Wednesday, November 14, 2012

Tibco Equity Research

It has been a tricky summer for technology as growth forecasts have been cut and the sector has seen some hefty mark downs as a consequence. The interesting thing now is that some tech companies are reporting results below analyst expectations but still seeing price rises. Such was the case with the recent results at Tibco Software (NASDAQ: TIBX). The market was clearly baking in an earnings Armageddon when all it got was a minor downgrade.

Tibco Results and Guidance

I like this stock and its big data driven end markets and I think it is relatively immune from a tech slowdown. Before doing this I will make one thing clear. There is a slowdown in tech and Tibco but it’s not as disastrous as some people think.

We can see the slowdown in how revenues and license growth is being affected at Tibco.

Note how relatively weak the guidance for Q4 is compared to what Tibco normally does in Q4. Moreover it was below analyst estimates.

  • Q4 Revenue Guidance $310-318m vs. analyst estimates of $326m
  • Q4 EPS Guidance of 42-44c vs. analyst estimates of 47c

No illusions here. Tech growth is slowing.  The geographic commentary featured a familiar refrain. Revenues in the Americas were up 19% with Asia Pacific/Japan rising 11% and EMEA flat on a constant currency basis. What was unusual is that management feels its execution could be better in the Americas and declared it had a ‘laser-like focus’ on improving it. There seems to be a desire to recruit some senior level personnel for the America because leadership was categorically referenced in the conference call.

So, yes there is a slowdown but we are still looking at mid-teens growth in license revenues and I think there are good prospects for Tibco.

Tibco and Big Data

Everyone talks about big data but what does it actually mean and what are its drivers?

I like to think of it like this. Massive decreases in the cost of storing data plus the proliferation of social networking and mobile computing are creating an explosion of data and more importantly unstructured data created by consumers. Unfortunately, making sense of this data requires substantive analytics and data mining.

Where Tibco’s middleware expertise comes in is with the real time structuring of this data in order to facilitate integrated action. It’s more than just CRM, it is about connecting with back office functions and processing transactions. It’s middleware by another name. Only more of it. Much more. The amount of unstructured data being produced by social networks like Facebook is truly staggering.

Facebook’s problem is in finding a way to successfully monetize this data without doing anything to stop consumers creating it. I think this will be an issue for the company particularly with mobile. Zuckerberg may well be right that Facebook will earn more money via mobile but the question is how much more and does it really justify an IPO price that valued every Facebook user at around $100? It’s nice to see the company getting towards a sensible evaluation but I still don’t think we are there yet.

No matter, the big data revolution is real and I think provides an excellent secular growth story for marketing spend. Let’s put it this way. Even if a company’s top-line growth is receding thanks to a global recession it will still invest in big data solutions if it helps it to better allocate marketing spend and therefore increase margins.

Industry Gearing For Growth

It isn’t just Tibco that believes in this. Oracle (NASDAQ: ORCL), Microsoft, IBM (NYSE: IBM) and SAP (NYSE: SAP) have all been investing in data centers and buying business intelligence companies in order to increase their big data capabilities. SAP, IBM and Oracle all offer data warehousing solutions along with analytics and business intelligence capability.

IBM and Oracle compete with Tibco in middleware solutions but they also sell a host of infrastructure, database and server solutions that are being driven by big data accumulation. Indeed in Oracle’s recent results presentations, Larry Ellison declared that he believed Oracle was winning market share from IBM and Microsoft in database.

Oracle’s rivalry with SAP is the stuff of technology legend and its German competitor is challenging it within its core competency of database. It launched a new data analysis software product (HANA) which gives corporations the capability to analyze and process data at high speeds. Ellison famously responded to the announcement of this product by speculating that SAP must be ‘on drugs’. With sales forecast at $420m for 2012 alone it looks like the ‘drugs’ must be working.

What unites all these companies is that they investing heavily in big data because they know it will drive growth in future. I doubt they are all wrong. For Tibco this should mean that corporations will be ever more willing to buy its solutions.

Where Next For Tibco?

Putting these arguments together creates a powerful case for Tibco. Growth is slowing but at the same time Europe has been weak for a while now. This means the European comparables will start to get easier next year. Meanwhile, the long term drivers for Tibco are strong. If there has been upside surprise in tech this year it’s been in the data center and the ongoing proliferation of mobile internet.

With regards evaluation Tibco is very good at cash conversion and because of its large ongoing service revenues the headline earnings number gives a misleading picture of the company’s future generate cash generation. With around $226m (or 4.8% of its enterprise value) in trailing free cash flow and mid-teens growth in revenue and earnings forecast for the next couple of years, I would argue that Tibco can ‘do its earnings’ in terms of share price movement. The median analyst target of $35 looks achievable.