Four Israeli Stock Picks from Chuck Goldblum

Excerpt from full interview in Israel Opportunity Investor:

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Hi, Chuck. Can you tell us a bit about yourself and your firm, Emancipation Capital?

Charles Goldblum: Emancipation Capital is a deep-value hedge fund with a focus on investing in technology companies. We’re primarily involved in software names. I was previously a sell-side analyst in the supply-chain sector. In addition to consulting for Emancipation, I run my own asset management firm.

As a deep-value fund, why do you focus on software companies? Why not companies with a lot of hard assets on the balance sheet?

CG: We focus on this domain for mainly one reason: software firms typically have a high level of recurring revenues undervalued by the market.

Do you bet on M&A activity for your portfolio companies?

CG: There will always be consolidation in the software industry. What typically happens is that a company and product mature to the point where the bulk of revenues are derived from maintenance contracts. These maintenance contracts are an incredible source of profitability. At this point, a software firm becomes an attractive acquisition for another firm to just take out its revenues or plug its product into a larger product offering.

How does this fit with Software 2.0 companies that focus on Software as a Service [SaaS] in which software is essentially rented on an as-use basis?

CG: We actually ascribe a much higher valuation for more typical software firms exactly because of this high profitability maintenance revenue stream. We basically see SaaS firms as just selling somewhat typical software licenses.

What are some of the Israeli names in your portfolio?

CG: We like Jacada (Nasdaq: JCDA). We did a lot of work analyzing their old legacy business. We basically thought that their legacy business was quite undervalued and investors got that business cheaply with their newer, higher growth call center business thrown in as a bonus. That’s how we looked at it. All in, we own about 13% of the outstanding shares of JCDA.

So, has your thinking changed after Jacada announced it would be selling off the legacy business?

CG: We’re conservative value investors. So, when someone tells you that they are selling a cash-cow business that drove high levels of profitability, you have to think a lot about it. This is a tough decision because it hurts profitability in the short-term and hurts revenues. Lopping off 30% of revenues or so could be seen as a setback but after working the numbers and speaking a lot to management, we’ll tell you that Jacada has repositioned itself as a pure-play high-growth rate company playing in the call-center space. Instead of a 20% blended growth rate with the legacy product, Jacada is growing at 60% or so. The firm thinks it will get a higher multiple on its business as a pure-play. We’re happy the company has announced that it will be using some of the cash from the sale to buyback stock.

So, tell us about Jacada’s high-growth rate product.

CG: I was speaking to Giddy Hollander the other day and he said it really well: "You’d be hard pressed to find another business that’s growing as strongly with such big-name clients, every year landing another big-name company as a client.” When I was covering the supply chain industry in the days of i2 and Manugistics, they sold perceived value. Jacada is the real thing.

What do you mean?

CG: As part of our research process, we’ve spoken with a lot of Jacada’s customers. Many of them tell us that with Fusion, they’re cutting out 15-20% of the time it takes for call handling. That can be translated directly into a reduction of headcount by 15-20%. We’ve studied a lot of customer feedback across a lot of industries – this uniform excellence is the best I’ve ever seen.

You don’t believe this story is in the stock. Why?

CG: For three reasons:

Jacada is a small company.

Because Jacada is not profitable, it becomes a show-me story again.

Jacada is an Israeli firm and is cast in the same shadow that poorly managed Israeli firms cast. We trust JCDA’s management. I don’t think they have this problem.

Are there any upcoming catalysts?

CG: We think a couple of things are going to start happening. As I mentioned, now that the company is not profitable, it becomes a story about execution. Therefore, investors are going to hone in on bookings numbers in the future. As Jacada announces new deals, the firm will chip away at the “too small to make a difference” moniker that the company has faced. They will begin to be taken more seriously.

The second thing we think may happen is that as the share buybacks begin taking place, we’re seeing a migration of the shareholder base from value investors to growth investors. Although now a story about execution, we still see Jacada as deep value. They have about $2.80 per share in cash, with an enterprise value of $20 million, and booked sales of $15 million for 2008. At this valuation, a value investor has got to be in the game.

Any other Israeli companies on the radar screen?

CG: We used to own NetManage (Nasdaq: NETM), which is on the verge of being acquired. For us, this was clearly another case ofa nice stable of maintainence revenues being undervalued by the market. Look what happened: they’re being acquired at about a 100% premium.

We’ve also looked at Comverse Technologies (CMVT.OB) and Verint (VRNT.OB). We think that in some way, these firms are being punished for almost being too honest. Options backdating is a huge problem and many firms were involved in this behavior. Comverse ran an internal committee that didn’t sweep the findings under the rug. They bring it out into the open and founder Kobi Alexander runs away.

Chuck, thanks for your time.

Comments

[Ames Tiedeman]

Zack:

Do you have an opinion of ALVR?

[Zack]

it's been absolutely crushed. small cap, israeli name -- no one wants to own it. they're still landing deals.

[quaintseed]

Can Jacada successfully sustain the tremendous growth rate without being mangled by resource constraints or vice versa? What share price do you estimate for JCDA by Q4 2009?

[Zack]

Not making any predictions on share price but the company is focused on trying to sustain this growth. that's why they shed the slower growth biz

[theman]

Hello Zack,

why would you want to invest in a company(VRNT.PK) when the founder runs away? Doesn't that prove his guilt!

Honest question, don't you think?

Thanks.

[Zack]

He may very well be guilty but the business seems to be rocking and rolling.