MATTERSIGHT CORP MATR
November 11, 2013 - 1:31pm EST by
Mason
2013 2014
Price: 4.80 EPS $0.00 $0.00
Shares Out. (in M): 17 P/E 0.0x 0.0x
Market Cap (in $M): 80 P/FCF 0.0x 0.0x
Net Debt (in $M): -10 EBIT 0 0
TEV ($): 70 TEV/EBIT 0.0x 0.0x

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  • Cloud
  • Micro Cap
  • Software

Description

 

At about 2x forward sales, Mattersight Corporation (“MATR”) is probably one of the least followed and most inexpensive “big-data analytics” and “SAAS” companies in the public markets.  An exciting new product introduction, which leverages the company’s existing intellectual property, should drive accelerating revenue growth over the next couple of years.  We believe revenue growth next year will be in excess of 30% and could be well over 50% in 2015.  While the stock has moved up sharply since reporting Q3 earnings, it is still well below its highs from 2012 and only trades at about 10x our 2015 free cash flow estimate, which we actually view as conservative given recent trends.  We more than doubled our position after the earnings call as it seems to be an inflection point.       

MATR has invested over $75 million to build technology that captures, analyzes and creates insight from unstructured conversations, emails, customer data and employee desktop activity.  Its primary end market is call centers.  Up until recently, the Company’s main offering was “performance management.”  You can learn more about this product offering here: http://www.mattersight.com/performance-management, but the main sales pitch is that it is a product call centers buy to improve the performance of their employees.  This product has a long sales cycle and the ROI is not easily quantifiable.  It also involves customers changing business processes and assumes that employees are willing to change.  As a result, revenue from this product has been lumpy and the penetration within the call center customer base has generally been disappointing, which is why the stock is where it is at (down over 80% from its high in 2007).  The reason why the stock is interesting is because of the company’s newest product offering called “predictive behavioral routing”.  You can learn more about this product here: http://www.mattersight.com/predictive-behavioral-routing.  This product is essentially an appliance that quickly detects behavioral characteristics of callers and then matches callers with the best agents.  Instead of trying to change agents, MATR is simply routing calls to agents that best match a particular customer.  For example, some agents at call centers may be much better than average at dealing with customers who are frustrated or angry.  Others may be much better than average at dealing with customers who appear to be in a happy mood.  MATR’s technology uses proprietary algorithms to instantly detect which callers are frustrated or angry and can then make sure those calls are routed to agents that are statistically better at dealing with them.   Using a baseball analogy, behavioral routing allows agents who are good a hitting fast balls to mostly receive fast balls and agents who are good at hitting curve balls to mostly receive curve balls.  Performance management involves making fast ball hitters better at hitting curve balls.  Forrester Research recently conducted a study (in fairness, the study was commissioned by MATR) that showed ROIs for behavioral routing that are over 400%!  An executive summary of the study can be can be found here: http://www.mattersight.com/sites/default/files/sites/default/files/Executive%20Summary%20The%20Total%20Economic%20Impact%20of%20Mattersight%27s%20Behavioral%20Analytics.pdf

 

You can see a short video of one of MATR’s early behavioral routing customers talking about the product here:  http://vimeo.com/75428372.  The customer says, “this was the best business case they had ever seen for any software they had been looking to purchase.”  It turns out that when agents are matched to callers based on behavioral characteristics, there is a significant reduction in talk time and call-backs and a significant increase in up-sell activity.  If you Google “behavioral routing”, you will find many other positive articles about Mattersight’s differentiated technology.  For example, MATR was very recently recognized as a “top 20 most promising data analytics company” by CIO Magazine (http://www.cioreview.com/magazine/20-Most-Promising-Data-Analytics-Companies-XZJX325814981.html).

 

Unlike performance management, behavioral routing is a much easier sale.  It does not require a call center to change any of its business processes and is not dependent on agents to put in extra effort.  It also offers a quick and easily measurable payback on investment.  Because it is an easier sale, channel partners can be leveraged and the company can go after smaller customers.  MATR historically focused on call centers with greater than 1000 seats, which is less than half of the US market opportunity.  As a result, the MATR’s pipeline activity is exploding.  If you listen to the last few quarterly conference calls, you will detect an increasingly bullish tone by management.  On the most recent conference call, the CEO said that the demand for behavioral routing is “almost unlimited.”  He also said, “the market’s response has exceeded all of our expectations.”  They are having 30 customer meetings a month with relatively limited sales and marketing spend and are looking to add more reps and channel partners to keep up with customer demand.  Just in the United States, there are about 2.25 million call center seats and the company is charging about $100 per seat for behavioral routing as a stand-alone product.  Moreover, behavioral routing will likely lead to more performance management business over time. 

