The correction in small cap stocks, as measured by the Russell 2000 Index, reached a loss of around 19%. However, more than a few shares fell much further. One of those is ClickSoftware Technologies Ltd. (Nasdaq: CKSW), a company which I hold in my portfolio measured by "Globes".
ClickSoftware's share price fell from a record $7.45 in mid-April to a low of about $4.75 last Thursday, a drop of 36%. In my opinion, nothing bad happened during that period in terms of the company's business, but three factors combined to sink the company's share price.
In April, ClickSoftware published a shelf prospectus for up to 15 million shares, which was about $100 million at the price at the price then. When management publicizes a prospectus for such a great dilution - of up to 50% - without explaining why - it is going to send investors into shock. Some of them, especially institutional investors - pick up and run, saying that they can buy the shares back in the offering at a much better price.
After the hit from the prospectus, came the market correction. The third factor was the fact that the company gets about half of its sales from Europe, which is clearly in a crisis.
If investors were quick to drive down ClickSoftware because of its sales from Europe, president and COO Hannan Carmeli came to an RBC investors conference in New York last week and tried to calm things down. He said that what others see about Europe, they don't see. That is, in the meantime there is no negative impact in business. He reiterated guidance for $74.5 million revenue this year in the upper range, which reflects growth of 22% over 2009.
Carmeli explained that based on experience with previous crises in the world, companies during a recession have to do "more with less". That is where ClickSoftware fits in, with software solutions that help companies do more work with less money.
ClickSoftware develops automated workforce management and optimization solutions for service businesses of various sizes. With ClickSoftware's systems, companies know at any moment who is doing what, where, how, and for whom.
ClickSoftware's potential market reaches $18 billion. According to the company's calculation, the Western world has altogether around 9 million service people in companies with over 500 workers. The cost of software licenses and service is about $2,000 per employee.
Among ClickSoftware's largest customers are telecommunications giant Deutsche Telecom, which for 7 years already has been managing its 26,000 service people with ClickSoftware 's solutions. ClickSoftware sells directly as well as through software giants like IBM, SAP, and Accenture (NYSE: ACN).
After the share's collapse, at a price of around $5.30, the company is very attractively valued at $160 million, as it has around $39 million cash and no debt.
In 2011, the firm is set to reach $90 million sales, and to earn over $0.50 per share, so that its sales and profit multiples are quite low.
In addition to the three strikes we mentioned above, investors have also removed an acquisition premium that was once attached to ClickSoftware. I think that is a mistake, because a niche company like ClickSoftware is always attractive to many larger software companies.
I see the shelf prospectus as a general tool that bankers recommend to file with the US Securities and Exchange Commission (SEC) "just in case". In my opinion, if the company utilizes the prospectus, it will be for a much smaller number of shares, and at a much higher price, so that any dilution will not be significant. It will happen if and when management has a clear acquisition target. Similar large filings were handed in at the end of 2009 by EZchip Semiconductor Ltd. (Nasdaq: EZCH; TASE:EZCH) and Orbotech Ltd. (Nasdaq: ORBK), and neither one has acted on the prospectus through today. Investors who fled those shares immediately upon the filing of their prospectus lost out on sharp gains.
Published by Globes [online], Israel business news - www.globes-online.com - on June 15, 2010
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