ClickSoftware (NASDAQ:CKSW) provides workforce and field service management products and optimization solutions. The product suite includes shift planning and scheduling, field data communication for mobile and back-office staff, and customer appointment booking, and customer satisfaction surveying.
These services enable clients to be more effective and efficient in the management of their own resources, to increase the quality of service to their customers, and to enhance regulatory compliance. Such enabling role, embedded in the clients' basic business activities and daily contact with their own customers, is of critical importance in the clients' creation of shareholder value.
This article discusses FYE 12/11 financial results within the context of historical performance. The focus is in the creation in shareholder value and in the value of the stock. Metrics discussed are relevant to fundamental valuation.
ROIC in excess of WACC and Revenue growth are overall enterprise value objectives. The first one determines the extent the firm is actually creating shareholder value wealth; the second indicates the momentum in business expansion. Revenue growth drives increases in absolute NOPAT Dollars.
- ROIC (Return on Invested Capital) = NOPAT / Operating Capital
- NOPAT (Net Operating Profit after Taxes) = EBIT (1- Tax Rate)
- OC (Operating Capital) = NOWC (Net Operating Working Capital) + OLTA (Operating Long-Term Assets)
- WACC (Weighted Average Cost of Capital) = Estimated at 10%
- EVA (Economic Value Added) = (ROIC - WACC) OC
- FCF (Free Cash Flow) = NOPAT - (Changes in OC)
- As an approximation FCF = CFO (Cash Flow from Operations) minus Depreciation and Amortization
- EV (Enterprise Value) = PV of prospective FCF
- Stock Value = (EV + Surplus Cash - Debt) / # Shares
|ClickSoftware Chart --Selected Metrics|
|(Amounts in millions of US$, unless otherwise noted)||FYE 12/07||FYE 12/08||FYE 12/09||FYE 12/10||FYE 12/11||5-Yr. Avg.||Q 12/10||Q 12/11|
|Revenue Growth (y-o-y)||23%||31%||17%||16%||23%||22%||30%|
|NOPAT / Revenues||3%||12%||18%||13%||14%||12%||8%||11%|
|OC / Revenues||-19%||-6%||17%||9%||12%||5%||9%||11%|
|ROIC = NOPAT / OC||-18%||-194%||105%||137%||114%||29%||93%||102%|
|FCF (CFO - Dep.&Am.)||4.29||7.79||6.15||14.32||8.69||2.26||-0.30|
|FCF / Revenues||11%||15%||10%||20%||10%||13%||12%||-1%|
|FCF Growth (y-o-y)||-18%||82%||-21%||133%||-39%||27%||-113%|
|Year End Stock Price||4.01||1.83||6.94||7.64||9.59||7.64||9.59|
|Yr.End Stk.Price Growth||36%||-54%||279%||10%||26%||59%||26%|
Worth highlighting from the chart are the following:
The company is a strong creator of shareholder value. ROIC was 114% in FYE 12/11, and 102% (annualized) in Q 12/11, well in excess of 10% WACC. The company returns more than ten times its cost of capital; an exceptional metric.
Robust ROIC encompasses a healthy cash generation (NOPAT) relative to the amount of OC deployed. This entails effective management of both, the commercial cycle (NOWC) and the investment cycle (OLTA). In other words, ROIC results from the ability to manage relationships with stakeholders (including the ecosystem of collaborating partners) in a productive and capital-efficient fashion; and to carry out product development productively and capital-efficiently.
EVA measures the creation of shareholder value. EVA for FYE 12/11 was $ 11.14 million [(1.14 - 0.10) x 10.71]. The firm returns $11.14 million using $10.71 million in OC. Pretty impressive, I would say.
