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Jive Software: Current Star, Future Wallflower?

by Melissa Davis and Sonya Colberg - 5/3/2012 10:09:35 AM

Talk about fancy moves. Before Jive Software (Nasdaq: JIVE) finally stumbled a few weeks ago, hammered by a wave of selling pressure that could dramatically escalate from here, the bleeding social media company danced all the way from $14 to $28 a sharevirtually doubling in a brief 70-day span – without any major breakthroughs on its part. Jive instead relied on a powerful “sympathy rally” for most of those huge gains, records indicate, suddenly exploding to life after Facebook announced plans for an initial public offering that temporarily shifted attention away from its own plight. (See the main story above for a detailed review of that hyped-up rally.)

Since Jive itself went public barely five short months ago, the company faces a looming overhang that could soon pound its richly valued shares. When Jive carried out its IPO late last year, past news coverage reveals, the company originally released less than one-quarter of its shares onto the public market and subjected the vast majority of its stock to trading restrictions that will expire very soon. 

Come June, records indicate, Jive could see roughly 38 million additional shares of company stock – much of it originally priced around $5 a share or less – start pouring into the marketplace. With Jive currently fetching almost $24 a share on the open market, where daily trading volume averages around 500,000 shares (the equivalent of just 1.3% of the restricted shares set for release), the stock looks rather vulnerable to say the least.

Jive actually took an early hit before its lockup period officially expired, a familiar pattern among young Internet stocks – such as Zynga (Nasdaq: ZNGA), Groupon (Nasdaq: GRPN) and even current standout LinkedIn (Nasdaq: LNKD) – that enjoyed temporary honeymoons after their celebrated public offerings last year. While Jive maintained its stamina longer than some other newcomers to the sector, records show, the stock finally reversed course about a month ago. Jive lost 20% of its value in the weeks that followed, shedding much of that during a heavy two-day selling spree, with the share count in its freely trading “float” somehow expanding (despite continued lockup restrictions) along the way.

Two venture capital firms control most of that restricted stock, records indicate, with both of them already recording massive returns on their investments at this point. Corporate insiders sit on a mountain of cheap restricted stock as well, records show, including a CFO who previously kept the books for a pair of young highfliers that soon collapsed and vanished from the stock market as the result of fire sales.

Last month, as Jive itself finally weakened under the pressure of an early selling spree, cautious investors started bracing for a serious meltdown.

“JIVE is one of the few IPOs holding up,” one investor noted last month, shortly after cutting his own stake in the company. “Gotta feeling its days are numbered.”

Indeed, records show, Jive promptly tanked the very next week and has staged only a modest comeback since that time. Now a popular target of hungry bears, records indicate, Jive has attracted a growing crowd of short sellers – clearly aware that the lockup period will soon end – who keep raising their bets against the stock in anticipation of an oncoming crash.

Jive did not respond to questions for this story

Short Honeymoon

Based on recent history, that threat looks very real and the fear behind it justified as well. Like Jive itself right now, records indicate, LinkedIn once counted Sequoia Capital among the largest holders of its restricted shares when it began trading on the public stock exchange. Following in the footsteps of other early LinkedIn backers who rushed to lock in their paper gains, however, Sequoia has since gone on to sell its gigantic stake in that social media company. 

As the largest Jive shareholder of all, records indicate, Sequoia now looks poised to hit the jackpot once again. Sequoia owns almost 17 million shares of restricted stock in the company, or 27% of the shares outstanding, and stands to make an outright fortune on that investment as well.

Together with a second venture capital firm, The Wall Street Journal noted last summer, Sequoia paid barely $5 a share for a portion of its Jive stock in mid-2010 and previously spent even less  -- just $3.68 a share -- for the stock that it secured as the first major backer of the bleeding software firm. All told, past news records indicate, Sequoia and its financing partner Kleiner Perkins Caufield & Byers (KPCB) provided about $100 million in funding to Jive before the company went public and wound up with a mountain of restricted stock – worth more than $550 million at current market prices – in return.

That lucky duo controls 23.6 million shares of restricted stock in the company, records indicate, a total that practically matches the 23.7 million shares that have reached the public market at this point. Therefore, those two firms could effectively double the existing float – all by themselves – if they dump their valuable shares once the lockup period officially expires.

When LinkedIn saw that fateful deadline fast approaching, The Wall Street Journal observed last November, the company scrambled to limit the number of freely trading shares that would flood onto the market at one time. Even with Sequoia (and other major investors) holding onto their LinkedIn shares for an extra 90 days, however, the stock still tumbled during the rapid sell-off that soon followed. Already trading well below its early triple-digit highs at that point, LinkedIn lost one-quarter of its remaining value -- sinking to an all-time low of $56 a share – the very month that its original lockup period came to an end.

