Oh no, it is worse… MTSL takes another $561 thousand torpedo

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.

…. And, if you find yourself enjoying this posting, consider supporting the blog through a donation. For your convenience, PayPal links are provided to the right and at the end of the posting.

USS John Young

In a recent posting (here) I wrote about the fourth quarter and full fiscal 2013 year earnings announcement by MER Telemanagement Solutions, an Israel based company that I have followed for quite a while.

I noted that the company had announced (1) a new high in cash (and cash equivalents) on hand almost exclusively on the strength of a very profitable contract with Simple Mobile, a West-coast based MVNO whose managed services contract with MER Telemanagement Solutions had generated a guaranteed $300 thousand in revenues and cash every month throughout MER Telemanagement Solutions’ fiscal 2013 year; and (2) the end of this revenue and cash stream, effective as of December 31st, 2013.

The termination of the Simple Mobile contract in itself was a disaster, but, unfortunately, things were even worse, with overall revenues and operating profit down significantly year-over-year and net income down $1 million to $1.4 million year-over-year when accounting for a one time $1 million tax charge in the company’s fiscal year 2012.

In my posting I included a computation table, trying to assess the impact of the Simple Mobile contract loss on the 2014 results based on previous results, and — oh, boy! — it was not pretty (here is a direct link to the table,) projecting a revenue drop of $3.6 million (or 28.5%) in 2014 and a net income drop well into the red.

Today, the company filed its 20-F filing with the Securities and Exchange Commission, and, unfortunately, things went from bad to worse. While I, in my table had estimated the Simple Mobile revenue contribution for 2013 to be 28.5%, it showed to be a staggering 33%.

As the company wrote in its very first qualitative statement in the 20-F filing:

If we do not replace the revenues generated by Simple Mobile LLC our operations and financial condition will be adversely affected.

Our principal customer during the three years ended December 31, 2013 was Simple Mobile LLC, a U.S.-based mobile virtual network operator, or MVNO, for whom we provided hosted billing services. In 2011, 2012 and 2013, sales attributable to this MVNO accounted for approximately 16.4%, 22.8% and 33.3% of our revenues, respectively. During 2012, Simple Mobile was acquired by TracFone and in 2013 TracFone migrated our hosted billing services to its own platform and did not renew its agreement with us, which ended in December 2013. If we are unable to replace the revenues generated by Simple Mobile LLC, our operating results and financial condition will be adversely affected.

Not exactly encouraging stuff.

The difference of 4.5% or $561 thousand between our previous estimate and the new announced results is significant enough in itself, but, unfortunately, there is more.

First, this means that the revenue contribution that has to be backed out of the 2014 projections are higher…. arghhh!…. leading to even more loss, in fact an additional loss of $453 thousand for a projected worst-case loss of $1.8 million in 2014.

Second, the significant increase in the Simple Mobile revenue contribution means that MER Teleamangement Solutions’ revenues that were not attributable to Simple Mobile declined a full 17.5% in 2013… a disaster of the highest magnitude.

Here is the updated table:

(c) Per Jacobsen, 2013 and 2014. All rights reserved

(c) Per Jacobsen, 2013 and 2014. All rights reserved

Oh, by the way, this worst case scenario, may not, in fact, be the worst case, since it assumes that the non-Simple Mobile revenue will be stable in 2014. If, instead, the drop in revenues continues, then we need to clear the decks for a much worse worst case.

Now, I hasten to say that there were some good news in the 20-F filing, albeit not much.

First and foremost, the company has reduced its payroll, laying of a large part of its staff. This, of course, was something that I knew had to happen, but that the company for some reason saw fit to not tell its shareholders was happening (read more about this and the company’s puzzling and, in my opinion, warped communications with its shareholders in my previous MER Telemanagement Solutions postings… you can use the nifty XREFs section to get them.)

