Money McBags wanted to finally get to SAAS today because he has mentioned it a fuckton but has just never found time to cover it in full detail (likely because he has spent way too much time covering this in full detail) and it deserves it’s own break out.  This is one of Money McBags’ favorite names right now (he likes the name even more than he likes the names Madz Negro, Dick Blewitt, and the soon to be immortalized Harry Baals) so it’s time to roll up the sleeves, break out the excel, the thesaurus, and the urban dictionary, and get down to business:

What the fuck do they do? inContact is the actual name of the company (and Money McBags would love to be in contact with Jayme Langford, but that’s a different story), and they have two basic businesses.  One sucks more dick right now than Tori Black in A Shot to the Mouth and is more irrelevant in the long-run than something called Lady Antebellum (or the entire Grammy Awards show) and the other is more awesome than a Mickey Mantle letter.

The crappy business is their legacy telephony business which basically aggregates and provides telecommunications services to companies and that might be one the least interesting and most irrelevant businesses other than providing computer repairs for the Amish.  They basically go to Verizon, Qwest, and Global Crossing and then act as the middle man (the telephony Lucky Pierre if you will) and resell those companies’ various telecommunication services and products in a bundled offering to their own clients.  This is and has been the majority of their business and is the main reason no one has given a fuck about this company because frankly, it’s just not going anywhere.  As technology gets better and long distance telephony becomes more competitive, reselling other companies’ plans has a future about as bright as that of JOEZ jeans, so a big fucking yawn.

That said, the sizzle to this steak or the extra F in the MFF scene is their cloud computing, software as a service (and yes those two terms are mostly redundant but the more Money McBags types them the harder his dick gets because those usually result in premium mulitples applied to a stock) call center business.  This business basically takes all of the big legacy equipment out of the call centers, optimizes the call routing, and allows for call center employees to work at home.  Their 10K has the gory details, but in their words their software:

includes automatic call distribution (“ACD”) with skills-based routing, interactive voice response (“IVR”) with speech recognition, computer telephony integration (“CTI”) capabilities, reporting, work force optimization, e-learning, call center agent hiring and customer feedback measurement toolsTaken together, the inContact solution creates an integrated solution for call centers, including those with distributed workforces – either at-home or multi-site.

In Money McBags’ words, their software is full of fucking awesomeness because it cuts the costs out of an unneeded business expense that traditionally has relied on big upfront equipment spend and ongoing real estate and maintenance costs, while also better optimizing the whole fucking process.  Seriously, Money McBags dreams about businesses like this (such as CNQR, KITD, and fleshlights) because they are scalable, take the place of more expensive alternatives, and automate the process.

So now that we know what this company does, here are the interesting points (though not as interesting as these points):

1.  Their software business is growing ridonkulously fast, even faster than Sofia Vergara‘s son’s reputation on “Take your Mom to School” day.    Since 2006 the software business has grown annually at 240%, 48%, 46%, and probably ~20% in 2010 which is spanktastic.  They are penetrating a market that has yet to take advantage of this kind of software and their business has gone from $4MM in revenue to $35MM in four years and they are both winning new customers (~35 per Q) and also upselling old customers (by adding 22 upsold contracts in Q3 2010).  The obvious question though is what the fuck happened in 2010 that the growth rate was cut in half (in Q3 they said the lost two large customers of ~$225k in revenue), because seriously, that is more concerning than finding pants that fit is for a polyorchid.

Normally, when Money McBags sees a growth rate falling like that huge red flags shoot up faster than a heroin addict trying to get rid of the DTs, and those flags did shoot up, but Money McBags talked to one of SAAS’ biggest investors a couple of months ago and was told that the declining revenue growth rate was from an internal sales fuck up (Money McBags has not confirmed this with the company so he is relating information from a third party, and as always, Money McBags is just some random guy on the internet with a predilection for dick jokes and Alice Eve, so take all of this for what it is worth).

The story Money McBags was told is that SAAS tried to launch the next version of their software before it was completely finished and that version didn’t have some of the capabilities that the old version had, so customers basically said “fuck you very much” and decided to wait for SAAS to work out the kinks before upgrading or buying the new version.  This caused sales to get pushed out and as a result SAAS told the new version of the software to go fuck itself, stopped trying to sell it before it was ready, and went back to selling the shit that works until the new version is 100%.  As a result, their sales should start to pick up again because the sales force isn’t going out with some confusing message about two versions of a software.  It passes Money McBags’ sniff test (unlike Paris Hilton‘s vagina or asparagus urine), though it does raise questions as to management’s capabilities.

