After our Alpha-Rich article came out last week, several readers pointed out that we had underestimated the value of one of IDT's (IDT) hidden assets, Fabrix. As IDT is significantly undervalued excluding Fabrix altogether, we had simply valued Fabrix the same way IDT did when they recently acquired a larger stake in the company.
Upon further review, we agree IDT purchased more shares in a sweetheart deal and thus our valuation of Fabrix was unreasonably conservative. In the interest of correcting this error, we are releasing this follow-up article with our revised analysis and valuation for the company. We stand by our analysis of every other asset and business within IDT.
Fabrix produces a network appliance (NAS) specialized for storage. This high-quality unit is blazing fast, capable of storing petabytes of data, and can be bundled with optimized add-ons for big-data applications. For example, Fabrix can come prepackaged with video transcoding and/or ad-insertion engines that run on the appliance itself. Similar to building a production plant alongside a mine, this means Fabrix can dramatically outperform a standard computer/data setup. I have significant background in this area and would be happy to explain more offline.
Of all of Fabrix's applications, the company has been most successful with Video Storage and its Cloud DVR offering. From the recent 10-Q:
"In the first quarter of fiscal 2011, Fabrix successfully deployed its deep video storage product with a North American tier-1 operator. In addition, the major American cable operator that licensed the Fabrix software in August 2010 to empower its cloud-based DVR offering continued to purchase additional product. In the nine months ended April 30, 2013 and 2012, Fabrix received cash from these sales of $14.4 million and $7.5 million, respectively."
Fabrix has a very sophisticated technology that large enterprises are willing to pay a lot for. This is a company that can be massively profitable off of even a few customers.
In light of the valuation below, we believe IDT's intrinsic value is $37 per share. This change reflects an additional $63.32 million (accounting for IDT's 86.1 % stake) in value from Fabrix. This makes IDT now over 80% below intrinsic value, a true bargain among bargains for value investors.
Revised Fabrix Valuation:
1) Widely circulated rumors indicate that within the past few years IDT may have rejected a $100 million bid for Fabrix from IBM and a lower one from Dell. As these rumors originated in 2011, an acquisition today would likely occur at a significantly higher valuation given that revenues have doubled in the past year alone. With this in mind, we think a likely acquisition price for Fabrix would be over $200 million.
IBM's recent actions are consistent with an increasingly serious interest in the space. On June 4th, the tech conglomerate acquired SoftLayer (very similar business model) for $2 billion. On the same day, IBM announced the formation of a new cloud services division. We find it reasonable that IBM may acquire Fabrix for this division.
IDT's management has specifically stated that they are interested in monetizing Fabrix. However, they have also stated they will only do so at a price they deem attractive, and apparently they have not yet received such an offer. While we do not assign a probability to an imminent sale of Fabrix, we believe the event to be fairly likely.
2) According to the recent 10-Q filing, Fabrix produces well over $10 million of annual revenue and has enormous gross margins. Although the company has not reached profitability yet, if IDT were to stop investing in Fabrix's growth the company would immediately become extremely profitable. Currently, SG&A and R&D together account for almost 87% of Fabrix's expenses. If IDT were to reduce these costs, it could easily have Fabrix producing more than $8 million in annual EBITDA.
Fabrix has been growing at a 100% clip for the past several quarters. Assuming a steep haircut to 50% growth, we can expect EBITDA excluding growth expenses to reach at least a $12 million run rate at this time next year.
Our assumed 50% growth rate is obviously conservative. We believe that growth may even accelerate growing forward:
- Samuel Jonas, the company's Chief Operating Officer, was extremely bullish on Fabrix during the most recent conference call, saying, "They continue to do very well. I mean, I've looked at their, we'll call it, their sales leads over the next 12 to 18 months, and it's, I mean, it's phenomenal. I mean that they could be on a cash flow basis, they could be like half as profitable as all of IDT."
- Fabrix is entering additional verticals, including biosciences, security, and drilling. We find it unlikely that Fabrix would be entering these businesses without expressed interest from clients.
We value a growing business like this one at 10x next year's EBITDA excluding growth expenses. This gives Fabrix a valuation of $120 million.