BluePhoenix Sets 2008 Bar at 20 Percent Growth as Q2 Numbers Come In

September 2, 2008 Timothy Prickett Morgan

Legacy application modernization tool vendor BluePhoenix Solutions, a mainframe specialist that got into the midrange when it acquired ASNA last year, reported its financial results for the second quarter of 2008 and at the same time says that it expects business to be good through the rest of 2008, now that it has sold off its stake in Mainsoft.

In the quarter, BluePhoenix posted sales of just a smidgen over $23 million, up 20.1 percent over the second quarter of 2007. On a GAAP basis, the company had an operating loss in the quarter of $165,000, which was better than the $518,000 loss it had a year ago, but had a $90,000 net income from continuing operations. However, the company had to write off $8.4 million in expenses relating to the Mainsoft sale, and that pushed BluePhoenix to a net loss of $8.26 million after other factors (amortization and stock-based compensation) were factored in. That is a much larger loss than the company posted a year ago, when it had a $1.76 million loss on $19.17 million in sales, but most of that loss ($1.71 million of it, in fact) came from the Mainsoft business. (Mainsoft has created a set of tools that allow .NET applications to be converted and run as Java applications on IBM servers running WebSphere middleware.) Profits were also hurt in the quarter because the U.S. dollar has depreciated by 20 percent against the Israeli shekel in the past year.

BluePhoenix completed the quarter with a deal backlog of $103 million, the same as the quarter ended in March and only a little bit lower than the $105 million backlog it had in December 2007. So the pipeline for deals looks pretty good for the company. The company said that its ASNA unit, which is focused on helping OS/400, i5/OS, and i shops port their RPG applications to the .NET environment on Windows servers, had a 183 percent increase in bookings compared to the first quarter of 2008. BluePhoenix did not say how much revenue ASNA generated or what its annual growth was.

Arik Kilman, chief executive officer at BluePhoenix, said in a statement that the company expected business to be pretty good for the remainder of the year. “We believe that our backlog and pipeline for new business will enable us to continue growing our revenues at a rate of approximately 20 percent per year,” he said. “Accordingly, we are expecting revenue for 2008 of $92 million to $97 million. Taking into account the effect of the currency exchange rate, the growth in services as part of our revenue mix, and our ability to close deals directly ahead of us, we are forecasting our non-GAAP earnings per share for 2008 to be in a range of $0.55 and $0.70. The wide range in this forecast reflects our more tenuous view as to timings of near term revenue recognition, primarily based on longer sales cycles in our business. Legacy migration tools remain in high demand and our long-term prospects remain excellent.”

There are a lot of companies running a large number of legacy RPG and COBOL applications out there, and most of these applications have not been modernized in a significant way. This is the key reason why BluePhoenix bought ASNA, of course. Wall Street, of course, likes to see profits, which is why BluePhoenix’s shares are still trading in the range of $5 a share, one-quarter their value in late 2007 and early 2008, and that gives BluePhoenix a market capitalization of $106.5 million as we go to press on Friday. If BluePhoenix can get profitable and stay there, its shares should rebound. They question now is whether or not some private equity firm or other software company might take a shining to BluePhoenix, especially now that the two key legacy IBM platforms having BluePhoenix tooling. Microsoft could certainly leverage the tools well, and it is a wonder why Microsoft hadn’t already bought ANSA. A case could also be made for IBM’s Software Group to acquire BluePhoenix as a means to slow the move of legacy applications away from its own systems and tooling and as a way to profit from such a move when it is inevitable and unavoidable.

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