Walker Interactive Systems ELVN
July 19, 2001 - 9:29am EST by
2001 2002
Price: 0.68 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 10 P/FCF
Net Debt (in $M): 0 EBIT 0 0

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Walker is a small software company with no debt, trading at a 17% premium to cash. These days there are likely hundreds of similar situations however, as I will explain, WALK is truly a unique situation with minimal downside risk and substantial upside potential.

WALK went public in 1992 at $15. The company’s main business was financial analytics software (general ledger, accounts payable, accounts receivable, etc.). WALK’s customers are primarily large corporations using mainframe technology. As the financial software market matured, WALK found itself with declining revenues and an uncertain future. A few years ago, the company repositioned itself by developing e-business software that ties directly into its financial software. For example, a company can do all of its procurement on-line and each transaction will be recorded in A/R, A/P, etc. A company can realize significant savings and an attractive ROI by monitoring its procurement and consolidating its suppliers through e-business applications.

In late 1999, WALK hired Frank Richardson, an industry veteran, as CEO to lead its transition to an e-business software provider. Frank had run three software companies – Wycat, Ametech and Firefox. Don’t bother looking up the tickers, all of these companies have been sold; and that is the plan for WALK. Frank was retired and amassed a considerable nest egg. He did not need the work; rather, he saw a tremendous opportunity in WALK.

WALK’s “moat” is its global customer base using its financial software. These are primarily Fortune 1,000 companies that include Lincoln National, Sanlam (the largest financial services company in South Africa), Halifax (a large U.K. bank), UCLA and Pep Boys. I talked to three of WALK’s customers that recently bought their e-business products. All said that WALK’s technology is solid and more flexible than the competition for their purposes. WALK’s competitors include Oracle, SAP, Peoplesoft and numerous smaller competitors. The opportunity Frank saw in WALK is that the majority of its financial software customers have little choice but to buy e-business software from WALK. Otherwise, they will face substantial difficulty and cost integrating another e-business software package with WALK’s financial software base. The company estimates about 75% of its customers will go with its e-business suite of products, while the other 25% will seek best of breed providers in each e-business category. One customer I spoke to (in the 25% camp) had WALK’s financial software and bought just one of its e-business products because they felt WALK had the best of breed solution in that category. However, with each subsequent purchase they will evaluate WALK’s solution relative to the competition. This customer admitted it is far more expensive and time consuming to integrate products from multiple software providers, but their philosophy is that the benefit of having best of breed products in each category justifies the cost. This is a minority opinion, as there are numerous horror stories about companies trying to marry software from different providers.

So why is the stock so depressed? WALK disappointed investors as its transition to an e-business provider took much longer than expected and the company went deep into the red in 1999 and 2000. The good news for non-shareholders is that former investors threw in the towel on WALK, as did the NASDAQ (the stock got delisted earlier this year for not maintaining a $1.00 bid price and now trades on the OTC Bulletin Board) just as the company turned the corner. WALK reported its first profit in some time…$0.01 in Q1:01 and gave guidance for $0.15 to $0.20 in EPS and $50 - $55 million in revenues for 2001. The CFO, Stan Vogler, did a terrific job of cutting expenses and WALK is a very lean company today. It is now just a matter of growing the top-line. After a slow start, WALK’s e-business software sales are gaining traction (just look at their press releases). Earlier this year, WALK sold almost every product it offers to Workers Compensation Fund of Utah. WCF evaluated over 50 software providers, received 21 proposals and chose WALK, stating that “Walker had an outstanding customer base and excellent references” (Walker Press Release, March 21, 2001). Excellent customer service is the only way a small company can compete with the Oracles of the world. Frank knows this and he personally visits every customer before and after a sale. Customers actively contribute to new product development efforts.

WALK trades at $0.68 per share, has no debt and $8.5 million in cash ($0.58 per share). Therefore, the business is being valued at just $0.10. If WALK meets the low end of its guidance ($0.15 in EPS and $50 million in revenues), the stock trades at less than 1x earnings and 3% of revenues, net of cash.

The long-term plan is for WALK to be sold to a larger software company. Take-out multiples for similar software companies have ranged from 2x to 4x sales. Assuming revenues grow to $60 million next year and shares increase to 17 million from 14.9 million today, WALK will have revenues per share of $3.50. Applying the above multiple range values WALK at $7 to $14 in a transaction. However, a sale of the company is not needed to make a handsome profit in this stock.

The biggest risk going forward relates to the economy. WALK’s sales cycle has been lengthening (like all software companies) as customers are deferring software purchases. However, WALK’s pipeline is strong. The biggest question is the timing of its conversion into sales. Philip Fisher said…it is easier to know what will happen than when it will happen. “What” will happen is this company will be sold. The valuation is so compelling and the upside is so great that we don’t need to worry about the “when.”


1. Net of cash, the stock trades at less than 1x earnings and 3% of revenues.
2. The CEO is an industry veteran who ran three software companies in the past, all of which were sold.
3. WALK just turned profitable after two years of losses.
4. The long-term plan is for WALK to be sold to a larger software company. Private market value ranges from $7 to $14 per share.
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