Broadsoft BSFT S
March 22, 2011 - 10:30am EST by
mm202
2011 2012
Price: 51.10 EPS $0.42 $1.00
Shares Out. (in M): 26 P/E 121.0x 50.0x
Market Cap (in M): 1,310 P/FCF 0.0x 0.0x
Net Debt (in M): 0 EBIT 0 0
TEV: 0 TEV/EBIT 0.0x 0.0x
Borrow Cost: NA

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Description

 

 

 

 

Broadsoft

We believe that Broadsoft ("BSFT") is a timely short opportunity with significant downside potential.  I will keep this write-up brief as this is time-sensitive with a catalyst this week.  Broadsoft IPO'd in June of last year at $9.  Since November its stock has increased by approximately 550%. 

 Broadsoft was a venture backed deal founded in the late 90's and took years to gestate.  It is a provider of software that allows fixed-line, mobile and cable service providers to deliver voice and multimedia services over their Internet protocol-based, or IP-based, networks. This is the function of a softswitch.  Their software, BroadWorks, enables service providers to provide enterprises and consumers with a range of cloud-based, or hosted, IP multimedia communications, such as hosted IP private branch exchanges, or PBXs, video calling, unified communications, or UC, collaboration and converged mobile and fixed-line services. Broadsoft serves as the software element that delivers and coordinates voice, video and messaging communications through a service provider's IP-based network. Service providers use BroadWorks to capitalize on their investments in IP-based networks and help them migrate services from their legacy, circuit-based networks to their IP-based networks.

 

Competition

Broadsoft is not the only company in this space.  They compete with legacy Class 5 circuit switch providers such as Alcatel-Lucent, Avaya Inc., Ericsson, Nokia-Siemens Networks, Huawei Technologies Co. Ltd as well as softswitch startups Digium, Metaswitch Networks and GENBAND Inc. and legacy softswitch providers Sonus Networks and Cisco Systems. 

Sonus and Cisco have been trying to convince telcos to replace their Class 5 switches since the 1990s.  There is nothing more economical than a fully depreciated Class 5 telecom switch.  They last well beyond their depreciable lives and once fully depreciated, the contribution margin of a dollar of revenue run through the switch is 95%.  The PSTN network where these Class 5 switches route calls and traffic are fully depreciated assets that are not going away.  IP networks have greater capacity and are more efficient that the PSTN because IP traffic does not require a fixed circuit.  But they will never fully replace the PSTN.  All of this is to say that Broadsoft's market isn't that large nor will it materialize that rapidly as displacing Class 5 switches is hard to do given their favorable economics.  

Valuation

Broadsoft currently trades at a valuation that makes even Salesforce.com blush.  The stock currently trades at a hefty 11 times the high end of 2011 sales guidance.  Earnings are not taxed, yet the stock trades for about 120 times last year's $.42 EPS.  Last quarter was the last quarter where they still had NOL carryforwards and EPS was $.44.  Next quarter they will be fully taxed and earnings will drop to an estimate of $.09.  The stock is trading at about 75 times the high end of 2011 EPS guidance (for .66 per share) BSFT is priced today as though they've developed some panacea for the telecom industry.  Very little of their revenue is recurring, so forward growth assumptions assume massive adoption by telcos of a technology that has been around for almost 15 years. 

We believe the wireline market will not provide a growth rate sufficient to sustain their current 14x EV/rev multiple.  Though the feature function and lighter footprint (vs a traditional CLASS 5 switch) of Broadsoft is terrific and its software instance can live quite comfortably in the cloud (someone's hosting center) but the company is worth 4-5x EV/rev as the leader in a relatively small market segment (as measured by addressable universe of revenue).

Catalyst

There is a huge unlock this coming Friday that should unleash an avalanche of selling on this bloated stock.

http://biz.yahoo.com/e/110307/bsft8-k.ht...

The total number of unlocked shares that will be eligible for sale for the first time is around 12.2 million. 5.3 million of those unlocked shares are from the December 15 private placement at $22..and the rest of the roughly 6.9 million shares are held by IPO investors who agreed to extend their unlock until next Friday (per the link above), when the private placement investors could sell. The private placement investors are sitting on roughly a 2.5 bagger in 3 months..and the IPO investors have more than an 5.5 bagger. I expect to see a ton of profit taking on Friday when these fortunate souls can finally cash in their massive profits.
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    Description

     

     

     

     

    Broadsoft

    We believe that Broadsoft ("BSFT") is a timely short opportunity with significant downside potential.  I will keep this write-up brief as this is time-sensitive with a catalyst this week.  Broadsoft IPO'd in June of last year at $9.  Since November its stock has increased by approximately 550%. 

     Broadsoft was a venture backed deal founded in the late 90's and took years to gestate.  It is a provider of software that allows fixed-line, mobile and cable service providers to deliver voice and multimedia services over their Internet protocol-based, or IP-based, networks. This is the function of a softswitch.  Their software, BroadWorks, enables service providers to provide enterprises and consumers with a range of cloud-based, or hosted, IP multimedia communications, such as hosted IP private branch exchanges, or PBXs, video calling, unified communications, or UC, collaboration and converged mobile and fixed-line services. Broadsoft serves as the software element that delivers and coordinates voice, video and messaging communications through a service provider's IP-based network. Service providers use BroadWorks to capitalize on their investments in IP-based networks and help them migrate services from their legacy, circuit-based networks to their IP-based networks.

