Undervalued Actuate Delivers Solid Growth

May. 7.12 | About: Actuate Corporation (BIRT)

Actuate (NASDAQ:BIRT) announced its first quarter earnings last week and as expected, the company's investment is delivering solid growth. Considering the unique terms of each license agreement, enterprise software transactions should be measured on a year-to-year basis. Actuate does not rush transactions to pump up quarterly numbers, which is a sign of strong management. And while sequentially revenue was flat, license revenue has grown 15% from the same period last year and total revenue has increased 9%. Actuate continues to post double-digit growth and is on the path to hit the $250 revenue target in 2016.

BIRT-exchange has grown from 60,000 registered users to 85,000 within the year. As I had mentioned before in my previous article, BIRT's open source users start in the open-source BIRT-exchange and move towards commercial licenses. This hybrid business model has been continually increasing the company's exposure. When a freeware developer is matched with an Actuate sales rep, they discover the value-added benefits of signing a license agreement. Transactions greater than $100,000 were closed with 71 customers during Q1. This compares to 62 a year ago, demonstrating the need for patience with these large deals.

To-date, the company has been more concentrated on building the BIRT community. Now that the community has emerged itself, the company can start its high-growth monetization. Approximately 10% of the developers are working on enterprise-class projects and Actuate intends on aggressively pursuing them. BIRT is in the process of adding to its sales head count. The number of sales reps has increased from 48 to 61 and the company expects to have 70 by the end of the year. The turnover for sales is about 40% and the average transaction per rep is about 4.3. Therefore, as the sales force increases, so will booked revenue.

Actuate currently has no debt and continues to carry a revolving credit line of $50 million should an acquisition present itself. I want to make a note here that the following numbers represent organic growth, not the growth of any potential acquisitions. When considering an appropriate value, I use adjusted net tangible assets, an adjusted EV, and then subtract debt. This more properly reflects the net present value of the company's assets and liabilities.

For Actuate, net tangible assets are $68 million. Forward 12-month revenues have been fine-tuned and are slated in at $156 million. Given the recurring nature of its business, its strong balance sheet, and double-digit product growth rates, a 3x multiple would still be justified. This would peg the enterprise value at $468 million, giving it a market cap of $536M or $11 per share.

Actuate has successfully established its BIRT community and is now in the early stages of monetization. Since my first article "Undervalued Actuate: The Time to Rediscover It Is Now," shares are up 19%. But it's not too late, at the current price of $6.94 this stock is trading at a 58% premium.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in BIRT over the next 72 hours.