The reduction is force is deep, but it does not make up for the loss off the Simple Mobile contract (to be fair to the company, almost nothing except a full scale roll-back of staffing in the very early part of 2013 could make up for the catastrophic loss of the Simple Mobile contract) and the extensive cost of winning and launching new managed service of cloud business. So, in spite of the lay-offs — a case of too little, too late — things are definitely looking bad.

Moreover, there were more somber language about the PFIC classification and its potentially adverse impact on United States based shareholders (read more about this here.) As I wrote I this earlier posting, the cash hoarded from the — now dead — contract with Simple Mobile may, in a ironic twist, become a poison pill for United States based holders of shares in MER Telemanagement Solutions.

Interestingly, today, on the tail-end of the filing of the 20-F, when investors (if they could — and cared to — read) should be heading for the hills, the company’s equity exploded. This could, of course, be caused by anything, including investor stupidity or leaking of information that the company is getting sold or having gained another customer, but it certainly does not mean that the company is doing well.

With respect to the potential for the gain of new customers to change the fundamental situation of the company, it may be worth thinking deeply about the depth of the problem to be plugged. As I wrote in an earlier posting (here) where I discussed an, in my opinion, less-than-reputable and poorly researched article by Mr. Sujan Lahiri, a self-confessed post-for-profit contributor to Seeking Alpha:

Mr. Lahiri’s rather simplistic view continues throughout his article. For instance, he writes:

For instance, if MTSL were to land one large customer, EPS could easily grow from current $0.27 to $0.40 per share in the near future. Apply the industry average of P/E 15, and you have a $6.00 share. Another customer could mean $0.50 or $0.60, that’s a $7.50 or $9.00 share. Any extra customers directly add to the profit without a substantial increase in costs. The upside potential is therefore very large.

Well, let’s look at this. The assumption here is that a new customer would add something like $0.13 in earnings in the near future. In real terms this means yearly earnings (not revenues!) of $585 thousand or so, or just about $50 thousand per month. Assuming a liberal 20% margin, this amounts to $250 thousand in revenues per month.

With the Simple Mobile pricing a benchmark for per subscriber revenues, pointing to something like a quarter of a dollar per subscriber per month in revenues, this would mean that the fictive customer would have a subscriber count of one million.

MVNOs or MVNEs with 1 million subscribers are relatively rare, and, importantly, they don’t just emerge in one go (read about subscriber count in the MVNO world in an earlier posting here,) so I think that Mr. Lahiri’s projection of the “near future” earnings is… well… laughable.

So, new customers are definitely not a valid reason for a surge in the per share price of MTSL.

We’ll soon see what gives, I guess.

Donations, please….

As usual, if you found this posting useful or entertaining — or if it saved you time, you can express your appreciation through donation via PayPal right now.   For this type of posting a one-off donation of $20 is suggested — however, any donation is, of course, appreciated.

What is wrong with ClickSoftware?

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.

In this posting I ask the, perhaps, seminal question of what is wrong with ClickSoftware, referring to ClickSoftware Limited, a software organization headquartered in Israel, whose equity, CKSW, is traded on the Nasdaq exchange.

The question is valid because the equity of ClickSoftware, a company with revenues of $100 million per annum; annual revenue growth of 15%, or so; consistent profitability; regular dividend payments; a very strong product catalog; and a stellar balance sheet, is experiencing exceptional, sustained volatility, with CKSW’s per share price’s 52 weeks high and low swinging between $6.81 and $13.07.

As I will explain in the following, the answer to the question of what is wrong with ClickSoftware is everything… and nothing. This answer constitutes, of course, a dichotomy, and, therefore, the question is interesting. Moreover, as we will also discuss in the following, this dichotomy explains why traders and investors engaged with CKSW are increasingly becoming entrenched in their view of the equity, exhibiting, in a sense, textbook examples of cognitive dissonance.


The answer to the question, nothing… and everything, is similar to the cryptic answer that the Baron Balian of Ibelin got from Ṣalāḥ al-Dīn Yūsuf ibn Ayyūb in William Monahan’s fictionalized account of the surrender of Jerusalem on October 2nd, 1187, when he attempted to value the invaluable:

Balian: What is Jerusalem worth?

