Whoever negotiated the deal cut last April, to land Documentum Inc a cool $125m convertible loan note, especially on terms that means it only converts at almost double the current share price, has single-handedly given the software vendor a golden opportunity to become the gorilla in residence in the document and content management arena.
With a set of third-quarter figures that show a sudden return to profitability, and a healthy increase in revenue, especially in high-margin software license revenues, Pleasanton, California-based Documentum seems to have joined the rock solid safe club, after years in and out of the financial wilderness.
The bald facts are that it has $173m in the bank, which when combined with $60m in long-term investment means it has over a year’s revenue held in cash. It has a brand new enterprise product line, numerous vertical and specialist segment product launches, and three acquisitions that are likely to be accretive at the net income level. These could be the growth kickers that will push last quarter’s $56m revenue up past the $62m mark and beyond.
On that background, Documentum is today valued at $720m, equating to cash in bank plus two times prospective revenue. That looks huge in today’s market and despite the strength of the company, most of the good news must already be in the price.
But it wasn’t always this rosy, and earlier in the year Documentum was still steeped in losses, way off its revenue highs of two years ago, trying to fire Andersen as its auditor (which it managed). It raised just $10m in a stock issue, while it was still burning cash.
This quarter just gone saw the core business contribute $12m to cash, so it won’t be too many more quarters like this one before we see Documentum going back to the market and either looking to repay all or some of this debt or find itself pushed to buy its own shares. The only sure-fire way around this type of pressure is to keep up the acquisition trail.
A couple of minor notes of concern stare out from the pages of Docmentum’s filings, such as its drop in deferred revenue from $6m to $2.7m. This usually means that there have been changes to the license types that are being pushed, more permanent licenses than firm term licenses, but this is only a matter of $3.3m which has been cashed from deferrals, and is minor enough to ignore.
The acquisitions it has lined up, Boxcar early in the year, now fully absorbed, eRooms, which has happened since the quarter ended, and TruArc, all fill out the Documentum portfolio, strengthening content, collaboration and distribution. Collectively these acquisitions, along with some visible growth, have given Documentum management the confidence to offer a $64.5m top of the line guideline for its coming quarter. The deals should eat into its cash by not much more than the business generates in the quarter, roughly $16m.
Documentum is one of the few companies not carrying forward massive restructuring charges and it has only reserved a total of $2.5m to reduce headcount and drop some minor facilities which will eat only another $700k in cash. Again, that’s chickenfeed.
Much of Documentum’s success has been in the quality of execution of its shift to a smaller direct sales force and extending and layering its channel structure, evidenced by the fact that with costs for the year in sales and marketing down 12%, Documentum has managed to grow sales.
The license revenue improvements on the quarter may have been substantially due to a single $7m deal, but there is a growing revenue base coming from Asia Pacific that almost from a standing start has closed $3m of license revenue for almost no cost.
A final note for a truly successful company is to be found in services revenue. We see too many firms where services revenue is simply a means to ship product, and one that offers very little margin at the net level. Documentum clients don’t seem to mind the prices it is charging for implementation, because it is producing services revenues with a gross margin of over 50%, and genuinely profitable at the net level. Not surprisingly, R&D spend remains a healthy 14% of revenue.