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With over 20 years of professional experience, Mark Gomes is among the world's most experienced technology stock analysts. During his time as a contributor to Seeking Alpha, over 50% of his official picks were either acquired or tripled in value. Currently, Mr. Gomes is the CEO of Pipeline Data,... More
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  • Software Earnings: Attunity Reports 100% Growth; Broadvision Looms 13 comments
    Feb 6, 2012 2:47 PM | about stocks: ATTU, BVSN

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    ____________________________________________

    It's a busy earnings week for small cap software companies. One of the more notable reports was released by Attunity (ATTUF.OB) this morning. Meanwhile, one of the more highly anticipated results will be released by Broadvision (NASDAQ:BVSN) tomorrow night. In these two software vendors, we have a tale of divergent fortunes.

    Looking at ATTUF, the company and its shares appears poised for another year of meteoric growth. The company reported revenue of $5.7M, up 121% year over year. This represents an acceleration of its 26% growth during the first nine months of the year. The results were driven by its flourishing strategic relationship with Microsoft, IBM and Oracle, Notably, the multi-year / multi-million dollar Microsoft deal was recently renewed.

    Based on discussions with the Gartner Group, I have learned that Attunity possesses unique strengths in the red-hot data integration space which make it attractive to these large partners. Indeed, ATTUF's technology is in an integral piece of Micosoft's latest version of SQL Server. Following my discussions, I concluded that one of ATTUF's partners might want to acquire the company to gain a competitive advantage. This gives ATTUF's shares two avenues for appreciation - growth and/or acquisition.

    It's important to note that Attunity's arrangements yielded 156% growth in its software license business in Q4. Since software licenses are a precursor to maintenance and services revenue growth, investors can count on more revenue growth in the quarters to come.

    ATTUF has also boosted its R&D spending in recent quarters. New products have been released and more are coming. This will also drive continued growth for the company.

    Looking at its valuation, ATTUF increased its book value by $4.5M in 2011, up more than 600% over 2010. Backing this number out of its market cap, we can calculate that its adjusted enterprise value to equity-growth ratio (a proxy for P/E) is less than 6. Meanwhile, its adjusted EV to revenue run rate ratio is just over one. Its R&D ratio is a miniscule 3. This is a low-water mark that often results in a higher valuation or acquisition for software companies over time.

    Considering its 100% revenue growth rate, both of these ratios are significantly lower than typical valuation metrics would provide. Software venddisplaying this sort of growth and traction with industry leaders are generally afforded valuations between 5 and 10x these levels. This implies that ATTUF could justify a share price of $4-10.

    The disconnect is clearly a function of its non-existent institutional sponsorship. However, as its visibility increases the shares have been steadily rising. After a recent pause, its chart shows a clear cup-and-handle formation, one of the most bullish set ups a stock can display. This is consistent with ATTUF's seasonal pattern -- for each of the past two years, its shares have more than doubled in the winter timeframe.

    Cup- and-handle formation signals another rally is beginning for shares of Attunity

    With a market cap of just $30M, insiders owning 25% of the shares outstanding, and average volume of just 22,000 shares, it won't take much for the shares to take flight.

    Income Statement - Attunity (ATTUF)

     

    Year Ended

     

    Quarter Ended

     

    2010

    2011

    Change

     

    Dec-10

    Dec-11

    Change

            

    Software Licenses

    4,645

    8,140

    +75%

     

    1,242

    3,182

    +156%

    Maintenance & Services

    5,430

    7,029

    +29%

     

    1,337

    2,530

    +89%

            

    Total Revenue

    10,075

    15,169

    +51%

     

    2,579

    5,712

    +121%

            

    COGS

    1,951

    1,453

      

    408

    509

     

    R&D

    2,482

    4,960

    +100%

     

    799

    2,219

    +178%

    Sales & Marketing

    3,831

    5,851

      

    976

    2,275

     

    G&A

    1,854

    2,835

      

    522

    723

     

    Operating Expenses

    10,118

    15,099

      

    2,705

    5,726

     

    Operating Income (loss)

    -43

    70

    +263%

     

    -126

    -14

    +89%

    Financial Expenses, net

    1,388

    1,284

      

    999

    918

     

    Loss Before Taxes

    -1,431

    -1,214

    +15%

     

    -1,125

    -932

    +17%

    Taxes (benefit)

    74

    -399

      

    17

    -521

     

    Net Loss

    -1,505

    -815

    +46%

     

    -1,142

    -412

    +64%

            

    Loss Per Share

    -0.05

    -0.02

    +60%

     

    -0.04

    -0.01

    +75%

    As investors digest ATTUF's results, many still await BVSN's upcoming release (due out Thursday evening). In the September quarter, revenues showed some signs of life, growing marginally over its June results, but still down 19% year over year.