MATR has a new CFO and the company now gives more detail on its pipeline than any software company I know.  The company added 52 new routing opportunities to its pipeline in q3.  This was up from 35 new routing opportunities in q2.  The company also provides a lot of detail about its sales cycle.  The company is seeing about half of these opportunities in the pipeline take on a pilot project.  If a customer is interested in behavioral routing, MATR will conduct analysis for the customer for about 2 weeks and provide the customer with an initial estimate of savings/ROI.  This stage of the pilot is called “impact analysis.”  By q3, the company reported that it had 20 pilots in the impact analysis stage up from 8 in q2.  Only 1 of the initial 8 pilots in was dropped.  The potential customer and MATR then spend about 8 weeks negotiating a contract.  Once a contract is negotiated, the pilot moves to being in the “routing appliance” stage.  MATR takes about 4-6 weeks to install the appliance and the appliance then runs for 1-2 months.  As of the end of q3, MATR had 3 pilots in the routing appliance stage up from 0 in q2.  The company also said that as of last week, there were an additional 2 more pilots in the appliance stage.  Based on recent trends, the Company believes about 80% of impact analysis pilots will convert to routing appliance pilots.  Given the compelling ROI, the company expects a very high conversion rate from pilots that reach the routing appliance stage and is expecting an annual contract value per routing customer to be in the $500-600k range (total company revenue last quarter was just $8.7 million).  If you waterfall the potential from existing pilots, conservatively grow the number of new pilots and assume a slightly higher drop-out rate than the company has been posting , you will get significant upside to street expectations and accelerating revenue growth through 2015.  With all the new transparency that MATR provides about its pipeline and bookings, we find it amusing that most of the sell-side analysts still model the company in the same way they always have.  They just slap a y/y or quarterly sequential growth rate to total revenue.     

The initial success of MATR’s behavioral routing product will likely attract competition, which is very limited currently.  Nevertheless, MATR appears to have a clear time to market and technology lead.  The routing product essentially uses the same technology that the company has developed for performance management over many years.  It is possible that companies that sell hardware to call centers like Avaya and Cisco may eventually want to acquire MATR.  These companies are trying to transition their businesses to be more value added / higher margin.  Synergies would be high as the existing sales force could be utilized to accelerate market penetration.  Other potential suitors include companies like VRNT and NICE, which are indirect competitors to MATR.  VRNT and NICE provide analytic solutions to call centers but currently do not participate in routing. 

 

A short term risk is MATR’s contract with General Dynamics, which is a material customer close to $1.5m per quarter.  General Dynamics is operating a large call center operation for Medicare and the Affordable Care Act (ACA) and its contract is up for renewal at the end of this year.  It seems clear that General Dynamics views MATR as an important partner but nobody knows whether its contract with the Federal Government will be renewed.  We are still trying to assess this risk, but our current view is that a renewal is a higher probability outcome.  The Federal Government does not tend to change suppliers frequently and General Dynamics has had to deal with much higher call volumes than anyone expected given issues with the ACA.  The problem with the ACA rollout is the website and back end technology - not the call centers.  Moreover, the risk is not necessarily binary.  It is possible that General Dynamics keeps servicing Medicare even if there is a change for ACA, for example.  Furthermore, even if the General Dynamics contract is completely not renewed, this is mainly a position sizing issue in our opinion.  While company has been upfront about the uncertainty regarding this contract, MATR’s stock will undoubtedly go down if the contract is not renewed and my free cash flow estimate for 2015 will need to be revised lower, but it does not change the acceleration the company is experiencing with behavioral routing.  We are sizing the position to be able to add in the event the contract is not renewed. 
 

The author and/or others he advises hold shares in MATR at the time of publishing this article. The author may make trades in securities mentioned without notification. The information contained in this article is impersonal and not tailored to the investment needs of any specific person. You should consult with a professional where appropriate. The author shall not be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

The opinions expressed in this article are for informational purposes only and should not be construed as investment advice. The article is not a recommendation of, or an offer to sell or solicitation of an offer to buy, any particular security, strategy or investment product. The research for this article is based on public information that the author considers reliable, but the author does not represent that the research or the article is accurate or complete, and it should not be relied on as such. The views and opinions expressed herein are current as of the date of this article and are subject to change. Any projections, forecasts and estimates contained in this artcile are necessarily speculative in nature and are based upon certain assumptions. In addition, matters they describe are subject to known (and unknown) risks, uncertainties and other unpredictable factors, many of which are beyond the author’s control.  No representations or warranties are made as to the accuracy of such forward-looking assumptions. It can be expected that some or all of such forward-looking assumptions will not materialize or will vary significantly from actual results.

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

Catalyst

accelerating bookings growth, renewal of general dynamics contract
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