Description

This idea is small and highly illiquid. Therefore, it is likely only suitable for smaller funds / PAs. There is also a poison pill in place at 4.9%.

Onvia (ticker: ONVI) helps a wide range of companies market and sell to local, state, and federal government agencies by providing online access to a proprietary and customizable database of government procurement activity. More specifically, the company provides business intelligence tools designed to help identify and research new market opportunities, analyze market trends, and better understand competitors and channel partners.

Despite trading for ~$5.00 today, we think ONVI shares are worth north of $9 with limited downside to $3.50 or $4.00. The company is currently valued at 1x sales with $1.10 in cash per share on 7.3 million shares outstanding.  With ONVI’s transition to a SaaS-based business gaining steam, we believe the company is at a key inflection point.

Onvia shares have been weighed down by the combination of a tough operating environment and poor management. From a macro standpoint, austerity measures reduced government spending and decreased demand for contract procurement information and services.  Internally, a lack of strategic vision consigned ONVI to chasing lower-margin revenue. These challenges, however, are no longer as acute. Local, state, and federal budgets are recovering and, under the leadership of a new management team (CEO, CIO and multiple division presidents have spent three or less years at the company), Onvia is executing on a comprehensive turnaround plan.

Onvia’s management team is working to transform the company from a low-cost provider of information serving a wide audience into a high-value partner serving a concentrated number of clients. Since 2011, the company has made good progress. New tools and product refreshes are oriented around business planning and execution vs. simple lead gen. The company has adopted a more thorough, consultative sales strategy. SG&A costs have fallen from $20.2 million in FY2010 to $14.4 million in FY2012. We expect the combination of a better suite of products and a more strategic sales strategy to meaningfully grow sales over the course of the next 12 - 24 months, with a sleeker cost structure enabling more of these dollars to fall to the bottom line. We are already seeing signs of improvement, as subscription revenue (86% of total revenue) recently registered its first YoY growth in 10 quarters.

Over the same time horizon, average contract value per client (ACVC) has increased every quarter, both on a sequential and YoY basis. In the most recent quarter, ACVC increased 14% YoY to $4,909. More encouraging still, new client ACVC continues to ramp. New client ACVC reached $10,277 to end FY2012, up 36% from $7,560 in 4Q11.

The company believes there are ~1.9 million “casual users” of government procurement data. That was Onvia’s old target market. Today Onvia is targeting an addressable market of ~30,000 “power-users” of government procurement data.  In 2010, Onvia report 6,200 clients. Now that number stands at 3,850. Assuming the company is right, the company is positioned for years of double-digit revenue growth. See table below. (Note: this analysis uses today’s total ACVC and new ACVC to estimate the high and low end of the revenue range at the implied penetration rate.)

Growth is a key component of our thesis. ONVI has been very deliberate in building out its sales force, initially prioritizing the small and medium business channel over enterprise. In 4Q12, for example, the company increased its acquisition (vs. account management) SMB sales team by 40% to 20 seats at an annual cost of $750K. (ONVI expects a salesperson to generate positive cash flow within 6 months and negatively impact EBITDA for 3 to 4 quarters.) In 1Q13, SMB bookings increased 32% YoY. The company plans to turn its attention to building out its enterprise acquisition sales team in 2014. The company’s current headcount in enterprise sales acquisition is 2.

Given the company’s subscription-based business model, we believe ONVI can generate double-digit EBITDA margins at scale. Management is equally optimistic. CEO Hank Riner, answering a question on the company’s most recent quarterly conference call, noted, “so we now have a business model for the first time that we believe is scalable, we believe will have a high percentage of recurring revenue, we will generate cash and we will have great operating leverage.” He believes the company will soon show “double-digit revenue and double-digit EBITDA growth.”

In April, Onvia repurchased 1.2 million shares from Symphony Technology Group, a private equity group focused on software and services companies, for $3.50 per share. Symphony built its position in late 2010 at prices ranging from $3.00 to $4.50. In January of 2011 it bid for the entire company, offering $5.30 to $5.50 per share. A year later, as ONVI was formulating its turnaround plan, Symphony bid again at $4.25 a share. In 2012 it bid a final time, again offering $4.25 per share. Each time Symphony was rebuffed.

Onvia has a history with failed takeover attempts. Without going into too much detail, the first poison pill was adopted at 25% in 2002. Shortly before Onvia repurchased Symphony’s stake, the Board amended Onvia’s poison pill to 4.9%. Simply put, we think Onvia’s Board rejected Symphony’s bid because it was a low-ball offer. Deltek, Inc. acquired Onvia competitor INPUT, Inc. for $60 million in late 2010, paying roughly 2.5x sales. Deltek itself was subsequently acquired by private equity group Thoma Bravo for 3.2x sales. We believe Onvia’s fair, private market value is approximately $9 a share. With a poison pill in place and the Board and Management controlling over 18% of shares outstanding, Symphony wasn’t in a position to steal the company.

We think Onvia is on track to put up $30+ million in sales over the near-term, with much more upside over a 2-5 year time horizon. With $30+ million in sales, we estimate the business can generate low double-digit EBITDA margins and garner an attractive multiple. Even after adding over $8 million to the top line, the company will still be underpenetrated with additional pricing power (ACVC today is half of new client ACVC). We don’t think it will take long for investors to take note and award the company a multiple on par with other growing and profitable subscription-based businesses (REIS, LOOP, CGSP etc.).

Risks:

• Poison pill at 4.9%.
• Stock is illiquid.
• Needs to grow power user base.

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