Ṣalāḥ al-Dīn: Nothing. [walks away]

Ṣalāḥ al-Dīn: [stops, turns around, spreads out his arms] Everything!

BalianofIbelin1490Ṣalāḥ al-Dīn’s fictive answer is, of course, cryptic primarily because it is a deliberate dichotomy, thrusting two world views against each other.

In the one view, that of Balian, a pragmatist and rationalist, Jerusalem’s value lies in its location, its land, and its treasures. In the other view, that of Ṣalāḥ al-Dīn, a spiritualist and nationalist, Jerusalem’s value stems from the belief that it has been exalted above all other places by God and from the fact that it can act as a lightening rod for a nationalistic movement, enabling him to achieve hegemony over a diversified Islamic empire.

By casting his answer in Baladin’s context first and applying his personal value system to this context, by which Jerusalem, of course, is worth precisely nothing, and, then, immediately afterwards, casting the answer in his own context and value system, by which Jerusalem is worth everything, Ṣalāḥ al-Dīn bridges the cultural cliff between himself and Baladin, a necessary step in the process to end the cycle of violence.

ClickSoftware – A primer à la Rochelle Jenks

Rochelle JenksMs. Rochelle Jenks, a member of an investment club, has published a comprehensive article on ClickSoftware on Seeking Alpha, and, so, in the interest of time, I will allow myself to extrapolate and extract from her article in the following.

Ms. Jenks describes ClickSoftware as a provider of mobile workforce management software and solutions to service-oriented businesses and notes that workforce management applications offer automated solutions to challenges such as shift management, schedule optimization, route recommendations, workload forecasting and performance measurement.

She notes that, in its fiscal year 2011, ClickSoftware recorded $87 million in revenues with earnings of $0.53 per share, and she notes that, in its fiscal year 2012, ClickSoftware recorded $100 million in revenues with earnings of $0.31 per share (a decline of 42% in earnings on a 15% increase in revenues.) Moreover, she notes that ClickSoftware is projecting 20% growth in revenues for 2013, but, at the same time, is projecting earnings per share in the range of $0.24 to $0.30 (at the high end, a further decline of 3% in earnings on a 20% increase in revenues – and, at the low end, a further 23% decline in earnings on the same revenue increase) and notes that “… [i]t’s hardly an optimal signal when revenue grows and earnings decline.”

In her article, Ms. Jenks proceeds to provide an explanation of why the earnings decline is happening, which hinges on a bet that the company is undertaking based on a perceived paradigm shift in service organization. This bet has required significant associated investments that, at the end of the day, has caused ClickSoftware to end up in a situation where, even though its year-over-year revenues have grown at an impressive pace, its operating income margins have decreased significantly. Specifically, ClickSoftware’s bottom line has taken and continue to take hits because of heavy investments in research and development and sales and marketing related to this bet. Between 2011 and 2012, for instance, the research and development spend increased 46%, sales and marketing expenses increased 36%, and the number of employees increased 25%.

Ms. Jenks proceeds to lay out a succinct view of important developments for ClickSoftware and its equity in the company’s fiscal 2012 year, a period where the company’s equity, now trading at a price of $8.20 per share, declined from a high of $13.07 to a low of $6.81. I will let Ms. Jenks speak for herself:

February – ClickSoftware reported year-end 2011 earnings and provided 2012 revenue guidance at $100 – $105 million.

April – ClickSoftware shares fell 16% when it announced first quarter 2012 revenues would come in below expectations. At the same time, it reiterated 2012 revenue guidance at $100 – $105 million.

May – The actual earnings report was published and share price fell another 8% even though revenue came in slightly ahead of the projection in April and full year guidance of $100 – $105 million was reiterated a second time. The actual miss was with earnings per share (EPS) which came in at $0.04 instead of the estimated $0.05. The next quarter’s estimates were estimated at $24.5 million for revenue and $0.11 for EPS.

