BroadVision: Challenges Loom Ahead

| About: BroadVision, Inc. (BVSN)

Broadvision (NASDAQ:BVSN) is overvalued, and Wednesday's earnings release should further demonstrate that. The company's shares have been inflated by the efforts of several stock promoters who have been hyping the company's enterprise social networking initiative, Clearvale.

But in our opinion, Clearvale remains unproven and faces substantial competition from larger and well-funded players. Given the number of companies that have entered the enterprise social networking competitive landscape, we think Clearvale will fall short in its attempts to generate value for Broadvision shareholders.

As a result, we expect today's earnings release to remind investors that Broadvision is in very much a transitory mode. Earnings per share and operating profit could very well be negative in 2012, if recent history is any indication. The company's legacy products are in decline and unlikely to re-enter a growth mode. In the meantime, the company's Clearvale product did not generate material revenue in 2011 and should remain unprofitable throughout 2012, given that Clearvale remains in a development phase where R&D and marketing costs will likely outweigh any initial revenue. As such, we expect continued losses at BVSN.

Legacy Businesses in Rapid Decline

First, let's discuss Broadvision as a whole. The business has been in serious decline over the past five years, with both revenue and profit on a steep downward trajectory, as we can see below.

Revenue has declined at a compounded annual growth rate of -19% over the past four years. Operating profit has turned negative for the past two years, coming in at -$3.4 million in 2010 and -$4.7 million in 2011.

The company's drop in revenue has been caused by its troubled legacy products. These legacy products include a variety of software solutions that customers can implement for e-commerce, customer interaction and other functionalities on both intranet portals as well as external websites. Products include Broadvision's Business Agility Suite, Commerce Agility Suite and Quicksilver solutions, and descriptions of these products can be found here and here.

These businesses have been suffering rapid decline and there appear to be few expectations of a turnaround. Management makes this relatively clear in both SEC filings and conference calls. For instance, in the company's most recent earnings call, CEO Pehong Chen commented that "Market maturity and consolidation mean that all legacy solutions cannot sustain a growth business." In the third quarter earnings call, Chen elaborated:

The legacy business is a very horizontal platform business, and as we have said many times, they are very mature and consolidated under primarily two players, IBM and Oracle/BEA... Even though we still think we have a very good product, and all our current customers still on our platform can attest to that, I think the trend is just not in our favor as, again, probably is evident to many people… [That] explains our declining install base and maintenance revenue.

Clearvale: A Small Player Competing Against Well-Funded Giants

Given its declining legacy business, Broadvision has focused its turnaround efforts on its new Clearvale product. BVSN has substantial cash on its balance sheet, and Chen has signaled that much of this cash will be used to fund Clearvale's development. Clearvale is an enterprise social networking ("ESN") product that is intended to enable customers to build the next generation of interactive internal portals and external websites.

Unfortunately for Clearvale, it is competing with large competitors with deep pockets, many of whom currently have more advanced offerings and began developing their enterprise social networking solutions before Clearvale.

For instance, type "Enterprise Social Networking" in Google. Paid ads include ones from Jive, Salesforce, Yammer, Socialcast, Spigit, etc. Clearvale does not appear until the second page. Below is a list of companies which have released enterprise social networking solutions:

Company

Resources

Website

IBM

Largecap public company

Click here

Microsoft

Largecap public company

Click here

Salesforce.com

Largecap public company

Click here

Oracle Webcenter

Largecap public company

Click here

Yammer

$140m+ VC Capital Raised

Click here

Jive

$1.5bn Market Cap

Click here

Bloomfire

$10m VC funding raised

Click here

Moxie Software

$80m VC funding raised

Click here

NationalField

n.a.

Click here

Saba

$280m Market Cap

Click here

Social Text

$18m VC funding raised

Click here

SocialCast

Largecap public company

Click here

Telligent

Backed by Intel Capital

Click here

Igloo

$9m VC funding

Click here

Tibbr

Largecap public company

Click here

Click to enlarge

The list of industry titans devoting resources to the enterprise social networking market is daunting. IBM launched IBM Connections several years ago, and Microsoft's (NASDAQ:MSFT) SharePoint, a broad content-centric collaboration offering, is increasingly becoming prevalent in a social enterprise context. Salesforce.com (NYSE:CRM) has made its Chatter social networking product a central focus, and given Salesforce.com's track record of forward-looking and innovative products, we think that Chatter may end up being the main enterprise social networking platform for customers who already use the Salesforce CRM platform.

