Tibco's trials and tribulations ....
investor.redherring.com
By Paul La Monica
3/5/2001
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Ever have one of those dreams where you're falling and you have no idea when you'll stop? You just keep tumbling down, down, down, in a vertiginous death spiral. And what's truly unnerving is that it's hard to imagine what would be worse: continuing to plummet or finally hitting the ground with a sickening, resounding thud.
With technology stocks in free-fall, many investors are currently living this nightmare. But perhaps no shareholders are more shell-shocked than those of infrastructure software company Tibco Software (Nasdaq: TIBX). The stock has fallen, kamikaze-like, some 76 percent so far in 2001, from $47.94 to $11.44.
Yet Tibco, unlike many other technology companies that have seen their stocks plummet this year, has not announced an earnings or revenue warning and has not given analysts any reason to lower estimates for 2001. In fact, earnings estimates for Tibco's latest quarter, which ended on February 28, increased 6.3 percent in the past six weeks. And estimates for fiscal 2001 (ending in November) have been raised 6.9 percent in the past three months. So what's the dilly-o? (For those of you over the age of 35, that translates to 'what's the deal?')
I had an interview lined up with Tibco CEO Vivek Ranadive last week to get some insight as to why the market is beating the stock silly. This chat was originally scheduled for Tuesday and then was postponed to Wednesday. Alas, on Wednesday, the interview was canceled, and I was told that Mr. Ranadive would be unavailable for comments for the next few weeks. So of course this made me even more curious (in addition to annoyed).
WILL THERE BE AN EARNINGS WARNING?
Well, even though the interview was shelved, I'm not going to hold a grudge. I've come to praise Tibco, not to bury it. Tibco is one of the leaders in the integration software sector -- software that allows businesses to link their internal, customer, and supplier channels in real time -- a market that IDC predicts will be worth $8.9 billion in 2004. Revenue increased 161 percent in 2000 and is expected to jump another 82 percent this year. Earnings are expected to increase 45 percent this year. And considering that the company's balance sheet is in tip-top shape, with no long-term debt and $586 million in cash, the long-term outlook for the company is sound. It appears that investors are betting that Tibco will issue an earnings warning for the quarter that just ended.
Given the current economic environment and all the mounting evidence of an IT spending slowdown, an earnings warning at this point wouldn't exactly be a shock. But with the way the stock has performed as of late (it fell 43 percent in the last two weeks of February alone), it seems to me that -- barring a major disaster, say, a quarterly loss and significantly lower guidance for 2001 -- bad news has been pretty much priced into the stock already.
So far, the company has not commented about its earnings, and analysts say that because a lot of software contracts are typically finalized at the end of a quarter, it's hard to judge at this point whether Tibco had a good quarter. Analysts are expecting the company to report earnings of 7 cents a share, up from a penny a share a year ago. And these aren't pie-in-the-sky estimates. 'The numbers out there aren't unreasonable numbers. Tibco tried to manage expectations to a point that there's some degree of cushion,' says Robert Fontana, an analyst with Wachovia Securities.
Still, the outlook for Tibco is complicated by the fact that two of the company's main competitors have recently posted wildly different results. In early January, Vitria (Nasdaq: VITR) announced a surprise fourth-quarter loss resulting from the cancellation of some software orders. But later that month, Webmethods (Nasdaq: WEBM) reported its first profitable quarter and raised its earnings and revenue outlook for this fiscal year. It's reasonable to wonder whether Webmethods's strength is coming at Tibco's expense.
SHORTS ARE CIRCLING
According to analysts, the questions about earnings aren't the only concerns facing the stock. Rumors have been circulating about accounting issues with Tibco, helping to fuel the sell-off.
The whiff of accounting irregularities attracts short-sellers the way that the scent of blood draws great white sharks. As of February 15, 2.86 million shares of Tibco were being held short -- that is, they had been sold but not yet repurchased. Although this was a 5.6 percent decline from January's level of short interest, the number of shares being held short account for 12.3 percent of Tibco's available shares -- a sizable amount.
