EDGAR Online: More than Just a 'Financial iPod'

EDGAR Online, Inc. (EDGR) [$1.35 Nasdaq, $41 million cap, 52-week range: 2.83 - .60] will report Q3 earnings in a couple of weeks. I expect continuing lackluster legacy product sales but significant gains in XBRL filings revenue and the number of XBRL corporate clients served. Emerging XBRL market trends suggest a far larger potential for EDGAR Online than I had originally thought.

Research analysts are quick to discount newly defined markets and their impact on particular companies. However, far more interesting are those potentially large markets which are hard to define, where companies' market shares are not disclosed, where the timing of future revenue is non-quantifiable, and where the profitability on those revenues is no more than a stab in the dark.

This uncertainty, if combined with unexpected market scale, can lead to volatile markets for those impacted companies. The trick is knowing the direction and, indeed, if there is a logical and probable basis for such markets to develop.

In an earlier report I emphasized the potential of the XBRL financial reporting standard on EDGAR Online's future business. I used estimated 40%, 30%, and 25% market shares for XBRL filings for the years 2009, 2010, and 2011, respectively.

In a recent presentation before the Noble Financial Small-Cap Conference, Philip Moyer, EDGAR Online's CEO, stated that their printing partner R. R. Donnelley (RRD) had an SEC financial printing market share of approximately 15-20%. He further stated that EDGAR Online receives around $10,000 - $20,000 per year per client for filing the defined XBRL filings (like 10-Ks and 10-Qs).

Using 20% share, $15,000 price, and assuming the number of SEC-required filers to be 12,000, that would suggest an annual, recurring XBRL filings business of about $36 million per year---phased in between now and 2011. EDGAR Online had TTM revenue for March 2009 of $18.7 million.

This all suggests a major increase in revenue over the next few years. Since the company's gross margin is around 75% and they have $30 million of NOLs carried forward (vs. market cap of $41 million), it is clear that there is a good chance of rapidly increasing profits.

My view of EDGAR Online's potential has changed---but not just because of the new SEC-mandated filing requirements. Certain other emerging trends in regulatory requirements, the public's push for transparency across financial markets, and major and largely undefined potential in world XBRL markets lead me to raise my forecast on the positive impact of these trends on EDGAR Online's business.

However, the best I can do for now is to broad-brush its potential new market opportunities.

First, it is important to state that EDGAR Online now has the only XBRL database of US companies and mutual fund companies; and it has a highly automated method of converting corporate financial data to the XBRL format. It is hard to grasp, but Moyer stated that the company has 1.5 - 2.0 million rules that control their automated XBRL filing process. They recently announced that they have handled XBRL conversions for in excess of $4.0 trillion of company market cap.

Here are some significant market opportunities for EDGAR Online:

• Municipals - According to a report citing the Federal Reserve figures, there are about 60,000 issuers of municipal securities. See also the Municipal Securities Rulemaking Board website for their progress in converting to the XBRL standard (via website search of "XBRL") and their recent statement supporting the XBRL standard. Since this number of municipal issuers is 5x's the number of SEC-reporting companies, the potential scale of the muni market raises new market opportunities for EDGAR Online.
  
• Mortgage-Backed Securities ("MBS") - The MBS market now has around 35,000 issues. The fact that extensive filings are made by these issuers but not converted to usable interactive data causes "dark" markets. Only investors with large resources can evaluate the risks and value those MBS issues. The rating services have been overwhelmed by the information filings, and it seems clear that a new way to create public access is needed. The recent financial collapse has drawn attention to the complexity of MBS and the heightened need of designing ways for the public to access MBS financial data.
• Credit Derivatives - Depository Trust states that there are 2.26 million credit derivatives contracts as of May 8, 2009, representing $28.2 trillion worldwide. XBRL offers a potential way to provide defined taxonomies related to describing these contracts.
  
• Hedge Funds - Various regulatory requirements may be developed to register hedge funds and establish other data considered relevant to market supervision. XBRL is a logical potential filing standard to use for this purpose.
• World XBRL Securities Potential - EDGAR Online currently streams data from Korea, China, and Japan, but the xBRL markets are only now opening up worldwide. The EDGAR Online chart (chart 10 of 15) suggests that there ar about 50,000 publicly traded companies, 50,000 mutual funds, and about 1,000,000 fixed-income securities.
  
