|Shares Out. (in M):||41||P/E||0||0|
|Market Cap (in $M):||609||P/FCF||0||0|
|Net Debt (in $M):||-87||EBIT||0||0|
Actua (the “Company”) is a portfolio of four cloud software platforms focused on a total addressable market that exceeds $20B. Each of the focused verticals participates in a market with growth potential exceeding 20%. Actua has been successful in each vertical with an overall retention rate of 97% and recurring revenue of 87%.
I am advocating a long position in Actua. Although this idea will not screen as “value”, I think that’s among the reasons the opportunity exists. On the surface, Actua is not a “value” with negative free cash flow and negative profitability expected this year. However, the Company’s growth potential is substantial (organic growth of more than 25% in 2014) and the trajectory towards overall profitability is achievable. Three of the businesses will generate free cash flow this year. Given favorable market dynamics and competitive positioning, it’s likely that more than 20% of organic growth can be achieved for a few years.
On a 2015E revenue basis, the vertical software peer group is trading at more than 6x compared to Actua at less than 4x; Actua’s revenue growth is forecasted to be 25% more than the peer group. Nevertheless, I believe the best way to value Actua is to evaluate each of its businesses separately as I will describe below.
Although I anticipate some volatility in getting there, I believe there’s 35% upside potential that can be achieved in two years or less. I have hedged part of my position with a few peers.
The insiders are confident as well as evidenced by six insiders having recently asserted their confidence with ~$1.7M of total purchases since May 2015 at prices ranging from$12.75-13.50. During the second half of 2014, the Company repurchased $14.5M of stock at an average price of ~$16.65.
The company name “Actua” is relatively new, as of September 2014. Actua’s previous name was Internet Capital Group. You might remember that company (ticker ICGE). It briefly was worth almost $60B as the dot.com frenzy made its stock soar in 2000. Two years later, it was valued at less than $200M. Actua has evolved from essentially being a publicly-traded venture investment vehicle focused on the B2B e-commerce sector to an operating company with four businesses that it controls, each acquired during the past five years.
The continuity of leadership is intact with each of the four acquired businesses having retained their CEO. Actua’s management team works closely with each business, with an emphasis towards sales and marketing, product development, and tuck-in acquisitions. A total of twenty people work at corporate including eight characterized as “management.” Three of the twenty are solely focused on corporate development activities to assist the four businesses with tuck-ins and competitive intelligence. Each of the four businesses benefits from Actua’s strong balance sheet (over $85M of cash as of Q1 2015) which serves as an important source of stability, both real and perceived which is critical when these relatively small businesses are driving sales growth, often with multi-billion dollar enterprises and government agencies. The Company will benefit from more than $100M of NOLs. Actua also has almost $20M of legacy, minority investments in four companies on its balance sheet.
The four verticals where Actua operates cloud software solutions and the estimated revenue for each in 2015 are as follows:
1. Property and Casualty Insurance: Bolt Solutions ($25M)
2. Environmental Health and Safety: MSDSonline ($40M)
3. Wealth Management: FolioDynamix ($35-40M)
4. Government Communications: GovDelivery ($35M)
Management’s guidance for 2015 is $133-138M in revenue and a loss of $5-9M in cash flow from operations. The transparency of each business segment is poor and arguably an issue. However, I believe that management understands the importance of improving the transparency of performance metrics across its businesses and that they intend to elevate such in the future (i.e., a potential catalyst). The Company will likely host an investor day during October and could share more performance and financial metrics then (it has been very much encouraged).
In the descriptions below, the main emphasis is qualitative. I believe Actua is well-positioned across its portfolio to drive both top-line and bottom-line growth in the future. It is management’s intent to own each of these businesses but they are aligned and cognizant of the fact that the market might only ascribe value to some businesses if separated or sold.
Actua owns 70% of Bolt Solutions, the “number one insurance distribution platform.” Bolt provides a multi-channel, multi-carrier software platform that enables insurance distributors to retain and grow revenue through a comprehensive insurance solution. The build-out of this business requires mission-critical infrastructure which takes lots of time and money but the completion of such can make the Bolt Platform an integral and sustainable part of the insurance industry with a highly-defensible moat.