    The coming report will be crucial for BVSN. The company has been enjoying the fruits of past success in the form of software maintenance revenues. Ever since its days as an Internet darling, BVSN has been collecting annual maintenance fees on the numerous multi-million dollar deals it signed for its market-leading eCommerce suite of products. However, 10 years have passed and customers are overdue for more modern solutions. Unfortunately for BVSN, they are purchasing them from the likes of IBM and Oracle (via its acquisition of ART Technology Group) among others.

    Of equal importance, CFOs have long-since depreciated BVSN's software from their balance sheets. This has given IT departments the financial green-light to replace BVSN's aging platform. This is bad news for BVSN maintenance revenue. The can clearly be seen on its balance sheet. In the first nine-months of 2011, deferred maintenance fell 38% to a mere $3.4M. This is particularly shocking because software maintenance revenues typical rise...and rarely fall by more than 10%.

    This decline has been a significant source of BVSN's revenue shrinkage. Even more disconcerting, maintenance fees are among the most profitable sources of revenue for the company. As a result, we will be watching eagerly to see if BVSN's newest offerings are gaining enough traction to offset the demise of its eCommerce franchise.

    It will be most interesting to see if the company can match ATTUF's $5.7M in Q4 revenues. If it does, that will be one thing the companies share. Indeed, BVSN contrasts with ATTUF in several regards:

    • Its valuation has become very full in recent weeks. Backing out its book value, BVSN currently trades at 5x its revenue run rate. ATTUF trades at 1x. The same ratio for R&D puts BVSN at 14x versus ATTUF's 3x. Looking at book value growth, BVSN's multiple is -29x versus 3x for ATTUF.
    • Year over year growth in the most recently reported quarter was -19% for BVSN versus 121% for ATTUF. License revenue at BVSN declined 3% while ATTUF's grew by 156%.
    • According to Gartner Group's latest Magic Quadrant, 22 vendors offer social enterprise platforms that met the criteria for inclusion in its report. BVSN wasn't one of them. Assuming that it eventually meets the necessary requirements, it will be competing against IBM, Microsoft, and Jive Software for a spot in the leaders' category, along with SAP, Salesforce.com, and four others in the visionary category.

      In contrast, Gartner lauds ATTUF's capabilities as being unique in the marketplace. The company has smartly sought to partner, rather than compete, against the industry's leaders.

    Considering each company's respective valuation metrics, BVSN appears to be overvalued by 35-50%. Meanwhile, ATTUF is arguably undervalued by several hundred percent. With ATTUF results fresh off the presses, investors can jump in, armed with positive results and the knowledge that sales of SQL Server are helping to steer future growth.

    In contrast, holders of BVSN will be waiting with baited breath for results that will have to show marked improvement across many categories to avert a further decline in its shares.

    Disclosure: I am long ATTUF.OB.

    Stocks: ATTU, BVSN
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Comments (13)
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  • crimsonbey
    , contributor
    Comments (520) | Send Message
     
    It appears you have your years and quarters wrong. With 2010 being higher than 2011 and your calculating it in reverse.

     

    I have a deep aversion towards non-liquid (low volume things). The problem is not when everything is good. The problem when things are neutral or bad then you really eat it in the bid/ask spread and are essentially trading with yourself (my view).
    3 Feb 2012, 03:18 AM Reply Like
  • Mark Gomes
    , contributor
    Comments (1951) | Send Message
     
    Author’s reply » Crimson,

     

    We're working on getting that typo fixed. Indeed, this year's results were much stronger than last year's!

     

    I share your aversion to illiquid stocks. However, when the discount is so steep, I feel compensated for the low volume. Most stocks gravitate toward fair value. With low-volume stocks like this, all it takes is one good catalyst (or getting bought out) and the shares take off. It's just a matter of patience.

     

    Thanks for the heads up!

     

    Mark G.

     

    p.s. As a reminder, you get receive free updates on your cell phone by texting the words FOLLOW BOSTONGEKKO to 40404.
    6 Feb 2012, 02:45 PM Reply Like
  • Ian Bezek
    , contributor
    Comments (1118) | Send Message
     
    Broadvision reported earnings 1/27/12, right?
    6 Feb 2012, 05:01 PM Reply Like
  • FortSumter
    , contributor
    Comments (44) | Send Message
     
    Looks like you were correct for the first half of your thesis. It's an ugly morning for BVSN. I'm anxious to follow the remainer to see if companies are switching to ATTUF. Great insight btw. I appreciate your work.
    7 Feb 2012, 10:48 AM Reply Like
  • Mark Gomes
    , contributor
    Comments (1951) | Send Message
     
    Author’s reply » Ian & Fort -- LOL. Yes. BVSN's earnings were a couple weeks ago...and as weak as I warned they would be. I think today's drop have something to do with the double-top the stock just formed. This could be the end for it. We'll see.

