Description

HUMC is a global software solutions provider based in Canada. The company has been around for 20 years, and has transitioned from a focus on the connectivity market, where it gained a dominant position with its flagship connectivity product holding over 70% market share, to the enterprise content management (ECM) market.

Hummingbird Connectivity is a mature business that experienced a steep decline in revenues beginning in FY01 (fiscal year-end September 30). Sales were at the $115mm level in '00. (All figures in US dollars and US GAAP.) Connectivity sales then fell about 20% annually over the next two years. Over the last eight quarters, sales have been around $17mm-$18mm per quarter, or approximately at the $70mm level. Management sees the business stabilized at this level.

Currently, the connectivity business accounts for just north of 30% of HUMC's total revenues. This is down from roughly three-quarters of total revenues in the late '90s. Its products are used for accessing back-office UNIX, mainframe and AS/400 applications.

In the late '90s, HUMC really began shifting from the legacy Connectivity business to the ECM business. HUMC began acquiring technology to build a suite of integrated product offerings in its growing enterprise family of products. It made a number of acquisitions, and along with capitalizing on the growing ECM market, its enterprise revenues grew to around 60% of total revenues in '02.

In '03, HUMC completed four additional acquisitions, with a focus on consolidating its positions in the legal and government verticals. For instance, in the legal market, HUMC serves more than 1,000 law firms on a global basis. According to the AmLaw Tech Survey 2003, 54% of the 200 top-grossing US law firms use HUMC's document management solution.

Products include document management for both structured (data stored in traditional database management systems) and unstructured data (estimates indicate roughly 80% of enterprise and government content is unstructured--data and file formats such as web content, spreadsheets, PDFs, rich media, email, etc.), records management, knowledge management, content sharing, business intelligence, data exchange, content access, image management and document routing.

Through continued investments in the ECM market, Hummingbird Enterprise has grown to nearly 70% of the business at present. Industry estimates are just that, but both Forrester Research subsidiary Giga Research and IDC have the industry growing to >$3.4B by '06-'07. In the latest fiscal year, Enterprise generated roughly $150mm in revenues, up from roughly $122mm in '03. The investments made in '03 were key drivers. Enterprise has been the focus of HUMC's investments. In addition to the legal and government markets, HUMC has also been targeting financial and manufacturing markets.

Of the four acquisitions completed in FY03, the last two acquisitions (Kramer Lee, focused on practice management solutions for law firms, professional service organizations, etc., and Valid Information Systems, focused on the UK compliance and records management market) were completed on June 26 and July 1 of '03, respectively. HUMC hasn't done any acquisitions since.

So HUMC lapped the last of its FY03 acquisitions starting in the September '04 quarter. In this quarter, Connectivity actually grew 3% (the third consecutive quarter of YOY growth for this business) and Enterprise grew 15%. The growth in Enterprise was down from the 25%+ growth posted in each of the prior four quarters, but by the September '04 quarter the last of the acquisitions had been anniversaried.

HUMC generates very high gross margins--roughly 88% in the last fiscal year. This is down about 200 bps from FY03. Management notes the acquired businesses have a higher services component to them, which carries an increased level of costs.

Sales and marketing expenses remained relatively flat in '04 as a percentage of sales at around 43%. R&D amounted to around 18% of sales and G&A amounted to less than 10% of sales.

HUMC generated nearly $38mm in EBITA in FY04, a 17% margin.

HUMC has approximately $130mm in net cash. With approximately 17.4mm shares, this has net cash per share of ~$7.40 and EV of around $323mm, or $18.50 per share.

Net income adjusted primarily for the amortization of intangibles (as well as excluding after tax interest) came to approximately $24mm in '04. Depreciation and capex roughly offset (in '04, depreciation amounted to $3.7mm while capex amounted to $3.4mm).

On '04 numbers, HUMC trades for just over 13.5x earnings. Outlook for '05 amounts to $1.60 per share. In late November, HUMC announced it intended to initiate a course issuer bid for up to a maximum of 1.5mm shares, around 9% of shares out. (HUMC purchased around 215K shares in the preceding 12 months.)

HUMC is focused on the competitive and growing ECM market. HUMC has a nice cash balance, is a FCF generator and has recently initiated a program to buy back a significant amount of stock. On forward numbers, ex. interest, HUMC trades for around 12x earnings.

Catalyst

Significant share buyback. Low teens valuation as HUMC continues to focus on growing its core Enterprise market, consolidating its existing markets and entering new markets.