Bolt is improving and transforming the distribution of high volume, low premium P&C flow business to its platform that connects carriers, products, markets, consumers, and third party facilitators. Actua acquired its initial stake in Bolt in 2009. Bolt, which was initially called Seapass Solutions, was founded by Israeli software engineers in 2000. It changed its name in 2013 after becoming majority-owned by Actua. In the past couple of years, the Company paid $10M for two Bolt tuck-ins, specifically Superior Access and Ludwig. Bolt will likely generate ~$35M of revenue this year and I estimate lose over $20M in cash flow.
Like it has for numerous goods and services, the Internet is changing the way companies shop for insurance. The new reality for insurers is that 70% of insurance shoppers use the internet, 65% would consider purchasing insurance products from organizations like Google, Amazon, or Verizon, and 40% of insurance shoppers are on mobile devices. However, unlike flights or hotels, the complexity and variety of small business property and casualty coverage poses a challenge to insurers and brokers who want to provide customers with a Kayak.com-like shopping experience. Insurers are looking for ways to navigate the changing landscape. Bolt Solutions is helping to fill that void by further enabling insurers to embrace the omni-channel imperative with a better way for consumers to choose and buy insurance.
According to Senior Insurance Analyst Michael Fitzgerald at Celent, consumers are increasingly demanding services that are just-in-time, just-enough, and require little effort. However, the biggest challenge that Mike highlighted is that these changing patterns don’t match up with how the insurance industry does business which is mostly designed to serve a smaller segment of the aging population, which is shrinking in both size and value.
Bolt’s main business is building product-comparison software platforms for property and casualty (P&C) insurers. Bolt’s Platform is integrated into sixty-three of the largest insurance carriers and has over 3,000 carrier connections which create the largest source of insurance flow for direct carriers, agents, agencies and alternative insurance distributors. The Bolt Solution is a SAAS platform that integrates all the elements required—the people, processes, markets, and technology—to enable sales and distribution. Through Bolt’s platform, insurers gain marketplace intelligence in areas of consumer trends and pricing as well as capitalize on real-time connections to expand their addressable market. Bolt’s clients include Progressive, Allstate, and Citizens (the latter signed a ten-year $45M arrangement with Bolt).
Bolt’s software enables insurers and agents to quote and sell their own products online, as well as those of their competitors which are on the Bolt Platform. The Bolt Platform enables agents to quote, bind and issue the products their customers need in a matter of minutes instead of the typical hours and sometimes days or weeks. The Bolt Solution makes the sales process much easier. Bolt differentiates itself from competitive alternatives through its multi-pronged approach focused solely on the P&C market segment. Competition includes EZLynx, Applied Systems, as well as sales and comparison portals offered by the Independent Insurance Agents & Brokers of America to its 28,000 members. Bolt’s competitive advantages are derived from selling technology to big carriers and small agencies alike, pitching products directly to consumers, and offering call center support, analytics and data warehousing services to insurers.
Some have characterized Bolt as the “holy grail” to the insurance industry. During 2015, CIOReview named Bolt Solutions among the top twenty most promising insurance technology solution providers. As a trusted partner to some of the biggest insurance carriers, Bolt empowers its customers to always say “yes” to the insurers’ customers, thereby broadening carriers’ distribution and customer relationships to succeed in the new omni-channel reality. Quoting multiple insurers is known as “comparative rating.” Although the concept was available before Bolt introduced its platform, the process is now automated because of Bolt. The automation of the process by Bolt makes it more economical to sell a lower-commission product by enabling higher sales volume. The Bolt solution only provides a competitor’s quote if the insurer handling the business opportunity doesn’t offer a certain type of coverage or a prospective customer doesn’t meet its underwriting requirements.
The insurer/agent gets a commission if a competing product is sold. Bolt also receives a commission and the revenue derived from commissions on premiums sold through Bolt’s Platform currently comprise ~50% of Bolt’s revenue mix. Given the substantial premium growth that will likely flow through the Bolt platform, the commission mix will grow as well. The other main revenue source is subscription-based derived from multi-year/multi-million dollar contracts.
The single carrier model is problematic for consumers wanting all of their insurance needs met in one place. Numerous carriers spend hundreds of millions of dollars in television advertising to drive their branding and as a component of their cost to acquire customers. In 2013, GEICO spent $935M in advertising and Allstate, State Farm, and Progressive each spent ~$500-600M. P&C insurers spend in aggregate billions of dollars to acquire customers but such carriers do not provide all of the products that every customer relationship seeks.
