I wouldn't say that the market's love affair with all things “cloud” or collaborative is over, but having the right buzzwords is no longer an express ticket to a high multiple. Due in part to self-inflicted wounds that management blames on execution and investor/analyst worries about competition, Jive Software (Nasdaq:JIVE) has dropped more than 10% over the past year and significantly underperformed its peer group.
It may be early to throw in the towel, though. The company's new sales approach, one based on establishing real-world value for clients, is still fresh and the company continues to have the opportunity to show that it can offer a better collaborative platform than less focused rivals like IBM (NYSE: IBM), Microsoft (Nasdaq:MSFT), and Salesforce.com (NYSE:CRM). Although Jive's shares don't look very cheap on a discounted cash flow basis, that's nothing new in the world of growing software companies and other methodologies suggest more upside.

SEE: Earnings: Quality Means Everything
It Doesn't Take Much When The Street Already Doubts
All things considered, Jive's second quarter results and third quarter guidance really weren't as terrible as the stock reaction would have suggested. Then again, given that Wall Street was already a little nervous about this name, it didn't take much to get the sell-off rolling.
Revenue rose 31% for the second quarter, which was pretty close to in line with analyst expectations. That said, billing growth of 24% was slightly below expectation and that was even with the inclusion of “ a few million” in early renewals that helped goose the number. More worrisome was the single-digit growth in new billings – something in the area of 6% to 7% by my calculations. 
Jive isn't really a margin story yet, but the news here was mixed all the same. Gross margin improved both annually and sequentially, but the company continues to post an operating loss as spending on marketing and R&D remains aggressive.

SEE: A Look At Corporate Profit Margins
You Can't Have “Sloppy Execution”
In talking about the business, Jive management blamed “sloppy execution” in the final stages of multiple deals as a precipitating factor. That simply won't cut it – you can't be sloppy when you are competing with companies like IBM, Microsoft, and Salesforce.com and trying to convince companies that there is real value to be had in paying actual money for the company's enterprise social/collaborative software services.
That news also runs counter to the enthusiasm analysts expressed when the company brought in Jay Larsen, formerly of SuccessFactors (which sold itself to SAP (NYSE:SAP) at a very nice premium), to run the sales effort. The company had been heading in a pretty good direction – refocusing the sales effort around “use cases” that demonstrated the utility and dollar value of Jive's offerings to particular customers. Moreover, the company had started to transition away from early adopters and towards “early mainstream” customers.
Unfortunately, this is the wrong time to mess up. It's all well and good that Jive's offerings are platform agnostic and can work and play well with offerings from Microsoft, IBM, and so on. But Microsoft and IBM have stepped up their marketing and integration efforts, attempting to make the social capabilities of Lotus and SharePoint/Yammer more clear to clients. Likewise, although Salesforce.com and TIBCO (Nasdaq:TIBX) haven't quite changed the world with Chatter and Tibbr, respectively, they can at least credibly argue that they offer enterprise collaboration functionality on top of the other proven benefits of their platforms.
The Bottom Line
I do believe that there is a place for strong, differentiated social enterprise software tools, and I think Jive has those. I'm incrementally less convinced, though, that Jive has the ability to convince customers that it has them and that they are worth paying for instead of going with Microsoft or IBM.
I still believe that Jive could grow its top line at a roughly 20% clip for the long-term and generate an eventual free cash flow margin in the 20%s (though margin and free cash flow leverage has been challenging for many SaaS businesses). The trouble is that on a fully discounted share count (something few analysts use), the value just isn't there.
Jive would hardly be the only SaaS stock that could succeed despite looking overpriced on a DCF basis. Looking at the multiples paid for other SaaS stocks, you could argue that Jive should trade closer to $17 per share. Seeing as how I believe the M&A case for Jive is still relevant, that doesn't seem like an unreasonable approach. Still, for Jive to work from here, the company must start executing better and reestablish investor confidence that significant growth and market share gains are on the way for many years.
Disclosure – At the time of writing, the author did not have a position in any of the companies mentioned in this article.

Related Articles
  1. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  2. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  3. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  4. Brokers

    The Next Industries Bound to be Uberized

    As more startups succeed with the sharing economy business model, investors seek out businesses poised to disrupt their industries like Uber.
  5. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  6. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  7. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  8. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  9. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  10. Stock Analysis

    Is Walmart's Rally Sustainable? (WMT)

    Walmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the formula for calculating weighted average cost of capital (WACC) in Excel?

    When analyzing different financing options, companies need to look at how much it will cost to fund operations. There are ... Read Full Answer >>
  3. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  4. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  5. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  6. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>

You May Also Like

Trading Center