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(Editors' Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.)

One of the best sectors to currently invest in is companies that provide end-to-end cloud-commerce, payments, and marketing solutions. These companies combine a cloud-commerce technology platform and a suite of services to help clients as part of the clients' website. Their services include design, development, and hosting of online stores and shopping carts; store merchandising and optimization; order management; digital product delivery through download; physical product fulfillment; subscription management; online marketing, payment processing services and website optimization. Their clients include software, hardware, consumer electronics, and online channel partners, including retailers.

ServiceSource

ServiceSource (SREV) is a $1 billion company located in San Francisco. It is the global leader in recurring revenue management with the only cloud application built specifically to grow recurring revenue. By leveraging big data to give companies a complete view of their customers, their software and services drive higher subscription, maintenance and support revenue while improving customer retention and increasing business predictability.

Mike Smerklo is Chairman and CEO. Mr. Smerklo is top-notch. He founded the company in 2002 and built it into the global powerhouse that it is today. With more than a decade of experience exclusively on growing recurring revenue he manages more than $10 billion of it annually. Their client list is impressive including names such as IBM (IBM), Salesforce.com (CRM), Adobe (ADBE) and Jive (JIVE). ServiceSource's products and services are based on proven best practices and global benchmarks.

A few years ago ServiceSource's business model was focused on delivering a business outcome - they offered a bundled service including software and associated services, and were paid based on performance. Based on client requests, Mr. Smerklo recently changed their model to offer a customer friendly cloud-based product which could be subscribed to independently, or in conjunction with services alongside. The result is their new product - Renew OnDemand™. It's the only cloud application built specifically to grow recurring revenue - automating a highly valuable but typically manual business process. By leveraging big data to give companies a complete view of their customers, Renew OnDemand and ServiceSource's associated services drive higher subscription, maintenance, and support revenue, improved customer retention, and increased business predictability.

ServiceSource has a truly global business, with about 140 engagements and 40% of revenue coming from outside of the U.S. They recently announced second quarter results, including total subscription bookings up nearly 40% quarter-over-quarter. They announced four new subscriptions including Dell. Revenue was 67.7 million, up 13% over second quarter 2012, with adjusted EBITDA of 4.4 million.

Non-GAAP net income in the quarter was $1.5 million, or $0.02 per diluted share, compared with a net income of approximately $1.5 million, or $0.02 per diluted share for the same period last year.

ServiceSource recently raised $130 million in convertible notes to allow for product expansion. It sees opportunity in smaller tech companies that have complementary products so that ServiceSource can add these to add to its own portfolio.

ServiceSource's stock has been on a tear this year. At a recent price of $13.20, it's tripled from its November 2012 low of $4.00. To find out more, listen to their webcast from the September 11 Deutsche Bank technology conference.

Rainmaker

Rainmaker (RMKR) is a $18 million company in San Jose, CA. It focuses on cloud-based recurring revenue ecommerce in the Small and Medium Sized Business (SMB) market. The SMB market is $163 billion of the $300 billion annual software sales market - making it larger than the Enterprise and Consumer markets combined. There is a shift taking place in software sales globally, from upfront purchases to cloud-based subscriptions (20% of all Microsoft (MSFT) sales are now in the cloud). Rainmaker is poised to take advantage of this shift.

Rainmaker is an e-Commerce software company that partners with multi-national companies to sell software and SaaS solutions to their B2B markets. Rainmaker offers its clients a global solution to automate their recurring revenue model, manage the subscriber lifecycle, and increase customer lifetime value. While Rainmaker is small, it has been tested - its three largest clients are Microsoft, Symantec (SYMC) and Hewlett Packard (HP).

Rainmaker is a turnaround play. The founder and former CEO Michael Silton had a background in call center based businesses, and that is how he ran Rainmaker. The business was People (employees) first, then Process, and finally Platform - in that order. Michael also paid himself a million dollar salary and expensed a Bentley to an unprofitable, microcap public company.

Don Massaro, the current CEO, began in December of 2012. He was previously CEO of six Silicon Valley tech companies, turning around four and founding two. He has sold five of the six (to the likes of Xerox (XRX), IBM and Snap-On (SNA)) and completely turned around the sixth. Don Massaro's focus at Rainmaker is: Platform first, then Process, and finally People. He has reduced the workforce from 1,283 to 131 people. He closed 3 of 4 call centers including an 800 seat center in Manila that was losing $6.3 million per year.

