Aliso Viejo business software maker Quest Software Inc. is taking a breather from its years-long buying binge.
Quest, which makes software that improves on or helps manage database programs from Oracle Corp., Microsoft Corp. and others, has rolled up nearly a dozen small companies in the past few years.
There’s been a marked change of tack lately as the buying has slowed and the company has shifted to throwing a bone to investors via stock buybacks.
“I think there has been a big change at Quest in the past few months,” said Todd Weller, software and Internet infrastructure analyst at Stifel, Nicolaus & Co. in Baltimore. “We still think Quest will be acquisitive in the long term, but they are focused now on integrating those acquisitions and repurchasing shares.”
Earlier this month, Quest said it’s set to spend some $150 million to buy back nearly 11 million shares.
The company said it plans to pay no more than $14 per share and no less than $12.50 per share to buy nearly 11% of its outstanding stock. Quest was trading at around $14 per share late last week.
In December, Quest paid $143 million for roughly 11% of its outstanding shares, at $12.50 per share.
Quest reported that it had about $311 million in cash at the end of the first quarter.
Most Wall Street analysts say the buybacks are a good thing in the short term.
Wall Street generally likes them because they give a boost to one of analysts and investors’ favorite numbers,profits expressed on a per share basis.
A buyback also helps buoy Quest’s stock, which has been trading roughly sideways for some time.
Quest’s shares are off about 13% in the past 12 months on a recent market value of $1.3 billion. The Standard & Poor’s index’s drop for the past year is about 30%.
“For the past few years there has been increasing pressure from the Street to do things that will increase shareholder value,” Weller said. “Their stock has been pretty flat for a period of time. Quest has always had a fair amount of cash on the balance sheet, so it has been a good return for them to buy stock at these levels.”
Buybacks are a nod to investors, who get to see a return on Quest’s cash coffers. The company’s many small acquisitions, while they’ve added to revenue, aren’t great profit generators.
Slowing Buys
Quest’s voracious appetite for companies has been almost completely extinguished,it’s most recent buy was back in January, when it bought Redwood City-based Monosphere Inc., a small maker of software that manages data storage networks, for undisclosed terms.
“I think this is an unusual period for Quest,” said Richard Sherman, managing director at MKM Partners LLC in Greenwich, Conn. “They have historically done three to five per year over the past few years. I think investors don’t want them to do acquisitions just to do them at this stage.”
Most of the buys were to snatch up novel technologies that could be integrated into its products.
“The acquisitions they’ve done historically have been really small companies with interesting technologies or products but not a lot of revenue,” Weller said. “Quest can take that product and put it through its distribution channel. They have been essentially buying research and development.”
But many on Wall Street still are wrestling with whether the buybacks are good for Quest’s long-term prospects.
Some say Quest is missing out on buying companies on the cheap during the downturn, while others say holding off shows some fiscal restraint.
“There are a lot of cheap things out there, but they are trying to be more disciplined and regimented,” Sherman said. “It’s a function of valuations for the types of assets they want,they either haven’t come in line with what they are willing to pay or they’ve moved beyond doing deals for more products.”
Analysts have their eyes on Quest’s second-quarter results, to be announced in August.
Recently, Quest’s customers have shrunk their technology budgets and are delaying software purchases and license renewals.
“The fundamentals have to get better,” Weller said. “You need improvement in the economic environment, a better performance on the margins and some recovery in their licensing business. On a positive note, expectations are somewhat reasonable for Quest.”
Analysts, on average, are looking for Quest to post profits of $19 million on sales of $166 million.
It’s not likely that Quest will continue repurchasing stock after its most recent offer.
“As long as buybacks are accretive and improve earnings per share, they are very positive,” analyst Weller said. “But there comes a point where you can’t keep doing it forever. It will reduce liquidity in the long run.”
