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 year to $5.4 million, or $0.14 per share, from $3.5 million, or $0.11 per share. Year-to-date, EPIQ has been hired for 20 new corporate restructuring engagements.
Other accomplishments include introducing international versions of its eDiscovery software, expanding its London office through an acquisition and increasing its international business opportunities by offering Safe Harbor compliance capabilities to European companies. Analysts think EPIQ will produce 26% growth this year and 17% average annual longer-term growth. My $19 price target for the company is 18% above Tuesday’s closing price of $16.07. Shares have ranged between $12.11 and $20.72 over the last 52 weeks.
CSG Systems provides outsourced customer interaction management tools for the North American cable and direct broadcast satellite industry. Its customers include Comcast Corporation (Nasdaq:CMSA), Dish Network Corp. (Nasdaq:DISH), Time Warner and Charter Communications, Inc. (Nasdaq:CHTR). CSG Systems provides software and services that help these companies set up and activate customer accounts, support sales and marketing, process orders, calculate invoices, produce and mail monthly customer statements, manage reporting and payment, field customer calls, and deploy and manage field technicians sent to the customer’s home.
Through its broadband customers, CSG Systems is benefiting from escalating demand for IP voice, video and data services. Broadband deployment is growing because users need higher speeds for data-rich applications such as file sharing, downloading music and games, video on demand and voice-over-Internet phone. The number of broadband users worldwide is estimated at around 300 million and the U.S. subscriber base is forecast to increase to 57 million in 2008 from 32.5 million four years ago. According to the Telecommunications Industry Association, this is particularly impressive growth given that there were only 5 million U.S. broadband subscribers in 2001.
CSG Systems increased revenues 9% last year to $419.3 million from $383.1 million in 2006 and boosted per-share earnings 20% year over year to $1.52 from $1.27. During the first quarter of 2008, the company’s revenues grew 15% year over year to $113.6 million from $98.7 million and operating income improved 14% to $23.3 million from $20.4 million. Although net income declined 8% year over year in the first quarter of 2008 due to reduced interest income, per-share earnings improved 25% year over year to $0.45 from $0.36, reflecting the favorable impact of share repurchases. Important events during the first quarter included the acquisition of privately owned DataProse, a provider of statement presentment and direct mail services. DataProse will help CSG Systems expand into new industry verticals such as utilities and financial services.
CSG Systems is targeting full-year 2008 revenues at $470 million and per-share earnings around $1.62. Analysts anticipate 10% average annual longer-term growth for this company. CSG Systems shares appear very reasonably priced at an 8 times P/E multiple; these shares have traded as high as $28 over the last 12 months. My $17 price target for CSG Systems suggests a 31% appreciation potential over Tuesday’s closing price of $12.95. Over the last 52 weeks, shares have ranged between $10.49 and $28.22.
About the Author
Contributing author Lisa Springer is an equity research analyst with nearly 20 years of investment research experience.
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