Actuate Continues to Accelerate Growth

| About: Actuate Corporation (BIRT)

Once again, Actuate (NASDAQ:BIRT) delivered exceptional results. Revenues came in at $33.7M, up 12% from Q2 2010 (versus the Street's estimates of $33.1M). The driving force behind these numbers is the company's BIRT licenses. BIRT license revenues are up 130% for the year. This represents the seventh straight quarter of revenue growth (2%, 10%, 18%, 3%, 102%, 22%, and 24%, respectively). Last year's total BIRT license revenue totaled $9.5M. Licenses for the first half of this year have already reached $11.4M. This further proves that BIRT's new business model is paying off. Consistent with my previous article, I believe BIRT's growth is in its infancy.

The company's innovative open-source business model has proven effective in increasing the company's exposure. There have been over 10 million BIRT downloads worldwide. Registered BIRT exchange users have grown 10% since last quarter to over 65,000 users. The open-source platform allows potential customers to test out its business intelligence-reporting tools before purchasing them. Revenue contributions from users who started in the open-source space increased 165% from Q1. Out of the 55 BIRT customers added this quarter, over half were new customers not already using its legacy products.

Last year's acquisition of Xenos has allowed Actuate to analyze big data that was otherwise inaccessible. The company refers to the process as archive data analytics, which essentially allows an end user to reach years of archived data and perform BIRT analysis. This is especially useful for a company that relies heavily on statements, such as a financial firm, utilities company, government agency, or telecommunications company. According to industry analysts, financial services companies spend about $350 billion globally on IT and will need to make heavy investments to modernize applications. Actuate is poised to absorb much of this demand with its archive data analytics ability. Currently, financial service companies make up about 50% of revenues.

Globally, Actuate stands to benefit from a high demand for application software and BI. International revenue for the quarter has grown 42%. This can be attributed more to China and India than the eurozone or Japan. Firstly, China and India have large markets with a growing demand for BI. Secondly, China and India are large outsourcing influencers. Taking into account the collaboration of global IT professionals, the company has recently sent employees to India to train thousands of developers.

Actuate's bookings have been up 21%, 22%, and 12% in the past three quarters. Continued strong revenue should yield at least $0.37 in EPS compared to its current diluted EPS of $0.01. This results in a forward enterprise P/E of 12 at today's price of $6.50 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 $52 million (up $10M from Q1 due to a released notes payable that was weighing on the balance sheet). Forward 12-month revenues are slated in at $171 million. Given the recurring nature of its business, its strong balance sheet, and double-digit product growth rates, a 3x multiple would be justified. This would peg the enterprise value at $513 million, giving it a market cap of $565M or $13 per share.

Actuate Corporation's BIRT business model is in its infancy and based on its growing pipeline, we haven't seen anything yet. BIRT continues to be an undervalued asset.

Disclosure: I am long BIRT.