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Ticker: (Nasdaq: RATL)
How Did It Double?
It's not easy to admit, but in the last two weeks I've become an avid fan of Olympic gymnastics. True, I was disappointed by the American men's team lackluster effort in the team competition, and even more so by the International Olympic Committee's decision to disqualify gold medallist Andreea Raducan for ingesting an over-the-counter cold remedy (such an outrage). However, I left the events impressed by the athletes little margin for error.
Business Description
Rational provides tools and solutions that help build, test, and manage the entire software development process. Building refers to creating the code to meet customer requirements. The next step deals with testing the load capacity and functionality of the applications, which ultimately leads to redesign. Finally, managing the process deals with getting groups of programmers, testers, and managers together on one page to manage software change and defects. In addition, Rational offers a variety of consulting and training services.
Financial Facts
Income Statement
How Could You Have Found This Double?
This double could have been found if you followed the advice of Bela Karolyi and "focused, focused, focused." Actually, this company has appreciated for a number of reasons. For starters it boasts an excellent trailing operating margin of 18%. The company maintains a long-term goal of 20%, which exhibits its commitment to keeping expenses in check to see a greater proportion of revenue trickle down to the bottom line.
Where to From Here?
The call for e-applications has spurred increased demand for software development tools. Rational has a competitive differentiator because it offers one-stop shopping with the only end-to-end solution on the market. Pure-play competitors like Mercury Interactive (Nasdaq: MERQ), which has a 40% market share in the testing space, is unable to offer a full solution of tools under a common umbrella.
Phone: 408-863-9900
Website: www.rational.com
Price (10/4/00): $57.38
The software sector is a lot like gymnastics. Meaning, firms in the space have all been afforded lofty valuations and even the slightest misstep could lead to Olympic devastation. Many companies, however, support those haughty valuations, and Rational Software (Nasdaq: RATL) is no different. Impressive margins coupled with significant sales growth have placed the Cupertino, California-based company on the Daily Double medal stand and the time to assess has come.
Software is intended to solve a business problem or automate a certain process. Previously, in an effort to expedite the applications development cycle, little regard was given to whether or not it was sustainable. However, as the scope for software applications has expanded to include internal and external operations engineered to run over the Internet, the building process and maintenance of software have been given greater significance.
Software has evolved to where dot-coms and global 2000 businesses depend on it to run every business operation. As a result, the programs have become more complex and are critical for businesses to stay afloat. Adding to that, the rush to Web-enable operations has placed an even greater burden on programmers to bring e-business applications to market in Maurice Greene-like speed. If systems fail and a company is unable to operate its customer-based applications, for example, sales would be adversely affected.
Thus, software development is marked by speedy development and emphasis on Web-enabled applications. Demand for products that ensure software works the first and every time has, likewise, grown at an exponential rate. A business is not willing to leave its business reputation to chance. A growing demand for its products has been the cause for Rational's Daily Double gold.
According to the company, it sells products in three main areas: e-infrastructure, e-business, and e-devices. E-infrastructure deals with enabling Internet and technology providers, such as Sun Microsystems (Nasdaq: SUNW) and Microsoft (Nasdaq: MSFT). The e-business segment deals with customers who are building e-commerce applications. Customers include Merrill Lynch (NYSE: MER) and eBay (Nasdaq: EBAY). Finally, e-devices represent the greatest area of growth for Rational due to increased demand for Web-enabled content on wireless devices. Customers in this space include Nokia (NYSE: NOK) and Sony (NYSE: SNE).
12-month sales: $625.1 million
12-month income: $90 million
12-month EPS: $0.47
Profit Margin: 14%
Market Cap: $12.9 billion
Balance Sheet
Cash: $979.5 million
Current Assets: $1123.9 million
Current Liabilities: $248.2 million
Long-term Debt: $600 million
Ratios
Price-to-earnings: 122.1
Price-to-sales: 9.24
Rational has exhibited excellent technique on the balance beam, whoops, I mean balance sheet. The company has nearly a $1 billion in cash, a mere $600 million in long-term debt and generated $70 million in cash flow from operations in the recent quarter. Another important factor to consider, particularly in the software space, is the days sales outstanding (DSO), which is derived by accounts receivable divided by sales in the quarter. Rational has a DSO of 81 signaling strong market traction and a lack of back-end loaded quarters.
Lastly, and perhaps most importantly, Rational has exhibited strong revenue growth quarter-over-quarter. The company is in an excellent position to continue growing its revenue because it caters to companies growing at tremendous rates. As Web-enabled software continues to create gains and efficiencies for businesses, Rational will do the same for those offering the software. The company exhibited 39% year-over-year sales growth in fiscal 2000 (ended March 31).
There is great demand for improved support among large corporations that operate in international markets. For example, a multinational with offices in Japan and the United States finds great value in Rational's full-suite because it creates communication on every level of development. Thirty percent and ten percent of its business came from Europe and Asia, respectively. Hence, increased international sales pose a significant opportunity.
Wireless technology and the Internet are rapidly joining. Demand continues to grow for wireless devices that can capture Internet content anytime, anywhere. Thus, Rational's largest growth opportunity is in the e-devices space. However, that currently represents only 15% of sales.
Dot-com dependence has become a big risk factor as many of those companies have fallen victim to financial woes. A portion of its business comes from dot-coms, but the company continues to diversify its customers base. Over 80% of the Fortune 100 are Rational customers, but continued improvement on this front will be an important factor to track.
Revenue growth, the only end-to-end solution on the market, wireless opportunities, and strong management are just a few reasons this company has been awarded a Daily Double medal. Success should continue, assuming Rational continues to execute properly and stick those landings.
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