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.