I Was Flat Wrong About SoundBite: Bombs Q1/2008 Earnings, Lowers Guidance
It looks like I’ll be eating my first dose of humble pie since I started PeakStocks.com about 7 months ago. In a business where if you get slightly over 50% of your picks right, you attain rock star status, it looks like we’ll be adding SoundBite to the “losing” side of the scorecard, at least for now.
SoundBite Communications (Nasdaq: SDBT), a leading provider of on-demand customer contact solutions, reported its fiscal 1st quarter 2008 earnings on Wednesday May 7th after the market closed, and to say they were bad would probably not serve the word “bad” properly.
Not only did SoundBite miss their own guidance and estimates for the first quarter, but they also LOWERED guidance for Q2/2008, AND full-year 2008, only 3 months after they had raised that same guidance.
So is it time to sell SoundBite and cut our losses? Maybe…
What follows is a brief summary of SoundBite’s earnings announcement and conference call, with my solemn thoughts at the end.
Look for a full report on their latest quarter and analyst conference call highlights in a few weeks after they release their latest 10-Q filing and I have a chance to parse the data fully.
New to the SoundBite story?
- Read my last company update and buy recommendation here.
or you can:
I’ll break down this report into 4 parts:
- Hit Me With The Numbers: Sales, Earnings, Margins: All DOWN!
- Other Business Highlights: Lowers Guidance, Free Cash Flow Positive
- Conference Call Highlights: Patent Litigation Update, Management “Excited”
- Bottom Line: This one certainly came out of left field…
Hit Me With Some Numbers
Lower Guidance Already?
Here are some of SoundBite’s earnings lowlights (growth from previous year’s 1Q/analyst’s estimates where applicable):
- Quarterly sales of $10.6 million (up 21% from prior year/vs. $10.86 million projected)
- GAAP quarterly loss of (-$1.5 million), or a loss of (-$0.10) per diluted share (down from a (-$.86 million), or (-$1.37) per diluted share, loss in the prior year)
- Non-GAAP quarterly income of (-$636,000) (down from a (-$31,000) loss in the prior year)
- Non-GAAP loss of (-$0.04) earnings per share (up from a (-$.05) loss in the prior year/ vs. $.00 projected)
- Gross margin shrunk to 61.7% (down from 63.9% from prior year, and 66.6% last quarter)
My Take: Yuck…I couldn’t even try to dress these numbers up if I wanted to. I guess the only good news is that sales actually did grow 21%, but does it really matter when losses grew even faster?
In addition, SoundBite is facing more intense competition, and it’s showing up in their lowered margins. They are having to lower their prices to be competitive with the other players in their space, more so than they expected.
Other Business Highlights (Lowlights)
Lowers Guidance, Free Cash Flow Improves
- For the second quarter of 2008, SoundBite currently projects GAAP revenues in the range of $11.2 million to $11.8 million and gross margin in the range of 61% to 63%. This compares to analysts expectations of $12.33 million (about a 6.7% decline taking the midline).
- For the second quarter of 2008, the projection for Non-GAAP operating loss is in the range of $400,000 to $900,000.
- For the full year 2008, SoundBite lowered their GAAP revenues to a range of $47.0 million to $49.0 million from the previous range of $53.3 million to $55.3 million, and analysts expectations of $53.47 million (about a 10% decline!)
- For all of 2008, SoundBite projects GAAP gross margin percentage to be in the range of 61.0%-64.0%, from a previous range of 62%-65%.
- For all of 2008, SoundBite is estimating a non-GAAP operating loss of $100,000 to $1.6 million.
- In Q1 SoundBite had 184 active clients, an increase of 10% vs. 167 in the prior quarter.
- Existing clients accounted for 99% of total revenue, while new clients accounted for 1%.
- Top 20 clients accounted for 78% of total revenues.
- Cash flow for Q1 was $1.5 million
- CAPEX: $631,000
- FCF: $869,000 (First Free cash flow positive quarter!)
My Take: Well SoundBite WAS cash flow positive this quarter and free cash flow positive for the first time ever as a public company…that has to count for something right?
Don’t bet on it!
This is obviously not what I expected or could foresee coming! Especially in light of last quarter’s beat and raise earnings announcement where everything in the business seemed to be humming along quite nicely…
There’s nothing I can say except I was flat our wrong on this one.
Conference Call Highlights
URS Patent Litigation Continues, Despite Crappiness, Management Still “Excited”
The following are the highlights from SoundBite’s analyst conference call:
- URS Patent Litigation Update: There seems to be 2 separate items with regards to the URS patent litigation claims. Management wasn’t entirely clear on the call, but I believe it breaks down thusly:
Part 1: First off, SoundBite believes they are still on track for a May expedited trial date for the previously mentioned URS case where SoundBite sued URS for tortious interference during their IPO, and they believe they will be successful in this suit. They have completed the discovery process with a number of depositions being taken and they are merely waiting for a trial date, which they believe will take place this month.