Mr. Massaro has invested in sales and marketing. He hired a team of 7 experienced salespeople, lead by a Senior Marketing VP, where Rainmaker previously had none. He says he will need to add more salespeople to handle the flood of new business coming their way. He is targeting accounts like Microsoft, Oracle, Auto Desk, SAP, Salesforce.com and Verizon.

The results are only just starting to show. Rainmaker closed an additional $8.6 million in new business as stated in the July press release. The revenue will be recognized over the next year bringing revenue up to over $30 million in the next four quarters. But this is just the beginning. There is an inherent lag from the time of investment to the time revenue is booked. So, what's even more promising are the prospects going forward. From the last quarterly conference call:

equally as encouraging is the pipeline that our new sales force has developed over the last several months. We are seeing demand pickup with our existing strategic customers as well as with new prospects including several Fortune 500 companies

Under Don Massaro's guidance, Rainmaker has also invested in technology and in his engineering team. From the same call:

We believe that this renewed interest in Rainmaker can certainly be tied to our efforts to invest in and accelerate critical functionality in our e-commerce and our learning management systems platforms, as well as our investments in creating a world-class global commerce service center in Surrey, England.

We also made significant progress in rebuilding our engineering team. Our engineering group is at full strength and was able to successfully execute on six code releases in Q2, all delivered with the full functionality as planned.

My model indicates that Rainmaker is breakeven at $9 million per quarter and the Don Massaro has stated that he believes this may happen in Q1 2014. But we think current expectations are on the low side. Our due diligence indicates that Q3 and Q4 for 2013 may be better than expected. We have had numerous conversations with current management and the sales staff. It is our understanding that in the last 100 days the head of U.S. sales has met with over 140 new customers. He believes that the close rate is better than ever. He stated:

It's like working for a start-up without the need for venture capital. In the 10 years I have been at the company, I have never been more excited about the current opportunities. We are signing new business opportunities every day.

Based on our discussions, I believe that some of these opportunities may be between $3 million and $5 million contracts. I would expect to see some color on new customers signed and additional backlog prior to the next earnings announcement.

Rainmaker showed revenues of about $10 million in the first six months of 2013. My due diligence and public statements from the company lead me to believe that Rainmaker will generate about $25 million in recurring revenue this year. By Q2 2014, revenue could ramp up to $15 million per quarter. My model indicates operating margins of 11% at $15 million per quarter and 17% at $25 million per quarter.

Microsoft is Rainmaker's largest customer and is A+ rated. Rainmaker has the exclusive distribution for Microsoft Office 365 and Microsoft's CRM ex US/China. This is where Microsoft's business is going in the future in the SMB market - $20/head/month as opposed to $1,000 upfront from a Microsoft VAR. The Microsoft relationship allows Rainmaker to convince new customers that they have the best platform. I have been told that Microsoft has chosen Rainmaker because they have the best technology and superior SAAS systems.

The Microsoft sales channel has 24,000 resellers. This will all be replaced by storefronts on an ecommerce platform - this is the opportunity for Rainmaker. Cloud based sales of Office 365 is like the difference between leasing and buying a car. All updates happen seamlessly - there is no need to purchase Office 2008, then 2009 then 2010, etc.

Symantec is Rainmaker's second largest client. The platform is here. Check it out - it's really slick. Rainmaker does the entire transaction soup to nuts. Gross margins on this business are 90%.

Rainmaker has some potential catalysts in the near and long term. They could win a large customer like Oracle (ORCL), AutoDesk (ADSK) or SAP (SAP) and Verizon (VZ). As management executes there should be a revaluation at some point - the stock is currently trading at less than one-half of revenue. Once they achieve operational profitability investors should take notice. The CEO's long-term goal is to create a solidly profitable company with a reoccurring revenue stream.

