Don't show againSoundBite Communications: A Big Mess, or a Golden Opportunity?
SoundBite Communications (Nasdaq: SDBT), a leading provider of on-demand customer contact solutions, recently reported their Q1/2008 earnings, and the subsequent disappointment and stock collapse led to much head scratching.
I followed up with SoundBite’s management team to clarify some things that were said on the conference call, in addition to talking more about the business, the future, and to help understand whether or not we should hang on to our shares of SoundBite for another quarter or cut bait now.
What follows are the questions that I asked SoundBite’s management (In Bold), and their responses to those questions (paraphrased).
New to the SoundBite story?
- Read my last company update and buy recommendation here.
or you can:
I’ll break down this report into 2 parts:
- What’s Really Going On: Management discusses the business, present and future, as well as URS legal matters
- Bottom Line: More clarity, but still on notice
What’s Really Going On
Broad ranging discussion includes industry trends/economy
Q: Are the business trends that SoundBite talked about in your last call specific to your company, or are you seeing it across the board?
A: Since SoundBite is the only public company in this space, they are the only ones that report numbers.
However, that being said, they are seeing some pricing pressure in the 3rd party space where typically companies compete less on service and more on price.
Originally, when this all started and the pricing pressure really started to heat up, SoundBite thought that originally these companies were trying to steal market share since SoundBite is the leader in the 3rd party space, but as things have progressed, they are hearing and seeing things in the marketplace that lead them to believe that there is some weakness there.
Q: Why didn’t SoundBite issue some form of preliminary guidance prior to the earnings release if you knew that things were shaping up poorly?
A: In the midst of the quarter, everything was tracking within the range they gave, but in March some 3rd party accounts didn’t pan out, and pushed their campaigns out into the next quarter.
All things being equal, they only missed guidance on their low end by about $65,000, so they felt that they didn’t need to issue any preliminary guidance.
Q: What competitive strengths does SoundBite have going forward to see you through these tougher times?
A: SoundBite believes they have a technological advantage via their automanage and call-flow algorithms.
Basically what this means is that their system is continually looking at hold times, ring times, abandon rates etc., does this every minute or so on a real-time basis, and then based on the parameters of the individual campaigns, it then controls the flow of incoming and agent-based calls using an algorithms within the platform
SoundBite has a patent application pending to patent this capability.
Another competitive advantage is their robust and flexible scripting language that allows customers to implement their campaigns easier and more quickly than the companies they compete with, and change those campaigns in any way they want with very little work or time wasted.
This allows SoundBite the ability to be able to be flexible for their customers so they can change things quickly, in days instead of weeks.
Lastly, management cited SoundBite’s domain expertise in the collections space, which is their bread and butter and in fact they are so confident they are better in what they do, that they don’t make customers sign any contracts, and a customer can leave anytime.
They also said that they are still growing strong (20%+ range), just not as fast as before (30%+) range.
Q: Will you be tapping into your cash reserves in the coming quarters?
A: Management stated that they are a cash intensive business, so if their margins decrease due to loss of sales or increased competition, then yes, they will have to tap into their cash.
Last quarter though even with the shortfall, SoundBite was cash flow positive.
Q: If SoundBite was so “excited” about the future, why did you lowball guidance?
A: SoundBite has a very detailed sales forecasting model, and based on the bottom-up forecast, macroeconomic trends, cycling up of orders, etc., they put out guidance based on what they are comfortable with.
They also realized that you don’t want to ever have to lower guidance again, so make sure you reduce expectations low enough so that even if things get worse, you are covered looking forward.
Finally, they reiterated that they are optimistic because they have some very exciting prospects in the 1st party space.
Q: Are you going to be cutting costs? Jobs? Etc?
A: You can’t grow a business and cut costs, but that being said, they will be slowing spending, but still investing in their infrastructure, sales team and business.
They will also be spending less in sales and marketing, but still spending. If they stopped that, they wouldn’t grow, and that’s something they aren’t considering at this time.
