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Tuesday, July 11, 2006

Stock of the Week: Click On Click Commerce

By The Average Joe Investor

Stocks: (CKCM)(WMT)

Click Commerce (Nasdaq:CKCM) is down almost 8% year to date, though it's down even further if you just recently bought in February or March. But what isn't down, right? We're still dealing with a Nasdaq that's down 4% since the beginning of the year. Right now Click is trading at a mere 13x their trailing 12 month EPS and 14x 2006 analyst estimates. Tack on a 25% long term growth estimate and you're looking at a PEG that looks like a screaming buy. But is it?

There is really a lot to like about this company besides just the price of its stock. Click is all about efficiency - they develop and sell on-demand software solutions for supply and demand chain management. To break down that jargony mess, we're looking at this 1) this is a software play, 2) this is a newer-age software play that allows customers to buy on a license, meaning that they pay a large sum up front for use of the software, or use the software "on-demand" and pay a subscription fee (this is also known as "software as a service"), 3) their software helps companies manage their supply and demand chains, which are basically the chains of other companies linked together on either the customer or supplier side for the company.

Picture this: you're Wal-Mart and you've decided to add a new SKU to the mix, say a new Apex DVD player. So now that you've made the decision to add the SKU, and you've done your demand forecasting on a store level, and you have to figure out how to get these DVD players from Apex in Canada to, what, fifty million Wal-mart stores? Not only that, but you're going to want to be able to track the progress of these shipments and be able to easily order more in the future. Of course this is an extremely watered down idea of supply chain management, but it gives you an idea of what it's all about. Not a cake walk by any means.

Click's primary business is developing software that helps customers like Wal-mart, Home Depot, Lockheed Martin, and Motorola keep tabs on their supply and demand chains. To help customers drive even more efficiencies, Click has also started offering radio frequency ID (RFID) enabled supply chain solutions. RFID tags are these neat little devices that can hold a small amount of identification information and can be read within a certain proximity by RFID readers. Companies like Wal-Mart have implemented RFID in an effort to more easily track the massive amounts of goods passing through their warehouses and stores. While Click doesn't sell the actual RFID tags or readers, they have enabled their software to interact with these devices.

I'm also a fan of how Click has started to sell its products. Specifically, I think that on-demand software offerings represent a significant step from traditional license selling. For one, when you're selling on a license it's generally a huge up-front price that a customer has to cough up. When you can offer a customer an option where they can pay a much lower monthly subscription fee, it removes a significant hurdle to the initial purchase and allows a customer to try out a new solution without paying a massive license fee. Another advantage of on-demand solutions is that they are typically hosted on-site at the vendor, which allows for more efficiencies in implementing and running the software for any given customer. And, of course, for the vendor, subscription-based on-demand software offers a nice, predictable recurring revenue stream (Wall Street analysts LOVE predictable revenue streams!).

Looking at the way Click's revenue breaks out, it's apparent that the subscriptions have not caught on in a big way yet (they were about 10% of revenue in Q1), but, on the bright side, Click has seen some really nice growth in their hosting and maintenance revenue stream. While there's a bit more cost on Click's side associated with this type of revenue, it is still a nice stream because of its recurring nature. In Q1 maintenance and hosting was 46% of total revenue and had grown over 100% versus the previous year.

With that all said, there are some questions that I have about Click. Enterprise software companies in general tend to have longer collection periods (DSOs) than the average, but Click has seen some not-so-nice spikes in their receivables in the past. For instance, a quick glance at the balance sheet in their 10-K for FYE 2005 shows receivables leaping from $7.3m in 2004 to $25.3m in 2005. Sure sales more than doubled in that period, but that's a pretty extreme jump in receivables. This could be do to timing of sales at the end of the year and when they collect, but you still want to see your sales turning over to cash ASAP.

The other thing that gives me a bit of pause when looking at Click is the number of acquisitions that they have done. We're not talking about a big company here; right now I'm looking at a sub $250m market cap on GoogleFinance. Typically, acquisitions are done when a company doesn't necessarily see a lot of additional room in their market and they want to branch out or if they simply can't grow organically fast enough. Both of these scenarios are more typical of much larger and slower growing companies. The reason this worries me for Click is that I would think that there is plenty of opportunity in their market and I would hope that they would have the internal development capabilities to tackle that opportunity. I've never been a really big fan of acquisitions as there is a pretty wide margin for error in trying to integrate operations, people, and technologies.

In other words, I would certainly not deem Click to be totally without fleas, but for an investor with some amount of appetite for risk and some room in their speculative portfolio, this price will likely offer a good amount of upside over the next twelve months. I did a quick-and-dirty valuation on this assuming a 20.5% 5-year growth rate, earnings of $1.40 for '06 and $1.60 for '07, and a 15.6% discount rate and came up with a value around $22.50, which represents around a 15% premium to the current price. And this is only a 16x P/E on '06 earnings - if this were to really catch a tailwind it could easily get bid up into the 20x range.

So if you haven't gotten enough of an ulcer from the market volatility lately - CLICK IT UP!


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