Is TIBCO's Stumble An Early Christmas Gift?

By Stephen D. Simpson, CFA | December 04, 2012 AAA

Back in March, I wrote that investors were only likely to see TIBCO Software (Nasdaq:TIBX) trade at a discount to fair value "if the company significantly disappoints the Street." Well, the company did just that on December 4, announcing a nearly 10% revenue miss and a bigger miss in earnings per share terms. While TIBCO just bought itself a spell in the penalty box, risk-tolerant investors may want to take this opportunity to check out one of the few quality independent middleware companies left on the market.

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Swing and a Miss for Q4
TIBCO didn't sugarcoat the news, and this guidance for the fourth quarter marks a pretty disappointing performance.

Revenue looks to be up just 1% this quarter, and almost 10% short of consensus. License revenue looks like the big disappointment, as weakness in core service-oriented architecture infrastructure sales led to flat revenue and more than a 10% miss relative to analyst expectations. Maintenance revenue also looks like it'll be disappointing, though it looks to be up about 2%.

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Although management didn't give much additional guidance, it's pretty clear that margins are going to be disappointing this quarter as well. Simply putting the new revenue guidance through the model doesn't add up, and I would expect that sizable headcount additions this year are going to lead to some meaningful operating de-leveraging this quarter.

Unfortunately, these results are probably worse than they look. For starters, TIBCO had beaten its revenue and earnings guidance for about three years running, so the shock is all that much greater. What's more, the company deferred almost $30 million in licensing revenue earlier this year and that should have helped boost results. Overall, it looks as though the normal seasonal 50% sequential licensing growth seen in this fourth quarter may be cut in half.

Some Market, Some Marketing
TIBCO definitely cited some macro factors as playing a role in the disappointing result, and that makes sense. While Dell (Nasdaq:DELL) and Hewlett-Packard (NYSE:HPQ) have ample problems all on their own, their recent guidance wasn't especially strong, and other software players like IBM (NYSE:IBM) and Oracle (Nasdaq:ORCL) have expressed more caution lately.

More specifically, TIBCO management mentioned weak government spending. If that's a widespread phenomenon, investors in names like CA (Nasdaq:CA), BMC (Nasdaq:BMC) and Oracle may want to reconsider their expectations.

There are some company-specific issues here as well, though. TIBCO has been having sales execution issues in North America for a few quarters now. While TIBCO has strong products, they can't sell themselves and management needs to get this ironed out quickly.

Still a Lot to Like
It's impossible not to be a little concerned about TIBCO's revenue trajectory, but the company's products and capabilities argue for some optimism. TIBCO has core strengths in messaging and integration and holds the number-two slot in message-oriented middleware (though it's far behind IBM in market share terms).

More recently, the company has built up its data analytics, cloud solutions and business intelligence capabilities. I'm particularly interested in the company's complex event processing capabilities, as I think that could be a key in TIBCO emerging as a bigger play in big data. Now it's true that TIBCO is going to keep chasing IBM in many markets, not to mention competing with the likes of Oracle and SAP (NYSE:SAP), but the company has strengthened its hand.

The Bottom Line
I may be overreacting to TIBCO's warning, but I'm adjusting my model such that more of the company's free cash flow margin improvement comes in later years. Simply due to the time value of money, that reduces the fair value of the stock. Overall, I still believe that TIBCO can grow free cash flow at a low double-digit rate for many years to come, though I also acknowledge that the company needs to show a relatively quick reacceleration of revenue growth or the Street simply won't buy that story.

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I think investors can find fair value on TIBCO shares in the mid-to-high $20s, and I would also point out that TIBCO would make a very logical acquisition target for many larger tech companies (though this miss could force prospective buyers to wait for signs of growth reacceleration).

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

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