Factoring in advertising and promotional campaigns, the cost to acquire a customer is $400-500 for some insurers. One insurance executive said, “Every insurer’s goal should be to make effective use of a lead by finding every possible way to fulfill the customer’s product needs.” Despite “acquiring” a customer, the carrier or agent is not monetizing each customer relationship to the extent possible. Management estimates that 40% of potential business is lost to other carriers because products being sought by customers are not provided by selected carriers and/or agents.
One CEO of a major P&C insurer estimates that $2-3B of potential annual commissions are a “lost opportunity” to his company because his company doesn’t provide product(s) that a customer seeks. Having “acquired” a customer to discuss insurance products but not fulfilling his/her requests, the total “lost opportunity” across the P&C sector is estimated to amount to $30B in annual commissions. Bolt’s Solutions are tailored with standardized processes to enable this “lost opportunity” to be captured more easily. Furthermore, there’s a network effect that can benefit those on the Bolt platform and the “lost opportunity” can become magnified for those not on the platform.
Bolt is Actua’s only business that is not yet profitable. However, it could have the most upside potential. Management estimates that $30B of annual industry commissions could be available through $250B of potential premiums generated across the Bolt Platform. As of Q1 2015, Bolt generated more than $1B of premiums through its platform and management expects almost $2B of premiums by the end of 2015. Bolt receives ~80-100 basis points of commission on premiums generated through the Bolt Platform. As evidence of the growth potential from the Bolt Solution, premiums across the Bolt platform grew by more than 6x from the beginning of 2014, at $140M, to the end of 2014, at $850M.
Management’s goal for Bolt is to grow coverage of P&C connections from currently being 60% to 90%. The network effect derived from increasing connections has been and is anticipated to be substantial. As demonstrated by premium growth of more than 7x from the beginning of 2014 through the end of Q1 2015, there is a step-function of potential growth with new connections and as the Bolt Platform gains traction in the marketplace, significant premium growth is expected to continue. By the end of 2015, management anticipates that Bolt could serve 70-75% of the overall market in an automated manner and 90% of coverage might be achieved in 2016. The cost of the build-out is expected to substantially decline as the business scales and reaches the 90% coverage level. I estimate that Bolt’s cash burn will exceed $20M in 2015. Actua’s other three businesses are expected to generate $12-16M of cash flow this year.
The Bolt Solution is a “transformative” enabler for the P&C industry but the sale involves a long sales cycle in the “slow-moving” insurance industry. “By its nature, insurers are notorious for dragging their feet in decision cycles.” Bolt’s value proposition to its customers is significant but given the strategic importance of the insurer’s decision, the green light to proceed often comes from a carrier’s CEO, CFO and CIO. Moreover, pursuant to a decision by a carrier to proceed with the Bolt Solution, the initial ramp-up involves lots of data integration which adds more time (~6 months) until revenue visibility from a new carrier develops. Implementation can be complex which results in lower margin service requirements but pursuant to the implementation phase, the prospect for recurring, high margin revenue growth is substantial.
After growing by 52% in 2014, expectations for Bolt are high and since the Bolt business was flat in Q1 2015, investors were disappointed. The stock declined by ~11% the day of the earnings release. Not surprisingly, the market wasn’t focused on the longer-term prospects despite the quality of an expanded pipeline of nine large, mid-to-late stage deals that would expand Bolt’s coverage towards management’s stated 90% goal. Moreover, Bolt expanded its relationship with its three biggest customers and launched a partnership with Google Compare.
Given that more than 70% of consumers start their search for insurance online coupled with the poor perception of the insurance purchasing process, Google launched their comparison product Google Compare to improve the customer experience. Bolt recently partnered with Google Compare to enable insurance carriers an easy on-ramp to leverage the benefits of Google’s reach. Through Bolt, carriers gain access to Google Compare with minimal IT involvement and no contract or integration directly with Google.
Bolt focuses on P&C “flow” business which is less of a focus among insurance agents. Flow business is estimated to total $250B of annual premiums and $30B of annual commissions. With only 60% of the P&C landscape currently covered by Bolt versus a goal of 90% (over 4,500 connections), management perceives a significant growth trajectory. The growth potential of Bolt’s solution as an aggregator has already been demonstrated in the UK. Over a decade ago, 90% of auto insurance in the UK was sold by agents and 10% by aggregators; today almost exactly the reverse is true.
