Description

For full write-up with exhibits, please see...

https://www.scribd.com/document/322657947/CommerceHub-Memo-August-2016

8/30/16 (all per share values and prices reflect CHUBK closing price as of 8/25/16)

Recommendation: Long CommerceHub Inc (Class C Stock) (CHUBK)

Summary

CommerceHub is a SAAS (Software as a Service) company that enables ecommerce fulfillment between retailers, brands and end-customers. The company was recently spun out of Liberty Ventures (Ticker: LVNTA) and is meaningfully underfollowed by the investment community and sell-side given a limited initial roadshow.

Prior to the spin, Liberty and CHUBK management had limited interaction with investors. In the past 4 years CHUBK has grown revenue 20%+ annually with 70% gross/50% EBITDA margins. Growth is leveraged to ecommerce tailwinds as its revenue model is approximately 2/3rds usage based and 1/3^rd subscription fees. This combination allows CHUBK to have a base-line income stream with a call option on continued e-commerce growth despite the negative secular headwinds traditional retail sector.

At its current price of $13.13/share, I estimate the CHUBK 2016 EV/EBITDA to be 13.7X while its closest retail SAAS peer, SPS commerce (Ticker: SPSC), currently trades at 36X EV/2016 EBITDA. Notably, 2/3rds of CHUBK revenue is driven by ecommerce volumes and not by recurring software fees which I believe makes CHUBK more closely comparable to retailers with strong ecommerce platforms, which trade at an average EV/EBITDA multiple of 9.4x based on consensus 2016 estimates.

Based on my 2016 estimates, if CHUBK trades a multiple that is 1/3^rd SAAS and 2/3rds retail, the implied multiple would be 18x EV/EBITDA and therefore suggests CHUBK should be valued at $17.52 or 33% above the current price.  I also see additional optionality as an acquisition candidate for a larger software company. Demandware, a slightly larger ecommerce focused software company, was recently acquired by CRM for over 80x EV/EBITDA. I believe this suggests that large software companies are interested in owning smaller fast growing cloud based software names that are levered to ecommerce strategies. Both Demandware and CommerceHub fit this profile.

Background

CHUBK was spun out of John Malone’s LVNTA on July 22^nd 2016. LVNTA built CHUBK over the past decade through a series of acquisitions and significant internal investment.

Prior to the spin, I don’t believe the equity market ascribed a fair value to CHUBK inside the broader LVNTA corporate structure. Once it reached scale, it is my understanding that Liberty management felt it was time to spin out CHUBK as a stand-alone business  it was not getting enough credit inside LVNTA’s structure.

As per the CHUBK S1 filing, it is important to note that CHUBK is not a traditional Liberty tracking stock, but rather a hard spin, resulting in the outright ownership of the business vs. reference entity with credit risk to Liberty. Thus, on July 22^nd 2016 shareholders of LVNTA received common voting shares of the new separate entity CommerceHub, Inc. Malone still has control through a supermajority voting class of shares as per the CHUBK initial filings.

Share Count - Pro forma for the spin (before future stock compensation incentives and management options) there were 42.6 mm shares of CommerceHub outstanding.

·         Series A (4445)- Nasdaq listed – Malone 1% ownership – 13.5 mm shares out

·         Series B (CHUBB) – OTC – Malone 94.3% ownership – 0.7 mm shares out

·         Series C (CHUBK) – Nasdaq listed – Malone 5.4% ownership – 28.4 mm shares out

-           Following the consummation of the Spin-Off, Mr. Malone is expected to beneficially own shares of our common stock representing less than 1% of CH Parent's Series A common stock, approximately 94.3% of CH Parent's Series B common stock, approximately 5.4% of CH Parent's Series C common stock and approximately 33% of CH Parent's voting power, based upon the distribution ratios for the Spin-Off and his beneficial ownership of LVNTA and LVNTB as of April 30, 2016.

*Source: CHUBK S1

Business Description

CHUBK is a cloud-based e-commerce fulfillment and marketing software platform of integrated supply, demand and delivery solutions for large retailers, online marketplaces and digital marketing channels, as well as consumer brands, manufacturers, distributors and other market participants. The company’s solutions combine supply, demand and delivery over a single platform. The software platform acts as a hub that allows trading partners to maintain an omni-channel relationships in consumer and B2B e-commerce markets.

CHUBK has approximately 9,500 customer or trading partners with access to the platform daily to exchange critical information with each other, including orders, invoices, product information and other electronic documents. Collectively, the trading partners constitute a vibrant network of the largest retailers, marketplaces and brands in North America that use the platform to interact with one another to more efficiently manage and orchestrate sophisticated supply-chain strategies.

Revenue Drivers

Per the S1, CHUBK derives 68% of its revenue from usage fees that are based on the retail volume of activity (% of GTV ~ Gross Transaction Value) that its customers process. The balance of the revenues include recurring subscription fees and non-recurring installment charges. 