July – When the second quarter was reported, revenue for the first six months was $44.3 million which was equal to 44% of the low-end of the full-year projection. Not only was that number in line with ClickSoftware’s historical trends but it was in line with industry trends of IT software investments. Even though ClickSoftware was fully confident in delivering another $44 million by year-end, it did conservatively lower full-year revenue guidance to $98 – $103 million. Again, the concerning miss was with earnings which came in at $0.03 instead of the projected $0.11. The share price fell another 14%. Analysts now projected full-year revenue at $101.8 million and EPS at $0.52 and third quarter revenues at $25.4 million for revenue and EPS at $0.07.

October – Third quarter reporting was finally somewhat of a bright spot for ClickSoftware. Revenue came in at $27.3 million and EPS came in at $0.11 beating the estimates of $25.4 million and $0.07. Still, earnings trailed the previous year’s same quarter by 36%. Estimates for the final 2012 quarter were now at $29 million for revenue and $0.12 for EPS. Full year revenue estimates from analysts fell to $98.8 million and EPS estimates were cut almost in half to $0.27. Click Software reiterated revenue estimates at $98 – $103 million.

February, 2013 – The conclusion of a challenging 2012 was summarized. Year-end revenue finished at $100 million and EPS finished at $0.31. Meeting the $100 million revenue milestone was the intentional target of ClickSoftware’s multi-year plan just as much as the decrease in earnings per share was. ClickSoftware purposely augmented and matured its products to meet industry needs, enhanced its marketing engine to generate leads and enlarged its sales force to drive revenues. The expenses of such are projected to continue through the first half of 2013. But, the benefits of higher profit margins are expected to begin to accelerate in late 2013 and continue improving in 2014.

In a rather unusual twist for Seeking Alpha articles, the point of Ms. Jenks’ article is not clear, but a conclusion appears to be that the time to invest in ClickSoftware, zero hour, if you will, may be the time when the company’s revenues demonstrate the double-digit pace, margins begin expanding, and earnings per share commence a sturdy upward trend. As Ms. Jenks points out, this point in time may be a while coming since:

[b]oth the company’s and industry’s history show cyclic buying from customers of 45% of annual revenues in the first two quarters and 55% in the last two … [and] … expenses for the transformation will continue through the first half of 2013 .. [and] …ClickSoftware’s tax status … will be a costly impact in 2013 and beyond … [and] … [c]arry-forward losses from the past are depleted … [and] … government exemptions are … fully consumed.

My involvement with ClickSoftware

CKSWI have previously invested in ClickSoftware’s CKSW equity, benefiting from a sustained growth in ther per share price from $6, or so, in 2010 to $12.50 in 2012, when, a couple of days before the company’s release in March, 2012, of the full year results for its fiscal year 2011, I liquidated my position.

My exit, which proved to be exceptionally timely with the company’s per share price dropping $2, or 20%, in the days immediately after the earnings release and an additional 30% in the months thereafter, was dictated by two factors. First and foremost, by fundamentals analysis that showed that at $13, ClickSoftware, which I was estimating to have lower than expected earnings, was over-priced, and, second, by my expectation that the market would react strongly to the miss on earnings.

If you had performed a fundamental analysis of ClickSoftware in 2002, or so, as did one of my fellow contrarian, common-sense investment acquaintances — a self-confessed investment dumpster diver, you would have been sitting pretty, having experienced a near 20 fold return on investment over the past decade, handily outperforming Warren Buffett and Charlie Munger.

Unfortunately, I missed that boat, primarily because I was heavily committed elsewhere. In fact, my entry did not occur until 2010 and was mostly prompted by the company’s filing of a shelf-registration in April of 2010 and the usual adverse, knee-jerk reaction by the market, which dropped the per share price 25% on what is essential a neutral event.

Shelf-registrations are early-warning registration statements filed with a regulatory body. They are generally not well received in the market — mostly because their fundamental nature, an indication that the company may at some point in the future exchange some of its own paper equity for a share in another equity, is not understood for what it is, namely a non-dilutive mechanism for growing a company in a non-organic way.

