Callidus Software Increases Sales but Misses Estimates on Earnings

Callidus Software (Nasdaq: CALD  ) reported earnings on May 2. Here are the numbers you need to know.

The 10-second takeaway
For the quarter ended March 31 (Q1), Callidus Software missed estimates on revenues and missed expectations on earnings per share.

Compared to the prior-year quarter, revenue improved and GAAP loss per share grew.

Gross margins increased, operating margins dropped, net margins dropped.

Revenue details
Callidus Software booked revenue of $22.0 million. The six analysts polled by S&P Capital IQ predicted sales of $22.6 million on the same basis. GAAP reported sales were 11% higher than the prior-year quarter's $19.8 million.

Source: S&P Capital IQ. Quarterly periods. Dollar amounts in millions. Non-GAAP figures may vary to maintain comparability with estimates.

EPS details
EPS came in at -$0.03. The six earnings estimates compiled by S&P Capital IQ predicted -$0.02 per share. GAAP EPS were -$0.20 for Q1 compared to -$0.07 per share for the prior-year quarter.

Source: S&P Capital IQ. Quarterly periods. Non-GAAP figures may vary to maintain comparability with estimates.

Margin details
For the quarter, gross margin was 45.7%, 610 basis points better than the prior-year quarter. Operating margin was -22.2%, 1,020 basis points worse than the prior-year quarter. Net margin was -31.7%, 1,940 basis points worse than the prior-year quarter.

Looking ahead
Next quarter's average estimate for revenue is $23.2 million. On the bottom line, the average EPS estimate is $0.00.

Next year's average estimate for revenue is $95.7 million. The average EPS estimate is $0.04.

Investor sentiment
The stock has a two-star rating (out of five) at Motley Fool CAPS, with 59 members out of 63 rating the stock outperform, and four members rating it underperform. Among 14 CAPS All-Star picks (recommendations by the highest-ranked CAPS members), 13 give Callidus Software a green thumbs-up, and one give it a red thumbs-down.

Of Wall Street recommendations tracked by S&P Capital IQ, the average opinion on Callidus Software is outperform, with an average price target of $9.00.

Over the decades, small-cap stocks, like Callidus Software have provided market-beating returns, provided they're value priced and have solid businesses. Read about a pair of companies with a lock on their markets in "Too Small to Fail: Two Small Caps the Government Won't Let Go Broke." Click here for instant access to this free report.

Seth Jayson had no position in any company mentioned here at the time of publication. You can view his stock holdings here. He is co-advisor of Motley Fool Hidden Gems, which provides new small-cap ideas every month, backed by a real-money portfolio. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On May 29, 2012, at 7:39 PM, mastiffler wrote:

    Seth, your synopsis delivered as promise, hitting all the key indicators in the latest Callidus earnings report. As the founder of Synygy, the largest and longest-standing sales performance management (SPM) company and an observer of the competitive landscape for more than two decades, perhaps I can add some insight with a closer look at what was, for me at least, a surprise: the dramatic drop in the stock price of Callidus (NASDAQ: CALD), which fell 40% from $8.02 to $4.79 between May 1 and May 17, 2012.

    PRELUDE: A STRATEGIC SHIFT

    Callidus Software appeared to have begun a rather significant shift in its strategy and direction about a year ago when the company borrowed tens of millions of dollars, began to acquire numerous small “cloud computing” companies, and then changed its business name to “CallidusCloud.”

    With these actions, the company seemed to be shifting its positioning away from its historic focus on sales compensation management and toward being a much broader cloud-computing vendor with a growing set of somewhat-related products.

    The shift in positioning appears to be what many refer to as a roll-up strategy, which involves combining companies that share a common characteristic. In this case, the commonality seems to be that they are all software companies operating in the cloud and are all charging a recurring subscription fee for their software.

    Although each of the acquired products operates (for the most part) independently, the goal of a roll-up strategy is usually to increase the value of the company as a result of perceived cross-selling opportunities between the products.

    INVESTOR RISK

    If accomplished correctly, such a roll-up strategy could lead to a great return for investors. However, investors seem to be skeptical that the company can execute its strategy, and when investors sense risk, a company’s stock price falls. But what are the possible risks that caused CallidusCloud stock to precipitously drop 40%? In my view, there are three types of risks: financial, operational, and customer.

    Financial Risks

    Financial risks include the potential for continued losses, the impact on profitability of paying interest on its debt, and the ability to pay back its debt, all of which Callidus recognizes in its SEC filings.

    According to these filings, since its founding, CallidusCloud has amassed cumulative losses of $217 million (which is an astonishing ten times its quarterly revenue). The company’s losses, including interest expense, have grown in each of the past four quarters, with the loss in the first quarter of 2012 alone reaching $7.1 million (equal to -32% of revenue).

    In addition, the company has taken on over $60 million in debt (which is a hefty 4.5 times equity in comparison to the average of 0.5 across all technology companies).