• XBRL Licensing Potential - In 2005 - 2007 EDGAR Online filed U.S. Patent applications regarding the basic rendering and viewing of XBRL data and also for certain claims related to the Microsoft Excel add-in product. Whether these patent applications will be granted or whether they are significant is hard to determine.
• U. S. Government Use of XBRL Data - The government is overwhelmed by corporate filing data. The information required to file is extensive. However, the ability to effectively use that data in its non-interactive PDF format is driven home when one tries to read and analyze the 1,300-page 10-K of Citigroup (C). U. S. Representative Darrell Issra (Republican, California) has recently introduced H.R. 2392 entitled, "Government Information Transparency Act." It is hard to get a handle on the potential significance on EDGAR Online of the government starting to consider using XBRL in other agencies beyond the SEC. On July 14, 2009 the Congressional Budget Office issued its cost estimate to implement HR 2392's XBRL provisions for government agencies.
• XBRL-powered Financial Analytic Tools - EDGAR Online now provides not only XBRL data-sets to financial providers and investors but also offers the web-based I-Metrix suite of proprietary XBRL-powered analytic tools. I-Metrix is offered independently by the Compay, and it is also offered in whole or part via other financial information companies. Checkpoint (a Thomson-Reuters product) includes a module for I-Metrix, Excel offers an I-Metrix add-in, and companies like JustSystems offer I-Metrix as part of their web-based software analytic tools. Now that XBRL has been mandated by the SEC for reporting companies, I expect further joint ventures between EDGAR Online and financial information companies.
• Internal Auditing and Reporting - EDGAR Online's XBRL filings business markets is related to external financial reporting to the SEC, but internal auditing and reporting in business intelligence programs by corporations will gradually expand their use of XBRL. Whether this will impact EDGAR Online is hard to say.
• Investor Relations Use of XBRL - Part of the SEC XBRL mandate requires companies to upload their XBRL financial results to their own websites. This has broad implications for the need by corporations to upgrade their websites to comply with the new SEC Rules. EDGAR Online offers various data-sets for those investor relations websites.

In case you have not ever reviewed an XBRL instance document, here is EDGAR Online's 10-Q filing for the quarter ended March 31, 2009. If this is abbreviated, just check the SEC website for the "complete submission text file." You can also check other types of regular XBRL filings at the SEC website.

Since EDGAR Online has never recorded annual net income, it is tempting to only give EDGAR Online credit for the XBRL data packets that it builds and stores (and sells).

However, after reviewing these new worldwide potential XBRL markets, it is now my opinion that the company is far more than just a 'Financial iPod" with thousands of XBRL usable (playable like iTunes) data packets. After all, to build these data packets for easy retrieval and use, the Company uses deep, proprietary data-mining techniques and protocols (established over the last decade) to capture, parse, and analyze the U. S. government database. The Company's intellectual property value appears to dwarf its 'nano-cap' status.

Today, with the worldwide demand shift to interactive XBRL data, I find the valuation of EDGAR Online a highly challenging and intriguing puzzle. The company's competitors in the financial information sector are financial giants and highly valued in the marketplace. (See FDS, MHP, MCO, TRI, IDC, MSCI, MORN, GOOG, YHOO, and NDAQ for comparable valuation purposes.) Yet, EDGAR Online is the only company that has a proprietary interactive database to be used in supporting the infromation needs of the financial markets.

How these potential XBRL markets will unfold and which companies will become leaders in the various sectors will become much clearer over the next year. At this point in time, EDGAR Online, Inc. is the only publicly traded way to invest in a pure play on XBRL. RR Donnelley and Bowne (BNE) are both large financial printers. Private companies with significant XBRL exposure include Rivet Software, UBmatrix, Merrill Corp., JustSystems, Clarity Systems, EDGARfilings, IRIS, Altova, CoreFiling and many other firms specializing in various aspects of XBRL. Many of the large high-tech companies like Microsoft (MSFT), IBM (IBM), Oracle (ORCL), Hitachi (HIT), and SAP (SAP) have important XBRL-related operations.

About a decade or two ago, a friend of mine said that a certain stock's potential was significant---very significant. I kept asking him for further definition of the potential---why this and why that. He kept just saying, "You just have to be there." I think I now know what he meant.

Disclosure: I am long EDGAR Online, Inc. common stock (EDGR). Also, I use their data-sets in my web-based financial analytic program.