The rationale for shelf-registrations is quite simple. They allow companies to move faster in raising capital once such companies find acquisition targets, since the preliminary filings have already been undertaken, and, also, reduce the scope of the category of objections by the seller that relates to the liquidity of the buyer in a merger and acquisitions scenario.

The market’s lack of understanding of shelf-registrations is partly a question of education and experience, but, also, a consequence of the fact that companies tend to be more tight-lipped about shelf-filings than they are about most other things. This tight-lipped behavior is in most cases related to the fact that when a company files a shelf-registration it is already in advanced talks with a seller and, therefore, there is a concern that any public information regarding the shelf-registration will adversely impact the talks.

The general idea, of course, is that the filing company intends to use its equity — rather than it cash — to acquire another company. Presumably, the value of the company being acquired will be equal to or exceed value of the equity being expended, and, thus, the event is non-dilutive to the common shareholder.

Thus, from an educated fundamentals investor’s standpoint, shelf-registrations are good signs, since a shelf-registration indicates that the company is seeking acceleration of its growth and, importantly, that the company considers its shares to be undervalued by the market. Most importantly, however, because of the market’s ignorance and general paranoia, the filing of shelf-registration introduces a near-immediate drop in the per share price of the filing company, providing the fundamentals investor with a discount for entry. All good stuff.

As it happens, ClickSoftware’s shelf-registration was not executed upon, and the company did not undertake an acquisition. Moreover, the shelf-registration will, I believe, expire in April of this year. So, in effect, the only thing that the market achieved with its knee-jerk reaction was to allow me entry to CKSW at a 25% discount, substantially adding to my return on investment. Good for me, bad for lots of people caught up in the turbulence of market stupidity.

But I digress… Back to the question at hand and the dichotomy of the answer.

What is wrong with ClickSoftware?

5372590938_e898f8d9be_oSo, back to our original question and the answer, that nothing and everything is wrong with ClickSoftware at the same time.

A clear dichotomy, which, as it was the case with the Jerusalem answer, can only be understood by viewing the question through the prisms of those mostly concerned with the performance of ClickSoftware and CKSW: Traders and investors.

A trader’s view

From a trader’s perspective, i.e. the perspective of an individual or institution that has a short-term view of his, her, or its position in CKSW, almost everything is wrong with the company and its equity at this stage.

Principally, the company appears to have a year-long, or even multi-year outlook, colliding headways with the outlook of traders, which is, at best, monthly or quarterly; a non-linear revenue achievement curve; a genuine and blatant disinterest in the interests of traders; a somewhat experimental and/or tinkering approach to the markets for its product; and a built-in belief that the company’s principals know better than the market. and, in a sense, that the market does not matter.

The company’s year-long outlook and revenue-up, earnings-down trend and their impact on traders are particularly interesting to watch and, lately, has become almost amusing for me. The company insists of making yearly forecasts, which are just that — yearly forecast, and traders insist on interpreting these in a quarterly manner, in spite of strong causal evidence that they should not, viewing each of the first three quarters of the fiscal year as failing to achieve the allotted 25% of the annual revenue guidance, leading to an assured quarterly, post-earnings release depression in per share price.

An investor’s view

From an investor’s perspective, i.e. the perspective of an individual or institution that has a long-term outlook on his, her, or its position in CKSW, almost nothing is wrong with the company and its equity. The company’s operation management success is nearly unparalleled, and historically the company has managed to strike a good balance between investment in future opportunities and consistent delivery of strong results.

Moreover, the company has demonstrated an ability to achieve and manage rapid growth, to undertake significant product development while maintaining positive results, building and maintaining strong and highly liquid balance sheet, and, importantly, the company has controlled its acquisition strategy carefully, limiting the significant exposure inherent in mergers and acquisitions. Indeed, given ClickSoftware’s consistent year-over-year revenue growth, equally consistently positive earnings, and the decade long price performance of CKSW, the company has demonstrated to investors that notwithstanding short-term equity pricing fluctuations, primarily, of course, caused by traders, an investor can have strong confidence that his, her, or its investment will result in an excellent return.

