InnerWorkings, Inc. (NASDAQ:INWK)
Credit Suisse Global Services Conference
March 11, 2013 13:00 ET
Eric Belcher - Chief Executive Officer
Alban Gashi - Credit Suisse
Alban Gashi - Credit Suisse
Hi, good morning. My name is Alban Gashi, and I work on the data processing and IT services at Credit Suisse, and here today, we have Eric Belcher, CEO of InnerWorkings. We are going to do a quick presentation, and then follow it up by Q&A. Thanks a lot.
Okay, thank you very much, Alban. So, we have a very innovative business model. We think a very disruptive business model, a technology backed solution coming into a very large and fragmented old school industry, the commercial print manufacturing space. And we know we all know from having seen many times over that that in and of itself doesn’t create shareholder value, then in concert with excellent execution is the solution we believe. And you can see here, our performance at least on one metric, revenue, which isn’t the primary metric that we evaluate ourselves on, but it’s the metric that we plotted on this chart. We expect this trend to continue for quite sometime. We’ll get into our guidance for 2013 here in a few minutes.
So, a little bit about who we are and who we are not? We believe corporations should outsource the non-core function of procuring branded materials, printed materials such as packaging and labels and direct mail and store signage, anything with their brand on it, the sourcing of those materials and increasingly a lot of services surrounding the use of those materials to a professional third-party that does nothing other than focus on that sole task. And so we don’t make print, we don’t sell it, we are a procurement organization with a data advantage that allows us to save our clients anywhere from 15% to 20% a year in utilizing our services versus what they would be able to do were they to attempt to manage this non-core function on their own, turn to an ad agency, or any of the other historical solutions that have been in place.
Now, we believe we are just getting started. I showed earlier that we delivered almost $800 million in revenue last year. And that is just the drop in the bucket versus what we believe is our eligible market opportunity of about $0.5 trillion. So, what I would like to do is spend a few minutes on our growth engines, how we see ourselves penetrating that $500 billion market opportunity going forward, and then a little bit about our financial performance. We have three main drivers of our growth, the first being our contractual relationships with large corporations, where our economics are transparent or generally onsite and we become their procurement and production management arm. We have also in the past turned to mergers and acquisitions in our space as a method of growing our business. And then finally, we have more recently as in the last couple of years began attacking the small to medium size business market.
Now, what’s unique about each of these three growth engines is first of all, we believe in and of themselves each one of them. We could build an outstanding business around. However, in concert, in unison, they are actually highly complementary. And by that I mean, the more contracts we sign with large corporations to takeover the management of their spend, the better of course we become at buying the more leverage we have, the more information we have, and that then in turn helps us as we, for instance, target a medium-sized business in terms of what we are able to save them and not only that, but of course, what margins we are able to deliver there for our shareholders.
Our M&A practice is a source of talent, which allows us to accelerate the signings on the enterprise contracts side. This small and medium business services segment is the hot bed for us right now in terms of information about new product categories, as an example food packaging that we maybe able to roll out into our larger corporate clients. It’s also a method of bringing in new industry talent, new talent into the industry, new talent into our company that ultimately may for instance move over and help us with our larger corporate contracts. So, all three working in unison together creates a platform that we believe can continue to deliver a very high growth rate, at least similar to what we have done in the past as well as these engines complement one another.
So, let’s quickly touch on all three. The majority of our growth over the last five years has come from contracts we have signed with large corporations who have gotten out of the business of having a procurement team managing this segment of their business and they have handed it over to us. We have a lot of momentum in this segment last year was our best year ever by a fairly wide margin and there are reasons for that and I will explain in a minute. We now – if we look at our enterprise solution and we weigh it up against what we had as recently as two or three years ago in terms of an offering to large corporations, we now have a substantial, a meaningful advantage versus our solution again just a few years ago primarily along these four lines, these four topics.
So, first of all, in terms of our breadth of offering we originally focused on the sourcing and production management of materials. Today if you look at our solutions we are managing the internal studio in other words working on [VNC] [ph], creative, file prep, versioning, all sorts of things dealing with the original artwork at inception, all the way through a range of services of which only a fraction are listed right here. And so the depth of our relationship with our clients today is much more significant than the original concept of turn the procurement function over to InnerWorkings, they will use sophistication and data instead of relationships and in an absence of information to source more intelligently and it’s evolved into what you see here and more.
Our original data advantage was real, but it was the fraction of what it is today. Today we are rolling our technology on a global basis all currencies, all languages on one platform. We have already converted Latin America last quarter, Europe this quarter and that allows us when we are supporting global clients in particular to provide them consolidated reporting a lot more visibility into this area of their supply chain that they have ever had in the past, it allows us to source with more intelligence across borders, it allows us to share concepts and designs within a client across their business units across their regions and many, many other advantages, not the least that which would be the data just continues on a daily basis to get richer and richer.