Comments

[Robert Maltbie:]

Miles-

Excellent piece and I just wanted to chip in my 2 cents on why EDGR shares languish. As you may know, the company has undergone a management change somewhat recently. I confess that I had stopped paying attention, but under the prior team the stock had slowly trended downward. Some of that was obviously due to the fact that XBRL implementation continued to get pushed out but, generally speaking, most institutional investors involved with the company at the time had a very negative attitude regarding the prior CEO. That culminated in a push by one holder to have her pushed out, although I dont know if that is ultimately why she is no longer CEO.
So, in a nutshell, I suspect that EDGR now has a fair amount of investor fatigue. Many institutional investors gave up on the name and may not realize that there's been a change in management and, now that XBRL implementation is a reality, the stock deserves a fresh look.

J

Jul 20 08:04 AM

[User 212321:]

Miles,

You said "Using 20% share, $15,000 price, and assuming the number of SEC-required filers to be 12,000, that would suggest an annual, recurring XBRL filings business of about $36 million per year---phased in between now and 2011. EDGAR Online had TTM revenue for March 2009 of $18.7 million."

Experience is showing that first-time creation of XBRL data is in that range, but that subsequent periods the effort plumets. I expect the first two annuals from companies will be something in that range (two years because in the second year there will need to be detailed tagging at the footnote level).

In outyears however, I would expect the XBRL to almost be a check-box selected output format, with the corresponding filing costs also plummeting.

Growth will come from expanding the range of reporting in XBRL, not from extrapolating year-1 filing costs.

Cheers,
Dan

Jul 21 04:44 AM

[Miles P. Je...:]

If XBRL becomes a household name and XBRL conversion merely a "checkbox", that would be the best scenario for EDGAR Online. The reason is that their I-Metrix suite of XBRL products all hinge on the success of the XBRL standard. For example, their high-end I-Metrix Pro web-based subscription product now sells for $4,800 per year. Just a thousand subscriptions equals 25% of their current annual sales. Professional analysts tend to use programs which meet US accounting standards.

I'd rather not debate what happens in year 3 and 4 since it is not only speculative but also I suspect that other large US XBRL markets will have emerged by then. However, the 3rd year will be the first filing year for about 10,000 US companies. So, it is my guess that those new companies will have the usual first-year issues for compliance; and they will most likely outsource that conversion. Also, I used 20% share based on RR Donnelley's market share for printing. EDGAR Online may actually have a larger share than 20%. The Donnelley partnership, I think, is for U.S. markets only. For instance, EDGAR Online has already signed up Canadian News Wire as its partner in Canada to address the XBRL filings market there---as it develops. (It is hard to guess pricing 3 years out, but it does seem that the complexity and compliance issues of SEC XBRL filing will tend to justify the Company's price levels.)

In the long run, the current large SEC XBRL filings business will be dwarfed by other areas of conversion and the broadening out of business intelligence, auditing, and analytic products.

I take my hat off to the Company for building this massive XBRL database and product suite over the last 5-7 years, a time when their cash flow was tight and there was NO assurance XBRL would emerge as the SEC standard. It was a bold move to singlehandedly create a database of 12,000 companies, 6,000+ data-elements deep, and 10 years of financial history long---plus products that employ the XBRL data. They have developed, as Moyer stated, a set of 1.5 - 2.0 million rules that control the automated XBRL conversion process. Their independence, automation, consistency, and around 7 years of actual conversion are key competitive factors.

You might like to take a look at one of their patent applications to get a sense of the issues here. For instance, how will EDGAR Online's early commitment to XBRL and their related patent applications affect their future business? Conceivably, they may have certain intellectual property rights related to the use of XBRL by other XBRL service companies. Below is US Patent application 20070192265: www.freshpatents.com/S...
They also have a basic application on Viewing as well as one for the Microsoft Excel I-Metrix add-in.

Note: EDGAR Online does single-line its XBRL filings revenue, so we may get a sense of pricing over time.

