Recommendation: Buy
Ian Strgar and Daniel Greenfield
March 5th, 2013
Background
› Founded in 1997 as reseller of telecom services
– SLC, formerly known as UNC inc, name change in ‘09
› Launch SaaS deployment based call center software
platform in 2005
-Revenue model transition
Segments
› Telecommunications: Qwest, Verizon, Global Crossing
– Typically 1-3 year contracts
› Software: Delivery/Support of SaaS based call center
software
– Typically last 1-2 years, billed monthly
– InContact sales team: 37 sales reps, up 37% from 11Q4
Key Reseller Agreements
› Siemens
– NOT Exclusive, minimum purchase agreements: $4.5, $7, $5 million in 2012,
2013, and first 7 seven months of 2014
› Verizon Wireless
– North America market share, not yet ½ way through Verizon’s customer base
– 12Q4 – Booked largest contract to date through Verizon reseller agreement
› Main Benefit: 3000+ sales team behind InContact
platform
Call Center Industry Background
› Private Branch Exchange (PBX): A switchboard (originally),
internal telephone system where larger lines are broken
down in multiple extensions
– Contrast against common carrier operated lines – much more costly
Wave of the Future: Hosted PBXs
› Increasing internet speeds allow for hosted PBX systems
– Calls begin and end at hosting vendor’s data center
› Decentralization, cost pressure
Primary Software Offerings
› Automatic Call Distributing (ACD)
– Handles inbound/outbound calls as efficiently as possible
› Dialer
– Number manipulation: preview (information), power (agents available),
predictive (agents not available), auto (pre-recorded)
› Interactive Voice Response (IVR)
– I.e. pre-recorded help lines for large volumes
› Workforce Optimization (WFO)
– Planning, scheduling, forecasting workforce needs
Competition
› On-Premise
– Aspect, Avaya, Cisco: large legacy product vendors hold largest market
shares
› Cloud Competitors:
– Five9, Interactive Intelligence: less mature products for SMB
› Development of cloud offerings by large software vendors
is perhaps InContact’s greatest risk
InContact vs. On-Premise
› Data from Frost & Sullivan
Market Opportunity
› Roughly $8 billion opportunity
– Data from Frost & Sullivan, DMG Consulting, and Gartner
InContact Market Opportunity
4000
3500
3000
$, Millions
2500
2000
1500
1000
500
0
Dialer
North America
IVR
Rest of World
WFO
Total Market
ACD
Comparable Analysis
Interactive Intelligence Group
Industry/Product
Bazaarvoice
Salesforce.com
Contact Centers, SaaS and On-Premise Social Commerce Interpretation Customer Relationship Management
Comparability Lies In..
Business model, revenue growth
SaaS, size, revenue growth
SaaS, revenue growth
Weighting
30%
20%
20%
Verizon Wireless
Telecom Services
Brightcove
SaaS Digital Media Human Capital Management
Same Product, Reseller SaaS, gross margin
15%
Cornerstone OnDemand
10%
SaaS, beta
5%
Revenue Model
› Software Revenue
– New Customer Sales: 3 pieces of data - new customers books, average # of
seats, cost per seat
› New Customers in ’12: 60-65
› Average # of seats for new customer in ’12: 40
› Average cost per seat: $1.7k-$2.5k. We took a low end estimate to be conservative ($2k)
– Current Customer Sales
› Retained revenue (92%), 6% growth in same store sales of retained customers
Software Revenue Model
New Customers
Number of new customers
Seats per new customer
Cost per seat
Sales from New customers
Q1
Q2
Q3
Q4
3/31/2013E
6/31/2013E
9/31/2013E
12/31/2013E
2013E
2014E
2015E
2016E
2017E
63
40
2
5040
63
40
2
5040
62
40
2
4960
62
40
2
4960
250
40
2
20000
270
40
1.96
21168
310
40
1.95
24180
330
40
1.95
25740
350
40
1.92
26880
Land & Expand
Retained Revenue (92%)
Sales from additional applications of current customers
Sales from Current customers
11318
679
11997
11802
708
12510
12858
771
13629
14351
861
15212
50329
3020
53348
67480
4049
71529
85281
5117
90398
105412
6325
111737
126479
7589
134067
Total Software Sales
Growth
17037
27%
17550
31%
18589
34%
20172
33%
73348
34%
92697
26%
114578
24%
137477
20%
160947
17%
Revenue Model Transition
Revenue Model Cont.