    Operational Risks

    Operational risks include the ability to integrate all of the acquired products and to build a larger, more costly sales force to exploit cross-selling opportunities, which would, at least for a few quarters, decrease the chances of reversing the company’s large losses.

    Another operational risk is lower employee morale and higher turnover due to the stock price drop combined with the company’s considerable use of stock options to motivate its executives and employees.

    Customer Risks

    There also is the potential for two important customer-oriented risks that might impact the company’s success: loss of core focus and lack of services.

    These particular risks are rooted in the complex nature of the SPM business and what it takes to successfully deliver SPM solutions. As a result, these risks are ones that most financial analysts may not fully understand or appreciate, and yet these customer-oriented risks may be quite significant.

    LOSS OF CORE FOCUS

    From my observations of the SPM market and the new positioning of CallidusCloud, it looks like the company has lost its focus on what has historically been its core business and which still represents 90% of its revenue: sales compensation management.

    This is quite critical because the essential component of SPM is the ability to link pay to performance. Sales compensation management is the core of SPM and without linking pay to performance there is no SPM.

    Yet, as described on the company’s website, the new positioning of CallidusCloud shows “sales commissions” as merely one of 15 application areas. And as a further indication of this waning focus, on May 7, 2012, during his keynote address at the company's user conference, which included a demo of the CallidusCloud product portfolio, Callidus CEO Leslie Stretch made nearly no mention of sales commission management.

    In another example, three of the primary application areas of CallidusCloud (hiring, marketing, and learning) are broadly applicable outside of the sales arena. This in itself has the potential to cause confusion among the traditional purchasers of SPM solutions.

    If a lack of core focus causes dilution of software development efforts, the future of its core offering could be impacted. And if customers begin to perceive a loss of core focus on sales compensation management or lack of clarity in positioning with respect to the sales organization, there is a potential risk to the company’s success.

    LACK OF SERVICES

    For many quarters, in its earnings calls for investors, one repeated theme has been the company’s desire to have a high level of recurring revenue relative to total revenue. Another theme is a desire for higher overall gross margins. In the SPM business, non-recurring revenue consists primarily of high-margin upfront software licenses and low-margin implementation service fees.

    During the Callidus earnings call on May 3, 2012, the company’s CEO made it very clear what he thought about services when he stated: “The core focus is to move the product and…we don't want to staff up a great, big consulting monster to do that. We’ve done that before."

    A look at the CallidusCloud financial data over the past five years reveals that the company’s services revenue is down more than 70% from its peak. At the same time, reducing services seems to have directly contributed to improvement of overall gross margins. That’s because its gross margin on services has historically been negative and more recently has been only nine percent.

    (Note that as of the first quarter of 2012, investors may no longer be able to determine the actual gross margin on services because the financial filings now group the low-margin services with the high-margin software licenses.)

    The focus on selling high-margin, recurring-revenue products and minimizing low-margin services revenue seems to have driven the choice of CallidusCloud to reduce its own professional services staff and to increasingly rely on partners to service its clients.

    However, a reliance on partners (even ones with well-known brand names) has the potential to create risks for the company if the desire to push product outweighs the importance of providing a complete solution—one that includes both software and services.

    That’s because specialized knowledge and experience are required to implement and maintain SPM software as data, commission plans, reports, workflows, and other business processes change over time. As a result, customers often require that an SPM solution include software, implementation services, and optional managed services from a single vendor—to preempt the finger pointing that can occur with a multi-vendor approach.

    So, if CallidusCloud wants to be just a product company, the lack of a meaningful services offering could be a significant risk.

    CONCLUSION

    The 40% drop in the Callidus stock price might be reversed if investors feel that the financial, operational, and customer risks are being addressed. (For me, this will be evidenced when the company achieves both solid, double-digit revenue growth and profitability, as in income before taxes and not the non-GAAP numbers that the company puts in its press releases.)

    With the risks facing the company, possible outcomes are many. Perhaps CallidusCloud will unwind its strategy and sell off its acquired products. Perhaps it will keep growing and continue to add products to its portfolio. Or perhaps investors will hit the jackpot and CallidusCloud itself will be acquired for a substantial gain.

    The real challenge for CallidusCloud may be the very thing it added to its name—the Cloud. That’s because, in today’s world, cloud-based technology is merely the beginning of solving SPM problems. In my experience, it is clearly an enabler of success, but companies need a lot more than just the cloud to effectively optimize their sales compensation management and related SPM business processes.

    To be successful, companies need to get “above the cloud” by sourcing a business platform that combines:

    • technology enablement through software and software hosting services;

    • standards and best practices through implementation services; and

    • continuous improvement through ongoing managed services.

    In my view, success for Callidus boils down to two things: maintaining a focus on its core business and providing the services that are essential to delivering and maintaining a comprehensive and truly effective SPM solution over time. Rather than dismiss becoming a big consulting monster, perhaps that’s the very thing that it needs to embrace.

    --Mark

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