Over the last couple of years numerous software stocks have gone through the grueling transition to the cloud. In most cases, the stocks have suffered as the company takes a hit from the lower current quarter revenue and higher expenses. A perpetual license that previously went directly to revenue during the quarter of the signed contract now becomes a subscription recorded over two to three years of monthly revenue.
One software firm that has been impacted is ClickSoftware (NASDAQ:CKSW) that provides automated mobile workforce management and optimization solutions for such industries as utilities, telecom, and home security.
In several cases, stocks that appeared headed for the grave quickly rebound to previous highs as the market becomes more comfortable that the temporary setback is in fact only short-term. Remember that the shift to the cloud has huge long-term benefits for a company that now obtains stable monthly revenues going forward. In fact, the market is infatuated with cloud software stocks providing huge multiples for the strong growth potential, but the question is whether ClickSoftware can join that group.
Heading Into The Cloud
ClickSoftware has been working on the transition to the cloud over the last couple of years, but it continues to run into customers that are suddenly transitioning faster than expected. The recent quarter actually had lower quarterly license revenue than last year even as the company continues to see higher customer interest. Unfortunately though, the main customer desire is to start with a smaller initial deployment size over a short period of time and follow that up with a solution for the full workforce.
The company has several offerings for the cloud including an Enterprise solution that includes the following offerings: ClickSchedule, ClickMobile, ClickRoster, ClickContact, and ClickAnalyze. It also offers a ClickExpress out-of-the-box solution for small and medium service businesses that have a limited and quick resource implementation. The remaining option, ClickWorkforce, provides a mobile workforce management solution optimized for scheduling and mobility in partnership with Force.com from Salesforce.com (NYSE:CRM).
The solution provides the following platform guarantees:
Our cloud offering uses Amazon Web Services (AWS) as the platform for our cloud services giving you the opportunity to replace up-front capital infrastructure expenses with low and predictable variable costs. With ClickSoftware, you get the same powerful mobile workforce management solution with the added benefits of a reliable AWS cloud implementation:
- Elastic - Enables you to increase or decrease capacity in real-time, not hours or days.
- Scalable - Your application can automatically scale itself up and down depending on its needs
- Control - You have a complete view of your application using the Cloud Operational Dashboard
- Reliable - We offer a highly reliable environment where replacement instances can be rapidly and predictably commissioned plus a Service Level Agreement commitment of 99.95% availability for each Amazon Region.
- Secure - We provide security and robust networking functionality for your computer resources
Considering the move to mobile at all enterprise levels, the mobile focus of the products makes in an ideal solution for the BYOD environment. The following slide from an investor presentation highlights the steps that can be undertaken by a workforce using the mobile solution:
A big issue for investors is to grasp the potential in the workforce management service sector. After years of 20% growth, the company is only expected to reach a revenue base of $110 million. The company lists a VDC Research estimate of a mobile worker population reaching 1.2 billion workers by next year. The following slide lists several sectors it focuses on with market potentials in the billions:
If a company was looking for a move that would crater it to multi-year lows, than nothing does that better than announcing that a C level executive is leaving the company. Further take it to the next level of a Co-CEO that has only been in that position for a couple of months and the stock is set up for a disaster. Once a company has reported disappointing results any executive departures only tends to signal further weakness to the market.
At the beginning of September, the company announced that Co-CEO, Hannan Carmeli, had resigned from the position that he obtained in June 2013. Mr. Carmeli joined the company in 1996 and the Board claims that having two leaders in the top position wasn't practical. One has to assume that the results since June and especially in August were very disappointing; otherwise, the move wouldn't have been needed. Remember that companies aren't quick to change processes that are working. The market is rightfully expecting another miss during Q3 that ends in a couple of weeks.
Other Stocks To Double Back
The note worthy part about this story is that it's very common for stocks to lose 50% such as ClickSoftware has done since peaking above $12 back in early 2012 and eventually doubling back to those previous highs. In fact, some of these examples provide for the stock to move on to higher levels after recovering from the disappointing situation.
In the cloud software sector, both Constant Contact (NASDAQ:CTCT) and ServiceSource (NASDAQ:SREV) have seen huge rebounds this year. Outside of the cloud software sector, iRobot (NASDAQ:IRBT) bounced back from a dramatic setback to reclaim previous highs. Generally the stock turns around due to facts changing on the future prospects that the market finally realizes with the basic situation usually occurring when earnings estimates hit a trough and rebound solidly.
Below are samples of what was going on with these firms when the stocks hit bottom:
Constant Contact: the developer of online engagement marketing tools reported weak guidance in October 2012 that sent the stock crashing below $12 from a previous level of over $16 and a yearly high of $32. The company disappointed the market with new customer additions that were below expectations with only 35,000 new customers compared to 45,000 in the prior year period. Soon after, the stock hit bottom and the recent earnings numbers have exceeded estimates helping push the stock back to over $21.
iRobot: at the end of October 2012, the robotics maker reported earnings and revenue numbers that were virtually flat with the prior year. The company discussed further restructuring and the stock slumped to nearly $16 from a previous week of trading near $24 and hitting a high of $40 near the start of the year. The company faced huge cutbacks from the defense sector that masked strength in the home robots sector. The stock eventually hit bottom a few weeks later and has soared to again reclaim $40 by the end of June.
ServiceSource: a leader in recurring revenue management, the company reported disappointing Q3 numbers in early November 2012 sending the stock crashing to only $4 after trading near $9 prior to the numbers. The stock had spent a part of early 2012 in the $18 range. The company discussed issues with converting customers to revenue and timing issues with new customers. After providing weak Q412 guidance, the company ended up smashing the earnings estimates by earning $0.05 versus the $0.01 estimate. The stock has returned all the way to near $13.
Ironically, all three examples included stocks that slumped based on Q3 results last year. Possibly the situation was more the environment for technology customers back during that time period, but in all three cases investors dumped the stocks due to depressed outlooks to only watch the stock soar. Will ClickSoftware be next after plunging below $6 following the Co-CEO departure?
If an investor pulls up the chart of any of those other stocks, they'll see the stock plunge to new lows that eventually led to the stock bottoming out in the next month at lower levels. If ClickSoftware follows that trend, it might bottom out around mid-October.
Stock Chart - 2 Years
When an executive leaves a company, outsiders have an impossible task of determining whether something more is insinuated by the departure. In this case with ClickSoftware, the move is strange and could be an indication that the Co-CEO setup wasn't working, but it could be an even bigger sign that results are only getting worse and could be dismal in Q3.
Outside of the executive change, the company has some interesting prospects for converting customers to the cloud. As the other examples highlight, a company can appear down and out and end up rebounding strong in a flash. The CEO provided an interesting hint on the quarterly call that the amount of deals and orders are increasing, but the conversion to the cloud is leading to smaller initial trial type deals. With $54 million in cash and expected positive earnings for the year, ClickSoftware as all the makings of a stock that will rebound to reclaim previous highs once the smoke settles in the next month. The stock could easily double on a rebound.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.