Although Bolt is currently the Company’s smallest business (at ~$25M in revenue) and the only Actua business not yet profitable or generating free cash flow, it could have the most upside potential. A valuation of Bolt based on recent results will not convey “value”. Bolt’s business model is highly scalable and although the timing of an inflection point of profitability is challenging to predict, I believe the attractiveness of Bolt’s business model will surface with more visibility in 2017.
For modeling purposes, I assume that premiums flowing through Bolt will grow sequentially each quarter through the end of 2017 by 25%. Since that is roughly the rate of growth forecasted by management during their Q4 earnings call held this past February from Q1 2015 through the end of this year and that’s without achieving 90% coverage, I think my assumption will prove to be conservative. Increased connections (or coverage) will drive a step-function in growth. Given the implementation phasing, 2016 will likely evidence much more growth as connections are fully-integrated from launches being implemented during the second half of 2015 and during 2016. Nevertheless, assuming 25% of sequential growth in premiums, that yields a total of more than $11.5B by the end of 2017. This is less than 5% of Bolt’s targeted P&C market. Assuming Bolt receives 80 basis points for commission, Bolt Solutions would generate $92M of high margin, recurring revenue in commission dollar mix. This is in addition to the high margin, recurring revenue from SaaS software licenses which I estimate to be another $35M in 2017. It’s reasonable to assume that Bolt would generate a margin of at least 20% margin, thereby yielding ~$25M of operating income that is relatively stable and will continue growing.
For illustrative valuation purposes, I ascribe a multiple of 15x 2017E EBIT, thereby resulting in a value of ~$380M (or ~$265M for Actua’s 70% interest). At 20x 2017E EBIT, Actua’s interest is worth ~$355M.
I allocated much time on Bolt because my research led me to believe there is a meaningful value proposition from the Bolt Solution. The infrastructure build-out to enable Bolt’s role as an aggregator is expensive and the decision-making process by customers is appropriately long but the marketplace has already validated the Bolt Solution and premium growth is demonstrative of a strong trajectory of potential upside and further reinforced by the robust pipeline for getting to the 90% coverage goal. It is admittedly hard for me to think about ascribing so much value potential to something that has yet to generate cash flow but I am ascribing a high probability of Bolt being successful based on existing results that more than validate the concept and further reinforced by primary research with industry participants. In regards to valuation, for context, note that the best publicly-traded peer is Guidewire Software (GWRE) which provides the core software that P&C insurers use to run their business-from underwriting and policy administration to billing and claims management. Guidewire is trading at 10x LTM revenue and 39x 2017E EBIT.
MSDSonline (“MSDS”) is the leading provider of cloud-based environmental, health and safety (“EHS”) solutions. MSDS is one of the largest companies in the workforce compliance software industry. MSDS has compiled and fully indexed more than five million material safety data sheets, which contain information on the potential health effects of exposure to chemicals, or other potentially dangerous substances. More than 10,000 companies are using MSDSonline’s chemical management, on-demand training, incident management, and authoring solutions to help more than 8M employees perform their jobs safely.
The ultimate goal for MSDS is to automate the desktop of the safety manager who is tasked with significant consequences, in the absence of compliance, with the increasing complexity of regulatory pressures. If a company fails to comply, that company is likely to be fined by five figures on a daily basis. Therefore, the value proposition offered by MSDS is quite attractive, at ~$4,000 annually for a three-year subscription.
The Company acquired MSDS in April 2012 for ~$48M. MSDS was breakeven on ~$13M of revenue in 2011. To further accelerate growth and fortify its competitive moat, MSDS acquired Knowledge Management Innovations (“KMI”) in August 2014 for $10.3M (or up to $12M based on earn-out potential). KMI enhanced the solutions that MSDS could provide by addressing the larger and more complex needs of multi-nationals. KMI added more environmental-related content to fortify the health and safety emphasis at MSDS so now the EHS solution is more complete. Furthermore, integrating KMI's array of incident management reporting solutions into MSDS's existing platform doubled the addressable market for the company to over $3B market. In addition, the acquisition enables cross-selling opportunities for MSDS's more than 150 sales people. During Q1, MSDS added 563 new customers including two cross-sell wins with two large manufacturers largely driven by the MSDS/KMI combination.
