Monday, October 26, 2015

IDI - Building An Extraordinary Business $IDI

This is the second in a series of substantive articles on IDI (ticker: IDI) from Jeff Geygan and his team at Global Value Research Company. I'm publishing with permission:

IDI, Inc (ticker: IDI) is an exceptionally positioned company to benefit from the rapidly growing data fusion business, possessing significant profit potential in the evolving field of Big Data/Data Fusion.

IDI's current management team has been instrumental in creating commercial uses for fused data since the 1990s, and is now on the verge of capitalizing on the latest iteration of their technological know-how.

Background and Industry

Wikipedia describes "data fusion" as the process of integrating multiple points of data and knowledge, representing the same real-world objects, into a consistent, accurate, and useful representation. The expectation is that fused data is more informative than the original inputs.

A powerful characteristic of this business is that data can be purchased once and sold multiple times. 

For example, the data point for a person's date of birth is static. Once purchased, the data can be sold numerous times with the cost per sale declining with each new sale.

If a business can replicate this simple process with a large number of data points for thousands of customer transactions, the economies of scale are enormous.

IDI is in the business of buying and selling data. More than simply repackaging the data, they process it, synthesize it, amalgamate it, and extract from it new interpretations from data inputs, yielding unique outputs. This is data fusion. This is the reason IDI's exists.

There are several well-known companies selling data: Equifax, Inc. (ticker: EFX), Experian, plc, LexisNexis (owned by Reed Elsevier, plc), and TransUnion, LLC (ticker: TRU).

Three of these companies have legacy ties to the late Hank Asher, the "father of data fusion" and inspiration to the current IDI senior team. Equifax, LexisNexis, and TransUnion's data business were in whole or part acquired from Asher.

These companies sell "regulated" data. Regulated data is information such as a person's name, date of birth, current address, and Social Security number. Laws dictate how this information can be shared, and by whom it can be accessed. Typical users of regulated data include law enforcement, credit bureaus (fraud prevention), and Government agencies (cybersecurity).

According to recent industry statistics, the regulated data business generates $2 billion annually.

A fourth data business is Palantir, LLC (Palantir), a privately held Palo Alto, CA company.

Palantir describes itself along the same lines as IDI in that the data they sell has been further processed to provide unique insights (fused).

According to news releases and other media sources, Palantir primarily has served US Government agencies and state law enforcement.

Peter Thiel, a co-founder, stated in his book (Zero to One), the company could generate as much as $1 billion in revenue during 2014.

A July 23rd, 2015 SEC filing in which Palantir raised $500 million of additional capital, implies the company is valued at roughly $20 billion.

The primary difference between aggregated and fused data is in presentation: aggregated data is a collection of useful information in a manageable set that can be easily manipulated for referencing, for example an automated library index card set.

Fused data extracts relationships between data points to draw inferences or intuitive conclusions which were previously unknown or difficult to observe independently.

The economic difference between these two data types - aggregated and fused - is substantial.

Equifax, Inc. (ticker: EFX) trades for 5x revenue; Experian, plc (ticker: EXPN) trades for 4.5x revenue; Palantir, LLC trades for an estimated 20x revenue. (LexisNexis is an operating division of Reed Elsevier, plc).

IDI has additional opportunity in the "unregulated" market place, which is substantially larger than the regulated market.

Estimates of revenue exceed $10 billion, and the applications for data fusion are just becoming apparent.

What does the unregulated marketplace look like?

Assume a national retail merchandiser collects vast amounts of transactional information about its customers, yet is unable to distill meaningful analysis from it. IDI's data fusion software can overlay the retailer's existing data set and extract information such as relationships among customers, products purchased, preferences, seasonality, best offers, appetites, activity/sports preferences, buying habits, etc. The combinations go on and would serve both the retailer and customer by having the right inventory, at the right price, at the right time - amazing implications for consumer behavior.

Seasoned Management Team

IDI's new team is led by Mr. Michael Brauser (Chairman), Mr. Derek Dubner (CEO), and Mr. James Reilly (President). All have substantial experience with this technology. Mr. Ole Poulsen (Chief Science Officer), who along with the late Hank Asher, literally created the data fusion industry source code, is an integral part of the team as well.

Brauser was instrumental in creating and ultimately selling several of Asher's data fusion businesses. 

TransUnion, Equifax, and Reed Elsiver (parent of Lexus-Nexus) acquired earlier versions of the Asher/Poulsen technology. The most recent deal was made by TransUnion in December of 2013 when it acquired Asher's business, TLO, subsequent to Asher's untimely death.

There is current litigation between TransUnion, Brauser, Poulsen, IDI, and others related to the sale and ownership of the Intellectual Property (IP) of TLO, among other issues.

TransUnion asserts it acquired TLO and its assets, including the IP. Brauser, Poulsen, and IDI claim the IP was never sold to TransUnion, but rather, IDI is the rightful and current owner. This litigation has proceeded for nearly a year with over 200 court filings. A court date is scheduled in December.

Due to the nature of the claims and counter claims, there is a reasonable basis to assume TransUnion may settle with IDI - on terms favorable to IDI - in advance of the December court date. Brauser was quoted in a July 22, 2015 interview by Mr. Ezra Marbach explaining those circumstances.

