ClickSoftware at Inflection Point

|
 |  Includes: ACN, CKSW, SAP
by: Gino Verza

ClickSoftware Technologies Ltd. (NASDAQ:CKSW) is the leading provider of workforce management and service optimization solutions. These create value for the client through enhanced efficiency and cost effectiveness; and higher level of satisfaction for the ultimate customer.

This article reviews CKSW’s progress and opportunities going forward in light of the CEO’s assessment that ClickSoftware is at an inflection point (a recent CKSW’s Investor Day presentation is available on the company’s home page). The focus is on the contextual underpinnings supporting the CEO’s assessment. We also review CKSW’s performance, resources, capabilities, and CKSW’s industry leadership position, as collective enablers contributing to the realization of the inflection point.

An inflection point can be viewed as a window of opportunity where the fundamentals of a business, however successful, are changed or substantially realigned in favor of a greater vision and higher potential rewards. Fundamentals encompass matters such as the value proposition to the client, or client benefit; the economic equation (the interplay between product demand and the firm’s own cost structure to produce attractive equity returns), and the firm’s technical and managerial competence.

Based on the track record of ClickSoftware and on the strength of management, we submit the view that the company is well positioned and already executing well within the higher profit potential window of opportunity. Further, we expect the undertaking to continue, to be successful, and to significantly augment the enterprise value and the price of the stock.

Client Benefit

CKSW’s client roster continues to expand rapidly, currently totaling some 120, mostly large corporate clients. Growth is driven by the value clients obtain from the company’s products. Simply put, clients are able to do more with less. This is because they are able to improve upon the management of their field team resources. They are also able to test their own customer servicing policies (in this document a customer is the client of a CKSW client) against CKSW’s solutions. Often, policies regarding customer service reflect the clients’ well-meaning intent but fall short in their practical every-day applicability. Clients obtain a greater insight on the implication of their own customer policies and practices when measured against improvements with CKSW’s products.

CKSW’s products strengthen the relationship between clients and their own customers. The value to the client is strategic and fundamental in the client / customer interaction. Customers also benefit from CKSW’s products by being able to manage their own time resources more effectively --due to the optimization of the service loop. This optimization takes place from the initial service request call by the customer and prompt appointment setting, to the timely customer updates, punctual arrival, effective service execution, and job completion.

Quite appropriately, CKSW plays a consultative role with clients. This role provides the access for a mutually constructive dialog which leads to improvement in field service management by clients and to product improvement by CKSW. Client feedback and client requests provide a strong lead for product improvement and CKSW’s R&D.

Business Risk

ClickSoftware’s business risk is reasonable and well within management’s capabilities. Operating performance is substantially dependent upon sales and product execution which constitutes daily practice at the company. There is no major concentration risk in any one client, supplier, or geographic location, which would represent major potential negative outcomes.

CKSW has a stable financial condition. The company generates substantial operating cash flow, holds relatively large cash balances, and is free of debt. Backlog and deferred revenues provide visibility and smoothness in earnings.

Historical performance shows a steady expansion in the client base, product capability, and geographic footprint. Strategic alliances for marketing, selling, and supporting CKSW’s services have shown effectiveness in terms of deals done. Importantly, new products have effectively expanded the size of addressable market, currently estimated at $46.0 billion.

Third quarter 2009 results show continuing y-o-y growth in sales, EPS, and in cash balances. These measures reinforce the proposition that ClickSoftware is a fast grower and effective user of capital with significant growth potential going forward.

Operating Leverage

Over the last few years revenues have absorbed significant costs in product development and in the expansion of the geographic footprint and delivery infrastructure. A relatively small and growing revenue base has absorbed a disproportionate amount of expenses in R&D and infrastructure growth that accrues to future benefit.

Earning margins have steadily increased due to sustained revenue growth and the leveling off or reduction of the mentioned costs. Margin improvement is reflected in the rapid increase in equity, through retained earnings. As of 9/30/09 equity increased 88.0% y-o-y. In this scenario of fast revenue growth operating leverage is advantageous to CKSW.

An aggregate of $45.0 million in tax carry-forwards, principally in the UK, USA, and Israel, provides a significant tax cushion for the next few years. This cushion will meaningfully support continuing rapid growth in equity.

Capabilities and Opportunities

Particularly during 2009, ClickSoftware has accelerated the expansion of its product suite, a business fundamental. This has effectively expanded other fundamentals --the target client profile and the company’s addressable market.

The acquisition of businesses in India (Manchitra), USA (AST), and Israel (AiPoint), have in different ways supported expansion in the product suite, in the addressable market, and in the geographic footprint. In addition to providing the beachhead for regional coverage, Manchitra is also a supplier of specialized technical knowledge at low relative cost. The broad utilization of this competitive advantage has broad strategic implications.

The acquisitions have been relatively small in Dollar terms –in the neighborhood of $6.0 million, as an aggregate –but their strategic impact on the company’s prospects is major. By design, they propel the transition from single product, niche industry coverage, to a multi-product, multi-vertical, broadly defined industry leader. This enhanced competitive position means more products for more clients or prospects, everywhere.

