The Street Does Not Forgive

I was with a banker today talking about the influx of new IPO filings and the end result of our discussion was the following:

1. Filing does not mean anything, the companies may never go public
2. Performance is key-revenue visibility is of utmost importance because the street does not forgive

Case in point-if you miss your numbers within the first two quarters after you go public, forget about it. Take a look at Callidus Software which is a provider of Enterprise Incentive Management software systems to global companies, used to model, administer, analyze and report on incentive compensation, or pay-for-performance plans. The company went public in mid-November, hit a high of close to 21 and was recently punished for preannouncing a shortfall in revenue. The stock now trades at $8.34.

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Here is what the CEO had to say:

"Callidus Software, like many enterprise software companies, transacts a significant portion of its quarterly business at the end of each quarter," stated Reed Taussig, president and CEO of Callidus Software. "Our quarterly license revenues are dependent on a relatively small number of large transactions involving sales of our products to customers, and any delay or failure in closing one or more of these transactions could adversely affect our results of operations. In this quarter, we failed to close several transactions due to customers' merger and acquisition activities. In addition, a number of customers failed to conclude contracts due to their timing or budgetary considerations. We are disappointed with these results. However, we continue to be optimistic about our business, given the potential of the emerging EIM market, our product position, and our strong customer base. We will address second quarter and full year guidance on our planned April conference call."

So if you want to go public, please make sure you have the visibility in your sales pipeline to hit your numbers the first couple of quarters out of the gate. What this also shows is the enterprise software business is a tough game. It is difficult to sell large licensed software and have real predictability. Salesforce.com will be an interesting company as their hosted, subscription model gives real strong visibility on future quarters. That being said, if you want to go public, you need strong pipeline coverage to make up for potential end of quarter jockeying by potential customers. You need good recurring maintenance revenue. Don't overpromise on your initial quarters post-IPO, give yourself some cushion to exceed financial expectations. Because if you don't, the street will not forgive.

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