2.  Their revenue and earnings look deceptively shitty: Without looking at their two businesses separately, their revenue has basically been flat since 2005 at ~$82MM, they have had negative EPS, and negative cash flow from operations until this past year, so um, seriously?  At first glance, Money McBags would run further away from this company than the lovely Meredith Whitney seems to be running away from congress or Gary Busey seems to be running away from sanity, and that is why this company is still under the fucking radar.

Their shitty legacy telephony business has gone from ~$75MM to ~$48MM in revenue and that is masking the growth of their cockriffic software business.  Not just that, and this is really one of the two key points to this whole story, management is OVERINVESTING IN THE SOFTWARE BUSINESS right now because they want revenues to rapidly grow in order to get scale.  Their software marketing costs were up 28% last Q which is outpacing revenues and obviously not a way to run this business in the long-run.  At $100MM in software revenues, this business becomes hella fucking attractive to a CSCO or whoever else has tried and failed with this kind of solution so management is stepping on the pedal to try to ramp up revenues as fast as possible.  Shit, if you strip out that unnecessary marketing costs, the software business would be profitable today.  In 2010, the software business will have lost ~$6.25MM in income while their legacy telephony business will have earned ~$6.10MM in income (EBITDA has been positive for the last 9 quarters).  They are using their shitty legacy run off business basically to fund growth, it’s a great strategy, but hidden in their financials which causes fund managers to overlook them when running screens.

3.  The market opportunity is ginormous and scalable, like Kim Kardashian’s ass, (though if you are going to try to scale Kim Kardashian’s ass, make sure you have an experienced belayer).  In their latest presentation the company estimates this is ultimately an ~$8B global opportunity and again they currently have only ~$35MM in sales so Money McBags will address that opportunity with a “hell fucking yeah” (though throwing that $8B number out is a bit preposterous as it is more divorced from current reality than Lindsay Lohan, but whatever.  Money McBags is sure this is a big opportunity, shit maybe it’s only 1/2 of what they think, but if so, that’s still a $4B market and they are only ~1% of that right now).  They estimate there are ~3MM call center reps in the US and 72% of them are in enterprise sized contact centers that would be able to use their services which is their current market focus.

4.  Their competition sucks.  They have two competitors, legacy premise based businesses and other software based models. Compared to premise based call center providers, SAAS offers better service, at cheaper prices, with more flexibility, scalability, and security.  It’s like going from a palm pilot to an iPhone or dating 2005 Heidi Montag to dating 2010 Heidi Montag.

As for other software solutions, as far as Money McBags can tell no one has yet matched what SAAS can provide in terms of functionality (shit like ACD, IVR, CTI, WFO, and JIZZ solutions.  And only one of those is made up).  Money McBags knows and CSCO have tried to compete with SAAS but as of now, SAAS still has the best technology (though CSCO should buy them to combine their sales force with SAAS’ software in a marriage that would be as cocktacular as peanut butter and chocolate or strings and bikinis, but alas SAAS seems too small for CSCO to care about right now even if the potential market is huge).  SAAS is the only cloud based solution that can offer “telecommunications services with contact handling and performance management optimization.”

5.  It fits a need in the market and trends are in their favor.  SAAS’ software is basically a cost save to enterprise companies.  It allows people to work from home, it cuts hardware costs, and it increases efficiencies which equates to a 28% cost save for companies with 25 seats all the way up to a 45% cost save for a company with 400 seats.  Now Money McBags is not sure what percent of a company’s total cost is typically related to call centers, but a 45% savings in anything is nothing at which to sneeze.  With margins soon to be compressed across the globe as input costs rise, companies need to continue outsourcing and becoming more nimble, and this is one easy way to do that.  Plus SAAS offers the first solution for the middle market that is affordable.

But it’s not just the cost save as the trends are all pointing towards solid growth.  Cloud based computing is becoming trendier than Power Balance bracelets or NSFW muff guessing.  With more people already out of work, working from home is becoming an easier option and SAAS allows call center reps to stay the fuck at home and thus not have to be functioning members of society.  Most importantly, CRMs/ERPs/whatever acronym you want use are looking for this kind of bolt on type offering.

6.  There exists a place in this country called Sacopee. Yep, Sacopee, Maine, its mascot is the fighting colonoscopy bag (or the Hawks, potato-puhtato) and it is located just south of Mouthnipple, Canada.  This of course has nothing to do with SAAS, but it is something Money McBags thought you would all be curious to know.

