Blue Martini BLUE W
February 25, 2005 - 6:59pm EST by
2005 2006
Price: 2.29 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 29 P/FCF
Net Debt (in $M): 0 EBIT 0 0

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  • Software
  • Large Net Cash Position
  • Net-Net
  • M&A Catalyst


Blue Martini is a down and out software company that has been unable to execute and just posted their worst quarter in the company's history. I am by no means suggesting that you trust management to turn this business around and execute, however I do believe the company is for sale and that a transaction is fairly near.

I won't spend alot of time on financials since this write up isn't suggesting you buy it for their great earnings. Basically, the stock is trading below the cash balance of $2.55 a share. Management did say on the last conference call that they had engaged outside advisors and today they filed an 8K with a retention agreement for the VP of Global Marketing and Business Development. They hired him in May, so filing the agreement now suggests there is a reason they need to retain him. If you take a look at MAPX, they filed an 8K w/a retention plan for their interim CFO shortly before announcing they were being acquired by Infor Global Solutions.

They posted $5.4 mln in revenues last qtr, of which less than $1 mln was license revenues. As I mentioned, this was the worst quarter yet. They have recently attempted to change their sales strategy to more of a VAR strategy from direct sales and saw the impact of that. Additionally, they have been cutting costs to preserve cash so they only have 7 direct sales people left. Lastly, they chose to focus on retail and "retail like" verticals which is where the majority of their customers reside. Before changing their strategy, they had been generating $32+ mln in annual revenues each of the last several years.

They have roughly 90 customers that generate approximately 8.8 mln a year in maintenance revenues.

They had federal NOLs of approximately $140 mln at the end of 2004.

For such a small company they really do have some good customers. Among the list of retail and retail like companies that use their technology are Harrah's Entertainment, Kohls, Iomega, Nordstrom, Saks Fifth Avenue, Levis, Harley Davidson and many more.

Who might buy them? I am guessing JDA Software (JDAS) or Retek (RETK) are the most likely buyers. IBM is possibly a buyer, but my sense is BLUE is too small for them to care. RETK and JDAS both have heavy concentration on the retail verticals and this would give them an opportunity to move to the front of the store. It would be very complimentary to their current offerings.

What is the stock worth in a takeout? It does really depend on who buys them. Troubled software companies can sell at .7-1.5x EV/Sales..anything less than that seems to be unlikely. IMNY is being acquired by SLTC 1.1x EV/Sales and many of their shareholders are opposing the deal. Another very troubled software company named Primus Knowledge (PKSI) was acquired by Art Technology Group (ARTG) at .8x EV/Sales last summer.

If you assume the company gets 1x EV/Normalized sales of around $30 mln, add in $32.9 mln in cash less one quarter burn of $2 mln and no implied value for the NOLs (very conservative)you come up with a takeout value of $4.87. Even if you assume the low end of the takeout range at .7x you'll come up with a value north of $4. There are only 12.5 mln shares outstanding, so any incremental money they get is impactful to the share value.

With the stock trading .26 BELOW THE CASH VALUE and a quarterly burn rate of only .16, I strongly believe the risk/reward is compelling. I've been involved in this stock for over 2 years and can sense the change in management's conviction from operating as an independent company to the realization that they just haven't been able to get the job done. My sense is that the downside is to roughly $2.10 (19 cents) with upside of no less than $1.50.


Management has engaged outside advisors and just filed an 8K with a retention plan for their VP of sales they hired in MAY '04. It is very possible takeover talks are coming to a conclusion in the short term.
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