Brad Peppard recently joined Rainmaker as CFO. Brad has a stellar resume, and it begs the question as to why someone with these credentials would join a small company like Rainmaker. Brad was previously President at LTP, Inc., President at Lime Tree Productions, Inc., President at Cinemascore Online, Inc., President at Monogram Software, President at SoftMail Corp., Treasurer at Trader Joe's Co., Vice President-Marketing by Quarterdeck Office Systems, and Vice President-Marketing by Software Publishing Corp. He also served on the board at Oppenheimer Industries, Inc., Aladdin Systems, Inc., CBS TV, Smith Micro Software, Inc. He has an MBA from Stanford Business School with a concentration in Finance, and prior audit committee experience with a number of public companies, including: Aladdin Systems, Monterey Bay Technology, and Oppenheimer Industries. Why would a guy like this come to a small company like Rainmaker unless he thought there was significant upside to his 500,000 option grant?

Rainmaker was a mismanaged business in a potentially explosive vertical run by a call center centric CEO. New management has come in to right the ship and the worst is behind the company. Rainmaker is now focused on its platform and poised for growth in the SMB ecommerce market as global software sales continue to move to the cloud. As the Rainmaker team continues to execute on guidance the company should be revalued from its current 0.44x revenue multiple. Even a 1x multiple on Rainmaker's $30 million guide would suggest a double from here. If they continue to grow revenues, as the sales team leads us to believe the stock price should be at $3.00 by 2015.

We would like to remind readers that small cap companies come with a higher potential for risk.

Digital River

Digital River (DRIV) is a $560 million company located in Minneapolis. It recently reported second quarter results including revenue of $92.5 million, above the guidance of $89 to $92 million. It grew organic payments revenue at a 60%+ for the third consecutive quarter. It raised fully-year GAAP guidance and reiterated non-GAAP EPS ranging from $0.55 to $0.65. It continues to win and expand key customer relationships in commerce and payments; and made progress on its strategic transformation to drive sustainable growth. BlueHornet Networks, Inc., the email marketing solution from Digital River announced the introduction of several new clients, including TheLadders, an online career-matching service; Indochino, an global leader in custom online menswear; and Blooms Today, which offers flowers and gifts online in the United States and internationally.

Digital River recently announced the launch of Beanstream Mobile, a suite of mobile payment solutions for iPhones, iPads and Android devices that provide fast and secure transactions in 140 currencies. Beanstream Mobile frees merchants by turning mobile devices into a portable card swipe, cash register and comprehensive solution.

Beanstream Mobile works with an encrypted card reader and a free downloadable app. With the solution and their mobile device, merchants can swipe or key in credit or debit card data on the spot, accept and track cash and check transactions, and capture online sales wherever they go. In addition, merchants can supply receipts, complete with geo-location data, directly from the app via a printed copy, email or text message. The system consolidates all sales workflows and data into one system, making analytics more accessible and comprehensive. Unlike most mobile payment solutions, Beanstream Mobile's interface and encrypted card reader are specifically designed to be white-labeled by brands and financial institutions.

Digital River recently announced the expansion of its relationship with PayPal to deliver additional payment options to its global commerce customers. In addition to being certified as a PayPal provider, Digital River has added PayPal Express Checkout and Bill Me Later to its existing PayPal portfolio. The new payments represent the first in a series of PayPal options that Digital River will make available to its commerce customers.

Digital River insiders have recently been buying stock. Over the past six months, DRIV has seen 4 different instances of insider buying:

Purchased

Insider

Title

Shares

Price/Share

Value

05/09/2013

Stefan B. Schulz

Chief Financial Officer

1,000

$14.83

$14,830.10

05/10/2013

Kevin L. Crudden

VP and General Counsel

1,000

$14.98

$14,980.00

05/08/2013

Thomas F. Madison

Director

9,030

$14.96

$135,062.65

05/09/2013

David C. Dobson

Chief Executive Officer

30,000

$14.88

$446,300.00

I believe that cloud commerce will be a sector that rewards investors in the years ahead. While there are plenty of mature companies operating successfully in the space, there are also a few hidden gems. The right management team is key to developing the platform, running effective and efficient operations, and driving new client sales and relationships. Investors who do their homework will be handsomely rewarded by investing in cloud commerce companies with the best management teams and business models.

Source: New Opportunities In Cloud Commerce

Additional disclosure: I have recently purchased a significant position in Rainmaker as I believe its prospects are exceptional. I can trade my position at any time, but currently plan to hold until at least a double or higher from current levels.