Description

Under-valued, misunderstood and French, Infovista (IFV) is a growing software company with a large margin of safety and immense upside for patient, long-term investors. The company is trading at less than 1x LTM Revenue, with 55% of its market cap in cash and is the last independent player in a consolidating sector.

Disclosure: I am a shareholder of Infovista

Company Overview:

• Name: Infovista S.A.

• Ticker: IFV.FP

• Exchange: Euronext Paris

• Headquarters: Les Ulis (near Paris), France

• Year Founded: 1995

• # of Employees: 231

• FYE: June 30

• URL: www.infovista.com

• The company reports its financials in Euros.

Valuation Snapshot:

• Market Cap = €64.2M (based on a recent price of €3.45/share on 7/17/07)

• Enterprise Value = €27.8M

• Cash = €36.4M (€1.96/share)

• Debt = $0

• Shares Outstanding = 18.6M

• LTM Rev = €41M (44% Europe, 40% North America, 16% Asia)

• LTM Maintenance Rev = €15M

• LTM EBITDA = €0.8M

• Tangible Book Value = €38.8M

• TEV/ LTM Rev = 0.7x

• TEV/ LTM Maintenance Rev = 1.9x

• TEV/ LTM EBITDA = 37x

• Price/TBV = 1.7x

Investment Thesis Overview:

• Large margin of safety

• Last independent software vendor in a consolidating market niche

• Cash flow generation potential increasing as the company restructures its US operations and shifts development to India while leveraging its fixed cost structure. Given the leverage in the their business model, the company is trading at less than 10x FY 2008 free cash flow.

• Revenue acceleration from growing market opportunities and launch of new products: next generation IP-based networks, server virtualization, on-demand / managed services offering

• Short-term mis-pricing: the stock is down 45% since the company announced that it would self-delist off of the Nasdaq. It decided to delist as it became too expensive to maintain SEC and Sarbanes-Oxley compliance (over $1M/year). We presume that this event has recently caused some US shareholders to sell the French securities that they received in the recent share exchange.

Margin of Safety:

• Shares in Infovista offer upside in excess of 100% with a high level of margin of safety.

• Intrinsic Value per Share (upside): €7.25

• Potential downside price upon a liquidation: €3.25

• Net Cash as % of Market Capitalization: 57%

• Value of Maintenance Contracts: Strategic buyers often pay 2x-5x maintenance revenues for enterprise software companies while Infovista is currently valued at 1.9x LTM maintenance revenues.

• Net Operating Loss Carryforwards as of June 2006: €41.5M (with over 85% that have minimal restrictions and do not expire under French tax law)

• The business is currently operating at cashflow breakeven

• The company has a share buyback plan in place to purchase up to 10% of the company’s stock below €7.25

Company Overview:

Infovista, SA (“Infovista” or “IFV”) is a global software company in the €350M Service-Level Management (SLM) / Business-Service Management (BSM) market. One of the last remaining independent vendors in the SLM/BSM market, IFV provides network and server performance management solutions for telecom service providers, managed service providers, and enterprises. Infovista’s VistaInsight suite of solutions provide proactive, real-time management tools for large networked environments, such as data centers and communications services, including servers, hosted applications, ATM, Frame Relay, MPLS IP VPNs, Metro Ethernet, Wi-Fi, IP Telephony and Carrier VoIP. IFV’s business model is a traditional software license + maintenance model, however the company has recently developed an on-demand/managed service offering as well. Infovista has major sales offices in Paris, Herndon, Virginia and Singapore with R&D centers in Paris and Bangalore.

Investment Opportunity:

• As one of the few leaders in this niche software space, Infovista has an attractive moat that includes a platform technology that its customers have built their businesses upon, a healthily maintenance revenue stream, flexible and innovative products with high switching costs. After a poorly executed foray into the US enterprise market, the company has recently brought back the co-founder and original CEO to re-focus the company on its core strengths of being the premier provider of service-centric performance management solutions. By refocusing on the service provider market and building a strategic partnership with a large Systems Integrator partner, the company has the ability to grow its revenues to over €70M in the next 3-5 years.

• My estimate of the company's upside price is €6.65 (2x Forward EV/Rev) based on comps and €7.25 based on a 5-year discounted cash flow model.

• My model assumes a 15% annual growth rate (below the company’s own long-term expectation of 20%) over 5 years. I also assume that the company can improve its EBITDA margins from 2% to 12% over the 5 year period. Though the company has historically been focused on top line revenue growth over profitability, I believe the recent restructuring of the US business along with a greater shift of their R&D to India will enable the company to achieve EBITDA margins more in line with the software industry average. My model also assumes a 15x terminal multiple of free cash flow.

Industry Overview:

• SLM and BSM are sub-sectors of the €11 billion global IT management software market (source: Forrester). SLM is defined as being the activities related to the creation and monitoring of service levels as agreed with IT users. BSM is an intelligent layer that supports all the management processes involved in the delivery of IT services. BSM solutions map multiple applications and the infrastructure resources they depend on to the business function they provide.

Key Products:

• Infovista offers 3 main solutions: 1. VistaInsight for Networks, 2. VistaInsight for IP Telephony; 3. VistaInsight for Servers.

• Infovista’s network performance monitoring software is a critical component of the larger Operations Support Systems (OSS) that telco service providers deploy to operate their networks. Growth for network performance monitoring software is driven by the advent of IP convergence and its key applications, Voice over IP; IP-TV; the emergence of Consumer as well as Triple Play service offerings; and increased competition coming from the cable operators. Service providers are adopting the following initiatives to remain competitive: 1) customer retention and management, 2) measurement and presentation of differentiated Service Level Agreement (SLA) offerings, 3) optimization of network investments and efficiency. The service providers sector represents 75% of Infovista’s revenues. Its products are optimized to work with leading network equipment vendors such as Cisco, Juniper and Alcatel-Lucent.

