Despite Some Hiccups, ClickSoftware is a Good Long-Term Investment

ClickSoftware’s (CKSW) revenue is diversified globally and across industries. This should allow the company to hold up well against regional and industry specific problems that may arise over time. However, the company is not immune to a global slowdown. Below are two tables that show how the business is spread out globally and by industry respectively:

North America	48
Europe	40
Asia Pacific and Central America	12

Utilities	38
Telco	25
Retail	15
Computer and Office Equipment	13
Home & Consumer Services	3
Others	6

The latest annual report has the following tidbit:

In 2006, we also started to work on the new generation of our architecture, which is primarily focused on service oriented architecture (SOA), an architecture that is being widely adopted in the enterprise software industry.

The company has been discreet about this effort since then. SOA is a huge growth area in the software industry and has immense potential. However, given the fast pace of the industry, ClickSoftware may already be a little late on this effort. Unless the release schedule and customer expectations are managed well, odds are that the new technology might negatively impact the company’s existing business as customers anticipate the new release and delay making buy decisions.

Given that the company’s products are extensions of ERP and CRM products and such vendors being more high profile, it is very likely that ClickSoftware will receive buyout offers from some of them. Although several areas within the software field including ClickSoftware’s niche are experiencing good growth, consolidation is happening in parallel. Furthermore, as the industry matures it is highly probable that the entire industry will consist of a few large companies in a few years. This reason alone is sufficient for management to consider such offers seriously, and act accordingly.

ClickSoftware’s service optimization product suite is in a market niche that is still very much in its infancy. As a first mover, the company has tremendous clout and that has enabled it to form partnerships with much bigger software enterprises such as IBM (IBM), Microsoft (MSFT), and SAP (SAP). The current size of the market is upwards of $15B, and should increase as it successfully expands into new verticals such as retail, home, healthcare, and insurance services.

The company has a reasonable valuation of 24 times next year’s earnings as the growth expectation is close to 30% going forward. As a small cap company in a high-growth area, the shares should continue to remain volatile. It is possible for valuation to reach compelling levels if a general market correction causes another substantial pullback in the price/share. However, even at the current price, investors should be able to realize an above average return over the long-term.

Some of our previous analysis on ClickSoftware can be found here and here.