Why Investors Need to Be Cautious About Tech in Q2
Lee is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Just as Albert Einstein might have said, it’s all relative, isn’t it? In case of TIBCO Software’s (NASDAQ: TIBX) latest results, it most certainly is. The real question is to analyze what is going on in an absolute sense and what it might mean for the rest of the tech sector. It’s been a difficult 2013 so far for technology, so what do the tech company’s latest results tell us?
TIBCO’s Q2 results were within guidance, but so what?
In summary, TIBCO managed to report results within the range of its previous guidance. While this may not seem like a big deal, its beleaguered investors are bound to breathe a sigh of relief as it has disappointed so often over the last year. Indeed, a look at its previous statements and results reveals a mix of disappointing results accompanied by some, arguably, overly positive commentary and guidance.
Turning to the previous quarter, here is how the numbers compared
- Q2 revenue of $245.8 million vs. guidance of $242 million-$252 million. Adding back the adverse currency movements gives a revenue figure of $247.2 million
- Q2 license revenue of $82.3 million vs. guidance of $78 million-$88 million. Adding back adverse currency movements gives a license figure of $82.9 million
In other words, the numbers came in pretty much at the mid-point.
Happy days are here again?
Environment remains challenged
Frankly I think these results weren’t great and they weren’t what many tech investors may have been hoping for.
Firstly, let’s recall that TIBCO has had some company specific sales execution issues which it seems to have spent a few quarters trying to rectify. Therefore, we might have expected some additional performance merely from fixing these company issues. Indeed, TIBCO talked of improved performance in the U.S. (the region where its execution has been weak for a while) with the financial services vertical up 10% and retail up 19%. These two areas contributed seven of the top 10 deals.
Secondly, while TIBCO has a reputation for offering best in class solutions, it is also known for being relatively expensive compared to comparable solutions from its main competitors International Business Machines (NYSE: IBM) and Oracle (NYSE: ORCL). It may well have been missing out on business because of this, but the indications from its deal size and customer behavior are that customers are trimming deal size and TIBCO is taking on smaller size deals. For example, in the previous quarter, it reported 147 deals above $100,000 as against 137 last year. However, it only had 12 deals above $1 million as opposed to 20 last year.
Note that both Oracle and IBM had argued, at their calendar Q1 results, that their pipelines were largely still in place and hadn’t been reduced. Instead, they had argued – linked here and here – that the problem was merely about the timing and execution of these deals. The difference now is that Oracle and TIBCO have reported for Q2 and there does appear to be some trimming of deal size. This is usually a sign of weakness in the spending environment and not just an issue of 'deal timing.
Its interesting to compare the investment propositions with these three stocks. Oracle's challenge is to deal with the transition to cloud-based software sales while managing its legacy on premise on license sales. This is why analysts have it on mid-single digit growth for the next few years. However, the stock looks very good value on an EV/EBITDA multiple of just 7.4x and with trailing free cash flow generation equivalent to over 10% of its enterprise value.
IBM is slightly more expensive with a multiple of 8.8x and 6.6% for the same metrics. IBM presents a slightly different proposition in that its main focus is on expanding its higher margin businesses and making strategic cost cuts and divestitures where possible. Moreover, I am slightly cautious going into IBM's results.
Thirdly, it is all very well for TIBCO to talk about ‘value added’ but the fact is that a whole host of tech companies have reported disappointing numbers this year and the enterprise spending environment has weakened. While IBM and Oracle (who recently reported disappointing results) can afford to take pricing on middleware and data analytics because they generate revenue from a number of revenue streams, a ‘price war’ in the industry will disproportionately hit TIBCO.
The bottom line
In conclusion, the results were good relative to what TIBCO has previously reported but it’s still not great. The enterprise sector’s willingness to spend on discretionary IT appears to be weak and TIBCO also advised conservatism over the Government vertical.
Looking at these results in tandem with what Oracle just reported suggests that the tech environment is still weak and investors in IBM and others should not expect too much from its forthcoming results. So far, there is little indication that the tech sector is going to bounce back in this quarter and I think investors need to remain in cautious mode for now.
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Lee Samaha has no position in any stocks mentioned. The Motley Fool recommends Tibco Software. The Motley Fool owns shares of International Business Machines. and Oracle.. 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!