Part 2: In addition to this first suit, it seems that SoundBite is now a part of another suit AGAINST them on the part of URS.
According to management on the conference call, on May 1st, 2008, URS filed a complaint in federal court in Minnesota, looking to retract its statement of non-liability, from the aforementioned case.
In the new complaint, URS asserts a claim for material misrepresentation, alleging that it filed the original statement of non-liability after relying on what it characterizes as “false representations” from SoundBite concerning its non-infringement of URS’s issued patents.
URS has also asserted a claim that SoundBite’s on demand AVM products infringe on one of URS’s existing patents. SoundBite’s response to URS’s claim is due on June 25th, 2008.
This appears to be a separate claim than the one that they are going to trial on in May.
My Take: Yet another wrinkle in the SoundBite vs. URS matter. I am going to have to talk to management to clarify this exactly, and make sure that I got my story straight, but I believe these are 2 separate lawsuits, one brought about by SoundBite against URS for interfering with their IPO, and one brought about by URS against SoundBite withdrawing their original non-infringement claim that took SoundBite off the hook in the original suit.
Confused yet? I’ll make sure to get to the bottom of this.
- Patent Infringement Suit Cost: The above guidance does not include approximately $1.7 million in legal expenses for the URS patent litigation suit, that is expected to total about $2.5 million by the end of the year.
- Overall Economy’s Affect on Business: During the 1st quarter, SoundBite had a number of collections clients utilize their service less than was originally anticipated, and they believe that some of this is the result of the sub-prime mess that is affecting many markets, and decreased usage as a result.
The CEO further stated that because of the current credit climate, collections agencies are having a harder time collecting debt, and therefore, are taking a more conservative approach to using SoundBite’s services.
He reiterated that their business typically has some seasonality built in. The first quarter is typically lower in sales on a sequential basis from the 4th quarter of the preceding year, and then sales rise in each subsequent quarter, and they expect this year to be no different.
When talking to an analyst, the CEO explained that they never said their business was countercyclical, but the CEO explained that because people are losing their jobs, houses, etc., they are unable to pay anything, and that includes debt, so debt collection agencies are scaling back their usage of SoundBite as a result…
My Take: I am mystified by these comments!
I want to make sure I got this right: SoundBite is a countercyclical company (at least that’s what we were led to believe when first investing in the company), BUT not if the economy goes down too much, then its just like every other business? I am not too happy about this change in tune at all.
- First and Third Party Collections: When asked about the relationship of the 1st party (companies that use SoundBite to collect their own debt, retain customers, etc.) to 3rd party (companies that use SoundBite ON BEHALF of other companies) and why their revenue fell short, the CEO stated that what they are seeing and didn’t anticipate was that the 1st party guys are taking longer to test and evaluate their campaigns before deciding to ramp up and spend more on them.
He said that they seem to be more cautious and it takes a month or more to get the data back and analyze it and then move on it.
Furthermore, when the analyst asked if they had seen some of these 1st party customers pull back or back out of their testing and contracts, the CEO said no, that none of them have done so, which is why they are so bullish on the continued growth for them (SoundBite) and the sector, but that they cannot predict with certainty when these accounts will convert.
The CEO then kept stating how “excited” they are about their future growth prospects, and gave various “examples”.
My Take: Huh? So you are excited because it looks like more and more 1st party clients are signing up to use your stuff, but as of yet, they are slow to commit and use SoundBite’s offerings, but nonetheless, the CEO is EXCITED about their future prospects?
Oh, and I might want to remind everyone, that SoundBite did just LOWER 2nd quarter guidance and full-year guidance pretty substantially….but overall, I’m really excited too!
- The CEO on Forward Guidance: Moving forward SoundBite believes it prudent to lower their guidance in light of the abovementioned factors for the following reasons:
- The current economic climate and softness in the collections industry are likely to continue through year’s end
- Second, they are seeing pricing pressure from competitors using both hosted and on-premise solutions
- Third, because in the last year they have focused their products and marketing on 1st party clients
While the resulting revenue stream is greater in this segment, ramping up sales and securing contracts are more difficult to predict, and garner.
Further, the CEO noted that in these times, companies are laying off employees and reengineering their processes rather than focusing on new initiatives like SoundBite’s services, even though in theory, they fully understand the potential cost savings and benefits to their organization.
My Take: While any lowered guidance is never good, some are better than others. This was not the good kind, and the reasoning behind the lowering of the guidance makes sense, but I still think that SoundBite should have seen this coming.
Bottom Line
SoundBite is on Notice!
I’ve been pounding the table so hard, and for so long for SoundBite, that my hand hurts!
