| Insights from activist filings

Two insightful letters from activist investors

by | Aug 27, 2019

Excerpts from activist letter and presentation

Activist’s letters and presentations are long, and most of the contents are arguments that highlight mistakes of the management or the board.

Some activist fund managers share their “thought process”, “analysis” and “opinion” about the business, industry, valuation and competitive landscape. We extract the sections that provide readers with “insights”.

1. Laughing Water Capital says Iteris, a micro-cap company, enjoys a huge market share and has the potential to be a $billion+ company

Iteris Inc. is a provider of information solutions for intelligent traffic systems (ITS) and the precision agriculture markets.

On August 13, 2019, Matthew Sweeney, managing partner of Laughing Water Capital, sent a letter to the board of Iteris, and expressed his belief that the company has the potential to be a $billion+ company in the future.

the Company has recently started a new chapter that presents a tremendous value opportunity. With an increasing focus on software and IOT, Iteris’ traffic related businesses (“Traffic,” Roadway Sensors, Transportation Systems) have a touch point with 1/3rd of the intersection based traffic signals in the United States, and ~50% market share in traffic sensors. This represents a commanding position in an attractive niche market that should allow for a bright future as the Intelligent Transportation, Smart City and Autonomous Vehicle movements are all in their early days.


With sustained organic double digit revenue growth likely on the horizon, tremendous strategic value, and today’s valuation of ~1.6x our estimate of forward Traffic sales and ~9x Traffic segment EBITDA vs. recent transactions and public peers that trade at 3-4x sales and mid-to-high teens EBITDA multiples, we believe Iteris stockholders are well positioned to benefit for years to come, even before ascribing any value to the Company’s Weather offerings, one of which is related to Traffic and currently profitable. Our faith is bolstered by the fact that relatively new CEO Joe Bergera is an alumni of Roper Industries, where excellent capital allocation has led to a share price CAGR of ~20% for decades.


We believe that Iteris has the potential to be a billion+ dollar company in the future

2. Edenbrook Capital applauds the Marchex management for its initiatives over the course of 2018; Believes that the stock is worth $6.25 per share

Marchex Inc. is an advertising analytics company. The company offers products and services for enterprises that depend on consumer phone calls to drive sales.

On December 26, 2018, Edenbrook sent a letter to the chairman and CEO of the company expressing support for the development of the business from primarily a transactional business to a recurring revenue business, and for the execution of several initiatives over the course of 2018, including payments of special dividends, share repurchases, and two strategic transactions. The letter also reiterated Edenbrook’s belief that the Class B common stock is currently undervalued in the marketplace, and as a result, trades at a significant discount in relation to the intrinsic value of the company.

Snowball research additional notes:

Most recently, in May 2019, the company announced that it was named a market leader in the Spring 2019 Call Tracking & Analytics Software Customer Success Report published by FeaturedCustomers. FeaturedCustomers evaluated dozens of call tracking and analytics software companies for possible inclusion in the report. Only 17 companies met the criteria required, and Marchex received an award in the Market Leader category, the top designation.

Over the nearly four years of ownership, we have seen the Company’s management team successfully transform Marchex from a primarily transactional business to a recurring revenue business focused on enterprise clients. In doing so, you have put Marchex on a path to long-term, profitable and cash-generative growth. While the path to getting to this point has not been linear, the progress has been profound, and accelerated significantly this year. Over the course of 2018 alone, the Company has executed several meaningful examples of capital allocation, including:

1) Paying a special dividend of $0.50 per share in March
2) Opportunistically repurchasing an insider block of 2.3mm shares at $2.43 per share in May
3) Acquiring Telmetrics, an enterprise call and text tracking analytics company, in November
4) Acquiring Callcap, a call monitoring and analytics company, in December


Additionally, for the first time, in its third quarter 2018 earnings release, Marchex provided stockholders with segment reporting that broke out the Company’s faster-growing, higher-margin analytics revenue, which is largely recurring in nature. This high quality, software-based business, when combined with the two acquisitions referenced above, positions the Company to have a growing analytics business with more than $50 million in revenue. With the faster growing, higher-margin business expected to be more than half revenue in 2019, we expect to see meaningful pull-through effects for the Company’s aggregate financial profile. As one might have expected from this segment reporting, stockholders enjoyed an initial bounce in the stock price after Marchex’s third quarter earnings report showed how strong the crown jewel analytics business has become.


Despite all of these positive developments, Marchex’s Class B Stock now trades at an enterprise value of less than $70 million. One way to look at Marchex’s trading price is to say that Marchex is being valued at less than 1.4x its high quality analytics revenue, with zero value being given to the $50 million in trailing twelve months revenue from the Company’s legacy marketplace business, its $100+ million net operating loss carryforward or any of the Company’s intellectual property, including the massive conversational data set built up over many years, which is both hard to replicate and is the source of value creation for new higher, margin, recurring products.


We believe Marchex’s trading price of $2.63 per share (as of December 21, 2018) demonstrates a substantial discount to comparable industry valuations. Similar analytics-based public companies are trading at 4-6 times revenue, while private companies are being financed at 6-10+ times revenue. If Marchex were valued at 3 times analytics revenue (which is still a substantial discount to the market and less than Marchex just paid for Callcap), and approximately $44 million in cash were factored in, this would yield a value today of approximately $4.65 per share, which is 75% above today’s trading price of $2.63 per share (as of December 21, 2018). Adding in discounted values for the legacy business and the NOL carryforward would yield another approximately $1.60 per share, totaling approximately $6.25 per share, more than double today’s price. Further, given the continued profitable growth of the business, we expect these values to continue to expand in the coming years.


While the market is currently missing out on the accretive, profitable changes you are making to the business, we remain steadfast supporters of your transformation and believe that in time, the value will shine through and shareholders will be rewarded for your efforts and value creation.


Snowball Research,

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