On Dec 5, we downgraded, Vocus Inc. , to Neutral based on the company’s disappointing third quarter results and disappointing outlook for the fourth quarter.
Why the Downgrade?
Though Vocus’s third quarter revenues of $46.6 million increased 1.9% from the year-ago quarter,it missed the Zacks Consensus Estimates of $47 million. Fourth quarter revenue guidance of $45.1 - $45.5 million was also disappointing.
Vocus’ expansion plans are taking a toll on its operating results. Adjusted gross margin decreased to 82.9% from 83.7% in the year-ago quarter. Moreover reported operating margin was 5.3%, down from 8.7% in the year-ago quarter. Adjusted operating expenses also increased 5.0% year over year, primarily due to growth in direct sales capacity, higher commission and investments.
Additionally, Vocus lost 317 net customers as against 479 additions in the previous quarter and 1,015 additions in the year-ago period, primarily due to higher marketing suite prices and discontinuation of renewals for the small-business version.
We believe international expansion is crucial to business growth and success. Vocus’ significant exposure in Europe, risks of foreign currency fluctuations and changes in international businesses are expected to impact fourth quarter results. Further expansions could adversely impactthe results, going forward.
Additionally, continuous decline in demand for its legacy PR solution, lesser focus on selling low-end solutions to small businesses, margin contraction, currency fluctuations and competition from Marketo, Inc. (MKTO - Snapshot Report) could prove to be headwinds.
Nonetheless, Vocus has successfully capitalized on strategic acquisitions. The company continued to acquire more customers for its marketing suite, which reflects growing demand. Moreover, the company is targeting more customers and cloud opportunities in the small and medium business space, which will boost its software portfolio and expand its geographical reach.
Other Stocks to Consider
Vocushasa Zacks Rank #3 (Hold). Better-ranked stocks in the technology sector include SanDisk Corp. (SNDK - Analyst Report) and Microchip Technology Inc. (MCHP - Analyst Report), carrying a Zacks Rank #1 (Strong Buy) and Zacks Rank #2 (Buy), respectively.