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EAI Needs Neon to Pull Through >By William Fellows.

New Era of Networks Inc's second quarter collapse left it $6m in the red after recording higher than anticipated expenses even though revenue increased 127% to $26.1m compared with $11.46m. It missed expectations by a mile and Wall Street crucified its stock even though enterprise application integration has a gold seal of approval from most market researchers. In addition, more than 20 class action lawsuits have been filed against it.

Even though Neon has been pulling out all the stops its share price is still near rock bottom at $13.75 from a year-high of $78.38. It even got its biggest revenue stream, IBM Corp, to rattle off a message of support (only two weeks late). Ironically, however, Neon cited its increasing dependence on IBM as part of the reason, along with sales slippage, for its second quarter shortfall. 50% of the 60 or 70 deals that slipped were IBM-related. While Neon is reckoned to get 60% of the royalties on its sale of MQSeries Integrator which it co-developed and IBM resells, it gets only 50% when IBM makes a sale and 20% if the IBM sale is through a third party reseller. Neon is now going to account for its expectations for IBM sales in the quarter they are booked which means the current quarter will be ugly again. It really should have done that from the start, and now it's learning the hard way.

Meantime, Neon last week trumpeted its third patent for EAI; this time for work on a "balanced queue" technique that moves large volumes of transactional data at high speed using a relational database as the implementation vehicle. It has also hired former general manager of the Americas' Society for Worldwide Interbank Financial Telecommunications (Swift) to head its global financial services business.

Neon got waylaid trying to integrate four acquisitions at the same time as selling into markets other than its core financial sector. The realization for Neon is that it takes other industries longer to figure out how it can help them and for them to go and cut million dollar checks. Neon has said that one second quarter deal required board approval while others required CEO involvement.

Rivals including TSI International Software Ltd and Software Technologies Corp have been quick to find fault with Neon's growth by acquisition strategy. Indeed TSI CEO Connie Galley and her model for organic growth has been pushed square into the limelight. TSI's second quarter net income rose 82% to $1.62m from $890,000 on revenue that rose 133% to $23.64m from $10.13m, growth only just ahead of Neon. TSI's share price is at $19.62, up $1.69, from a year-high of $32. Not exactly riding high. The EAI vendors need the each others to do well to maintain momentum and confidence. Neon is going to take several quarters to win back confidence (and 'buy' recommendations) and TSI will surely suffer with it. The best way for Neon to start will be by meeting expectations. Meantime, still private STC claimed it invoiced 52 new clients in the second quarter - at an 80% win rate against competitors - and has 1,200 sites worldwide.
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Publication:Computergram International
Geographic Code:1USA
Date:Aug 4, 1999
Words:531
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