Description

Direct to consumer peers LifeLock (LOCK) and nano-cap ID Watchdog (IDW.V) trade at 3x sales and a mid-teens multiple of EBITDA. These businesses have no customer concentration and therefore none of the bank-channel challenges that have plagued INTX’s wholesale business. In February the Federal Trade Commission announced identity theft was the number one consumer complaint for a 14^th consecutive year. Prevalent concerns surrounding identity protection and privacy are leading to significant organic revenue growth with high retention rates and reasonable profitability across the industry. For instance, LOCK is forecasted to grow sales 22% YoY in FY2015, ID Watchdog is guiding to 45-50% QoQ growth, and Identity Guard sales are guided to accelerate to the mid-20% range in 2015 and 2016 in order to meet target guidance of $100 million in sales by 2017 (see March Conference Call with Investors).

Inside INTX, there are significant growth businesses that we believe will gain strong momentum which we expect to drive a discovery effect and significant multiple expansion in 2015. In fact, without its wholesale operations, INTX would look like a business with sales of almost $80 million exiting FY2014 and guiding to sales of $120-145 in FY2015 and $170-225 million in FY2016. Despite newly segmented operating metrics, and perhaps due to a lack of analyst coverage, we think investors have paid very little attention to the core growth businesses at INTX. We believe if the wholesale business were sold / divested, INTX would trade at a 2-3x multiple of Identity Guard and Credit Alert revenue, or an implied value of $155-230 million vs. INTX’s current $65 million enterprise value.

INTX is cheap, trading at just 25% of LTM sales and 3x 2015 EBITDA guidance, given no analyst coverage, no investor relations or public relations strategy, no roadshows, and one earnings call a year.
The top 3 shareholders also own approximately 60% of the equity. As importantly, EBITDA has fallen from $50 million in 2012 to an estimated $6 million in 2014. This sharp decline is the result of two factors: a drop in wholesale subscribers and start-up costs for Voyce, which will impact the business by at least $14 million in 2014. Management has guided to $4 million in EBITDA out of Voyce in 2015, or a $20 million YoY swing ($1.10 per share on a $3.50 EV).

Despite a net cash position, a valuation of less than 3x forward EBITDA and a new line of credit from Silicon Valley Bank, 55% of the float is short the stock based on what we believe is a deeply flawed assumption that wholesale constitutes 100% of the value of INTX. It will take 80 days of short covering at 100% of trailing average daily volume to unwind this position. Our thesis is that core EBITDA on consumer has stabilized in the mid $20 million range .The shorts appear to be interpreting the $14 million EBITDA drag related to Voyce as a further deterioration of the core. The start-up business that will cost the company at least $14 million in 2014 should contribute +$4 million in 2015. INTX has 25% of its market cap in cash and investments and is guiding to $15-25 million in EBITDA in 2015, or $.90-$1.35 per share on a $4 share price. We see the potential for a $13-17 dollar stock over the next year provided the company is successful in growing Identity Guard with new products and Voyce begins to generate revenue.

Below is our sum-of-the-parts analysis. We assume the shorts have only focused on A and C below while largely ignoring B.

1. The shorts must believe INTX’s wholesale business will run off to zero imminently which will lead to a liquidation value of $1.75-$2.00 a share. We view this as an unlikely catalyst for the shorts.

• Although sales are expected to continue to decline in the wholesale channel, this remains a sizeable business with total revenue of $150 million in 2014, and guidance of $120 million and $105 million in 2015 and 2016, respectively.

• At current rates of churn, the wholesale business should generate $200 million in contribution dollars over the course of 2015, 2016 and 2017.

• Historically ~20% of contribution margin converts to EBITDA. This implies $40 million in runoff EBITDA over the next three years. Discounted back at a 25% rate to reflect uncertainty, this equates to an NPV of $27 million for wholesale alone.

• Restructuring costs will reduce operating expenses by $15-19 million, with $10 million already in place as of 3Q14 and the rest coming by 3Q15. We believe this restructuring will enable INTX to continue to convert contribution margin to EBITDA at a minimum of historical rates.

• Our wholesale assumptions include zero new business / pure runoff with only a 3-year life. At current rates of churn, the last 1% of BofA subscribers will churn in 17 years.

• Conclusion: We come close to agreeing with the shorts on the value of the wholesale business at approximately $30 million. With current cash on the balance sheet and long-term investments worth at least $8 million, our conservative sum-of-the-parts for this business pencils out to $2.65 a share.

2. Despite run-rating almost $50 million in revenue with better ARPU and lower customer acquisition costs vs. competitor LifeLock, which trades at 3x sales, shorts appear to assume Identity Guard is worth next to nothing. Similarly, despite run-rating $30 million in revenue, INTX’s Canadian operations are also being ignored.

• We believe Identity Guard and Credit Alert are valuable, hidden assets. Identity Guard has grown revenue at a 21% CAGR since 2011 and consumer direct subscribers have “higher per subscriber profitability than [INTX’s] traditional endorsed subscribers” (March 2013 Conference Call with Investors). Using public comps at 3x sales, these two businesses alone are worth $240 million, or $13 per share.

• The silver lining to the regulatory issues that drove INTX’s recent subscriber losses is the removal of bank competition. This has decreased customer acquisition costs, improved business practices and resulted in subscriber bases that lack customer concentration risk and consequently enjoy significantly higher valuations at 2-3x sales.

