TIBX: MARKET LEADER IN DELIVERING END-TO-END INTERNET AND
ENTERPRISE INTEGRATION...
Deutsche Banc Alex. Brown - US Equities
James A. Moore,Chin, CFA, Randal R.,Seihun Kong
August 09, 1999
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TIBCO SOFTWARE INC. [TIBX] "STRONG BUY"
Market Leader In Delivering End-to-End Internet And Enterprise
Integration
Solutions--Initiating Coverage With A STRONG BUY Rating
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Date: 08/06/1999 EPS 1998A 1999E 2000E
Price: 22.06 1Q (0.02) (0.05) (0.04)
52-Wk Range: 41 - 20 2Q (0.02) (0.06)A (0.03)
Ann Dividend: 0.0 3Q (0.09) (0.07) (0.05)
Ann Div Yld: 0.00% 4Q (0.03) (0.05) 0.00
Mkt Cap (mm): 1,295 FY(Nov.) (0.17) (0.23) (0.10)
3-Yr Growth: 50% FY P/EPS NM NM NM
CY EPS (0.17) (0.23) (0.10)
Est. Changed Yes CY P/EPS NM NM NM
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Industry: SOFTWARE & SERVICES
Shares Outstanding(Mil.): 58.7
Return On Equity (1998) : 0.0%
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52 week range since 7/13/99 ipo priced at 15
HIGHLIGHTS:
--Initiating Research Coverage With A STRONG BUY Investment Rating On The
Shares. TIBCO is a market leader in delivering end-to-end Internet and
enterprise integration solutions to Global 2000 corporations. The Company
is a direct play on the burgeoning markets for Internet infrastructure
solutions, enterprise application integration (EAI), and event-driven
computing.
--Proven Technology. TIBCO's flagship product is The Information Bus, or
TIB. Since introducing this technology in the late 1980s, TIBCO has played
a key role in inventing, defining and driving publish/subscribe, subject-
based addressing and event-driven solutions. Few vendors can match TIBCO's
expertise in helping corporations integrate their operations with those of
their customers, suppliers and partners.
--Expanding Into New Vertical Markets. The Company established its
reputation in financial services where it won the business of over 300
global banks, and various stock exchanges, including NASDAQ. TIBCO is
leveraging its domain expertise to address opportunities in the
electronics, manufacturing, oil & gas, pharmaceuticals, power and
telecommunications sectors.
--Potential Upside From TIBCO.net. Businesses are moving to the Internet
with increasing speed and urgency. TIBCO.net provides a comprehensive
Internet infrastructure solution to help companies seamlessly integrate
business systems, commerce services and internal/external content for the
Web. Launched in early 1999, TIBCO.net already serves five of the top 10
Web portals and we believe this product has only begun to scratch the
surface of its potential.
--Solid Growth Outlook. We believe TIBCO plays in a large and growing
market for Internet infrastructure solutions, EAI and event-driven
computing. We expect the Company to generate 50% revenue growth over the
next 3 years as it capitalizes on its many technology assets and
opportunities before it.
DETAILS:
--COMPANY BACKGROUND
TIBCO Software has established itself as a leading player in three high
growth markets:
1) Internet and enterprise infrastructure solutions
2) enterprise application integration
3) event-driven computing
The Company's flagship solution, TIB/ActiveEnterprise, is a computing
platform that enables companies to automate their front, middle and back-
office operations. The Company has leveraged this rich core technology to
develop TIBCO.net which provide Internet infrastructure solutions for Web
portals. Founded in 1985 by Chairman and CEO Vivek Ranadive, TIBCO's
predecessor company was formerly known as Teknekron Software Systems and
traded on the NASDAQ exchange before it was acquired by Reuters in March
1994. Reuters changed Teknekron's name to TIBCO Inc. in 1996. A year later,
Reuters separated TIBCO into two separate entities: TIBCO Software and a
wholly owned subsidiary of Reuters focused on providing TIB technology-
based solutions to the financial services and insurance sectors. TIBCO
Software has licensed (on a royalty-free basis in perpetuity) the TIB
technology from Reuters. As part of this complex royalty arrangement, TIBCO
has the rights to sell TIB technology into all industries other than
financial services and insurance (TIBCO.net is excluded from this
arrangement and is being sold across all markets).
TIBCO completed an initial public offering of 7.3 million shares on July
14, 1999 at a price of $15 per share. In conjunction with this offering,
two of the Company's strategic partners, Yahoo! and Sun Microsystems,
agreed to purchase minority equity stakes of 267,000 and 500,000 shares,
respectively. The Company's single largest shareholder is Reuters with 38
million shares which equates to a 65% stake and three board seats. Other
key minority owners include Cisco Systems (7%) and the Mayfield Fund (5%).
