Description

Intro:
Investools is a high barrier to entry, rapidly growing, #1 player for online and offline investor education services (revenues $56mm ‘02A, $73mm ‘03A, $100-105mm for ’04E). Even better, the stock is liquid, cheap (‘04E: .85x ev/revs/9x ev/net), and customers LOVE service (97% say hit or exceed expectations after shelling out $2,500-4,000 for course, $4-6K with up sells). The story is in the 1st inning, strong margin expansion, I think the company could earn .16-.20 ’04 and .40-.50 for ’05. The company has the exclusive rights for brands such as: Business Week, CNBC, Motley Fool, Peter Lowe, Thurston Wright, NTC, and others. In addition, IED has recently acquired the 360 group, a direct marketing company that develops custom database and management for finding customers. (IED has been using them for 18 months before acq, been tremendously positive for the company). 360 Group used by University of Phoenix, Mens Wearhouse, Levi’s, The North Face, and Peet’s Coffee. IED paid $5.5mm in cash and stock. IED’s revenues are equal to the combination of BOTH The Street.com (TSCM) and CBS Marketwatch (MKTW) but trades at just 35% of TSCM/MKTW combined market cap. In my opinion, IED is a far more attractive business than MKTW or TSCM: higher margin, faster growing, much bigger revenue opportunity, better sr. mgt, better economics, and higher customer satisfaction. I believe this year the company will see $4-4.50 and possibly $6-7 over the 12-18 months, while I feel the downside is $1.75 (see below).

Company created and owns proprietary internet tool kit (35,000 subscribers, +100% last 2 years $21mm in revs,) (similar to retail style Bloomberg) and offline education ($53mm on principles of fundamental investing).

IED has educated over 100,000 students, and I believe will be an ideal take out candidate from larger education or speciality education company. IED trades at .85x ev/revs, 8.5x ev/ebitda, and 9x ev/gaap Vs. education peer group 3.9x ev/revs, 25x ev/ebitda, 40x ev/gaap (DV, COCO, ESI). I think IED could see $5-7 over the next year or so. IED’s Deferred revenues were up 19.4% quarter over quarter and top line 50% (4th qtr/4th qtr) and 30% yr/yr.

IED businesses: A) offline education 2 day program 8 hours a day ($2,450-$3,995) B) Investools Internet Tool Kit (think poorman’s Bloomberg/last 24 months doubled subs), 35,000 subscribers paying $600 a yr C) Coaching/Help Desk sold in 6 month increments $800-$2,000 D) small subscription based web sites/newsletters (wallstreetcity.com). About 25-30% recurring revenue business off tool set alone, and possibly much higher depending on assumptions on ability to up sell additional services and programs overtime… which again seems very likely given customer satisfaction of 97% (53% hit /44% exceeded expectations).

History and Management:
Investools just got listed on AMEX in early Dec 2003, from BB, and is merger several years ago between ZiaSun (offline) and Telescan (investor software/internet sites). Lee Barba took over in 2001 and in mid 2003 threw out founders. Lee is an outstanding manager. Previous experience includes: served as co-head of Fixed Income at Paine Webber (has MBA from Columbia University), managed global trading business for Bankers Trust responsible for European offices and global risk management practice, also responsible for consolidating Bankers Trust technology operation functions for global capital markets businesses (2,100 employees on three continents), and CEO of Open Link Financial (risk management software). Lee has great background of industry expertise, technology background, and is a very bright guy. In fact, let me quote a former sr. manager who was fired by the company “lee is resourceful, driven, highly talented, and extremely well connected…owns a lot of stock, and will see shareholder value realized.”

Management is focused on lifetime value of customer which they believe to be approximately $7,000 (I estimate the cost to acquire is approximately $950). This seems to be reasonable considering in year 1 $5,000, then retention on tool kit, coaching or possible additional course. IED has educated approximately 100,000 investors, there are approximately 25,000,000 individual accounts in US. If you think about several factors: a) potential losses in investing in equities, for especially novice investors (potential dollar losses vs. $4-6K is not much for learning fundamentals for investing) B) Americans are feed up with corporate and Mutual Funds self-dealing C) combined with the need for baby boomers to retire soon. IED’s program is not for everyone, however, most students are: 62% technical/professional, average income $85,000, 55 years old, 84% married, 32% have incomes over $100K, 27% have lived in house for over 20 years. So, not your average day trader, but someone established, close to retirement, who wants to learn and manage personal account for retirement.

It is also interesting to note, that NBC, trusts IED enough to use the Peacock brand image for direct mail marketing of CNBC brand (only one other company is allowed to use peacock outside of NBC).

