Subject: MatrixOne: Enabling Inter-Organization Processes From: distribution@epoch.com Date: Tue, 17 Apr 2001 06:00:01 -0500 To: fox@csit.fsu.edu For in-depth coverage of all companies within the Software Sector, please visit http://www.epoch.com/emailalert/software.html Company Note MatrixOne, Inc. Epoch Partners APRIL 17, 2001 NASDAQ:MONE Mark Verbeck David Trainer Timothy Madda MATRIXONE: ENABLING INTER-ORGANIZATION PROCESSES _______________________________________________________________________________ FUNDAMENTALS Price (04/16/01) $19.87 FY Ends Jun 2001 2002 NASDAQ Comp (04/16/01) 1,910 Revenue(MM) $141.6 $210.2 Prev Est.(MM) NC NC NA 52-Week Range $10.25-49.38 EPS Shares Outstanding(MM) 43.9 Q1 $0.03A $0.06E Market Cap(MM) $872 Q2 $0.06A $0.07E Q3 $0.05E $0.08E Avg Daily Vol(3Mo.)(000s) 700 Q4 $0.05E $0.10E Fiscal Year $0.20E $0.31E Previous Est. $0.20 $0.31 P/E 99.3x 64.1x Source: Epoch Partners _______________________________________________________________________________ Business collaboration will be the next big wave in enterprise software, and MatrixOne is at the forefront of this market. We believe the company’s product strategy and superior architecture will make it a winner. Confusion in the market for collaboration solutions is creating volatility in MatrixOne’s stock. We think investors should accumulate shares when price fluctuations depress the price below our valuation. * Collaboration an Untapped Component of Corporate Value Chain. Increasingly, companies are turning to collaborative solutions to create value inside and outside the four walls of the enterprise. MatrixOne is leading the way in collaboration with its platform and growing applications suite. * Blue-Chip Customer Base and Partner Ecosystem. Nokia, Goodyear, Honda, Proctor & Gamble, Medtronic, and General Electric are all customers of MatrixOne. The company has also partnered with leading systems integrators and best-of-breed complementary software companies. * Internet Architecture. Internet architecture is a key feature for deploying collaborative applications. MatrixOne’s eMatrix 9 is well positioned as a result of its Internet-standards based and highly scalable architecture. * Growth Story in an Uncertain Economic Environment. Growth stories carry notable risk. MatrixOne is a newly profitable company growing at a tremendous rate in a market that we think is poised to grow even faster. We think current projections are conservative, but they could still be at risk in the current economic environment. * Marketplace Wins Are Limited. e2open was a high-profile marketplace- customer acquisition in January 2001, but there have been none since. Marketplaces will be important to collaborative design, and it is important for MatrixOne to participate in these opportunities. _______________________________________________________________________________ Investment Positives * Collaboration Is the Untapped Link in the New Corporate Value Chain. When Chrysler foresaw its pending losses, the company did not respond by conducting more auctions or doing more supply-chain optimization. Rather, it gathered suppliers around conference tables to figure out how to make components cheaper. Billions of dollars have been spent to optimize transaction processes. Now, companies are turning to collaborative solutions as the next vehicle to create value inside and outside the four walls of the enterprise. MatrixOne is leading the way in collaboration with its platform and growing applications suite. * Internet-Architected Platform Deploying Collaborative Applications. An Internet architecture is a key feature for deploying collaborative applications because of the wide-ranging deployments. eMatrix 9 is well positioned as a result of its Internet-based standards and highly scalable architecture. * Many Are Talking about Collaboration, but MatrixOne Is Leading the Way. Collaboration has generated a lot of interest, particularly as it relates to design and the supply chain. MatrixOne is enabling more true collaboration in this area than anyone else. * Blue-Chip Customer Base. Nokia, Goodyear, Honda, Proctor & Gamble, Medtronic, and General Electric are all MatrixOne customers. These customers are a testament to the strength of the MatrixOne product as well as an important validation for future sales. * Strong Partner Ecosystem. MatrixOne has partnered with leading systems integrators and best-of-breed complementary software companies. These partnerships will aid the company in quickly gaining scale. * Worldwide Presence. Matrix One has 10 offices worldwide and an extensive international network of distributors. This presence aids the company in addressing the multinational market and helps prevent overseas upstarts from gaining a foothold. Investment Risks * Transitions in Progress. MatrixOne is the process of transitioning from an infrastructure company to a products company and is also working to expand from its mechanical engineering strengths into new areas of less- specific collaboration. These transitions carry product development risks as well as the risk of running into new competitors, in the areas the company is targeting. * Ariba Relationship Has Questionable