My apologies as between traveling and other responsibilities I’ve been slow in putting together my thoughts on Q1.
CKSW’s inherently lumpy revenue recognition usually generates an “oops” quarter every 12 to 18 months. This is pattern is normal and always sends some investors panicking for the exits. While any plunge in share price is disconcerting, it is not unusual.
In the 7 years I’ve studied the company, it has never been permanent.
Regarding revenues, the company recognized only $21.8 million. While not a high enough run rate to hit guidance, they also added $4 million to backlog. This puts Q1 sales around $25.8 million… or a $103 million annual run rate. That hits guidance. Remember several deals, including “some big ones,” slipped into Q2. Adding any of those would put Q1 sales well above guidance.
I won’t waste time trying to predict how much revenue will be recognized in Q2, Q3 and Q4. Click is simultaneously building its sales and marketing teams, its distribution channels, its geographical reach (Latin America, Russia) and expanding its verticals. Between those four factors I will predict the 2012 trend for sales and revenue recognition will be up.
The Q1 drop in margins gave short term investors reason to panic. For long term investors, however, it is more likely a reason to smile.
Among the small group of microcaps I study, Moshe, Shmuel and Hannan have been the most consistently conservative, prudent and deliberate executives in planning and execution. On any “irrational exuberance” scale they rank near the bottom.
So why are these careful, conservative executives suddenly, to use Moshe’s phrase, “pushing the pedal to the metal?” and willing to sacrifice quarterly margins?
Last week in Palo Alto I stopped at an Apple store to see my first iPad3. A salesperson offered to demo the camera. He took a picture of his hand and watch. And then magnified it. Unbelievable. Perhaps five seconds later I decided to buy one.
iPhones, iPads and Androids are already game changers at the consumer level… and will soon be game changers at the enterprise level.
Consumers are no longer be satisfied with a legacy smartphone or tablet. Anyone doubting that should talk to a Nokia or RIMM executive. The same trend will hit enterprise service organizations where tens of millions of field reps and technicians still work every day with dinosaur devices or user interfaces. When technicians, supervisors and executives see the capabilities of an iPad 3 working with a next generation HTML5 operating system, I believe their response will be “wow” and “I want one.”
Click’s leadership team recognizes the “wow” potential of ClickMobile combined with the ClickAppStore in meeting this surging demand in the enterprise mobility market. Are they sacrificing short term margins to grab a leadership position in this niche? Yes. Would they do it if they were not highly confident in their product line, competitive position, staff and market position? No.
You wrote: "... I have owned other companies that provided a software product where revenues were recognized over the product life. Checkpoint security software is a good example (chkp) and what drove that stock back in the late 90's was an ever increasing backlog and license revenue recognition. If license revenues are always flat, what does that say??? It tells me cksw is making most of its money servicing existing customers which is fine, but you need new contracts to offset the old ones and new contracts to grow the business model. I dont see many announcements of new contracts either. Until that changes we are stuck in a range and right now the share price in my mind is not a compelling value. Will you lose money??? Probably not, but is it a screaming buy, no."
Well, I understand the point that you are driving at, but I think that it is incorrect.
First, license revenues are not flat for Click Software, but, rather, stable as percentage of total revenues (as revenues increases so does the license revenues.)
Second, being a supplier of highly customizable and configurable software to large enterprises is different than being an out-of-the-box commodity provider to enterprises, SMEs, and retail customers (as is, I think, Check Point Software.) The latter will indeed be seeing its license portion (and, presumably, backlog) going up as its product offering matures (until, of course, the point of the time when the company reaches the end of the lifecycle for its products or when maintenance revenues (which I think most companies account for as backlog) exceeds new revenues.)
Click Software's legacy products are by their very nature not out-of-the-box, and I doubt they will ever mature to a point where they will be. Whereas my enterprise's requirements for a firewall (whether in software or hardware form) is more or less identical to any other enterprise, a scheduler product would need to be integrated into my environment, customized to my needs, and configured to reflect my workflow, plant, and equipment - all of which are materially different than other enterprises.
So, I don't think that it is a reasonable expectation that the license ratio will got up markedly unless the mobility suites provides so much out-of-the-box license revenues as to effectively offset some of the legacy software's requirement for services (and corresponding revenues.)
In the cc Moshe mentioned seeing almost as many RFP opportunities for ClickMobile as with ClickSchedule. That is more than a trend… it is a seismic shift.
Click added 37 new employees in the first three months of 2012 and currently has 42 open positions on its careers page. Pedal to the metal in sales and marketing. The same in R&D. That aggressive investment ramps costs up front… exactly as Moshe and Shmuel outlined in previous conference calls. In this cc they acknowledged their ramp up has accelerated vs. the plan just three months ago.
For long term investorsthis aggressive ramp up in hiring is a very positive indicator… but only if one has confidence in the leadership team, staff and market opportunity. Any investor who should sell their shares anyway.
As pajacobson pointed out, the last panic in response to an “oops” quarter created a huge buying opportunity. At $9.20 per share Click’s dividend alone is roughly 3%. A return just to $12 will generate a 25%+ gain.
There may well be a major “uh oh” factor somewhere on Click’s radar screen that I am not aware of. But I didn’t see or hear any cause for panic Q1 financials or conference call comments. After factoring in the increased backlog, the Q1 results were solid and in my opinion, the continued aggressive hiring a positive indicator of both confidence and market opportunity.
In my opinion Click is in its strongest competitive position ever and has an extraordinary market opportunity. The key question is simply customer-by-customer execution.
Good luck to everyone.
Tbe problem I have is that the license revenue is mostly always disappoiting. The company makes most of its revenue servicing existing customers, not selling more software licenses. Software license revenue needs to grow in order for this stock to take off. My rule of thumb metric is taking the share price less tangilbe assets per share (now about 1.86) and dividing by eps. This has gone from about 13-14 a share down to seven in the past couple years. Right now we are around twelve with the recent downgrade in earnings estimates and reduced share price. Now click is just average in valuation to prior years. I have owned click in prior years and have no shares now. I will not be buying anything above nine.