Hard at work
By : Charles Ward
One of the hottest stocks on the Warsaw Stock Exchange (WSE) in recent months is ComArch, a tech dynamo that saw its share price skyrocket 100% from Nov. 2 to Jan. 14.
Investor exuberance over the shares stemmed from the company's strong results last year. ComArch's net profit soared 89.3% in 1999, mainly due to the unique market position the company has managed to carve out for the custom-made software and internet solutions it sells to telecom operators and banks.
"It's a very well-run company, the management is very young and dynamic," said Michal Buczynski, an analyst at Centrum Operacji Kapitalowych Banku Handlowego.
ComArch's performance sets the stage for a successful second public issue next month, from which it hopes to raise zl. 60 million-zl. 70 million ($14.6 million-$17.1 million) for investments and possible acquisitions. The issue will increase the percentage of ComArch's shares floated on the Warsaw Stock Exchange (WSE) from 27.8% to 37.3%, said Johannes Weyringer, an analyst at Raiffeisen Capital & Investment. At its closing price Thursday of zl. 182 a share, ComArch currently has a pre-offering market capitalization of $137 million.
Krakow-based ComArch spent the last decade making its name developing homegrown software solutions, hardware and training for specific clients. The company's real success took off a few years ago as telecom operators, which account for 52% of the firm's revenue base, adopted its tailor-made applications for the industry, such as its billing system for Telekomunikacja Polska (TPSA). Similarly, analysts said the popularity of ComArch's software increased among the banking sector, where the company works with clients such as BIG Bank Gdanski and Bank Handlowy. Much of this popularity stems from the firm's ethos of technological prowess, they said.
"It positions itself as a very technologically advanced company, and I think it's true to a large extent," said Marcin Sadlej, an analyst at CDM Pekao Securities. "They are more technologically advanced than other Polish IT companies."
But the IT market here is changing rapidly as competition becomes more intense and solutions are quickly outdated. According to ComArch's prospectus, the company, like others of its ilk, has much to fear from the industry's growth. That growth may prompt foreign players to move into this market, particularly as the country is poised to join the European Union (EU) in the next few years. Furthermore, not all clients have been happy with what they have purchased. Credit Lyonnais, for example, said that ComArch is more than a year late on finishing the French bank's back office system in Poland.
Despite the risks, a general euphoria has surrounded domestic information technology (IT) stocks in the last year. Companies such as Softbank, ComputerLand and Optimus have watched their share price push up 104.4%, 113.95% and 238.24% respectively year-on-year to Jan. 14. Weyringer said that investors believe the IT market to be undervalued, and moves into the internet from companies such as Optimus and Prokom renewed excitement about the sector. He said the recent rally may have proved too fast for some investors, but others are waiting in the wings, and that "a huge (amount) of money will come" to the sector this year.
"The country offers huge potential," Weyringer said.
ComArch is no exception in the run on IT stocks. The company's 100.7% rise from Nov. 2 to Jan. 14, when it closed at zl. 187 a share, meant that it outpaced the WSE main market WIG index, which was only up 36.4% during the same period. Analysts said the jump was due to a current worldwide fervor for IT stocks, investor enthusiasm before the firm's upcoming move to the WIG and anticipation over how the company will be able to use the capital raised.
But analysts said that it would be difficult for ComArch to keep up this pace. "I expect in the near future some correcting wave to take place," Buczynski said. "After that the stock price can grow" at a more stable rate.
Last year, ComArch reported sales revenue of zl. 123 million ($31.54 million), up 95.2% from 1998's figures, which had in turn risen 548% on the previous year. Furthermore, net profit climbed 89.3% to hit zl. 14.2 million ($3.64 million).
Although 2000 is expected to post impressive returns, they will not be as substantial. Buczynski said that this year sales were expected to rise 38.2% to zl. 170 million ($41.5 million) while ComArch's net profit is predicted to increase 60.6% to zl. 22.8 million ($5.5 million). "We can't sustain such dynamic growth, it would hurt the company," said Janusz Filipiak, ComArch's president.
No copies
Filipiak, a professor of telecommunications at Krakow's Mining and Metallurgy Academy, and his wife, Elzbieta, founded the firm in 1991, changing its name to ComArch in 1993. After years spent abroad working as a contracted telecom researcher in France, Australia, Canada and the United States, he returned to Poland at the beginning of the last decade and soon kick started the venture with the help of two of his students.
Instead of turning to venture capital firms for financing, ComArch grew on cash flow provided by the increasing demand for telecom software. One of its first clients, in fact, was TPSA, Filipiak said. "We have built the company on the orders we got from the market," he said.
Rather than buying solutions from Western software developers and then re-selling them to Polish firms, as was the norm at the beginning of the decade, ComArch's strategy was to create its own IT products, Filipiak said. "We concentrated on developing rather than shifting software" created in Poland for Polish businesses, he said.
