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.