Description

Inforte ("INFT") is a provider of IT-oriented strategy and implementation consulting. Currently, the company can be purchased at a discount to its tangible book value, 65% of which is represented by cash. Net of its cash, the company can be purchased for 7x its run-rate earnings, and roughly 4.5x what I believe to be an achievable run-rate earnings level within the next 18 months. Moreover, by purchasing the company today you get a free option on the company’s interest in a JV (“Provansis”) with significant potential value upside. Unlike most deep value situations that require faith in some element of turnaround, INFT’s turnaround is already well underway.

INFT is not a complicated company. Like most consulting organizations, economics are driven by the number of billable professionals, bill rates, and utilization. Roughly 1/3 of the company’s business is oriented towards providing advice on higher-level organizational technology strategy, with the balance devoted to more traditional IT implementation consulting. The company’s business was adversely impacted over the last few years by the commoditization of consulting related to customer relationship mangement (CRM) software implementation. This had been a strong area of focus for INFT, and as offshoring drove bill rates down by nearly 50%, top line and profitability were both adversely impacted. In response, INFT established its own offshore operation which currently has roughly 30 bodies operating out of New Delhi. After bottoming in late 2004/early 2005, INFT’s business has since stabilized with respect to both top line and operating margins. As the company has regained its footing, utilization rates have rebounded to roughly 60%, within striking distance of the company’s 70-80% target level.

In May of this year management formed Provansis with another partner. In exchange for a modest capital infusion and provision of a working cap line, INFT received a 19% initial stake in Provansis and options on two additional tranches. Provansis is attempting to commercialize data-analytics-based product offerings in two verticals – insurance and healthcare. The offerings are designed to increase the quality of underwriting decisions (insurance) and prescription pricing (healthcare). While details on the product offerings are somewhat sketchy, management belives that the ultimate revenue benefit to INFT thru the JV could be on the order of “several million dollars”. Moreover, if the products take root they could generate additional pull-through revenue opportunites as INFT upsells other consulting services to the insurance and healthcare customers. Pricing on the products is transaction-based, which if successful would provide a nice recurring revenue stream. Several insurance companies are currently running pilot programs for the offering. I am ascribing no value to the Provansis product.

Incremental SarbOx costs currently run the company $1.5mm per annum ($0.08/shr). To the extent the company were either taken private (MBO) or purchased by a competitor, some or all of these expenses would disapper. While management believes that there are still benefits to being a public company (credibility with customers, incremental press coverage, employee incentive), they feel that these benefits have diminished materially over the last several years.

Management is competent and shareholder friendly. INFT’s Chairman and Founder, Philip Bligh, holds about 20% of the shares outstanding. Earlier this year the company distributed $1.50/shr in the form of a special dividend to address an overcapitalized balance sheet. CFO Nick Heyes makes himself readily accessible to investors.

One of the company’s directors, Stephen Mack (former President and COO) has been selling shares at a glacial pace over the last bunch of months. He still holds roughly 9% of shares outstanding, and given his role as a non-executive director and slow pace of divestiture the sales don’t concern me greatly.

Of the $3.85/shr market price, $2.75/shr is in cash. With a net implied value of $1.10/shr for the operating business, the company trades at 6.9x its current $0.16/shr EPS run-rate. Mgmt has a near-term operating margin target of 10% (7%+ MRQ), which it believes is achievable on a $12mm/qtr ($48mm annual) revenue run-rate. This run-rate compares to the most recent quarter’s $10.6mm in revenues, and $13.2mm in the year-ago quarter, so heroic increases aren’t necessary to hit the near-term targets. At a $48mm annual revenue run-rate, 10% operating margins, and a 40% tax rate, the company would deliver $0.25/shr in operating earnings (for an implied EPS trading multiple ex-cash of <5x).



DISCLOSURE: We and our affiliates own shares of INFT, and may buy additional shares or sell some or all of our shares, at any time without notice. We undertake no obligation to update the information provided above or to inform you of any changes in our views of INFT. This is not a recommendation to buy or sell shares.

Catalyst

Catalysts:
Going-private transaction
Takeout by larger competitor
Provansis contract announcements