ClickSoftware has expanded the traditional field workforce activities for “large size” companies, at top-end of the market to also cover “mid-size” (ClickIMRS) and “small size” (AST) companies. The addressable market has expanded from field customer servicing (where the customer requests the client for service –e.g. cable installation) to shift planning (where the customer goes to the client to request a service –e.g. retail sales store). The addressable market is now estimated at $46.0 billion.

The product suite has been expanded from the traditional Click Schedule (large companies) to include ClickRoster (shift planning), ClickMobile, and ClickIMRS (mid-size), and Software-as-a-Service (small companies). With some qualification, the product offering can be viewed as a collection of modules that can be assembled and organized to produce custom solutions.

Management Strength

ClickSoftware’s accomplishments reflect a strong client focus and the ability of management to profitably balance the often conflictive objectives of short term performance and long term opportunity development.

With relatively modest financial resources CKSW has accomplished a great deal. It has achieved steady revenue and earnings expansion while concurrently constructing a framework and developing capabilities for continued and profitable growth and maintaining a strong financial position. More basically, ClickSoftware is an industry leader profitably serving companies of all sizes globally with a full product suite.

Possibly the best tribute to any business comes from its clients. ClickSoftware’s clients vote with their wallets and continuing loyalty. Client retention is very high.

The company is the acknowledged market leader in accordance with leading independent industry analysts, such as Gartner (NYSE:IT) (Magic Quadrant for Field Service Management, May 2009), and Aberdeen Group (Mobile Field Service AXIS, April 2009).

Strategic alliances for marketing, selling, and providing support to CKSW’s products are by all measures going very well. The most salient are the relationships with SAP (NYSE:SAP) and Accenture (NYSE:ACN). These alliances are meaningful, with defined purposes, and engrained in the organizations through strategies, roles, metrics, and profit sharing. In other words they are active and operational; they identify prospects, conclude deals, and produce earnings. These alliances represent key relationships within ClickSoftware’s overall ecosystem.

While perhaps it is too early to assess the full impact of the recent acquisitions, it is clear that the rationale behind them point to clear thinking and to a deliberate and conservative management style by the company’s CEO and his management team. Management has been measured in risk taking. Acquisitions have been strategically purposeful and paid for in cash. All indications suggest an appropriate post-acquisition focus to achieve effective integration and rationalization of the acquired businesses.

ClickSoftware appears to be a tightly run organization that practices clarity in purpose, process, accountability, and performance rewards.

Inflection Point

Growth in business volume, positive operating leverage, a strong balance sheet (with cash for opportunities), an expanded addressable market size, a broad product suite, and industry leadership (despite a small market share) provide the context for the inflection point. Continuing inflection point execution will be a continuing challenge for management due to the increasing complexity in the business as it is today and due to continuing disruptive change going forward.

Today’s complexity is inherent in the continuing rapid organic growth –more of everything; clients, deals in progress (alone or in coordination with the strategic alliances), products, overseas offices, associates (and foreign languages), etc. Complexity is further heightened by the increased diversity --expanded client verticals and product suite, differences in country regulations and business practices, broader array of skills required from associates at all levels, etc.

The urgency of the moment as an inflection point is silent and self-imposed. There is no apparent change in the competitive landscape, or compelling deadline, or analysts’ expectations setting a performance yardstick. Nonetheless, timing is of the essence, and there are obvious benefits to realizing first-mover advantage. Staying the course may signify losing the moment due to unforeseen and uncontrollable events, such as a strategic realignment among competitors, or a new market entrant with greater financial resources.

The motivator for initiating disruptive change is management’s own assessment of the moment, resources available, the envisioned opportunity, and the ability to manage through exponentially growing complexity. Risks and rewards can be high.

Implicit in the firm’s expansive view of its role and opportunities is the acceptance of the challenge of disruptive change currently underway. The CEO has very generally indicated that, differently from the three acquisitions in 2009, the next acquisition would be of a company with substantial revenues and business volume (CKSW’s 10/29/09 Investor Day presentation).

Such new acquisition would build on ClickSoftware’s robust product suite, geographical footprint, and other attributes discussed earlier. It would also reinforce sustained organic growth and accelerate shareholder value creation, increase cross-selling opportunities and market share, and preemptively reinforce industry leadership. Acquired assets with expected returns higher than the cost of capital would replace existing low yielding cash balances. Appropriately priced, an acquisition of substantive size would propel a leap in the value of the enterprise.

Conclusion

In a relative short period of time ClickSoftware has made substantial progress, operationally and strategically. The result is an enhanced capacity to deliver value solutions to clients, a strengthened financial position, and expanded addressable market opportunities for continuing growth. The next step is a strategic leap in value creation by means of a major increase in business mass.

If past performance serves as a guide, there is strong evidence to support the high qualification of management in execution and in managing change, appropriately balancing among conflictive objectives and cautiously gauging risk and reward. Past performance points to a strong management team who is well suited to the challenge of execution through and beyond the inflection point.

Achievement should become increasingly evident with the passage of time as today’s management vision, adept choices, tough work, and focused execution, turn into tomorrow’s news and full financial measures. In my opinion the improvement in shareholder value over the medium term will be major.

Disclosure: I hold CKSW common stock.