The dichotomy lives

5817572653_f9dcd7d745_oAnd, so, the dichotomy can exist in the world of ClickSoftware. For, for the trader, the opportunity to make a return with ClickSoftware and CKSW lies solely in the elusive timing of the market, and outside of getting this timing right every single time, trading in CKSW is an unpredictable science, and, therefore, since the company’s management appears to be doing whatever it want, without regards to traders desire for the next quarter to be the surprise quarter, where the company’s earnings growth resumes, everything is wrong with ClickSoftware. For the investor, however, there can be a high level of certainty that, when viewed over a multi-year period, the increase per share price of CKSW will be significant, easily outperforming the major indices, and, so, nothing is wrong with ClickSoftware.

The dynamics between the two parties are interesting. On the one hand, traders with their short term view and this view’s collision with ClickSoftware’s management year-long horizon consistently create a discount that investors can capitalize on. On the other hand it is investors that maintains a bottom on the equity, which ensures that a trader does not lose everything when his, her, or its trades in CKSW eventually goes wrong, as they must assuming that the tenet that consistently timing the market it impossible.

The investor’s position, by the way, is not clear-cut. Without a doubt, the company has engaged in a multi-year bet, investing heavily in new products and increased market and sales reach, trading of short- and medium-term earnings growth for sustained revenue growth and — eventual — long-term revenue growth. Should this bet, which is not, by any stretch, proven, fail to pay off in a reasonable time-frame, the company would in all probability scale back its investment and reduce its workforce, and the company would almost certainly suffer a significant loss in market capitalization, possibly setting investors many years back.

And a bet it is. Although the emotions among CKSW’s traders and investors alike are running high after the earnings release for fiscal year 2012, somewhat clouding the facts and impeding rational discourse, the facts are straight-forward: The company is making a substantial investment in the hope that it will provide a large return at a later date, the investment constitutes a — largely unproven — bet on an expected paradigm shift in enterprise mobility technology, and the bet comes at the expense of short- and medium-term earnings.

Moreover, the investor must embrace the volatility of CKSW, and must be armed with a near-infinite time-horizon on an investment in ClickSoftware, lest he, she, or it will simply revert to being a trader. If, for instance, you had invested in CKSW in April of 2011, then your CKSW position would now, in February of 2013, have increased precisely zero per cent (that’s 0%, people,) reflecting a per share price fluctuation from $8 over $13 via $7 to $9 back to $8. An amazing, but, ultimately, at least in the short- and medium-term, unprofitable journey — during a period where the major indices grew 15%.

What to do

7985815593_b9ee0e1252_oSo after all this, clearly the question is what to do.

Depending on how the company’s bet turns out, ClickSoftware may or may not show to be a “bad” company, but its common equity, CKSW, is certainly a stock that is exhibiting characteristics that should make anyone think hard before investing or trading.

From P/E to volatility

Let’s take a look at the P/E situation for ClickSoftware.

At a current P/E of more than 35 for ClickSoftware, CKSW ain’t cheap, and with a significant baked-in annual dilution it ain’t getting cheaper, even if the per share price does not move up, unless, of course, net income goes up radically over the next quarters, something that the company has been explicit in telling the market will not happen.

Moreover, when all is said and done, the harsh reality is that year-over-year earnings declined from $0.38 per share in fiscal year 2011 to $0.31 in fiscal year 2012, causing the per share price of CKSW to drop, and driving up P/E.

A funny thing about the P/E for ClickSoftware is that the only way to rapidly make a return now is for the P/E to grow even more into the stratosphere or by the company being acquired. So, if one is looking for a return in the space of, say 9 months or less, the question should be as simple as whether or not one believes that the revenue growth will significantly outstrip the expense growth or the company will be acquired within the next quarters.