› Telecom: healthy growth, but decline as % of revenue
Revenue Model
($ in thousands)
Software
2008A
2009A
2010A
2011A
Q1
Q2
Q3
Q4
3/31/2012A
6/31/2012A
9/31/2012A
12/41/2012A
2012A
Q1
Q2
Q3
Q4
3/31/2013E
6/31/2013E
9/31/2013E
12/31/2013E
2013E
2014E
2015E
2016E
2017E
19,972
29,103
33,692
39,870
12,302
12,828
13,976
15,599
54,705
17,037
17,550
18,589
20,172
73,348
92,697
114,578
137,477
160,947
% Growth (YoY)
48%
46%
16%
18%
32%
35%
40%
42%
37%
38%
37%
33%
29%
34%
26%
24%
20%
17%
% of Total Revenue
25%
35%
41%
45%
48%
49%
50%
51%
50%
53%
53%
53%
52%
53%
55%
58%
61%
63%
59,653
55,080
48,463
49,115
13,373
13,387
13,886
15,133
55,779
14,906
15,526
16,415
18,414
65,261
74,398
81,838
88,385
93,688
(10%)
(8%)
(12%)
1%
11%
9%
14%
19%
14%
11%
16%
18%
22%
17%
14%
10%
8%
6%
Telecom
% Growth
% of Total Revenue
Total Revenue
% Growth
75%
65%
59%
55%
52%
51%
50%
49%
50%
47%
47%
47%
48%
47%
45%
42%
39%
37%
79,625
84,183
82,155
88,985
25,675
26,215
27,862
30,732
110,484
31,943
33,076
35,004
38,586
138,610
167,095
196,416
225,862
254,635
.2%
6%
(2%)
8%
20%
21%
26%
29%
24%
24%
26%
26%
26%
25%
21%
18%
15%
13%
Cost of Revenue
› With cloud transition, COGS declines
Other Notable DCF Considerations
› Selling & Marketing
– Guidance: projected to rise to 28-29%
› Research & Development
– Guidance: projected to rise to 9-10%
› Depreciation & Amortization
– Straight-line, 2-3% growth
› Tax Rate
– Compared to CRM, VZ, ININ
– Determined reasonable average: %11-18
InContact 1 year weekly
Beta
0.87
SD
Weighting
0.38
40%
InContact 3 year daily
1.32
0.07
30%
InContact 5 year monthly
1.14
0.21
30%
InContact estimated beta
1.08
DCF Price Target
Final Price Target
Questions
Beta sensitivity a potential issue…
InContact 1 year weekly
Beta
0.87
SD
Weighting
0.38
40%
InContact 3 year daily
1.32
0.07
30%
InContact 5 year monthly
1.14
0.21
30%
InContact estimated beta
1.08
Exit Multiple
EV/EBITDA Multiples 2013
INFA EV/EBITDA
13.2
SQI EV/EBITDA
21.4
RAX EV/EBITDA
13.4
VMW EV/EBITDA
13.6
ININ EV/EBITDA
46.1
CRM EV/EBITDA
40.2
VZ EV/EBITDA
5.7
CTL EV/EBITDA
5.7
T EV/EBITDA
6.2
2013 EV/EBITDA Industry
17.1
10%
10%
10%
10%
10%
10%
20%
10%
10%
EV/EBITDA Multiples 2014
INFA EV/EBITDA
11.1
SQI EV/EBITDA
15.4
RAX EV/EBITDA
10.8
VMW EV/EBITDA
11.7
ININ EV/EBITDA
45.6
CRM EV/EBITDA
31.8
VZ EV/EBITDA
5.3
CTL EV/EBITDA
5.8
T EV/EBITDA
6.0
2014 EV/EBITDA Industry
14.9
EV/EBITDA
16.0
10%
10%
10%
10%
10%
10%
20%
10%
10%
Exit Multiple Cont…
Exit Multiple (1.32 Beta)
Terminal Year EBITDA
$
Exit Multiple
Terminal Value
16.00
$
Discount Period
Exit Multiple Assumption Adjustments
Discounted Terminal Value
5.46%
% Equity
953,592.94
10
Discounted @ WACC of
Market Risk Premium
59,603.74
9.19%
$
395,743.99
98.56%
% Debt
1.44%
PV of FCF
98,970.00
Cost of Debt
6.68%
Enterprise Value
$
CAPM
9.25%
Less Debt
$
WACC
9.19%
Equity Value
$
Diluted Shares Outstanding
$
Current Price
$
Implied Price
489,398.99
9.27
6.90
34%
Undervalued/(Overvalued)
EBITDA EXIT Multiple
Beta
(5,315.00)
52808.84
Implied Share Price
Undervalued
494,713.99
EBITDA EXIT Multiple
9
15.500
15.750
16.00
16.250
16.275
1.52
8.36
8.46
8.57
8.67
8.68
1.42
8.69
8.80
8.91
9.02
9.03
1.32
9.03
9.15
9.27
9.38
9.40
1.22
9.40
9.52
9.65
9.77
9.78
1.12
9.79
9.92
10.05
10.18
10.19
All Things Considered
Discounted Free Cash Flow Assumptions
Tax Rate
18.00% Terminal Growth Rate
Risk Free Rate
3.00%
2.04% Terminal Value
Beta
529,096
1.32 PV of Terminal Value
Market Risk Premium
% Equity
219,576
5.46% Sum of PV Free Cash Flows
98,970
98.56% Firm Value
318,547
% Debt
1.44% Total Debt
Cost of Debt
6.68% Cash & Cash Equivalents
5,315
CAPM
9.25% Market Capitalization
313,232
WACC
9.19% Fully Diluted Shares
52,809
Implied Price
$
Current Price
$
Overvalued
Final Price Target
48,513
Implied Price
5.93
6.90
(14.04%)
Weight
Comparables Analysis
$9.26
33.33%
Adjusted DCF
$5.93
33.33%
Exit Multple
$9.27
33.33%
Price Target
$8.15
Current Price
6.90
Undervalued
18.15%
From Our Boy, Aswath
› “When
you have a growth company,
the discount rate is the least
important input into the valuation. It
is your revenue growth, margins and
cash flows that matter.”
-Aswath Damodaran
Recommendation
› In conclusion, we recommend a buy for all portfolios