Hoovers, Is a profitable (operating CF) growth story trading at an
exceptionally low valuation (63% of mkt cap in Cash, EV/sales 63%, Insiders
and company buying back stock). Hoovers business sports high barriers to
entry, highly differientiated business model, many proprietary advantages,
and is a healthy growing business. Hoovers operates sites in 5 countries and
in 4 languages (French, Italian, German, and Spanish).
Intro: Hoovers is the largest pure business information portal: 2.5mm users,
300,000 paying subscribers, 400 million page views annually. HOOV site is
designed to provide business information to Corporate Enterprise users
(Sales, Marketing, R&D, and Senior Management). The company dominates the
small and medium sized corporate market for sales and marketing
professionals(101% subscriber growth yr/yr). Hoovers also has a strong large
corp base cusomers include: IBM, HP, UPS, Merrill Lynch, GM, Sun, Texas
Instruments, etc. The company has 4 high margin revenue streams:
Subscriptions (70% of revenues), Advertising, Licensing of content to other
sites, and CD-ROM/Print(of hoov handbooks). 80% of company's revenues are
locked in by 1 year contracts.
1)Hoovers is Debt Free, and has $1.95 a share in cash ($29.9mm)vs. $51mm mkt
cap (62% of market cap is in cash)
2) Company has generated Positive operating Cash Flow over the last 2 qtrs
$1.8mm vs. EV =$20mm Operating Cash flow I estimate will be close to $4.8mm
3) Subscription business should grow north of 40% (revenues)(first 6 months
up 54%) and 100% in terms of enterprise users (7400)
4) GAAP Net Income Profitabilty (March '02)the company has EPS power of
.25-.35 for next yr.
DSO's are @ 34 days down from 50 in March. Cash makes up 88% of Current
Assets (76% of Total Assets), A/R make up 8.8% of CA, and inventories: half
of 1%, Fixed Assets: 13.3% of Total assets,Total goodwill and Intangible
assets: $89,000 dollars
Liabilities: Deferred Revenue is up 32% YTD to $6.922mm or 59% of Total
Insiders have bought about 70,000 shares ytd. and Company has bought Buyback
400,000 Shares avg price $2.63 per share YTD. Including (143,333 shares last
Gross Margins jumped from 51% to 65% yr/yr (sept qtr)
'02E 65% (1H 64.2%)
Advertising revenues: fell 50% this yr, However company should benefit with
improving ad mkt in '02. Advertising used to make up 45% of revs now less
Advertisers on Site: Fed Ex, Mercedes, Lexus, Honda, Principal Financial,
IBM, HP, NY Times, WS Journal, Verisign, JP Morgan, Fortune
Hoovers Demographics: 39% of users make over $100K, 75% college educated, 40%
professional/Managerial positions, 95% have purchased over internet = Premium
pricing on Advertising Rebound.
a) Low Cost Leader: 10 seat license $2750 vs. ONES $35,000 per seat.
b) Original Proprietary Content: Hoovers employs over 100 Research Analysts
and Editors to update 18,000 companies in real-time. (also subscribers get
information on 12mm companies from D&B data feed). Competitor OneSource lis.
data from third parties on their platform.
c)4 High Margin Revenue Streams(no other company in the industry has such a
model): Very tough for competitors to compete with: Business.com is
Advertising based (so economic downturn hurts much worse than HOOV, who
reached Operating CF profits in Downturn)Work.com and Office.com had to merge
d) Brand Name: Hoovers has been around over 10 years and is the biggest in
terms of total users vs. Office/Work.com, Business.com, OneSource (ONES).
Management: non-promotional and keep their heads down and executed (reached +
CF despite rough market conditions).
America Online (AOL) owns 18% of the company, Media General 15%, Larry
Ellison and Mike Milken 7% (through Knowledge Universe holdings), GE 1%.
None of the above can buy more the 49% of company until after May '02.
Mgt stated on last call that for every incremental $1 in revs .90 should drop
to the bottom line, believe longer term that OM should run 20-25%, and GM
70-75%, Company is guiding for 2-3% sequential rev growth, with continued
growth into 4th qtr, Cash should be between $30-31mm,
1) Little/None in the stock (price as dot.BOMB)
2)Mgt. just hired Frank Milano to help get story out (Dec '01). Frank
previously worked in IR internally for Dell and FORG.
3) Company is meeting with interested investors in New York City the week
(late Jan '02) after they report earnings.
Valuation: Peer group EV/sales multiples: (IUSA (2x), EDGR(3.15x),
ONES(1.56x) , FDS 5.86x), HOOV (.62x): avg group EV/sales=2.63 or about 25%
of the peer group.
I estimate Operating cash flow will be about $4.8mm this yr
that is approx. 4x EV/Operating Cash flow for good growth/high margin
Depreciation runs @ .22 per share annually
Min. Capex (on run rate for about .10 per share this yr)
Company should generate significant FCF as company reaches Net Income
Industry: Mgt feels they have penetrated less than 2% of potential #
subscribers, believes that Subscription business potential is $140mm
2) No Coverage (could stay cheap)
3) Subscriptions revenues drop
Reasons the stk is cheap: 1) Failed acq. by former CEO (he resigned in May
'01, and is chairman) However he did an outstanding job of designing the
business model and successfully guided to CF +. Company had to write off
nearly the entire investment and discont. No Coverage, Significant
shareholder (AOL, Media General, Knowledge Universe, GE, and Mgt own over 50%
of company). The company has not told their story to Wall Street nearly since
I estimate revenues will be up 4%, despite advetising revenues falling 50%,
(if advertising revs were flat revs. would have grown 26%)
I think the company could possibly reach GAAP net Income profitability this
qtr, mgt guided to GAAP net Income profitability by 4th qtr of this yr (March
1) Valuation (63% mkt cap in cash, EV/Sales .62) 2) Growing company projected to reach GAAP profitability in 4th qtr 3) Insider and Company buying stk 4) Take Out Target