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Inside Jive Software's S-1 Filing: Details and Analysis

On Wednesday (August 24, 2011), Jive Software filed an S-1 form with the Securities and Exchange Commission, registering their intent to execute an Initial Public Offering (IPO) of common stock in the company at an unspecified future date. While many IPO details remain undefined, it appears that Jive is seeking to raise just over US $100 Million from the equities markets. If carried out, Jive's IPO would be the first by a provider of Enterprise Social Software.
 
This post will briefly examine details of Jive's strategy, tactical operations, and financial history and present condition that were not publicly available prior to the S-1 filing. For more information from Jive and reactions from media sources, see Jive's press release and articles from TechCrunch, Forbes, VentureBeat, ABC News, The Wall Street Journal, and Business Insider.

OPERATING RESULTS

 
The Jive S-1 paints an interesting picture of a rapidly growing company at a pivotal moment in it's evolution. Jive's operating results reveal that the company's revenue has increased annually, but so have expenses (see Income Statement below).
 
The largest contributors to Jive's profitability challenges in the first half of FY11 were expenses related to Sales & Marketing ($19.5M), Research & Development ($15.8M), and Cost of Revenues ($15.1M). Relatively high Sales & Marketing and Research & Development costs are normal for startups operating in rapidly-growing markets that demand frequent and consistent product innovation. What is somewhat surprising is the bloated Cost of Revenues. In the S-1, Jive attributes the high Cost of Revenues to increases in salaries and benefits, as well as third-party hosting services, royalties, and consulting fees. It also cites the cost of bringing ownership and responsibility for much of its data center operations from SunGard in-house as a reason for the increase.
 
Of greater concern, expense growth rates have outpaced those of revenue, and it appears that this will be a continuing trend. Jive has lost more money in the first half of FY11 ($30.6M) than in all of FY10 ($27.6M). Product revenue-related expenses grew at 136% in the first half of FY11, while product revenue only grew at 78.6%. And Jive expects the situation to get worse, as indicated by statements in the S-1 such as this:
"Our planned transition from data centers managed by a third-party service provider to a co-located facility managed by our internal network operations team is complex, could result in operational inefficiencies or operational failures and will require significant upfront capital expenditures for equipment and infrastructure as well as increased personnel expense. We expect these investments will have a negative impact on margins in the near term."

LIQUIDITY

 
Limited liquidity is another hallmark of a rapidly-growing startup. Jive has approximately one year's historical revenue on hand in cash ($44.6M in cash as of 6/30/11, compared to FY10 revenue of $46.3M). However, as of 6/30/11, Jive has a Working Capital deficit of $15.9M. Cash flow is positive, but not appear to be robust enough to support operations at current or anticipated increased scale in the long-term.
 
In the S-1, Jive states:
"Our principal needs for liquidity include funding our operating losses, working capital requirements, capital expenditures, debt service and acquisitions. We believe that our available resources are sufficient to fund our liquidity requirements for at least the next 12 months from June 30, 2011."

LEVERAGE

 
Jive's level of indebtedness is high, as indicated by its Debt Ratio (Total Liabilities ÷ Total Assets) of 116%. Jive is aware of its highly leveraged position and states in the S-1:
"We intend to use approximately $20 million of the net proceeds we receive from this offering to pay down the balances outstanding under our term loan and senior term loan. We incurred this indebtedness in May 2011 in connection with our acquisition of OffiSync. As of June 30, 2011, we had total indebtedness of $29.6 million outstanding under these loans."
 
It appears, from that statement, that Jive may have reached a bit in buying OffiSync just two months after acquiring Proximal Labs. Obviously, the management team decided that was a risk worth taking and that they could carry the debt incurred until an IPO was completed or Jive was acquired itself.

ANALYSIS

 
Jive's run rate, liquidity, or leverage are not a cause for concern when viewed on their own. Indeed, Jive's current financial state is typical of an aggressive startup scaling toward an IPO. What may unnerve potential investors is the combination of these factors with Jive's S-1 statement regarding future profitability:
"We have a history of cumulative losses and we do not expect to be profitable for the foreseeable future."
 
Investors with lower risk tolerance will likely see a big red flag raised by this combination of increasingly larger operating losses, somewhat limited liquidity, growing debt, and indefinite lack of profitability.
 
It seems that Jive surprised many, myself included, by filing an S-1 now. I had anticipate a filing in October or early November. Jive has not reached the $100 Million annual revenue trigger for an IPO that CEO Tony Zingale articulated widely earlier this year. More concerning, Jive appears unlikely to reach that point in 2011, given it has only booked $34 Million in revenue as of June 30.
 
So the logical question is: why did Jive file now? There are several possible answers.
  1. Additional outside funding is needed, as soon as possible, to shore up the balance sheet in the face of continuing, increasing operating losses and relatively high financial leverage.
     
  2. Market and global economic conditions are deteriorating so rapidly that Jive sees its potential IPO window closing if it doesn't act now.
     
  3. Jive is merely testing the waters. It is useful to remember that filing an S-1 does not equal going public for a company. It merely announces that an organization intends to offer common stock and does not bind the company to do so. The rapidly deteriorating economic and market conditions around the world have caused a near record number of companies to postpone or completely withdraw planned IPOs. It is conceivable that Jive might only be testing the waters for an IPO by filing an S-1 to see what price shares of its common stock might command.
     
  4. Jive is signaling availability to potential acquirers. Because of it's current and forecasted future negative operating results, Jive may be looking to more than just the equity market for a lifeline. Given Jive's current state, potential acquirers could interpret Jive's S-1 filing as an invitation to make an offer to purchase the business.
 
Only Jive knows why it filed an S-1 now, and it will be interesting to watch the company's IPO process unfold. It would not be shocking to see Jive acquired prior to completing an IPO. In fact, that seems the best-case scenario, given the increasingly rough operating and hostile IPO environments that Jive faces.
 
What is your take on Jive's S-1 filing? Please leave a comment below.

 

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