Miles





On Jul 21 04:44 AM User 212321 wrote:

> Miles,
>
> You said "Using 20% share, $15,000 price, and assuming the number
> of SEC-required filers to be 12,000, that would suggest an annual,
> recurring XBRL filings business of about $36 million per year---phased
> in between now and 2011. EDGAR Online had TTM revenue for March 2009
> of $18.7 million."
>
> Experience is showing that first-time creation of XBRL data is in
> that range, but that subsequent periods the effort plumets. I expect
> the first two annuals from companies will be something in that range
> (two years because in the second year there will need to be detailed
> tagging at the footnote level).
>
> In outyears however, I would expect the XBRL to almost be a check-box
> selected output format, with the corresponding filing costs also
> plummeting.
>
> Growth will come from expanding the range of reporting in XBRL, not
> from extrapolating year-1 filing costs.
>
> Cheers,
> Dan

Jul 21 11:35 PM

[Neal Hannon:]

I will get excited about EDGR as a stock investment when I see several quarters of GAAP profitibility and positive cash flow, something this company has never experienced.

Jul 22 09:15 AM

[Miles P. Je...:]

Fortunately, with EDGR we know that the database costs and analytics costs are behind them. Shareholders have absorbed years and years (between 2002 - 2007) of conversion costs to convert the SEC pdf files to usable XBRL interactive data files---massive costs. And they absorbed large additional costs to build the I-Metrix suite of XBRL-powered analytics. Now, database costs are stable. All they need is top-line growth. Now, with their 75% gross margin, revenue will plummet to the bottom line.

How they stayed the course in building the XBRL database in face of no government XBRL standardization is beyond me. As you know, it was a multi-year commitment and a real "bet-the-ranch" move based on their advanced XBRL data handling capabilities. I've heard that the database has cost between $30-40 million. Now at $40 mil cap and $30 mil NOLs, the stock seems to be priced way to cheap vs. potential XBRL markets.

Now with the SEC mandate, EDGR's XBRL unique and proprietary XBRL database positions the company as having "the only hardware store in a gold rush."


On Jul 22 09:15 AM User 458196 wrote:

> I will get excited about EDGR as a stock investment when I see several
> quarters of GAAP profitibility and positive cash flow, something
> this company has never experienced.

Jul 22 11:46 AM

[NOTAEOL:]

I read with excitement your article on Edgar Online. First and foremost as you have stated you are long Edgar Online. I read this as long user of EOL. Let me enlighten you on what Edgar Online Cannot Do:

1. They only have Fundamental database in XBRL. As a matter of fact even in non XBRL they only have that information and their parsing effort probably uses something like Netowl (from html to db) which their 10-K states.
2. Download their information for BAC, or VZ and you will see they cannot even Identify a Income statement properly.
3. They cannot and will not go beyond Fundamental tables as they lack technology sophistication.
4. They claim they can convert in 15 mins -6 hrs. Really? thats too slow for many useful apps in the Algo trading world
5. They can only do US based companies.
6. They could be a big player in the conversion world but lets wait for requirement to span all information than just Fundamental tables and few years (you dont need a $10K per year conversion and filing fee).

Finally, there are up and coming products that will blow EOL out of water. Who they are you find out as time goes but they are there.

NOTAEOL

Aug 03 04:05 AM

[Miles P. Je...:]

I wonder if you have used I-Metrix Pro. As a subscriber, I found their comparative analytics, ratio analyses, and fundamental data to be exactly right. Also, I receive fundamental XBRL data feeds from them, and I have run extensive checks on their data.

Your statement "They only have Fundamental database in XBRL" amuses me. The company built that database at a cost of around $20-40 million and designed analytics programs that run on that database. I agree, of course, they cannot cover every area in the world of data. They are focused on this unique XBRL area---where they helped to build the taxonomies and established proprietary data-mining ways to capture and use data from the SEC's EDGAR System. Now that the SEC has established the XBRL standard for the US, EDGR's database has taken on new value and relevancy for information providers.

As to non-US XBRL data-sets, they do stream Korean, Japanese, and two exchanges in China. These countries have converted to XBRL. I assume that as other countries convert to XBRL, EDGAR Online will provide even broader international fundamental data-sets.

With 70 million page-views per month and their analytics an add-in to Excel and a module in Thomson Reuters, they seem to be doing a lot right.

Non-fundamental data is not their focus. Their database is for full SEC reports rendered in the SEC's XBRL taxonomy. They have identified and executed products around their fundamental database.

They are expanding the number of analytics programs that they support with their XBRL fundamental data. If you check Google, MSN, Yahoo, Nasdaq, MarketWatch, etc., you will see that the Street's reliance on their fundamental data-sets is pretty extensive. What you don't see is a breakdown of the over 250+ clients (algo, hedge, private) that use their data and which provide over 50% of their revenue.

