several analysts say the stocks of a handful of lesser-known players are likely to get a more-immediate lift if the ASP market takes off as many have predicted.

ASPs are thought to be one of the hottest emerging business-computing sectors. The idea behind an ASP is that business customers will choose to rent whatever software applications they need over the Internet on a per-use basis, rather than purchase them.

Several recent surveys, however, indicate a majority of the largest potential corporate customers of ASP services are reluctant to use them until the business model is more mature.

That leaves an opening for early ASP leaders who have what the marketplace needs right now. That group includes firms such as AXENT Technologies Inc. {AXNT}, which offers the online security needed to assuage fears about ASPs; Interliant Inc. {INIT}, which just inked a potentially lucrative partnership with Microsoft Corp. {MSFT}; and Intershop Communications AG, a German-based firm that has filed to go public in the United States, after already helping establish more than 5,500 electronic commerce sites.

AXENT Technologies

Rockville, Md.-based AXENT, for example, is getting traction in the ASP market by providing security solutions that directly address current user fears. AXENT’s stock has already made up much of the ground it lost last April when the firm posted its first disappointing flat-revenue quarter after 11 consecutive upside quarters.

Analysts blamed last year’s slowdown at AXENT on a variety of factors, including troubles with an acquisition and concerns over whether the firm might be forced to switch auditors in connection with a regulatory issue. More recently, however, AXENT has returned to favor among several analysts who say the company has just what the ASP and larger online market needs at the moment: tighter security.

“The need for security is expanding potentially geometrically,” says Paul Merenbloom, an analyst at Prudential Securities Inc. in New York. “This is going to be bigger than big.”

Three weeks ago, Merenbloom upgraded AXENT to “strong buy” and set a 12-month price target of $45 on the stock.

“We are helping ASPs remove one of the major barriers to their success,” says Greg Coticchia, AXENT’s vice president of marketing and business development. “Growth in the ASP sector is going to be an important part of our business going forward.”

At present, sales of AXENT security software and services to ASPs represent a small fraction of the firm’s overall revenue. The company has, however, sold its security-enhancing product to several “first-mover” ASPs whose continuing success would rather quickly validate AXENT role as a leading enabler of the secure online delivery of software services. Those clients include Digex Inc. {DIGX} based in Beltsville, Md., and Santa Clara, Calif.-based Exodus Communications Inc. {EXDS}.

“Security is an absolutely critical concern for ASPs,” says Stacie McCullough, senior analyst at Forrester Research, based in Cambridge, Mass. “Promises of security are going to be one of the ways ASPs may compete in the future.”

“We’re pretty high on AXENT,” agrees David Hilal, an analyst with Friedman Billings Ramsey & Co., based in Arlington, Va. Hilal currently has an “accumulate” rating on the stock, his firm’s second-highest recommendation.

“They have a minor accounting snafu that needs to be resolved, related to changing their auditor,” Hilal says. “That should be resolved by the end of this month. We think investors should buy the stock.”

AXENT reported unaudited net income of $997,000 on revenue of $112.8 million for 1999, as compared with net income of $19.9 million on revenue of $101 million for the prior year.

Interliant

Purchase, N.Y.-based Interliant is another early beneficiary of growth in the ASP market. The stock has been on a generally upward trend since last October when the firm’s acquisition strategy attracted favorable attention from several financial analysts.

Interliant post-IPO stock performance

“Interliant’s five-year application-hosting experience and impressive customer base make it stand out among the start-up ASPs,” wrote Jeanette W. Sing, an analyst at Wasserstein Perella Securities Inc., based in New York, when she initiated coverage of Interliant last November with a “buy” recommendation and a $35 price target. The stock was trading at $22 at the time.

Sing raised her target to $65 more recently and says it may soon be revised upward yet again, due in part to this week’s announcement that Microsoft is buying a $10 million stake in the firm and will work with it to develop and market hosted applications that use Microsoft’s Exchange 2000 server platform.

“Interliant is in great shape these days,” Sing says. “They have some very good upside. I’m very bullish on ASPs. The sector is definitely the way to go. A lot of applications are going to be hosted. That’s why all the big guys like Microsoft are investing in the sector.”

“Creating a deep relationship with Microsoft means truly integrated products,” says Interliant chief executive officer Herb Hribar. “It’s an alliance that involves us jointly marketing the product. Microsoft will be referring customers to us that are looking for hosted applications, which gives us a very significant revenue opportunity.”

Hribar says the deal with Microsoft, coupled with other recent developments, puts Interliant on track to meet its annual 70 percent growth target.

“We have a ‘strong buy’ on Interliant,” says William Dering, an analyst at C.E. Unterberg Towbin, based in New York. Dering initiated coverage of the stock in mid-November when it was trading in the $20 range. In mid-February, Dering reiterated his recommendation and set a new $60 12-month price target for the stock.

“Interliant is one of the major public ASPs out there in the market focused on mid-market sized customers,” Dering says. “The exciting part of the story is that they are expanding out to higher-margin enterprise markets.” Dering says Interliant’s recent acquisitions of two firms that specialize in implementing PeopleSoft {PSFT} Enterprise Resource Planning systems should add about $40 million in incremental revenue to the firm’s bottom line in 2000. “Interliant has amassed some very extensive experience,” he adds.

Interliant reported a loss of $53.9 million on revenue of $47.1 million for 1999, as compared with a loss of $10.7 million on revenue of $4.9 million for the prior year.

Intershop Communications

Another emerging ASP firm to watch is Intershop.

“We’ve been doing this for a while,” says Sam Boonin, Intershop’s director of product marketing. “We’re the clear undisputed leader for ASPs serving small and medium-sized businesses.”

Although Boonin notes that his firm began with a focus on bringing e-commerce capabilities to small and medium-size businesses, he says larger customers are also moving in his firm’s direction.

“The big [information technology] departments are kind of pissed off at the SAPs of the world for charging them $3 million for an ERP and $5 million to some other firm to implement the thing,” Boonin says. “They’re going to get tired of that and want systems that work and are cost-effective.”

In the meantime, however, Intershop is sticking with its original mission of helping small and mid-size firms build e-commerce operations using the ASP model while also generating strong sales of its newer “Infinity” product which is targeted at higher-end, more-complex e-commerce systems. “E-commerce is really the sweet spot for ASP’s right now,” Boonin adds.

“We’re seeing companies willing to take the ASP leap with their outward facing processes,” McCullough says. “It’s in the small to mid-size market where we’re seeing this grow like wildfire.”

McCullough adds that she would not be at all surprised to see larger would-be ASPs, such as Oracle eventually decide to spin off their ASP units as separate firms, since success in renting applications threatens to cannibalize revenue from those firm’s sales of similar applications. “All of the big firms are struggling a lot around that,” she says.

And that could mean that for investors looking to cash in on the projected booming demand for ASP services, the smaller fish might turn out to be the better catch.

Intershop AG posted a loss of $18.3 million on revenue of $46.26 million for 1999, as compared with a loss of $17.3 million on revenue of $17.8 million in 1998.

No date has been set yet for the company’s IPO, which is expected early this year.

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