While LinkedIn has rebounded strongly since that time, staging a remarkable comeback often viewed as wildly overblown, the company boasts several key attractions that Jive itself now lacks. A household name for starters, LinkedIn started making money back in 2010 (clearing that particular hurdle before it ever went public), and the company looks poised to generate much fatter profits -- while Jive faces ongoing losses -- than those that it has already recorded on its books.

Still, with LinkedIn already trading at almost 100 times its forecasted earnings for 2013 -- and the company expected to quadruple its annual profits before that year even begins -- the stock looks priced beyond perfection based upon standard valuation tools. When The Motley Fool recently examined the stock and found it trading at almost 900 its prior-year earnings and 20 times its reported sales (a huge price-to-sales ratio that resembles the hefty multiple sported by Jive itself), records show, the Fool declared LinkedIn the "most expensive stock" that it had ever seen and hinted at the potential for a major correction in the price.

Meanwhile, relying on a variation of the fruitless strategy that failed to protect LinkedIn months ago, Zynga has already tried to prevent a massive selloff of its restricted shares. In early spring, Zynga announced a secondary offering designed to “facilitate an orderly distribution” of its restricted stock into the public marketplace. Although Zynga released only a portion of its restricted stock at that time, with the remainder set for release the same week that Jive will see its own lockup period expire, the shares have since fallen 25% below their secondary offering price and now threaten to revisit the record low they briefly touched as a brand-new public company.

A $15 highflier back in early March  (the same month that Jive set its all-time high as well), Zynga has by now lost almost half of its peak value, with the stock resting firmly in single-digit territory after sinking to a near-record low of barely $8 a share.

Faded Glory

Groupon paid a dear price much earlier than that. Less than three weeks after going public (with its own restricted stock still locked up for another good five months), The New York Times observed, Groupon fell alongside LinkedIn and swiftly lost all of its enormous IPO gains. While Groupon clawed its way out of the teens and into the low $20s by the time that Jive itself went public – escaping that recent hit entirely – the company followed up with a string of disasters that dragged its shares right back down again

Now racing toward the end of its own lockup period (helpfully delayed by a month to allow for a scheduled earnings report), Groupon – like Zynga -- hovers just above its all-time low.

On June 1, the threat that first hammered Groupon five months earlier will finally materialize. With restricted stockholders free to sell their shares, Forbes has cautioned, “expect them to rush for the door at the first possible moment.” Since Groupon initially released only a tiny fraction of its shares when it went public, experts have warned, the company could see its stock come under heavy selling pressure once again. 

By then, Jive will enjoy little remaining protection of its own. Indeed, barely one week after Groupon subjects itself to those powerful market forces, Jive must turn around and do the same

“There is a standard 180-day lockup, which would date the release on or around June 9, 2012,” UBS dutifully reported back in January, with that threat (listed at the end of the obligatory “Risk Analysis” section) still a safe distance away. Then “48 million shares are expected to become available for sale, representing roughly 64% of diluted shares outstanding.”

 

While 10 million of those shares have apparently snuck into the public float already, current figures suggest, Jive has yet to release at least 37.7 million of its 61.5 million outstanding shares onto the market at this point. Sequoia and KPCB still own their gigantic stakes in the company, records indicate, but corporate executives apparently rushed to cash in some of their cheap shares. 

The very week that Jive first began trading, records show, five officers sold almost $20 million worth of stock in their newly public company. They parted with only a small portion of their vast holdings, however, so they still have plenty of stock left to sell. The two young co-founders inherited more than 6.5 million shares apiece, records show, while other company leaders divided up a pile of cheap stock options to purchase a similar number of shares.

Ugly Haircut

CEO Anthony Zingale collected 3.34 million of those options (more than the rest of that group combined), records show, and exercised about one-third of them before the stock even landed in the public’s hands. He still owns more than 2 million options at this point, however, all of them carrying strike prices of $1.75 a share or less. Right now, with Jive trading at the high end of its impressive 52-week range, he is worth almost $70 million on paper as a result. 

Other Jive executives currently rank as paper multimillionaires, too. Take CFO Bryan LeBlanc, for example, who took a hyped-up online retailer public during the last dot-com boom. As a four-year “veteran” of the company, LeBlanc wound up with a nice supply of dirt-cheap options that have already vested at this point.

