Description

The 60 Second Thesis

Greenfield Online is a widely misunderstood, exceptionally undervalued business. The significant disconnect between market value and intrinsic value is the product of two of my favorite investment themes: the broken IPO and the hidden asset.

Less than 6 months ago the company’s core business, which accounts for around 87% of revenues, was growing organically at 46% in an under-penetrated market, and expected to generate around 30 M in EBITDA this year (with minimal maintenance capex). Due to increased competition, integration woes, and related management fumbles, this business suddenly stopped growing – which caused the survey business’ significant operating leverage to materially reduce expectations for this years EBITDA to 12-13 M. This core business is conservatively worth at least the current enterprise value, with the potential to be worth substantially more if management is successful at stemming problems and growth resumes. The remaining business, which is 13% of revenues, is worth an additional 75 – 115 M – a valuation which has been validated by three fairly recent, separate acquisitions of competitors. Interested? Read on.

Overview

Greenfield Online is the largest independent provider of Internet survey solutions to the global marketing research industry. The company manages an Internet-based panel of over 6 million individuals and services over 2500 marketing research firms. Independence in this context means that the company does not also perform marketing research (i.e. they do not compete with their customers). Conversations with over 15 individuals in the industry have indicated that both the need and demand for independent survey/panel providers, and Greenfield Online specifically, is very important.

The evolving industry presents growth opportunities

Greenfield Online’s significant historical growth is the result of an industry-wide shift from offline surveys to cheaper, faster, and more convenient online surveys. This shift has been hastened by the Do Not Call registry, which has served to increase the cost of telephone-based surveys. Nonetheless, telephone surveys still account for 35% of the overall market, and online surveys are expected to gain share here. The online research market is currently 3 B and independent research firms believe that the market will double over the next 5 years to 6 B. Being the largest independent panel provider by a wide margin (they are ~ 4x larger than their next closest competitor) with less than a 100M top line, there are clearly significant growth opportunities for the company.

Impact of revenue growth is magnified by the operating leverage and low capital requirements

Given the cost structure in this business, operating income will grow much more rapidly than revenues (the last 6 months have shown investors the reverse of this). Operating margins are less than 15%, but incremental operating margins carry a 55% margin. Until the sudden downturn, overall returns on capital were 80%+, with incremental returns on capital in the triple digits. Although the company has around 5 M in capex this year, a few million of this is associated with integrating the company’s 3 recent acquisitions: Ciao, Rapidata, and GoZing.

Why the downturn? And why will things get better?

So there’s significant growth potential with very attractive economics attached, sounds good – but why have the wheels fallen off the cart in the past 6 months then? All of the problems appear to stem from two sources: acquisition integration and competition.

In the past year the company has acquired three companies – Ciao, Rapidata, and GoZing – for a combined purchase price of $190 M (Compare that to the current enterprise value of ~$111 M. In fact, the company had over $5/share in cash before they acquired Ciao). This should illustrate both that the acquisitions were fairly large and the rapid change in market valuation. In a nut shell, the company stumbled on integrating the acquisitions. They have been running the business from 3 separate panel databases and it is taking them longer to integrate these into a unified database than they expected. As a result, the company has operated less efficiently (you can’t maximize the full value of every panel member), has had trouble meeting their promised turnaround times, thus annoying clients, and has just generally seemed to have been overwhelmed by the integration task. These problems have led to a decrease in client satisfaction, which has in part led to clients giving Greenfield less of their business. It is comforting to know that discussions with various market research firms have indicated that these customer service issues are a recent phenomenon, and that Greenfield has a strong reputation in the industry for both data quality, fast turnaround times, and customer service.

The other half of the problem is increased competition. At least 4 private companies in this space have been raising money and nibbling away at Greenfield’s market share – these aren’t new entrants to the industry, but rather are much smaller existing competitors that would like to get bigger. This has resulted in pricing pressure in their North American sample business, which is around 1/3 of revenue. There are several important points to make note of here. First, although it is tough to argue that providing panels is at least somewhat of a commodity (you’re essentially providing data), size is also important. If you want to target a very specific demographic (i.e. men over the age of 45 that have purchased a Hummer in the past two years), you need to be relatively large to be able to offer a large enough sample to draw meaningful results from. And although competitors can try to target specific niches, there are limits to this as it isn’t efficient for a MR firm to work with 20 different panel providers. As a result, it is with these more general panel requests that the company has seen pricing pressure. Also, due to the overall industry growth and the operating leverage in the business, the company should be able to offset considerable pricing pressure and still show at least modest margin expansion.

