Broadsoft Inc: Zacks’ Bear of the Day Play

Earnings estimates have fallen sharply for BroadSoft (BSFTSnapshot Report) after the company delivered a big Q2 miss on August 3. The drop in consensus estimates was large enough to send the stock to a Zacks Rank #5 (Strong Sell), placing it in the bottom 5% of all stocks that Zacks ranks.

While shares are well off their 52-week highs, the stock does not look cheap at 82x forward earnings.

BroadSoft provides software and services that enable mobile, converged (mobile and fixed-line) and cable telecommunications service providers to deliver hosted, cloud-based Unified Communications, or UC, over their internet protocol, or IP, based networks, including over carrier’s emerging voice over LTE, or VoLTE, networks.

Second Quarter Results

BroadSoft reported its second quarter results on August 3. Adjusted earnings per share (but including stock-based compensation expense) came in at -$0.20, missing the Zacks Consensus Estimate of +$0.09 by a wide margin. It was the company’s first earnings miss in two years.

Total revenue jumped 23% to $64.5 million, beating the consensus of $62.0 million. License software revenue, which accounted for 47% of total revenue, rose 17%. Subscription and maintenance support revenue, which accounted for 42%, rose 23%.

However, total operating expenses jumped from 70.8% to 81.5% of total revenue. This was driven by sharp increases in sales and marketing, R&D, and general and administrative expenses, due in part to higher stock-based compensation.

The company generated $9.6 million in operating cash flow in the quarter versus $5.7 million in the same quarter last year.

Estimates Falling

Following the second quarter report, analysts revised their earnings estimates significantly lower for both 2015 and 2016. This was sharp enough to send the stock to a Zacks Rank #5 (Strong Sell), placing it in the bottom 5% of all stocks that Zacks ranks based on earnings momentum.

The current Zacks Consensus Estimate for 2015 is -$0.06, down from $0.74 before the report. The 2016 consensus is now $0.62, down from $1.07 over the same period.

Lofty Valuation

Shares of BroadSoft are down 16% from their 52-week high, but they do not look like a bargain. The stock trades at 82x 12-month forward earnings and sports an enterprise value to EBIT ratio of 34.

Its Zacks Value Style Score is ‘F’.

The Bottom Line

With falling earnings estimates and premium valuation, investors should consider avoiding shares of BroadSoft for now.

Todd Bunton, CFA is a Stock Strategist for Zacks Investment Research and Editor of the Income Plus Investor and Surprise Trader services.

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