Previous articles have discussed the strength of CKSW’s business model, steadiness in execution, and the attractiveness of the stock. Subsequent price appreciation and the recently announced 1Q 2009 results prompt reassessment regarding the current attractiveness of the stock.
In a nutshell, overall performance and 1Q 2009 financial results reinforce the positive view of the company, its management, and the continuing attractiveness of the stock.
There is plenty of evidence to support the view that CKSW’s products provide real value in enhancing the businesses of its clients, day in and day out. This value is strategic --workforce and service management software is embedded in the delivery of services that CKSW’s clients provide to its own customers. In other words, ClickSoftware’s products are embedded in the client/customer relationship. Further, the products enable the efficient allocation of the clients’ own resources.
The growing roster of prime name clients, expanding market influence, and the variety of awards received by ClickSoftware from renowned industry observers is convincing evidence of the client benefit.
Growth in the client base, revenues, and earnings, translate into strong and growing Free Cash Flow. Effective use of capital (in operating working capital and fixed assets) supports fast growth and growing surplus cash balances.
An important detail regarding revenue growth: 1Q 2009 revenues increased 34% y-o-y after adjusting for a reduction of $2.4 million due to foreign exchange fluctuations. This compares with 13% in revenue increases headlined in the 1Q 2009 earnings report.
The knowledge and expertise that constructs quality products and organizes delivery is a core competency in CKSW. Importantly, strategic allegiances with well known and less well known third party partners serve to leverage sales growth with only modest expansion in expenses. These mutually-reinforcing alliances represent an eco-system which leverages resources to support growth and promotes information exchange regarding clients, products and markets. In their totality these attributes represent major competitive advantages for ClickSoftware and significant barriers of entry to potential competitors.
Operational risk is modest and within CKSW's capacity and core competence. Performance does not seem to rely excessively on any one product, client, or market. In other words, the probability that an unexpected event(s) could impair the value of CKSW's assets or franchise, to the point of threatening viability, seems remote.
Furthermore, CKSW is financially very stable. Strong operational cash generation, high surplus cash balances, and zero debt provide a major cushion which enhaces flexibilty in case of need.
Going forward, the challenge is more of the same --focused day-in and day-out execution and maintaining performance risk low (within management's ability). Non-operating strategic initiatives should be viewed with caution.
Management deserves praise for its ability to control costs in the face of diverse growth opportunities and for its deliberate approach as shown in a recent acquisition. The acquisition of selected Manchitra business in India represents an extension of the current strategy and business model. It responded to specific needs in market expansion, cost structures, and technical knowledge, and involved modest upfront resources. The acquisition could be characterized as a low risk/high reward proposition.
The Manchitra acquisition suggests that management would be equally careful and deliberate in negotiating with potential acquirers.
We should expect the analysts to raise estimates and upgrade recommendations.
Using the same methodology employed in the past, estimated stock value is in the range of $9.00 - $13.00 per share. The increase over previous value estimates is in large measure due to the strong 1Q 2009 results.
Estimated annual Free Cash Flow is between $11.30 and $17.80 million. Enterprise Value $237.30 - $373.40 million. Assumptions include 27% tax rate, 5% perpetual growth, 10% Weighted Average Cost of Capital, and normalized expenses (after adjusting for 1Q 2009 expense savings due to foreign exchange rates).
This is not an investment recommendation. Please due your own due diligence.
Disclosure: I hold a long position on CKSW