When two threads meetPosted: July 8, 2013
As it is the case for all postings in this blog, my standard disclaimers apply for this posting. However, since this posting discusses investments, I urge you to review the disclaimers laid out in the About section with extra diligence. Moreover, even if you have already reviewed these disclaimers in the past, you need to review them again, as they are subject to change without notice. Do it now, and remember that whatever I say in this blog posting is simply my opinion — it is not science, it is not advice, and it is not an attempt to make you act in any way whatsoever.
ClickSoftware’s quarterly nemesis
In previous postings (here, here, and here) I have written about ClickSoftware Technologies, noting that the company, an Israel headquartered technology company whose equity is trading on Nasdaq with the ticker CKSW, has gone through remarkable growth and that its equity is strongly undervalued.
I have also written that one of the reasons why the company’s equity is under-valued is that the company’s guidance, which is provided in annual increments, continues to be interpreted in quarterly segments by the market and, so, the market has, time after time, set itself up for a disappointment at the time of the quarterly earnings call in spite of the fact that the company has consistently met its annual guidance.
On February 7th, 2013, for instance, I wrote:
If forced to trade, I would probably lean on the side of the short trade for the next quarters, engaging only when the quarterly results are almost in, gambling (1) that the company’s revenues across the quarter would be lumpy relative to the annual guidance. However, this strategy is definitely not strong since it relies on the company not achieving a prorated 25%, non-lumpy revenue growth in the first quarters, and, critically, relies on other speculators to build up the per share price by going long before earnings — something that, of course, there can be no guarantee will happen. The alternative, however, to go long, is not great, since the company has a track-record of being punished for lumpy earning around the first quarters of the fiscal year. …
Moreover, if history is bound to repeat itself, the company current guidance for fiscal year 2013, which points to revenues of $120 million, or so, will be interpreted by the market to mean that the company will record revenues of $30 million per quarter; the company’s results will be somewhat less than that for the first quarters; and the market will punish the company for missing these unilaterally imposed quarterly objectives, driving the per-share price further down.
I was right. In fact, the per share price of CKSW raced to the top, reaching $9 in the weeks before the earnings release, and then descended to $7 just as rapidly as it had ascended.
The earnings result were excellent, showing revenues of $24.5 million, profitability, and overall improvement in all categories, and were fully in line with the annual guidance (remember that there is no quarterly guidance,) but this fact did not matter in the face of the lemming-like behavior of the market.
The postings of thegunnerab
In other postings (here, here, and here) I have written about a poster on Yahoo Finance message boards who operates under the handle thegunnerab and engages in near-constant ad hominem attacks on other posters and, as I have written about earlier, is often wrong in his predictions and statements. For instance, thegunnerab is currently engaged in an attack campaign against another poster, moaamar, as part of which, for example, he recently wrote:
It seems Moaamar is too busy helping the Muslim brotherhood in Egypt to release the big news by Friday that he promised.
Please ignore everything he posts since he is useless POS.
Quite recently these two posting threads crossed when I commented on the ClickSoftware guidance issue in a Yahoo Finanance message board posting, explaining — as I have done in the past — that the company had not provided quarterly guidance and, therefore, could not possibly fail to meet its quarterly guidance.
My posting was directed at another poster’s comments, but this time thegunnerab stepped in, saying that:
The company gave annual guidance of $120M+ and guided for 45% in H1 and 55% in H2.
Since Q1 revenues were $24.5M and Q2 estimates are $28M, if Click meets estimates it will generate H1 revenues of $52.5M. They will need to generate revenues in excess of $67.5M in H2 to meet the lower guidance bar of 120M.
Obviously, It they fell to deliver $28M in Q2, it will be very hard to meet the $120M revenues line.
This butting in from the sideline was consistent with a number of other postings from thegunnerab in which he has indicated that ClickSoftware has provided quarterly guidance and has intimated that the company would fail in meeting this alleged guidance.
My contention, of course, is that there is no quarterly guidance, and, so, thegunnerab‘s posting is, at best, meaningless and, at worst, ignorant and misleading.
In a later posting thegunnerab expanded on this alleged quarterly guidance for second quarter of 2013, citing a remark by the company’s CEO, Dr. BenBassat, on the company’s fiscal year 2012, fourth quarter earnings conference call, in which Dr. BenBassat said:
“If you look historically at ClickSoftware and overall in the software industry, typically the first-half is in the ballpark of let’s say 42% to 47% and the second half gives you the 53% to 55%.”
And there we have it. A purported professional investor (you can read more about this here) interpreting a CEO’s anecdotal comments about the company’s historic performance and the historic performance of the software industry as guidance.
This, of course, is not guidance. In fact, it is not even any form of forward looking comment. It is a general observation about the company’s historic performance and the performance of the software industry, and, from the perspective of guidance, it is precisely nothing.
This is pretty scary stuff, because when thegunnerab talks about the company’s alleged quarterly guidance, he does so with the air of an expert, but on the basis of nothingness. And, notably, once corrected, he does not issue a retraction or something similar.
Chain of fools
Over the last months, as we have closed in on the earnings release for ClickSoftware, the per share price for CKSW has climbed and the short interest has mounted. Today, on July 7th, 2013, the per share price is approaching $8.50 and the short interest has hit a new 52 week high.
Presumably, the short interest is a manifestation that the company’s results will not be in line with expectations or guidance.
The quarterly guidance, of course, can not be out of line with the quarterly results since (and, I apologize for belaboring the point) there is no quarterly guidance — unless, of course, the so-called guidance is simply derived from expectations articulated by people like thegunnerab on no valid basis whatsoever.
The expectations might also originate with the three or four analysts that follow ClickSoftware. Unfortunately, however, their analysis appears to follow along the lines of thegunnerab‘s style of analysis, and, so, they are more or less worthless.
What is interesting here is, of course, that if you invest on the basis of facts, and investment in CKSW should be straightforward since, year over year, ClickSoftware pretty much does what it says it will do. However, the investment is not straightforward since, quarter over quarter, the market, in some insane catch-22 chain-of-fools manner, keeps setting arbitrary quarterly expectations and punishing the company for not achieving these.
Now, all this being said, it is quite possible that the company will struggle to reach its guidance, since it is facing two large business transformations at the same time, the shift from enterprise based licensing to cloud based licensing and the overall shift to mobile computing. In positioning itself to survive these transformations — and ultimately benefit from them — the company will increase its expenditures and may see a dramatic shift in revenues, since these new licensing and delivery models alter the very profile of revenue recognition.
On the other hand, it is also possible that the company may have positioned itself perfectly for these transitions, experiencing the best year ever, perhaps in the latter quarters of the fiscal yer at the expense of the performance of the earlier quarters.
As I have said before, the company is engaged in a bet, which will either pay off big or will force the company to retrench and re-focus on its original (and rich) core business of advanced workforce scheduling. in the latter event, the fact that the company has zero debt, has more than $50 million on hand, and has avoided goodwill-costly M&A transactions will certainly be a plus.
Regardless, the only measure of guidance that the company can be held accountable for performing to, is the measure that it, itself, releases — not a measure imposed by Yahoo Finance Message board posters such as thegunnerab or a couple of analysts following the company.
Finally, it is worth noting that, if the company will indeed have trouble performing in line with its yearly guidance (or, for that matter, will blow out its number,) then the time to raise this issue and probably restate its guidance will be now, immediately prior to release of the earnings results for the second quarter and half year.)
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