Management expects MSDS to generate $40M of revenue and $10M of operating income in 2015. The addressable market is over $3B so there is meaningful growth potential. During Q1, MSDS grew by more than 40% inclusive of KMI. Given its mission-critical value proposition, the recurring/high margin business model, and the ongoing growth prospects at MSDS, I think it’s reasonable to ascribe a 15-20x EBIT multiple to the business, thereby ascribing a value of $150-200M for MSDS.
A safety data sheet, material safety data sheet (“msds”), or product safety data sheet is an important component of product stewardship and occupational safety and health. These sheets are a widely-used system for cataloging information on chemicals and are intended to provide employees and emergency personnel with procedures for handling or working with substances in a safe manner, and include information such as physical data, toxicity, health effects, first aid, reactivity, storage, disposal, protective equipment, and spill-handling procedures. In the U.S., the Occupational Safety and Health Administration (“OSHA”) requires that safety data sheets be available to employees for potentially harmful substances handled in the workplace under the Hazard Communication regulation.
According to the OSHA, more than 5M facilities in North America handle hazardous chemicals. Given increasing regulatory requirements, many of these facilities are seeking ways to efficiently manage their hazardous chemical compliance needs. A majority of facilities still use a paper-based solution which can frequently total several thousands of pages. The MSDS solution integrates a suite of capabilities that automates material safety data sheet management on one platform. In addition to providing core hazardous chemical management features, MSDS empowers EHS professionals with regulatory compliance capabilities, such as injury and illness record keeping, on-demand workplace training, and compliance education tool kits.
The onslaught of more regulatory issues is a challenge to numerous industries but more rules and regulations coming from OSHA are a tailwind to Actua's MSDS. A specific tailwind is the global adoption of GHS--global harmonization standard--which aims to essentially standardize all material safety data sheets globally. Although the Company is not currently focused on selling in Europe except to its multi-national customers, MSDS will benefit in Canada where GHS has recently been adopted and MSDS-owned KMI is located.
Given the attractiveness of the value proposition to the end market, I am surprised that MSDS hasn’t been even more successful at penetrating the market. I was told that there’s inertia among those in charge of safety at smaller companies in doing it their way and they aren’t accustomed to making this type of technology-related purchase. The current customers are satisfied as evidenced by the high retention rate. Ongoing growth is “just a matter of time and allocation of marketing and sales resources.” To tackle the underpenetrated market, MSDS has hired an “army” of telesales people of more than 150. As of Q1, MSDS was in active dialogue with more than 3,000 customer prospects.
Actua owns 97% of FolioDynamix (“Folio”), a leading provider of wealth management technology and advisory services. Folio offers a comprehensive web-based technology platform for managing the full advisory lifecycle—proposal generation, research, model management, portfolio accounting, trade order management, reporting, and performance analytics. Folio is the only vendor to offer a “truly-unified” enterprise wealth management technology platform that can support the entire fee-based advisory lifecycle. As a provider of one cohesive solution through single code, Folio is differentiated from its peers.
Actua acquired its stake in FolioDynamix for ~$200M in November 2014. Its acquisition was not expected by the market although Actua management had followed Folio since 2010 (Actua’s COO previously worked within the industry) and seized the opportunity to acquire the business when it was put up for sale. Industry experts were surprised by Actua being the ultimate buyer. One expert characterized his reaction to the acquisition by Actua as being a “head scratcher.”
Folio was acquired for over 6.5x its net revenue run rate which exceeded $30M with positive earnings and cash flow. That’s arguably an expensive price paid and calls into question if Folio at $200M is a “value”. Primary research confirms that Folio is a well-positioned business model and that industry participants were prepared to pay more than $200M. Folio’s leadership preferred being acquired by Actua and apparently was able to influence the previous Folio owners to accept a lower price from Actua. Given the importance of the leadership continuity to the business, it’s not atypical for a leadership team to influence an outcome of a sale at a lower overall value if there’s a specific buyer the leadership would prefer. In knowing that there were strategic industry participants willing to pay more than $200M less than a year ago, I view this dynamic as important context in assuming that Folio is currently worth at least $200M. Envestnet (“ENV”) is the most comparable publicly-traded peer to Folio. ENV is currently trading at more than 4x LTM revenue and more than 35x LTM EBITDA.
