(Updated: I read the earnings call transcript and made a few changes.)
Yesterday, Convera announced their first-quarter fiscal 2009 (1Q09) financials, so let’s check in and see how things are going:
- Revenues of $0.40M
- Year-over-year growth of 24% compared to 1Q08 revenues of $0.32M
- Consecutive growth of 44% compared to 4Q08 revenues of $0.28M
- Ending cash and equivalents of $31.4M
- Cash burn of $5.3M
- COGS of $1.8M on running the hosted services, suggesting gross margins of -348%
- 6 new Excalibur-supported vertical sites (for a total of 45)
- 1 new publisher launching an Excalibur-supported site (for a total of 25)
- The revenue numbers are still tiny in an absolute sense; usually the law of small numbers would apply, meaning that off such tiny figures we’d see multi-hundred percent growth rates. At 24% compound year-over-year growth, it takes Convera 5 years before they’re doing million-dollar quarters. Yikes.
- The 44% consecutive growth rate out-pacing the 24% year-over-year growth rate is usually a good sign as it implies acceleration. However, due to the seasonality of software revenues, I believe that year-over-year growth is the more reliable (and easily interpreted) growth metric. Ergo, I put more faith in the 24% than the 44% as the indicator of real growth.
- That said, an up-quarter from 4Q to 1Q is usually a good sign since software (and to a lesser extent SaaS) companies tend to have back-loaded, seasonal sales that result in a saw-tooth revenue curve where 1QN+1 revenues are often a bit less than 4QN, even when the company is experiencing strong growth.
- That said, Convera’s 4Q08 was worse than their 1Q08, providing an easy comparison point for the 1Q09 numbers. Simply put: does 44% 1Q09 consecutive growth mean “great 1Q09,” “bad 4Q08,” or a bit of both? (Sometimes, the easiest way to interpret all these relative growth rates is just to make a chart, which I eventually did, and included above.)
- The cash burn rate is sustainable over the mid-term, but not the long-term. They have $31M in cash ($35M including $4M held in escrow) and they are burning $5M/quarter. At that rate, the cash lasts 7 quarters.
- Overall customer acquisition to-date seems good, and 25 publishers signed-up is fairly impressive. But, in my opinion, publishers are drawn — like moths to a flame — to the something-for-nothing idea that they can invest little and get a vertical search site. The question is will Convera ever be able to charge enough to run a profitable business? Right now, Convera is subsidizing their customers’ sites to the tune of more than $20M/year. Going forward, they’ll either deliver enough value to extract enough revenue to run a profitable business, or their customers will scatter like cockroaches when they try. Time will tell.
- The new customer acquisition/deployment figure of 1 suggests deceleration and is, in my opinion, not good.
- The company says 75 vertical sites are under contract (compared to 45 launched) with 25 publishers. This sounds good and tends to indicate broad acceptance of the strategy.
- But the earnings call transcript reveals that a single customer accounted for 80% of revenue during 1Q09 and this same customer was 82% of revenue in 4Q08. I sure hope Convera keeps this customer happy, since they’re doing only $100K/quarter in revenues without them. This undercuts the credibility of the claims that support broad success.
- In the transcript, CEO Pat Condo gives revenue growth guidance for 2Q09 of “over 25%.” It’s not clear if means consecutive or year-over-year growth.
- There’s a lot of happy talk about traffic both in the press release and in the earnings call transcript. I’ve disregarded it for two reasons: (1) it’s a busy week and I’ve not had time to fully parse it, and (2) the kind of traffic in which I’m most interested turns to revenue and should show up in the financial statements.
- In the transcript, they say that total 1Q09 expenses net of non-cash charges for depreciation and stock-based compensation were $3.6M. They guide that the same expense metric will run between $2.8M and $3.4M per quarter in the coming year. This, and other comments, suggests they have done some heavy cost-cutting, and thus that the cash will last even longer than my previous calculation suggests.
Overall, I’d say the experiment is still in progress. Convera has plenty of cash to keep it running, so let’s see what happens. Personally I’ll be watching customer acquisition and deployment, revenues, revenue concentration, and cash.
(And, by the way, Convera, you can revise government out of your safe harbor statement; you sold that business to Fast some time ago.)
Ultimately, I’m cynical on the notion of cheap-as-chips vertical search. I believe the answer for publishers is not to focus on lowering costs, but instead to focus on creating value. For more on that riff, read (the end of) this post (Blind Eyes, Industry Analysts and Lessons from B2B) or see my slides from the recent E-Publishing Innovation Form in London, embedded below.