LeBlanc scored 1 million stock options in all, corporate filings show, the vast majority of them fully vested and exercisable at just 53 cents to 56 cents a share. Going forward, those filings indicate, LeBlanc could pocket a handsome eight-figure payout of his own – if Jive actually holds on to its enormous gains -- by cashing in those vested options (with plenty of unvested options left over) once the lockup period comes to an end.

But Fogdog, the last Internet company that LeBlanc brought to the market, produced only fleeting gains instead. When Fogdog went public in late 1999, past news coverage shows, the stock briefly doubled to more than $20 a share on its opening day of trade. With Fogdog spiraling all the way to $1 just nine months later, however, Forbes bluntly proclaimed that the company had relied on “accounting hooey” to achieve a double-digit stock price in the first place. Shortly after that, records show, Fogdog rushed into the arms of a stronger rival – selling itself for a tiny fraction of its original market value – just as the Nasdaq prepared to delist the penny stock from its respected exchange.

“Soon after Fogdog went public last year, its market value skyrocketed past $750 million,” Dow Jones reminded at the time. “Eleven months later, Global Sports (GSPT) now says it will buy the company in a deal valued at $38.4 million … Talk about a haircut.”

Three years after Fogdog carried out that fire sale, its IPO made headlines once again. At that time, records show, securities regulators filed charges against a Fogdog underwriter for alleged violations that allowed the firm to score outsized profits on the public offering.

By then, LeBlanc had already served as the CFO of yet another newly public company that wound up selling itself on the cheap. The year before LeBlanc took over as its finance chief, an old Dow Jones article reveals, inSilicon enjoyed a “strong public debut” as its brand-new stock rocketed from $12 to more than $25 a share on its first day of trading. Less than a year after LeBlanc arrived on the scene, however, inSilicon found itself slashing its workforce in a doomed effort to survive as a stand-alone company. LeBlanc hit the door soon after that, records show, with inSilicon gladly agreeing to sell itself for barely $4 a share – after watching its stock sink below $2.50 on the open market – in the months that followed. 

David DeWalt, a Jive director who serves on the audit committee, currently chairs a multibillion-dollar technology company that suffered a recent meltdown of its own. Polycom (Nasdaq: PLCM) rattled the market earlier this month, records show, when the company issued a profit warning that dashed hopes for an expected turnaround. A $20 stock shortly before that announcement – which fetched more than $30 last summer – Polycom has since plummeted to a multiyear low of just $12.42 a share.

Double Date

Before Jive tapped him as its leader, records show, Zingale ran another technology company tainted by outright scandal. 

Zingale previously served as the turnaround CEO at Mercury Interactive, The Wall Street Journal noted back in 2006 (when he still held that post), one of the first high-tech companies caught up in a sweeping investigation focused on backdated stock options. Although Zingale arrived on the scene years after that suspicious activity took place, the Journal observed, he inherited a company that would continue to operate under a dark cloud nevertheless. With Zingale at the helm, the newspaper recounted, Mercury wound up restating a decade worth of financial reports – and temporarily losing its spot on the Nasdaq exchange – in a rocky comeback that finally allowed the company to sell itself to Hewlett-Packard (NYSE: HPQ) in a multibillion-dollar deal.

Jive lured Zingale to the company a few years after he negotiated that transaction, records show, and now counts Hewlett-Packard as one of the most treasured names on its entire client list. Earlier this year, however, a muscular rival apparently scored a major contract with that big electronics company as well.

“Salesforce (NYSE: CRM) has landed Hewlett-Packard … as probably its biggest customer and has been talking about it since it last reported earnings,” Dow Jones noted about two months ago. “Look for Salesforce to play up this relationship as often as it can in the coming year.”

Jive still provides the social-networking platform utilized by Hewlett-Packard, Dow Jones acknowledged, which said that it has “no existing plan” to shift from its current system to the rival program offered by Salesforce (hired for other services) instead. Although Jive ranks Hewlett-Packard among its most valuable customers, based upon the size of its contract, the company likes to brag that “millions of people at the world’s largest companies” by now use its platform to “transform their businesses.” With that customer base increasing at a much slower rate than its overall sales, however, Jive readily acknowledges (and, in fact, repeatedly cautions) that the company depends heavily on the continued renewal – and lucrative expansion – of existing accounts to drive its surging revenue.

If anything, corporate filings indicate, that situation has grown more pronounced with the passage of time. 

In 2010, for example, Jive boosted its customer base by a solid 26% and – with the help of those new customers – went on to report an even stronger 54% jump in annual revenues. Jive expanded its customer base by just 13% in 2011, however, and wound up leaning even harder on the customers that it already served. By retaining 90% of its big-ticket accounts and “up-selling” more services to some of those important clients -- which the company obviously needs to keep -- Jive actually managed to top its earlier performance with a striking 67% jump in annual sales.