If, over the next quarters, the per share price grew to, say, $10, while the earnings per share declined, then the P/E would grow to the other side of 40, probably making the P/E a somewhat meaningless measure, because a P/E in excess of 40 for an equity representing a company that is declining in net income is, in itself, at best, plain silly and, at worst, potentially dangerous.

Growth companies are certainly different than, say, income companies, but they are subject to laws of physics, if you will (or, perhaps more appropriately, subject to the laws of economics,) and the law that governs here is the law of volatility. Simply put, in my view, the higher an equity price climbs without earnings for the underlying company growing correspondingly, the more potentially volatile the equity becomes, and, unfortunately, the issue with volatility — as we saw with the drop from $13.07 to a low of $6.81 in per share price — is that it has potential to cause swings that moves faster than investors — or traders — can.

Hijacking — Financial style

3121126114_72c2f048fb_oPerhaps surprisingly — and having worked and invested in publicly traded companies I can attest to this being a distinct possibility — such volatility can manifest itself in a much more direct and harmful way than that of rapid, erratic movement of per share prices, taking the form of financial hijacking.

Hijacking can happen when the company’s management reaches the point of feeling that the market’s valuation of the company, as measured by its capitalization, is out of line with the intrinsic or true value, creating a company culture dominated with discontent with its investors, eventually leading to a hijacking of the company by the management, taking the form of either a privatization transaction, LBO, or forced sales — all, of course at a price that represents a significant discount to the intrinsic or true value of the company, but a smallish premium to the, then, current price.

If, for instance, volatility drives the per share price CKSW to drop to $5 in 2013, sentiment may build among the company’s management that a sale — in some manner — for, say, $6 per share should be undertaken, causing long-term investors to be under water, and, effectively, having no way to recoup their investments.

The probability of such hijacking scenario playing out stands in proportion to the ownership stake of the management of the company and the entry point for this ownership stake. If, for instance, in the above scenario, the company’s management team has a significant number of options or RSUs that have a strike price of $2.50, then the probability of a hijacking scenario is higher than it would be if the options or RSUs had a strike price of $10.

Financial hijackings are not unusual, and, in fact, are on the rise. When you work within a publicly traded company, you can actually see these hijacking coming, with an early warning sign being that the sentiment expressed by the company’s management about investors in in-house conversations results in these investors being referred to as — and pardon my language here, I am simply quoting — shit-heads.

Arguably, Mr. Michael Dell’s recent offer to leverage out Dell, for instance, could be viewed as an example of such behavior, and since the burden of proof for malfeasance is very high, most such hijackings, conducted in full daylight, will probably succeed. I plan to explore Mr. Dell’s apparent blatant attempt to hijack Dell (using, it would appear primarily Dell’s own money to finance the caper) in a future posting. Stay tuned!

In case you were wondering, the company’s Chief Executive Officer and other parts of the company’s management team control approximately 20% of the outstanding shares, a significant number of options are outstanding at an exercise price vastly below the current per share price of $8, or so, and the company continues to issue stock-based compensation at a high pace in spite of the fact that the company’s net performance, measured in earnings per share, has deteriorated over the last years.

There is, of course, other form of financial hijacking, including consistent issuance of diluting incentive equity to senior employees who does not need it. For ClickSoftware, for instance, Mr. BenBassat — in one form or another — controls close to four million shares, amounting to 12%, or so, of the total number of outstanding shares, and, yet, the company’s Board of Directors, lead by Dr. BenBassat, insists on issuing more than 100,000 options on an annual basis to … you guessed it… Dr. BenBassat.

Should the company be sold at some point in the future at a per share price of $15, Dr. BenBassat’s shares (or, rather, shares controlled by Dr. BenBassat) will be worth a staggering $60 million. On this scale of compensation, I, for one, do not see how the addition of 100,000 options annually really increases Mr. BenBassat’s incentive to achieve such outcome.

So, an important point in this nothing versus everything discussion, is that the imbalance between earnings growth and price is something to take into consideration and that both investors and traders needs to understand that this sort of imbalance causes the overall system to become volatile and potentially unstable.