When TLO was sold from the estate of Asher, Dr. Phil Frost and two other industry investors, Mr. Jules Kroll (Founder and owner of Kroll Security), and Mr. Thomas Glocer (former CEO of Thompson Reuters, Corp.), formed Data Acquisition Group with the hope of acquiring TLO. They were outbid by TransUnion who offered $154 million for the business.

Frost is now the largest shareholder of IDI. He has been a regular buyer of IDI over the past three months making open market purchases.

Frost, Kroll, and Glocer have an industry perspective on the value of the legacy company and its IP/know-how as well as applicable uses today.

IDI has an opportunity that is just becoming evident, but has previously been identified and pursued by knowledgeable investors and industry experts.

Due to the timing of information releases the value of the business has not been reflected in the share price which trades for less than $6.50 per share.

Economic Characteristics of the Business

The research team of Global Value Research Company (GVRC) has spoken with Brauser, Dubner, and Reilly on separate occasions to verify facts related to this report.

GVRC gathered additional data and confirmed with independent sources many facts and statistics included herein.

GVRC's research team had an opportunity to view a real time presentation of idiBASIC in order to experience the effectiveness of the product. During the presentation it became evident that idiBASIC, although powerful, would pale in comparison to its next generation idiCORE, according in part to James Reilly, who conducted the presentation, as well as other available product information.

Among the notable takeaways from the presentation were the speed of access and the breadth of information available on a near instantaneous basis. At this point the power of IDI's technology and the economic and strategic value were clear to GVRC's research team.

Reilly confirmed that idiCORE will be available for sale before year end.

The economic implications of idiCORE will be significant if IDI can capture 25% market share of the $2 billion regulated market. The company previously stated they expect to capture a much higher percent; however, IDI's earnings potential is impressive with 25%.

The company described idiCORE in public documents by saying this product "will be more powerful than other products in the market, as well as less expensive to use." IDI made this statement while presenting at an analyst conference in NY City on September 10th, 2015. Better product, lower cost.

During IDI's Annual General Meeting held on June 6th, 2015, Brauser replied to a shareholder question indicating that his experience with a previous data fusion business suggest that once IDI exceeds a critical level of revenue, gross profit margin should be 80%.

Brauser went on to state to shareholders that he believes with IDI's technology the company could capture a large share of the regulated data market.

Experienced technology investors understand the financial implications for a fixed cost business, with low variable costs, and how this mix leads to potentially very high operating margins. GVRC believes net income margins will exceed 20%.

Past Experience is No Guarantee of Future Results

There can be no assurance that IDI will successfully execute to plan, however, the Brauser team has a track record of success in the data fusion business.

Brauser and his team continue developing business in Boca Raton, recently adding a VP of Sales and Marketing with extensive direct industry experience, Dan Lanphere (formerly LexisNexis, Verisys Corp), while Ole Poulsen works from Seattle building the next generation research and development team.

Poulsen recently added Ted Stern - Sr. Software Developer (formerly Boeing, Cray, Tempress Technology), Ivan Gilchrist - Sr. Software Engineer (formerly Disney, Microsoft, Expedia), Angus Macnab - Sr. Data Scientist (formerly Eagel Harbor Tech, DyNuSim, Woodruff Scientific), Dominic Suciu - Data Scientist (formerly G-Genomic, Space Curve, Microsoft), among others to the IDI staff.

Coincidently, Palantir opened an office in Seattle in March, in part due to "the deep talent pool" in the area according to John Grant of Palantir.

It appears IDI has laid the groundwork to create an unusual and successful company. They have developed products they claim are best in class offered at low cost, built an enviable management team of experience executives and scientists, aligned with deep financial investors, and methodically begun to communicate with Wall Street.

Of course there are many uncertainties and threats facing IDI including:
  • known litigation versus TransUnion
  • known competitive threats from Palantir
  • unknown future regulatory issues
  • unknown competitors attracted to the industry
IDI recently ceased operating its China outdoor advertising business, but still has details of extricating itself and potential unforeseen liabilities.

With that said, IDI's share price has yet to reflect the enormous economic potential of IDI's business.

GVRC continues to be impressed as it learns about the company and ongoing communication with Management.

The company will soon announce results of its Q3 operations and undoubtedly provide further detail related to the release of idiCORE. We remain optimistic.

Disclaimer: The security described in this report has been owned in the past and may be owned in the future by the contributor and clients of Global Value Investment Corp or its divisions. Thus, the contributor may have a financial interest in any future price changes of the security. See for additional information.

All statements or opinions contained herein that include the words "we", "us", or "our" are solely the responsibility of Global Value Research Company, a division of Global Value Investment Corp. and do not necessarily reflect statements or opinions expressed by any person or party affiliated with the company mentioned in this report. Any opinions expressed herein are subject to change without notice. All information provided herein is based on public and non-public information believed to be accurate and reliable, but is not necessarily complete and cannot be guaranteed. No judgment is hereby expressed or should be implied as to the suitability of any security described herein for any specific investor or any specific investment portfolio. The decision to undertake any investment regarding the security mentioned herein should be made by each reader of this publication based on its own appraisal of the implications and risks of such decision.

NOTE: More analysis of IDI here.

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