West Corp (WSTC), a provider of technology-driven communications services, is approaching the sixth month anniversary of its March IPO lead by Goldman Sachs (GS) and Morgan Stanley (MS) and as disclosed in West Corp S-1/A filed 3/15/2013 filed with the SEC, the official unlocking of 60,527,088 shares which represents 97.4% of shares immediately prior to the IPO held by its two largest venture capital shareholders, directors and officers. The unlocking places WSTC share price in some potential jeopardy and may present aggressive oriented investors with a shorting opportunity.
West Corp offers numerous communications services, including conferencing, call center outsourcing, and emergency call services, among others. The company has numerous clients among the Fortune 1000 though it offers its services to small and medium-sized businesses as well. In the quarter ending June 30, 2013, West Corp posted $672,695,000 in total revenues and $43,668,000 in total net income.
SHARES UNLOCKING ISSUE ON SEPTEMBER 18th
The lock-up on WSTC shares owned by a pair of private equity firms, directors and officers will expire on September 18th, and may trigger selling activity. Venture Capital firms have been under continual pressure to return capital to their investors in the wake of the 2008 financial crisis and the resulting recession, and the firms that hold large stakes in WSTC are no exception. Thomas H. Lee Partners, LP and Quadrangle Capital Partners, the two largest shareholders with 36,109,395 and 7,545,309 shares, respectively, both decreased their ownership percentage in WSTC in the company's March IPO, and will have an opportunity to raise capital after their shares are unlocked.
Company executives and directors will also have their first opportunity to sell their shares after their shares unlock, and may do so at least to some extent in the interest of diversification and tax and estate planning.
Share prices also often move down before insider share unlockings, as investors anticipate the possible sales that could occur on the unlocking date from the institutional investors, directors and company executives who may be selling for diversification and tax planning reasons. See our recent articles on Silver Springs (SSNI), Model N (MODN), Marin Software (MRIN), and Enanta Pharmaceuticals (ENTA) that have shares unlocking in September that have given our readers successful shorting opportunities already.
OTHER RISK FACTORS
West faces significant competition like most technology companies with major players like AT&T (T), Cisco Systems (CSCO) and Verizon (VZ). These companies are much bigger and have substantial resources.
Like many venture backed companies, West has a lot of debt on its balance sheet which is a negative.
Call center outsourcing makes up a significant percentage of the company's business, and the company therefore faces the continuing issue of offshore outsourcing. It's hardly news that call agents in India and the Philippines can be had at significantly lower wage rates than American workers, and improvements in communications technology will somewhat ironically hamper the agent-oriented elements of West Corp's business as it becomes less expensive to access those workforces. While West Corp does have some international presence, the bulk of its agents are in the United States.
WSTC's Unified Communications segment also faces problems brought on improvements in technology. Numerous vendors continue to enter the marketplace with VoIP and PBX solutions, among others, and are driving down prices. WSTC will need to increase its volume of transactions and/or efficiency in order to keep up, but increased competition will make these tasks difficult as well.
West Corp is among a number of businesses peddling IP-based 9-1-1 solutions, but many potential customers remain fundamentally unsure of the safety of these services. Concerns surrounding service interruptions, real or imagined, have been persistent and may make it difficult for WSTC to grow and profit from this element of its business.
While WSTC has a long client list, the majority of the firm's revenue is generated from relatively few clients. WSTC estimates that its top 100 clients by revenue account for approximately 57% of its own revenue, leaving it relatively vulnerable to the loss of individual clients - and putting it in a very poor negotiating position with its most important sources of revenue.
Additional disclosure: This report is written for informational purposes and based in part on the company's S-1. Investors should consult with their financial adviser before making any decisions and they should read the S-1.