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Is Tibco a worrying sign of a different malaise?

The news that Tibco’s sales and profits are down has left financial analysts wrong-footed, resulting in them being instrumental in seeing the value of its shares fall by over 4 percent.

It has also started to beg an important question: should Tibco follow Dell’s example and jump from the stock market casino ship in order to get itself through the fundamental business changes it – and the rest of the software industry – now faces? Indeed, is it time for all software companies to do the same?

I accept that the phrase, `being instrumental’ is quite a significant accusation but I would contend it has some serious foundations. The fact that so many stock traders, especially in the USA, follow what the financial analysts say is now becoming a danger to the software industry generally. The reason can be found in this judgement on Tibco by Trade-Ideas LLC, which has branded the company as a `roof leaker’.

This is defined as `a stock worth watching because it begins to experience a breakdown which can lead to potentially massive losses. Once psychological and technical resistance barriers like the 200-day moving average are breached on higher than normal relative volume, the stock may then be subject to emotional selling from investors that can continue to drive the stock lower.’

And thereby lays a deadly combination for all software companies. The combination of financial analysts and emotional investors will necessarily be volatile, and if the analysts do not understand the major changes an industry sector is undergoing, then many of the businesses in that sector may find themselves doomed, even if they are all starting to go in the right direction.

In a company statement Tibco Chief Executive, Vivek Ranadivé, attributed the revenue drop to the company’s move to a subscription-licensing model. Given the way that cloud-delivered services are becoming a mainstream option for the way businesses consume the capabilities of software – and heading towards a largely dominant option in the near future – moving to the subscription model is an inevitability for all software vendors, whether they like it or not.

The real trouble here is that financial analysts are showing continuing evidence of not understanding what is happening in the digital-business marketplace, especially when it comes to the switch from licence sales to the annuity model of subscription licensing for revenue generation. This issue will affect all software vendors over the next five years, and has been eminently predictable over the last five at least. It must be at least that long since I first wrote that it would happen.

The problem is simple: traditional licence sales generate hugely positive revenue `hits’ on the bottom line of software companies. That makes it easy for the analysts to determine successful ones, for their bottom lines keep growing. It also makes it simple to observe failure, for the obverse is true, and predict future success or failure from any trends between those two points.

But the annuity model – paying either a regular monthly subscription or a direct pay-per-use model – generates a regular monthly income that, hopefully, grows as more customers start using it. This means revenue is more predictable, if more slowly accrued. The downside, however, is that the switch between the two revenue models has the inevitable hole that all financial analysts seem to fall in. That huge, upfront revenue hit declines, and then disappears.

So a business can be actually growing  – as a business – while appearing to be on the fade in terms of purely short-term financial numbers.

And the short term emotional mindest of stock traders that follow the analysts is that the last one out of a stock where numbers have negatively changed (even for a predictable and understandable reason) is a sissy – and even worse, a fool.

This decouples investment resources from any real view of what is now happening in the marketplace. It also means that what is happening to Tibco is going to happen again and again, and the bigger the `name’ the harder the analysts and traders will make those companies fall. Some big names are likely to hit this trap and be bombed severely, leaving them prey to the hedge fund and equity management cowboys who will happily asset-strip them, leaving them as smoking wrecks.

And it is to be noted that CEO Ranadivé is already finding himself pushed by investors into considering partnerships with, or selling off at least parts of the business to, hedge funds.

I have two suggestions on what not just Tibco but the whole software industry needs to do about this as a matter of some urgency.

The long term option is difficult. I have written before that the industry really needs to start educating the financial analysts before they wreck the software business permanently. And they will: they will create stocks worth only `fire-sale’ values, so that valuable technologies and IP will drift away to geographies that will enjoy having western businesses and economies as supplicants.

The short term option, and one I would suggest to Ranadivé  if he were here now, is to follow the route taken by Michael Dell and pull the company out of the stock market. That way it can be re-built in the light of the drastic transformations software and services delivery is taking, without having to explain every step to people operating within a three month event-horizon.

In fact, I would recommend that action to every software company in world.

And as a final irony, Tibco has just been named by research company, Gartner, as a leader in its 2014 Magic Quadrant for Social Software in the Workplace – the very type of software that is paid for by subscription or pay-per-use.

Now, regardless of anyone’s degree of scepticism about Magic Quadrants, this simple detail says much about the level of misunderstanding the financial analysts have about what it going on now.

Posted in Business.


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