Description

Selectica was one of those boom and bust bubble-era IPOs that after a long restructuring process and a humbling valuation is now poised to be acquired or move higher. The company markets advanced pricing software that enables a firm to save money and time in its sales process. Although not yet profitable, the company’s business is finally improving, they have a cash hoard which they aren’t afraid to use to buyback stock, and are trading at 1.2x tangible book and an EV/’03 revs of 0.5x. This makes for an investment opportunity with limited downside and a call option on a pick up in business or an acquisition.

BUSINESS

SLTC’s software solution can benefit any company that markets products or services that have complex configuration and pricing requirements. Manufacturing, insurance and financial services are all areas where SLTC has traction. The firm has an A-list of customers (Cisco, GE, Aetna, IBM, Dell, etc) and their technology is considered best in class.

The basis of SLTC’s product is the Configurator, a configuration engine that allows the most complex of products to be configured, quoted, and priced. All of their software is web-based and is often used by companies as the engine behind their online sales efforts. Dell’s server business website uses the product and IBM’s entire worldwide e-commerce websites will be powered by SLTC shortly. IBM was looking for a platform to move all of their global e-commerce offerings on to and SLTC was the only one that could manage all of the complexity of thousands of products, multiple currencies, etc. The launch of this new platform should be a high profile event for the company and should happen in the next quarter or two.

There is not much debate on the superior quality of SLTC’s product, but this high end market position has been a limiting factor as they have been relegated to the largest companies with the most complex pricing issues. This tends to produce large deals but also extended sales cycles and a smaller number of potential customers. The company had been run by its founder, Sanjay Mittal, until this summer when he stepped down for personal reasons. He was the technical genius behind the product and as such had a near religious devotion to the idea and the technology behind it. Unfortunately this kept him from making decisions that could have broadened the products appeal, such as offering a less robust version for small to medium sized businesses that want an affordable pricing engine to sell their products on the web. The company is now doing a search for a replacement who will be more sales-focused and they hope to hire someone in the next two months. The CFO, Stephen Bennion is acting as CEO and is moving forward on new product initiatives that were taboo six months ago. Meanwhile, the company says the sales pipeline is the biggest it’s been in two years and they expect to roll out seven new products in the next two quarters that are aimed at the small to medium size business market.

With corporate profits up and some uptick expected in capex, SLTC is well positioned to benefit. If not through higher sales, then through the increased M&A activity that we are starting to see in the CRM space. With plenty of NOLs, low overhead and attractive valuation the company has a good chance of being scooped up at a premium by one of the larger CRM vendors.

VALUATION

Price: $4.28
Mcap: $135.44m
Shares: 31.6
Cash: $3.59
Tang. Bk: $3.59
EV: $21.9m
FY03 Rev (Mar-03): $35.6m
CY03 Rev (est): $40.0m
FY03 Loss (Mar-03): ($19.7m)
CY03 Loss (est): ($14m)

While the proximity to tangible book and low EV are attractive, the obvious question is what the burn rate will be going forward. There has been good progress here as overhead has been cut this year, last quarter the company brought the breakeven point for quarterly revenue to $11.2m, 13% above last quarter’s $9.9m. The cash burn will likely be $3-$4m if business does not pick up. Until the company has some success in the small to medium-sized business market, deal sizes will remain large, and a couple of deals that are delayed or come in more quickly then expected can make a big difference. This of course cuts both ways but at the current run rate it would only take a couple of deals to bring the company into profitability.

The company’s willingness to buyback stock provides some support near the tangible book price level. They’ve purchased a total of 6m shares, and they bought 251k shares at $3.64 last quarter. There is $29m remaining in board authorized buybacks.

RISKS

- While the company has reduced overhead dramatically, they will still likely burn between $3-4m of cash in the current quarter.

- The founder and former CEO and Chairman Sanjay Mittal owns almost 8% of the company and is likely to keep some pressure on the stock. He remains on the board.

- While the company has a strong sales pipeline, the sales cycle is a long one and delays in closing deals could cause some big revenue fluctuations.

Catalyst

- Best of breed technology and attractive valuation make for easy acquisition target in a consolidating CRM software industry.
- Recognition of improving business fundamentals and lowered overhead
- New CEO and new products bring increased opportunity
- Launch of high profile relationship with IBM