In the quarter that preceded FolioDynamix being acquired, Folio was the fifth biggest non-advisory third-party managed account provider, with ~4.7% of non-advisory market share. Folio’s share was dwarfed by Envestnet’s 39%. Among the activities that Actua has taken to fortify FolioDynamix’s position are as follows: i.) empower more sales through increased resource allocation to sales and marketing (only six sales people prior to Actua’s acquisition); ii.) drive continuous innovation with a larger engineering team; and iii.) focus on tuck-in opportunities that improve Folio’s moat and value proposition.
Folio grew by more than 40% in 2013, by 43% in 2014, and by 27% in Q1 2015. As of Q1 2015, Folio’s customer base included over 200 banks, brokerage firms and large RIAs. During February 2015, Folio was in discussions with ~250 additional firms about providing all or some component of a prospect’s wealth management platform. In total, Folio had more than 97,000 end-users as of Q1 2015. Folio’s growth is impressive on its own but even more so when contextualized by the fact that a nine months sales cycle of many potential prospects stood on the sidelines deferring action until customers knew who would buy Folio. During Q1 2015, Folio signed four new deals and another four in April. The implementation phase will typically take six months. Management cited an expectation of more than 30% growth at Folio resuming during Q4 2015. In 2015, Folio will generate cash flow and will likely generate $35-40M in revenue.
Folio’s strength in the marketplace is with banks and broker dealers and management believes Folio has a distinct advantage in the private wealth and trust segment. In the RIA segment, Folio is mostly focused on the larger industry participants. Of the eight new customers signed in the first four months of 2015, five were banks.
A key driver of revenue is regulatory assets under management which totaled $4.1B as of Q1 2015, up ~11% sequentially from the end of 2014. Folio earns ~20-25 basis points from regulatory AUM. Another important barometer of Folio’s success is assets under administration which amounted to $688B at the end of 2014.
Some companies that sell technology systems to the fee-based managed account industry are “antiquated in their mainframe file applications.” Providing an end-to-end turnkey asset management platform (“TAMP”) for advisory firms to run their entire operation and outsource part or all of their back office, Folio has become one of the leading advisory platforms since they were founded in 2007. In 2014, they received the Advisory Solutions Technology Innovation of the Year Award from Money Management Institute.
Folio’s value proposition is improved client productivity enabled by its technology. For some of its clients, Folio’s technology has enabled something that historically took an advisor as much as five days to complete might now take just five minutes. Moreover, Folio has succeeded in landing premier clients including Raymond James, Cetera, Pershing, BB&T, Cambridge Investment Research, and LPL Financial. Average selling price is six-to-seven figures and the top ten customers currently comprise ~60% of Folio’s revenue.
Folio is well-positioned to benefit from several industry tailwinds including an increase in fee-based advisory services, an increase in the number of fee-based advisors, and a move toward fiduciary standards in the industry. According to Cerulli Associates, the percentage of households investing through financial advisors increased from 50% to 86% during the period of 2008-2013. Over the same period, the number of RIAs increased 27% and fee-based AUM increased by almost 120%. The U.S. Department of Labor has proposed rule changes to make more retirement assets subject to fiduciary standards. Folio’s solutions help financial advisors comply with these fiduciary standards and could benefit from this trend. Wealth management firms are increasingly adopting third party platforms to reduce fixed costs while speeding the innovation cycle and breaking down technology and product silos. There is increased mobility among financial advisors and technology enablers have become a more critical factor in their decision process when choosing another firm.
Unlike Actua’s other three businesses, Folio has numerous competitors although a majority of such competition is tailored to one or two point solutions and not a comprehensive solution like that offered at Folio. For example, when it comes to a rebalancing solution, Folio competes with Envestnet/Tamarac, iRebal, Redblack Software, and Total Rebalance Expert. Within the bank/broker market segment which is Folio’s main focus, management said that 9 out of 10 times, Envestnet will be Folio’s primary competition. Although Envestnet does offer a comprehensive solution set, Folio management has said the approach at Folio is one singular solution versus Envestnet which approaches the market through “siloed solutions that are almost like point solutions bundled under one brand.” Envestnet has made twelve acquisitions since 2001. Management said that Folio wins “its fair share”. According to a research note from Northland Securities, Folio’s competitive win rate is ~80% in the banking/trust channel and ~50% with large brokerages. Additional competition comes from other turnkey asset management providers including AssetMark, BNY Mellon/Lockwood, Citi Investor Services, Genworth Financial, and SEI, as well as from other wealth management applications such as Albridge (BNY) and Advent Software (recently acquired by SS&C for 6.8x LTM revenue), and from custodians like Charles Schwab and BNY Mellon/Pershing. In terms of scale, according to the Trust Advisor: 2014 America’s Best Turnkey Asset Management Platforms, Envestnet is the largest followed by SEI, Genworth, Citi, FolioDynamix, and Lockwood. Based on total turnkey asset management platform assets, Folio was almost one-third the size of Envestnet according to Trust Advisor. Despite the more intense competition within Folio’s market, the business is very sticky as evidenced by Folio’s 100% revenue retention when it was acquired.
