Interwoven (Nasdaq: IWOV), which develops enterprise content management (ECM) software, has had a big move since June -- with the stock price going from $8.50 to $12.48. And on its recent earnings report, investors rewarded the stock some more, with a 4% jump. Clearly, the company is seeing traction in its business. But there are also rumors that it has become buyout bait.
In the third quarter, revenues increased 16% to $50.9 million. Net income was $1.8 million, or $0.04 per share, which is up from $184,000 or break-even for the same period a year ago.
Also during this period, software license revenues increased to $18.5 million from $17.4 million. This growth is important because it is a source of future service and maintenance revenues. In fact, in the third quarter, Interwoven snagged 68 new customers.
Basically, Interwoven has a comprehensive suite of software tools that help with ECM, such as allowing for the management, distribution and archiving of documents, spreadsheets, emails, and presentations.
Moreover, the company develops specialized versions of its software for different industries. For example, it has a product to help accounting firms manage client engagements (there are more than 60 accounting firms using the software). The software makes documents searchable and shareable, which is a big help since many accounting projects are off-site. Also, this is done in a secure manner that meets strict regulatory requirements.
So, what about the stock? Despite the run-up, the valuation still looks reasonable to me. Subtracting the company's $160 million in cash and liquid assets, the stock is selling at 1.85 times revenues (assuming annual sales of $200 million). Keep in mind that the general rule of thumb for software valuations is about 2 times revenues.
What's more, there has been a variety of deals out there for content management companies. There was IBM's (NYSE: IBM) purchase of FileNet at 2.6 times revenues and OpenText's (Nasdaq: OTEX) purchase of Hummingbird for 1.9 times revenues.
Who would buy Interwoven? Some prospects include Oracle (Nasdaq: ORCL) and Hewlett-Packard (NYSE: HPQ), which need a better presence in content management. It would also be a quick way for those companies to add new software customers (which would provide cross-sale opportunities).
True, buying a stock based on a buyout possibility is not a good idea. However, the recent M&A activity is validation that big tech companies see a lot of opportunity. And with a fair valuation and a nice growth ramp, investors will probably have more nice surprises with Interwoven.
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Fool contributor Tom Taulli does not own shares mentioned in this article.
He is currently ranked 12 out of 11,654 in CAPS.
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