I pride myself on doing diligent and persistent research on all the companies that I follow. This includes talking to management on a frequent basis, constantly revisiting my investment thesis for any changes, and monitoring any news that comes out about a company and how it might affect us…
But as we can see, sometimes you are surprised by totally unforeseen factors or circumstances, and nothing you could have done would have changed the outcome, short of inside information.
All I can say is that I was flat wrong about SoundBite, at least for right now.
SoundBite is in the penalty box, and instead of just issuing a sell on the shares, I’m going to take my time, and get some more information on exactly what is going on.
That includes trying to get an interview with the CEO/CFO that I will post on the site, where hopefully, we can get some clarification on what has transpired and not jump to any rash decisions.
After all, in my original investment thesis for SoundBite, one of the risk factors was any kind of change in the business and the lumpiness in earnings from quarter to quarter.
Well, we’ve just hit a proverbial “lump” all right…
I’ve given SoundBite the benefit of the doubt by not delisting them yet to a “HOLD” or “SELL” but the company is officially on notice and the clock starts ticking now.
Shares of SoundBite might fall more from here…it might get painful out there, so if you want to sell now and ask questions later, I won’t blame you, but one bad quarter should never be enough to sell a solid company that hit a bump in the road, or was that a lump?
Along those same lines, because SoundBite’s shares have already been beaten up badly from their initial IPO price, it’s entirely possible that the shares actually won’t drop much more from here because SoundBite is already trading at or near their cash on hand of about $2.30 per share, and their Book Value of about $3.00 per share.
Either way, I want to wait this one out, and see if this was just a temporary interruption of SoundBite’s business or something more serious, before pulling the plug.
I understand that it’s management’s job to curtail unreasonable expectations, and run a business, so I’m willing to give them the benefit of the doubt.
SoundBite gets one quarter to straighten things out, then it’s Hasta La Vista Baby!
- 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: |
BUY |
| 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 Buy Now: |
|
| Market Cap: |
$63.52 |
| Revenue (2007): |
$40 |
| Cash/Debt: |
$36/ $0 |
| Current Price: | $4.00 |
| Risk Rating (?): | 10 (Highest Possible Risk!) |
| Position Size (?): | 1/4 (2-1-08), 1/2 (2-13-08), 1/4 (5-1-08), |
| Buy Around Price (?): | $6.00 (2-1-08), $5.50 (2-13-08), $4.00 (5-1-08) |
*As of 5-7-08. Except share price, all values in millions.
(2 votes, average: 5 out of 5)
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(11) comments to “I Was Flat Wrong About SoundBite: Bombs Q1/2008 Earnings, Lowers Guidance”
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Seeking Alpha Gold Certified Contributor
May 8th, 2008 at 5:11 am
Chris.
We certainly did get blindsided by management. :Lowering guidance and at the same time being very excited about the prospects of the company seem odd to me. They also better be right about their so called “investment” in the suit against URS. THat’s a lot of legal fees to spend when it could be used to grow the business, especially when any litigation outcome is never certain! Your sentiments echo mine as well after listening to the call. We’ll see
May 8th, 2008 at 8:28 am
I have been looking at this stock for a while and was reluctant to pull the trigger. I think your fundamental analysis was great. But for two reasons, I don’t think it is a good investment:
1. There is very low moat on their business;
2. After last quarter’s “excellent” result, we did not see price pop. Instead, there was huge selling in that day. Normally, traders knew what happened in the company better than retail investors.
I will never invest in a company which feels “excited” about litigation as an investment. Anyway, don’t blame yourself. It is always a risk to invest in penny stock. By the way, I do like your recommendation on Authentec.
May 8th, 2008 at 8:37 am
Tough one here. The company seems to have been blindsided, themselves, over the past couple of months. Perhaps they are learning as they go about how the market responds to their services in a recession. Their lack of business outside of the US is a huge problem now, as US banks cut back on budgets.
I never saw their moat, unless they are able to better integrate into their customers’ networks. Their main selling point - flexible, on demand pricing, based on individual campaigns - is also their achelles heel: it makes it easy for customers to switch to competitive products.
–JC
May 8th, 2008 at 1:04 pm
The company does not even have voip, and will not till mid to end of summer. tcnbroadcasting.com has had voip for over 5 years and is rolling out a new platform this month. So the whipping that soundbite is getting will be even bigger next time around. The thing i would watch for next conference call is the number of customers leaving to competitors.
May 8th, 2008 at 2:59 pm
Hey guys, thanks for the contributions and thoughts. Here are my replies:
Rick - I agree…now there appear to be 2 suits, which not only distracts management (is this why things are down, or at least one of the reasons?), but eats into cash flow, and profitability.
Let’s see if management was just being cautious in their outlook, or if things really are going downhill, and this is the first of many downward revisions!
Jerry - Thanks for the positive feedback I appreciate it.