But the scuttlebutt appears to be nothing more than that: idle gossip with no basis in fact. 'There are a lot of rumors about accounting issues, but they don't have any validity,' says Tim Klassel, an analyst with Thomas Weisel Partners.
If anything, it looks like Tibco's accounting situation is improving. Software companies, particularly ones that have exposure to Internet companies, are frequently judged by a measure called days sales outstanding (DSO), which is indicator of how quickly a company is getting paid by customers. This measure is calculated by dividing the most recent quarter's accounts receivable by the amount of sales in that quarter. That number gives you a figure known as inventory turnover. You then divide that figure by the number of days in the quarter to calculate the DSO number.
Basically, a higher DSO is bad news because it shows that a company has a lot of recorded sales that have yet to be actually paid for. Tibco has historically posted a high DSO number, which could be a reason why short-sellers flocked to the stock. With all the bad economic news, it's reasonable to surmise that customers may be having more difficulty paying their bills. But in the fourth quarter of last year, Tibco's DSO was 95, compared with 115 a year ago. And Mr. Klassel is expecting DSO for the first quarter of this year to come in at about 90.
Bolstering this case is the fact that Tibco is not really exposed to a large amount of dot-com disasters. Tibco's three largest customers last year were Global Concert Networks, which is a joint venture between AT&T (NYSE: T) and British Telecom (NYSE: BTY); financial news provider Reuters (Nasdaq: RTRSY), which is also a majority owner of Tibco; and Procter & Gamble (NYSE: PG). Each of these three accounted for more than 10 percent of Tibco's accounts receivable last year.
STOCK FINALLY LOOKING ATTRACTIVE
The key question, of course, is whether the stock now trades at a compelling valuation. I think it does. At its most recent price of $11.44, Tibco is valued at 36 times fiscal 2001 earnings estimates. That's still not dirt cheap, of course, but it's a far cry from the multiple of nearly 150 times 2001 earnings estimates that the stock had at the beginning of the year. And because analysts predict that earnings will increase at a clip of 50 percent annually over the next three to five years, the stock is now trading at a discount to its growth rate.
Will Tibco turn around overnight? No. Is there more downside risk for the stock? Certainly. In fact, Tibco's stock was taking another fresh pounding on Friday after Oracle's (Nasdaq: ORCL) earnings warning. In response to that shocker, Goldman Sachs and Morgan Stanley Dean Witter downgraded Tibco in addition to several other software stocks. But at this point, I can't imagine that it can get too much worse, even if Tibco's earnings estimates are revised downward. And with the large amount of shares that are being held short, there is the possibility of the proverbial short squeeze on the horizon if Tibco reports some positive news.
Now if I can only get the CEO on the phone.
FOCB WINNERS AND LOSERS
First the good news. The third season of the Sopranos is finally upon us. How is Tony going to cope with his mother Livia's death? Will Meadow enjoy life at Columbia? (I think it's funny that she couldn't get in to Penn, my alma mater.) And poor conflicted Carmela. Will she finally attain the sense of spiritual enlightenment that she seeks? I can't wait to find out.
OK. If you think all this Sopranos talk is my way of trying to avoid mentioning the decrepit performance of the Fish or Cut Bait Reader Index, you're right. It was another miserable week. Only 11 of the 50 stocks rose, and a dozen fell at least 10 percent. And thanks to Oracle's earnings warning, the near-term outlook for technology stocks continues to look bleak. Anyway, on to the winners and losers.
Internet software manufacturer Macromedia (Nasdaq: MACR) was the top performer in the FOCB Index, gaining 12.3 percent on no news. And looking at the losers, Tibco was the biggest dog, dropping 29.6 percent.
***For more about Tibco, scroll to the top of the page and read this lovely column all over again. It only gets better the second time around. |