     

    Competition

    Broadsoft is not the only company in this space.  They compete with legacy Class 5 circuit switch providers such as Alcatel-Lucent, Avaya Inc., Ericsson, Nokia-Siemens Networks, Huawei Technologies Co. Ltd as well as softswitch startups Digium, Metaswitch Networks and GENBAND Inc. and legacy softswitch providers Sonus Networks and Cisco Systems. 

    Sonus and Cisco have been trying to convince telcos to replace their Class 5 switches since the 1990s.  There is nothing more economical than a fully depreciated Class 5 telecom switch.  They last well beyond their depreciable lives and once fully depreciated, the contribution margin of a dollar of revenue run through the switch is 95%.  The PSTN network where these Class 5 switches route calls and traffic are fully depreciated assets that are not going away.  IP networks have greater capacity and are more efficient that the PSTN because IP traffic does not require a fixed circuit.  But they will never fully replace the PSTN.  All of this is to say that Broadsoft's market isn't that large nor will it materialize that rapidly as displacing Class 5 switches is hard to do given their favorable economics.  

    Valuation

    Broadsoft currently trades at a valuation that makes even Salesforce.com blush.  The stock currently trades at a hefty 11 times the high end of 2011 sales guidance.  Earnings are not taxed, yet the stock trades for about 120 times last year's $.42 EPS.  Last quarter was the last quarter where they still had NOL carryforwards and EPS was $.44.  Next quarter they will be fully taxed and earnings will drop to an estimate of $.09.  The stock is trading at about 75 times the high end of 2011 EPS guidance (for .66 per share) BSFT is priced today as though they've developed some panacea for the telecom industry.  Very little of their revenue is recurring, so forward growth assumptions assume massive adoption by telcos of a technology that has been around for almost 15 years. 

    We believe the wireline market will not provide a growth rate sufficient to sustain their current 14x EV/rev multiple.  Though the feature function and lighter footprint (vs a traditional CLASS 5 switch) of Broadsoft is terrific and its software instance can live quite comfortably in the cloud (someone's hosting center) but the company is worth 4-5x EV/rev as the leader in a relatively small market segment (as measured by addressable universe of revenue).

    Catalyst

    There is a huge unlock this coming Friday that should unleash an avalanche of selling on this bloated stock.

    http://biz.yahoo.com/e/110307/bsft8-k.ht...

    The total number of unlocked shares that will be eligible for sale for the first time is around 12.2 million. 5.3 million of those unlocked shares are from the December 15 private placement at $22..and the rest of the roughly 6.9 million shares are held by IPO investors who agreed to extend their unlock until next Friday (per the link above), when the private placement investors could sell. The private placement investors are sitting on roughly a 2.5 bagger in 3 months..and the IPO investors have more than an 5.5 bagger. I expect to see a ton of profit taking on Friday when these fortunate souls can finally cash in their massive profits.

    Messages


    SubjectDecember Lock-up
    Entry03/22/2011 11:07 AM
    Memberhawkeye901
    It looked to me like the December offering was a standard public secondary with no lock-up.  Can you point me to the disclosure about the relevant lock-up terms?  Thanks.

    SubjectRE: December Lock-up
    Entry03/22/2011 11:23 AM
    Membermm202
    Hey hawkeye.  This is from page 34 of the 10k:
    If our existing stockholders sell, or indicate an intent to sell, a significant number of shares of our common stock in the public market, the trading price of our common stock could decline significantly and could decline below the price you paid for your shares. As of December 31, 2010, we had outstanding 25,463,545 shares of common stock. Of these shares, 12,773,508 shares of common stock are freely tradable, without restriction, in the public market. An additional 487,799 shares are held by employees that, pursuant to our insider trading window policy, will be restricted from public sale until approximately March 10, 2011. An additional 12,202,238 shares will be eligible for sale in the public market, subject to certain legal and contractual limitations, following the expiration of the lock-up agreements or obligations pertaining to our recently completed follow-on offering which we presently expect to expire on March 25, 2011.
    MM

    SubjectThe unlock is bigger than I thought
    Entry03/22/2011 12:06 PM
    Membermm202
    From the 10k, there are actually roughly another 1.3 million shares coming on the market this Friday, from vested options...with a basis down in the 2.30 range.  
    <After the lock-up agreements pertaining to our recently completed follow-on offering expire and based on options and RSUs outstanding as of December 31, 2010, an additional 1,245,314 shares subject to outstanding options and 59,723 shares issuable upon the vesting of outstanding RSUs will be vested and eligible for sale in the public market beginning March 25, 2011.>

    SubjectRE: The unlock is bigger than I thought
    Entry03/23/2011 09:27 AM
    Memberspecialk992
    To be clear, the shares sold in the secondary are not locked up, the 12.2M shares that are locked up are VC and founder shares, they agreed to lock up their shares as part of the secondary agreement.

    SubjectRE: Author Exit Recommendation
    Entry03/25/2011 09:56 AM
    MemberDen1200
    Can you expand as to why you exited the position?

    SubjectRE: RE: Author Exit Recommendation
    Entry03/25/2011 11:52 AM
    Membermm202
    I exited today because the drop was so massive (straight down about 8.50 from where I posted the idea) and the catalyst that made this is a seemingly "easy" play (the massive unlock) happened today. I personally still view BSFT as overvalued..but the thing is that the market just loves this stock. it's a real market darling...and with stocks like that valuation often doesn't matter much (just look at OPEN, LULU, GMCR etc etc). so I was concerned that we could possibly see a squeeze with the buyer's strike due to the pending unlock over. It's also entirely possible that the huge overhang takes a while to work through and the stock heads lower- I just thought it was better to take the windfall $8.50ish profit in less than a week and move on.
    MM
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