How the business works:
Target city with 2-3 days: target direct mailings, TV ads, radio, newspaper, email
advertise seminar in particular city (give free 90 minute seminar, in nice hotel)
100% register, 75% attend, 13% buyers after show, 6% customers held ($2,500-$4,000)
Two weeks later course starts (1-2 days @ 8 hours a day)
Then maintain nearly daily contact with students (emails, coaching, internet tools)
Options buy Internet Investing Tool Kit (6 months $299, 1yr $599 2 yrs $1000), Internet tool box retention is about 65% and/or Coaching/help desk ranges in price $795-2,000.
Almost all take internet tool box option, WILL NOT sell Tool Kit without offline education

Each brand is focused on precise user demographic and geographic demographic (Business Week, $3,995 vs. Peter Lowe $2,450)

Similar business to Weight Watchers (WTW) in that it is selling advice, no inventory, great cash flow business. IED is also similar to Ediets (DIET), in that is has the exclusive rights to very strong brands. However, it is close to a 25/75 online/offline revenues model.

STRATEGY:
IED has more business than they can handle with current brands, but the good news is there are a ton of additional brands IED can partner with in the future. Here are several partners i thought they could potentially partner with: ValueLine, Major Business Magazines, Discount brokerages: Schwab, E-trade, ameritrade, etc. Its good business and provides very nice incremental revenue stream with very little risk to company. IED is by far the largest and only public pure play investor education company that I can find. IED just crossed 100,000 total students educated.

Barriers to entry:
a) Brands which IED has exclusive on: CNBC, Business Week, Motley Fool, Peter Lowe, etc
b) Combination of Exclusive brands (CNBC, BusinessWeek) + Proprietary Internet Tool Kit, which creates recurring revenue through installed base
c) IED dominates Investor Education market by far, only mom and pop competitors (this is the reason brands such as CNBC and Business Week outsource to IED vs. do it themselves)
d)ability to acq customers, fulfill and retain, carry out lifetime strategy with up sells
e) Very difficult without Economies of Scale (e.g. customer acq costs) and multiple brands & products essential: 1) strong brands lower acq cost and 2) IED’s proprietary products (internet tool kit) and services (coaching/help desk, etc) increase value of customer.

The business is very difficult to succeed in with only one brand and essential that have add on products to increase average selling price to effectively leverage customer acquisition costs.

IED has database of 700,000 potential customers, significant considering ASP $5,500

PowerPoint Presentation: http://www.sec.gov/Archives/edgar/data/1145124/000110465903027609/a03-5941_1ex99d1.htm


Valuation
2004
Market cap = $92mm
Cash $15.3mm
EV $76.7mm
Revs Est. $100mm
CF $9-11mm
CAPEX $1.3mm
FCF $8
TEV/FCF = 9x
.8x ev/revs




Valuation
Similar to IED ONLINE BUSINESS:
Investools IED (.85x EV/REVS and 9x ev/FCF)

CBS MarketWatch: MKTW (3.67x ev/revs, 75x ev/ebitda),
The Street.com TSCM (3.30x ev/revs, negative ebitda and eps),
Skill Soft: SKIL (5.20 ev/revs, negative ebitda and eps)
Ecollege ECLG (10.70 ev/revs, 167 ev/ebitda, 35 forward eps)
University of Phoenix UOPX (11.27x ev/revs, 31x ev/ebitda, 43x forward eps)

IED Online business
Currently has 35,000 subs paying on avg $600 a yr = $21,000,000
I think by year end this will approach 45,000 or nearly $27,000,000 in revs)



Similar to IED OFFLINE BUSINESS:
Education Management EDMC (3x ev/revs, 20x ev/ebitda, 25x forward eps)
Devry DV (2.89 ev/revs, 16x ev/ebitda, 28x forward eps),
ESI (2.1x ev/revs, 9x ev/ebitda, 15x forward eps, ESI -50% last 3 weeks on fraud)
Corinthian College COCO (4.2x ev/revs, 18.4x ev/ebitda, 24x forward eps)

2003 trailing numbers
Online business: $1.63 a share (at 3.5x ev/revs)
Offline business: $2.94 a share (2.5x ev/revs)
Value= $4.60 a share

2004
18x ev/ebitda =$4.00 (not unreasonable given growth and market position)
2.0x ev/revs= $4.67 a share
20x eps = $3.60 a share
Avg= $4.10 a share

Ideal take out from: educational company (UOPX, APOL, COCO) or brokerage company. 4th qtr revs +50%, gaap + 91% yr/yr. .8x ev/revs, 10x CF, great cash business DSO’s 7 days (no inventory very short and predictable cash collection cycle).

Internet BUSINESS
2003
35,000 subs (12/31/2003),
growing 35% per yr,
estimated producing $21mm in revs
13mm monthly page views (very high user utilization about 14 page views per user per day)

2002
17,856 subs (march 2002)
$10.7mm in revs
1.9mm monthly page vies
produced about 3.5 page views a day per user

Catalyst

catalysts:
a) Very attractive business: DSO’s 7, no inventory, #1 brands, rapid margin expansion, i think longer term company can get to high teen OM.
b) Run by strong management (see above)
c) record business
d) take out/coverage: very cheap, dominant business should get one of these.
e) Cheap: ‘04E .85x ev/revs and 9x ev/fcf (I think EPS could get to .40-.50 for ‘05E, which 4x eps)