I am trying to get an interview with management at SoundBite so we can clear some of this stuff up, and as for the moat, I thought that SoundBite had built enough of it to really separate themselves from the competition. You never operate in a vacuum, there is always competition, but with the free-to-end-user text messaging, and the call flow control features that allow them to monitor and control the flow of calls to call centers, and their client roster, I thought that momentum in their business was only going to grow.
I was wrong at least at this juncture.
You are right, that is the risk of small and micro cap stocks, and that won’t stop me at all from finding more unique and potential opportunities that will more than make up for this one stinker.
Joe - You may be right…perhaps this is the first time management has had to deal with really intense competition, price wars, and a slowing economy all at the same time, and they aren’t sure how to proceed.
I do agree that they need to expand outside the US, and it is something that I thought they would have implemented again by now. Again, highly disappointed in everything about the call and direction of the business right now.
TheWord: I notice that your html link is to TCNBroadcasting.com…do you work for them? Why are you so hot on them?
As for the VOIP, you are right, I failed to mention that SDBT pushed back their full VOIP roll out to LATE summer from mid-June..another bad sign.
Finally - To wrap this all up: SDBT gets one more quarter.
After today’s debacle and stock price decline, which I knew was coming, they are trading for slightly above cash value, so there is no point in selling the shares right now. I’ll look to speak to management, get more details and clarification on matters, and then do some more soul searching and research and see what I come up with.
The only good news that I can see is that they are cash flow positive, and free cash flow positive now, so they won’t need cash anytime soon, so they can sustain themselves as an ongoing concern.
And with the share price this low, even if they report “in line” next quarter, there might be some movement upward as things don’t appear to be getting worse.
This is a “speculative buy” because of the previously mentioned factors, with now my highest risk rating attached.
If you are looking for something super high risk, high reward, you can get a company trading at cash value that is cash flow positive, other than that, we’ll have to wait and see.
Thanks again guys,
Chris
May 8th, 2008 at 4:11 pm
I bought some SDBT at $5.00 and will at least hold it until it sees $5 again. The company has a few things going for it right now - no debt and a wee bit of cash. It also has a decent product, even if it lacks a moat. Sure, its 1Q shocked investors and we are emotionally affected by that. But not too many companies with these characteristics go to $0. I’m not saying SDBT is a good long-term holding; I wouldn’t buy it now. Given the nature of its business, however, free cash flow will likely stablize at or above $0 and the stock will return to $5 over the next 2 years. There is no surer way to lose money in stocks than to sell at a loss.
May 9th, 2008 at 6:04 am
I spoke with the company regarding expansion into Europe. I work for a well known company in their space, and discussed potential cooperation. They seemed to be more focused on the American market, and didn’t really express much interest.
May 9th, 2008 at 7:19 am
I put tcnbroadcasting.com, as a link to show all the readers that there are many companies out there that offer a this product at a better price with better tech built on voip. tcnbroadcasting.com just happens to be my favorite.
word
May 9th, 2008 at 7:42 am
Jim back here…
I cautioned months ago - not to trust this investment. I still maintain it.
I have a technology background and what they are attempting to do - no business unit inside a Fortune 1000 company will ever think of doing - It’s a money pit. If one indulges in such a business (voice calling, patent litigation, FREE SMS etc) inside a Fortune 1000 company - heads roll, people lose jobs. SoundBite has just displayed this publicly. The next thing will be they will cut jobs. This is the easiest way for a company to get revenues right.
SoundBite claims, they control flow of calls into call centers? Any one ask how? Its a guestimate they use - not a science. I will not go into further details - but when you call them Chris, do find out and post.
SoundBite is expensive!! When a VoIP call rack rate is around 1.0c a minute why do they charge 10c or more per minute for their service? Thats 10 times!!
This is the sole reason for that 62% margin.
I maintain that their business will be subjected to margin erosion and reduced revenues, plus spending on patent litigation. Once URS is done others are waiting to eat as well. This is similar to the Vonage Saga … one lawsuit after another.
Cut your losses and move on.
May 9th, 2008 at 3:21 pm
Jim,
You make some interesting points, and sure hindsight is 20/20.
I think that the SMS technology is free to end user, NOT free for the person sending it, obviously.
SoundBite was “excited” as well over the prospects and interest in this product, and it was something that I myself was interested in going forward for my buy recommendations for the website.
At any rate, the control to call centers question is a good one, and one that I would like to find out myself, as SoundBite claims that this is one of their competitive advantages.
I’ll be doing some more digging to see whether it is prudent to sell SDBT now or give them one more quarter to see if business improves.
One thing I pride myself in though is never jumping the gun, on the upside, or the downside, and I’ll make sure and do the same in this case.
I’m going to get an interview set up with the CFO soon, and we’ll go from there.
Chris
June 22nd, 2008 at 10:04 am
Thanks for the great article. Keep up the good work.