Things will start improving for the core survey business for two reasons. First of all, the acquisitions have finally been almost fully integrated, which will both improve efficiency and customer service. More importantly, however, the CEO that oversaw this mess, Dean Wiltse, is now gone. He has been replaced with Al Angrisani, who is now responsible for turning the business around. This is a notable replacement as Al is very well regarded in the industry, and is widely thought to be the best man for the job. He previously oversaw the successful turnaround of market research firm and competing panel provider, Harris Interactive. He has already made a number of changes in the business, and early signs as far as customer satisfaction goes are positive. Clearly this investment thesis does not hinge upon a turnaround – a turnaround here would be gravy – but with this change in management, a turnaround is looking to be realistic.

Ciao Comparison Shopping a.k.a The Hidden Asset

The Ciao comparison shopping network is essentially a European shopping aggregator that augments product listings with product reviews. Its closest competitor is Kelkoo (now owned by Yahoo), who is #1 in the European market (Ciao is #2). Competitors in the US market include Shopping.com (Ebay), Shopzilla (EW Scripps), and Yahoo! Shopping.

The comparison shopping network is the hidden gem in this business, but to even call it a hidden gem is a gross understatement. None of the analysts covering the company even acknowledge the existence of this valuable asset. No one ever talks about it. This is particularly surprising when you consider that:
a) similar shopping comparison businesses have been highly sought after by both large, new and old media companies, and
b) as a separate entity, the community business alone can justify Greenfield’s current enterprise value.

Management views this as a core asset – they use the community from the comparison shopping business as a source of new panel members. Panel providers will typically contract with various web portals to similarly aid with panel acquisition. The community, however, is clearly completely different from the core panel management business with no synergies or need to be joined together. More importantly, the community business is a natural fit for a large number of companies that have made recent acquisitions in this space at valuations that would unlock considerable value for Greenfield Online shareholders.

The current revenue run rate in this business appears to be around 12 M with over 40% operating margins (around 5 M in operating income). The business has been growing at over 70% despite not launching a new portal in several years. The company is just now resuming geographic expansion, first with a Dutch portal in Q4. The company is also adding a travel category in Q3. I believe that this business alone has a value of around 75 – 115 M (i.e. 15 - 23x current operating income). Given the nascent nature of the business, it is difficult to be very precise.

A brief look at the acquisitions of some competitors helps to give a better idea of how much the Ciao comparison shopping business would fetch in a sale.

1) Kelkoo was acquired by Yahoo for $579 M in March 2004. Kelkoo had 2003 revenues of $52M. Their UK portal was around 40% of this business, and for reference, has around 2.5-3x the web traffic the Ciao UK portal.

2) Shopping.com was purchased by Ebay for $620 M in June 2005 (they also had $140 M in cash). Shopping.com had around $131 M in revenues and 17 M in operating income. One of Shopping.com’s biggest draws was their database of reviews (formerly Epinions – the company was formed as a merger between DealTime and Epinions), which is actually smaller in size than Ciao’s.

3) EW Scripps acquired Shopzilla for $525 M in June 2005. Shopzilla was forecasting 2005 revenues of around $130-140 M and EBITDA of $30-33 M.

Valuation

I’ve gone through all the numbers, but I’ll bring everything together. The core survey/panel business is on pace to do around 12-13 M in EBITDA. This business should be worth at least 10x EBITDA, or $125 M. Considering that 6 months ago this business was expected to do 30 M in EBITDA and the potential industry growth previously discussed, I think there is substantial upside to the valuation of this business.

As for the shopping comparison business – after considering the growth, earnings power, and similar deals that have been done, I think this business is worth around $75 – 115 M.

Combining these two parts, the overall business is worth between $200 – 240 M, with the potential for considerable upside in the valuation of the core business. With an enterprise value today of $111 M, the company is trading at approximately a 50% discount to its intrinsic value.

As the business begins to stabilize, new management earns the trust of investors, and awareness of the shopping comparison business grows, I expect this significant discount between market and intrinsic values to narrow.

Catalyst

Management unlocks considerable value through the sale of the Ciao shopping comparison business.
Management’s turnaround initiatives begin to bear fruit.
The company resumes growth.