SunGard bolstered by 2002 acquisitions

SunGard reported positive financial results last week, but analysts noted that, stripped of the acquired companies’ revenues, SunGard’s 'organic' revenue increase for 2002 was 1% for the year, and the company’s revenue actually decreased 1% during the last quarter of 2002 compared with Q4 2001.

SunGard reported $326 million in net profit for the full year of 2002 – a 32% increase over 2001, officials said. Revenue was $2.6 billion, up 31% over 2001. The bottom line was assisted by SunGard’s digestion of competitors Comdisco and Guardian IT, which SunGard quickly turned into cash generators, analysts said.

The company breaks reports into two groups: investment support systems (ISS), which includes the Brut ECN, PowerNet, Brass, and most client-hosted software applications; and availability services, which includes the hardened data centres and networks for which SunGard has become a household name, particularly in an industry increasingly focused on business continuity after post-9/11.

ISS revenue grew 4% to $1.36 billion on the year and 2% to $362 million on the quarter; but when acquired businesses are not considered, revenue declined 2% for the year and 4% for the quarter.

Availability services’ 101% spike in revenue to $1.05 billion in 2002 looks less impressive when the combined revenue of Comdisco and Guardian IT is left out: SunGard said organic revenue was up 7% in 2002 and 4% in Q4.

SunGard officials said the company projects net income per share growth between 8% and 12% in 2003, excluding merger costs.

SunGard appears to have a strong cash position: it spent $353 million in cash on nine acquisitions in 2002 and still has $440 million left over.

But SunGard’s performance is not as immune from cyclical trends as the numbers - and management - would suggest, analysts said. They believe a continued downturn in equity markets could eventually cut into revenue increases, since a lot of its products' revenues are based on transaction flows.

"SunGard has a history of making good acquisitions," said Glen Greene of Chicago research firm ThinkEquity. "Before about 2000, it had 8–10% organic growth in ISS, and disaster recovery was in the double digits. Now, those kinds of numbers are not sustainable. ISS is tied to the brokerage and investment management end-market, which is struggling."

SunGard officials said the company typically declines comment on analysts’ opinions.

Peter Heckmann, an analyst at Stifel Nicolaus in Kansas City, believes SunGard will achieve 1% organic growth this year.