How to make a FileNet flip: Mix better-than-expected quarterly profits with a promise of more to come. Watch stock sizzle.
That’s been the recipe of late for Costa Mesa-based FileNet Corp., a maker of software for managing far-flung data on corporate networks.
In late April, FileNet reported a doubling in first-quarter profits, thanks largely to cost cutting. The company’s operating expenses dropped 7% from a year earlier.
The results were more than what Wall Street had expected. The kicker: FileNet said sales and profits for the current quarter also should beat what analysts had in mind.
As of last week, FileNet’s shares were up nearly 30% since mid-April, the second highest point for the stock in three hard years and a peak for the year.
FileNet had a market value of $1.5 billion last week.
Not bad for a company that was slammed by investors six months ago for not closing enough deals.
“The company did much better in the last quarter,” said Mark Schappel, an analyst with Keybanc Capital Markets, part of Cleveland-based KeyCorp.
In January, an analyst downgrade of FileNet’s shares took an 11% one-day bite out of the stock. At the time, FileNet faced “hurdles toward driving growth,” the analyst wrote.
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Roberts: “Our win rates against IBM and EMC have been consistent” |
Late last year, FileNet found itself in a slump as big deals it hoped to close didn’t realize. Some speculated customers were dragging their feet on big software buys to avoid messing up their auditing in the first year of compliance with the Sarbanes-Oxley accounting reform act.
FileNet sells what’s called content management software. Big companies and others use the software to organize disparate computer files that aren’t easily handled by a database. Those include audio and video files, electronic forms, scanned documents and e-mails.
Competition is tough.
Rivals include IBM Corp. and EMC Corp., which bought FileNet competitor Documen-tum Inc. in late 2003. Smaller players include Florida’s Citrix Sys-tems Inc. and Canada’s Hummingbird Ltd. and Open Text Corp.
Market Leader
FileNet has the lead in the content management market, according to market tracker International Data Corp.
The company often beats out big rivals, Chief Executive Lee Roberts told investors on a conference call last month.
“Our win rates against IBM and EMC have been consistent in that 60% to 70% range, and that has been consistent now for five or six quarters,” Roberts said.
FileNet closed a number of deals with big customers in the first quarter, Roberts said. They include Avaya Inc., Citigroup Inc.’s European arm and Canadian utility British Columbia Hydro and Power Authority.
“We continue to see an increasing demand for our products and are seeing not only an increase in overall momentum but also in the number of customers that are looking to make decisions,” Roberts said on the conference call.
FileNet reported first-quarter sales of $100 million, up just slightly from $99.5 million a year earlier. But the figure still topped estimates.
The company’s real gain came on the other end, with operating income growing 63% to $10.7 million.
FileNet has made several changes in the past year, such as cutting research and development and marketing costs. It has shipped about 50 jobs to India.
“They’re being much more efficient,” Schappel said.
FileNet’s recent stock runup has turned off one investment bank that follows the company. In a research note, UBS Warburg analysts reduced their rating on FileNet from “buy” to “neutral.”
“While there is still modest potential upside to our target, we believe the risk/reward profile is now less compelling,” the analysts wrote, “particularly in what remains a tough, low-growth enterprise spending environment.”
Another factor that always seems to be at play for FileNet: acquisition rumors.
FileNet long has been cited as a takeover target for big players looking to get into or expand in the company’s market. Roberts and other FileNet executives dismiss such speculation, saying the company is intent on going it alone and making acquisitions of their own.