We say the first client in a vertical is generally the most difficult for us to bring on board as clients tend to want to be able to turn toward a referenceable account that we may have in their domain in their area in their vertical. We have moved from having let’s say some medium sized business populating the various verticals to having in many cases the flagship of brands across verticals and so that gives us confidence that we are going to be able to roll out in an accelerated fashion our solution across these main verticals for our solution. Not that long ago, we were only in two countries. We were and when we were almost exclusively a U.S. based company, we offered a regional solution, not a global solution. We wind forward to 24 months later and that’s changed dramatically. And we believe having a global platform. The brand across our clients doesn’t change whether it’s in Germany or Brazil and the needs are the same. Historically, we said to our clients, we can only support you here in the U.S., possibly in England as well. Today, it’s a completely different proposition. So, we have never had more to offer to our prospects and of course not only that, but to our long-term existing clients as well. And the result is we have got the strongest pipeline we have ever had in our company’s history.
Moving now from the enterprise solution into M&A. M&A has been our primary source of recruiting new talent into our organization over the years. Entrepreneurs who without perhaps the resources and technology, the scale with sophistication of InnerWorkings have been able to offer a comparable solution to their clients usually, a very limited offering involving perhaps just one service or just one or two product categories. We have historically been able to gain the ability to penetrate a new geography or gain the technical capability to enter into a new product category or service through recruiting these talented entrepreneurs. We are the only active credible buyer right now in this space, has been for quite sometime, and we expect to continue to be active on this front.
Here are some statistics. As you can see, when we talk M&A, it’s not perhaps the way people traditionally think of an acquisition. In that, our partnerships generally involve substantially less than half the proceeds down on day one with the balance paid out based on performance, profit performance over a multi-year period out into the future. And so what does that do for us? It ultimately allows us to only attract the most confident and capable and growth oriented of entrepreneurs in the marketplace. We have never bought a company that was looking to sell. And we have got a number of dialogues going on right now.
And then finally, the third area of our focus, if we were having this conversation a few years ago, we would not have been talking about the middle market. All of our energy had been applied to the enterprise solution, large corporations outsourcing a non-core function to us. However, if you look at this market segment, in addition to tens of billions of dollars being spent every year, it is also the market segment that is paying the highest premium for their materials and receiving on average the least amount of service and support for their brand.
The question though that we did not know how to solve a few years ago was how to penetrate this segment in a cost effective affordable way. And we have come up with the solution. It’s an internet lead generation solution with an inside sales, outbound call center that allows us to prospect in an extremely aggressive and very efficient manner. It has been a period of a few years of investment to get the business off the ground. You can see now, we have with just representatives alone over 150, and then there is trainers and instructors, and there is sales managers, and there is recruiters in all sorts of infrastructure built around this brand new business. We are gaining a momentum we think we have hit an inflection point. We believe this year the business will breakeven or be slightly profitable. And we expect big things from this segment of our business, going forward.
No one has tried something like this in the printing industry. I actually do come from the industry even though now I have been with InnerWorkings for seven years and I was resistant to this idea as I felt it needed to be a face-to-face personal contact when discussing somebody’s physical marketing materials touching the brand, somebody handing off their precious artwork that they may have been working on for months at a time, but I have come full circle on that, and I realized the way of the future is to support corporations, businesses in the medium-sized market through this far more efficient platform. So, those are our three growth engines.
Now, how have we done, what have we accomplished? Let’s quickly run through a few statistics. 19% organic growth rate on average over the last three years. Debt continues to come down. We are making investments not only in what I just showed you there in inside sales, but in opening new markets organically like China and Brazil. Our EBITDA margins as operating leverage kicks in as our business continues to grow continued to grow as well. ROIC is also climbing. Our performance last year, 26% growth on the top line, 19% of that organic, and our EBITDA despite those investments also grew 20% could have grown much more meaningfully had we chosen.
And here is our guidance, what we have given now for the last four years as well as what we have recently gave, I think it was two weeks ago for our 2013 expected performance, and I will go into each of the two areas that we guide on revenue and earnings per share in a little bit more detail here. First of all, how do we get from $798 million in revenue last year to our $930 million to $960 million this year? We had a few very small tuck-in acquisitions, which if you take their run-rate. What we didn’t realize from them in 2012 based on when they were purchased versus what we expect to realize from those entities in 2013, there is a small contribution there. The vast majority, as you can see once again, would be organic revenue growth through signing on new contracts with large corporations or growing within an existing account growing into new services and product categories or new geographies.
And then we also saw the numbers earlier in the growth that we expect from our new middle market initiative and that brings you to $930 million to $960 million in revenue. Our EPS growth of between almost 40% to 50% significant this year, $0.05 of that growth is simply not losing the money that we did through the investments we made in Brazil, China, and inside sales in 2012, we expect in 2013 breakeven or better from each of those three major investments. And then of course, the delta is made up by the growth that we just took a look at on the previous page associated with bringing in new large client contracts.