And so?

All this being said, I really can’t suggest any sensible path for traders when it comes to ClickSoftware and CKSW.

Frankly, with the last years’ developments, I would have thought that traders would have sought other pastures, simply viewing CKSW as too volatile and too unpredictable, particularly since it has a management team that may or may not meet traders’ and the market’s expectations — and probably won’t lose any sleep over these expectations, but, contrary to my expectations, the traders appear to still be around shorting, longing, and optioning CKSW as much as ever. Go figure.

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.

From an investor standpoint, this is an interesting time, because, as Ms. Jenks indicated, it does not appear to be zero hour yet, with the company clearly telling the market that its pace of investment will continue in fiscal year 2013 and providing guidance that show a further deterioration in earnings for that fiscal year. So, effectively, the company is saying to any investors that, short of revenue growth and pipeline increase, there should be no expectation of improvements in the company’s fundamentals in fiscal year 2013 — not exactly an encouragement to invest now.

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.

So, if Ms. Jenks’ point is that a wait-and-see attitude is appropriate at this time, then she is probably right if nothing monumental is in the cards.

Unfortunately, however, there is some probability that a monumental event will happen. It is possible that ClickSoftware’s bet will begin to pay off in fiscal year 2013, and there is even a possibility — however slim — that ClickSoftware will be acquired by SAP or someone similar during the fiscal year — two events which I predict will happen without much prior notice by the company and, given the level of attention that the equity is getting from traders, will cause a rapid and violent increase in the per share price of CKSW, possibly shutting a wait-and-see investor out.

There are a number of good reasons why ClickSoftware and/or CKSW may take off in fiscal year 2013. First and foremost, the enterprise mobility market appears to be accelerating and, critically, the acceleration appear to be sustainable, which should lead to increased business, increased margins, and increased mergers and acquisitions activity in the space. Second, for an enterprise software company, ClickSoftware has now reached a quite advanced age of 15 years, a point where, normally, something have to give. Third, the company’s Chief Executive Officer, and principal principal, if you will, Dr. Moshe BenBassat, is just around 65 years old, an age where retirement is normally considered. And, finally, fourth, there is the issue of hijacking of the company, as discussed in the above.

Perhaps a recent poster on the Yahoo Finance Message Board said it best when he wrote that:

[t]here are a lot of conservative investors like Rochelle who are not comfortable investing until they see the financials move first. Wall Street dumpster divers like myself prefer to buy at a much deeper discount… which is before a full turnaround shows up in the financials.

Put simply, perhaps for ClickSoftware and CKSW we are closing in on the time where the investors have to acquire some of the speculative nature of the traders if they wish to secure a position at the table. The irony of this should not escape us.

Cognitive dissonance

On the tail-end of ClickSoftware’s radical per share price swings over the last year and the non-blockbuster earnings for fiscal year 2012, emotions are running high, involving near-shouting matches around the nothing/everything dichotomy. Rather unusually, it is the investors that are most vocal, resorting increasingly to ad hominem attacks against anyone who question the value of ClickSoftware.

However irrational this behavior is, it is understandable. The latest evolutions in earnings and per share price has lend credence to the contention that ClickSoftware is worth nothing, which conflicts head-on with the investors’ viewpoint that ClickSoftware is worth everything, leading to cognitive dissonance, a feeling of discomfort when simultaneously holding two or more conflicting beliefs.

In line with cognitive dissonance theory the investors’ response is to seek the reduction of the dissonance by reducing the importance the dissonant elements, leading to the increasingly aggressive behavior against naysayers.

Arguably sound investment practices start with asset protection. From an asset protection standpoint, where the paramount objective should be to preserve capital by pinging actively for any signs that one’s capital base is endangered, cognitive dissonance is exceptionally dangerous, since it will cause one to ignore facts that are adverse to one’s belief system, and, often, engage in directly self-destructive behavior.

Just saying….

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