Q: Can you explain the URS patent litigation stuff in more detail? For instance, from what I understood on the call, there appeared to be 2 separate cases, is that correct?
Read my initial explanation of the litigation from SoundBite’s latest conference call.
Case 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.
A: SoundBite confirmed that this first case indeed has a May trial date.
Case 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.
A: According to SoundBite, URS was essentially trying to unwind their first response to SoundBite’s legal actions
I further asked what was URS’s strategy by doing this? Management talked about how in these cases a lot of the time, the companies settle before they go to court.
It could be that maybe URS is using another suit as a bargaining chip in settlement talks.
What I don’t want to see happen is for SoundBite to settle and pay out anything especially in light of the fact that they have already dropped a lot of money on legal fees. This would be a net loss for the company at this point both in lost time and productivity and distraction, as well as financially.
Finally, SoundBite stated that there have been court ordered mediation sessions, so both companies are talking.
Obviously getting this resolved is in everyone’s best interest, but I believe that URS has no legal basis here, and hope that SoundBite, if they do settle, at least recoups their legal fees that they’ve incurred up to this point.
Q: Part of the investment thesis in SoundBite is due to the countercyclicality of the business in terms of collections agencies using your services more during times of economic stress. Now that seems to have changed, why?
A: Management went to great lengths to say that what they said was: “logic would suggest that it would be a “countercyclical” business”…but since they haven’t gone through that yet, they don’t know.
I guess we’re finding out that perhaps SoundBite is just like any other company in good times and bad.
It looks like more and more 1st parties are trying to get ahead of the debt and default cycle, but the 3rd parties are having trouble collecting the debt, and since that is SoundBite’s largest segment, by revenue, if that space has trouble, so to does SoundBite.
Further, SoundBite said that they hadn’t gone through it before, so they didn’t have a forward-looking understanding of the business.
I then asked about the margin deterioration, and I was told that if revenue is lower, it messes up the margins because SoundBite is a highly scalable, fixed cost business, so that the margins are affected both ways: higher in good times and lower in bad.
Q: Why isn’t SoundBite expanding into Europe to try and take some of the sting out of the US marketplace?
A: They have to get their VOIP network deployed first.
It’s taking longer than anticipated: always nuances that come up when venturing into new technology. They are working with their VOIP providers to resolve these issues, things like call durations, call volumes, etc.
They think they will be done by the end of the summer.
They are still looking at the market strategy in Europe. They stated that you want to start slowly, and then build up slowly, so perhaps they will use a reseller channel to start since there would be less costs involved to start up, or they would deploy a local sales person to scout out first party clients.
Also something interesting to note is that even though all of SoundBite’s business is in the US, a female voice with a British accent tends to get the best response in their call campaigns! I’m not sure what exactly that means or tells us, but it is definitely interesting.
Q: Does the Free to end user (FTEU) text messaging cost the companies using it? How much?
A: It is similar to standard text messaging, but the cost is higher than a regular text message, and the companies pay on a per message basis.
Basically SoundBite is just the aggregator, then there are standard billing rates, and there is an access fee, and then they are charged on a per message basis.
It’s about twice the price of a standard text message, but free to the end user.
This functionality has already been integrated into SoundBite’s platform in their co-location facilities, and is already in use.
The response from their clients thus far has been “very exciting”, and they have over 12 agreements signed and in process.
Q: What about acquisitions?
A: The recent Mobile Collect acquisition is the type of stuff they are looking at.
They want to increase their offerings to their current customers and to attract new ones, but aren’t looking to make an acquisition to increase their customer base, and are looking for small companies that have to partner with a larger player, like Mobile Collect, which come at a lower purchase price, but provide a better bang for the buck.
In fact, they mentioned customers who have come from one of their competitors, Varolii, a privately held company, and how those customers are surprised and happy with SoundBite’s service, and their ability to implement campaigns quickly.
Bottom Line
Still Sticking With SoundBite for Now
Other sources that I’ve talked to in this industry agree with SoundBite’s assessment that 1st party clients take a long time to come on board and test out all the functionality and potential benefits of the AVM systems that SoundBite offers.
