For the past few years, the stock price of Callidus Software (NASDAQ:CALD) has treaded water, ranging from $3 to $4 per share. Although the maker of high-end compensation management software has seen some strength in its stock lately, that strength is likely to be short-lived.

In the second quarter, revenues were $17.7 million, a 40% increase from the same period a year ago. This looks good at first, but keep in mind that the second quarter of 2005 was particularly weak; the company generated only $1.29 million in new license business.

What's more, Callidus is still losing money. Its second-quarter net loss was $3.2 million, or $0.12 per share. This amount includes $1.4 million in stock option expenses. The cash burn rate is also particularly troublesome -- the business went through $3 million in the first quarter of 2006 and $4 million in the second quarter.

Callidus develops software for Global 2000 customers such as Aetna (NYSE:AET), Amgen (NASDAQ:AMGN), JPMorgan Chase (NYSE:JPM), and Wachovia (NYSE:WB). The software helps companies manage the complexities of compensation for sales forces, handling quotas, territories, commission grids, and customer satisfaction. The software even helps to analyze the effectiveness of incentive programs -- a valuable tool when you consider that proper incentives can help drive sales.

So what's the problem at Callidus? Increasingly, customers want Web-based products with affordable subscription models. This new model, known as on-demand software, has propelled the growth of companies like (NYSE:CRM) and NetSuite.

As for Callidus, it is still primarily a traditional software company. The software can easily cost several million dollars and take a year to implement. Given this, customers may instead opt to use alternatives, such as offerings from SAP (NYSE:SAP). True, SAP's compensation-management software may not be as good as Callidus'. However, if a company has already spent a large amount to install SAP, why not add this module (which is likely to be cheaper)?

There's also competition from Web-based upstarts such as Xactly. In an interview, that company's CEO, Christopher W. Cabrera, said, "Kudos to Callidus Software for figuring out that on-demand is the future of software, going so far as to mention 'on-demand' 28 times in this week's Q2 earnings call."

Simply put, it's tough for Callidus to get new business, as witnessed by its 4% decline in sequential revenue in the first quarter of 2006 and a 15% sequential decline in the second quarter. The company was able to compensate for the fall-off with service revenues -- but these have much lower margins.

In other words, unless the company can start to juice up new business, it will continue to burn its cash. That will likely keep the stock in the low $3 to $4 range for the foreseeable future.

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Fool contributor Tom Taulli does not own shares mentioned in this article. JPMorgan Chase is a Motley Fool Income Investor pick. The Fool has a disclosure policy.