Why Pervasive's Shares Remain Under the Radar

The company has been quietly gearing up for a major product cycle. Pervasive has gone three years without releasing exciting new products. As a result, its revenue growth has been muted. Sales have been stuck at $47 million for the past two years. No growth = no investor excitement. Nevertheless, the company has now released three exciting products over the past few months. The R&D that has been hiding Pervasive’s strong underlying profitability is now about to drive renewed revenue growth.

As for whether or not its R&D investments have been worthwhile, its new products happen to fit perfectly into the burgeoning Cloud Computing paradigm. For that matter, the company was either very forward-looking or very lucky. Either way, it is now in the right place in the right time…and that’s all that matters. Investors that recognize this and buy the shares earlier the revenue ramp begins in earnest.

Pervasive’s sales are already growing ... however it's a secret to most. Pervasive reported Q4 revenue of $11.7 million, flat versus the year ago period. Still, the company has been in the midst of transitioning its integration revenue to a subscription model. In accordance with its traditional model, most of the revenue from any new contract would get recognized right away and show up in that quarter’s revenues release. Pursuant to this agreement its new subscription model, new business gets recognized over the duration of the subscription period.

As a result, reported earnings have been artificially compressed. In spite of moving to a subscription model, reported revenue has remained flat. This is one sign that its sales have to tell the truth been rising. Furthermore proof of this can be found in the company's balance sheet. Deferred revenue represents cash the company has collected, however has not but recognized as revenue. A rising deferred revenue balance is as a rule a sign that a company is growing faster than the numbers it reports to investors.

In Pervasive’s case, deferred revenue has been showing annualized growth for six straight quarters. Actually, afterwards hovering nearly 0% growth for full-year, PVSW’s deferred revenue has grown in the double digits for four straight quarters. In passing, four quarters is usually the amount of time it takes for accelerated deferred revenue growth to transform into accelerated revenue growth. That is, investors who buy the shares now get to benefit from all hard work Pervasive has done to become more of a subscription-based company without enduring the past several quarters of flat earnings.

The company’s fastest-growing products haven't reached critical mass but. In Q4, 55% of earnings came from its database business, which has been it slowest growing business.

Meanwhile, 40% of earnings now come from its Integration business. On paper, the Integration appears to exhibit flat growth. Nevertheless, it has been transitioning to a recurring revenue model, which masks its true growth rate. Management has stated that apples-to-apples growth for this business is to tell the truth in the mid-teens. This growth will start to manifest itself in PVSW’s reported results as the subscription earnings get fully recognized. This has already begun and is set to accelerate over the coming quarters.

Last, nevertheless not least, PVSW’s newest products only represent 5% of revenue, yet are poised to quickly build momentum off a small base. DataRush version 5 is a quantum leap over its previous incarnations and comes at a time when market demand appears ready to "cross the chasm". Given the excitement around Big Data and Cloud Computing, this business has the potential to become as big, otherwise larger than, PVSW’s other businesses.

Taking everything into consideration, one can hardly blame them. Many comparable companies have been acquired for several multiples of revenue [i.e. CastIron by IBM for $190M and Aster Data by Teradata for $263M). Similarly, market-leading Informatica trades at 6-times revenue. Opposite, PVSW’s enterprise value remains just above one times sales.

Meanwhile, the company has reported 40 straight quarters of profitability and is now entering into two major product upgrade cycles, during an exciting new product holds the potential to drive accelerated revenue growth for years to come.

And during this has but to show up in its headline numbers, there are obvious signs that Pervasive’s resurgence is already underway. This is why a company’s stock often takes off a few months previously it as a matter of fact starts reporting strong results.