THE DAY AHEAD: Pervasive plunge overdone, Sycamore's 1st few minutes

Pervasive Software (Nasdaq: PVSW) is going to be an interesting case study in a few quarters. For now, the software company is just one dog of a stock, but could emerge as a value investment.

Pervasive was leveled Friday as shares fell 67 percent to 12.

That's a big drop for a company that met expectations and reported soft revenue growth. But there's more to Pervasive's fall than some soft sales.

Pervasive: Value play?

The company is betting its business and profits on a Web development product called Tango, which competes with Allaire Corp.'s (Nasdaq: ALLR) Cold Fusion.

According to CEO Ron Harris the company has "a significant window of opportunity" to be a leader in Web infrastructure, specifically the "beyond the PC" niche also known as the wireless Web. A bunch of new wireless Web applications are being developed and Pervasive could be a major player.

The catch? The business model is changing on a product that represents just 5 percent of Pervasive's first quarter sales of $16.7 million. Pervasive is primarily a database company that competes with the likes of Sybase (Nasdaq: SYBS).

Pervasive officials said they would spend $13 million over the next four quarters to develop Tango and grow revenue. The goals are to generate leads, create a telephone support center for developers and improve branding. Officials said the investment is warranted given that Tango has "gained significant traction."

The rise in expenses will create three consecutive break even quarters or worse compared to consensus estimates for a 50 cents a share profit in fiscal 2000.

It didn't take long for investors to overreact to analyst downgrades. Hambrecht & Quist, Robertson Stephens, Needham & Co. and FAC/Equities cut the stock. Robertson Stephens said the Tango investment would weigh on shares, H&Q cited the business model, and FAC said database sales were slowing.

Investors panicked, but no one pondered what Pervasive would look like if its bet paid off. The move from a long-term perspective makes sense. Database sales aren't going to turn the company into a next-generation player. With databases, you're either Oracle (Nasdaq: ORCL), Microsoft (Nasdaq: MSFT) or IBM (NYSE: IBM) or you're dead.

If Tango can tap into a growing market for "Web-enabled e-business applications," why shouldn't Pervasive take a shot at it?

Short answer: Pervasive wasn't initially a Web company and has made money in the past. Read any Web company prospectus and you'll find that they are going to spend a lot of money on development and marketing. What's $13 million in the big picture?

"The market doesn't like surprises, but this is probably a little severe" said Harris, referring to the Pervasive plunge in an interview with ZDII. "We've never made a business decision with an eye on the short term and we don't expect to now. You can't let Wall Street run the company.

"We'll take our beating and focus on the long-term."

Pervasive is spending $13 million over four quarters to develop a product that could transform the company -- and it has a profitable database company it can use as a crutch. To put that $13 million in perspective, many Web companies blow $20 million on ads in a quarter.

But the rules are different for Pervasive -- once you've made a profit you can't turn back. "Analysts and investors didn't expect the incremental investments we would be making," said James R. Offerdahl, Pervasive's financial chief. "They would have expected it out of a young startup company."

Now there are a few execution concerns here. Pervasive had trouble moving 700,000 orders due to a third party vendor that goofed. Of that sum, 500,000 was attributed to the vendor and the remainder just wasn't in stock. About 160,000 of those orders were Tango shipments.

That kind of execution glitch doesn't instill confidence, but it's not any worse than any other software company could have. Management is convinced it is making the right move and analysts could become supporters of the strategy in a few quarters.

"Our job is to continue to tell the story and execute the strategy," said Offerdahl.

Joseph Payne of Hoak Breedlove Wesneski & Co. told ZDII that the move to push Tango is "ultimately the right thing to do." He downgraded the stock from "buy" to "accumulate," but said "it's a real accumulate," meaning it may be time to buy.

Those rattled Pervasive shareholders sure hope Payne is right.

Swinging from Sycamore

The dangers of buying into an IPO on the first day couldn't have been more evident with the Sycamore Networks (Nasdaq: SCMR) debut Friday.

When shares started trading at the opening price of 270 7/8 we conducted a little experiment we're sure many of you were trying at home -- clicking the real-time quotes every 30 seconds or so.

The swings were quite an eye opener. Shares opened at 270 7/8, settled down to 212 1/8 before bouncing back to 226 1/8. After a minute or so, Sycamore hit 195, then bobbed back up to 225 just seconds later. According to the quote, the low was 180, but who could tell because things were moving too fast.

All this in the first 15 minutes or so of trading. Shares of Sycamore closed at 184 3/4. Sycamore may be a hot company but playing that stock once it hit the market Friday was downright dangerous.