Description

I am recommending shorting Jive Software, a company that provides enterprise social networking (ESN) and collaboration software, and software for public forums.

Jive is down 42% over the last year, and has been steadily declining since its post-IPO pop in 2012. I believe the business is still worth significantly less than current prices and hence still worth shorting. However, as is often the case in tech companies of its ilk, acquisition risk is unavoidable. Cisco is considered the most likely acquirer, as they discontinued their WebEx Social product last summer and partnered with Jive – more on that below. I still believe the risk/reward makes Jive worth shorting, and especially, adding to the short if the stock goes up for non-M&A reasons.

Background:

Jive was founded in 2001, and was one of the first movers in the ESN space. It makes two main products, a social communication and collaboration platform for businesses, and software for companies to host external customer or partner communities. The first product has typical social networking features such as newsfeeds, chat, video chat, and reviews, as well as collaboration tools such as document sharing and editing, and it integrates with Google Docs, Outlook, Office 365, Salesforce, and other applications. Jive argues that these features increase employee productivity and job satisfaction. The second product allows companies to host customer support forums or discussion communities for business partners – for example, Apple is said to run Apple Support Communities on Jive. Approximately 70% of revenues are from the ESN product, and 30% from the external communities product.

IDC estimates that Jive is #2 in the space with 11% share of a $1.2 bn global market that it projects will grow at 23% per year through 2018.

In 2013, IBM and Jive posted solid revenue growth rates of 21% and 28%, but Microsoft and Salesforce grew significantly faster, due in part to Microsoft’s 2012 acquisition of Yammer (it was already growing rapidly however), and Salesforce’s major expansion of Chatter.

Competition:

Jive plays in an incredibly competitive space with low barriers to entry, and few natural competitive advantages to standalone players. The competitive advantage due to network effects that traditional social networking companies have does not extend naturally to enterprise social networks, since each company creates its own internal network whose value is unaffected whether 0 or 10 million other companies’ employees use the same solution. The way advantages of scale can however impact ESNs is when the provider of the ESN also provides other solutions to a company, such as Salesforce or Microsoft. If employees are already using one environment – for example Salesforce – for part of their workflow, extending their workflow to another solution in the same environment will be much easier than adopting a new solution. Likewise, the corporate sales process will also be easier, especially when big providers are bundling ESNs into their existing solutions and offering these for free or very low prices. This puts Jive at a fundamental disadvantage to its biggest competitors.

Jive competes with IBM Connections, Microsoft's Yammer, and Salesforce's Chatter in larger enterprises, and with Hipchat, Confluence, Slack, Flowdock, and others in smaller or typically younger companies. These names are just a few of the most prominent in the exploding online collaboration category.

In large enterprises, Microsoft's acquisition of Yammer in June 2012 turned it into one of Jive's biggest competitors. One of Jive's biggest challenges is that Microsoft offers Yammer free with Office 365 subscriptions (which start at $5/user/month), and for just $3/user/month on a standalone basis – significantly undercutting Jive's prices (reported to be ~$12/user/month). Yammer was used by over 500,000 organizations as of last summer. Jive ended Q3 of 2014 with 936 customers.

Note the recent traffic trends for Yammer versus Jive:

Jive also competes with Salesforce's Chatter, which is also bundled for free with a CRM license. IDC elaborated on its incredible growth of late: “The fastest-growing vendor in the top 20 was salesforce.com with a growth rate of 280.3%. The continued growth of salesforce.com is on the back of the change in positioning of Chatter to become a more horizontal support layer to Salesforce1, and salesforce.com has seen a number of notable enterprise deals with the addition of community offerings for sales, marketing, and partner communities.”

