Analysts Archive

Walldorf Success Story Continues

from GOING PUBLIC, 4/99



realTech - Neuer Markt

from FINANZEN 4/99



IPO Timing By realTech Looks Solid

from THE WALLSTREET JOURNAL EUROPE, March 16, 1999



News from Walldorf Valley

from GOING PUBLIC, 3/99







Walldorf Success Story Continues from Going Public, April 1999



Newly-listed realTech reports impressive figures. We have been used to getting reports from Walldorf of annual growth rates in the upper double-digit percentage range ever since SAP entered the scene. Equally successful is realTech AG, which was portrayed in the 3/99 issue of Going Public. At average growth rates for sales and profit of over 100%, realTech has shown a performance that may even gain in momentum by its listing.



Strength in earnings power

The figures shown in the table show the company's dynamic growth. Also for the future, there is no indication of a slump, with the trend in returns on sales expected to show an overproportional increase of 30% before taxes and just under 20% after taxes. This will be due largely to its increasingly well-established consultant and staff organization as well as the targeted increase in the sales share accounted for by proprietary software tools. Essentially, the current structure may be considered a sound basis supporting the development forecast shown with DM 111.3 million in 2001 and an expected DM 21.8 million profit after taxes. However, these figures do not yet reflect the potential that will be tapped with the proceeds from the increase in capital, particularly in terms of acquisitions and the establishment of new subsidiaries abroad.



Quality has its price

All in all, the company's share capital will be increased by 1 million to a total of 5 million individual stock certificates. Upon the exercise of the Green-Shoe option with another 100.000 shares allocated, its free float will be 22%. This means that the current stockholders, in their majority the four incorporators, offer only the minimum amount to outside stockholders required to get a quotation in the Neuer Markt, which can only mean that the founders have great confidence in the future of their company. According to the following assessment, the issuing proceeds should nevertheless run close to or even above a three-digit amount in million deutsch marks.



A close estimate?

Although Hancke & Peter as IT consultants and Brain International, the ERP software developer, are not fully comparable, the pricing of their issue is a good clue as to the price realTech may fetch. They were valued at around 35 on the basis of their P/E ratio of 2,000. This P/E ratio is also close to the average valuation of IT issues in 98. Because realTech has a higher growth rate compared with the other two companies mentioned above, a P/E ratio of 35 should be the lower limit. In terms of business activity and ratios, iXOS comes closest to realTech. On the basis of its profit expected for 2000, iXOS was listed in the Neuer Markt segment at a P/E ratio as high as 45 in October 1998. By the end of April 1999, realTech's valuation might even be a bit higher. On the basis of this estimate and an anticipated after-tax profit of DM 14.5 for 2000, realTech's market value is between DM 500 and 650 million. Because despite other methods the valuation of IT companies is geared to their P/E ratios , also its book-building range should be in this magnitude..



Conclusion:

Even now, before the book-building range has been determined, there are indications that the issue will be grossly oversubscribed. Subscribers who are allocated shares may probably expect the issue to be valuated as an attractive buy-and-hold investment. With prudence, those who come away empty-handed in the IPO still have good prospects in the aftermarket. As was demonstrated by first-trading-day quotations in early March, aftermarket prices of no more than 20% to 30% above the first offering price are possible now even for attractive stocks in the Neuer Markt. To draw an upper limit, a multiple of roughly 1 should result as the ratio of the P/E ratio on the basis of the profit anticipated for 2000 to the expected increase in earnings.



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realTech - Neuer Markt

from FINANZEN, 4/99



realTech was founded by four former SAP consultants in 1994. Their business idea was to address inadequately met needs for technical consulting in the implementation of SAP R/3 systems. The fact that there are major shortcomings, indeed, is evidenced by their business figures. By 1998, realTech already recorded earnings of DM 33.6 million.



The operating profit was around DM 5.5 million. This head-on expansion is going to continue. For the most part, realTech's clientele are companies that have worked with the SAP R/3 system for two or three years. Because the R/3 business has boomed over the last three years, realTech will continue to have a full order book. realTech plans to invest its issuing proceeds in the further development of proprietary software so as to grow from a consulting firm to a software company.



Information & ratios

Summary:

Exciting and plausible business story. Naturally, the investment performance depends on a fair offering price. This stock is certainly suitable for long-term investment. Subscribing should be worthwhile.



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IPO Timing by realTech looks solid

from THE WALLSTREET JOURNAL EUROPE, March 16, 1999



FRANKFURT - Information services specialist realTech AG may have picked a good time to go public - its business is expected to snowball. The five-year-old German company, which plans an initial public offering of as many as one million shares in April, specializes in installation, technical support and consultancy for software company SAP AG. It serves SAP's integrated business systems software, known as R/3, and said it is the only company to offer similar services for SAP worldwide.



Commercial banks are optimistic about the niche information technology market that realTech serves. "IT services is the IT growth segment par excellence," said an IPO specialist at a commercial bank in Frankfurt who predicts double-digit annual growth. Simone Glass, analyst at Sal.Oppenheim, is setting her sights even higher, estimating more than 50% growth in the next two or three years.



Close ties

Analysts see average annual growth of 8% over the next five years for the overall IT market, which includes fields such as software, hardware, services and technical support. The German IT market had sales of 93 billion marks ($52.5 million) in 1998. realTech's links to SAP go deeper than just offering services based on the software maker's products. Its four founders are former SAP R/3 specialists, and the company's headquarters is next to SAP's main Walldorf, Germany, base. SAP is among the top business software companies.

Last year, realTech had 33.7 million marks in sales and pretax profit of 5.5 million marks. It sees 1999 sales at 50 million marks and pretax profit at 11.1 million marks. It expects these numbers to rise to 150 million marks and 45 million marks, respectively, by 2002.



