Bazaarvoice Inc (NASDAQ:BV): Further Gains Through Q4?


Here is one we’ve not touched on before – Bazaarvoice Inc (NASDAQ:BV). The company just closed on 52 week highs, and we think it probably has the potential to continue gaining strength as the year draws to a close and beyond into 2017. It is one of those companies that most probably aren’t familiar with, or even those that are, are probably not 100% clear on its operations. With this in mind, and with the goal of gauging the company’s potential going forward, here is a look at what is driving Bazaarvoice right now, and the metrics to watch going forward.

So, let’s kick things off with a look at the company.

Bazaarvoice is a tech/media company with a focus on operations in the online retail space. The company owns and operates a network of media publishing outlets (mostly websites, but some social media assets) through which retailers, reviewers and customers can communicate and publish content. Its sales pitch is this: sign up to our services and use our network to drive sales and conversions.

And it seems to be effective.

More and more, people are basing their online retail decisions on reviews, and the ability to access this and – perhaps more importantly – trustworthy review content is key to conversion. The Bazaarvoice platform and network allows for this, and the company is seeing growth in its client base as a result.

So that’s operations in a nutshell. Let’s move on to the figures that matter.

Bazaarvoice generates revenues from what’s called software as a service (SAAS). Some reading may already be familiar with this concept – it’s essentially the rental of access to a particular software, facilitated by cloud technology (generally, these days) for what is usually a recurring fee paid monthly, quarterly, annually etc. The good thing about this model is that it offers insight into not just client on-boarding, but also client retention.

At last count, the three months ended July 31 this year, Bazaarvoice had 1,397 active SAAS clients on its books. This is up from the equivalent period a year earlier of just 60 clients, so growth isn’t ideal, but each of these clients generates in the region of $35,000 quarterly, and retention rate is a little over 95%, which sort of adds a silver lining to the low growth. For reference, this latter metric refers to the number of clients active at the end of a period, who were also active at the beginning, having rolled over from the previous period.

So how does this translate to top line? Well, the company generated $50.1 million revenues during the period in question, up from $48 million during the same period a year earlier. Again, not growth to write home about, but this is an intensely competitive space, and growth is growth. Gross profit increased from $29 million to $31 million, and bottom line tightened from a $10.2 million loss to a $5.1 million loss.

What does all this mean going forward? The market for this sort of service is expanding, and to say anything other than online retail is set to expand both near and long-term would be outright incorrect. However, and as mentioned, there are a number of other players in the space offering a service similar to that of Bazaarvoice, and this is going to put pressure on the company’s top and bottom line over the next 12 months. This competition will likely influence revenues to a higher degree than net, because SAAS competition is notorious for price war. Indeed, the company expects its sales to suffer fiscal 2017 (that’s the twelve months to April next year) based on price pressure:

“We currently expect our SaaS revenue growth rates for the remainder of fiscal 2017 will be lower than our historical growth rates as a result of increased competitive pressure that has led to intensified price-based competition.”

That said, here’s our takeaway: Bazaarvoice has an established network, and for those familiar with the space is a well known and respected brand. The company has close to $100 million cash on hand, more than enough to run it through the next 12 months, and a very competitive network offering (and that’s what’s important in this industry). Competition driven price pressures may induce top line growth decline near term, but longer term, there’s a growing market, and this should offset any growth issues. The companies that can ride out the price wars are going to benefit from the industry growth in the long run, and we think Bazaarvoice is probably one of the most likely to come out ahead.

Risk is rooted in failing to execute on an effective sales and marketing strategy. SAAS businesses have their core product in place already, so the only real costs associated with it are maintenance and upgrades. The vast majority of costs derive from sales and marketing, and the ability of management to allocate for the best ROI is going to be instrumental in Bazaarvoice’s success or failure.

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Disclosure: We have no position in BV and have not been compensated for this article.