Editor’s note: To download a Microsoft Excel file containing the full results of the CFO Midcap 1500 Software Industry Scorecard, click here.
The mid-market software sector managed to eke out 4% revenue growth in the first quarter over the same period in 2008 — a seemingly positive result amid abysmal economic conditions, but one that was driven largely by acquisitions rather than improved cash performance.
Among the 41 software companies in the CFO Midcap 1500 whose first fiscal quarters ended March 31, profits plunged by half as operating cash flow fell off by 5% and money tied up in working capital swelled by 4%.
Cash earnings per share — defined as operating cash flow divided by diluted shares, a measure of funds available to invest in the company or pay dividends — dipped a penny, to 24 cents from 25. But even with that decline, cash EPS was 5 cents higher than it was in the first quarter of 2007.
A number of the trends show up in the quarterly results of Taleo Corp., a vendor of human capital management software. The company’s top line jumped 34% over last year’s first quarter, from about $36 million to $48 million. About half of that increase, according to CFO Katy Murray, was attributable to the company’s July 2008 purchase of Vurv Technology, another talent-management solutions provider. But the acquisition was also the main culprit in a net quarterly loss of $2.2 million, compared with a $561,000 profit a year earlier.
The big hit came in amortization charges absorbed in the Vurv deal, noted Murray. The adjustment for depreciation and amortization on Taleo’s quarterly cash flow statement ballooned to $6.7 million from $2.4 million in the year-ago quarter. Backing out that line item as well as stock-based compensation, another non-cash expense, the company actually made $5.6 million of “real cash profit” in the quarter, Murray told CFO.com.
“Those expenses drove the loss, not the fundamentals of the business,” she said. “There is still very good demand for what we sell. Did we do as well as we would have if the economy wasn’t challenged? That’s hard to say, but we’re the leader in our space, and at times like this the strong tend to get stronger. We’ve seen more business close — our ‘win’ rate has gone up.”
Murray also credited a 95% renewal rate on software subscriptions, and a quarterly billing cycle that she said makes collections easier in these tight times than expecting customers to pay for a whole year up front, as some software-as-a-service companies do.
To be sure, the acquisition helped add $8 million to the company’s net working capital load, and sales, general, and administrative expense as a percentage of revenue climbed by 11%. Still, Taleo’s cash EPS was a healthy 43 cents, up from 28 cents in last year’s first quarter.
Taleo’s purchase of Vurv was a relatively small one, costing $37.5 million in cash and 3.8 million shares of common stock. A much bigger deal was closed last summer by Ansys Inc., a maker of engineering software, which acquired Ansoft Corp. for $387 million in cash and $423 million worth of stock.