Epiq Systems, Inc. EPIQ
December 15, 2015 - 8:10pm EST by
SQN Investors
2015 2016
Price: 14.57 EPS 0.82 .92
Shares Out. (in M): 38 P/E 17.6 15.8
Market Cap (in $M): 546 P/FCF 7.2 6.5
Net Debt (in $M): 368 EBIT 76 87
TEV ($): 933 TEV/EBIT 12.3 10.7

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  • Big data
  • Small Cap


EPIQ Long Write-Up


Summary Investment Thesis

  • Strong secular trend of increasing digital data volume growth is making it more difficult to search/organize data and increases the need for eDiscovery services; in addition, eDiscovery is expanding into additional use cases and customers are looking to save money vs. traditional law firms

  • Masked growth as decline in the bankruptcy business line masks the growth of the eDiscovery business.

  • Counter-cyclical characteristics of bankruptcy business provides natural hedge to an economic downturn

  • Leverage helps equity returns and equity value will rise as company de-levers

  • Multiple targeted areas for potential cost cuts and margin improvement, on a business with a pro forma ~14% LTM PF FCF yield

  • Potential for reinvigorated strategic review and M&A given large constructive / activist shareholder base

    • Interest from buyers as a market leader in a consolidating fragmented space.  Both strategic and private equity buyers with multiple constructive hedge funds in the stock, two of the largest activists collectively own >30% of the company; one of the two (Villere) recently proposed a new board slate

Key Risks

  • Competitive Pricing Pressure

    • Risk of price pressure in both document review and in technology processing as competition increases

    • Offshore review is an option for some litigants


      • While the space is partially commoditized, cost is currently not the primary basis of competition

      • Scale helps Epiq compete for national and spike volume accounts vs. smaller local providers

      • Decreasing costs and growing volumes have helped to offset processing ASP drops

  • Reliance on 3rd-Party Technology

    • The absence of a disruptive technology innovation in eDiscovery threatens to increase pricing competition and commoditization

    • Half of Epiq’s ESI revenue is generated through the use of 3rd-party software providers


      • Experts currently believe that proprietary software is not a key differentiator and often results in a lack of competitive flexibility

      • Epiq has invested in developing in-house along with strategically acquiring technology and has proprietary data centers

  • Technology Disruption

    • Technology Assisted Review (TAR) or predictive coding may reduce the number of documents reviewed by human services


      • Rapid data volume growth has more than offset predictive coding efficiencies

      • Highly sensitive documents and large litigation will still require human review

  • Continued Decline in Bankruptcy Business

    • Total U.S. bankruptcy filings continue to decline due to the strong macro economy.  This has hurt Epiq’s bankruptcy and settlement division.


      • The businesses are countercyclical, so should recover if the macro economy turns


Business Description

Technology Segment Overview:


Bankruptcy and Settlement Admin Segment Overview:


Investment Considerations


  • Secularly growing market

    • The accelerating growth of corporate electronic data demands automation and eDiscovery solutions as companies shift from more costly traditional law firm reviews

    • Growing awareness of eDiscovery issues in Europe and Asia and aggressive investment in those areas will drive growth internationally

  • Misunderstood Multiple Business Lines

    • EPIQ is often seen as a bankruptcy and settlement business despite eDiscovery representing 70% of Epiq’s revenue today

    • Growth of the eDiscovery business is masked by the declining bankruptcy and settlement business

    • Aggressive investment in eDiscovery international growth temporarily depressed earnings but margins are starting to re-accelerate and the company is implementing cost cuts

  • Profitable Business Model

    • 50%+ gross margins and 20%+ AEBITDA margins

    • Flexible cost structure allows Epiq to maintain margins as document review volumes vary yoy

    • Heavy investment in international expansion has depressed margins and created one-time capex, but the growth in eDiscovery should provide earnings leverage vs. largely fixed costs

  • Consolidating Market

    • As eDiscovery matures, law firms cannot ignore the technology and will acquire or eDiscovery players will seek to consolidate.  Consolidation should help stabilize margins

    • Epiq is a leader in the space and brand name/scale matter to large enterprises

  • Strategic Review Dynamics

    • Tom Olofson, CEO and Chairman since 1988, is 73 years old and owns 8.9% of the company

    • Villere is actively pushing for a sale of the company

    • There is broad private equity interest in this asset. P2 Capital already submitted a $20/share buyout offer in August 2014 (that was rejected by the company)

  • Valuation

    • 8.3x LTM PF EBITDA and 13.8% PF FCF yield for a business with 52% gross margins and historically higher EBITDA margins; Epiq’s valuation does not reflect the emerging growth of its eDiscovery business, which is a 50%+ recurring revenue business.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


-M&A (ongoing strategic review & activist involvement)

-Growth in eDiscovery business; potential counter-cyclical recovery of bankruptcy business

-Margin improvements as company cuts costs

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