(URS) SoundBite Communications: It’s Time To Sell
That’s it, we’re done.
It’s time to liquidate your entire position in SoundBite Communications (NASDAQ: SDBT), a leading provider of on-demand customer contact solutions.
What I heard on today’s conference call, coupled with the Q2 results and forward guidance leave me little choice but to cut-bait and put our money to work in a better company, with better prospects, better management, and better fundamentals.
What follows is a summary of SoundBite’s earnings announcement, conference call highlights, and my reasons for selling my shares in the company.
New to the SoundBite story?
I’ll break down this report into 4 parts:
- Hit Me With The Numbers: Sales Up, Everything Else Down
- Other Business Highlights: Guidance Lowered AGAIN!
- Conference Call Highlights: More of the same: Bad news, excuses
- Bottom Line: Times to cut our losses
Hit Me With Some Numbers
Top Line In-Line, Bottom Line Worse Than Expected
Here are some of SoundBite’s earnings lowlights (growth from previous year’s Q2/analyst’s estimates where applicable):
- Quarterly sales of $11.3 million (up 21% from prior year/vs. $11.38 million projected by analysts)
- GAAP quarterly income of $2.9 million, or $0.18 per share (up from $428,000, or $.03 per share in the prior year)
- Non-GAAP quarterly loss of (-$629,000) (down from net income of $177,000 in the prior year)
- Non-GAAP loss of (-$0.04) per share (down from income of $.01 per share in the prior year/ vs. (-$.02) projected by analysts)
- Gross margin was 61.8% (up from 60.4% from prior year Q2, and 61.7% last quarter)
My Take: Aside from the top line number coming in-line, everything else blew big chunks.
SoundBite lost more money in the quarter related to higher expenses due to the Universal Recovery Systems (URS) litigation, and their overall business trends.
Don’t be fooled by the GAAP quarterly income. This includes more than $4.6 million in money that SoundBite received in their settlement with URS.
It’s not as rosy if you strip that out, and would have shown a substantial loss using GAAP or non-GAAP estimates.
On top of that Soundbite badly missed analyst’s earnings expectations.
This isn’t even the really bad news…that’s coming up below.
Other Business Highlights
Lowered Guidance for Q3 and Full-Year 2008
- For Q3/2008, SoundBite projects revenues in the range of $10.1 million to $11.1 million (vs. $12.17 million projected by analysts)
- For Q3/2008, SoundBite projects gross margin in the range of 59% to 61%. (This is down sequentially, and lower than previous guidance)
- For Q3/2008, SoundBite currently projects non-GAAP operating loss in the range of $1.1 million to $1.8 million. (This would represent a loss per share of $.07-.12, vs. analyst’s projections of a profit of $.01 per share)
- For the full year 2008, SoundBite is projecting revenues to be in the range of $43.0 to $45.0 million from previous guidance last quarter of $47 to $49 million, which was already lowered from $53 to $55 million the quarter before that. (vs. $47.71 projected by analysts)
- For the full year 2008, SoundBite is projecting its gross margin percentage to be in the range of 60.0% to 62.0%, down from 61% to 64% last quarter, and 62% to 65% the quarter before that.
- For the full year 2008, SoundBite is projecting a non-GAAP operating loss of $3.2 million to $4.7 million, which has increased from last quarter’s guidance of a loss od $.1 million to $1.6 million. (This would represent a loss per share of $.20-.30, vs. analyst’s projections of breakeven or $.00 per share for 2008)
- This guidance does not include actual legal expenses of $1.9 million associated with the URS matter.
- Cash flow for Q2 was $3.2 million ($4.6 million of that via the URS settlement)
- Capital Expenditures were $421,000 vs. $631,000 last quarter
- Ended the quarter with $38.9 million in cash, up from $35.9 last quarter, with no debt. (about $2.50 per share in cash)
My Take: Jeez, I don’t even know where to start on this one…
I remember talking to the CFO last quarter after their first earnings debacle, and he told me that they were scaling back their guidance so much because they didn’t want to ever have to do it again…
Whoops…
This speaks to bad management, poor visibility, and frankly, a broken business model.
