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Support Group

This stock finds its niche in the growing customer support software market.

The company: Based in Emeryville, California, Scopus Technology Inc. develops customer information management software.

The markets: Scopus offers five primary software applications that can be integrated or stand alone: SupportTeam, SalesTeam, WebTeam, ServiceTeam and SmartScript, covering everything from automated product design changes to customer support management. The need for customer and business information management extends to all industries, so Scopus' clients are diverse and growing.

The sizzle: Scopus is a leader in its young industry, which is focused primarily on customer support. By January 1997, the company had more than 350 clients, up from 200 in 1996.

Market analysts expect Scopus' industry to keep growing 22 percent annually for the rest of the decade, while International Data Corp. expects customer support software sales to grow threefold in the same period. Scopus has been profitable since its 1991 inception and has lately seen rising margins. Analysts also expect Scopus to grow 45 percent annually over the next five years and predict a 52 percent earnings growth this fiscal year.

The risks: The customer support software market is relatively new, and competition is keen. And Scopus derives 70 percent of revenues from selling software licenses to businesses; one or two large contracts could impact a quarter and lead to sporadic growth or a slower quarter to follow.

Scopus has topped earnings estimates in the past, but if it fails to do so in the future, the stock would likely be punished. The stocks of Scopus' peers have been cut in half on news of weaker earnings. Scopus is priced such that any slip could send the stock significantly lower in the near term.

Historical financial performance: The company has increased net sales at a compounded annual growth rate of 120 percent over the past three years. Revenues climbed from $2.7 million in 1993 to $28.6 million in 1996--and then jumped to $63.1 million in fiscal 1997, which ended on March 31. Earnings have increased from $0.03 per share in 1993 to $0.42 per share in fiscal 1997, and net profit margins first rose above 11 percent last year. Scopus has no long-term debt, $79 million in cash and equivalents, and no one customer has accounted for more than 10 percent of revenues over the past three fiscal years.

Projected financial performance: Current estimates call for Scopus to reach $0.64 in earnings per share this fiscal year, putting the $22 stock at 34 times forward estimates; the company is also expected to grow earnings by more than 50 percent. Leading software companies usually trade at multiples close to their growth rates, and if Scopus can continue to improve margins while growing the business as expected, its growth rate may continue to exceed expectations.

With 20 million shares outstanding, Scopus has a market capitalization of $440 million, or seven times sales. To keep trading at its current growth rate, Scopus would need to rise 45 percent to $32 by April, assuming estimates were met.

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This article was originally published in the October 1997 print edition of Entrepreneur with the headline: Support Group.

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