Tickers in this Article: TIBX, ORCL, VMW, CRM, RHT, MSFT, SAP, HPQ, CTXS, TLEO
Value investors, and their quasi-quisling cousins GARP investors, often find little to buy in the software space. All too often, any software company priced like a bargain is likely to struggle to grow much (and will likely underperform the estimates that make it look cheap) or get much love from the typical tech investor crowd. That makes TIBCO (Nasdaq:TIBX) an intriguing but risky idea. While this company's valuation and their position as the last small independent integration vendor are appealing, any value investor is wise to be cautious about why this software stock seems appealing. (For related reading, see Stock-Picking Strategies: Value Investing.)

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A Fine End to the Year
Despite the disappointing Oracle (Nasdaq:ORCL) reports that spooked investors, TIBCO reported a pretty good quarter. Revenue rose 20% for the quarter and slightly beat the average estimate. Growth was a little stronger in the slightly larger service/maintenance segment (up about 22%), while the licensing line showed around 17% growth and the company boasted of 28 deals over $1M for the quarter.

TIBCO also stands out among smaller software companies with its profitability. In an environment where VMware (NYSE:VMW), Salesforce.com (NYSE:CRM), Red Hat (NYSE:RHT) and a host of others often struggle to show GAAP operating leverage, TIBCO does not. Gross margin was flat this quarter, but GAAP operating income rose around 24% and the company logged more than a half-point of operating margin improvement.

TIBCO also happened to end the year with excellent free cash flow margin and solid improvement from the year-ago level. (For additional reading, see Free Cash Flow Yield: The Best Fundamental Indicator.)

Mostly Good, but Some Concerns
While TIBCO did offer guidance that was a boost to the prior analyst guess, it wasn't all sweetness and light for the quarter. For starters, the Service Oriented Architecture (SOA) business was not so strong. Business optimization was up 45%, while SOA was up just 6%. SOA is volatile on a quarter-to-quarter basis, but it is a yellow flag for those value investors who are a little leery about software names as SOA is still a large part of the business.

It's also worth noting that there were signs of deceleration in business. Clearly management's commentary was more favorable than that from Oracle (and the results were better too), but it's not completely an Oracle-specific problem out there.

Scarcity Value
TIBCO is a solid way to play "Big Data;" SOA has plenty of room left to grow in the enterprise IT world, and there's likewise some interesting opportunity from newer offerings like "tibbr." On the other hand, IBM's (NYSE:IBM) Tivoli is a very real threat to TIBCO and Oracle and Microsoft (Nasdaq:MSFT) are hardly pushovers.

One valid question is whether TIBCO is destined to be the last pure-play integration vendor for very long. Although buying up select SaaS stocks is the current vogue in the software world, SAP AG (NYSE:SAP) and Hewlett-Packard (NYSE:HPQ) could both use TIBCO and even an established rival like IBM or Oracle could find leverage from a deal.

The Bottom Line
The growth expectations that are baked into TIBCO are far more rational than many other smaller software names today. After all, VMware, Citrix (Nasdaq:CTXS), Taleo (Nasdaq:TLEO) and many others are growing their top lines much faster. The question is whether the Street has been too eager to forget about middleware/SOA/integration and move on to hotter ideas in virtualization and SaaS.

An apparent value in software is always a dangerous proposition for an investor. In TIBCO's case, there looks to be some legitimate scarcity value and further growth potential. While it does look like this name is worth serious due diligence, investors should not make the mistake of thinking that a better relative valuation means there's substantially less risk to an investment here. (For related reading, see Relative Valuation: Using Stocks To Value Other Stocks.)

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At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.

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