I don’t really have to explain much about what happened.
You can read for yourself how SoundBite lowered their revenue guidance, margin guidance, and profit (or lack thereof) guidance, for Q3/2008, and for the full year as well, and this was already working off of a lowered guidance model from the previous quarter!
This is absolutely horrible! If I ever saw this type of scenario play out with any other company I was considering for my portfolio, I would run for the hills, and that’s exactly what we need to be doing with SoundBite.
I’ll explain more below.
The only slight bit of positive news in the quarter was the fact that the URS litigation settlement netted SoundBite some extra cash in their coffers, and because they don’t carry any debt, shares of the company’s stock currently are worth about $2.50 per share, but this won’t last, seeing as SoundBite expects massive losses this year, and might plow through some of that cash by year’s end.
Conference Call Highlights
Somber Conference Call, Management Still Clinging to Hope
The following are the highlights from SoundBite’s analyst conference call:
- URS Patent Litigation Update: I don’t need to go over this in detail as I’ve already covered it extensively, but SoundBite agreed to a settlement with URS to the tune of $4.6 million.
You can read the full scoop on the patent litigation, and the settlement here.
- CEO Talks About the “Transitions” Going on in the Industry and at SoundBite: The CEO gave an overview of the business talking about the 1st and 3rd party space, and the changes that are affecting the industry and SoundBite in particular.
He first started off explaining that 3rd party customers are those that collect debt charged off by the original credit granters, like credit card companies, etc., and is either sold on a contingency basis, or sold off completely to a debt buyer.
A client in the 1st party space focuses on early stage collections, or pre-charged-off debt, where the credit granters own the relationship with the customers and are trying to get the customer to pay before sending it to a collector. These entities include any company that extends credit to customers in one form or another or allows people to pay their bills in 30 day or longer increments.
Think of this in terms of your cell phone company trying to collect payment on a bill that you owe themselves, rather than sending it off to a 3rd party to collect it on their behalf, or just getting the whole debt off their books entirely by letting 3rd party debt collections agencies try and get pennies on the dollar.
The CEO went on to explain that there is now a transition in SoundBite’s business whereby they see the 3rd party space not growing at all and in fact shrinking for at least the next 2 quarters while their 1st party space is starting to pick up steam.
To reiterate this fact, he stated that revenues grew 38% year over year in the 1st party space in Q2/2008, vs. relatively flat for the 3rd party space.
Further, he stated that SoundBite is experiencing issues in the 3rd party space for several reasons:
1) There is increased competition from new entrants driving prices lower, which is bad timing due to the credit crisis. Even though there is more debt outstanding and more consumer debt to try and collect, the ability to collect that money has decreased because of obvious liquidity issues on the consumer side.
2) As a result of these issues, collections agencies are not spending as much on collections at this time. There is no sense trying to collect money that people can’t afford to pay.
My Take: It sounds to me that SoundBite is trying to turn a big hulking ship way too late in the game.
With the current credit market the way it is, it’s obvious that SoundBite is having spectacular problems with utilization of their services by what is their largest client base, debt collection agencies.
They are trying to transition to a business model that caters more to larger businesses with in-house collection agencies that are more stable, and more likely to collect on the debt owed to them, and thus continue to use SoundBite’s products and services.
This is a transition that SoundBite should have seen coming, and done something about a long time ago, and one that I will not be sticking around to witness.
- Guidance Was Lowered Because: Tying into the point above, the CEO then went on to explain why guidance was lowered for the following reasons:
1) SoundBite forecasts much lower revenues from 3rd party collections agencies in light of the above rationale and continued weakness in the housing and credit markets, and
2) One large client in the 1st party space has suspended their campaign with SoundBite for the time being “due to a change in strategy”, and SoundBite doesn’t feel comfortable guiding higher with this client sitting on the sidelines.