Expansion plans

"We want to be a global player in IT consulting," Chairman and co-founder Markus Adam said in an interview. The company plans to reduce its dependence on SAP by investing heavily in its own software solutions and by striking up more partnerships with other producers. It already has strategic alliances with producers such as SAP, Microsoft Corp., International Business Machines Corp., Hewlett-Packrad Co. and Oracle Corp. It has six subsidiaries outside Germany, including the U.S., Australia and Singapore, and plans to use the IPO proceeds to found another 15 in the next five years. "We're eyeing Asia intently," said Mr. Adam.



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News from Walldorf Valley

from GOING PUBLIC, 3/99



realTech is on its way - to the "Neuer Markt" at the Frankfurt Stock Exchange

realTech, founded in 1994, has long stood in the shadow of the mighty SAP – but only their company headquarters, and only until their pending move in mid-1999 is complete. A comparison of the prizes and awards the company has won in the past year (including the Baden-Württemberg Förderpreis, an economic development award), realTech has long escaped from SAP’s shadow.

The growth of the company, which was founded by four former SAP employees, has even surpassed that of their large neighbor and partner. And because people from Walldorf do not just sit back and rest on their laurels, realTech’s IPO on the Neuer Markt is planned for the end of April, to underpin further growth.



Technical R/3 consulting

When they were consultants at SAP, the four realTech founders Markus Adam, Daniele Di Croce, Rainer Schmidt, and Peter Stier discovered that technical consulting was often shamefully neglected during the implementation of SAP R/3 Systems. The company’s technical R/3 consulting offerings encompass the selection of the suitable hardware, all activities at the operating system level (such as installation, configuration, and security), installation and maintenance of the databases, and all network aspects – including data security and high availability. In addition to configuring the SAP Basis software, the services include permanent administration, including upgrades and system-side adjustments to the R/3 Systems.



Explosive growth

The latent demand for comprehensive consulting services is documented by realTech’s explosive sales growth, from 0 to DM33.6 million in just four years. And this growth was not purchased with heavy startup losses, either – realTech has been in the black from the start. According to advance figures, the company realized EBIT of DM5.5 million in 1998, and the company is counting on growth rates in the future that should lie far above the general 30-35% rate forecasted for ERP software.



Independence

With so many connections to SAP and its software, it is natural to suspect that realTech is totally dependent on the fortunes of SAP, but nothing could be further from the truth: the company’s expertise focuses more on the technical level than the application level. At this level, the differences between the individual ERP software vendors are much less pronounced. Moreover, the company is only marginally dependent on SAP’s new business. Another interesting fact is that realTech is usually not hired during the actual implementation of SAP R/3, but instead after a period of two to three years.

During this time, the endusers experience the technical problems themselves and then turn to experts like realTech. With the large number of new SAP systems installed in the last few years, realTech’s present business is likely just the tip of the iceberg. The company’s dependence on technical R/3 consulting will be reduced through general IT consulting orders and an increased focus on developing their own software tools. The funds from the IPO will be largely dedicated to developing and enhancing these tools. realTech is also proud of the fact that their past growth was achieved without a major partner or large shareholder – it was financed entirely from their cash flow.



Potentials

The company’s currently available software tools are theGuard! and the TransportManager. theGuard! is an application management tool that automatically detects any error situations in an R/3 System – including operating system, database, and hardware – and alerts a system administrator who can be located anywhere. The TransportManager allows a flexible transport of objects within the R/3 System that goes beyond the standard SAP transport options. Software sales result in extremely high margins, which means that consequent expansion of the sales sector will result in a proportionally larger increase in profits.



Market demand is surely present, as the software has been developed based on the company’s own customers’ experiences. Moreover, with their interest in topnet AG, an ISP, realTech possesses a strategic access point to new forward-looking business potential in the Internet. Last but not least, significant potential lies in realTech’s excellent corporate culture and management team that has already shown that they have the right stuff.



Corporate Culture

The factor for success is hiring qualified staff – the majority of realTech’s employees are specialized, certified college graduates from technical subjects. Thanks in no small part to its strong corporate culture, realTech has been able to acquire excellent staff despite the general shortage in the labor market and its close proximity to SAP. Recent graduates usually go through an internal trainee program for around two months, followed by six months of on-the-job training as a consultant. With this structure, motivated employees can quickly assume responsibility independently and advance within realTech’s flat hierarchy. A requirement in this sector is an employee share program, which realTech started in 1998 and will give realTech staff incentives through stock options every two years.



Market leader

In line with their "follow your customer" principle, realTech began establishing international subsidiaries in 1995. They currently number six: in the U.S., Italy, Australia, New Zealand, Great Britain, and Singapore. Accordingly, the company is well positioned to expand to their target of 25 international subsidiaries worldwide. An entry into a new market could also be accomplished through a strategic takeover. The same applies to intensifying development of the software tools. In the long term, realTech’s goal is to achieve 50% of sales in this area. Management’s goal in this area is clear: "In the markets we enter, we intend to be market leader, or at least in the leading group."



Summary:

realTech has been able to position itself so well in its market perhaps precisely because that market is so unglamorous. Sales and profit growth over the last few years show that this extremely lucrative niche market is far from exhausted. With the revenues from their IPO on the Neuer Markt, the company is in an excellent position to become the global market leader in their business sector. The company’s dynamics will be increased through additional new developments like their proprietary software tools.



Investors are offered above-average development potential through both fair pricing and a suitable purchase price on the stock exchange. However, based on the overall inflation on the Neuer Market and the expected excess demand for this model company, a "suitable" price might be difficult to find. Still, another comparison with SAP might help determine the proper investment horizon: for a long while, any realized sales price turned out to be a bad deal. So buy the shares prudently and hold on to them.



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