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Wednesday, December 31, 1997

Scopus Technology Inc.
(Nasdaq: SCOP)
Phone: 510-597-5800
Website: http://www.scopus.com
Price (12/30/97): $10 5/16


HOW DID IT FIND TROUBLE?

Here's a trick you've probably seen way too many times. Take a company in a battered sector. Put the brakes on sales growth. Then, toss in an earnings disappointment. Want to see some market cap disappear? Hocus pocus Scopus!

It's tragic magic, but that is exactly what investors found when they dialed up the shares of customer care software specialist Scopus in the latter part of 1997. It was a hot industry 2-3 years ago, when most of the niche companies, Scopus included, came public to great fanfare.

In a business world where enhanced customer service is always in demand, the companies devoted to facilitate the process prospered. Yet by the fall of 1996 margins and sequential profit growth had peaked. Too many new players were chasing and underbidding the same accounts.

By the time October 1997 rolled around, Scopus had hung up more than half of its share value -- even before a UBS Securities downgrade and warning Wall Street that third quarter earnings would fall far shy of analyst estimates.

BUSINESS DESCRIPTION

California-based Scopus provides software for the customer information management market. The company's products allow a company to automate customer support, change product designs, and manage sales and marketing activities. Scopus also offers consulting, training, and postsale maintenance and support services for its products.

Scopus clients include America Online, AT&T, Packard Bell, and Dell. In February the shares were split 2-for-1.

FINANCIAL FACTS

Income Statement
12-month sales: $80.9 million
12-month income: $9.7 million
12-month EPS: $0.47
Profit Margin: 12%
Market Cap: $222.8 million

Balance Sheet
Cash: $47.4 million
Current Assets: $100.5 million
Current Liabilities: $14.7 million
Long-term Debt: None

Ratios
Price-to-earnings: 21.9
Price-to-sales: 2.8

HOW COULD YOU HAVE SEEN IT COMING?

Back in April, Clarify (Nasdaq: CLFY) set the proper gloomy tone for the sector. The company put out a bleak forecast and its shares were sliced in half on a single trading day. While the other players initially fell in sympathy, investors forgave and forgot, bidding shares of Scopus past $35 a share a month later.

The helpdesk software industry is fragmented. There are ten publicly traded companies catering to the niche, and the largest, Remedy (Nasdaq: RMDY), sports trailing revenues of just $120 million. The sector is thoroughly covered in the Front Office Software message board where Mike Buckley, MF Buck in an earlier life, often leads the engrossing research efforts.

On that message board, a telling comparison of the ten publicly traded players found that Scopus was one of just two front office companies that had reported lower trailing sales than the year before. That is a revenue slowdown before one even considers the profit margin slump in the sector as a whole.

On October 6 analysts who were looking for the company to earn $0.14 a share for the fiscal second quarter were surprised when Scopus announced that the company would only earn a nickel a share. A shock to many, but not to those who heeded the Clarify warnings back in April. Those wary investors figured that the helpdesk apple doesn't fall from the tree and made a prompt exit from the sector as a whole.

WHERE TO FROM HERE?

Naturally, earnings estimates have been shaved considerably since then. As a matter of fact, the $0.40 per share expected for next year is a few pennies lower than what the company earned last year.

Yet Scopus is in an enviable position with a sparkling cash rich and debt-free balance sheet. That is why it may have seemed odd when the company chose its battered stock rather than cash to acquire Clear With Computers two months ago.

Nothing wrong with the purchase of CWC, which specializes in interactive selling systems, as the company will now become a more complete corporate solution. From customer acquisition with CWC and customer retention with Scopus, on the surface it appears to be a sound business combination.

With the stock value offered for CWC falling from $90 million to $60 million since then, it seems that Scopus knew that its cash hoard had a better chance of holding its value than its own shares.

Consolidation is a common occurrence in a battered and fragmented sector, and this trend continued two weeks ago when IBM's (NYSE: IBM) Tivoli subsidiary announced a buyout of Software Artistry (Nasdaq: SWRT). Of course, one should never buy a stock in hopes of a buyout unless one has done due diligence and found that the stock is indeed undervalued and perceives a potential acquisition as a bonus.

In the meantime, with Scopus selling at 25 times fiscal 1999 (ending in Mar. 1999) earnings estimates. Absent a marriage proposal, it seems the stock will be hard pressed to bounce back unless the prospects for the company -- and the sector as a whole -- improve. Now, that would be a great trick.

-Rick Aristotle Munarriz
(tmfedible@aol.com)


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