3 Software Companies Growing With the Cloud and Apps
Lalit is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
There has been a lot of discussion on increased competition in systems software of late. The most obvious example is Microsoft, whose core offering Windows is losing ground thanks to increased competition from Google’s Android and Apple’s iOS in the tablet and mobile space, and Red Hat Linux in the server/PC segment. But there is a whole other class of software, applications, benefiting from the recent trends in the industry, i.e. increasing mobile usage and migration towards cloud computing.
Increased mobile/tablet usage means more users are downloading application software. In addition, some of the application software providers have also started offering their services on the cloud in order to increase revenue. In this article, I will be discussing three application software companies that have outperformed the market by a good margin in recent times. The companies are Demandware (NYSE: NQ), Active Networks (NYSE: ACTV) and NQ Mobile (NYSE: NQ).
Encouraging deal pipeline at NQ Mobile
NQ Mobile recently reported good second quarter results, beating its previous guidance. Management also gave an encouraging commentary on the pipeline of business and partnerships on the horizon. I expect the strong pipeline will help the company maintain a sustainable growth rate in the coming quarters.
NQ Mobile has announced many interesting deals recently. Its subsidiary Beijing Jiutain Technology (FL Mobile) signed a new strategic deal with Baidu. According to this deal, Baidu DuoKu will be the exclusive publisher of the FL mobile developed game.
The company also announced that it will buy the remaining 45% stake in NationSky for a total of $25.2 million; $11 million in cash and the remaining $14.2 million in stock considerations. This purchase will have no effect on the revenue side, as the company already consolidated 100% of revenue in its financials. But the profit will increase, as the company only shows 55% of profit from NationSky. This will also increase margins.
The company has also been pursuing tier 1 carrier relationships. In March 2013, the company signed a deal with America Movil to offer its flagship security and privacy products across Mexico and Latin America. In addition to this, the company has also entered into an agreement with Target group to sell and distribute its products in more than 3,500 retail stores. These deals will help the company reach to more customers in the US market.
Management change creates uncertainty for Active Network
Active Networks' stock has had a good run in the last three months and has gained ~70%. But more recently the company's stock has declined due to management uncertainty. The company's executive chairman and CEO have both resigned, and a former executive has been appointed as interim CEO until a permanent CEO is named. The company has suspended full year guidance due to management transition. These changes have been negative for the company, and one should wait till the new CEO is appointed and listen to his vision.
On the positive side, a low customer churn ratio for the company will help it improve upon the margin per customer, which will percolate down to its bottom line. In the coming year, with reduced R&D costs from combining its integrated technology platform, EBITDA margin will increase.
Also, with the integration of Starcite completed, I expect it will help Active Networks cross sell its products and accelerate revenue growth in the coming quarter. I believe that company will now focus on profitability and margins rather than growth. So this will help remove the redundant resources and RoCE will increase.
Sales force ramp up and consolidation in e-commerce space to help Demandware
DemandWare has been aggressively scaling its sales force to increase its customers in North America and expand its footprint globally. The improved customer sentiment in North America and increase in its customer base globally will help the company grow its business.
Consolidation in the e-commerce segment is another driver for DemandWare, as it is the only company left in the e-commerce technology space providing on-demand e-commerce solutions to retail clients and brands. There has been evidence that acquisitions have a tendency to provide short-term disruption (evident from Oracle’s acquisition of ATG and IBM’s webSphere acquisition), so this should help DemandWare.
I am bullish on NQ Mobile and DemandWare, and have a market perform rating on Active Network. NQ Mobile and DemandWare are poised to gain in the market. NQ Mobile is seeing strong trends, and based on management’s guidance and its future pipeline deals, it should be able to grow on the top and bottom lines. For DemandWare, recent consolidation has created disruption in the e-commerce platform and DemandWare is expected to gain from this disruption. Active Networks is going through turbulent times, as top management has resigned and an interim CEO has been placed. So one has to wait till a new CEO is appointed and more clarity emerge.
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Lalit Kumar has no position in any stocks mentioned. The Motley Fool recommends The Active Network. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!