According to eMarketer, e-commerce sales are expected to more than double on a global basis to $3.6T by 2019 vs. 2015. This could provide CHUBK with a multi-year term secular growth story with limitedcompetition based on our due diligence.

*Source: CHUBK Investor Presentation

History

The company was founded in 1997 by Frank Poore and Richard Jones, and was acquired by QK Holdings, Inc. in August 2006 and later by Liberty in May 2010.

CHUBK provides solutions to an affiliate company, QVC, which is a wholly owned subsidiary of Liberty. For the three months ended March 31, 2016 and 2015, revenue from fees paid by QVC, together with revenue from fees paid by QVC's suppliers, collectively accounted for approximately 8% of total revenue. For the years ended December 31, 2015 and 2014, revenue from fees paid by QVC, together with revenue from fees paid by QVC's suppliers, collectively accounted for approximately 8% and 10% of total revenue, respectively.

*Source CHUBK S1

Competition

CHUBK competes primarily with other SAAS providers servicing the e-commerce industry; however, the competitive dynamics of the market are unpredictable because it is fragmented and rapidly evolving. Due to the nature of the business and the variety of products the company offers, CHUBK does not believe there is one pure competitor, but rather different competitors across CHUBK’s product offerings.

The company splits out its business into 3 different segments, as follows:

·         Supply Solutions

-          Similar offerings include VendorNet (which is owned by eBay Enterprise) and SPS Commerce in North America and VirtualStock and Kewill, among others, in Europe. Additionally, it also faces competition from in-house developed solutions used by retailers that choose to build and maintain their own proprietary integrations to online channels, using a combination of order management, custom written software and value-added networks.

·      Demand Solutions

-          Competitors in this segment are highly fragmented, including Channel Advisor, Merchant Advantage and various advertising and digital marketing agencies.

·         Delivery Solutions

-          Competitors include the major shippers (UPS, FedEx) and logistic companies.

* Source CHUBK S1

Historical Operating Performance

Despite having a business model with comparable clients, end-market and revenue growth and a 11.9x EV/EBITDA, I believe CHUBK trades at a material discount to the 18x implied multiple derived from taking the average multiple across high e-commerce exposure retails and software companies.. I estimate that CHUBK actually has 40% EBITDA margins vs. 15% for many SAAS based software companies with 15 to 20% historical revenue growth.

*Source CHUBK S1

Comparable Companies

One important aspect of understanding CHUBK’s cash flows and the quality of its EBITDA is its stock compensation. While stock-compensation add backs are a debated issue with SAAS based companies, the historical financial results for CHUBK as provided in the Liberty Interactive Investor Day slide presentation from November 12^th 2015 show that almost all of the company’s adjusted EBITDA is generated from an add back of stock compensation. This makes the company’s stock compensation look massive on both an absolute basis and on a relative basis when compared to other software companies. However, CHUBK’s large stock compensation expense was driven by the company’s accounting policies that will no longer be available now that it is a public company. 

As a private company, stock compensation, related expenses and related liabilities were derived from a process of having third parties value the company and a cash settlement accounting technique to account for stock compensation. With public companies, the majority of stock compensation is accounted for as stock settled awards which can result in significantly smaller stock compensation add backs to adjusted EBITDA and the appearance of a more robust cash flow as a result. Going forward, I believe this should result in considerably lower amounts of stock compensation imbedded in CHUBK’s operating expenses bringing the company more in-line with other publicly traded software companies.

For details regarding the equity compensation program please see the CHUBK S1 filed 7/14/16.

**Comparable company analysis sourced from Bloomberg data and proprietary calculations.

** SPS Commerce’s EBITDA includes add-backs

Conclusion

·         SAAS based software and Ecommerce GMV driven model

·         Fast Growing ecommerce addressable market (21% estimated 4 year CAGR through 2019 according to eMarketer)

·         Large blue-chip customer base with 9,500 plus customers

·         High gross margin 70%+

·         Comparatively low sales and marketing expense: 13% of revenue

·         Robust EBITDA margin +40%

·         Clean balance sheet

·         Discounted valuation

·         Strategic value to buyer

Disclaimer:

The write up is not investment advice or a recommendation or solicitation for any investment fund or to buy or sell any securities. The author and/or related persons may hold a position in the subject company; however, no representation or warranty, express or implied, is being made that the author and/or related persons will continue to hold a position in the subject company. The view expressed on the subject company or its investment positions therein is subject to change at any time, for any reason or no reason. This includes buying, selling, covering or otherwise changing the form or substance of its investment. The author and/or related persons disclaims any obligation to notify the market of any such changes. The information and analysis presented in this write up is based upon publicly available information only. While the author has tried to present the facts it believes are accurate, no representation or warranty, express or implied, is being made as to the accuracy or completeness of the write up, and the author expressly disclaims any liability relating to the write up (or any inaccuracies or omissions therein). The author undertakes no obligation to correct, update or revise the write up or to otherwise provide any additional materials.

Catalyst

- Analyst Initiations 

- Management conference attendance