Summary

For 5.6x LTM EBITDA, you get a high-margin company that has historically grown FCF at 20%+ and is the market leader providing virtual datarooms to M&A and DCM transactions with attractive growth opportunities in broader enterprise virtual datarooms.  Intralinks has fallen from ~$30 in May '11 to ~$6 today on the back of three earnings misses.  The company trades at this level primarily due to investors overestimating the impact of a slow deal environment and ongoing macroeconomic uncertainty on earnings; but also due to the loss of a key customer in the enterprise business in 1Q11 (the FDIC) and the overhang of an SEC subpoena (disclosed August '10)

Due to these three overhangs, we believe Intralinks represents a compelling risk / reward and is easily worth over $14 / share (12x LTM / consensus '12 EBITDA) in-line with other fast-growing software comapnies

Company Overview

Intralinks was founded in 1996 to help streamline the exchange of information in the loan syndication market.  Intralinks is essentially a 'software as a service' company that sells its software in the form of online dataroom service to clients.  Intralinks operates in a premium, niche market where security, uptime and 365x24x7 support are absolutely critical, and offers a level of service not matched by larger software vendors.  It doesn't directly compete with Microsoft Sharepoint and Cisco Webex (which are much cheaper and do not offer the same level of service); its competitors are Syndtrak (FIS), Merrill Datasite and Bowne

We think of Intralinks as two different businesses based on end-market.  The first is providing virtual datarooms for financial transactions, where Intralinks has a very strong position (management estimates a 60% share in both syndicated loans and in M&A, although independent checks suggest a higher share in syndicated loans). In these markets, Intralink's value proposition is well established and growth opportunities are limited to taking further share, expanding into smaller deal sizes and new geographies

The second business provides datarooms for non-transactional purposes such as life sciences R&D collaboration, general counsel offices, LP reporting for alternative investments etc.  The growth opportunity here is tremendous, but Intralinks has been trying to crack into this business for the last few years with mixed success.  This is the growth option that you are not paying for at the current valuation

Attractive business model

Intralinks has a very attractive business model (buzzwords such as 'software as a service' and 'cloud software' come to mind):

1) Clear 'gold standard' in M&A and DCM datarooms with low price elasticity overall.  Intralinks is the premium provider with a differentiated service (security, uptime, scalability and 365x24x7 support).  Dataroom costs are a very small portion of overall transaction costs, and junior bankers typically make vendor decisions although some investment banks have 'exclusive' relationships and on occasion, clients will request a specific vendor

2) High FCF generation: Intralink's dataroom services leverages prior investments and requires little in the way of working capital and capex requirements.  Additionally, it has a highly scalable cost structure with low fixed costs

3) Revenue visibility: A significant portion of revenue is 'repeat' business, particularly in loan syndication and non-project based enterprise deals, driving 75%+ revenue visibility at the beginning of each quarter

4) Growth prospects: Despite strong existing market positions, there are several growth opportunities internationally (Europe, Asia); in the enterprise business (specifically serving life sciences, LP reporting for investment funds, general counsels at Fortune 500 companies); as well as expanding to serve smaller deal sizes

Impact of a slow deal environment, aka reliving 2008

At the current valuation, we believe little to no growth in enterprise is priced in, and that the stability of the core DCM and M&A businesses (which has so far proved stable) is being questioned.  In addition to looking at how the business performed by segment in the 2008 downturn, it’s worth noting the following:

* Intralinks gets paid whether or not deals are completed

* Intralinks revenue is linked to deal / loan volume (which is more stable) and not deal / loan value (which is more volatile and is more widely reported)

Analysts are reasonably optimistic on the business (2012 estimates of $220M+ in revenue and $70M+ in EBITDA) which represents high single digits growth with slight margin compression.  This implies a 5.4x ’12 EBITDA multiple - which we consider a bargain

We have also estimated a ‘worst-case’ scenario with $170M of revenue and $44M of EBITDA which implies a 9x multiple.  This is based on the lowest 12-month DCM and M&A revenues over the past 5 years ($33M in 2Q10 and $50M in 1Q10 respectively), current enterprise revenue conservatively adjusted for $8M of lost FDIC revenue and 26% EBITDA 'trough' margins (last seen when the company was much smaller).  It’s very unlikely that this will happen, but represents a compelling margin of safety

In the 1Q11 earnings call, Intralinks announced the loss of a large customer (~$13M in '10, ~$7-8M in '11 and ~$5M in '12) which drove a 1Q11 bookings miss and a downwards revision in '11 guidance.  The lost earnings is already baked into street estimates and the current valuation, but FDIC remains an overhang due to reduced confidence in management and the potential for further price competition.  Intralinks has since gone out to state this was by far their largest enterprise customer (4x the size of the next largest)

There is a silver lining here: Intralinks is a premium provider willing to draw the line on price competition.  Independent checks revealed that pricing for virtual data rooms has been relatively stable (primarily due to the fact that virtual data room costs are a small proportion of overall deal costs) and that price compression has been driven more by expanding into smaller deals than price competition

SEC subpoena

This is our biggest concern.  In August, Intralinks announced that the SEC had issued a subpoena requesting 'certain documents related to the Company’s business from January 1, 2011 through the present' and that they intended to co-operate fully with the SEC. 

The fact that the subpoena only asked for documents dating from 1/1/11 precludes any large-scale accounting irregularities (dating back past 2011) and any issues surrounding the IPO.  If we had to guess, it could potentially relate to two things, neither of which would significantly impair the business.  First is the disclosure of the FDIC account in May '11, which management claims that they were unaware of losing until after the secondary in April '11.  Second is the adoption of FASB revised authoritative guidance covering Multiple-Deliverable Revenue Arrangements that was adopted 1/1/11, which the company has stated did not have a significant impact on financial statements

We don't have any additional fact base, but are comfortable underwriting this risk at the current valuation

Other notes:

High inside ownership is normally is a positive, but we are concerned when a company has a high concentration of insiders seeking liquidity (typically VC / PE backed IPOs, aka ‘lookout for the follow-on’).  It's worth noting that TA associates paid ~$450M for Intralinks (~14x EBITDA) at the height of the PE boom mid 2007.  At the time, Intralinks had <$15M of revenue outside of M&A and DCM.  It was a heavily contested auction and there's no doubt TA overpaid, but it is worth comparing to the current ~$390M enterprise value, which includes $94M of LTM revenue outside of M&A and DCM

New management as Ron Hovsepian (Novell, IBM) replaced Andrew Damico (10 years at Intralinks, CEO since the 2007 buyout) in December.  We don’t have a strong read or feeling about this change; prior management had a mixed track record, but so does Ron at Novell

Valuation

The current valuation is very cheap (5.6x LTM and consensus ’12 EBITDA and 9x a very conservative ‘floor’ EBITDA) for a high-growth business (20%+ FCF growth) with strong free cash flow version and good revenue visibility (FDIC not withstanding).  With a few good quarters to prove out the strength of the core DCM and M&A business, the company could easily be worth over $14 / share assuming the SEC subpoena does not significantly impact the business (and we have not found a plausible situation where this could be the case).  This represents a 12x LTM / consensus EBITDA multiple that is in line with other fast-growing software peers

Strong performance in M&A / DCM allays fear on core business

More details on SEC subpoena

Potential growth in enterprise