• Infovista's network performance monitoring products are a platform technology (critical component that is difficult to rip and replace) for its Tier 1 global telecom service provider customers as witnessed by its high maintenance renewal rates. During my channel checks with customers, it’s evident that Infovista’s products are best-of-breed and can rapidly be deployed across multiple parts of a carrier’s network. Competitive products by IBM/Micromuse and CA/Concord are less flexible and do not have the features and functions that Infovista offers.

• Infovista also targets the enterprise market with its software. Its software monitors network and server performance for Fortune 1000 enterprises and small and medium sized businesses. Though the enterprise market for IT infrastructure management has returned to growth after a slowdown in the early part of the decade, this market tends to be more cost competitive as network performance monitoring tools are less critical piece of an enterprises IT infrastructure. The enterprise sector represents 25% of Infovista’s revenues.

• Infovista is in the process of launching a software module compatible with VMWare for enterprises that enables IT managers to determine server utilization. By doing so, IT managers can determine which servers can be virtualized by VMWare’s software. We believe that this add-on product may represent a large growth opportunity for the Company starting in 2008.

Key Customers:

• IFV has over 600 customers worldwide

• Major Carriers: AT&T, Verizon, Bell Canada, British Telecom, Cable & Wireless, Deutsche Telecom, France Telecom, NTT, Savvis, Telefonica, US Cellular

• Major Financial Institutions: ABN Amro, Axa, BNP Paribas, Royal Bank of Scotland, Wachovia

• Major Enterprises: BASF, British Airways, Chevron, Hitachi, Microsoft

Key Channel Partners:

• Equipment Vendors: Alcatel-Lucent, Cisco Systems, Juniper Networks, Nortel Networks

• Independent Software Vendors: BMC Software, EMC Smarts, Opnet

• Systems Integrators: Accenture, Cap Gemini

• OEMs: Ericsson, Motorola

SWOT Analysis:

• Strengths: Platform technology; #1 vendor to carriers; Maintenance revenue stream.

• Weaknesses: Small management team; Unproven ability to execute outside of core market; Lack of sustained and growing profitability.

• Opportunities: Next-generation networks; Virtualization.

• Threats: Bundled offerings from large software vendors; A severe telco market slump

Go-To-Market Strategy:

• Next-generation networks (NGN) transport services opportunity (Market size €163M): Service providers are building NGNs for new applications and services to enhance / replace declining voice revenue streams. These new applications include VoIP, messaging, home entertainment, multimedia conferencing and other IP-based services.

• IT Infrastructure shares services opportunity (Market size €1.0B): Application-centric networks, data-centric optimization and unified communications.

• Residential unified play services opportunity (Market size €85M): VoIP, IPTV, fixed-mobile convergence.

Competitive Landscape:

• Direct SLM/BSM Competitors: Concord Communications (CA), NetIQ (Attachmate), Fluke Networks (Danaher)

• System / Network Solutions: CA (Unicenter), HP (Openview), IBM (Tivoli/Micromuse), BMC

• System Integrators: Accenture, Wipro, Infosys

• Internal Corporate IT Departments

Precedent Transactions (EV/LTM Revenue):

• Over the last three years, IBM, CA and EMC have bought Infovista's competitors for 2x-5x EV/Rev. I believe consolidation in the market will continue with larger software or communication equipment companies acquiring smaller niche vendors in order to capture the huge market opportunity that exists in the telecom sector as next generation networks are buildout.

• Precedent acquisition multiples (EV/Rev) of telecom software companies include the following:

• Micromuse/IBM (2/06): 4.5x

• Quallaby/Micromuse (4/05): 4.7x

• Concord/CA (4/05): 2.5x

• Aprisma/Concord (2/05): 2.1x

• Smarts/EMC (12/04): 4.9x

Recent Events:

• The company’s revenues in the last twelve months grew only by 2% though they have historically grown by 15%-20% per year. The lack of revenue growth recently was driven by the company’s poorly executed entry into the enterprise market in the US. The company has recently re-installed the company founder and previous CEO and CEO once again and has changed its VP of Sales for the US. In my conversations with management, the company admits it inappropriately re-directed it direct US sales organization to focusing on enterprise sales which led to a lack of focus on the service provider segment. The company is now re-focused on the telco service provider segment and has decided to employ a channel strategy to target the enterprise segment. It is in the process of selecting a large Systems Integration partner (most likely one of its current partners) to develop a broader relationship with. This partner will be incentivized to develop vertical solutions based on Infovista’s technology, and build sales and deployment teams focused on selling these Infovista-enabled products.

Notable recent events include:

• July 2007: IFV delists its US-traded securities, causing many US investors to sell shares and depressing the stock.

• June 2007: IFV holds an analyst day in Paris to unveil a new three-year strategic plan with the aim of reaching €70M in sales with 10% operating margins by FYE 10.

• March 2007: IFV issues a profit warning, blamed largely on the poorly executed US-enterprise strategy and announces CEO change and restructuring.

• Feb 2007: announces voluntary Nasdaq delisting.

• Jan 2007: announces $15M 3-year license agreement with Microsoft

Key Shareholders (per Bloomberg):

• Fidelity International (10.9%)

• Odyssee Ventures (9.4%)

• Generali Finance (6.2%)

• Platinum Partners (5.9%)

• Alain Tingaud, CEO (5.1%)

• Powe Capital (5.1%)

Catalyst

• Revenue growth and profitability improvement over the next 6-12 months from its recent restructuring and launch of new products.
• Potential acquisition of the company by either a strategic or financial buyer as it is difficult for a sub-$100M revenue software company to remain public.