What This Tech Company's Warning Tells Us

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I want to talk about how investors can protect themselves from risk by engaging in an ongoing process of constantly checking the validity of assumptions that they are making while looking at an investment. Tibco Software (NASDAQ: TIBX) recently gave a great example of this.

Tibco’s Disappointing Guidance

Tibco recently came out and disappointed the market with its preliminary results for Q4. Subsequently, the stock took a beating. In order to demonstrate what happened I’ve summarized the Q4 numbers vs. what the company previously guided towards

  • Q4 Revenues of $292-295 million vs. previous guidance of $310-318 million where analyst estimates had been $326 million
  • Q4 EPS of $0.37-$0.38 vs. previous guidance of $0.42-$0.44 where analyst estimates had been  $0.47
  • Q4 license revenues of $135-$136 million vs. previous guidance of $148-$156 million

This is a substantive miss, and investors have a right to ask questions. I’m not going to hide here; I previously wrote about this company at the time of the Q3 results and outlined the reasons why I liked the company and its end market growth prospects. My only concerns were with its faltering execution in the US and the bullish tone of its commentary and guidance.

Quite frankly anyone who follows investing closely should know that tech spending (particularly in areas like telco and enterprise spending) has gotten progressively weaker as the year has gone on. In this environment, any company with management giving guidance that seems overly positive needs to be looked at closely. Here is a graphical representation of Tibco’s previous guidance looked like.

<img src="/media/images/user_12882/tibco1_large.png" />

License revenue is going to be more variable then services, so it is the ‘swing’ contributor here. It is not hard to see that Tibco was forecasting a re-acceleration of license growth in Q4. I suspect this is a largely a consequence of believing that it had sorted out the execution problems in the US. However, in a weakening tech environment this kind of guidance deserves introspection.

IBM’s Results Served as a Warning

Indeed, investors were reminded of this when IBM (NYSE: IBM) gave results.  I discussed these results in a previous article and openly questioned if Tibco was now going to hit its guidance for Q4.  IBM’s story was one of doing okay in software but having weakness in hardware. In addition, total middleware sales were only up 3% and the commentary was not positive, with enterprise spending cited as weakening in September. The warning signs were there for Tibco.

The big data and analytics market is growing fast and the leading players of the sector (IBM, Oracle (NYSE: ORCL) and SAP (NYSE: SAP)) have all been investing in buying smaller companies that give them business intelligence capability. Tibco does tend to operate within the niche of marketing, so it’s hard to conclude that its problems are due to competitive pressures. In general these three have been seeing weaker conditions, so Tibco’s problems look to be a combination of macro and internal execution in the US.

On a more positive note, Tibco said its Spotfire (Master Data Management or MDM) solution was seeing strong global growth. Therefore it was puzzling to see an MDM-focused company like Informatica (NASDAQ: INFA) get beaten up in sympathy.  Moreover, Informatica recently said that its US operations were doing fine, with some strength in the public sector. This is the polar opposite of what Tibco said. Go figure.

The warning signs were there for Tibco.

Excuses, Excuses

Rather amusingly, CEO Vivek Ranadive declared that Tibco’s philosophy was ‘no excuses,’ and then promptly cited government spending and Sandy as reasons for his company's problems. However, he did mention the execution problems within the US. It is funny how these things always tend to take longer to iron out than management expects them too.

The problem for Tibco is that investors always tend to overweight near term affects. In other words, I doubt they will forgive the company for such a big miss (from internal guidance), even though Tibco does have a good historical track record of beating estimates.  The good news is that this market skepticism could be creating a good entry point to a stock in strong end markets.

Where Next For Tibco?

The stock now looks a lot cheaper than it has for ages and will –no doubt- be attractive to value (yes I said value, look at its cash flow generation) and special situation investors. If you believe in the company’s product range and competitive positioning, there is a strong case to be made for buying the stock. For those of us more inclined towards a growth at reasonable price perspective, it is probably better to continue to monitor the stock and look for signs that it has sorted out its problems in the US before buying it. If the market is still giving you a reasonable price then buy the stock. If not then find something else to invest your hard earned money in.

With investing it is sometimes better to be patient and keep monitoring what the industry is saying, especially when companies are issuing what looks like overly optimistic guidance.

SaintGermain has no positions in the stocks mentioned above. The Motley Fool owns shares of International Business Machines and Oracle. Motley Fool newsletter services recommend International Business Machines, Informatica, and Tibco Software. 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!

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