When an analyst asked if their slowdown in revenue in the 3rd party space was due to market share loss, or just less spending from customers, the CEO stated that there were “1 or 2 customers” where they may have lost market share to, and that were entertaining a 2-vendor strategy, but most of the larger customers are still with SoundBite.
He basically conceded what we all probably already know: SoundBite is fighting for it’s life, and losing market share in some areas, and just plain old business in others.
My Take: The one customer that had a “change in strategy” sounds to me like “it didn’t work and we are taking our business elsewhere.”
In addition, the 2-vendor strategy that some of their customers are taking on to pit competitors against each other, appears to be the client’s way of putting added pricing pressure on SoundBite, and it seems to be working!
I can see SoundBite lowering guidance because of the slowdown in the 3rd party space, but the loss of a significant customer that had a so-called “change in strategy” tells me more about SoundBite’s offerings than it does about anything happening in the overall economy.
Bottom line, things are not good at SoundBite no matter how you slice it.
- Reclassification of 1st and 3rd Party Clients: This one is rather interesting and telling as well about SoundBite and how they are grasping at straws.
On the last conference call, SoundBite hinted that they might be reclassifying some of their 3rd party clients to 1st party clients because of their overlap with 1st party sales, and that they really weren’t true 3rd party clients.
Well, this quarter, SoundBite fully reclassified these clients, and guess what?
How did you know?
It totally makes SoundBite’s numbers look better quarter-over-quarter, and year-over-year, by showing that 1st party collections, which by the way is the new business model shift that SoundBite touched on above, is actually growing rapidly!
That’s really interesting how that happens…
They are going to use this new classification going forward.
Under the new classification, 63% of revenue in Q2/2008 came from the 1st party market vs. 56% a year ago, using the old classification, 46% came from 1st parties in Q2/2008 , vs. 46% a year ago.
Also, the CEO said they remain “optimistic” especially with their 1st party client increases.
My Take: Red flag! If there was ever a red flag in a company’s projections or reporting, this is it.
Trying to gussy up your reporting to make it look like the one thing that you have that shows growth is actually larger than it was before is a smart thing to do to try and fool analysts and Wall Street into thinking your business is functioning much better than it really is.
Add this to the list of negatives from the quarter and reasons for selling the stock.
- The CEO on Lumpiness Going Forward: The CEO talked about the “lumpiness” of the 1st party space and how it takes time for them to test, and finally implement the SoundBite platform into their sales force and customer contact solutions.
The CEO said that they have signed 8 of the top 10 credit card issuers, albeit in the early stages, and are encouraged about the potential for this space going forward.
My Take: There’s a big difference between signing a contract to test out SoundBite and actually implementing it and using it. The proof is in the pudding, and so far this pudding looks stale.
- VoIP Integration: The CEO stated that they are so far 55% integrated and that 60% of their traffic is now running on a VoIP backbone.
They hope to have the full conversion completed in the 3rd quarter and they are looking to service more clients overseas when this functionality is fully integrated.
My Take: This was supposed to be completed by now. At this point there’s no telling how much longer this will take since it has already been delayed from the first half of 2008 to the back half.
- Best For Last: SoundBite’s Long Term Projections For Their Business: On the call SoundBite reiterated their long term margin and profitability goals.
Here’s what they are projecting: Gross margins of 62-65%, operating expenses in the 45-49% range and operating income in the range of 13-15%.
Not too bad right?
So how long into the future before SoundBite expects this goal to come to fruition?
2011!
But much sooner if revenue increases more than expected!
Bottom Line
Sell SoundBite, and Never Look Back
Last time in this space, I said that SoundBite was on notice and that I was willing to give them the benefit of the doubt for one more quarter and see how the business trends played out and if indeed management had learned their lesson about guidance and had a better handle on their business.
Well, all my questions have been answered…in a negative fashion, but in one that leaves me no doubt whatsoever, that selling shares of SoundBite right now is the prudent thing to do.