7.  SAAS is a SAAS model which is the best revenue model in the world. SAAS is software as a service and it basically means companies sell the software on an ongoing basis and thus the revenues are recurring and stickier than the pages of an old Juggs magazine.  This model is much preferred to the traditional software model (though not preferred to the traditional runway model) where you actually sell the software in a one-time transaction and then maybe get some maintenance fees because this doesn’t lead to the lumpy quarter problem and it is easier to predict revenues.  The point is, Money McBags loves this kind of recurring revenue model and SAAS has 92% retention rates (which is actually a bit low, but given the ponzeconomy™ it is possible that they saw an inordinate amount of customers going out of business).

8.  There are a lot of fucking issues:  They are unprofitable and have had to raise funds in the last year, there are bigger companies out there who have more resources to eventually do this better, their management team took way too long to put all of this shit together, their legacy business blows, there is some sort of issue at the playboy mansion causing people to get sick (perhaps Pauly Shore went skinny dipping in the grotto), sales in their software business are slowing (but again, Money McBags hears their management team just cocked up the sales pipeline in the last few Qs to try to push out a new version of the software, so that should be getting better, but one never knows), they lost two large customers last Q (~$225k in revenue), and margins fell.

Valuation: Valuation gets a bit tricky because the company is overspending on marketing right now to ramp up quickly.  That said, lets look at a reasonable upside scenario,.  Say their legacy telephony business stays flat from here at it’s current $.16 eps run rate (though Money McBags hears it might actually have a bit of a comeback, like full bush).  Then say their software business gets its groove back and grows 35% a year for the next four years.  And yes that is an aggressive target but it is below the prior years’ growth rates until this year and the market is huge so there is a fuckton of room to grow.

If we then gross up software operating costs by 5% a year (which may be low in the short run, but their legacy business costs are actually declining and over time their software costs should fall back to normal levels) and do the Hokey Pokey and turn ourselves around, we get to ~$1.25 of tax free eps in 2014.  That said, they have $14MM in NOLs and at that rate they will crap out ~2013, so taxing that eps at 35% gets to ~$.80 eps.  For the combined company that growth rate would be ~15% per year and shit, you’d pay at least 15x for that (even though software as a service models tend to get premium multiples) so in 3 to 4 years this company could be trading ~$12 per share in that scenario which is ~3.5x to 4x up from here.  Yeah, NO FUCKING JOKE.  Just go back and read that again while Money McBags pinches himself.

Of course there is always a downside scenario so if their software business really is hitting a down growth cycle (which Money McBags highly doubts) and they only grow 20% this year, 15% next year, and 10% thereafter while increasing costs at 5% a year and getting no growth in their legacy business, they will only earn ~$.15 in eps in 2014 and you’d probably pay no more than 12x for that so the stock would be worth ~$1.80, or ~60% of where it is today.  That said, Money McBags thinks something like that is a ~5% scenario and he pulled those downside growth numbers completely out of his ass just as an illustration and to drive home the point that in any investment there are risks.

Money McBags thinks that his upside scenario is actually fairly likely, but also thinks this company sells themselves around when they reach that level and transactions have been happening between 4x and 8x revenues and so if they can ramp to $100M in revenues, that is quite some fucking upside seeing as how they have a ~$120MM market cap right now.  Seriously, there are so many ways for this stock to win that Money McBags is worried he is missing something bigger than Gabourey Sidibe‘s forearm.  They have a titriffic business model with high recurring revenues and high retention rates, they are penetrating a huge market with the leading technology, they offer a clear return on investment win for customers, and they are fucking cheap.  Shit, feel free to discount back the at least ~$12 price target Money McBags’ came up with for 2013 using the risk free rate of, well, of ~0% right now (thanks Bernanke) and see what you get, or just call BS on the whole thought experiment, but the fact is this company is worth a shit load more than it is trading for today and whether that is 2x, 3x, 4x, or 1 Billionty x, you can figure it out for yourselves.  All Money McBags can do is walk you through his thinking (and right now he is thinking he has always wanted to see more of this country’s landmarks, like the Flagler Memorial).

Anyway, Money McBags thinks SAAS can put up a strong revenue Q here, but thinks they only earn ~$.17 per share in 2011 and then ramp up to closer to $.40 in 2012 as the leverage starts to hit.  He does worry a bit about management, but he honestly thinks this stock could go up 3x to 4x in the next few years with not a ton of downside and you just don’t run in to many opportunities like that.  Money McBags is a shareholder, so do your own fucking research. and if that research leads you to finding out how to get in to Malene Espensen‘s pants, please let Money McBags know.

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