Headquartered in Palo Alto, California, the Company has over 340 employees
in over 30 offices worldwide.
--INITIATING COVERAGE WITH A STRONG BUY INVESTMENT RATING
TIBCO is a market leader in delivering end-to-end Internet and Enterprise
integration solutions to Global 2000 corporations. We believe the Company
is positioned to leverage its many impressive technology assets to become
the key platform for the "event-driven enterprise" (helping corporations to
run their mission-critical business applications inside and outside the
firewall). As a result, TIBCO is a direct play on the burgeoning markets
for:
*Internet infrastructure solutions,
*Enterprise application integration and
*Collaborative, event-driven computing
We expect TIBCO's event-driven solutions to be a key enabler of the
Internet B2B, B2C and B2Employee movement. Moreover, TIBCO still is in the
very early stages of its growth curve as the industry only is beginning to
recognize the potential ramifications of event-driven computing, Internet
business solutions and enterprise integration. With a compelling product
strategy, strong customer base, good partnerships, the leadership position
in the rapid growth event-driven solutions space and a strong management
team, the future looks very bright for TIBCO. We believe TIBCO Software's
stock deserves a premium valuation given its attractive growth outlook and
the valuations accorded to some of its publicly traded peers.
--PROVEN TECHNOLOGY AND TRACK RECORD
The Company's flagship product is called The Information Bus (TIB). The
TIB/ActiveEnterprise is a computing platform that enables corporations to
become event-driven enterprises. TIB/ActiveEnterprise supports over 30
different platforms and enables companies to automate their front, middle
and back-office operations. The technology employs intelligent agents and
alerts to monitor, manage and highlight real-time information as it flows
across the enterprise. The technology underlying the Company's products is
highly sophisticated. TIBCO has pioneered the development of advances such
as publish/subscribe messaging, subject-based addressing, reliable Internet
IP multicasting, asynchronous support, guaranteed delivery capabilities and
various communications protocols. We believe the patented technology TIBCO
employs as well as the maturity and time-tested scalability/reliability of
its products provide a significant barrier to entry for "me-too"
competitors and point solution providers. Few vendors can match TIBCO's
expertise in helping corporations integrate their operations with those of
their customers, suppliers and partners. The following table provides a
thumbnail sketch of TIBCO's rich technology history:
Year Event
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1987 Developed world's first digital trading system for Goldman Sachs
1990 Completed its first large-scale re-engineering project: the
world's largest digital trading floor
1992 Designed its first semiconductor factory floor
1993 Awarded patents
1995 Introduced a shrink-wrapped product line
1996 Launched its transactional messaging technology
1999 Introduced TIBCO.net
Source: Company data and Deutsche Banc Alex. Brown
The Company has amassed considerable domain expertise in publish/subscribe
technology and has become a key partner for corporations who need to
seamlessly run their mission-critical business applications. Customers feel
comfortable making the TIB their key backbone because TIBCO has:
--over a dozen years of experience in delivering publish/subscribe,
subject-based addressing and event driven solutions
--invested hundreds of millions in R&D dollars in this technology
--successfully applied its technology to some of the most demanding,
transaction-intensive, business-critical sectors of the economy (Wall
Street trading floors, financial institutions, stock exchanges, etc.)
--successfully helped run close to two-thirds of the semiconductor chip
capacity in the world
--convinced Cisco Systems, the world's largest networking vendor, to
embed its technology into every one of its routers, and hardware
giant Sun Microsystems to potentially embed the TIB into its Java
platform and Solaris operating system
--EXPANDING INTO NEW VERTICAL MARKETS
The Company has established a significant beachhead in the finance arena,
servicing brokerage houses, investment banks, insurance companies,
financial institutions, stock exchanges and other prominent businesses. In
fact, the Company has won the business of over 300 global banks, the NASDAQ
and many others. TIBCO is leveraging its domain expertise and de facto
leadership in financial services to pioneer key opportunities in the
electronics, manufacturing, oil & gas, pharmaceuticals, power and
telecommunications sectors.
--PROMISING INTERNET STRATEGY WITH TIBCO.net
Corporations, both large and small, are moving to the Internet with
increasing speed and urgency. The Internet has become a major new platform
that facilitates communication, distribution and information flow. But
moving to the Web is no cakewalk. Web sites need to run 24x7, 7 days a
week, handling unpredictable loads of traffic and integrating disparate
content and systems. Launched in early 1999, TIBCO.net provides customers
with a way to outsource the development and management of complex, high-
speed portals. TIBCO.net provides a comprehensive Internet business
infrastructure solution that helps enterprises seamlessly integrate
business systems, commerce services and internal/external content.