While Jive is focused on large enterprises – and has plenty of competition there from IBM and Yammer and Chatter et al – it isn't strongly competing where new customer growth is most rapid, in often younger and smaller companies where end users are driving sales rather than CIOs and IT departments. These types of customers are driving the massive growth seen at Slack and many other companies (Slack may be the fastest growing enterprise application in history – see the links below). A broad trend in software sales is that power is shifting from the CIO to the developer or user (aka the “consumerization” of IT), and companies that are focused on this more rapid sales cycle are steadily encroaching on territory that legacy players thought was permanently their own. Of course, there's a lot more to sales success than this, but often the companies that are embracing this sales model are also developing the most successful modern apps, with their success due in part to the model's focus on rapid iteration and 'delighting' users so they become internal promoters.

Even a company as young as Slack is seeing more traffic than Jive:

As is Hipchat:

Facebook is also trying to join the party, with the release last week of its Facebook at Work application (which as Techcrunch notes, it has been developing for 10 years – it is the same platform Facebook uses internally for collaboration). Some critics think Facebook will have a hard time convincing organizations to trust it with sensitive business information, but it still cannot be ignored.

Not to be left behind, LinkedIn has also announced plans to offer collaboration tools – see links below. The bandwagon effect reminds me of the joke in Silicon Valley that every sufficiently mature software startup will eventually include messaging. Apparently the same goes for business social networking.

While not all of these entrants are immediate threats, they represent a marketplace that favors either the largest players that can cross-sell or bundle products for free, or the smallest players that are winning the battle on a user-by-user level and also charging less than Jive, conditions which over the long term will encroach on Jive’s market share and its ability to be profitable.

In the Q3 2014 call an analyst asked how the competitive environment had changed over the past year, and Jive’s new president replied: “The competition in this market… is definitely more active. We have lots of application platform vendors adding special features to their environment. These social features are a necessity for people to collaborate together…” But, she added, no company uses only one application vendor, and while companies are adding social features to their applications, these applications don’t talk to other applications, so Jive is the only single environment that allows people to collaborate across multiple applications. This sounds good, though it’s not entirely true as Slack and Hipchat and others integrate with scores of other applications as well. But even if Jive offers the most integrations of its peers, I question whether this is sufficient to justify paying a hefty fee per month, when a free or much cheaper option is available.

For the external communities/forums product which is roughly 30% of revenues, Jive’s primary competition is Lithium Software, a privately held VC-backed company, followed by scores of other companies and free open source software. Forums software isn’t rocket science, and shouldn’t command high margins or returns. For example, one company in the space, VanillaForums, has 16 employees, has raised only $1 mm in external funding, and serves large customers such as Adobe, Shimano, Edmunds.com, ABB and others. So, this business is not hard to replicate, and the competition ranges from free to pretty cheap.

Not to read too much into this signal, but both Lithium and even the startup VanillaForums generate more traffic to their corporate websites than Jive does, and Jive is not just a forums business.

For more information, see the following links:

https://gigaom.com/2014/08/08/is-jive-software-caught-between-a-rock-and-a-hard-place/

http://startup88.com/startups/2014/08/09/slack-is-this-the-fastest-growing-enterprise-app-ever/6790

http://qz.com/293449/how-slack-has-made-itself-an-indispensable-business-tool/

http://www.zdnet.com/article/microsoft-moves-yammer-under-office-365-co-founder-david-sacks-is-out/

http://techcrunch.com/2015/01/14/facebook-at-work-ios-android/

http://techcrunch.com/2015/01/14/making-any-corporation-a-startup-again/

http://www.marketwatch.com/story/facebook-at-work-could-target-google-and-linkedin-2014-11-18

http://recode.net/2015/01/13/upcoming-linkedin-products-connect-coworkers/ 

Valuation:

While Jive does provide valuable services to its customers, I see very limited intrinsic value to the equity over the long term due to the competitive environment and commodity nature of what Jive provides.

Determining intrinsic value is challenging. I think there are three options: it's either an eventual zero or at best a low-returns commodity service provider as a standalone company, or it is acquired at a premium for its strategic value to a larger company – see more on the acquisition risk below.