So far, EDGAR Online is the leader in the conversion of US companies to XBRL data per SEC mandate. We will all learn more about this over the next few years, as competitive data becomes available. As to new areas besides fundamental corporate data, the company has been a strong advocate of using XBRL data in areas like MBS, Mutual Funds, Munis, Events, etc. And now, the data required by SEC is just the Ks, Qs. New filing areas like 4s, 3s, 13s, risks, etc. should open up major new areas where their database can be employed.

Good luck.

p.s. I am long EDGR stock and my company uses EDGR's data-sets in its web app.




On Aug 03 04:05 AM NOTAEOL wrote:

>
> I read with excitement your article on Edgar Online. First and foremost
> as you have stated you are long Edgar Online. I read this as long
> user of EOL. Let me enlighten you on what Edgar Online Cannot Do:
>
>
> 1. They only have Fundamental database in XBRL. As a matter of fact
> even in non XBRL they only have that information and their parsing
> effort probably uses something like Netowl (from html to db) which
> their 10-K states.
> 2. Download their information for BAC, or VZ and you will see they
> cannot even Identify a Income statement properly.
> 3. They cannot and will not go beyond Fundamental tables as they
> lack technology sophistication.
> 4. They claim they can convert in 15 mins -6 hrs. Really? thats too
> slow for many useful apps in the Algo trading world
> 5. They can only do US based companies.
> 6. They could be a big player in the conversion world but lets wait
> for requirement to span all information than just Fundamental tables
> and few years (you dont need a $10K per year conversion and filing
> fee).
>
> Finally, there are up and coming products that will blow EOL out
> of water. Who they are you find out as time goes but they are there.
>
>
> NOTAEOL

Aug 07 11:34 AM

[Ian Cassel:]

Miles: Great writeup first of all. What are your thoughts on XBRL revenue increases vs subscription losses. It seems the company will be plagued by this through year end at least ie subscription losses drowning out XBRL successes. I wonder when the inflection point will be when the tide reverses ?

A very interesting company. I've been watching it for some time. I'm also waiting to see what terms they get for the obvious financing they will need.

Aug 10 12:03 PM

[Miles P. Je...:]

Inflection point---nice way of expressing it. My view is that current levels of subscriptions will be dwarfed by the XBRL filings business. As to just the decline of subscription revenue as you asked, say - $2,052,000 annualized for 2009/2008 year-over-year, that would represent the revenue on just 137 new XBRL filing clients. I assume they receive around $15,000 per XBRL filings client per year.

Now the question is, what is the likelihood that the company will win at least 137 new filings clients over the next year. Well, if you take a look at xbrlcloud.com/edgar/ed... (the very last column to the right), you will see that EDGR now has the leading XBRL filings market share. I have followed this for awhile, and it looks like about 40% share. Since there are 1,800 new companies who will have to file starting after 6/15/10, that would possibly suggest that EDGR's share at 40% might be around 720, far in excess of the 137 needed to cover the shortfall in subscription revenue noted above.

Using a lower market share of 30% for the 1,800 and the 40% for the 500 this year, that would equal 740 clients, suggesting around $11.1 million in annual revenue. In fact, due to their highly automated XBRL conversion approach and years of experience, I suspect their share will stay at current levels or higher. And with about 10,000 additional companies required to file in 2011 (and many choosing to file early), I suspect these 2009 and 2010 numbers to be very low vs. long-term industry filings business.

But don't rule out subscriptions business. CPAs and attorneys are conservative and tend not to use a new service until it is "legit". Now that the SEC has mandated XBRL, and with Thomson Reuters selling EDGR's high-end I-Metrix suite of products, the case could be made for rising subscription product sales.

You refer to a possible financing. Maybe it will not be just money. What if their strategic financing partner also got certain rights as to the sale of certain of EDGR's XBRL database products?

EDGR has the XBRL database but it also knows how to extract and capture data so that it is usable in their analytic programs. Those proprietary data-mining tools represent real value to companies in the business of financial information.


On Aug 10 12:03 PM Ian Cassel wrote:

> Miles: Great writeup first of all. What are your thoughts on XBRL
> revenue increases vs subscription losses. It seems the company will
> be plagued by this through year end at least ie subscription losses
> drowning out XBRL successes. I wonder when the inflection point
> will be when the tide reverses ?
>
> A very interesting company. I've been watching it for some time.
> I'm also waiting to see what terms they get for the obvious financing
> they will need.

Aug 18 10:45 PM