TIBCO Software: Context Is King

| About: TIBCO Software, (TIBX)

The lexicon of the digerati can be complicated and confusing for those on the outside looking in. This is especially true for enterprise software, because it's not as easily a defined product for the masses as a smart phone or a tablet. The inner workings of this corporate software is usually shrouded in secrecy, and no one seems to care if it's working properly, unless you want to invest in a company that produces it. I'm a firm believer that investors should know the companies they are investing in and, with the advent of Internet 2.0 and Enterprise 3.0, due diligence is required to command the language of the new frontier.

TIBCO Software (NASDAQ:TIBX) is one such 21st century organization that manufactures and develops middleware for the enterprise environment. If you are wondering what middleware is, it basically functions as a link between two other programs, such as a web server and a database program. Middleware also has a more specific meaning as a program that exists between a "network" and an "application" and carries out such tasks as authentication, to paraphrase the Salon.com technology glossary.

For instance, if you are shopping for a sweater online at The Gap (NYSE:GPS), according to an article by Len DiMaggio in Red Hat Magazine titled What is middleware? In plain English,please:

Behind the scenes, middleware made sure that the store’s inventory database showed that sweater is in stock, connected to the charge card company’s database to make sure that your card wasn’t maxed out, and connected to the shipping company database to verify a delivery date. And, it made sure that hundreds or thousands of people could all shop that site at the same time.

Now you might think that middleware is a fairly established and saturated software sector, and you may be right. The latest S&P Report compiled by Zaineb Bokhari states:

Worldwide revenues for the Application Deployment Software segment in which TIBX participates rose 2.2% in 2009, to $14.9 billion, according to market research firm IDC .... Longer term, IDC expects sales of Application Deployment Software to increase at a compound annual growth rate (CAGR) of 4.2% from 2008 through 2013, reaching $18 billion.

An industry growing a little over four percent per year is not exactly cooking on all four burners, but, just like the consumer market, the corporate sphere is expanding rapidly with the advent of mobile computing, cloud computing and social collaboration. That's where TIBCO comes in. Besides a 14% R&D budget to expand on its offerings, the company made five tuck-in acquisitions last year and recently introduced a new service called tibbr, which has received much fanfare.

In a Jan. 24 article on ZDNet, TIBCO launches tibbr: Enough to make Enterprise 2.0 viable?, author Dennis Howlett speculates that the company has a big advantage in corporate social networking because of the easy-to-use Facebook-like interface that requires no IT assistance: "Unlike other systems, I wasn't left thinking that this was a solution looking for a problem. It has a much more of a self evident feel than other systems I have seen."

In essence, it works. In going back to the simplification of Silicon Valley-speak, Orly Seidman in his April 22 ValueLine report on TIBCO, says tibbr "enables users to incorporate social computing and real-time communication in business applications." ZDNet's Howlett adds: "It intelligently marries people, processes and context, delivering information the way people want to consume."

In the most recent earnings call transcript, CEO Vivek Ranadive expounds on the operative word "context" by enunciating: "Whereas content was king in the 20th century, TIBCO will prove that context will be king in the 21st century." That's a tough order to fill, especially since the 21st century still has 89 years to go and brings us to the question: How much do you want to pay for company like TIBCO Software?

The stock has already gained 600% since the March 2009 lows and has hovered at around $30/share with recent rumors of a Hewlett-Packard (NYSE:HPQ) buyout. Apparently, HP CEO Leo Apotheker and TIBCO chief Ranadive couldn't agree on a price. In an April 13 Motley Fool article by Anders Bylund, Why HP Wants TIBCO, the author reports: "Reuters found two anonymous sources who agreed that buyout talks have been happening but 'fizzled' about two weeks ago." The article also stated that TIBCO has been stealing market share from Oracle (NASDAQ:ORCL) and IBM (NYSE:IBM).

If video killed the radio star and Netflix (NASDAQ:NFLX) killed Blockbuster, I would think the erosion of marketshare by IBM and Oracle would be a big deal if tibbr is as good as it's hyped up to be. We are talking about the elimination of corporate e-mail with this product. There will be a new way to communicate in real-time in cubicles across the global panorama. TIBCO may be better off going it alone if this disruptive technology is as good as it's cracked up to be. After all, there is a large slice of the pie to capture.

That S&P Report by Zaineb Bokhari gives us a breakdown of this industry:

Based on 2009 vendor shares presented in an IDC report published in May 2010, TIBX ranked sixth in worldwide sales of application deployment software, with a 2.7% market share. Market leader International Business Machines held a commanding 32% share, and Oracle Corp. 16%. The top-five market participants in this segment held a nearly 60% share in 2009, up from 59% in 2008.

Before you rush out and buy TIBCO shares thinking tibbr is the big to-do, or the be-all end-all, let's take a look at its valuation. Only 11 analysts cover the company, according to Yahoo Finance. Of those analysts, six have a hold while four have a buy and one has a strong buy. The broker's reports I read by both ValueLine and Standard & Poor's seem to feel that TIBCO has a bright future ahead of it, but they are reluctant to place a bet on the stock at this juncture because of its lofty metrics.

Consensus earnings estimates for 2011 and 2012 are $0.91/share and $1.06/share respectively. Trading around $30/share, that gives us a current year P/E Ratio of 33 and a forward P/E Ratio of 28. That's not too bad, but after impressive earnings growth of 25% per year the past five years, earnings are expected to grow by 15% a year until 2016. Just examining the projected growth from 2011 to 2012, you can see that things are slowing down, although this hasn't been corrosive to share price because of the HP takeover speculation.

I would think that if you are a fast and loose trader, you could take a gamble on a small cap equity like TIBCO to see if indeed Hewlett-Packard acquires it. I imagine you'd get a nice pop in the price. However, if you've got a longer perspective, I would tend to believe that a security like TIBCO may correct from these levels because the stock itself, cloud computing companies and small cap stocks, have all had incredible run-ups (just look at the Russell 2000 the last eight months).

They say you can't start a fire without a spark, and if tibbr is the disruptive technology that Ranadive thinks it is, it will be an evolutionary process, not a revolutionary one. That's why I'm just going to watch this one for awhile. The price will come back to me; if it doesn't, I'll just find something else to invest in.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: Am short the market with inverse ETFs.

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