ClickSoftware: Innovative Software for the Service Industry

ClickSoftware (CKSW), was Israel Opportunity Investor's January Stock of the Month.

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ClickSoftware Technologies (Nasdaq: CKSW) provides workforce management and service optimization solutions. ClickSoftware’s Service Optimization Suite provides an integrated solution for optimized decision making used throughout organizations. Over 100 customers in telecommunications, utilities, financial services, aerospace use the company’s products. It markets its solutions via a direct and indirect sales force into North America, Europe and the Asia Pacific Region.

Investment Thesis

Gartner predicts that the market for field service management software and service will reach $1.6B in 2009, growing at 18% CAGR. This growth is predicated on a rising recognition within companies to view service operations as a differentiator. Furthermore, Service Integrators [SI] are aggressively building and marketing practices around service optimization.

The company has said that it enjoys win rates of 30%-40%.

The company boasts a strong balance sheet with over $20 million in net cash, currently 20% of the company’s $100 million market-cap. Moreover, the company generated almost $6 million in operating cash flow in 2006.

The client base is a showcase of blue chips. The company boasts numerous referenceable, multinational customers building on its proven ability to provide ROI. With large multinationals as customers, there is always the potential of add-on sales as large firms look to expand software platforms to foreign operations.

ClickSoftware’s bread and butter customers typically fall in the telecommunications space. One of the most compelling markets for ClickSoftware could be the Small and Medium Business [SMB] market, historically powered by homegrown solutions. Management believes that a mid-market solution could be an important catalyst for future growth.

Catalysts

Growing partnerships: ClickSoftware’s channel partners include SAP, Microsoft as well as SIs like Accenture and IBM. With partner revenues around 50%, CKSW may look to partner with other leading SIs looking to build out service optimization practices. We believe these existing partnerships, as well as future ones, are beginning to kick-in even more from a revenue standpoint, which will prove company guidance for 2007 and 2008 as conservative.

Potential takeover candidate: Given the firm’s roster of Tier 1 clients and a technology edge in its software suite, ClickSoftware could prove to be a great M&A target for a larger software vendor or SI looking to lock-in a strong partner in a hotly contested market.

Current Valuation: At $3.71 the stock has gotten cheap, and looks like an intriguing entry point for investors. The stock was trading around $7 in October but fell after an earnings report. The report was quite strong, but investors having priced the stock for perfection, focused on revenues that were down slightly from the second quarter, reflecting the specific timing of several multi-million dollar deals. One of these deals, with a major telecommunications company in India, closed in the fourth quarter. The backlog heading into ’08 is strong.

Threats to Thesis

Competitive threats: Given its niche focus, ClickSoftware competes both with smaller players as well as with larger CRM and ERP vendors with greater resources and market visibility.

Client and industry concentration: ClickSoftware has had large clients account for more than 10% of company sales. In 2006, two customers accounted for more than 10% of sales each. Further, CKSW clients have tended to come from the telecom and utility sectors. If these sectors face a significant downturn, it could affect the company’s ability to generate revenues.

Strong growth: CKSW continues to exhibit strong growth. This puts added stress on the company’s operational processes and management. If CKSW struggles with scaling the business, expected growth rates may suffer.

Capital structure: The company’s Chairman and CEO, Dr. Moshe BenBassat owns around 18% of the company’s shares and options. His strong influence on the firm can provide added complexity to future events.