Monday, November 7, 2016

Investor Discusses Cogint's Earnings & the Path Forward $COGT

This is the latest in a series of articles on Cogint (ticker: COGT) from Jeff Geygan and his team at Global Value Research Company (articles one & two & three):

Earnings Highlights:
  • Guides to Gross Margin between 45% - 55%
  • Insiders Continue to Make Open Market Purchases (See SEC form 4 filings)
  • “…we are working with the fusion, the synergies, the insights and the patterns that we can glean, that we believe will bring differentiated solutions for years to come.”
COGINT, Inc. (ticker: COGT) released 2016 Q3 earnings and update of business metrics and market opportunity on November 3rd. Quarterly revenue exceeded $52 million, a quarter over quarter increase of 27%. Net income was impacted by two non-recurring charges including a $4.1 million intangible asset write-off and a $7.4 million share-based compensation expense.

During the investor conference call, CEO Derek Dubner made several statements providing valuable insights:
“We are experiencing two very important dynamics worthy of mention. First, we are seeing not only adoption by new customers but increased search volume from existing customers. We saw a greater than 400% compound annual growth rate in idiCORE online transactions for the third quarter 2016. This informs us that our solution is not only being adopted but also becoming ingrained in our customers' daily work flow as they turn to our solution more and more for their decision-making processes, an essential metric to provide future visibility.” 
“Second, historically, in the early stages of similar product releases, we have seen a larger percentage of transactional usage versus contract usage as high as a 70-30 ratio of transactional to contract customers. Today, we are experiencing the opposite. Customers are executing long-term contracts with us. We attribute this to several factors. These include: positive customer impressions of our solution as to both usability and the understanding of what lies ahead in this product road map; our provision of excellent customer service and the customer's willingness to build a long-term relationship with us at an early stage; and the customer's desire to avoid anticipated price increases by competitors. Again, these indicators provide affirmation of the successful execution of this product rollout as well as future visibility in the form of recurring revenues.” 
“Across the entirety of our Information Services segment, which includes a portion of our consumer marketing business, we now have a differentiated and extraordinarily valuable comprehensive database, which includes holistic views of greater than 95% of the U.S. population, including unique data assets of over 120 million self-reported profiles, including 150 million unique e-mail addresses across 63 million households. 80% of consumer interactions with our owned media properties are from mobile, with over 700,000 daily survey respondents and 5 million compiled responses daily.” 
“We continue to focus on development of our proprietary platforms; we are aggregating and generating massive data sets, which fuel our platforms and solutions; we are seeing increased customer spend across product lines; and new product launches are demonstrating excellent traction. The key takeaway is that there is tremendous demand for our products and solutions.” 
“…what I wanted to relay through my notes to everybody is that we are sitting in an amazing position and many companies would desire to be where we are today. We're swimming in opportunity.”
The company has tremendous opportunity ahead. Company management now needs to meet investor expectations through consistent and improving revenue and earnings growth.

Further, CFO Daniel MacLachlan stated COGT’s long-term consolidate gross margin target is between 45% - 55%, but when pressed by an informed shareholder to clarify details he adds the Information Services segment, which included idiCORE and related services:
“Historically, when we look at the Information Services side of the business at a more mature state, you are seeing gross margins range from 70% to 85% because of the fixed cost nature of that side of the business.” 
“We saw tremendous demand and opportunity to grow our top line in order to position the company for accelerated growth over the next several quarters.”
COGT remains well positioned in this rapidly growing market space. We believe the regulated data market is $8 billion plus and the consumer data business market is well north of $50 billion annually currently.

Our recent visit with the CEO of Fluent, Inc. in its New York City office (Fluent is the largest subsidiary of the Performance Marketing segment) during which Ryan Schulke elaborated on the broad based opportunity for consumer targeted digital marketing, confirmed our belief this market space is in its infancy. The yet to be developed opportunities based on continually improving data acquisition techniques and the ability to provide à la carte, relevant, customer offering is enormous. Customers of Fluent, ranging from P&G, Western Union, Overstock and several ride share services, provide a glimpse into the breadth of opportunity based on the unique data aggregation and fusion technologies that result in ‘insight’ oriented target marketing data packets.

Investment houses Chardan Capital Markets and Barrington Research Associates have issued recent company reports with price targets well above the current share price. Undoubtedly they will need to revise their apparently modest outlooks given the company’s publically stated gross margin expectations of 45% - 55%. Currently Chardan’s analysis suggests a far lower forward margin of 28% - 30% out to 2018, whereas Barrington is forecasting margins in the 28% – 35% range out to 2019.

We believe the Performance Marketing segment is currently generating revenue in the $160 - $170 range with a typical gross margin of 30%. Company management suggests the Information Services business will rapidly move to near revenue parity. If this “catch up” period takes two to three years, it is reasonable to assume revenue from Information Services will be $150 million or more annualized. Combined, the enterprise will be generating $325 million plus in revenue. If management’s assumptions are correct, gross profit dollars will be greater than $145 million ($325 million x 45%) in the next three years, dwarfing the most recently reported $12 million of gross margin dollars.

There are no identical peers to compare with COGT. A few similar comps include Criteo S.A., a French based digital technology performance marketing company, and Palantir Technologies, Inc. a private Silicon Valley startup that develops and builds data fusion platforms, headed by Alex Karp and co-founded with former Paypal executives. CRTO, which is similar to COGT’s Performance Marketing segment, released earnings recently, reporting gross margins of 36% and a trailing three year compound revenue growth rate of 49%. Its shares trade for 34x earnings. At present Palantir does not release financial data, however, there has been speculation among industry journalists the company may be preparing for an initial public offering, presumably at a peak valuation which would create a credible comp to COGT’s Information Services segment.

We anticipate Wall St. research and banking houses will take interest as they recognize this unique situation. We suspect firms such as JP Morgan, Citigroup, Wells Fargo or even regionals such as William Blair, Sanford Bernstein or Piper will identify and focus on this business and the evolving market.

The current management team has been able to take three prior legacy businesses based on similar technology from start-up to sale. This management team has a tested track record. (See linked article for management background and prior company history).

Uncertainties exist with this situation as evidenced by the recent selling pressure. Post earnings the shares dropped nearly 25%. The recent publically disclosed short position for COGT is well over 1 million shares. There are those who have bet aggressively against management. As with nearly all rapidly growing businesses, management execution and focus is critical. Since taking the helm in December of 2014, management has progressively improved its shareholder oriented activities, first providing timely- filed quarterly reports, followed by regular investor conference calls with clear commentary and direct answers to pointed investor questions.

The company has yet to successfully attract broad based mutual fund interest in the shares despite a name rebranding from IDI to Cogint (Cognitive Intelligence) and relisting to the NASDAQ Global Market exchange with a subsequent non-deal roadshow. This appears to be a “chicken or the egg” situation.

Investors may also feel perceive the Board of Directors could be improved, with several legacy directors and those with lesser industry experience being replaced by directors who could add serious gravitas to the company. We suspect this will occur in the near term.

Global Value Investment Corp is a long-term investor in the company. The firm’s research team has held extensive, ongoing discussions with management and made several onsite visits to both the Boca Raton, FL and New York, NY offices to interview senior management and view product demonstrations.

We continue to believe these shares are sharply undervalued at the current time and price. We expect to see progressively improved earnings with each passing quarter. We believe the continued improvement in economic fundamentals and the growing application for the fused data created through the company’s unique technological know-how will accelerate earnings growth at a multiple of revenue growth and subsequently increased share price.


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