Tibco Software Looks Like a Great Buy

Richard Saintvilus

NEW YORK ( TheStreet) -- It hasn't been a great year for software companies. Just when investors believe they've gotten this sector pegged, Oracle announces a disappointing fourth-quarter, which ratcheted down most analysts' growth projections and effectively knocking out its own stock.

So it came as no surprise that Tibco Software , which is in the midst of some pretty significant restructuring, also missed its targets. The only question, though, is to what extent investors can blame this software weakness on broad macro concerns -- because if that's not the case, Tibco management has some explaining to do.

While the macro environment has certainly taken a toll on Oracle, Tibco's struggles span a much longer period. Although an argument can be made that the stock's recent decline has placed Tibco shares in value territory, I do wonder how long investors are willing to wait for management's turnaround vision to be realized.

It's tough for me to blame those who bailed on the stock after these latest results, but I also think it was premature to have done so.

As noted, not much was expected ahead of Tibco's report. The company posted revenue of $246 million, down 1% year over year and up just 3% sequentially. Again, given the soft patch that others including Red Hat and IBM have revealed, a 1% revenue decline by Tibco, which is trying to transform its business, is excusable -- if not totally expected.

License revenue wasn't extraordinary, but licenses did grow 5% sequentially to $82 million. Service revenue was a bit more pedestrian, growing just 2.5% sequentially to $164 million. But the company is doing well in maintenance revenue, which continues to grow at a better-than-expected rate, up 6% year over year and 3% sequentially.

It certainly seems as if management's efforts to reorganize infrastructure sales is moving along pretty well. Remarkably, there is now light at the end of the tunnel -- even amid prolonged weakness in Europe and government spending. Profitability, particularly the company's margins, was the biggest question mark heading into the quarter.

Management seems up to the challenge. Although gross margin shed roughly 2% year over year, Tibco was able to meet expectations. Profits weren't exceptional, though, with net income falling to $8.7 million from $26.5 million in 2012. But the company met non-GAAP earnings-per-share estimates at 18 cents.

It was far from an exceptional quarter for Tibco. But management didn't try to pretend as if it was more than it was. The company's CEO, Vivek Ranadive, acknowledged what the Street has known for some time -- there is still plenty of work left for the company to do. Although restructuring plans are on target, it doesn't mean Tibco is completely out of the line of fire.

The good news is the company has excellent products that customers love. The bad news is that, well, the company has excellent products that customers love. What I mean by this is, Tibco has caught the attention of many of its rival, including Oracle, which has shown some recent signs of struggles.

What's to stop Oracle, which has plenty of leverage, to launch an all-out attack against Tibco as Oracle seeks to increase revenue? Oracle, or for that matter Salesforce.com , can add margin pressure to Tibco at the expense of their own margins. The scary part is, they would still be able to post decent results.

In other words, there is the risk that Tibco's profits can suffer amid its restructuring efforts. This makes falling in love with the stock a risky proposition.

That said, I still like Tibco's long-term prospects, even though many others don't. Management deserves credit for the moves it has made, many of which should create more value for shareholders over time. Accordingly, with long-term revenue growth that should outperform both IBM and Oracle, I value shares of Tibco at $25, or 15% above current value.

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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