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Like so many other social media and technology related IPOs from 2011 and early 2012, Jive Software (NASDAQ:JIVE) quickly became very overpriced as the stock soared to $28. The market had huge expectations that far outweighed anything the company could produce. Even beating or meeting all three earnings reports since going public haven't been enough to keep the stock price at those highs.

The company is a leading global social business software company. Recently, the stock sold off 22% after reporting Q2 numbers that were mostly in line, while revenue guidance was at the low end of expectations. A stock trading at nearly 10x revenue has to increase guidance in order to sustain that valuation.

Q2 2012 Highlights

The company reported the following highlights for Q2 2012:

  • 2Q total revenue of $27.0 million, up 51% year-over-year
  • 2Q total billings of $33.7 million, up 41% year-over-year
  • 2Q cash flow generated from operations was $1.1 million
  • Non-GAAP loss from operations was $6.7 million, compared to a non-GAAP loss from operations of $8.3 million for the second quarter of 2011.

A key figure for this software company is the total billings that came in at $33.7M showing 41% growth over last year. Also, importantly, cash flow was a positive $1.1M, though free cash flow was negative due to $2.5M in capex. The company has a strong cash balance of $176M, so a slight burn of cash isn't a huge short-term issue.

Financial Outlook

The company reported the following financial outlook:

  • Third Quarter 2012 Guidance: Total revenue is expected to be in the range of $28.0 million to $29.0 million. Non-GAAP loss from operations is expected to be in the range of $6.0 million to $7.0 million. Non-GAAP loss per share is expected to be in the range of $0.10 to $0.12 based on approximately 62.3 million weighted-average diluted shares outstanding.
  • Full Year 2012 Guidance: Total revenue is expected to be in the range of $110.0 million to $113.5 million. Non-GAAP loss from operations is expected to be in the range of $22.0 million to $24.0 million. Non-GAAP loss per share is expected to be in the range of $0.38 to $0.42 based on approximately 62.2 million weighted-average diluted shares outstanding. Free cash flow is expected to be in the range of ($5.0) million to ($7.0) million.

The outlook remained equal to the previous expectations of the company, but the market expected much more in order to sustain the IPO and Yammer buyout hype. Ultimately the 45% revenue growth for 2012 will be the key focus of investors down the road.

Yammer Buyout

Back on June 25th, Microsoft (NASDAQ:MSFT) bought smaller competitor Yammer for $1.2B in cash. Naturally this valuation makes the current market cap of Jive at $957M as attractive to speculators. The stock jumped from below $15 all the way to $22 on the news.

AllThingsD had an interesting view on the buyout of Yammer. According to Arik Hesseldahl, Yammer announced 5M enterprise users though the key is that it only has 1M paying users.

On the Jive earnings call, the CEO had an interesting opinion on the Yammer purchase by Microsoft:

For the last 5 years, customers have heard claims from Microsoft that SharePoint was a social business platform. This was far from the truth, and many customers spent millions of dollars finding this out the hard way. Their acquisition of Yammer is further proof that SharePoint is not a social business platform. Unfortunately, for Microsoft, Yammer is essentially a lightweight activity stream with micro-blogging capabilities. It is not a comprehensive social business platform. They were years away from delivering what we had in Jive 5, and even further away from the significant advancements we made in our next-generation cloud platform launched during the second quarter of this year.

Those are very bold words that could either motivate customers to remain with Jive or alienate a powerhouse is the enterprise software area.

Conclusion

Jive remains a stock with huge potential and years of fast growth ahead. The key though is that price ultimately matters. Per Barron's blog, Baird was very constructive on the stock last week. Using metrics that compare a stock to an industry that is equally overpriced isn't always ideal.

In our opinion, Jive remains a stock that needs to grow into the existing valuation. Not to mention that just because Microsoft overpaid for Yammer doesn't mean that somebody else will pay up for Jive. That game should be left to speculators and not investors.

As 2013 moves into the markets focus and Jive still maintains the existing growth plans and stock price, the stock might just be a buy at that point. Until then, the inclination is to just watch safely from the sidelines.

Disclaimer: Please consult your financial advisor before making any investment decisions.

Source: Jive Software's Social Business Party Delayed