Note that EVA is arrived at after deducting the cost of the capital used in the business. This is in stark contrast with Net Profits under GAAP -- the surplus or deficit that results after deducting Expenses from Revenues, but without (repeat without) deducting the firm's cost of capital. Thus, it is quite possible for a firm to report positive GAAP Net Profits while decreasing EVA (subtracting from shareholder value). Curiously, many publicly listed companies exhibit strong analyst recommendation and robust PE ratios while display ROIC < WACC (albeit accompanied by rapid revenue growth). On its face, companies that do not earn a respectable margin over WACC make for a troublesome investment case.
Revenue growth is robust, 23% in FYE 12/11, and 30% in Q 12/11, y-o-y. Over the five years, FCF growth was faster (27%) than Revenue growth (22%). This means that the company is able to capitalize on market opportunity (providing a useful product) not only by expanding revenues, but also expanding FCF.
Multiyear averages in Revenue growth and FCF growth do, in my opinion, override glitches in any one particular intervening period. To the point, the drop in FYE 12/11 FCF and in Q 12/11 FCF, is largely explained by the $9.1 million increase in Accounts Receivable at the end of the year; likely due to one or more sale transactions booked during Q 12/11.
Business risk is relatively low. Business activities fall within risk boundaries that are well within management competence. Business Risk encompasses Operational Risk (everyday activities with the firm's stakeholders in the commercial and investment cycles), and Financial Risk (activities regarding capital structure and dividend policy).
Stable NOPAT / Revenues (or EBIT / Revenues) connotes low Operational Risk in matters such as concentration risk with clients, suppliers, and other stakeholders. Investment risk (OLTA) refers to the development of software products. This is a manageable risk, given the firm's single focus in workforce and field service management, available expertise, and industry leadership position.
Financial risk is very contained and defined by NOPAT generating capacity ($12.2 million in FYE 12/11), zero debt, robust cash position ($55.0 million at FYE 12/11), and conservative dividend policy ($0.32 per share/yr x 32.8 million shares = $10.5 million/yr).
The investment thesis behind the business model remains in force.
Value Proposition -- Client benefit in the eyes of clients is evident by the growing pipeline and growing roster of satisfied clients.
Economic Returns -EVA is exceptional and growing at a rapid pace, while business risk is maintained within reasonable boundaries and controlled by specific core competence.
Management Competence -This is the engine behind the Value Proposition and Economic Returns. The strategies propelling technical and industry leadership and strong organic growth are well balanced by clear industry and technological competence (read Management Commentary in the latest earnings report here), and by the ability to organize and deploy resources effectively
FYE 12/11 performance validates the investment thesis and prospective for increase stock price appreciation, and adds credence to the 2012 outlook provided by management in the above mentioned FYE 12/11 earnings report:
"For 2012, the Company currently expects to achieve revenues in the approximate range of $100 to $105 million, representing about 15% to 21% growth over 2011. This outlook is based on about $30 million in backlog and deferred revenues and current visibility into a growing sales pipeline".
The FV of the stock is estimated at $13.0, based on $13.4 million in 2012 FCF (NOPAT minus Changes in OC), consistent with 2012 Outlook. FCF is projected to grow at 9% per annum for the next two years, 8% in 2015 and at 5% thereafter in perpetuity; WACC is 10% p.a. through 2014 and 9% thereafter.
Management and the entire ClickSoftware team deserve recognition for truly exceptional performance. The 2012 financial results evidence that the company creates shareholder wealth at a rapid and sustained pace, that management is cautious in maintaining business risk well within skills and competence, and that the model is robust and stable. In good economic times and in bad, the company executes cleanly and crisply, and over-delivers on deliberate guidance.
Form this shareholder's perspective, there is growing appreciation for management's accomplishments, and the confidence that the marketplace will increasingly come to recognize the true value of ClickSoftware.
Disclosure: I am long CKSW.
Disclaimer: The views expressed in this article represent a personal opinion, not an investment recommendation. The methodology of analysis, including financial computations, presentation, and views, also reflect personal preferences. Presentation and computations entail a probability of error, which is entirely possible. I am not an investment management professional; please do not rely on this analysis, do your own due diligence.