Description

MobileIron (MOBL) is a small cap software company that is simply too cheap to ignore in my opinion.  MOBL currently trades at just 1.2x TRAILING gross profit (with 80% gross margin) due mostly to concerns about transition to recurring revenue, VC overhang, cash burn and tax-loss selling. The stock has not recovered since the company’s missteps in Q1 2016 even though Q2 showed signs of progress in billings growth. I believe billings should continue to improve, and the company should deliver breakeven cash flow by Q4. Specifically I believe its VC backers are motivated to sell the company, which could fetch $5-6/share (85-120% upside from current price of $2.70/share).

Company background

MOBL provides mobile device management (MDM) software.  It helps enterprises secure and manage their employees’ mobile devices and access to mobile applications. In essence, MOBL’s software has the functionality of Blackberry but for all platforms including iOS, Android and Windows. The competitors include VMWare/AirWatch, IBM, Citrix, Blackberry and Microsoft.  MOBL was founded in 2007 and held an IPO in June 2014, raising $103 million at $9/share.

Why this opportunity exists

• ·      New management team botched Q1 2016: MOBL has had its management team turn over in the past 12 months. After replacing its head of sales in early 2016, MOBL experienced sales disruption and reported a poor Q1. Its stock plunged from over $4/share to under $3/share and has not recovered even though management showed signs of progress in Q2 with improved billings metrics.
• ·      Transition to recurring revenue: MOBL has a hybrid business model. It sells both perpetual on-premise license and recurring cloud subscription. As more customers choose cloud subscription, MOBL faces decline in license revenue. This has the effect of somewhat masking MOBL’s fast growing cloud subscription business.
• ·      VC overhang: Three VCs control over 40% of shares outstanding. This exacerbates trading illiquidity and raises concern over potential VC sale or distribution. Given its low share price and trading liquidity, however, I believe the rational exit strategy from the VCs would be to sell the entire company. Two of the VCs have board representation.
• ·      Cash burn: MOBL has consistently burned cash since its inception. The recent expense reduction and billing growth should help MOBL achieve cash flow breakeven in Q4.
• ·      Tax-loss selling: Given poor share performance year-to-date, MOBL is a strong candidate for year-end tax-loss selling.

Why MOBL is attractive

• ·      Secular industry growth: The proliferation of mobile devices at home and at work is a long-term driver for enterprise adoption of MDM to securely manage mobile access to corporate data.
• ·      Marquee customer base: MOBL’s most valuable asset is its base of enterprise customers, including New York Life, Discovery Communications, Denso, Equinix, Barclays, Varian Medical, Wyndam, Swiss Re and Blackstone Group. At its 2015 user conference, Uber announced the adoption of MOBL to manage hundreds of thousands of phones that they provide to drivers.
• ·      Gartner Magic Quadrant leader: Gartner has consistently ranked MOBL as a leader in Enterprise Mobility Management Suites, just behind VMWare/AirWatch. Gartner’s influential ranking allows MOBL to win corporate CIOs’ mindshare.
• ·      High operating leverage potential: With 80% gross margin, MOBL should be a lot more profitable than it is today. I believe a strategic or private equity buyer could cut the expense structure significantly so it could operate at a profit level similar to other mature software companies – 30% or higher operating margin.
• ·      Motivated owners: In a recent discussion with management, they led me to believe the board is open to a sale of the company now more than ever. I think prior CEO Tinker was a roadblock to a sale as MOBL was rumored to have turned down a $1B+ offer from VMWare, who subsequently acquired AirWatch in January 2014 for $1.5B.

Valuation

I value MOBL on the basis of an acquirer’s EV-to-sales multiple.  The most recent comparable transaction is Blackberry’s acquisition of rival Good Technology for $425 million in September 2015 – representing 2.6x total revenue and 3.3x recurring billing.  Applying these multiples to MOBL’s trailing revenue of $158 million and recurring billing of $116 million yields an equity value of $5.25-5.50/share.  My valuation assumes $10 million in additional cash burn before breakeven.

Other comparable transaction multiples to consider are those from Open Text’s recent acquisitions of Actuate and HP’s customer communications software assets.  Actuate and HP have somewhat similar revenue models to MOBL – license and subscription.  Open Text is considered by many in the software industry to be a value buyer of cheap software assets.  In the cases of Actuate and HP, Open Text paid on average 2.5x trailing revenue.  Applying this multiple to MOBL yields an equity value of $5.35/share, assuming $10 million in additional cash burn.

I use Good Technology, Actuate and HP as baseline valuation because they were all having challenges, yet still found strategic acquirers. Good Technology had fallen behind MDM leaders like AirWatch and MOBL.  Actuate and HP had experienced sales decline.  In contrast, MOBL is a leader in its category and has revenue and billings growth.

Risks

• ·      Intense competition: In the past two years MDM has become more crowded with VMWare/AirWatch, IBM, Citrix, Blackberry and Microsoft putting pressure on MOBL.  Yet, industry contacts consistently name MOBL and AirWatch as the top 2 players.
• VCs irrationally decide to not sell the company: Given two of the VCs are board members and significant shareholders, I believe a sale of the company is the most likely exit strategy.

Catalyst

·        Continued improvement in billings after recent change in sales leadership

·        Cash flow breakeven in Q4

·        Sale of the company