As the company states in its 10-K, "We have incurred losses in each of the last six years... We do not expect to be profitable on a GAAP basis in the foreseeable future and we cannot assure you that we will achieve profitability in the future." I believe that the enterprise social networking product is basically a zero when Chatter and Yammer are available free, and the community forums product probably has some worth, but due to its commodity nature should have extremely low margins and returns.

Despite my gut feeling that the social networking product will never generate significant value in excess of customer acquisition costs, and that the forums product will barely generate economic returns, I’d like to give the company the benefit of the doubt to derive a very rough estimate of fair value. The company guides for ~$180 mm of revenues in 2014, and expects mid-teens billings growth in the near future, which seems reasonable given IDC’s market growth projections. Extending this growth through 2018 results in ~$310 mm sales run rate. Because of the competitive environment, I would posit that Jive’s businesses cannot generate above average normalized margins, and believe the reality will actually be far lower. But perhaps they could earn a computer-services-sector average net margin of 6%, for ~18 mm of normalized earnings power in 2018. Assuming the business generates market level growth from this point forward, a market multiple results in $300 mm of equity value. Discounting this to the present at a rate of 11% results in $200 mm vs. a current market cap of $419, or a price per share of $2.80 vs. $5.85, or, over 50% downside. 

Critics may argue the company will actually attain much higher internet-company margins, or continue growing much faster than the market well beyond 2018, but with the commodity nature of Jive's products and the amount of competition, I am extremely skeptical of such a result.

Comparing my rough estimate of fair value with a sell-side DCF is illuminating. Credit Suisse, for example, has revenues growing at a similar rate, though they project mid-teens growth continuing through 2023. Their after-tax operating margin in 2023 is just under my 6% normalized estimate. Through 2023 their PV of unlevered cashflows is just $110 mm, and terminal value $310. Adding in current cash they get to a target equity value of $511, or $7.20/share. I fundamentally disagree that this company will grow at mid-teens for the entire next decade, and that it will be around beyond 2023 to generate that terminal value.

Acquisition risk:

The company has been exploring a sale, but so far hasn't received any traction. Re/code reported last March that Jive had hired Frank Quattrone’s Qatalyst Partners and that they had already been shopping Jive for five months by then. Re/code said that Oracle, SAP, and Workday had all been approached and all three had passed. MarketWatch reported that the reason SAP passed was that Jive had too much product overlap with SAP's existing lines and wouldn't add enough market share. Last May GigaOm said that Jive's partnership with Cisco sparked talk that Cisco would buy it, but that actually the move indicated Cisco was shifting focus away from collaboration. As Re/code noted, “The problem appears to be that customers aren’t as interested in social software for the enterprise as it seemed a few years ago.” Re/code's opinion is a bit of an overgeneralization, as companies like Slack are growing extremely rapidly, however, I believe it is a valid criticism of sprawling tools that have evolved from legacy, on-premise solutions, as did Jive's application. Prices are certainly lower now than last March, so perhaps some of these companies will be more interested. 

http://recode.net/2014/03/11/collaboration-software-maker-jive-explores-possible-sale/

http://www.marketwatch.com/story/sap-ends-talks-to-acquire-jive-software-bloomberg-2013-05-24

http://research.gigaom.com/2014/05/what-does-the-ciscojive-partnership-mean/

http://research.gigaom.com/2014/03/jive-is-apparently-up-for-sale-and-no-one-seems-interested/

http://www.informationweek.com/software/enterprise-applications/cisco-drops-webex-social-for-jive--/d/d-id/1235040

Catalyst

I expect this name to continue to drift down as competition grows, with occassional good news that drives the stock up and provides opportunities to add to the short. The company has had significant management turnover during the past year, and if some permanence is restored, then that could drive up the stock. Additionally, Jive has had a trend of declining billings growth and new customer growth that was interrupted in the last quarter with better results. Should they put together a string of such quarters then that may drive the stock up as well.

The ultimate destination of the stock, barring the unavoidable risk of an acquisition, is what I feel confident about, and why I recommend establishing a position and then watching for additional opportunities to add.