Puzzling It Over -- Several Analysts Give Sequent A `Buy,' But Questions Remain For Investors

BEAVERTON, Ore. - Sequent Computer Systems Inc. presents many puzzles to investors.

-- It makes computers that do the work of mainframes, based on the same computer chips inside the personal computers you can buy at Costco, Fred Meyer and Ballard Computer.

-- Sequent sales are growing rapidly - $354 million last year, up 66 percent from $213 million in 1991, and some analysts predict $440 million for this year. Yet over the past six years, the company has lost more money than it has made.

-- Stockholders have had a bumpy ride since the company went public in April 1987 for $8.50 a share. The stock soared to more than $13 in the first few weeks, fell to $5 in the stock market's 1987 crash, peaked at $32 in June 1990, fell to $8 a year later, rose to more than $22 in January 1993, fell to $12 last July and has been in the mid-teens since then. The stock closed Friday at $15.50.

Here's another enigma: A 1993 study by InfoCorp., a market research firm in Santa Clara, Calif., shows Sequent with a 20 percent market share among large Unix-based computer systems (a niche of the mainframe market), more than twice the share held by such bigger-name competitors as Hewlett-Packard, Digital Equipment and IBM.

Sequent customers include many of the world's largest companies and organizations, including Microsoft, Boeing, the Nasdaq trading system, British Petroleum, Apple Computer, Nike, General Electric and Ford.

And yet Casey Powell, Sequent founder and chairman, says Sequent's biggest problem is lack of name recognition. "We are the biggest and the best, and no one knows who the hell we are," Powell said. "This is the biggest challenge that we face."

Some others agree. Scott Conyers, an analyst at Scott B. Conyers Inc. in Portland, says the best thing that could happen to Sequent would be a buyout offer from IBM, which has the name recognition Sequent needs badly.

Powell scoffs at that possibility and other analysts say they regard it as somewhere between unlikely and far-fetched.

What's an investor to make of all this - especially after Sequent announced in January that it lost $7.5 million last year because of a $22.3 million "restructuring charge" for splitting itself into two divisions?

"The company is still a buy," said Laura Conigliaro, an analyst who follows Sequent for Prudential Securities Research in New York. Conigliaro called the loss "a disappointment but not a disaster."

Jay Stevens, an analyst for Dean Witter Reynolds Inc., used the bad news to upgrade his recommendation on Sequent from "neutral" to "buy," saying the stock is undervalued in light of the company's growth opportunities as more companies move away from mainframe computers and embrace the "open architecture" in which Sequent specializes.

An investor or potential investor in Sequent is faced with a few main questions:

-- Is Sequent right that large computer users will increasingly seek alternatives to traditional mainframe systems where all the hardware and software is designed and delivered by one company?

-- If so, can Sequent continue to stay ahead of bigger-name competitors in its market niche by emphasizing consulting services as well as the company's original hardware-only orientation?

-- And if it does that, can Sequent produce profits steadily instead of sporadically?

Scott McAdams, an analyst who follows Sequent for Ragen MacKenzie Inc. in Seattle, thinks the answer to the first two questions are positive.

"If the world is truly moving toward client/server open systems instead of mainframes, Sequent is positioned to ride that wave," he said. "And it seems like the world is moving in that direction."

`Open architecture'

To understand "open architecture" in the computer industry, think of buying a stereo system.

If stereos were designed along the lines of traditional mainframe computers, they would be "closed." That is, all parts would be made by one company and it would be difficult, if not impossible, to add any component, say a compact-disc player, made by another manufacturer.

In addition, you would have to buy music (and perhaps listen to broadcasts) designed specifically and exclusively to play on that company's stereo.

Some stereos are designed like that, though music software and broadcasts are generic. But most stereo systems are built on the "open architecture" model: You can buy a receiver made by Sony, a CD player made by Yamaha and a tape deck made by Kenwood - and usually they will work together flawlessly.

"Open" computer systems are never quite that easy, but Sequent is betting its future that the demand for such systems will increase - and that it will be able to supply the expertise, in Powell's words, "to take the clients to the promised land one step at a time."

Company reorganization

Sequent's 1993 reorganization split the company into two divisions: "platform," which will make and sell computer hardware and Sequent's operating system, a version of Unix; and "enterprise," which will work with other hardware and software vendors to design custom systems based on Sequent hardware and possibly including hardware and software made by other companies.

Custom-designing computer systems is far from easy, and many things can and do go wrong.

Powell compares the resulting repair work to heart surgery.

"If anything gets screwed up, we are not always the first surgeon to operate on a patient," he said, "but we are always the second.

"We have earned better than 50 percent of our business by going in and fixing something that somebody else screwed up. We have put in more than 5,000 systems and we have never, ever had a company fail" to get its system running successfully, he said. "We have never lost a customer along the way."

However, there have been close calls. A few years ago, Burlington Coat Factory built its first central distribution warehouse in New Jersey and bought a Sequent computer system to automate it.

The warehouse, crucial to the company's entire operation, suddenly became paralyzed when the computer crashed because of problems caused by a beta version of another vendor's software.

Mike Prince, Burlington Coat's director of information services, called Sequent in desperation, and said there was no way to get back to the company's old system, and the only thing between him and joblessness probably would be a totally new Sequent system, up and running in New Jersey by the next afternoon.

In minutes, Sequent pulled a computer off the production line in Beaverton, loaded it and some equipment and a team of people onto a plane and got the system running in New Jersey on time.

Powell said he didn't even hear about the incident until later.

"I can tell you a hundred stories about how our people have turned this company inside out to take care of a customer," Powell said. "And they never ask for permission before they do it."

Betting on Windows

Another question for potential Sequent investors to sort out is how much the company is betting on the future of Windows NT, an operating system first released by Microsoft Corp. last August - and whether that is a good bet.

One of Sequent's main systems is based on NT, and Sequent has a unique method of showing it off to potential customers: in the back of a jet-black, 15-by-30-foot semitrailer that it takes to customer sites, trade shows and other events. The trailer is filled with Sequent systems feeding data and programs to a wall of 16 PCs, all running under NT.

Like Microsoft, Sequent sees NT as an important part of its future, an attractive alternative to proprietary mainframe operating systems such as those sold by IBM.

Bob Gregg, Sequent chief financial officer, says little of Sequent's projected success is dependent on NT, sales of which have been below Microsoft's projections.

"A lot of things have to happen to NT for it to become a big commercial success," Gregg told investors at a conference in Seattle last month. "When it comes, we are ready for it, but I am not going to build an operating plan" based on NT sales.

But elsewhere in Sequent, Windows NT is clearly in the spotlight.

"We see NT as a huge opportunity that we can't let pass us by," said Nancy Batten, senior market development manager. "It is the major change in the industry, and you are either going to be involved with it, or you are not.

"We made the decision two years ago to jump on it," Batten said. "We are in the Windows NT camp, and we think it's going to become the dominant standard" for linking mainframes and PCs.

"The question people are wrestling with right now," said McAdams of Ragen MacKenzie, who spent part of last week in Beaverton at Sequent, "is can this company compete in the face of new competition and make money at it? I don't have the final answer to that yet, but they sell to some great companies and they have great technology and great service.

"Everybody overestimated NT" in terms of initial sales, McAdams said. "But I'm still optimistic over the longer term."