There are much better places for our money, and even though my investment in SoundBite will most likely be down over 50% in aggregate, it’s better to admit your mistake and get out with something, than have nothing.
Here is a brief recap of why you should sell SoundBite right now:
- Poor management that doesn’t see the forest for the trees.
- Poor management that cannot properly manage expectations and guide their business through troubled times.
- Slowing macro business trends, both in the collections industry (where SoundBite gets most of their revenue), and in the overall economy and credit markets that disproportionately affect SoundBite.
- Slowing business fundamentals: lower margins, decelerating revenue Incorporatedreasing losses
- Along those same lines, bogus “reclassification” statistics to make numbers appear better than they are.
- Continued lowered guidance on all fronts: revenue, profit, margins, etc.
- Continued losses for the foreseeable future.
- Increased pricing pressure from competitors in an industry that is largely becoming commoditized.
- Long term growth prospects suspect, competition fierce, and customers looking for cheaper pricing rather than more robust offerings.
That about covers the bulk of it.
I’ll be detailing in another post the things that I learned from this whole SoundBite debacle, and let me tell you, there are some valuable lessons that we can take away from this whole mess.
But for the time being, the reasons outlined above are the short and sweet version as to why you should sell your shares immediately and never look back.
Although ultimately my recommendation on shares of SoundBite was wrong, my initial reasons for recommending the company were sound, and based on solid business fundamentals at the time, and very solid investigation of the business, its prospects and the niche in which SoundBite operated.
I was dead wrong on SoundBite, but not for the initial reasons that one might have thought.
The slowdown in their business and management’s incompetence caught me totally off guard.
The worsening of SoundBite’s business trends and fundamentals, and management’s continued blundering of the business, gave me reasons to doubt my original investing thesis that I had not foreseen when I made my initial recommendation and re-recommendations on several occasions.
In the end, as far as I am concerned, and as far as our investment is concerned, all that matters is that we are selling SoundBite at a considerable loss.
This is a bottom line business, and I totally understand that.
Therefore, I am willing to stand in front of the bus on this one, and say flat out, I was wrong, and it’s time to move on, and put our money into something much more productive and solid.
We’re just getting started here, and while I never like to lose money, or make a mistake, they are as inevitable as the market volatility that gives me many of my best investment ideas and results.
I’ll continue to plow ahead, take the lessons learned from the folks at SoundBite (thanks guys), and make sure that this isn’t a mistake, but rather a learning experience that we can all benefit from.
In a few weeks I’ll be putting together a final post on SoundBite outlining what went wrong, and what I learned from SoundBite that will help you and I to become better investors and lessons that we can apply to all future investments.
Until then, I am diligently working on some more excellent companies for inclusion into the PeakStocks.com portfolio that will more than make up for our exited position in SoundBite.
Remember that my passion is finding little known companies that are poised to explode, writing about them, and then investing in them right alongside my readers.
That mission never stops.
- Read my latest research report on SoundBite that tells you all you need to know in an thorough, informative and engaging manner.
|
*Variables You Should Know About SoundBite Communications (Nasdaq: SDBT) |
|
|---|---|
| Current Recommendation: |
SELL |
| The Company: | SoundBite Communications is a leading provider of on-demand automated voice messaging (AVM) solutions that are delivered through a Software as a Service (SaaS) model. |
| Why Sell Now: |
|
| Market Cap: |
$48.97 |
| Revenue (2007): |
$40 |
| Cash/Debt: |
$39/ $0 |
| Current Price: | $3.00 |
| Risk Rating (?): | 10 (Highest Possible Risk!) |
| Position Size (?): | 1/4 (2-1-08), 1/2 (2-13-08), 1/4 (5-1-08), SELL FULL POSITION (8-7-08) |
| Buy Around Price (?): | $6.00 (2-1-08), $5.50 (2-13-08), $4.00 (5-1-08), SELL FULL POSITION (8-7-08) |
*As of 8-6-08. Except share price, all values in millions.
View original at: PeakStocks.com
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