From those inauspicious beginnings, ComArch now employs 750 people, with seven people on the management board and 70 mid-level managers, Filipiak said. He and his wife now hold 62.8% of the firm and will control 52.9% after the offering. The owners will control 69.2% of voting rights after the issue, down from 75.1%.
Besides TPSA, the company has also provided IT solutions for other telecom operators such as Elektrim-owned firms El-Net and TPZ. It has also won tenders for work in the banking sector from BRE Bank, Bank Handlowy, BIG Bank Gdanski and Bank Przemyslowo-Handlowy, among others.
Furthermore, in recent years the company has worked with international banks, such as Credit Lyonnais and Deutsche Bank, as well as multinationals Procter and Gamble, Unilever and Lucent Technologies, for whom it has provided large database solutions and upgrades, as well as e-commerce applications, Filipiak said. "We are oriented toward the multinationals coming to Poland," he said.
By far the company's most popular product is its billing system, developed for TPSA's operations in the Warsaw area and since then installed for independent telecom providers El-Net and Szczecin-based TPZ, analysts said. But ComArch also sells to telecom operators with systems for managing their IT networks, and as well as providing software and applications for the internet.
For its financial clientele, the firm offers an array of products, including software designed to manage the operations of leasing companies and pension funds. But right now, most of the demand is for an e-commerce system for brokerage houses, for which the company recently won Twoje Pieniadze magazine's grand prize. The system enables investors to make transactions over the internet instead of going to the brokerage office in person, Filipiak said.
"Electronic banking is a very hot product," he said. "We have a lot of banking knowledge and we speak the same language."
But ComArch isn't speaking everybody's language. Credit Lyonnais uses a ComArch database application to manage its back office, and is not entirely pleased with the product.
"Maybe our case is completely different, but we are not very happy," said Joanna Dobrowolska, head of the IT department at Credit Lyonnais. "We have many problems and the project should have been finished a year ago."
Internet is the future
Recently ComArch has been making further forays into the internet and recently announced that net-related projects made up 15% of its revenue in 1999. The remaining 14% came from products for financial institutions, 19% from the provision of "other services and systems," and 52% from the delivery of IT systems to telecom operators, still the core of ComArch's sales.
Analysts said that the internet announcement was partially responsible for the share price's recent leap a result of investor interest in anything internet related. The company plans to invest zl. 16 million ($3.9 million) into Internet FM's portal Interia.pl as well as develop net products and e-commerce services, according to the company's offering prospectus.
"We see the internet as something that will determine the market's evolution," Filipiak said.
ComArch's competitors echoed this sentiment. "The internet is at the very beginning," said Maciej Wantke, assistant to Prokom's CEO Ryszard Krauze. "It is one of the sectors in which (IT companies in general) will compete."
Integral to ComArch's future is the use of capital raised from the share issue, estimated at zl. 60 million-zl. 70 million ($14.6 million-$17.1 million), Buczynski said. In addition to ComArch's internet investments, the company intends to complete real estate work on a software center in Krakow's Special Economic Zone and its Warsaw office, investments that will amount to zl. 17 million ($4.15 million). A further zl. 24 million ($5.85 million) is to be spent on modernizing and developing new products and ComArch's infrastructure, as well as improving the funding entities within its capital group.
And ComArch needs to shore up its capital resources to ensure stable growth, Buczynski said. At the end of last year, its capital chest held zl. 37 million ($9.49 million), paling in comparison to Softbank's zl. 180 million ($46.15 million) and ComputerLand's zl. 80 million-zl. 90 million ($20.5 million-$21.95 million).
"ComArch has very small capital resources," he said. "It will use the capital (from the share issue) to acquire, in the short and longer term, (small IT) companies."
In the meantime, attention is focused on the new offering of an additional 570,000 shares. The sale of 500,000 of those shares will take place next month while the rest will be taken up toward the end of the year.
Based on its Jan. 19 closing price of zl. 173, ComArch carried a p/e ratio of 30.8 on anticipated net profit for 2000, a premium against other IT stocks such as Prokom (20.7) and Softbank (26.9). The only company with a higher ratio is TPSA at 36.8. That p/e ratio does not figure in the new offering, however.
The WSE's p/e on Jan. 19 came to 25.65 for all companies on the market, and 22.49 for those showing profit, said Pawel Puchalski, an analyst for Dom Inwestycyjny BRE Banku.
The subscription period for ComArch's second offering is Jan. 31-Feb. 2. The offering price will be set once the book-building period ends next Tuesday. The minimum price per share given in ComArch prospectus is zl. 100, but the level could go as high as zl. 140-zl. 150, Buczynski said, even though that price represents a 20% discount to current trading levels. This would give the stock a p/e of 22.19-23.77 taking into account the new issue.
While ComArch won't continue its present rate of growth, "I think it will have one of the highest rates of growth among all Polish IT companies," Buczynski added.
