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Concur’s Stock Gyrations and SaaS Investing

Posted on Monday, Jan 7th 2008

In this morning’s Trend Radar 2008: SaaS in the Enterprise, I said I will keep recommending SaaS stocks despite rumblings of a recession. Concur (Nasdaq: CNQR) is such a stock. It is a leading provider of on-demand Employee Spend Management services in the niche area of Travel.

In my first post on Concur, I looked at how its travel expense management services align with the Software-As-A-Service (SaaS) and Extended Enterprise (EE) trends of Enterprise 3.0. It integrates the workflow of travel bookings and expense management beyond the walls of the enterprise, and brings into its fold the vendors. My thesis on Enterprise 3.0 can be found here in which I define it as Enterprise 3.0 = (SaaS + EE). You can also read my interview with Steve Singh, Concur’s CEO in which I trace the Concur story in great detail.

I followed this interview up with a post on how Concur is well-positioned to sell its services to not only enterprise customers, but also Small Medium Enterprises (SME) customers, yet another Enterprise 3.0 trend. Its delivery model, pricing structure, and sales channel are well-aligned with SME purchase dynamics, giving it a great opportunity to penetrate the severely under-penetrated SME market.

2007 has been a year of tremendous growth for Concur. Total revenue in fiscal 2007 that ended September 30, 2007 was $129.1 million, up 33%. Net income was $8.2 million, or $0.20 per share, compared to $ 34.2 million, or $0.87 per share for fiscal 2006. For 2008, Concur expects revenue to be $200 million and pro forma EPS to be $0.70 per share. The stock is now trading around $31, after its 52-week high of $39.73 on December 24.

The thought of a recession is on most investor’s minds right now. It’s a good time to start thinking about a strategy to recession-proof your portfolio. There are analysts who think the SaaS stocks are too expensive, and in a recession year, they would not hold up. There is certainly historical evidence supporting this point of view. The fact that CNQR dropped by almost 22% since Christmas is direct evidence that fears of a recession will drive stock prices down.

So what do we do? Probably, look for buying opportunities at significantly lower prices, and then hold for the longer term.

Concur is a good company in a hot growth space. As far as fundamentals are concerned, I expect that they will deliver to or exceed Street expectations. Thus, the gyrations in the stock would be due to macro-economic factors, not because the company doesn’t perform. And don’t forget, one of the greatest advantages of SaaS stocks in visibility into the recurring revenue backlog.

In general, my sense is that now is the time to be patient, buy/hold on to good companies, and not panic.

Concur Technologies, Inc. (CNQR)

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Can you say falling knife?

Fred Monday, January 7, 2008 at 7:41 PM PT

I’m sorry, I don’t understand what you are trying to say or ask.

Sramana Mitra Monday, January 7, 2008 at 8:32 PM PT

If you drop a knife your instant reaction is to try and catch it as it falls. The danger is that you will catch the blade and cut yourself.

In this case Fred’s analogy may be slightly inverted. With SaaS companies you are catching a rising knife, the share prices are rising.

The problem is what the reasons behind the rises are. SaaS is a ‘new exciting thing’ with many companies entering the market and you need to worry about wether the company has something worth offering that justifies its price or if it just has that price because it is in this particular market.

In addition, as something relatively ‘new’ you must expect that sometime there will be either a, possibly drastic, phase of consolidation where ‘best in class’ companies are bought out by major players and/or companies just dissappear because someone is offering the same services and doing it better.

There is a distinct possibility that your investment will do the same i.e. dissappear. A scattergun approach is probably not overly wise so you need to do proper research.

Unfortunately the current nature of the business and available metrics make that difficult if not impossible. Most of, if not all, of what you will know about a particular company will be what they decide to tell you.

One last concern is that the market, as such, might undergo a complete re-alignment as a result of the introduction of new technologies which enable ‘old’ but established and understood methods to compete with the SaaS WEB2.0 ‘paradigm’.

Bear in mind that this industry is still in its infancy and is still laying foundations and standards to deal with issues that have always existed. Security, interoperability and other concerns. Addressing such concerns will force some level of ‘open’ standards that will render some companies redundant.

Effectively you are catching a rising knife. That might not be the major concern even if you did catch it gently by the blade.

Are you going to be holding that blade when it falls?

Jack

Jack Simmonds Tuesday, January 8, 2008 at 2:28 AM PT