Every company/management team drops the ball eventually if they stay in the game long enough. The real question is how quickly they pick the ball up and get back to business as usual. TIBCO (Nasdaq:TIBX) has now logged two significant consecutive disappointments, and it is worth asking why management hasn't been more aggressive in addressing the sales execution issues it has cited as fueling the problems.
Although I think TIBCO is underrated and could become a “platform IT company” after these growing pains, these mistakes and lost opportunities raise legitimate questions about whether management can realize that transition. TIBCO looks cheap to me, but this is not a stock that I'd recommend for nervous or risk-averse investors.
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TIBCO has now delivered two consecutive disappointments, and sales execution is looming as a problem while key end markets like financial services continue to look soft.
Revenue rose 5% as reported, with license revenue down 5% and missing the average analyst guess by about 8%. SOA revenue seems to have fallen about one-quarter from last year, while business optimization was up 37% (though organic growth was more probably in the mid 20%s). Service and maintenance revenue rose 11%, while deferred revenue declined 4%. (L1)
With the top line weakness, poor margin performance wasn't such a big surprise. Gross margin (GAAP) declined nearly two points. Operating income was down 22%, with a nearly three-point drop in operating margin. Investors should note that there is a significant difference in the amount of operating income that TIBCO reports under GAAP and non-GAAP standards, though the change in margin was pretty similar by either calculation.
… But Misery Loves Company
To the extent that it makes anybody feel better, TIBCO's performance was not exactly unusual. Much larger rival Oracle (Nasdaq:ORCL) missed its license revenue target by a similar degree, and TIBCO's performance was relatively stronger than that of Informatica (Nasdaq:INFA). While the off-calendar fiscal year makes comparisons more challenging, it's worth noting that the last report from IBM (NYSE:IBM) showed pretty strong performance in middleware and analytics.
Even if TIBCO's performance is not entirely aberrant, I'm still concerned. In particular, management cited sales execution issues that appear to be lingering and festering. Unlike Oracle (which also cited sales execution problems), the issue is not so much about closing sales as how the company competes. It sounds like IBM and Oracle have shifted away from competing on best-of-breed technology (where TIBCO stacks up pretty well, actually) to more bundling and cross-selling into the installed base. While TIBCO is not completely powerless on the bundling side, it nevertheless demands a response from the company and different sales tactics.
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Don't Give Up Hope Yet
I'm still optimistic on TIBCO's long-term potential. I'm not a fan of buzzwords, but the reality is that TIBCO does have strong offerings to play themes like Big Data, cloud, and social enterprise. Just as much to the point, between its offerings in service-oriented architecture, business optimization, and business process management, TIBCO very well could be a platform IT company – though its market share is well behind IBM, Oracle, and even Microsoft (Nasdaq:MSFT) today.
TIBCO is not only one of the few middleware companies left, the quality of its technology – particularly in areas like complex event processing – is very good. The key for the company now is figuring out to market that effectively, while also educating customers on the full range of the company's capabilities.
The Bottom Line
TIBCO is no widows-and-orphans stock. There is every chance that IBM and Oracle effectively slam the door on further share gains from the company and leave it consigned to being a small player with a relatively rich cash-generating model but weak growth. If management can iron out these sales issues (and I do hope that the seats underneath the senior sales/marketing executives are getting very warm), I believe long-term revenue growth can approach 8%, with slightly better free cash flow (FCF) growth.
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With that sort of growth, TIBCO shares could be worth something in the low-to-mid $20s. Easier comps could likewise make the company's results look better as 2013 rolls on, but investors should realize that this company needs to seriously improve its execution and reported growth to get back into the good graces of the Street.