Yecch. If you like guidance raises in the future, but decelerating deferred revenue and billings growth in the present, tougher comps on the road forward, constant d-d% growth in diluted share count, FCF spent 100% on M&A to keep the engine running, and a company that has unconsolidated products and code bases chasing whatever is selling in the current quarter without roadmaps and code flexibility on the stuff selling last quarter…then maybe this is for you. Oh, also, if you like mature software companies from the 1990s that have already completed the conversion to SaaS yet have difficulty generating cash…then this one is definitely for you.
Takeaways from this quarter’s earnings call:
- YTD FCF 100% offset by M&A, and part of FCF was from working capital gains that will reverse
- Deferred revenue growth decelerated
- Billings growth decelerated
- OPEX accelerated (either on the Q or LTM if you like their excuse)
- Slow customer growth (100 net new logos) that is largely inorganic (70+ from OrientDB) and no update on multi-product customer count (a typically proud point for mgt)
- Company implied that they have yet to cross-sell the acquired ASC 606 Accounting Software into an existing customer, which doesn’t help their claim that this product fits perfectly into the SPM suite.
- Diluted share count growth of 12% y/y
- All of this offset by the company raising the bar on revenue growth estimates for next year, presumably to keep the stock price moving higher while they back-fill the growth with more M&A in the next ~12 months
Why is this a problem?
- More bases of code
- More product unconsolidated into single base of code
- No product roadmap / flexibility
- Constant lurch to buy new product to fill in guidance to keep the stock going so DSO can grow d-d% on major rewards
- M&A strategy veering off core focus
How does it come apart?
- Accelerated expectation-setting from management to keep the stock going means they have to step up the M&A and drain the balance sheet faster
- End of on-premise to SaaS revenue booster
- Salesforce fighting to keep more adjacencies on their own platform – including CPQ, a core offering here, where CRM is challenging the current market leader…Apttus (i.e. not Callidus)
- Management will need bigger and more M&A that drains the balance sheet
Net: If we are wrong, then upside risk is $29 on 6x fwd EV/Revenue in line with SaaS peers. If we are right, downside risk is to $15 on 35x forward FCF (generously). Yikes.
Questions?
