Description
Selling for 2x free cash flow, with new high-margin value-added services revenues growing 61% per year, with domain-name renewal rates increasing by two pct. points YOY to 62%, and with further room for cost reductions (from the ongoing restructuring program and the eventual resolution of the “material weaknesses in internal controls” related to Sarbanes–Oxley), and with $4.30/share in cash & marketable securities, Register.com is now officially a ridiculous bargain.
Many members here are probably familiar with the company, so I'll keep things really short. If you would like an overview of the company and the industry, please read my previous post at http://www.valueinvestorsclub.com/value2/Members/view-thread.asp?id=1485&more=dtrue .
Here's how I get the 2x FCF figure:
As restated ($MM) 2002 2003 2004
OPERATING CASH FLOW $16.5 $10.5 $18.2
Less: Capital Expenditures (3.2) (4.0) (3.1)
Less: Acquisitions (9.4) (0.0) (0.1)
Less: Interest Income (6.0) (3.1) (1.2)
------ ------ ------
FCF FROM OPERATIONS ($2.2) $3.4 $13.8
Market Capitalization $137.9
Less: Cash & Securities (108.3)
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ENTERPRISE VALUE (EV) $29.6
EV/FCF = $29.6/$13.8 = 2x i.e., ridiculously cheap
Total revenues have remained roughly flat over the past three years, but this masks the fact that new high-margin value-added services such as email, web hosting, website creation, and online backup have grown from $4.8MM in 2002 to $8.9MM in 2003 to $14.3MM in 2004, and are likely to continue growing over the next few years; and that these value-added services obviously tend to increase customer loyalty, as evidenced by the increase in the company's renewal rates.
Revenues have remained flat overall because the domain-name business has declined gradually for the past three years, primarily due to lower pricing and the introduction of more aggressive credit-card verifications to reduce credit-card fraud on the company's website. This has likely resulted in a higher-quality customer base, possibly also contributing to the increase in renewal rates.
Operating expenses decreased by 16% in 2003 and by 10% in 2004, and in my view are likely to continue to decrease or in the worst case remain flat, as the begins to reap benefits from its cost-reduction program and as the “material weaknesses in internal controls” related to Sarbanes–Oxley are resolved. A comparison of the company's cost structure to that of competitors suggests that there's still quite a bit of fat to be cut -- see my previous write-up for more on this.
In short, here's a company enjoying positive business trends, flat to growing revenues and flat to decreasing expenses going forward, and cash & marketable securities approximating its market capitalization (thereby limiting downside risk), selling for only 2x FCF!
CATALYSTS:
With the company selling at 2x FCF, do you really need a catalyst? Well, it turns out there are several potential catalysts, including the eventual restoration of a normal listing on NASDAQ following the upcoming hearing (nothing bad really happened; the company simply was late filing its 10-K); additional progress from the restructuring program in the form of reduced technology expenditures and other cost cuts; and further, if management decides to imitate the likes of United Online, perhaps the initiation of dividend payments down the road -- the company sure can afford it.
Catalyst
With the company selling at 2x FCF, do you really need a catalyst? Well, it turns out there are several potential catalysts, including the eventual restoration of a normal listing on NASDAQ following the upcoming hearing (nothing bad really happened; the company simply was late filing its 10-K); additional progress from the restructuring program in the form of reduced technology expenditures and other cost cuts; and further, if management decides to imitate the likes of United Online, perhaps the initiation of dividend payments down the road -- the company sure can afford it.