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, Gino Verza (6 clicks)
Value, long only, medium-term horizon, small-cap
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By way of background, ClickSoftware Technologies (CKSW) is the leading provider of automated workforce management and optimization solutions for every size of service business. Solutions, available on demand and on premise, create business value through higher levels of productivity, customer satisfaction and operational efficiency.

Over the last few years the company has exhibited sustained rapid and profitable growth, even in the face of macro-economic slowdowns.

This article discusses recent progress and points to an investment opportunity based on fundamental valuation.

Q 9/11 Financial Results

On October 31 ClickSoftware announced blowout earnings for Q 9/11 –Revenues increased 32% to $23.16 million, y-o-y; EBIT more than doubled to $5.30 million, y-o-y.

Implicit in the announcement was continuing strength in its competitive position – widening industry leadership recognition, rapid growth, and low business risk. This translates in superior liquidity, efficient capital utilization, attractive ROIC returns, and a steady dividend payout (discussed in previous articles in Seeking Alpha). For stockholders, the result is expanding fundamental value and sustained appreciation in the price of the stock, despite intermediate market hiccups.

Industry Leadership

Gartner’s independent research positions the company in the Leaders Quadrant in the 2011 Magic Quadrant for Field Service Management. In the words of the CEO, “ClickSoftware’s workforce management platform delivers mobile access coupled with intelligent decision-making and decision-support, already powering outstanding performance of best-in-class organizations”.

The value of services provided in the eyes of clients – as measured by increased productivity, customer satisfaction and operational efficiency – represents rather permanent demand, equally necessary during periods of broad-based economic expansion and perhaps more so in times of business contraction, where “the need to do more with less” is critical.

Fundamental Metrics

The Selected Metrics chart below updates with Q 9/11 results and comparable Q 9/10 information the metrics provided in the previous article.

ClickSoftware Chart --Selected Metrics
(Amounts in millions of US$, unless otherwise noted) FYE 12/07 FYE 12/08 FYE 12/09 FYE 12/10 4-Yr. Avg. Q 9/10 Q 9/11
Revenues 40.02 52.26 61.12 71.02 17.48 23.16
Revenue Growth (y-o-y) 23% 31% 17% 16% 22% 32%
EBIT 1.36 6.28 11.14 10.23 2.44 5.30
EBIT / Revenues 3% 12% 18% 14% 12% 14% 23%
Cash Flow from Operations 4.91 8.54 7.55 16.37 5.66 3.03
Cash Flow from Ops. / Rev's 12% 16% 12% 23% 16% 32% 13%
CF f/Ops.Growth (y-o-y) -13% 74% -12% 117% 42% -46%
Free Cash Flow (FCF) 4.29 7.79 6.15 15.12 5.16 2.96
FCF / Revenues 11% 15% 10% 21% 14% 30% 13%
FCF Growth (y-o-y) -18% 82% -21% 146% 47% -43%
FCF(Last 12 mos) 12.27 12.52
FCF(Last 12 mos) / Rev's 70% 54%
FCF (Last 12mos) Growth 2%
Debt Service Obligation 0.00 0.00 0.00 0.00 0.00 0.00
Cash (& Market.Secs.) 24.70 32.00 34.97 50.00 48.28 56.73
Dividend (Annual) 0.00 0.00 0.00 0.00 0.00 0.32/sh.

All in all, Free Cash Flow (FCF) continues strong due to growing Net Operating Profits after Taxes [NOPAT = EBIT (1 – Income Taxes)] -–to $4.61 million in Q 9/11 from $2.27 million in Q 9/10. Noteworthy is the following:

o Q 9/11 Revenues and EBIT continue to grow, at an accelerated pace, in comparison with the 4 year-average

o Q 9/11 Cash Flow from Operations declined by $2.63 million to $3.03 million

o Significantly influencing the decline is Deferred Revenues –a large $3.09 million increase in Q 9/10 relative to Q 9/09, and a $0.73 decrease in Q 9/11 relative to Q 9/10

o A view that such decline is not worrisome, and that it only obeys to operating timing and related accounting recognition, is supported by the stability of the Operating Working Capital to Revenue ratio (OWC / Revenue) –minus 4.67% in Q 9/09, minus 4.23% in Q 9/10, and minus 3.56% in Q 9/11

o FCF for the last 12-month period ending on Q 9/11 was $12.52 million vs. $12.27 million for the equivalent period ending on Q 9/10.

Return on Invested Capital

Notable is improvement in Return on Invested Capital (ROIC) in Q 9/11. Annualized ROIC, based on quarterly results is over 300% in Q 9/11 (my own computation) and over 100% in Q 9/10. This compares with 10% p.a., estimated Weighted Cost of Capital (WACC). Such ROIC is driven by strong NOPAT on a relatively small amount of Operating Capital (the sum of Operating Working Capital plus Operating Long Term Assets).

Strong generation of Shareholder Value (ROIC > WACC) suggests that it make be appropriate for the company to consider (reasonable) acceleration of growth in revenues and NOPAT (or an acquisition), even at a cost of reduced NOPAT contribution (NOPAT / Revenues). In other words, since the order of magnitude of ROIC is so large, absolute Dollar growth in NOPAT and FCF appears desirable even if accompanied by decreased ROIC. Such opportunity for enhanced performance may be attractive to potential acquirers motivated by above-market returns.

Fundamental Value

The fundamental value of the stock is conservatively estimated at $12.00 - $12.50, based on ongoing FCF of $13.50 - $14.00 million per year growing at 10% per annum for the next 4 years and at 5% thereafter in perpetuity; and a cost of capital of 10% p.a.

Dividend Policy

The recent dividend payout policy (see Q 9/11 earnings announcement) has effectively raised bottom support to the price of the stock and has added a strong differentiator to the profile of the stock, particularly within the small-cap space. I would foresee that continuing growth, efficiency in the use of operating capital, and concomitant FCF strength, will serve to support dividend increases in the quarters and years to come. In this regard, consideration to a structure (involving a corporate legal personality and flow of cash) that would obviate the 20% withholding tax (20% in the United States) at the origin would be beneficial to those shareholders who do not have the capacity to utilize the tax benefit in their own countries.

Summary

ClickSoftware continues to exhibit the attributes of a great business, which translates into rapid growth and robust financial results at a low business risk (discussed in previous articles), and steadily expanding shareholder value.

History tells us that market gyrations driven by macro-events generally do not (materially) upset the company’s business growth, or growth in revenues or in FCF. They, however, provide great entry opportunities to those investors who are able to identify value and to appreciate it.

Source: ClickSoftware: Investment Opportunity Based On Fundamental Valuation