Long-term, where are we headed? We have been doing better than 15% organic growth, and that’s without any meaningful contribution from our middle market business. We expect to be able to continue at least 15% organic growth. Moving forward, we do believe that we will see adjusted EBITDA margins in the 8% to 9% range as operating leverage continues, and we will be marching as we have been over the last few years steadily toward that number. So, margins increasing, ROIC increasing, DSOs are coming down. We have a large opportunity there, and our tax rate declining as well.
So, what gets us out of bed in the morning is we all truly believe that we are on top of the once in the lifetime opportunity in our careers. A market of this size with a solution is novel, and now a track record as substantial as ours, it doesn’t come around everyday and we intend to capitalize on it. We think we are just getting started. We have grown up a little bit. We have gotten a little bit bigger, but we are still a very, very small company in relation to our aspirations and in relation to what we believe the market will allow.
Our data advantage is substantial, data primarily as it pertains to pricing of these materials as well as equipment profiles. The combination of those two allow us to source with an intelligence that is unrivaled. And we are, as I mentioned at the very beginning, very, very focused on making sure that we not only get looked at when history takes a look back here at what happened as being the innovators, but also the company that took advantage on behalf of our shareholders of the fact that we have come up with this new superior solution.
So, I believe that is all I have got and we have left five minutes for questions.
Alban Gashi - Credit Suisse
I guess, when you look at the $500 billion market you guys are looking into how you see the growth prospects for that overall market, and then is it mainly just penetration that you are looking to gain as you enter that market or is it share gains which has growth in the overall market?
Well, the way we look at that $500 billion opportunity is the market opportunity in front of us mirrors the business that we currently have meaning we don’t look at it as though we need to expand into any new product categories beyond the ones that we are in. And now that we are in every major economy, we believe that’s an eligible $500 billion eligible market opportunity for us. We are not looking at growth from the industry overall. In other words, our projections don’t entail more store signage and direct mail in the future nor less although most industry projections see some modest gain at approximately the rate of GDP in the product categories that we support. So, for us, it’s primarily doing what we have been doing and rolling it out to new clients as well as in some cases we estimate that we are doing less than 5% within an existing account of the spend that should be under management, and so also aggressively penetrating even our existing client base.
Alban Gashi - Credit Suisse
I guess, when you look at penetration drivers cleared up into a key area, how is it different from enterprise with a small medium target?
Well, if you were to look at our team that’s having conversations on the enterprise front, it’s a group speaking primarily with the heads of P&Ls, CMOs, and individuals of that nature. Generally, the background is a high end management consulting type background and the conversation is an organizational strategy conversation as much as, let’s say, a procurement discussion or anything else. And the sales cycles can be long, 12 months or more, but then the contracts in turn can be three, four, five years than we have an outstanding rate at resigning the same economics our contracts as they come up for renewal.
Now, with the small to medium-sized market, we are not looking to sit down and hammer out a contract, our economics are not transparent. We are supporting clients on a job-by-job basis. The sales cycle is meaningfully more compressed. And it’s a completely different person from our side leading the conversation then on the enterprise front as well as the people we are speaking to at our prospects.
Alban Gashi - Credit Suisse
I guess, it has been the (clients), what kind of cost savings are you are delivering to clients on the enterprise in small to medium side?
On the small to medium side, it can be more than 20%. Our industry is rampant with price discrimination, and we believe the ultimate middleman in the space is the manufacturers who are generally taking 10% of the cost of the job. Mismatches between a job and the machine that they are being run on or the plants they are being produced in, and excess capacity that’s ramped. You would be surprised that the way in which bringing this business intelligence into the marketplace allows us to generate meaningful savings for our clients, while also generating the healthy return for our shareholders.
Alban Gashi - Credit Suisse
Great. And then I guess, we will just look on the audience if there is any questions out there?
Thank you. You achieved about an 8% EBIT margin five years ago, you are about half of that now, is that going to be achieved in the future or is your business primarily different and 4% is kind of what we can expect?
Well, we think in terms of EBITDA margins, and we believe that we will be adding about 50 basis points of EBITDA margin a year on our way to 8% to 9%, which is where we believe our business will likely plateau. The reason that we had such high margins five years ago is that we were more heavily a transactional business, which does have higher gross and net margins. And we have converted towards building out this open book transparent economic solution with clients under contract hopefully five years or more hopefully multiple continents with our people onsite and our technology embedded. The rates of return for our shareholders of those contracts are profitable and but we are pricing for long-term relationships. And we are satisfied with the way in which these enterprise contracts are coming along their contributions toward our economics and the reason why we are seeing the operating leverage kicking in. But again, we also believe that we are pricing these contracts for the long-term. So, 8% to 9% operating margins is how I suggest you model out this business.
Alban Gashi - Credit Suisse
I guess any follow-up questions before I conclude. Thanks. Well, Eric thanks so much for your time.
Okay, great. Thank you very much. I appreciate it.
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