2HRS2GO: TSI rides high on enterprise apps

Recent months have seen investors treat the enterprise software sector as a colony of Ebola carriers, but not everything in the world of corporate applications is diseased.

TSI International Software Inc. (Nasdaq: TSFW) provides today's example of a healthy provider of business software. The company's flagship Mercator product connects different applications, so that someone using, for example, SAP's R/3 can tie it into an Oracle database, or link to an e-commerce front end on the Web.

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Executives of TSI gush about their prospects, which in and of itself means nothing since every company thinks of itself as mana from the Almighty for corporate IT departments. Still, there might be something to TSI; after all, four of seven analysts following TSI rate it a "strong buy", while the the rest have the equivalent of "moderate buy" ratings on the stock.

Makers of enterprise applications and systems definitely have growth problems. SAP, Peoplesoft, Baan blame Y2K concerns for slowing spending dramatically, while other observers believe the market is just saturated, since there are only so many large organizations in the world who could use this stuff.

Either way, those expansion problems have taken down anything remotely related to corporate software. That includes TSI, whose stock price on a split-adjusted basis has fallen by almost a third since mid-March.

But unlike the gigantic ERP players, TSI doesn't care whose applications are used by a corporation. Mercator is designer to link any of them -- legacy software, e-mail systems, databases, mainframe programs, Web applications. It's a nascent market, if you believe research firms such as IDC, which expects 80 percent growth for the enterprise application integration market, which totaled about $300 million last year.

"We've got a long way to go before we run out of room," says Connie Galley, who spent time this week wooing investors at an investment conference organized by BancBoston Robertson Stephens, in San Francisco. "We are extremely well-positioned in a fast growing market."

Top and bottom line growth has been impressive, with second quarter revenue up 133 percent year-over-year to $40 million-plus, and earnings up 122 percent. Analysts expect that to continue, with Wall Street generally predicting TSI's full year revenue to double this year, and grow at least 50 percent the year after. And all that comes despite competitors' troubles -- New Era of Networks Inc. (Nasdaq: NEON) recently reported second quarter results that included an unsightly loss.

No rival appears in more than 15 percent of the contract bidding involving TSI, says Connie Galley, the company's president and CEO. "And many times, the competitor is eliminated early," she says.

At this point, TSI believes it mostly competes with corporations' own internal programmers. But TSI is making impressive headway, with half of the Fortune 50 use Mercator. TSI claims 1,500 customers at this point, many of whom buy Mercator because it can connect their internal applications with Web front-ends. None of those customer generate more than 5 percent of TSI's sales, Galley says.

TSI isn't perfect. Considering Mercator is an off-the-shelf product, it has a pretty long sales cycle: three to six months for contracts ranging between $150,000 and $200,000. Larger deals can take as long as nine months.

And even with its recent slide, it's hard to argue that TSI is cheap at 47 times estimated 2000 earnings. But it's a lot cheaper than it was earlier this year, and nothing's changed since then; in fact, analysts believe the picture has gotten better, which is why three of them just jumped onboard within the last two months. If you're going to buy TSI, might as well do it now, because it's starting to draw attention.

Other issues:

Sterling Commerce Inc.

(NYSE: SE) A word of advice: if you're going to issue a warning, make sure you at least meet the reduced expectations. J.P. Morgan Securities, Advest and CS First Boston today downgraded the maker of e-commerce software after the company reported earnings lower than the consensus estimate, which had already been cut after Sterling's preannouncement last month. Even worse, the company told Wall Street to lower its expectations for the third quarter, to no more than 42 cents per share in earnings. First Call had been predicting 45 cents.

eBay Inc.

(Nasdaq: EBAY) Exhibit A for the case against e-commerce, with the website down again, this time for most of today. Until the Internet's reliability improves by a few orders of magnitude, e-tailing will remain a lovely but little niche of overall retail.

Overall market negativity finally overcame the technology sector in the afternoon. With two hours left in regular trading, the Nasdaq Composite Index was down 16.35 to 2,549.48, the S&P 500 lower by 14.49 to 1,299.22 and the Dow Jones Industrial Average lighter by 98.47 to 10,695.35. 22GO>