The Boring Portfolio, Mar. 19, 1999

<THE BORING PORTFOLIO>
Complete Collapse
IT consulting hit hard

By Alex Schay (TMF Nexus6)

ALEXANDRIA, VA (March 19, 1999) -- The credibility collapse over at CATP (kat'pee) -- Cambridge Technology Partners (Nasdaq: CATP) -- had investors sniffing around the entire sector for signs of general weakness today. Cambridge was pretty much cut in half as a result of its warning that fiscal first quarter earnings will fall short of expectations. The company now anticipates delivering Q1 EPS of $0.12 to $0.14, versus analysts' forecasts of $0.21 to $0.24, and revenues of $148 million to $151 million, compared with analysts' forecasts of $163 million to $170 million.

While Cambridge chalked up the problem to an execution failure related to its reorganization, other information technology (IT) consulting firms endured some residual ill will from the Furies that descended on Cambridge. One of them, which I happen to have on my watch list, was Complete Business Solutions Inc. (Nasdaq: CBSI), and it dropped $2 5/8 to $20 1/8, or about 12%. Before proceeding any further with a look at CBSI, I've often found it helpful to think about the IT segment in the following general terms:

                    Predominantly     Predominantly
PRICING MODEL       Time &  <-------> Fixed Price
                    Materials         Fixed Time

REVENUE VISIBILITY  Little or  <----> Many Months
                    no backlog        of Backlog

HIRING MODEL        Hourly Wages <--> Salaried
                                      Employees

The strategic consulting outfits and system integrators with the higher EBIT (earnings before interest and taxes) margins (on the order of 20-25%) generally tend to fulfill the characteristics found on the right side of this chart. Application development and contract programming firms, in turn, exhibit more of the qualities found on the left side of the chart (with margins usually in the low to mid-teens). Of course, there is a substantial amount of crossover at times, which can skew this handy conceptual framework. While IT consulting is one of the few supply driven markets, the one universal element throughout the segment is a ridiculous amount of competition -- as well as widespread difficulty in recruiting and retaining qualified employees.

CBSI's services include application maintenance, development and reengineering, packaged software implementation, IT consulting, Y2K conversion, and contract programming. CBSI offers a "partnership sourcing" program that allows clients to take advantage of its diverse offerings at much lower "blended rates," thanks to the leverage provided by its global delivery model. This strategy aligns itself with the overall trend toward consolidation, which has accelerated in recent years as customers minimize the number of IT vendors that they deal with.

Continuous development projects with ever-changing functionality have transformed IT services into an important element of the long-term growth for some companies. Many IT consultants receive recurring revenue streams from their existing clients that can account for up to 80% of their future revenues (and CBSI is no different). CBSI's margin structure and return on invested capital profile is very attractive -- thanks in part to a quarter of its IT professionals residing in India. Operating margins surged almost 7% in the most recent quarter on a boost in high margin services, as well as the use of offshore development centers and success in pulling its subsidiaries together.

The real bottom line, though, is that CBSI has a lot of very loyal clients. I'll be writing some more about CBSI next week. Until then -- see you on the boards.

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Stock  Change    Bid
BRKb  -43      2547.00
CSL   -  1/8   44.13
CSCO  -2 3/8   104.50
GTW   -3 1/2   68.25

                   Day    Month   Year  History
        BORING   -1.83%   4.60%   0.09%  34.39%
        S&P:     -1.31%   4.92%   6.02% 116.37%
        NASDAQ:  -1.68%   5.83%  10.43% 132.62%

    Rec'd   #  Security     In At       Now    Change
  6/26/96  225 Cisco Syst    23.96    104.50   336.23%
  8/13/96  200 Carlisle C    26.32     44.13    67.62%
 12/31/98    8 Berkshire   2244.00   2547.00    13.50%
   2/9/99  100 Gateway 20    72.38     68.25    -5.70%


    Rec'd   #  Security     In At     Value    Change
  6/26/96  225 Cisco Syst  5389.99  23512.50 $18122.51
  8/13/96  200 Carlisle C  5264.99   8825.00  $3560.01
 12/31/98    8 Berkshire  17952.00  20376.00  $2424.00
   2/9/99  100 Gateway 20  7237.50   6825.00  -$412.50


                             CASH   $7658.52
                            TOTAL  $67197.02