Putting these tech largecaps aside, Jive Software (NASDAQ:JIVE) is the leading enterprise social networking platform right now, and is increasingly running away from the competition. The company now sports a $1.5bn market cap and a blue chip customer base. Yammer has received more than $140 million in venture capital funding to-date, while SocialCast has been acquired and is now a subsidiary of tech giant VMWare, Inc. (NYSE:VMW). Finally, a slew of other competitors have viable offerings, including Intel Capital-backed Telligent, VC-funded Moxie Software, etc.

We have reviewed many of the competitor platforms, and found quite a number superior to Clearvale. In a telling report, Forrester, a leading IT research firm, published a study reviewing the enterprise social networking sector. Throughout the report, there was not a single mention of Clearvale. In explaining why they excluded certain vendors in their report, Forrester wrote:

A number of highly viable vendors were not included because their social technology products have insufficient market presence and/or market awareness within Forrester and its client base. This list includes such vendors as Igloo, Moxie, and Saba.

Clearvale likely belongs under this classification, as it has apparently not won enough clients to put it on the map for Forrester. To better understand Clearvale's limited inroads thus far, it's instructive to compare Clearvale's customer testimonials with the customer lists of its competitors. These customer testimonials are available on the Clearvale website here, and provide a brief description of these companies in the table below:

Customer

Description

Aeroxchange Ltd

Private company with less than $10m
revenue (source)

Centro Nazionale Trapianti

Government organization

Confindustria Lombardia

Government organization

Front Burner Restaurants

Private restaurant company

Gemeente Tilburg

Government organization

ICT Consulting

Private company

HumanConcepts

A subsidiary of a competitor

QuickLogic

$100m public semiconductor company

Sempla

Private company

SoftBank

Large Japanese telecom

Synaptics

$1bn market cap company

Techtree

Private company

Click to enlarge

Compare Clearvale's customers to sample customers of competitors:

Competitor

Sample Customers

Jive

Alcatel-Lucent, Apollo Group, Live Nation, Juniper Networks, Nike, News Corporation, Yum! Brands, Scotiabank, SAP, McAfee, Vodafone

Yammer

LG, Deloitte, 7-Eleven, Unicef, Shell, eBay, DHL

Socialcast

GM, Philips, Avaya, Factset

Moxie

Teva, Epson, Nationwide, Sharp, the British Army

Click to enlarge

Another way to examine how Clearvale stacks up to the competition is to compare revenue between Clearvale and JIVE, the only publicly traded pure-play enterprise social networking business. In FY 2011, JIVE generated $77m of revenue. In contrast, "Clearvale did not generate material revenue in 2011", according to the most recent 10K. Based on press reports on the internet, we also believe that SocialCast and Yammer are generating at least $10m+ in revenue.

To be clear, we are not saying that Broadvision's Clearvale will be unable to transform itself into a viable player within the enterprise social networking sector. We are, however, arguing that thus far there is limited evidence supporting that, and the tripling of the BVSN stock price in the past four months is not justifiable when examining the current economic potential of Clearvale.

Clearvale has a tough road ahead of itself. It is competing in a crowded sector against well-funded competitors, many of whom have more financial resources for R&D and marketing expenditures than Broadvision, even after accounting for the $54 million of cash on the company's balance sheet.

From our review of the available service offerings, we would argue that quite a number of Clearvale's competitors have more user-friendly interfaces than Clearvale, and equally robust functionality. In examining the various leading enterprise social networking options, we were unable to find sufficiently differentiating factors with the Clearvale platform to become comfortable that Clearvale would be able to catch up to its competitors in market share.

While Broadvision management may argue that the ESN revenue opportunity is vast enough to allow quite a number of providers to survive, Clearvale has yet to post meaningful revenue, whereas its competitors have already posted tens of millions. Clearvale needs to report more progress, in terms of sales, profit, customer wins and industry acknowledgement, before we can justify the current share price.

Disclosure: The author is short BVSN. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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