Stellent, Inc. (STEL - $8.59)

Transcription

1 Richard A. Ryan (612) Enterprise Software August 7, 2006 Financial Summary Rev(mil) E Jun $22.3 $28.6 $32.3A Sep $28.0 $30.1 $33.4E Dec $27.7 $31.7 $34.8E Mar $28.5 $33.0 $35.8E FY $106.8 $123.4 $136.2E P/Sales 2.5x 2.2x 2.0x Proforma E EPS Jun $0.01 $0.06 $0.12A Sep $0.06 $0.08 $0.12E Dec $0.04 $0.11 $0.14E Mar $0.04 $0.11 $0.16E FY $0.11 $0.35 $0.54E P/E 78.1x 24.5x 15.9x Price: $ Week Range: $ $7.12 Target: $14.00 Rating: BUY Shares Outstanding: 31.1 mil Mkt. Capitalization: $267 mil Avg. Volume: 207,000 Inst. Ownership: 77% BV / Share: $5.55 Debt / Tot. Cap.: 0% Div./Yield $0.12/1.4% Est. LT EPS Growth: 15%-20% Company Description Stellent, Inc. is a provider of content management software solutions to large companies. Its Universal Content Management software allows companies to manage web content, documents, digital assets, records, and collaboration. Its Contents Components software makes information created in standard office software packages more accessible to its users. Stellent generates about half of its revenue through software license sales, about 35% from maintenance sales, and about 15% from consulting. Stellent, Inc. (STEL - $8.59) Q1 In line/2 Acquisitions Announced. BUY Q1 Results Were In Line With Consensus: For Q1, Stellent reported pro forma EPS of $0.12 on revenue of $32.3 million compared with EPS of $0.06 on $28.6 million.. We had expected pro forma EPS of $0.13 on revenue of $32.8 million. GAAP EPS was $0.07, which included amortization and restructuring charges. In-Line Guidance: Management guided Q2 to $33-$34 million and pro forma EPS of $ $0.12. This guidance surrounds our previous revenue estimate of $33.3 million, but the EPS guidance was lower than our $0.14 estimate. STEL made two acquisitions during Q2 which could dilute FY07 results by $0.03 in Q2 and $0.02 in Q3. An Acquisitive Quarter: On June 29, STEL acquired Bitform, a provider of content cleansing technologies for $2.5 million. On July 31, STEL acquired SealedMedia Limited, a leader in easy-to-use, enterprise digital rights management solutions, for $15 million. These technologies will enable customers to better secure and control sensitive content both inside and outside of the enterprise. Margins are Expanding: Due to the acquisitions, management lowered its operating margin target in 2007 from 14% (non-gaap) to 11%-12%. However, management again indicated that operating margins can be 18%-20% over the next 6-8 quarters. Q1 operating margin of 8.7% represents the third straight quarter over 8%. The mix of license revenue to total revenue is important as this segment generates high gross profit. Management has targeted license revenue to be about 46%-48% of revenue in For Q1, license revenue was 44% of revenue. STEL maintains a strong balance sheet: Cash increased to $84.0 million, generating $3.4 million in cash from operations. Deferred revenue was $21.7 million, up from $21.2 million in Q4. Making Adjustments to Estimates: For revenues, we are maintaining our Q2 estimate, but we are increasing our Q3 estimate by $900K to $34.8 million and our Q4 estimate by $1.4 million to $45.8 million. Our new 2007 revenue estimate is $136.2 million, up from $134.5 million. For EPS, we are reducing our Q2 (per guidance) to $0.12 from $0.14. Our Q3 estimate remains at $0.14 and we are increasing our Q4 estimate by $0.01 to $0.16. Our 2007 EPS estimate is $0.54, down from $0.56. We are introducing estimates for FY 2008 of $149.8 million in revenues and $0.68 per share in earnings. Investment Recommendation: We are impressed with management s conviction to cost containment and driving operating margins higher. With new compliance regulations emerging in Japan, Canada, and Europe, and Stellent s multiple global alliances, we believe leverage exists to our previous estimates. The weakness in the stock most likely reflects the near-term dilutive effects of the acquisitions. We are maintaining our price target of $14. This represents 17x our fiscal 2008 EPS estimate of $0.68, plus cash. This multiple approximates our estimated EPS growth rate for STEL. While STEL s relative valuations appear higher-than-average in the content management space, Stellent also seems positioned to grow its profits and cash flows faster than its peers. In addition, consolidation within the industry is active, and a premium-priced acquisition for STEL is always a possibility. Feltl and Company Research Department. Please see important disclosures on pages 3 to South Sixth Street, Suite 4200 Minneapolis, MN

