Hop On The CallidusCloud Train Before It Leaves The Station

| About: Callidus Software, (CALD)

Summary

SaaS revenue should increase in coming years.

CallidusCloud does not have outstanding debt.

CallidusCloud has increased its R&D expense over the last two years.

Technology is a rapidly growing industry that investors should expose their portfolios to since the industry offers attractive potential returns. Within the technology sector, cloud-service is becoming popular among consumers since it offers a reduction in technology infrastructure expenditure. Since most cloud-based companies are in the growthstage, it is important to consider their profitability, research and development expense, and debt management. CallidusCloud (NASDAQ: CALD) is a software as a service (SaaS) company that investors should buy for the following reasons.

Firstly, according to Statista.com, worldwide software as a service revenue has increased from $10.75 billion in 2010 to $27.94 billion in 2015. What's more is that revenue is forecasted to increase to $32.80 billion in 2016. In my opinion, CallidusCloud is part of an industry with outstanding growth potential.

One of the key features that investors must watch closely in a growth company is its profitability. CallidusCloud released its third quarter 2015 results. On the financial aspect, CALD's revenue increased by 29% from $35 million in Q3 2014 to $45 million in Q3 2015. More importantly, the gross ratio improved from 55% to 61% as a result of lower costs of goods sold. Overall, the company reduced its net loss from $5.2 million to $2.2 million over the same period. CALD has improved its revenue constantly for the last two years on a quarter-over-quarter basis.

Q3 2015

Q3 2014

Revenue

$ 44,944

$ 35,000

Gross Profit

$ 27,592

$ 19,354

Gross Ratio

61%

55%

Interest Expense

$ (26)

$ (38)

Sales and Marketing

$ 14,855

$ 11,153

R&D

$ 6,846

$ 4,920

Net loss

$ (2,243)

$ (5,235)

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Another important feature of growth companies is the ability to create new products. Therefore, these companies must invest in research and development to potentially create new products or improve existing products. CallidusCloud is on the right track because the company increased its R&D spending from $4.9 million in Q3 2014 to $6.8 million in Q3 2015. As CALD continues to invest in R&D, it's very possible that CALD will innovate and create products that will increase revenue further. Figure 1 illustrates a clear uptrend in R&D expense over the past two years.

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Figure 1. R&D Expense on a quarterly basis

Lastly, investors must closely watch the companies' outstanding debt. With the uncertainty of four potential interest rate hikes from the Fed in 2016, debt management plays a key role in the ability of companies to grow. High interest rates will result in lower cash available to continue ongoing projects or to explore new potential revenue streams. However, investors should not worry about CALD since the company does not have an outstanding debt. Therefore, CALD should be directly unaffected by the Fed's decisions in future meetings. Should CALD require cash to initiate new projects, the company should be able to obtain favorable interest rates since the company's working capital increased from $3.8 million in Q3 2014 to $47.2 million in Q3 2015.

(in millions)

Q3 2015

Q3 2014

Current Assets

143,654

81,042

Current Liabilities

96,452

77,236

Working Capital

47,202

3,806

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The brief message

As SaaS continues to gain popularity, cloud-based companies such as CallidusCloud should continue to expand. CALD should be bought in every portfolio since the company is profitable and it is bumping R&D expense to create and improve products. Also, uncertainty about possible interest rate hikes from the Fed should play a minor role in CallidusCloud's performance in the interim.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.