Is SupportSoft a New Geek Squad?

Includes: BBY, SPRT
by: Envoy Global Research

Despite the negative reaction of the stock market, I believe that the new management team at SupportSoft (NASDAQ:SPRT) is moving in the right direction with their new, albeit admittingly still somewhat underdeveloped, direct-to-consumer strategy discussed by CEO Joshua Pickus in the company's latest conference call. I encourage interested investors to listen to the call for an excellent overview of the company's new business direction.

Essentially, the new plan is an attempt to leverage SupportSoft's enterprise software assets to create a mass market, customer-support business that is somewhat similar to The Geek Squad, a nearly $1 billion unit of Best Buy (NYSE:BBY). The idea still has some small flaws, but I am pleased that the company is opting to invest a little bit of money on this type of growth path, rather than investing more heavily on the enterprise side. As I mentioned in my first writeup of SupportSoft, I do not believe that the enterprise software business is very attractive for investors long-term, given the reliance on large one-time sales and in the case of SupportSoft a limited base of potential customers. However, a successful mass market technical business, though risky to start up and tricky to scale, offers potentially huge growth opportunities.

Low Valuation of SupportSoft Still Provides A Margin of Safety

Of course, it will probably take time, money and several mistakes, before this new consumer endeavor is better defined and begins to generate meaningful revenue and profits. However, with an enterprise valuation of about of $45 million (I am assuming a cash burn of $10 million over the next year due to investments in the new business), and an existing enterprise software business that can generate $30 million to $40 million in annual revenue, investors can have patience for the consumer business to develop, as they are in fact paying virtually nothing for this new business, which to my mind has much more potential than the enterprise business, especially as it pertains to future share price gains. In other words, for little risk and little capital outlay (the company is committing a mere $10 million to launch the new business), there is the potential to own a piece of what could become a large business that can greatly increase the current market value of the company, even assuming modest success. Can Add Significant Value to SupportSoft

In fact, I think that management should be slightly more aggressive in using their large cash hoard (currently north of $120 million) to gain traction in the attractive consumer market, particularly as it pertains to what could become an extremely valuable consumer website property: In theory, I think that the company could create a unique and unparreleled portal-like customer support center for many different broadband products and services at It may sound dreamy, but I think SupportSoft has the physical, economic, and intangible assets, to actually execute on this type of plan. The value of the company could increase significantly if they can develop this type of portal for consumers.

Existing Business Models and Partnership Launch Strategy Increase the Odds of Success

In addition to the above thoughts, I think my bullishness for a direct-to-consumer business is justified for two main reasons:

Firstly, there is clearly a huge consumer need for technical help of the kind that SupportSoft is providing and the demand for this type of support will increase dramatically in the coming years, as consumers greatly increase their use of the Internet via computers and all types of gadgets. More importantly though, the success of the Geek Squad appears to prove that consumers will pay top-dollar for this kind of support (although of course SupportSoft is not going to be doing the exact same thing as the Geek Squad). The Geek Squad also provides aspects of a proven business model which SupportSoft can attempt to replicate as they develop their own direct-to-consumer business.

Secondly, SupportSoft clearly has the technical skills, market know-how, and partners to get this businesss up and running quickly and with minimal capital investments. In fact, in the worst case, the company seemingly will be risking a mere $10 million, or less than 10% of their total cash position, to get this business started. Additionally, SupportSoft will not be launching this service via an expensive direct-to-consumer marketing campaign. Instead, the company will start the service in partnership with an as of yet unnamed company with an existing large customer base who is in need of more specialized customer support. SupportSoft also supposedly has at least two other partners that are in advanced talks with the company about launching the service for their respective customer bases.

Risk-Reward is Still Very Favorable

In sum, despite the fact that every new business entails risks, I think that SupportSoft's new plan has excellent potential and in the worst case will consume only a small portion of the company's available cash. On the downside, should this plan fail to work, it seems clear that the company would be put up for sale and could justify a sales price of $5 to $6 assuming continued stabilization of the enterprise revenue stream and a return to profitability. On the upside, if SupportSoft can show even modest success with a direct-to-consumer support business, I think the stock could more than triple in price in the next several years.

SPRT 1-yr Chart

I, Yehuda Fruchter, own shares in the stock mentioned in this report. In addition, this report includes market analysis. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets or in any particular stock. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise. Yehuda Fruchter maintains no legal responsibility to update this report or his holdings in the stock mentioned in this report.