If this is indeed true, then we should start to see traction later in the year as more and more of these contracts come on board and start utilizing SoundBite’s services.
Because SoundBite makes higher margins from 1st party collectors (those directly involved with their customers, vs. 3rd party collectors that work on behalf of other companies), as they diversify their revenue stream away from 3rd party and more towards 1st party, their business trends should improve.
At the same time, economic forces also appear to be stabilizing, and it could very well be that SoundBite took their numbers down to make sure they lowered the bar so much, that it would take a short hop to beat the grossly lowered expectations.
Wall Street certainly took it to them for this revision, and the analysts that cover SoundBite have all lowered their earnings expectations, revenue outlooks, price targets and ratings.
At this point, with SoundBite trading near its cash value of $2.36 a share, there is downside protection very near today’s price, and one of the reasons why I am giving SoundBite one more quarter to show some business improvements.
I’m not expecting things to rocket upward quickly, but what I want to see is continued business trend improvements, more 1st party customers, and no more lowered guidance, or missed guidance.
Anything short of that puts SoundBite’s shares directly into the penalty box, no matter how “cheap” they may or may not look.
For now, if you still own shares of SoundBite, hold on to them, and for highly speculative risk-takers, buying shares of SoundBite at today’s prices might present a great risk/reward scenario with shares near their all-time lows and trading below book value, and right around cash value.
It takes guts to hold on and/or buy shares of SoundBite at this point, but there’s a reason that I started this website, and it was to be ahead of the curve, not behind it when it comes to recommending stocks that are on their way up, or that have bottomed out, as SoundBite appears to have done.
In fact, expectations are so low now, that even if SoundBite meets guidance, it is very possible that their shares will recover nicely from today’s levels in a relatively short amount of time.
The bottom line is this: SoundBite gets one quarter to show at least marginal improvement to their business, otherwise, we move on to greener pastures.
- 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: |
$44.8 |
| Revenue (2007): |
$40 |
| Cash/Debt: |
$36/ $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), |
| Buy Around Price (?): | $6.00 (2-1-08), $5.50 (2-13-08), $4.00 (5-1-08) |
*As of 5-21-08. Except share price, all values in millions.
(1 votes, average: 5 out of 5)
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(16) comments to “SoundBite Communications: A Big Mess, or a Golden Opportunity?”
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PeakStocks.com welcomes and encourages reader comments. Add your voice to the discussion whether you agree with me or not.
May 22nd, 2008 at 10:33 am
How can they patent something the competition has been using for years? TCN “controls the flow of incoming and agent-based calls using an algorithms” with its platform and has a VOIP platform. Soundbite will not have VOIP till the end of summer? Competitors already have it.
May 23rd, 2008 at 12:57 am
It’s simple really:
The first company to get a patent or file one, wins.
So just because others are doing it, if they haven’t filed the patent for it yet, then it won’t matter if SoundBite sends them a cease and desist.
Chris
May 24th, 2008 at 1:34 pm
All other things being equal, an inventor who files the first patent application outside the U.S. will win the patent outside the U.S. The first person to invent will win the patent in the U.S.
Big caveat. Just because SoundBite might eventually obtain a patent doesn’t necessarily mean they will be able to prevent or stop competitors. Their patent must be valid, enforceable and its claims must read on the competitor’s process, method, device, or the like. Even then, if the competitor develops a workable design around strategy, SoundBite’s patent becomes moot. Or SoundBite may end up licensing its patent to its competitor(s) a la Palomar Medical Technologies (PMTI).
May 24th, 2008 at 1:40 pm
Claude,
Good points, and thanks for the clarifications.
I was merely trying to state that this could be one of SoundBite’s competitive advantages going forward.
Even if someone does invent/create a workaround, if SoundBite’s systems and implementation are superior, they will have an advantage in that department.
Either way, we need to see some traction by the middle of this year to make the investment thesis hold for SoundBite.
