Seeking Alpha
Recommended for you:
Long/short equity, special situations, value
Profile| Send Message|
( followers)  

Covisint Corporation (NASDAQ:COVS) made its public debut on Thursday, September 26. Shares of the cloud engagement platform ended their first day with gains of 23.1% at $12.31 per share.

While the offering has been a success, I am not convinced by the company. Covisint has been around for quite some time, claiming to operate in the "cloud" business. I am hesitant to pick up some shares given the relative poor growth rates, lack of earnings, and the fact that a change in corporate control in Compuware could create a lot of selling pressure on shares.

The Public Offering

Covisint provides a cloud engagement platform for organizations to connect, engage and collaborate with customers, business partners and suppliers.

With the platform, organizations can streamline and automate external business processes involving security information and access to critical information. Covisint's cloud platform is offered as a Platform-as-a-Service (NASDAQ:PAAS) and it quickly deployed, scalable and adaptable to specific needs.

Covisint sold 6.4 million shares for $10 apiece, thereby raising $64 million in gross proceeds. All shares were sold by the company with no shares being offered by selling shareholders.

Bankers and the firm set an initial price range of $9 to $11 per share. Shares were eventually sold at the midpoint of the range.

Some 18% of the total shares were offered in the public offering. At Friday's closing price of $12.63 per share, the firm is valued at $460 million.

The major banks that brought the company public were Credit Suisse, Pacific Crest Securities and Evercore.

Valuation

Covisint has focused on the automotive, healthcare and the energy sector to sell its services. The company is focusing to leverage the platform to other industries where it can use its technologies and improve collaboration throughout the industry value chain.

The company owns an own sales force, while selling through a channel partner as well. Covisint has some 3,000 customers which have deployed the platform to over 80,000 partners and suppliers, thereby connecting 18 million users.

The core group of 150 customers generated over 90% of total revenues, while its largest customer General Motors (GM) made up 35% of total revenues during the past quarter. Other large customers include AT&T (T) and Daimler AG.

The customer is a spin-off from Compuware Corporation (CPWR). Covisint was founded back in 2000 as manufacturers worked together to reduce the cost of component procurement. The business was purchased by Compuware back in 2004.

Revenues for the calendar year ending in March of 2013, totaled $90.7 million, up 21.5% on the year before. Net losses rose from $3.3 million to $5.6 million in the meantime.

Revenues for the three months ending on June of this year, rose by 16.9% to $24.1 million. The company turned a modest $0.1 million profit last year into a large $4.7 million loss.

The company operates with $1.4 million in cash and equivalents, and $9.4 million in debt. Factoring in $64 million in gross proceeds from the offering, Covisint will operate with a net cash position of around $50 million.

This values operating assets of the firm at $410 million. As such, operating assets of the firm are valued around 4.5 times last year's revenues.

Investment Thesis

As noted above, the offering of Covisint was a success. The company priced the offering at the midpoint of the preliminary offering range, after which shares have witnessed cumulative returns of 26.3% at $12.63 per share.

The company has quite some industry and company concentration. For instance, the automotive sector generated 53% of total revenues in the first quarter, mainly caused by General Motors which makes up about a third of revenues. Covisint has a large exposure to the healthcare sector as well.

Given these concentration risks, don't read too much into quarterly fluctuations. Yet full year gross margins for the calendar year ending in March of this year rose by 310 basis points to 47.6% of total revenues. Revenues themselves rose by 21.5% on the year before.

Revenue growth fell to 16.9% in the past quarter, while gross margins fell again by some 340 basis points to 44.8% of total revenues. More worrisome, the company reported a large loss over the past quarter, in relation to recent performance. Note that the company has reported losses each year since inception.

Other risks include the fact that Covisint competes with cash and resource-rich competitors including International Business Machines (IBM), Hewlett-Packard (HPQ) and Salesforce.com (CRM), as well as other systems integrators.

Last but not least is the continued reliance upon Compuware which holds a post-IPO stake of little over 82%, valuing its stake in the business at around $380 million. This value represents roughly 16% of Compuware's market capitalization of around $2.4 billion.

Note that Compuware has been subject to a possible change of ownership after Elliott Management made an offer for the firm back in 2012, currently still holding a 8.7% stake in Compuware.

While the business is not that expensive based on sales multiples, its growth rates do not reflect that Covisint operates in the fast growing cloud. Being around for 10 years, and still relying for a third of revenues on GM, while reporting large losses, makes me hesitant to invest. The continued reliance on Compuware, which might act as a drag especially as the firm might sell its stake in the business, are red flags to me. The company simple doesn't seem much of a winner to me.

I am happy to stay out of this one.

Source: Covisint Corporation - No Buyer, Anticipating Selling Pressure From Compuware