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Omega Research: Betting the Farm on the Net

William and Ralph Cruz co-founded Omega Research in 1982 in order to develop products to make it easier to trade securities. By 1991, their company launched its flagship product, TradeStation. Since then, 45,000 copies have been sold - which accounts for about $100 million in revenues.

However, with the plunge in the stock market early this year, Omega Research has also suffered. In the past year, the high was $10-3/8 and the low was $2-3/8. The stock now trades at $3.

Omega Research has traditionally focused on software solutions. Of course, this has become passi. Investors want Web-based systems.

And, in the past year, Omega Research has been undergoing a massive transition towards the Web. In January 2000, the company launched WindowOnWallstreet.com. It is a Net subscription service that allows active traders to have access to such things as Level II quotes, option chains, portfolio management, discussion forums, analytical charting and wireless access. So far, there are more than 10,000 paying subscribers. The monthly rate is $79.95. On average, subscribers spend more than six hours per day logged to the service.

Most importantly, Omega Research plans to launch TradeStation.com later this year. With it, investors can test and automate trading strategies.

But the most intriguing element to the new product offering is direct-access order execution. Basically, Omega Research will become a high-tech brokerage firm. This is why Omega Research is merging with OnlineTrading.com (in the past quarter, revenues increased 80% from last year to $4.1 million), which is a leading brokerage firm for active traders.

No doubt, the radical change in Omega Research's business model has impacted the financials. In the past quarter, revenues were $5.4 million, which compares to $11.6 million in the same period a year ago. The company had a net loss of $3.9 million.

However, subscription revenues have been surging. The company saw a 122% sequential increase to $2 million in the past quarter.

But the new focus is critical. Simply put, Web-based trading systems are far better than client-based software. With subscriptions, as well as transactional income, Omega Research is positioning itself for much more growth in the next few years.

Also, Omega Research looks like a good buyout candidate itself. Big brokerage firms see active traders as a viable market segment -- as was seen with Schwab's purchase of CyberCorp. And, with Omega Research's tremendous analytical tools, the company does look very attractive, especially at its $73 million market cap (keep in mind that Schwab spent nearly $500 million to purchase CyberCorp).