TRX--Strong Execution But Getting Too Pricey (TRXI)

From Stifel Nicolaus analyst Scott Devitt's note to clients on TRX's (TRXI) Q1 results:

TRX reported a solid quarter and seems to be executing well against its business plan. That said, the shares are up by 34% in the past three months. Based on the shares move, we are lowering our rating to Hold but increasing our fair value estimate to $11.50 based on an EV/EBITDA multiple of 8x on our 2007 estimates.

TRX reported $31.8 million in revenues for 1Q06, in line with our $31.3 million estimate, with net income of $2.9 million and diluted EPS of $0.17, above our $0.09 estimate.

Customer care revenue declined to 23% of revenues, compared to 26% in 1Q05. The company has made a strategic decision to gradually transition away from its customer care operations.

We estimate revenues of $117.1 million for TRX in 2006 and $126.5 million in 2007, with gross profit and EBITDA margins of 43.6% and 17.6% in 2006 and 44.2% and 18.4% in 2007, respectively. Our EPS estimate for 2006 is $0.60 and EPS of $0.71 in 2007.

Recent Results
TRX reported $31.8 million in revenues for 1Q06, in line with our $31.3 million estimate, with net income of $2.9 million and diluted EPS of $0.17, ahead of our estimate of $0.09. Revenues excluding client reimbursements were $31.2 million. For 1Q06, Adjusted EBITDA was $5.7 million, up $3.1 million over the year-ago period. EBITDA margin in the quarter was 17.9%, driven by an improving revenue mix, increasing operating leverage and cost structure adjustments.

For the quarter, revenues excluding client reimbursements were $31.2 million; revenues from transaction processing services increased 6% over last year to $20.1 million, but growth was affected by 2% due to foreign currency effects; revenues from data integration services decreased 2%year/year to $3.9 million; and revenues from customer care activities decreased 8.6% from the year-ago period to $7.2 million.

Core transaction processing and data integration revenues increased to 77% of revenues compared to 75% in the first quarter of 2005. Customer care revenue declined to 23% of revenues, compared to 26% in 1Q05. Management noted that call center transition is on track and that since the first four months of 2006, total head count has been reduced by 25%. The company has made a strategic decision to gradually transition away from its customer care operations. Much of the current and expected margin expansion has been and will continue to be generated by the move away from the customer care operations.

Total transactions during the quarter were 23.3 million with revenue per transaction of $0.86, down from $0.88 sequentially. TRX's core business is typically comprised of 65% leisure travel and 35% corporate. In the quarter, the company saw stronger transaction growth on the corporate side than the leisure side.

Cash and equivalents on the balance sheet at the end of March 31, 2006 were $24.8 million. Capital expenditures in the quarter amounted to $578,000.

Outlook and Conclusion
Management guidance for 2006 included full year revenues to range between $113 million and $124 million, with core transaction processing and data integration revenues between $99 million and $104 million. Adjusted EBITDA is expected to be between $19.5 million and $21.5 million with EPS between $0.55 and $0.66, excluding the effects of FAS 123R. The company expects to record a one-time charge next quarter of between $0.8 million to $1.0 million relating to the ramp down of the customer care activities. Further, management expects that 75% - 85% of future growth should come from the existing client base as new solutions are added.

We estimate revenues of $117.1 million for TRX in 2006 and $126.5 million in 2007, with gross profit and EBITDA margins of 43.6% and 17.6% in 2006 and 44.2% and 18.4% in 2007, respectively. Our EPS estimate for 2006 is $0.60 and EPS of $0.71 in 2007.

In our view, TRX reported a solid quarter and seems to be executing well against its business plan. That said, the shares are up by 34% in the past three months. Based on the shares move, we are lowering our rating to Hold but increasing our fair value estimate to $11.75 based on an EV/EBITDA multiple of 8x on our 2007 estimates.