Chris
June 1st, 2008 at 5:23 pm
Chris
You said
“Basically what this means is that their system is continually looking at hold times, ring times, abandon rates etc., does this every minute or so on a real-time basis, and then based on the parameters of the individual campaigns, it then controls the flow of incoming and agent-based calls using an algorithms within the platform”
This is bogus. I say this with confidence because I know how telephony and ACDs work. You cannot in any way get an exact measure of controlling the flow of calls without touching the ACD or on-premise telephony system.
In what I understand about SoundBite - they do not directly interface or integrate with any ACD. They predict based on time.
The closest analogy is flood gates in a dam. You empty or hold water depending on water build up in the dam. This is exactly how SoundBite operates.
There are enterprise companies out there that have spent years developing network technology that can accurately measure and tell the handling and routing of calls to particular agents in a call center.
Unless Soundbite effectively integrates with enterprise ACDs - I do not see them being successful in 1st Party market. All Fortune 1000 companies have invested heavily in ACD technology.
Your pal Jim.
June 1st, 2008 at 5:39 pm
Jim,
You make an interesting point, and one that I would have to research further to make sure I understand better.
What I was relaying was taken from my talks with SoundBite’s management and not my own interpretation of what I think is going on.
Obviously the beauty of what SoundBite does is that they don’t have to mess with on-site applications at all, so having to do so is a huge potential detriment to their business model.
I’ll have to look into this further and get back to you.
Thanks again,
Chris
June 10th, 2008 at 6:21 pm
Chris
You said
“Obviously the beauty of what SoundBite does is that they don’t have to mess with on-site applications at all, so having to do so is a huge potential detriment to their business model.”
Indeed this would be a splendid thing to do.
However, forget telephony and call center for a second. Let’s look at a small example
There are 3 water tanks - each one can hold 100 gallons of water each. There is a universal water level meter on site that monitors water levels in each tank and makes sure that it does not get overfilled.
These tanks are being fed by one pipe, which has a control valve connected to the universal water level meter. So if all three tanks need to be filled - water flows in full force, if two tanks are full and the third one is nearing capacity … the valve on the pipe is being closed.
Assume, tank 3 now needs to be filled with red water. How would the same pipe feed only red water to tank 3? with the same setup as above. Puzzling question right?
This is exactly the flow control situation SoundBite and other voice messaging hosted players are subjected to. All such companies need a way to by pass the universal meter and valve or work by integrating with it.
Rain could still mess things up - but that’s an education for another day.
June 11th, 2008 at 12:56 am
Jim,
Interesting analogy, I appreciate you passing that along.
I suppose after thinking about it some more, the next thought that I had was, if all the AVM providers do this, and no one has direct access to the “pipes” so to speak to actually control the call volume flow, then SoundBite is still best in breed at what little amount of “flow” control they do.
If no one has the ability to do this that is no on premise, than out of all the providers that offer this type of service, whether they are overstating their capabilities or not, SoundBite already has top 2 market share, not to mention the end-to-end solutions they offer via their e-mail, text and AVM products in a tiered service offering that allows them to provide an end-to-end service to their customers.
Chris
June 11th, 2008 at 5:10 pm
If you have drunk the SDBT Kool-Aid. No amount of my analogies will be of any use.
At the end of the day even the Chia pet makes money for someone - http://en.wikipedia.org/wiki/Chia_Pet
Happy Making money on SDBT while it lasts.
June 12th, 2008 at 1:25 am
Thanks Jim for all your analogies and trying to help us poor folk understand SDBT…
Who do you work for again?
Are you saying that no company will ever be able to succeed in the AVM market?
What was your exact point?
Either way, thanks for the friendly dialogue and banter.
Chris
June 13th, 2008 at 4:42 am
Work for myself. Am a consultant
I did not say no company will be successful. There are success stories around - SDBT, Varolii, LiveVox, our friend from TCN, there is another called as GC and many more. Together they address the same market - AVM for both 1st Party and 3rd Party for Debt Collections.
