This morning Callidus announced the acquisition of Learning Seat, an Australian LMS company specializing in compliance training courses, for $26.4m in cash. CALD will add Learning Seat to its Litmos Learning Platform, which is hands-down the company’s fastest growing product category. Learning Seat is the biggest acquisition in the company’s history and brings with it ~500 customers and 700K users. In light of the fact that Callidus revenue is mostly US based (~80%), and that Learning Seat is based in Australia, we suspect that the vast majority of Learning Seat’s customers will be net new additions to Callidus.
The CEO of CALD didn’t say this but we are going to paraphrase their acquisition strategy here:
‘Well, we try to buy as much stuff as we can and then incentivize our sales team as much as possible to sell it – because let’s face it they are the big dog at our firm [he actually has said that part] and who cares about the boring engineers in R&D, anyway. At Callidus, we buy as much stuff as we can, pay the sales team through the nose to force it down customer throats, and we keep buying hoping something will hit. A lot of this stuff doesn’t hit and then we do nothing with it. Those products become something like the walking dead code, half-living inside Callidus. But when we do find a winner we go whole hog. We call these the "Tesla-Finders," because they enable us to reward ourselves with enormous stock options and buy new cars. Mostly Teslas.’
Minus the accent, this is kind of a fair assessment of what CALD’s CEO has communicated to the Street either in words or in actions.
Let us give you some tighter data around the subject.
- Acquires RevSym (ASC606 software company) in May…talks about it for a brief moment in time, and let’s assume that one is gone forever, as data indicates it is DOA
- Acquires Graph DB-AAS company OrientDB in September. Then AWS launches Graph DB-AAS. In light of some future hoped-for revenue of $1-2m at the time of the deal (our est. based on purchase price), we will assume CALD will not be able to go toe to toe with AWS for a long period of time. Moving on to the next!
- Communicates to Street on 3Q17 call that the new M&A strategy is more or less ‘anything goes’
- “The truth is, with OrientDB, we acquired it because it was an underpinning technology that we've been using for over a year, so we're very familiar with it. But now we see a new business opportunity, it has to be provided with the right sales and marketing. We can do that within our envelope, we believe can do that prudently from within our envelope. It doesn't have to do a lot to be a rip-roaring success, to be honest.”
- Establishes 2018 revenue guidance above the Street in Nov of 2017 when all the company has is 6-months of backlog on its books and that backlog $ amount points to ~$280m in revenue next year…hence he needs to buy more companies to fill the hole
AND – what is the revenue plan to get to ~$300m in 2018 revenue from ~$250m this year?
- ~$5m incremental revenue from the core ICM business (growing 3-5%)
- Less than $5m from the CPQ business as Apttus & CRM (Steelbrick) fulfill more of the demand
- $10-15m from LMOS if they can sustain that growth rate in a highly competitive, high churn market
- Sub-$5m from Other Products (x ICM, LMOS, CPQ)
- ~$10m from incremental service revenue
Nets to ~$285m from $250m in 2017. He needs M&A to fill in the rest:
- OrientDB = $1-2mn annualized, ~$1m incremental
- RevSym = $0-1m, negligible
- Learning Seat = ~$8m (our estimate)
- Learning Heroes = ~$2m incremental (total $5m+ in 2017 for the product)
Net – he is still about $5-10m shy of 2018 revenue, but he has plenty of time to buy more stuff and fill in the holes.
- Anything wrong with that? No.
- Is this the kind of company that should trade at 5-6x EV/S and over 100x trailing FCF? No.
- Will balance sheet cash deteriorate meaningfully over the next year as they pursue M&A? Yes.
- Do any of these products make the core stronger or is it just more stuff to sell? The latter.
- Will they need to do another equity raise (following raises in 2015 + 2016) to fund more M&A to reach their P+L goals for 2019? Yes.
- Is there an ROI in this strategy? No.
Watch it unravel.
