Sector Watch: Business software stocks

Despite a slowed U.S. economy, outsourcing of select business services continues to grow at a healthy pace due to the cost and efficiency advantages they provide. Keeping trot at that pace are EPIQ Systems (Nasdaq:EPIQ) and CSG Systems (Nasdaq:CSGS), two providers of business software and services that are poised for double-digit earnings growth this year.

EPIQ Systems provides software and services to the legal profession. The company’s software streamlines processing for bankruptcies, litigation, financial transactions and regulatory compliance. EPIQ’s clients include law firms, corporate legal departments, bankruptcy trustees and other professional advisors. The company operates from nine locations worldwide, serves over 1,000 clients and counts 39 of the top 50 global law firms among its customers. EPIQ’s electronic discovery business segment provides processing, search and review services utilizing the company’s proprietary eDataMatrix software for analyzing, filtering and de-duplicating documents. Its bankruptcy trustee segment supplies software that allows bankruptcy trustees to administer large caseloads simultaneously. The settlements and claims segment offers back-office administration support services that include notifying claimants and creditors and administering funds related to settlements.

Electronic documents are transforming the legal profession by streamlining discovery and litigation processes. According to a 2007 survey, electronic discovery revenues increased 51% in 2006 to $2 billion, rose 33% in 2007 to $2.7 billion and are forecast to grow 28% in 2008 to $3.4 billion. Due to the complexity and volume of documents generated for most legal cases, law firms are eagerly embracing electronic evidence management systems. EPIQ also addresses a large market for bankruptcy filings, estimated at more than 1 million filings per year. Bankruptcy filings have increased in each of the last seven quarters.  

Although EPIQ’s 2007 revenues of $174 million were below prior-year revenues of $224 million, this was because deferred revenues of $59 million were recognized in 2006. Per-share earnings were also lower at $0.21 in 2007 versus $1.05 in 2006. EPIQ is off to a strong start in 2008, however, with first-quarter revenues up 25% year over year to $43.9 million from $35.1 million and non-GAAP net income up 54% year over . . .

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