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Takeaway: Recent and updated findings on CALD, which remains a Best Idea Short.

  • Bullish: The Street is giving Callidus an easy glide path for attaining 2H17 revenue estimates, with expectations set at m-s-d% H/H revenue growth for CALD versus typical d-d% H/H growth in 5 of the last 7 years. On fundamentals, the slower topline expectations in 2H could be driven by expectations for slower customer growth y/y, but…then why would they all keep their Buy ratings (all of them)? We are guessing it is the old-school ‘wink-wink’ keep the bar low on the stocks we like rather than model what we intellectually believe. OK, we will take the challenge on that side of things.
  • Bearish: While a topline beat in 2H17 may be a foregone conclusion, no one is modeling the incremental costs from absorbing three acquisitions since May, nor the drain on cash from more M&A.

CALD | Bullish & Bearish Into Earnings - chart1

  • Bullish: Some recent surveys in SPM highlighted more true believers in the Commissions product than we would have believed based on the slow revenue growth.
    • Is this because of churn – i.e. since they turn over their customer base somewhat, it is always possible to find new, true believers? Callidus has moved the goalposts several times on the question of churn and retention, basically telling investors now that they retain north of 90% of enterprise customers, versus previously telling us they retain north of 90% of total customers. What % of customers are “enterprise”? Is that also a moving definition?
  • Bearish: We have been reading increasing commentary about the lack of IT services knowhow at Callidus, with internal and external sources publicly highlighting difficult customer integrations. Callidus will try to outsource more of this effort, but, if your own team can’t manage to make the software work, why would an external team have more luck?
  • Bearish: Litmos (CALD's Learning Management System solution) remains among the most popular products in its field (G2 Crowd, Gartner, Google Trends). LMS has been a great seller for Callidus, and a standout success from its M&A program. The problem? It is a high-turns business, not at all like cloud brethren selling SaaS software products that are adopted as a standard within enterprises for 5-25 years. The learning management software industry is also CALD’s most competitively intense business. Put it this way, companies with 3-6 month terms on customer engagement who face an intense flywheel of competition (see chart below) do not get cloud standard 6x EV/S multiples.
  • Bearish: Our recent conversations with industry competition indicate that Salesforce is pushing harder for business in the CPQ space, leveraging the SteelBrick acquisition they completed in 2015. Who is the leader in the market that Salesforce is competing against? Not Callidus, say participants, but Apttus. Where be Callidus?

CALD | Bullish & Bearish Into Earnings - chart2

Net: Seems like Callidus should be ok to keep the engine running in 2H on the same dynamics of beat topline, ugly everything else unless they non-gaapify some more expense. And seems they have to keep that M&A flywheel going until they find something that sells. Our recommendation: Callidus should enter the TOaaS (toaster-oven as a service) market and pair it with their AI offering (a clock to indicate when the toast is done). Innovation is everywhere.

The wheels fall off when that next deal (think graph DBaaS or ASC606 software) doesn’t really up-sell all that well, and CALD is forced to go bigger on their M&A game, drain the cash on the balance sheet, and hit the ATM machine (equity raise) again.

Why does a mature software company, already on the other side of a transition to SaaS, struggle to generate FCF?

For more information on our CALD Short thesis, please view our Black Book presentation (9/25/2017) HERE