Chris - you ask a fantastic question
What was your exact point?
Here’s the point
All companies listed above will continue as companies ..i.e., they will keep running. Why? cuz Debt Colletions does not dry out.
Can they be the next Apple or the next Microsoft? Probably NO.
SDBT is diversifying to text messaging you said. How many folks out there who owe debt and own a cell phone with a text messaging plan?
To complete my thought process
Chia has continued on for 20 years!! Hey! there is even a new Wall.E Chia coming out next month. Does that market exite me …NO. Is an AVM company adding text messaging Sexy? Not for me. It’s not innovative and its not earth shattering. Will someone use it - you can always find customers.
Hence the comparison. Not a Banter.
Make money while you can.
Cheers!
June 14th, 2008 at 1:33 am
Jim,
Again thanks for the comments.
What I wanted to mention was the client roster that SDBT has and the expansion with which they are entering new markets.
Not just AVM, text, etc., but I mean new markets such as 1st party collection space.
This is where the real money is at.
Once 1st party business are happy with your service, they are not likely to change.
Because SoundBite already has an impressive roster of clients, and is adding more each day, their credibility is increasing, and the text messaging aspect of things is just one aspect.
Remember, 1st party customers want to stay ahead of te debt collecting game. They don’t want to charge off the debt, and send it off to 3rd party collectors.
So, to stay ahead of that, they simply enlist SDBT, use their text messaging features, AVM features, email features all tied into one clean and robust platform, and get their customers to pay ahead of time.
This is not defaulted debt, SoundBite is trying to diversify away from that market, this is 1st party companies like Capital One, T-Mobile, etc.
Will SDBT ever become the next Microsoft?
To be honest, there is only 1 Microsoft, so that’s highly unlikely for any company that anyone covers.
But one thing is certain, this is a growing and rapidly expanding market, with SDBT being in the top 2 now in sales and volume.
Is is not enough to dominate a niche and be the best player in that niche?
I think the owners of Chia Pet stock (if there is one!) are very happy right now!
World dominance is never necessary, just niche dominance.
That’s all I’m after, and I feel SDBT, the last quarter’s results notwithstanding, could potentially be that company.
Chris
June 25th, 2008 at 2:45 pm
tHEY SETTLED cHRIS–Hit the wires after 4 pm today. there’s hopes after all
Hot Stocks story about SDBT
SoundBite Communications and Universal Recovery Systems announced that they have settled two lawsuits between the parties. As part of the settlement, Universal Recovery Systems will pay SoundBite $4.6M. SoundBite also has been granted a worldwide, perpetual, non-exclusive license to the Universal Recovery Systems patents involved in the two lawsuits. SoundBite has agreed, under certain circumstances, to not contest the presumption of validity afforded each of Universal Recovery Systems’ issued patents. SoundBite has agreed to dismiss its business tort and unfair practices claims in the Massachusetts lawsuit against Universal Recovery Systems and its CEO, Blake Rice. Universal Recovery Systems, for its part, has agreed to dismiss its claims of patent infringement and fraudulent inducement against SoundBite in the Minnesota lawsuit. :theflyonthewall.com
June 25th, 2008 at 5:17 pm
Rick,
Thanks for the update, I was right on it as you posted!
You can read my entire breakdown here:
http://peakstocks.com/its-over-urs-settles-claims-with-soundbite-for-46-million
Take care,
Chris
December 8th, 2008 at 8:27 am
Hi Chris,
you had stated ‘They are still looking at the market strategy in Europe. They stated that you want to start slowly, and then build up slowly, so perhaps they will use a reseller channel to start since there would be less costs involved to start up, or they would deploy a local sales person to scout out first party clients.’
Can i ask was this stated by the company to yourself or was it in a press release / news?
Thanks
December 8th, 2008 at 2:12 pm
David,
Unfortunately, I no longer cover this company, so I can’t help you there.
If I were you, I would forget about them entirely, the stock is down about 50-75% since I recommended selling around $3.00 per share, and it’s going to 0.
Chris