I believe this company needs to be sold. It has a number of hidden assets that make it a compelling investment for a larger software company or a private equity firm with a software platform.

 

1) Core business - $22mm quarterly of maintenance revenues, $30-35mm of quarterly support revenues and 11-15mm of software license revenues. EBITDA of $40-$60mm without synergies. The company has 45mm of G&A which a third-party acquirer can probably cut in half. On the conference call this evening, management discussed a recent cost cutting initative that will save $10mm annually (little of this i believe is in SG&A) At the current valuation, the stock is trading at 8x pre-synergy EBITDA. With $20mm of synergies, the stock is trading at under 6x EBITDA.

 

2) NOLs - ITWO has $1.7 Billion in NOLs. Even with a change of control that creates an annual limitation on usage, these NOLs would be worth $100-$140mm to an acquirer ($4-$5 per share). Post-NOL value,  the company is trading at 5x EBITDA. Post synergies, the multiple would fall to under 4x EBITDA (20mm of synergies).   The real home run would be if the company sold its opertaing businesses via asset sales and retained the cash and NOLs in a holding company structure.  Under this scenario,  i think the NOLs would be worth $12-$15 per share (assuming you can borrow $1B of debt against 500mm of equity) and the equity would be worth in the mid to high 30's per share.   

 

3) IP and litigation with SAP - The company had a joint venture with SAP to develop and sell supply chain solutions. SAP dissolved the partnership a number of years ago and ITWO believes that subsequent to the dissolution of the partnership, SAP stole intellectual property that was used as the basis for its current suite of supply chain products. The company is suing for lost profits and for an injunction against SAP from selling new supply chain solutions. A markman hearing has been scheduled for Q1 2008 in patent friendly Marshall, Texas. This is a free call option on a massive settlement or court win. Patent holders have had a historical success rate of over 90% in Marshall, Texas so I think the chances of ITWO winning are probably greater than 50/50%. Can you imagine Oracle's delight if they acquired ITWO to compete directly with SAP in supply chain and then won a court case that forced SAP out of the market? If SAP decided to settle, I think the settlement could cost SAP $100-$200mm ($4 - $8 per share)

 

The chairman of the board and founder, Sanjiv Sidhu controls 25% of the company, but he has seen the value of his holdings decline by almost 50% from its peak earlier this year. Rumor is he is getting divorced, so a sale may make sense for him at this juncture. The Board is truly independent with a 7 member board that includes a venture capitalist, retiring CEO McGrath (who I believe has been at odds with Sanjiv), an advisor to KKR, a Harvard Business School Professor, a COO of a publishing company, Sanjiv and 1 insider

 

Downside Risk:

 

If the NOL is never monitized, the company loses the SAP litigation, the company does not get sold,  and revenues never grow (but you get the benefit from the recently announced cost savings), EPS. on a PF basis would be $1.15 and the stock would be trading at 13x EPS ex-cash.  So, under a worst case scenario i own a cheap stock (maybe even a value trap), but on the upside, i can get valuations (including the NOLs and litigation opportunity)  in the mid $40's.