Value. The Ariba relationship was seen as an important step in gaining share in the marketplaces segment. Given Ariba’s recent poor performance in this area, MatrixOne is unlikely to get much benefit out of the relationship. The relationship could be replaced by one with any of the three strong players in the marketplace: SAP, i2, or Manugistics. * Marketplace Customers Are Limited. e2open was a high-profile marketplace victory for the company and there have been none since. Marketplaces, both public and private, can drive demand for collaborative design solutions. Therefore, it is important for Matrix One to participate in these opportunities and perhaps establish new relationships to aid its position in this area. * Growth Story in an Uncertain Economic Environment. Growth stories carry notable risk. MatrixOne is a newly profitable company growing at a tremendous rate in a market that we think is poised to grow even faster. We think current projections are conservative, but they could still be at risk in the current economic environment. Recommendation In assessing MatrixOne’s current valuation we used two analyses. First, we looked at trading multiples of a representative basket of software companies in directly competitive or tangential segments of MatrixOne’s market. This gives a context for relative valuation in the market today. Second, we examined long-term earnings prospects with a discounted P/E multiple analysis based on our growth and margin assumptions. This analysis provides absolute valuation support based on the estimated earnings power of the business. We think the best earnings-based guide here is to look at the P/E of companies that have mature operating margins like i2 and Oracle and then give MatrixOne an appropriate multiple for the expected tripling of its growth rate. Therefore, we believe that with established enterprise players trading at P/E ratios of 30x-40x, there is support for MatrixOne at 90x-120x CY01 earnings. From an absolute perspective, MatrixOne trades around fair value, with upside possible given our growth expectations. The mid-point of our analysis (20% operating margins and 32.5% growth compound annual growth rate) implies CY05 revenues of $535 million and EPS of $1.20. At current levels, we believe MatrixOne can outperform the market over the long term. The company is executing well, but it also has a valuation premium it must justify. We note that our valuation estimates are conservative given the economic climate and are subject to revision as the company’s fundamental execution progresses. Based on our analysis, we believe that investors should look at CY01 P/E ratios in and below the 90-120 range as buying opportunities for this stock with great long-term prospects. _______________________________________________________________________________ COMPANY PROFILE MatrixOne provides software that enables organizations to share information across the enterprise and with business partners. The company has built a collaboration platform and application development environment that it is expanding with a stable of applications that is growing from the company’s roots in manufacturing. _______________________________________________________________________________ The information contained herein is based on sources believed to be reliable but is neither all inclusive nor guaranteed by Epoch Partners. Opinions, if any, reflect our judgment at this time and are subject to change. Epoch Partners does not undertake to advise of changes in its opinion or the information. Epoch Partners may perform or seek to perform investment banking services for the issuers of securities which are the subject of our Research. Most of the companies Epoch Partners follows are emerging growth companies whose securities typically involve a higher degree of risk and more volatility than the securities of more established companies. The securities discussed in the Epoch Partners Research may be unsuitable for investors depending on their specific investment objectives and financial situation and needs. No report included in the Epoch Partners Research is a recommendation that any particular investor should purchase or sell any particular security in any amount or at all and is not a solicitation of any offer to purchase or sell from or to any particular investor. For additional information that may be available on the securities mentioned, please contact Epoch Partners. This document has been published in the United States for Residents of the United States. Copyright 2000, 2001 Epoch Partners. All rights reserved. Member NASD/SIPC. \END THE ABOVE RESEARCH HAS JUST BEEN PUBLISHED. For in-depth coverage of all companies within the Software Sector, please visit http://www.epoch.com/emailalert/software.html Epoch Research A team of industry-focused analysts creates Epoch’s proprietary Research. This team covers four technology sectors including Broadband and IP Data Services, Communications Equipment, Software and Internet. In addition to providing analysis of company and industry fundamentals and valuation, Epoch also filters and aggregates third party information. 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