2 Stellent, Inc. Fiscal Year End March (in thousands) Fiscal Year Jun-05 Sep-05 Dec-05 Mar-06 Fiscal Year Jun-06 Sep-06 Dec-06 Mar-07 Fiscal Year Fiscal Year 2005A Q1A Q2 A Q3 A Q Q1 Q2 E Q3 E Q4 E 2007E 2008E Software 54,376 13,728 13,321 14,176 15,725 56,950 14,353 15,268 15,515 15,767 60,903 66,993 Post-Contract Support 32,663 9,673 9,888 9,904 10,134 39,599 10,310 10,319 11,169 11,635 43,432 47,775 Consulting Services 19,772 5,160 6,938 7,622 7,116 26,836 7,679 7,787 8,068 8,356 31,890 35,079 TotalRevenue 106,811 28,561 30,147 31,702 32, ,385 32,342 33,374 34,751 35, , ,848 Cost of Goods Sold Cost of Software Licenses 5,017 1, , , ,405 3,350 Amortized Software from Acquisitions 2, , ,238 1,340 Cost of Services 6,831 6,706 13,537 6,803 6,930 7,180 7,437 28,351 29,817 Cost of PCS 24,900 6,875 8,440 1,747 1,716 18,778 1,725 1,780 1,921 2,007 7,433 7,644 Total Cost of Goods Sold 32,307 8,451 9,698 10,315 9,616 38,080 9,663 9,829 10,287 10,648 40,427 42,151 Gross Profit 74,504 20,110 20,449 21,387 23,359 85,305 22,679 23,545 24,464 25,110 95, ,697 Operating Expenses Sales & Marketing 42,365 11,436 11,332 11,282 12,357 46,407 11,758 12,181 12,163 12,158 48,260 52,072 G & A 14,097 3,170 2,812 3,208 3,092 12,282 3,096 3,337 3,301 3,272 13,007 13,861 R&D 17,958 4,656 4,895 5,010 5,592 20,153 5,218 5,256 5,386 5,364 21,225 23,226 Amort. Of Acq. Intangible Assets 93 Total Operating Expenses 74,420 19,262 19,039 19,500 21,041 78,842 20,165 20,775 20,851 20,793 82,584 89,159 Operating Income ,410 1,887 2,318 6,463 2,514 2,770 3,613 4,317 13,214 18,538 EBITDA 5,621 1,965 2,599 3,693 3,981 12,238 4,004 4,157 4,920 5,558 18,639 20,743 Other Income (expenses) , ,096 3,000 One-Time Items (& 2007 Option Expense) (6,568) (181) (1,238) (195) (515) (2,129) (1,100) (667) (695) (715) (3,178) (2,500) Pretax Income (5,841) 1, ,282 2,501 6,515 2,163 2,848 3,700 4,421 13,132 19,038 Income Tax Tax Rate 0% 0% 14% 3% 0% 3% 3% 5% 4% 4% 4% 4% Net Income (5,841) 1, ,212 2,491 6,342 2,100 2,708 3,550 4,246 12,604 18,288 Diluted Shares Outstanding 27,180 28,487 29,264 30,103 30,851 29,676 31,154 31,500 32,000 32,000 31,664 32,500 Fully Diluted EPS (GAAP) (0.21) Proforma EPS Page2 8/7/06

3 Analyst Certification I, Richard A. Ryan, certify that the views expressed in this research report accurately reflect my personal views about the subject company and its securities. I also certify that I have not been, am not, and will not be receiving direct or indirect compensation related to the specific recommendations expressed in this report. Important Disclosures: The analyst or any member of his/her household does not hold a long or short position, options, warrants, rights or futures of this security in their personal account(s). As of the end of the month preceding the date of publication of this report, Feltl and Company did not beneficially own 1% or more of any class of common equity securities of the subject company. There is not any actual material conflict of interest that either the analyst or Feltl and Company is aware of. The analyst has not received any compensation for any investment banking business with this company in the past twelve months and does not expect to receive any in the next three months. Feltl and Company has not been engaged for investment banking services with the subject company during the past twelve months and does not anticipate receiving compensation for such services in the next three months. Feltl and Company has not served as a broker, either as agent or principal, buying back stock for the subject company s account as part of the company s authorized stock buy-back program in the last twelve months. No director, officer or employee of Feltl and Company serves as a director, officer or advisory board member to the subject company. Feltl and Company Rating System: Feltl and Company utilizes a four tier rating system for potential total returns over the next 12 months. Strong Buy: The stock is expected to have total return potential of at least 30%. Catalysts exist to generate higher valuations, and positions should be initiated at current levels. Buy: The stock is expected to have total return potential of at least 15%. Near term catalysts may not exist and the common stock needs further time to develop. Investors requiring time to build positions may consider current levels attractive. Hold: The stock is expected to have total return potential of less than 15%. Fundamental events are not present to make it either a Buy or a Sell. The stock is an acceptable longer-term holding. Sell: Expect a negative total return. Current positions may be used as a source of funds. Page3 8/7/06

