FileNet Corp. finally is getting its due.
The Costa Mesa business software maker may not have the flashiest executive or products, but it’s been growing sales and profits while other technology companies stumble.
Investors like what they see and have pushed the company’s stock up to its highest level since the bubble days in 2000. FileNet now counts a market value of $1.3 billion.
The catalyst: After recording two quarters of rising sales but falling net income, FileNet turned in an estimates-beating second quarter, with an outlook that topped expectations, too.
“We’re obviously happy with the progress of the company within the last six months,” Chief Executive Lee Roberts said.
Shares of the company are up more than 10% in the past six months,much of that in the past few weeks,while Nasdaq has lost more than 10%.
Roberts said a $300 million bet the company made in 2001 is key to its recent results. FileNet has poured the funds into research and development for what’s called enterprise content management software.
The company previously focused on software that converted paper documents into digital files.
Enterprise content management software involves finding, sorting and retrieving “unstructured” (not digitally captured) documents and “structured” digital documents. That includes the scads of records from Word documents, PDFs and e-mails.
FileNet went a step further, folding in what’s called business process management software,essentially using all the data electronically to automate and speed up transactions, such as a mortgage loan.
The package, P8, now makes up about 90% of FileNet’s sales.
Sarbanes-Oxley ac-counting reform has been a boon to FileNet because it requires companies to provide more oversight and careful recording of transactions.
FileNet recorded a breakout second quarter.
The software maker’s adjusted net profit was $11.1 million, up 28% from a year earlier. Analysts were expecting profit of about $10.1 million.
Sales rose 12% to a record $117.1 million from a year earlier. Analysts expected revenue of $111.6 million.
Big Competitors
FileNet counts big names as customers, including Johnson & Johnson, Citigroup Inc. and Boston Scientific Corp.
Competitors loom.
Roberts said FileNet has about 18% to 20% of the enterprise content management software market. Other big players are EMC Corp. and IBM Corp.
And look out for Oracle Corp., which is angling to join the market. The database management software maker has tried,and largely failed,to crack the market in the past. In June, Oracle said it’s selling software that helps corporations manage “unstructured” documents.
Roberts said he’s more pleased than worried about Oracle’s effort.
“Those companies that are in that space validate the market size and opportunity,” Roberts said. “They are worthy competitors.”
FileNet is strong in the insurance, banking and government sectors, said Andrey Glukhov, an analyst with Brean Murray, Carret & Co. in New York.
EMC is particularly strong in the drug industry.
“IBM does have an offering … that’s generally perceived as disjointed,” Glukhov said. “FileNet does have one of the strongest content management offerings on the market.”
Consolidation?
FileNet long has been rumored as a potential takeover candidate in an industry that is prone to consolidation.
Oracle could be considered a potential acquirer of FileNet, Glukhov said.
“I know there is a lot of consolidation,” Roberts said. “I have a responsibility to listen if somebody asks.”
FileNet could improve in some areas, analysts said.
One area of concern: profit margins. The company turned in an operating margin of nearly 14% in the second quarter, up from 11.4% a year ago. The company’s guidance for the third quarter is for an operating margin of 11% to 12%.
“We believe a software company of (FileNet’s) size should be more efficient with operating margins closer to 20%,” wrote David Hilal, an analyst with Friedman Billings Ramsey & Co. in Arlington, Va.
Edward Maguire, an analyst with Merrill Lynch & Co., didn’t like the margin guidance either, but said in a research note that FileNet’s outsourcing could help boost margins.
Roberts said FileNet now counts nearly 200 workers in China and India,up from less than 100 a few years ago. He said the company keeps its core software engineering in Costa Mesa.
“Very often it is the kind of work that software developers aren’t terribly interested in doing,” he said of the company’s outsourcing.
Another question for FileNet: What to do with all its cash?
The company has garnered attention for its cash pile. FileNet had cash and investments of $452 million at the end of the second quarter, up about 15% from its stash at the end of last year.
Analysts have asked about acquisitions or stock buybacks.
Roberts said FileNet will spend cash only on acquisitions that boost its prospects.
Recent growth doesn’t mean the company is going to give up its conservative tradition.
“We’re going to spend the money wisely,” he said. “Just because you have it doesn’t mean you want to have it burn a hole in your pocket.”
_________________________________________________________
Gateway Sales Fall Short of Projections
Irvine-based Gateway Inc. last week posted a loss and disappointing revenue in the second quarter.
The company recorded a net loss of $7.7 million in the quarter, compared to a profit of $17.2 million a year earlier. Gateway posted a loss of $12.3 million in the first quarter.
Analysts were looking for a profit of $7.7 million in the second quarter.
The company reported revenue of $919 million, up 5% from a year earlier. Analysts were looking for sales of $1 billion.
As it has done in past quarters, the company posted an increase in its retail sales compared to the year-ago period, but declines in its direct (including Web sites sales) and business sales.
“While we are disappointed with our performance in the second quarter, we believe that our efforts in the first half of the year are beginning to resonate with customers and move us in a positive direction,” said Rick Snyder, Gateway’s chairman and interim chief executive.
,Brian Womack
