Sometimes companies have perfectly good products and customer prospects, but management just can't get the mix right. Such is the case with Workstream Inc. (WSTM). The company provides "workforce management solutions and software that help manage the entire employee lifecycle--from recruitment to retirement." The company has separate software offerings for both large and small enterprises. Workstream claims a 96% customer retention rate, which is almost unheard of. L'Oreal, the American Red Cross, Chevron, Johnson Controls, and Best Buy are among the company's customers. Workstream has also received a number of awards for its programs.
So, what does the company do? It has a mediocre quarter and retains a banker to look at strategic alternatives. That is, it puts the company up for sale.
For the company's fiscal third quarter (February 28), revenues were down slightly from the year before to $6,735,000. The immediately previous quarter revenue number was $7,200,000. The company had an EBITDA loss of $1,862,000.
During the quarter, the company also completed the acquisition of Exxceed, Inc. which brought an additional 40 new customers to the combined entity.
The silver lining? The CFO said that previously delayed customer projects will have a positive near-term impact on revenue.
Up until recently, the company has experienced very solid growth. The fiscal year ending last May 31 had revenue of $28.6 million up from $17.1 million in the previous year. But, G&A costs went from $14.1 million to $25 million over the same period. Much of this was for costs from several acquired companies, but it should have dropped by now. This is a software company. The G&A cost staying in place for this many quarters is bad management.
As Wedbush Morgan analyst Michael Nemeroff said last week "we remain positive about the growth of the human capital management software sector". Good point. Software which helps monitor employee performance that once had to be done strictly by people in HR departments is a valuable tool.
With $6.3 million in cash, Workstream is going to have to watch its pennies (in Canadian currency in this case). But, hiring a banker is generally a board's way of saying that management cannot get the company going in the right direction. With Workstream's cost structure, customer list and solid product line, it is hard to see why this is a bad business.
Based on the premium that software companies fetch in M&A transactions, the board is unlikely to get more than $2 a share for the company, which is a far cry from the $4.43 where it trade a year ago.
Fix the company. Bring in new management. It's the only possible way back to the 52 week high.
Douglas A. McIntyre is the former Editor-in-Chief and Publisher of Financial World Magazine. He was also the president of Switchboard.com when it was the 10th most visited website in the world, according to MediaMetrix. He has also been chief executive of FutureSource, LLC and On2 Technologies, Inc. and has served on the boards of TheStreet.com and Edgar Online. He does not own securities in companies he writes about.