• Bear Case: LifeLock’s customer acquisition cost per subscriber is between $180-200. Using the low end of this range, Identity Guard is worth $60 million to LifeLock. (LifeLock’s CEO has publicly commented on how challenging it is to acquire large blocks of subs and that increasing ARPU, which results in higher lifetime values, has increased his willingness to pay up for subscribers. Given these dynamics, we believe LOCK would pay well into the $200s for each Identity Guard subscriber.We would not view this as a positive outcome, as LOCK generates a high-teens return on equity, a return stream we would rather own than hand to a competitor.) If we assume Credit Alert is lower quality than Identity Guard and deserves a third of the peer group multiple, it is worth another $30 million. This gets us to a valuation of $4.85 per share

   

  MRQ Identity Guard Subscribers	Lifelock Estimated CAC	Implied Value/ INTX Share
  337,000	$180	$3.27
  337,000	$200	$3.64
  337,000	$220	$4.00

• Base case: Identity Guard and Credit Alert are worth the same as their peer comps or 2-3x sales / 16x EV/(OCF-CAPEX). This implies a value of $150-240 million or $8.20-13.00 per share. 

• Conclusion: Identity Guard and Canada are worth somewhere in the range of $5-$13 per share today.

3. Finally, shorts attribute zero value to Voyce, which has revenue guidance of $30 million in 2015 with $4 million in EBITDA. I have heard neither a long nor a short believe Voyce is worth anything more than -$0-. We were very skeptical at first, but as we continue to study the business, we have come to believe Voyce could have significant value.

• Voyce uses non-invasive radio frequency technology, accelerometers and onboard micro-controllers and algorithms to monitor pet health. This data is uploaded to the Voyce platform via Wi-Fi. On the March 2013 conference call, CEO Michael Stanfield commented on the reaction Voyce received at the 2014 CES in Las Vegas: “Thousands of professionals came to talk to us. Doctors, medical device manufacturers, pet food companies, veterinarian students and potential distributor partners from 34 countries, all wanted to know more about Voyce. We could not have asked for a better launch of our platform.”

• There is considerable public equity market demand for pet-related products and services given a high willingness to pay, growing pet populations and a declining birth rate. Pets are increasingly thought of as members of the family. This has equated to demand for better pet food, pet health insurance, pet hotels, pet pharmaceuticals and a number of other products. Publicly traded proprietary pet businesses trade at attractive multiples. (Freshpet (FRPT) at 8.3x sales, Neogen Corp (NEOG) at 6.0x sales and Zoetis (ZTS) at 5.4x sales.)

• There are multiple indicators of strong initial demand for Voyce. Voyce’s Facebook page currently has 233K “likes.” We’ve also seen encouraging reviews and positive press across the board.

• If 2015 revenue guidance for Voyce of $30 million with EBITDA of $4 million is achieved, we believe that this business will get a 2-4x sales multiple or higher. This translates to $3.25-$6.50 in value per share.

Taking a step back, we think the market will soon discern that the growing business and (hopefully businesses) within INTX are worthy of a 2-3x multiple of sales and value the entire business along these lines rather than the current 3x multiple of consolidated EBITDA. Voyce will likely get a similar multiple if the company’s projected $30 million in sales proves achievable. Based on guidance, which projects these combined businesses will add another $50 million of revenue in 2015, the company should be worth an additional $100-150 million by this time next year versus the current $65 million EV. 

To summarize, we think INTX has the potential to least double over the next 12 months. Based on our sum-of-the-parts analysis above, wholesale plus cash and investments are worth just under $3. Identity Guard and Credit Alert are worth somewhere in the range of $5-13. We acknowledge a high degree of uncertainty regarding Voyce but believe it could be worth another $3 a share. Taking a more simplistic approach, we place a 10x multiple on 2015 guided EBITDA of $20 million and add back cash and investments to get a fair value of $12 per share.

Risks:

• Limited daily volume in shares

• Sub-$100 million in market capitalization and therefore possibly more suitable for PAs

• Uncertainty regarding market reception for Voyce (although Voyce does not factor significantly into our estimates of fair value)

• Continued customer concentration at certain financial institutions (although this risk diminishes every quarter)

Disclaimer: This does not constitute a recommendation to buy or sell this stock. We own shares in this company, and we may buy or sell shares at any time without updating the board.

Catalyst

Catalysts:

• In 2015, EBITDA per share should be $1.10 at midpoint of guidance.

• Masking effect of $14 million of investments in Voyce should lift and revenue will flow with guidance of $4 million in EBITDA on $30 million in revenue. The impact of this is $1.00 per share swing on a $3.50 EV should be substantial!

• Top 3 shareholders own +60% of the company and 55% of the float is short.

• No Analyst coverage. After a tough 2014, the business should be in strong shape going forward and can resume quarterly earnings calls and will likely regain coverage.

• Potential for the sale of the wholesale business and general industry consolidation. If the wholesale business is sold at 2-3x EBITDA we believe this would bring in $25-35 million+ in cash. We believe Identity Guard and Credit Alert constitute attractive acquisition candidates.

• The combination of Identity Guard and Canada is projected to generate $90-110 million in sales in FY2015 with another $30 million from Voyce.

• Significant option value in Voyce similar proprietary pet focuses business models including FRPT, ZTS, and NEOG which average over 6x sales given growth opportunities in the industry. We think Voyce could be worth 2x sales, or $3.25 per share, but the potential multiple is MUCH higher.