TIBCO.net Services TIBCO.net Advantages
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- Content integration - Accelerate time-to-market
- Personalization/user - Improve user experience
customization
- Information content - Increase customer satis-
delivery faction and "stickiness"
- Highly scalable - Able to handle high loads
infrastructure of traffic and "eyeballs"
- Back-end integration - Provide a seamless,
to legacy systems integrated solution
Source: Company data and Deutsche Banc Alex. Brown
TIBCO.net already provides software, content aggregation and hosting
services for five of the top 10 Web portals (including Yahoo! Finance whose
site currently gets close to 30 million hits per day). Other key TIBCO.net
customers include Netscape's Netcenter, Lycos, CBS Sportsline, Alta Vista,
The Financial Times and Chemdex. We believe this product has only begun to
scratch the surface of its potential.
--TRENDS DRIVING DEMAND FOR TIBCO
Four key trends are driving demand for TIBCO's solutions:
1) The Rise of Event-Driven Enterprises
--Enterprises are migrating to event-driven systems that facilitate
collaboration, data sharing, order management and connectivity between
employees, customers, suppliers, partners and others
--Corporations need to become more information-centric because increased
competitive pressures are compelling them to place a high premium on
access to real-time data and analysis
--TIBCO is one of the only vendors positioned to provide the
comprehensive
suite of workflow, integration and management solutions required to
fulfill the event-driven enterprise
2) The Need for Integrated e-Business Solutions
--The Internet is becoming ubiquitous and enterprises are looking to
integrate key systems and information that are inside (back-office
systems and internal data) and outside (external data, content and
systems) the firewall
--Enterprises are eager to build customized, Web-based portals
--Enterprises need to distribute information across their value chain to
suppliers, partners and customers to increase the velocity of their
decisions and become more customer-centric
--TIBCO has taken the competitive lead in providing "portal-within-a-
portal"
and Internet integration solutions to the Fortune 1000
3) The Increasing Complexity and Lack of Integration Between Enterprise
Systems Is Spurring Demand for Enterprise Application Integration
--Companies are evolving into extended enterprises with worldwide
offices,
distributed applications, global partners and international
requirements
--Companies need to leverage their existing IT infrastructure while
layering
on new cutting-edge systems in an integrated manner
--They also need to seamlessly integrate custom built as well as
packaged
applications
4) The Post-ERP Deployment Spending Wave As Companies Seek to Leverage
Investments In Existing Systems, Including Their Multi-Million Dollar
Packaged Applications
As corporations and vendors respond to these four trends, they are
discovering that traditional technology solutions may not be robust or
flexible enough for their complex needs (integrating the Internet with
large, complex business software such as ERP, supply chain, e-commerce,
decision support and database applications). This is where TIBCO is
stepping in to define a critical new technology capable of driving a
substantial market opportunity. TIBCO's sophisticated, industrial strength
publish/subscribe solutions provide the scalable, high-performance platform
necessary to seamlessly run mission-critical business applications inside
and outside the firewall. Leveraging TIBCO's connectivity and information
delivery capabilities, corporations are in a position to flourish as event-
driven enterprises. Using TIBCO to tie their complex systems together,
companies are able to respond more quickly to business change as well as
their customers needs. They are able to integrate, exchange and share real-
time data over the Internet and across their extended enterprises with
their partners, suppliers and customers. In addition, they are able to
monitor, filter and deliver intelligent information across their networks
to decision-makers when and where they need it.
--THREE-DIMENSIONAL CRITICAL MASS
We believe TIBCO already is well on its way to generating critical mass
along three key dimensions: technology, customers and financial strength.
1) TECHNOLOGY
--TIBCO has over a dozen years of experience in inventing, defining and
driving publish/subscribe and event driven solutions
--TIBCO offers an end-to-end Internet and enterprise integration stack
of
products
2) CUSTOMERS
--TIBCO is installed at hundreds of Global 2000 customers worldwide
3) FINANCIAL STRENGTH
--TIBCO has had a long and impressive financial track record both as a
division of Reuters and as a publicly traded company prior to 1994
--Alliances with Reuters and other key allies such as Yahoo!, Cisco
Systems
and Sun Microsystems help open doors, provide added credibility and
generate new business opportunities for TIBCO
--STRONG PARTNERSHIPS
TIBCO's key strategic partners include Cisco, i2 Technologies, Oracle, Sun
Microsystems, and Yahoo! These partnerships help enhance and extend the
ubiquity of TIBCO's technology.
