Chordiant Cash Crisis

On August 9, CRM vendor Chordiant released earnings for the quarter ended June 30, 2005.

On the positive side, Chordiant announced a business process automation deal with Wachovia. Financial terms were not disclosed, but the customer made an advance payment of at least $5 million. Earlier in the quarter, the Boston Globe selected Chordiant Marketing Director, closing a sales cycle that began in 2002.

License revenue for the quarter increased from 5.4 million to 9.2 million. Management attributes the increase to timing factors in revenue recognition. Chordiant software takes considerable time to implement, and under GAAP accounting the vendor recognizes license revenue each period according to the degree of completion.

Unfortunately, the increase in revenue was more than offset by increased overhead, deepening Chordiant's net loss per share. Spending in all overhead categories increased, reflecting increased selling costs, higher costs to cover outsourced tech support, consulting fees to comply with Sarbanes-Oxley and accounting fees to cover restatement of 2004 results.

Chordiant's line of credit from Comerica, scheduled to expire on July 27, was extended through September 30 with additional conditions. The most stringent of these conditions requires that the entire amount borrowed remain on deposit with Comerica. On June 30, Chordiant was in violation of certain terms of the loan covenant and required a waiver from the bank.

Chordiant's situation is dire:

• Continued restructuring costs and compliance costs elevate overhead spending for the rest of the fiscal year;
• Progress accounting and long implementation cycles mean that a few sales now will not resolve losses in the short term;
• Restructuring and headcount reduction mean increased costs for functions such as outsourced technical support;
• Lack of credible partnerships and labor intensive implementations mean limited ability to scale even if sales reps can close some deals in the next quarter;
• Bank financing hangs by a thread.

Management must be hoping that by landing some quick deals and building a backlog, the company will attract an acquirer. Prospective customers should take note.