Friday, February 12, 2010

Rainmaker's services get in-sourced at Sun. They should in-source their PR (RMKR, ORCL)

Rainmaker is a Silicon Valley-based firm offering "sales and marketing solutions."  Their offerings enhance the productivity of other firms' sales functions.  Specifically, their products help people increase the percent of service and warranty contract revenue that is renewed.  Sounds like a great idea that adds a lot of value, and it is.  But every time I've sat in on a presentation from this firm I (and others) asked if they're seeing more of a threat from firms bringing these operations in-house.  Granted, RMKR's solution is to be cheaper and more productive than adding more bodies to the sales force, but at the end of the day they're only adding value if their customer's can't replicate the process themselves.  A look at their customer base above shows some of the savviest software firms on the planet, so that worry about "in-housing" the services RMKR delivers is very real.

It got more real last night, when Rainmaker announced that Sun - owned by Oracle now - will no longer be in need of certain Rainmaker services.  Shares are off 16% today, as Sun represented 20% of fourth quarter revenue.

Campbell, Calif. – February 11, 2009 –  Rainmaker Systems, Inc. (NASDAQ: RMKR), a leading provider of sales and marketing solutions offering SaaS application software and execution services, today announced that it has been notified by Oracle that some of the programs Rainmaker currently performs for Sun will continue, while others will not be continued past February 28, 2010. The programs Oracle will not continue are the contract sales programs. These programs accounted for approximately 13% of Rainmaker's fiscal 2009 annual revenue and 21% of its fourth quarter fiscal 2009 revenue. Oracle has indicated that they will be in-sourcing Sun's sales functions.

In the release, Rainmaker also announced an acquisition of Optima, a lead-development provider.  They also gave 2010 revenue guidance of $41million, about 20% below the consensus analyst estimate of $50million - pretty much just pulling the Sun revenue out of the plan.

 RMKR conducted a conference call last night to explain Oracle's decision to in-source the sales functions that RMKR had previously been a part of.  Management assures us that this was a decision "not specific" to Rainmaker, but to all companies proving contract sales services.  That's certainly of little solace - "Oh it wasn't just us, the whole industry's business model is under threat..."

To their credit, Rainmaker will reduce costs and return to positive operating cash flow in 2 quarters.  I certainly wish them well in these endeavors, and would suggest the first cost to be cut is their relationship with MKR Group, an outside PR firm.  It's a nice perk to have a third party getting your story out to the investment community, but c'mon guys - learn a thing or two from this Oracle experience!!!

Bottom left of this image is the "case study" on MKR Group's website.  I give them credit for increasing firms' exposure to the investment community, which can definitely be a benefit to existing shareholders.  But in addition to the cost of hiring this outside party are the not-insignificant costs to attend all these investor conferences.  These Public Relations expenditures amount to a MUCH more significant percent of company spending than they might at a larger public company.  I don't know what RMKR has paid these guys in the almost 4years they've been a client, but I'll bet if you add those fees to whatever has been spent shuttling company exec's to various small-cap stock conferences, it dwarfs the $492,000 cash consideration just paid for a 50person company, mentioned in last night's press release.

Rainmaker should forget the PR business and get back to basics.  Take the advice of one person mentioned on MKR's website of all places.....

" As you know, ultimately fundamentals win out but it is my opinion that MKR put both of those companies on peoples radar."

Copyright 2010 AlphaNinja

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