BluePhoenix Says Business Is Steady, Sells Mainsoft Stake

Published: July 21, 2008

by Timothy Prickett Morgan

Legacy application modernization tool maker BluePhoenix Solutions is getting ready to report its financial results for the second quarter of 2008, and as is the tradition for public companies, BluePhoenix put out a statement going over preliminary results in conjunction with a big announcement that it was looking to sell its stake in Mainsoft, a maker of .NET and Java tools. The preliminary report was designed to calm down a jittery Wall Street.

BluePhoenix, which is based in Herzliya, Israel, did most of its business in the mainframe market until last summer when it acquired ASNA, which has a set of tools that take RPG applications and move them to Windows and .NET using ASNA's own AVR for .NET compiler. ASNA has been one component of the company's growth in recent quarters. According to Arik Kilman, chief executive officer at BluePhoenix, in a statement released last week, the company expects sales in the second quarter to be in the range of $22.7 million to $23 million, which represents an 18 percent to 20 percent growth rate compared to the $19.2 million in sales that BluePhoenix had in the second quarter of 2007.

"Challenging global economic conditions, particularly related to IT spending, have resulted in a somewhat longer sales cycle, and as such, our ability to forecast the timing of revenue recognition is proving more difficult than normal," explained Kilman in the statement. "We have maintained a healthy pipeline and we are actively engaged in discussions with both new prospects and current customers for follow-on projects, some of which are sizable. We continued to book new projects throughout the second quarter despite the global economic conditions, and are seeing a particularly nice pick-up in AS400 business, as our ANSA subsidiary continues to grow."

BluePhoenix also announced that it has arranged to sell its 58 percent stake in Mainsoft, a vendor of tools that allow applications coded in .NET for Windows to be ported and run as Java applications on IBM's server line. (While the Mainsoft code will work on any Java server, Mainsoft only officially supports its tools on IBM's lineup of machines.) BluePhoenix said in a separate statement that the undisclosed buyer would be paying $1.7 million in cash for the Mainsoft stake, which will obviously give that buyer a majority stake in Mainsoft and therefore control of the company. BluePhoenix said that, as planned, it has reclassified the Mainsoft products as discontinued back through the fourth quarter of 2007; in January, it took a $7 million charge for the impairment of goodwill relating to its Mainsoft acquisition and in the second quarter it will take another $8.3 million charge after writing down the remaining book value of its Mainsoft stake. BluePhoenix announced in late January that it was looking for a buyer for its Mainsoft holdings, and said that the company generated between $5 million and $7 million a year in sales.

Wall Street took the second quarter news well, and was clearly pleased that BluePhoenix had found a buyer for Mainsoft. The company's stock had been trading just north of $4 a share prior to the announcement, and shot up to $5.70 over the tail end of the week as people began to process the news. That gives BluePhoenix a market capitalization of $104 million as we go to press on Friday morning. In late June, when BluePhoenix said that some companies in the U.S. were delaying purchases, the company's stock took a breathtaking dive over the course of a few days. In mid-June, the company's shares were trading around $12 a pop, and with last week's news the company's shares have climbed halfway back up to that point.

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