Founded in 2000, GovDelivery is a proprietary network and secure cloud-based enterprise marketing platform used by more than 1,000 government-related organizations to reach, inform, and engage over 80M citizens through the web, email, mobile and social media channels. GovDelivery is the number one referrer of traffic to hundreds of government websites and the only digital marketing platform that exclusively connects national, regional and local governments.
GovDelivery’s mission is to help government-related organizations make direct connections with their constituencies. At the simplest level, it gets people signed up for things like newsletters, SMS alerts and tweets. GovDelivery automates the communication process. By all accounts, Healthcare.gov was a “train wreck” of a web-site roll-out during 2013. Weeks after the site for the Affordable Care Act went online, users still were challenged to sign up for insurance because the page site wouldn’t load. However, the site did not lack for traffic with almost 5M unique visitors in its first 24 hours and GovDelivery was largely the source of such traffic as the number one source of referral traffic to Healthcare.gov according to web analytics firm SimilarWeb. Facebook accounted for less than 3% of such traffic.
Management estimates the addressable market is more than $1B. Revenue is derived from annual subscriptions (apparently the government doesn’t engage in anything more than a one year subscription). Organic growth has consistently been more than 20%.
In January 2010, Actua acquired 89% of GovDelivery for ~$20M. GovDelivery generated ~$9M in revenue in 2009, more than $12M in 2012, and is expected to generate ~$35M in 2015. Consistent with Actua management’s focus on tuck-in acquisitions, GovDelivery has made two within the last year. In December 2014, GovDelivery announced its acquisition of the open data platform provider NuCivic for its development expertise in Drupal, an open source website content management system embraced by many city and state departments. NuCivic extends GovDelivery’s capabilities with the provision of tools and a technology platform that sits on top of Google, a widely-used content management technology across the federal market, thereby enabling GovDelivery to manage open data sources to make them public, searchable and shareable by government agencies. NuCivic recently worked with the Department of Health and Human Services to redesign its data repository (HealthData.gov) to make government health-related data more accessible to the public for analysis. The other tuck-in, announced last week, is the acquisition of Textizen, a mobile messaging platform. Actua paid $5.4M for NuCivic including a provision of 2.5% of stock in GovDelivery (which implied a $136M value for GovDelivery). That value is ~4x revenue which is below the vertical cloud peer universe but I value GovDelivery at roughly half that, at $70M based on 2x revenue.
Based on the descriptions above, I arrive at a total valuation range of $685-825M (the upper range based on higher EBIT multiples, at 20x versus the lower end of the range at 15x, ascribed to Bolt and to MSDS. There is much optionality across Actua’s portfolio, especially with Bolt. I assume that cash at year-end is $75-80M and after cash burn of $5-9M this year (burned mostly in Q1 at $4.4M), I think Actua will be closer to cash breakeven in 2016. I estimate that unallocated corporate is ~$10M and I don’t deduct such from my valuation range as it’s essentially a wash with the cash. I also am not ascribing any value to the more than $100M of NOLs or the legacy minority investments.
There are numerous risks associated with this investment and most notably with regards to the potential success of Bolt. I think that MSDS is the lowest risk component of the portfolio given its attractive profitability profile already being achieved at current scale. The others are envisioned to scale towards strong profitability but there’s uncertainty in magnitude and timing. Moreover, the expectations for growth are inherently high with any stock trading primarily on a current revenue basis and such will create volatility. As noted, I am short some of the peers to hedge this inherent risk coupled with the overarching valuation risks within the cloud software arena.
Organic growth of at least 20% across each business
Bolt's achievement of at least $10B of premiums in 2017
3. Improved transparency communicated by management of business performance metrics and financial results
4. Visible path to positive cash flow and profitability for all four businesses (expect 2017 at the latest)
5. Potential for monetization of individual businesses, a source of optionality