Can SourceForge Turn Things Around?

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Maybe it just sags
like a heavy load.
Or does it explode?

-- "A Dream Deferred," Langston Hughes

That's the question right now for online gift store owner and high-tech media maven SourceForge (Nasdaq: LNUX). The company missed Wall Street's earnings estimates for the fifth time in seven quarters, along with reporting a very uninspiring sales performance. So where does SourceForge go from here?

The open-source software market is a multibillion dollar opportunity with an outside chance to eventually become the way to run a software development project. SourceForge runs a well-regarded development service that helps companies track and manage their projects, creating a central point for sprawling projects with developers working around the globe. But the idea is still in its infancy, and has yet to gain serious traction with the corporate IT directors of the world. Most of the growth is still in the road ahead.

Despite adding a slew of high-caliber advertisers like Akamai Technologies (Nasdaq: AKAM) and NetApp (Nasdaq: NTAP), SourceForge's online media division reported nearly flat sales over last year (1% growth) but 58% higher cost of sales. That's not good for the profit margins, and you have to wonder why some of the old advertisers didn't come back for more. There's the heavy load for you.

Overall, revenue grew by 15% year over year. That's disappointing after a string of sales growth figures in the upper 20% range, and even more so when you consider the company's heavy investment in sales and marketing recently. Over the past three quarters, SourceForge has increased its sales and marketing spending by 38%. In the end, the company swung to a loss of $0.01 per share from last year's GAAP profit of $0.09 per share.

Management put a positive spin on all of this, noting that this was a sales record for the media segment and the highest non-holiday revenue ever recorded by the e-commerce folks. CEO Ali Jenab also said that the company is "starting to see the results of the investments we have made in sales and marketing and the data center."

SourceForge is an important part of the burgeoning open-source ecosystem by way of its eponymous coding resource and popular tech news sites like Slashdot and BetaNews. It's troubling to see such a strong portfolio of properties growing much slower than Red Hat (NYSE: RHT), another business centered on the open source credo, or the open platform division of Novell (Nasdaq: NOVL).

I don't see any great returns from the sales investment yet, in spite of Jenab's assertions to the contrary. Thanks to a generous $45 million cash balance and little debt, SourceForge isn't exactly in trouble. But investors are losing patience with the sales growth rate and vague promises of improvements that never quite seem to materialize, and the stock has crashed hard in the past year. Will it explode?

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