Value Find: Selectica Inc.
A long-time underperformer has finally gotten its house in order, which could spell value for patient investors.
Microcap enterprise software company Selectica, Inc. (Nasdaq: SLTC) has a long and undistinguished history. Since going public at the start of the market crash in March 2000, the San Jose, Calif.-based tech outfit has shifted its business strategy several times only to consistently post losses. Not surprisingly, the $53 million market capitalization company fell off Wall Street’s radar long ago. Continuing to ignore this stock, though, could be a mistake.
After a very active October, Selectica has settled several major issues that have been hanging over the depressed stock for the past year. At the start of the month, Selectica completed its financial restatements and got up-to-date on its filing; now the stock is no longer at immediate risk of being delisted. Two weeks ago, Selectica settled a patent lawsuit with a competitor. In late August, Selectica named a new CEO, and demoted the previous CEO as part of a remedial measure taken in the wake of a now since resolved stock option backdating investigation.
Even with these recent positive developments, a microcap with a checkered past like Selectica is generally a crapshoot. However, in this case, the stock trades for only a little over the cash on its balance sheet, thus limiting the downside risk. Selectica ended June with over $52 million in cash and no debt. Granted, this cash balance has been declining by several million dollars per quarter. Selectica is also sitting on over $150 million in federal tax credits. Said another way, at a recent price of $1.84 a share, one can buy Selectica’s underlying business basically “for free.”
Of course, Selectica has so far continued to post losses and has yet to demonstrate that it is a company with a real future—and not a perpetual head-fake. For the fiscal first quarter ended June 30, Selectica generated revenue of $4.3 million, down from $5.2 million a year ago, but up sequentially from $2.9 million. Selectica posted a loss of $2.3 million for the quarter. On Wednesday, shares of Selectica closed at $1.86. Over the last 52 weeks, shares ranged between $1.42 and $2.46.
Management expects that recent cost-cutting measures will allow Selectica in the future to post operating breakeven results on at least $3.5 million in quarterly revenue. Management also claims that Selectica will operate at a cash flow breakeven level “at a minimum” going forward, excluding extraordinary expenses. Future legal and accounting expenses should decline materially with the recent completion of its financial restatements and patent lawsuit settlement.
Founded over 10 years ago, Selectica currently operates in two enterprise software segments: Contract Lifecycle Management (CLM) solutions and Configuration, and Pricing and Quoting (CPQ) solutions. CLM is Selectica’s newer segment and represents the growth opportunity for the company, whereas CPQ is a mature, service-driven business that has been in decline for some time. While CPQ revenue represented only one-third of total revenue for Selectica last quarter, this segment posted 130% sequential growth last quarter and appears to be gaining traction. According to Forrester Research, the contract management solutions market is expected to more than double in size over the next four years. Selectica’s impressive client list includes Cisco Systems, Inc. (Nasdaq: CSCO), Covad Communications Group (AMEX: DVW), 7-Eleven, Inc., Levi Strauss & Co., Host Hotels & Resorts, Inc. (NYSE: HST), and Ace Hardware Corp.
If, and granted this is a big if, Selectica can demonstrate that it is building operating momentum and really paring its losses, I think the stock could be revalued 50% higher to the $3 level in the coming months. Selectica is set to report its fiscal second quarter results on Nov. 7. In addition to potentially reporting improved results, Selectica could also announce the resumption of a stock buyback program, which could help solidify the stock. The company had been unable to buy back stock while it was undergoing its more than year-long financial restatement process.
Finally, we think it’s worth noting that two savvy microcap investors, hedge fund Steel Partners and private investor Lloyd Miller, III, collectively own a 14% stake in the struggling company. While both of these investors tend to be patient, they have also been known to turn “activist” when need be. Said another way, Selectica management certainly has pressure on it to perform.
Even with two smart investors holding the stock and a flurry of recent positive developments, Selectica could continue to disappoint. Its CLM business is young, small and unproven, and the future of its legacy CPQ business remains cloudy. The enterprise software market remains highly competitive and carving out a niche as a small player remains as difficult as ever.
All this being said, given its marginal enterprise value and signs that Selectica’s (SLTC) fortune could finally be about to change, we think the stock is a decent speculation below the $1.80 level.
About the Author
Contributing author Matt Ragas is an investment writer and analyst with ten years of experience analyzing small and microcap stocks, with a particular emphasis on value and turnaround situations.
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