4 8/1/2006 Ratings Distribution for Feltl and Company Investment Banking Number of Percent Number of Percent of Rating Stocks of Total Stocks Rating category SB/Buy 25 71% 5 20% Hold 9 26% 0 0% Sell 1 3% 0 0% % 5 14% The above represents our ratings distribution on the stocks in the Feltl and Company research universe, together with the number in (and percentage of) each category for which Feltl and Company provided investment-banking services in the previous twelve months. 11/16/04 Buy Target: $ /21/05 Buy Target: $ /16/05 Buy Target: $ /09/05 Buy Target: $ /04/05 Hold Target: $ /08/06 Buy Target: $ /16/06 Buy Target: $13.00 Date Nature of Report Rating Price Target 11/16/04 Coverage Initiated Buy $ /16/05 Target Reduced Buy $ /09/05 Price Target Raised Buy $ /04/05 Q2 Reported Hold $ /08/06 Great Q3! Upgrading to BUY Buy $ /16/06 Fiscal 2006 Results Buy $ /7/06 Q Results Buy $14.00 Feltl and Company does make a market in the subject security at the date of publication of this report. As a market maker, Feltl and Company could act as principal or agent with respect to the purchase or sale of those securities. Page4 8/7/06

5 Valuation and Price Target Methodology: We are maintaining our price target of $14. This represents 17x our fiscal 2008 EPS estimate of $0.68, plus cash. This multiple approximates our estimated EPS growth rate for STEL. While STEL s relative valuations appear higher-than-average in the content management space, Stellent also seems positioned to grow its profits and cash flows faster than its peers. In addition, a premium-priced acquisition is always a possibility. Risks to Achievement of Estimates and Price Target: We believe that Stellent faces three general types of risks: competition risk, acquisition risk, and valuation risk. Competition Risk: With the exception of a few large companies, who have established the standards within an industry, software is a very competitive industry. Because the marginal costs for software licenses tend to be very low, software companies sometimes have the incentive to cut prices significantly in attempts to secure market share. This competitive situation exists even if the industry is dominated by a small number of companies. Therefore, pricing tends to stabilize at the point where only the most efficient companies make profits. The less efficient companies, which tend to be smaller companies, often become stuck with perpetual losses unless they can find a less-competitive niche. Stellent will continue to operate in this generally competitive environment for the foreseeable future. While average selling prices have stayed firm to date, they may come under pressure in the future. Alternatively, Stellent may be forced to significantly increase sales and marketing expenses in order to win future deals. Acquisition Risk: The Enterprise Content Management market is consolidating as the smaller software firms are being acquired by larger firms, including software companies, hardware companies, or diversified technology companies. Because Stellent is one of the smaller, public, software firms remaining in this market, a larger firm may attempt to acquire its shares. The terms of such an acquisition may or may not be favorable to Stellent s existing shareholders. Valuation Risk: Even if Stellent meets or exceeds our expectations in terms of revenues, earnings, and cash flow, investors may not be willing to pay as high a valuation as assumed in setting our price target. Also, Stellent has historically reported income on a proforma and tax-free basis. To the degree that investors focus on these numbers, they may be disappointed with the apparent earnings growth as the Company transitions to pure GAAP reporting on a taxable basis. Due to a combination of substantial net operating loss (NOL) carry-forwards, and a history of losses, we believe that Stellent will continue to report earnings on a tax-free basis for the next four to six quarters. Readers should recognize that the risks outlined above do not represent a comprehensive list of all risk factors that may impact the achievement of our price target. Other Disclosures: The information contained in this report is based on sources considered to be reliable, but not guaranteed, to be accurate or complete. Any opinions or estimates expressed herein reflect a judgment made as of this date, and are subject to change without notice. This report has been prepared solely for informative purposes and is not a solicitation or an offer to buy or sell any security. The securities described may not be qualified for purchase in all jurisdictions. Because of individual requirements, advice regarding securities mentioned in this report should not be construed as suitable for all accounts. This report does not take into account the investment objectives, financial situation and needs of any particular client of Feltl and Company. Some securities mentioned herein relate to small speculative companies that may not be suitable for some accounts. Feltl and Company suggests that prior to acting on any of the recommendations herein, the recipient should consider whether such a recommendation is appropriate given their investment objectives and current financial circumstances. Past performance does not guarantee future results. Additional information is available upon request. Page5 8/7/06

6 EQUITY CAPITAL MARKETS DIRECTORY RESEARCH DEPARTMENT Clinton H. Morrison, CFA Director of Equity Research (612) Ernest W. Andberg, CFA (612) INSTITUTIONAL SALES: (866) Thomas Pierce Senior Vice President Institutional Sales (612) Mark Hagen (612) Richard A. Ryan (612) Jack M. Zipoy (612) TRADING: (866) Joseph G. Fredericks Manager, Equity Trading (612) William W. Koop (612) Thomas Walters (612) Elliott Randolph Institutional Sales Trading (612) Deborah L. Zieman Institutional Sales Trading (612) Luke J. Weimerskirch Institutional Sales Trading (612) Ryan Quade (612) Jo Pihl (612) Jimmy Sioris (612) SOUTH SIXTH STREET SUITE 4200 MINNEAPOLIS, MINNESOTA (612) (866) MEMBER SIPC & NASD