Undervalued Actuate: The Time to Rediscover It Is Now

| About: Actuate Corporation (BIRT)

Actuate Corporation (NASDAQ:BIRT) has seen its legacy business fade since its establishment in 1993. As such, many investors went running from this company. However, during the last six years, Actuate has been heavily investing in its BIRT business model. The new model provides a full array of products and services that support business intelligence and reporting. BIRT's license revenue is up 404% year over year and now represents more than half of overall business license revenue. The time to rediscover Actuate is now.

BIRT is an open-source project with about 60,000 registered users compared to 32,000 in September. There has been a 60% increase in BIRT users that start in open-source and move towards commercial licenses. This hybrid model continues to increase exposure to the company's application development solutions. Actuate has 4,700 customers using its products worldwide. Financial service companies made up 60% of Q1 revenue - JPMorgan Chase (NYSE:JPM), Bank of America (NYSE:BAC), HSBC Private Bank, Metlife (NYSE:MET), just to name a few. Other customers include big names such as HP (NYSE:HPQ), GM, GE Aviation (NYSE:GE), Motorola (NYSE:MMI), Genex, and more.

Industry analysts are saying that demand for application development is currently high. Spending will incorporate more agile BI, rather than all-inclusive platforms. Spending will also include analytics, big data, cloud, and especially mobile. Actuate is poised to capture this demand with BIRT's pricing and packaging tailored to any size organization. Actuate's onDemand service allows users to easily click and add services to their onDemand account. Mobile deployment is even easier because Actuate mobilizes a user’s BIRT content automatically.

In February of 2010, Actuate purchased Xenos Group for $35.5 million. Xenos Group's flagship product was its Enterprise Server. This platform has the ability to pull out archived data, convert it, and then stream it. Actuate's strategy was to create X2BIRT, which allows financial companies and others to reach archived data more than three years old and stream that data to the server where it can be utilized by any of Actuate's products. For companies with massive amounts of big data, this is crucial. Financial companies especially can now use it for risk tolerance, investment indexing, and more.

The closest competitor offering the ability to reach archived data is Datawatch (NASDAQ:DWCH). The closest competitors offering BI/Analytics are Qlik Technologies (NASDAQ:QLIK), SAP BusinessObjectives (NYSE:SAP), IBM, and Oracle (NASDAQ:ORCL). The packaging of Actuate's X2BIRT gives the company a unique advantage to fend off competitors. However, this barrier of entry can be broken with M&A from competitors.

Actuate's first quarter revenue increased 10% to $32.1 million compared to the same period last year. License revenues increased 22% and professional service revenues increased 65% . Bookings have been up 22% and 21% in the past two quarters. Stronger than expected revenue growth should yield at least $.32 in EPS by the year's end compared to its current diluted EPS of $.03. This results in a forward P/E of 10 at today's price of $5.85 per share.

When considering an appropriate enterprise value I use an adjusted EV, as opposed to a traditional net-cash-derived EV, because an adjusted EV more properly reflects the net present value of the company's assets and liabilities. For Actuate, net tangible assets are $42 million. Revenues are slated in at $130 million for the fiscal year ending in December. Given the recurring nature of its business, a 3x multiple would be justified. This would peg the enterprise value at $360 million, giving it a market cap of $402M or $8 per share. The adoption of BIRT onDemand and X2BIRT later this year suggests $140M in revenue next year. This would peg next year's enterprise value at $420 million giving it a market cap of $462M or $9.20 per share.

Actuate Corporation is starting to see its six-year long BIRT investment pay off.

Disclosure: I am long BIRT, DWCH.