Tickers in this Article: TIBX, IBM, ORCL, PEGA
Looking at the results this week from Red Hat (NYSE:RHT), Oracle (Nasdaq:ORCL), and TIBCO (Nasdaq:TIBX), it's pretty clear that there hasn't been a big re-acceleration in the market and conditions are still pretty difficult. That's not too surprising, really, but it does create uncertainty for these stocks in what is already a nervous market. I continue to like TIBCO, but the company definitely needs to start improving its sales and marketing strategy and execution. While the the shares do seem undervalued today, the valuation already incorporates a re-acceleration of growth and the company had best start delivering in the next year, or the stock will definitely suffer.

Fiscal Second Quarter Results Come In Okay
This was an “okay” quarter – something of a relief after a string of disappointing results, but definitely not the sort of result that will propel the stock substantially higher for the long term.

Revenue fell 1% as reported from last year, but did improve 3% from the prior quarter and basically met expectations. License revenue dropped 11% from last year, but rose 5% sequentially. While that reported growth rate isn't great, the “real” growth rate may have been a little better after you adjust for deferred license revenue between the two quarters. Maintenance revenue continues to grow – up 6% and 3%, respectively, this quarter.

Margins weren't all that great, but they were at least consistent with what most analysts expected from TIBCO. Gross margin declined about two points from the year ago (both by GAAP and non-GAAP accounting), while non-GAAP operating income declined 27% (GAAP operating income was down 44%) and the margin declined about seven points from the year-ago level.

SEE: Zooming In On Net Operating Income

The Business Is Definitely Under Pressure
Calling around for due diligence, I don't usually hear many negative things about the quality of the products that TIBCO offers. Even rivals like IBM (NYSE: IBM) acknowledge (even if grudgingly) that TIBCO's products are good. The problem for the company is that many of its competitors (including IBM and Oracle) are more willing to compete on price than in times past. To that end, while TIBCO saw deals worth more than $100K increase 7%, deals worth more than $1 million fell 40% and the ASP dropped 21% to an all-time low for the company (just under $500k).

It's not just IBM and Oracle that represent threats to TIBCO. Microsoft (Nasdaq:MSFT) is an underrated player in application infrastructure, and companies like Software AG and Pegasystems (Nasdaq: PEGA) have been showing up as more competitive lately.

But Still Very Much In The Running
Businesses are nervous about spending right now, so it's not exactly surprising to see that price-based competition is becoming more common. Over the long term, though, I have my doubts about how many competitors are structured to compete that way and still produce acceptable margins.

To that end, I think management has been making the right moves to build the company towards becoming a $2 billion business over time. While I think now addresses many of the right market segments, the marketing and sales execution has to improve. One interesting thing that comes up in the due diligence process is that TIBCO has a good quality reputation, but more than a few of those people who think well of the company aren't really aware of the full set of its capabilities. That's something management needs to address, or achieving the Street's growth targets is going to be difficult.

The Bottom Line
I would expect to see investors react with some relief to these results, but maybe not all that much enthusiasm. Even if the “real” sequential license revenue growth rate is better than it looks, the company isn't where it needs to be today in terms of reported growth rates or margins.

Long term, I believe TIBCO can generate revenue growth in the high single digits, with slightly higher free cash flow growth. There are risks that the middleware market has fundamentally slowed and/or that competition will limit margin expansion potential. Even so, the shares look to cheap on a cash flow basis. Likewise, the company appears to be trading at the low end of the range for what large companies like IBM and Oracle have traditionally paid for companies with large service/maintenance revenue components.

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