JIVE Turkey

 | Feb 13, 2013 | 3:30 PM EST
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Empire Capital Management, a technology-focused hedge fund co-managed by Scott Fine and Peter Richards, has reported ownership of 2.8 million shares of Jive Software (JIVE), as well as a significant number of call options. Altogether, it controls or has the potential to control 5.4% of total shares outstanding.

The company's products blend social and business software, allowing employees to share information among themselves, customers and business partners. Jive claims that a top consulting firm has shown that users of the software experience a 15% increase in productivity and a 4% increase in revenue. Jive has a market capitalization of about $980 million, with about 640,000 shares traded daily and a current stock price above around $15 (plenty of liquidity for most investors).

In the fourth quarter of 2012, Jive's revenue came in at $33 million, up from $23 million in the fourth quarter of 2011. Most of this growth came from product sales. The 44% revenue growth rate was in line with what the company had experienced earlier in the year, so sales growth does not seem to be decelerating by much as Jive grows and increases its market penetration. But the company's margins have not improved much and it remains unprofitable. Interestingly, gross margins have been fine. Operating expenses, including sales and marketing (which grew by 50% between Q4 2011 and Q4 2012, and now consume 60% of revenue on their own) have been keeping pace with revenue. Jive's operating losses grew 32% over this same period, reversing the trend from earlier in the year when losses actually had been smaller than in 2011. Losses per share were $0.24 for the quarter. In fact, cash flow from operations was narrowly negative last quarter, and was only barely positive for 2012. Jive does have a large cash hoard -- $168 million, including marketable securities -- but it's not a good sign to see a growing company go from cash flow positive to cash flow negative.

In fact, Wall Street analysts expect net losses to increase this year, to $0.56 per share, despite a consensus revenue growth rate of 35%. We have seen that top-line growth of that magnitude is not out of the question. But we hesitate to assume that it will be that high and we imagine that -- particularly as the growth in costs has tended to be in operating expenses -- any shortfall in revenue would make losses even larger. Jive's share price is down 22% in the past year, including a 4% decline year to date. The most recent data shows that 26% of the outstanding shares are held short, so a number of market players are bearish on the company.

We don't think that buying Jive stock is a good move. The company is unprofitable and, judging by recent quarters, it doesn't seem to be making progress towards profitability, despite considerably higher sales. In fact, cash flow has gone slightly negative -- and it is very low when there is any. We worry that the "cloud computing" buzz has excited a number of investors into assigning very high valuations. While the company has provided some evidence that its products are effective, that's not really relevant; high revenue growth, which is showing only small signs of slowing, itself demonstrates that getting customers is not Jive's problem. Until the company shows more progress controlling costs, we would avoid it. And depending on factors such as the cost to borrow and the likelihood of an acquisition by a larger technology company, Jive merits consideration as a short candidate.

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