     

    All things gravitate toward fair value in time. In between, anything can happen. It's all about supply and demand. About 250,000 shares (almost 10% of the float) changed hands in a blink. Someone "big" wanted out and provided a hefty discount to get out.

     

    ATTUF, COOL, CALX, and ZHNE are all acting well. Where they go next is not my guess to make. All I know is that my analysis says that fair value is a long way UP for all four of them.

     

    Kindest Regards,

     

    Mark G.

     

    _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

     

    Receive my updates for free by texting the words FOLLOW BOSTONGEKKO to 40404.
    7 Feb 2012, 02:04 PM Reply Like
  • Scott Ende
    , contributor
    Comments (7) | Send Message
     
    Hi Mark,
    Could you elaborate or give the specific numbers your were using for adjusted enterprise value to equity-growth ratio? Thank you for the analysis.

     

    Scott
    25 Apr 2012, 10:49 PM Reply Like
  • Mark Gomes
    , contributor
    Comments (1951) | Send Message
     
    Author’s reply » Scott,

     

    P/E is misleading because both "Price" and "Earnings" can mislead an investor. To derive a useful "P/E", I go through the balance sheet, line by line and revalue the company's assets and liabilities based on reality (as opposed to accounting standards).

     

    Similarly, I look at earnings the same way. Personally, I care most about the value that the company is adding to its balance sheet via its operations. That is why I look at the growth in shareholder equity (a.k.a. equity growth). Of course, book value needs to be adjusted for things like share buybacks, secondary offerings, etc.

     

    Good stock analysis is a lot of work, but provides a critical edge. There's actually a fine line between 5% gains and 50% gains. It just comes down to diligence and discipline.

     

    Cheers,

     

    Mark G

     

    p.s. A reminder to all. You can get my pick/comments in real-time for free by following me on Twitter (BostonGekko). Just text FOLLOW BOSTONGEKKO to 40404.
    26 Apr 2012, 11:32 AM Reply Like
  • Scott Ende
    , contributor
    Comments (7) | Send Message
     
    Hi Mark,

     

    Thank you for the quick response. It makes sense you would be most interested in the value the company is adding to the balance sheet but that must be used as a proxy for share price. As you stated:

     

    "Backing this number out of its market cap, we can calculate that its adjusted enterprise value to equity-growth ratio (a proxy for P/E) is less than 6"

     

    I am not familiar with this ratio, how did you calculate the less than 6? Also, how did shareholder equity increase from $733k to $5.3m on the 2011 form 20F without the company producing significant NI?

     

    Sincerely,
    Scott
    26 Apr 2012, 04:26 PM Reply Like
  • Mark Gomes
    , contributor
    Comments (1951) | Send Message
     
    Author’s reply » Scott,

     

    1. It is not a standard ratio. Its proprietary to Pipeline Data. We don't reveal the details of how we calculate it for competitive purposes, but suffice it to say that it is based on what I discussed in my prior note. Anyone can derive their own proprietary ratios to reflect reality, versus accounting "mumbo jumbo".

     

    2. I would have to go back and look at my team's work, but net income is OFTEN over- or under-stated for a variety of reasons. Remember, the income statement is based in accounting and not necessarily indicative of reality. If you investigate the fundamentals of accounting, you can become very good and picking financial statements apart. Unfortunately, that is beyond the scope of what I have time to provide in this forum. Hope that helps though.

     

    Kindest Regards,

     

    Mark G
    26 Apr 2012, 05:04 PM Reply Like
  • Rowdy148
    , contributor
    Comments (24) | Send Message
     
    Thank you for your articles on ATTUF. It has been a real joy watching this stock go up.
    9 May 2012, 05:25 PM Reply Like
  • Mark Gomes
    , contributor
    Comments (1951) | Send Message
     
    Author’s reply » Cheers Rowdy. It goes to show that a stock can jump without a pump if the research stands on its own.
    10 May 2012, 12:13 PM Reply Like
  • Rowdy148
    , contributor
    Comments (24) | Send Message
     
    Mark,

     

    Will you be offering an opinion on the reverse split anytime soon? I personally think it will be beneficial to the company.
    16 May 2012, 06:32 PM Reply Like
  • Mark Gomes
    , contributor
    Comments (1951) | Send Message
     
    Author’s reply » I just commented in the other article. Cheers!
    19 May 2012, 07:46 AM Reply Like
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