Fair-Weather Friends?

At the same time, however, Jive weathered major deterioration in a related metric that serves as a critical guide to future sales. Jive keeps a running tally of the invoices that it submits upon landing its contracts, records show, with the company presenting that supplemental billings figure as a "significant performance measure and a leading indicator of future recognized revenue" that will determine the level of its top-line growth. 

While bookings practically doubled back in 2010, with Jive setting a new record by posting a $35.7 million surge in bookings for the year, that growth rate fell by more than half in 2011 despite the massive sums the company spent while pursuing that business. Jive invested an extra $15 million in sales and marketing for starters, with its sales force expanding by more than 20% in the second half of the year alone, and threw an additional $12 million or so into the research and development of enhanced technology that could help drum up more customers as well. Corporate overhead literally exploded along the way, accelerating even faster than its other major costs, with those bills costing almost twice as much as they had the previous year. By the time that 2011 came to an end, records show, Jive had seen its operating costs skyrocket by a whopping 65% to almost $90 million -- a massive sum for a company that had generated barely half that amount in total sales the prior year -- and wound up with little to show for all of the extra money that it had spent.

After beefing up its sales team and indulging in a far more generous marketing budget last year, corporate filings show, Jive posted a $33.1 million rise in bookings that actually fell 7% shy of the record gain that the company had achieved in 2010 with far more limited resources. Despite the expanded reach of its sales force and the enhanced funding for advances in the technology that it offers, those filings show, Jive witnessed a sizable drop-off in its customer gains last year as well. The company added just 77 customers to its client list in 2011, records show, or 37% fewer than the 122 that it netted one year earlier. 

Even though Jive relied heavily on the renewal and expansion of its core accounts to achieve its impressive top-line gains last year, records indicate, the company also recorded a prior surge in bookings that promised a healthy stream of revenues to further bolster its sales. While Jive can seek even more business going forward from deep-pocketed clients like Hewlett-Packard -- a prize customer successfully courted by a resourceful competitor hoping for a bigger contract as well -- the company lacks the massive gains in bookings that previously served as an early signal of blockbuster sales.

Even Wall Street analysts, often optimistic by nature, have by now resigned themselves to a slowdown in top-line growth. While they're still banking on healthy revenue gains going forward, they predict that Jive will see its growth rate plummet by 23% this year and continue to shrink the following year as well.  

At the same time, analysts see no chance that Jive can generate enough revenue to cover its exploding costs. Even if sales almost double from 2011 levels by the end of next year, they predict, they will still fall short of the sums needed to pay all of the bills. Looking for Jive to further extend its history of losses for at least another two years, they expect the bleeding to slow but continue nonetheless.

As an unprofitable company with no forecasted earnings in sight, Jive remains valued almost exclusively on its top-line performance. Even based on this forgiving metric, which ignores ongoing losses, Jive looks incredibly overvalued at current prices. Jive already trades at almost 10 times its forecasted 2013 sales, while other software technology companies trade at an average of barely three times the sales they have already achieved. That group, as a whole, boasts healthy double-digit sales growth of more than  20% a year and -- unlike Jive itself -- typically makes money in the process.

With Jive sporting such a rich multiple as its lockup period comes to an end, the stock has already scared even some former bulls away. 

“Peeling off a little JIVE,” one stockholder recently volunteered when voicing his fears of an imminent collapse. “It was overdue,” he soon added, “for its IPO beat-down.”

Click here for the first article in this two-part report on Jive Software. 

* Important Disclosure: Prior to the publication of this investigative report, TheStreetSweeper (through its members) established a short position in JIVE with the intention of profiting on any future declines in the stock price. Currently, TheStreetSweeper has sold a total of 93,529 shares of JIVE short at an average price of $23.91 a share. It covered 15,539 shares on May 3 at $23 a share, 21,461 shares at $22.77 a share on May 4 and 27,600 shares at $22.63 a share on May 7. It covered the remaining 28,929 shares on May 8 at $21.84 a share and no longer has a position in the stock. Going forward, TheStreetSweeper may choose to establish a new short position in JIVE and will fully disclose the details of any future transactions in the stock as those trades occur. 

As a matter of policy, TheStreetSweeper prohibits members of its editorial team from taking financial positions in the companies they cover. To contact Melissa Davis, the primary author of this report, please send an email to editor@thestreetsweeper.org.

 

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