We like TIBCO Software (TIBX) and had written a column about it for publication Friday. But after completing our first draft Wednesday, a significant event transpired. Praesidium Investment Management, a savvy hedge fund with a great record, sent a letter to TIBCO's board urging it to focus on maximizing value. Herb Greenberg highlighted this letter in Reality Check, and he has stated that other activists are now getting involved.
While the software maker's stock is rallying on this incremental news, we believe that where there is smoke, there is fire, and TIBCO is poised for better things.
TIBCO Software has been a big disappointment to investors over the past two years. While the stock market has had a record rally since 2012, TIBCO's shares are off by 42%. While the company's revenue has risen modestly, earnings have experienced a significant decline due to rising investment spending. Non-GAAP earnings peaked at $1.10 per share in 2012, before declining to $1.03 in 2013. For 2014, earnings are projected to be essentially flat, at $0.99.
The biggest delta for the share correction has been a multiple contraction. From a price-to-earnings (P/E) perspective, TIBCO shares still look expensive on an absolute P/E level at 40x earnings. However, for software-related companies, a number of analysts prefer to use an Enterprise Value (EV) to EBITDA ratio. Based on these metrics, TIBCO is deeply discounted today at 10x EV/EBITDA. TIBCO and other software-related names typically trade for 15x EV/EBITDA. Acquisition ratios are typically higher than this. There is a long list of suitors for TIBCO, including Hewlett-Packard (HPQ), SAP (SAP), Oracle (ORCL) and IBM (IBM).
Investors don't expect the fundamentals to turn dramatically to the upside in 2014, as TIBCO repositions its small, struggling, but highly innovative, Spotfire product line. Furthermore, TIBCO has been making heavy R&D and marketing expenditures to grow and diversify. We believe the company won't see a turn in its business fundamentals before 2015.
For those with a higher risk tolerance, however, now is likely a very good time to step up and buy the stock. The shares have always sold at a high valuation level because TIBCO is a highly regarded middleware software vendor. Its core product lines allow vital real-time data to be shared and transferred between various computers and programs. This was initially used by Wall Street trading firms to develop computer-driven stock trading. It eventually migrated to being used as vital software for manufacturing and Internet-related firms. TIBCO also owns Spotfire, a highly regarded and innovative technology for visual analytics.
TIBCO's major competitors are IBM and Oracle. Fortunately, the company has a strong lock at major corporations, including Charles Schwab (SCHW), Nasdaq OMX (NDAQ), Yahoo! (YAHOO), and even at its competitor, Oracle. Gross margins are still in excess of 70%, while operating margins have come down on increased investment spending. The company still generates healthy free cash flow and has a solid balance sheet.
We believe TIBCO will eventually right its operations over the next 12 to 24 months. The core middleware software business is still very healthy and growing. The mishaps have been on the investment-spending side and smaller revenue units (in particular the Spotfire product line). TIBCO shares are very attractive at the midday price of about $20.80 per share. The shares have not fallen below this level for very long periods since 2011.
Either the company gets its act together, or an acquirer will step in and take advantage of the depressed stock price for this attractive software provider. With activists stepping up the pressure, it may happen sooner than later.