--PROMISING DIRECT SALES MODEL
The Company is focused on driving license sales through a direct sales
model. TIBCO has approximately 24 quota-carrying salespeople and plans to
double its sales headcount over the next 12 months. A typical sales cycle
runs 90 days with an average order size of approximately $500,000.
--RAPIDLY GROWING, BLUE-CHIP CUSTOMER BASE
TIBCO Software already has established a significant beachhead in the
finance arena, servicing brokerage houses, investment banks, insurance
companies, stock exchanges and other key financial institutions. As the
Company has gained experience in vertical markets, it has created industry-
specific templates for the technology. These templates allow TIBCO
Software to
* shorten its sales and implementation cycles in these markets
* modify the TIB/ActiveEnterprise suite to capitalize on its core,
cross-industry benefits
* tailor solutions to meet the specific functional needs of companies
across a wide range of industries
TIBCO Software is moving rapidly to leverage its de facto leadership in
financial services to pioneer other key sectors including Internet portals,
electronics, manufacturing, oil/gas, pharmaceuticals, telecommunications,
and power sectors. The Company's customer base includes dozens of blue chip
enterprises, including AOL/Netscape, Chevron, Ericsson, Fidelity, Goldman
Sachs, Intel, Intuit, Lucent, Mobil, Morgan Stanley, NASDAQ, Nortel,
PageNet, 3Com and Yahoo!
--EXPERIENCED, PROVEN MANAGEMENT TEAM
We believe the Company has established a solid management team with proven
skills, led by its founder, chairman and CEO Vivek Ranadive. Mr. Ranadive
has demonstrated superior strategic vision and judgement in identifying and
addressing an attractive, sizeable market opportunity, literally years
ahead of its competitors. Many of the Company's research and development
personnel have been with TIBCO for several years, a sign of good stability
and cohesiveness, in our view.
--SOLID GROWTH OUTLOOK
We believe TIBCO plays in a large and growing market for Internet
infrastructure solutions, EAI and event-driven computing. We expect the
Company to generate 50% revenue growth over the next 3 years as it
capitalizes on the opportunities before it.
--INVESTMENT RISKS
* Relationship With Reuters. TIBCO, then known as Teknekron Software
Systems, was acquired by Reuters in 1994. TIBCO Software was spun off as
a separate entity in December 1996 and established an agreement with
Reuters allowing the Company to license TIB technology royalty-free and
in perpetuity. The Company also has a complex royalty arrangement with
Reuters covering sales into the financial services sector (excludes
TIBCO.net).
* Sales Execution And Back End Loaded Quarters. The Company rapidly is
growing its sales organization to increase its account coverage and
reach. Like most of the enterprise software companies we follow, the
Company faces the potential risk of lumpy quarters and dependence on
large deals.
* The Competitive Environment. TIBCO's competitors include IBM, BEA
Systems and a host of privately held companies. Our analysis of the
competitive situation indicates that TIBCO has the most sophisticated
and scalable technology in the event-driven computing market. TIBCO
holds a clear edge in domain expertise in key verticals such as
financial services, electronics, manufacturing, and energy.
* The Year 2000 Issue.
* Need To Continue Building Critical Mass. Time-to-market, execution and
speed are key issues that will help determine who captures the high
ground first. TIBCO faces some well-capitalized competitors including
IBM and BEA Systems and will need to continue spending aggressively to
strengthen its technology and infrastructure. The markets for Internet
infrastructure and enterprise integration are growing very rapidly and
the Company will need to execute well to maintain its leadership
position.
* Projected To Generate Operating Losses Until F4Q 2000.
* Stock Trades At A Premium. The stock trades at 15.2x our CY1999 revenue
estimate of $85.4 million and 10.5x our CY2000 revenue estimate of
$127.7 million.
--INVESTMENT CONCLUSIONS
TIBCO Software is carving out a unique and enviable position in the
Internet and enterprise software universe. We expect TIBCO's event-driven
solutions to be key enablers of the Internet e-commerce, enterprise
integration, supply chain automation and event-driven computing movements.
Moreover, TIBCO still is in the very early stages of its growth curve as
the industry only is beginning to recognize the potential ramifications of
event-driven computing. Over the next 1-2 years, we believe the markets
TIBCO is addressing are positioned to reach a significant inflection point
in terms of mainstream adoption and critical mass. As this cross-over point
is reached, we believe TIBCO is positioned to be a significant beneficiary
given its leading edge technology, solid partnerships and unique strategy. |
