Friday, January 11, 2013

Tibco Software Equity Research and Analysis

It’s a Christmas time and it’s time to think about giving and receiving. I’ve no doubt many investors were looking at Tibco Software (NASDAQ: TIBX) and thinking that the stock price crash was a Christmas gift come early. Essentially the company missed estimates in the last quarter, but remains in very attractive markets. The problems were isolated to the US and specifically sales execution within its leadership. The investment thesis is therefore that a change of US sales leadership will then lead to the execution issues being rectified and investors can take advantage of a great entry point. In summary, it is a highly compelling case, but I think there are some reasons for caution here.

A Compelling Case

I find this an interesting idea because it has worked quite a few times with regards technology stocks this year. For example when Riverbed Technology (NASDAQ: RVBD) missed estimates earlier in the year there was no end of speculation that its core WAN optimization market was saturated and in some sort of decline. In the end it turned out to be nothing of the sort. It was just that the sales force needed realigning to deal with new products and sales prospects needed to be adjusted. These things can happen.

Similarly with LED and lighting manufacturer Cree (NASDAQ: CREE) it realigned its lighting distribution and this caused a quarter of weakness as the majority of them were selling new products. Just as with Riverbed, these issues were sorted out in time.  At the time I suspected they would be because- having been a sales guy- I can tell you that if any arm of an organization is going to be motivated to deal with problems in its internal organization it will be the sales guys.

I think with Riverbed and Cree there were clear cases of sales guys having to deal with a changing product range or lead base. I’m not so sure with Tibco.

Blame the Sales Guy

Forgive me, but my prejudices are kicking in here. As a former sales guy I worry about the motivation and execution of the marketing team or whether the R & D people are working on the right projects or not. I worry about end markets and managements making the right strategic decisions. I worry about IT implementation or large capital expenditures. In other words almost anything but the execution and motivation of an experienced sales force that has delivered quarter after quarter of ‘expectations beating’ performance.

Therefore I am naturally cautious when a management blames sales execution but, like I said, it’s my prejudice. I’m not asking anyone else to share it.

The one thing I will ask investors to consider is the guidance that Tibco gave prior to the Q4 numbers. I will replicate it here.

Suffice to say this guidance wasn't hit. The US sales team was not responsible for this forecast.  Granted you could make a case that they may have been reporting back with deal numbers they expected to deliver which then proved unrealistic. Who is to know? However I consider it a bit rich of the Tibco’s senior management to claim (about the sales team) on the conference call that

“Yes, it was sloppiness without adequate management, without attention to detail, without follow-through, without like what's next.”

It’s funny but these thoughts came to mind when considering what Tibco previously guided for Q4. Is it not incumbent upon a management to check deal conversion rates and what is going on in its end markets before issuing guidance that looks out of sync?  I’m probably being too harsh here but then again I invest my own hard earned money.

What Went Wrong?

Tibco talked of the new US head of sales and how he would improve ‘blocking and tackling’ and things like deal flow monitoring, coaching and sales discipline. So it sounds like a dose of micro management is on the way for Tibco’s sales force.

Tibco also claimed that no deals were lost although IBM (NYSE: IBM) was acknowledged as its prime competitor. IBM had claimed that enterprise business had got weaker noticeably in September but its software business did okay with middleware overall growing by 3%. Tibco also mentioned that Oracle (NASDAQ: ORCL) wasn’t as strong in its sector as it had been previously. Oracle's recent results were better than expected and a cause for optimism. This is obviously good news for Tibco.

Indeed, Tibco was categorical. This wasn’t about end markets or competition it was execution, execution, execution and specifically within the US. Deal closures were not as expected and ’10 to 20’ deals that were expected to close were delayed or failed to close. Federal business came in at $5-7m less than Tibco had hoped. Some telco deals slipped and energy was cited as being weak.


After a weaker than usual quarter in Q4 Tibco guided for a sequentially better than usual quarter in Q1 2013

This is not unusual in such circumstances and from a year on year perspective Tibco’s guidance looks more in line with its trends over the last year or so.

However, the one concern is the implied fall in margins that comes with its non-GAAP EPS forecast of 17-18c for Q1. This was explained as being a consequence of its strategy of going for leveraged growth. In other words, Tibco wants to invest in order to generate future top line growth and profitability will ensue from that. Another cause for concern was that no guidance for the full year for either revenue or margins was given.

The Bottom Line

There is a lot to like here and braver investors than me will buy in. Tibco is conservatively assuming deal closure rates close to those achieved in Q4 and if it does turn out to be one quarter of bad execution than this is a great entry point into a stock well positioned in some great end markets.

On the other hand, the notable fall in forecast margins plus the loading of the blame on the US sales force leadership is somewhat concerning for the reasons expressed above and it’s not like anything changed particularly for the sales guys in the quarter. I prefer to wait at least a quarter and see whether these issues have been sorted out or whether there are some other underlying ones. No matter, I suspect the market has heard what it needs too for this stock to go higher and the commentary around the stock will be positive so don’t be surprised if it moves on up from here.

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