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With Europe's debt crisis on center stage, last Friday played out as a tragedy for several technology companies, including Informatica (Nasdaq: INFA ) , Teradata (NYSE: TDC ) , MicroStrategy (Nasdaq: MSTR ) , Qlik Technologies (Nasdaq: QLIK ) , and Citrix Systems (Nasdaq: CTXS ) , among others. All were brought down "in sympathy" with Informatica because it warned of lower revenue and earnings.
Informatica is an enterprise data integration and data quality software and services provider that has shown signs of trouble since early 2012. The Motley Fool's Earnings Quality, or EQ, Score database ranks Informatica as a "D" stock, and its EQ score since January has bobbled between "D" and "F."
Informatica's storyline reads like this: Revenue rose 19% over the past 12 months despite seasonal variations. Margins have been growing faster than revenue, but the pace of margin growth has been slowing. Cash acquisitions since 2008 have equaled $377.3 million, which has caused capital expenditures to increase in order to manage the added breadth of applications, as well as the company's continued expansion into global markets.
Informatica now faces the dreaded double-edged sword: To expand its client base, more staff must be added to design and build upgrades into the longer menu of products, and to service existing and new clients. Direct sales staff will have to become knowledgeable in a greater variety of applications, too. The company has admitted that it competes on price against larger competitors in extremely competitive markets, so there will be continued pressure on margins because of price discounting.
Balance-sheet metrics look troubling. Accounts receivable have been growing faster than revenue, and days sales outstanding -- the time needed to collect money due -- also has been growing. The cash conversion cycle four-quarter average has increased from 36 days to 38. The company either has been offering its customers favorable payment terms or has been lax at bill collections, or perhaps both.
The market was not kind to Informatica on Friday, and the stock decreased 28% to $31.39, also below its $35 price at the start of 2012. Citing weak demand in Europe, the company reduced revenue estimates to between $188 million and $190 million, and earnings per share fell to between $0.27 and $0.28, versus an average revenue estimate of $197.6 million and EPS of $0.30. The market has had high expectations for Informatica based on its lofty price-to-sales ratio of 7.2 and its price-to-operating cash flow ratio of 31.2 as of March 31. The stock still has a trailing P/E of 28.82, in excess of its growth rate. During the past six months, insider transactions included sales of 520,900 shares, no purchases, and net institutional selling of 8,676,550 shares, or 9.04%. Insiders and institutions alike took advantage of the stock's run-up in price. Was this normal risk mitigation, or did the insiders know something we didn't know but should have been told?
Since January, four research firms have either initiated coverage on Informatica or modified their existing coverage: Two have initiated coverage with a "Neutral" rating, and two downgraded from "Outperform" to "Market Perform" or "Hold."
MicroStrategy ranks a "C" in TMF EQ Score database, up from an "F" since January, which means its situation has actually improved slightly. Revenue has risen 19% year over year, but the administrative costs are sky high at 56% of revenue. As a result, the operating and net profit margins are 0%. EBITDA and operating cash flow margins for the past 12 months show significant deterioration and are at 5% and 9%, respectively. Net income and earnings per share have been negative for several quarters. Worse yet, accounts receivable rose 20% year over year and days payable outstanding -- how long it takes to pay the bills -- is high at 103 days. Despite attempts to manipulate cash flow, it is still anemic. Price to cash flow from operations is 28.3. If you want to buy this stock with a P/E of 76.82, don't -- and buy my bridge instead!
Teradata is currently ranked a "D" for earnings quality and has been another low-earnings-quality stock in 2012. Income-statement metrics are acceptable, and margins and cash flow are much better than MicroStrategy's. Teradata's main issue is with receivables at 81% of revenue and days sales outstanding at 81 days. The P/E, while much lower than MicroStragegy's, is still high at 29.73 ,and this is a new value after the stock-price reduction. The metrics don't justify the valuation.
All five technology stocks deserve closer review, using some of the techniques I've described here. Investors want to find the next great growth play, and technology companies' stories can read like a comedy that'll have a happy ending but actually end in outright tragedy. As always, Foolish readers should base investment decisions on earnings quality.
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