November 21, 2014 - 5:13am EST by
2014 2015
Price: 57.25 EPS 0 .05
Shares Out. (in M): 38 P/E 0 0
Market Cap (in $M): 2,191 P/FCF 0 0
Net Debt (in $M): -259 EBIT -21 -19
TEV ($): 1,932 TEV/EBIT 0 0
Borrow Cost: NA

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  • Software
  • SaaS
  • Competitive Threats
  • Technology


DWRE is a cloud-based provider of digital commerce solutions for retailers and branded manufacturers. Leading indicators of the company’s business suggest that the company’s recent acceleration in revenue growth may not be sustainable and could decelerate. At 13x EV/sales I don’t think the stock will perform well with decelerating revenue growth, especially in light of potentially increasing competition, a worsening cash burn, insider selling and rapidly rising shares outstanding.

Indicators suggest revenue growth may decelerate. The company views two metrics as key to tracking the growth in its business: number of live customers and number of live customer sites. Revenue growth should track these metrics but in the last three quarters revenue growth has far outpaced growth in both metrics.

Also, a sharp slowdown in the amount of deferred revenue added so far this year versus last might suggest that the company is having trouble adding new clients, which could lead to slower future revenue growth. The following new disclosure in its 3Q14 10Q might shed light on what is going on with differed revenue: “we often invoice the first year subscription fee in advance upon customer contract execution as an initiation payment. Initiation payments are included in deferred revenue upon payment.” And from the 10K: “Consequently, a decline in new or renewed subscriptions in any one quarter may not impact our financial performance in that quarter, but might negatively affect our revenue in future quarters.” Perhaps the decline in growth of live customers is pressuring initiation payments, which in turn could pressure future revenue growth.


9mos Sep13

9mos Sep14

y/y growth

Total deferred revenue change




Analysts have modeled a deceleration of revenue growth to 38% in 2015, but I think investors expect more and in any case in light of the above, 38% could prove aggressive.

Competition may be increasing for DWRE as both SAP and NetSuite made significant moves into DWRE’s market within the last year or so. In August of last year, SAP bought hybris, a direct competitor to DWRE for roughly 6x run rate revenue, which was growing 89% (€1B purchase price and last 5 months sales of €70m in 2013). NetSuite bought Venda in July 2014 for roughly 5x revenue ($50.5m purchase price and about $10m in 2014 revenue).

DWRE’s cash flow from operations has taken a dive, possibly signaling future earnings pressure. Operating losses of many cloud companies have increased as revenue increased. Cloud companies cite investments now that will hopefully pay off later. We can debate the merits of this. CRM is the prime example. However, it’s not true that cash from operations necessarily worsens as revenue increases. CRM’s CFO has tracked revenue nicely whereas DWRE’s CFO has plummeted due to declining additions to deferred revenue, a decline in accrued expenses and increase in prepaids compared to prior periods. This large increase in accruals/net operating assets could pressure future earnings.

Shares outstanding rose 17%, or by 5.3M shares, from the date of the 3Q14 10Q versus the prior year, partially due to a follow on offering in November 2013 of 3.0M shares priced at $57 (officers and directors also sold 800k shares of their holdings with this offering). The company gave employees 3.5% of the company in 2013 through options (290k) and restricted stock (750k shares).


I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.


Dissapointing revenue growth and earnings

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