Peerless impresses its peers, but Wall Street is still wary.

It's going to be a critical year for Peerless Systems Corp.

The El Segundo-based creator of software systems for printers, copiers and fax machines garnered numerous accolades within the industry in 1998. Its CEO was named Southern California's "technology entrepreneur of the year" by Ernst & Young. and it was on Deloitte & Touche's list of the area's 50 fastest growing technology companies.

What Peerless must now do is prove its potential to Wall Street.

"We're waiting to get bullish," said Kevin Wagner, an analyst at Adams Harness & Hill. "The company's technology is very competitive and the business opportunities are there - especially for color products. But Peerless needs to sign more deals. When they do, we'll be more enthusiastic."

Peerless, which has been public for the last three years, first lost analysts' buy ratings in late August, when it announced that revenue growth for the year would slow from its historical 50 percent year-over-year rate to 30 percent. In the wake of that announcement - which came right before September's market correction - Peerless stock plummeted from $20 to $3 a share. It has since recovered to above the $10 level.

Chairman and CEO Ed Gavaldon, who expects a continued - and "more reasonable" - 30 percent revenue growth rate for the coming years, also sees the stock climbing. "Even at the current price, the stock is still pretty discounted," he said.

But Piper Jeffrey analyst Safe Rashtchy said, "They have some hurdles they have to clear. The stock may not earn more value until they sign up top-tier clients, and sign deals for more products per client."

Peerless already boasts a roster of blue-chip clients, including Xerox, IBM, Canon, Minolta and Tektronix.

Two-thirds of its business comes from licensing its intellectual property to these clients. The remainder consists of product development - an area that's expected to grow over the next few years as clients like Minolta and Canon outsource more of their products.

The company turned in an anemic third-quarter performance, although it did meet analysts' projections. For the three months ended Oct. 31, net income was $556,000 (5 cents per share). compared with $1.1 million (10 cents) for the like period a year earlier. Revenues were $7.3 million vs. $6.4 million.

"The single largest reason for the quarter's performance is that there was less licensing revenue from the color market than initially expected," Gavaldon said. "As for the net income, our (research and development) investment is up and a number of new products are under development right now. But we are on track to have a higher net income for the fourth quarter."

Peerless hit a high point in its technology development cycle during the year ending Jan. 31 by producing 20 new products, up from 10 new products the previous year.

In 1997, Peerless and Minolta delivered the first sub-$3,000 full-featured color printer into the desktop printing market. The two companies have now collaborated to offer enhanced-color printers for under $2,100.

Peerless is moving to establish a greater presence in such niches as the color printer and copier market, as well as the market for multi-function machines, such as the printer/copier/fax often seen in home offices.

Although some companies pushed back the launch dates of some of their color products which is what hurt Peerless last quarter - they all have plans for rolling out the products over the coming years.

The color market in the United States alone is projected to climb from a $1.3 billion industry in 1997 to $3.5 billion in 2002, according to Framingham, Mass.-based International Data Corp.

Peerless also is exploring new products, including digital cameras. It is working on a software system that would let cameras print their pictures directly onto laser printers. Gavaldon also mentioned wireless products that would allow held-held devices like the Palm Pilot to interact with a printer over an infrared beam.

This diversification will be key.

"Peerless is going in a very wise direction to expand their product base," Rashtchy said. "They're moving in the right direction, and they have good core technologies. Although the market prospects are not yet clear for some of the new items, their prototype on the digital camera, for example, has had a very positive response."

Peerless Systems Corp.

YEAR (Jan. 31)                    1998      1997

Revenue (millions)                $25.4     $16.0
Operating Expenses (millions)      11.3       8.0
Operating Income (millions)         6.0       1.8
Net Income (millions)               4.9       4.4
Earnings Per Diluted Share         $0.47     $0.90

SUMMARY

Business: Software systems Headquarters: El Segundo CEO: Edward A. Gavaldon Market Cap: $111.0 million Dividend Yield: N/A(*) Total Liabilities: $5.8 million P/E Ratio: 22.4 Long-Term Debt: $0

* Peerless does not pay dividends