I wish to expand a little upon John Swift's article regarding EDGAR Online (EDGR 1.20, 52-week range .71 – 2.20), hopefully adding some further context for investors.
Thomson Reuters Corporation (NYSE:TRI)
Swift notes that EDGAR Online’s competitors in the subscriptions and data business are “much larger and better-capitalized companies,” citing among others, Thomson Reuters. He further asserts, “EDGR simply does not add enough value with its services.”
Thomson Reuters is in fact EDGAR Online’s partner in marketing I-Metrix, the company's high-end XBRL-powered financial analytics tool. As Thomson Reuters VP Keith Haurie stated, “EDGAR Online’s technologies and capabilities will enable us to continue to deliver the state-of the-art, cutting-edge technology our clients expect. Access to I-Metrix XBRL-powered data and analytical tools is a natural next enhancement to SECPlus on Checkpoint, our flagship product for SEC compliance.” (Source: June 16, 2008 Thomson Reuters’ press release entitled, “Thomson Reuters partners with EDGAR Online to Launch I-Metrix on Checkpoint”)
In the data business, Thomson Reuters and EDGAR Online compete in providing relevant data to the financial markets---Thomson Reuters with self-prepared data sets and EDGAR Online with XBRL-formatted data sets. EDGAR Online continues to have the only complete U.S. company database company is also now providing XBRL data for the Chinese, Japanese, and Korean formatted in XBRL. The markets. The company’s corporate website and its partnership website with Donnelley (NASDAQ:RRD) provide extensive information about XBRL, their products, and filing procedures.
FactSet, Moody’s and Standard & Poor’s
As Swift notes, the financial and portfolio analytics markets are competitive. Both FactSet (NYSE:FDS) and S&P's Capital IQ (MHP) do indeed offer high-priced and high-value analytics platforms that provide broad access to world markets’ data and analytical services. On the other hand, EDGAR Online's I-Metrix analytics tool takes a focused approach, more along the lines of Jack Webb's “Nothing but the facts, Ma’am.” I-Metrix is solely powered by XBRL as-reported data and offers fully comparable company data. In addition, EDGAR Online and Microsoft (NASDAQ:MSFT) are partners, and I-Metrix is an add-in to Excel.
When Swift notes that “the big 3 rating agencies” are “much larger and better capitalized” than EDGAR Online (no dispute there), he neglected to say that Moody’s and S&P are clients of EDGAR Online. (Nov. 2009 investor presentation, pg. 12) EDGAR Online’s XBRL data sets are reaching a large and growing base of users. Per the company’s most recent 10-Q, the number of data contracts (customers like Yahoo, MSN, hedge funds, etc.) increased to 300 from 277 a year ago.
EDGAR Online’s Technology Base
In citing EDGAR Online’s small dollar amount for capitalized software, i.e., $1.7 million, Swift leaps to the false conclusion that such amount represents EDGAR Online’s total cost of building and developing their integrated software systems, methods, and products.
Swift asserts, “you could replicate EDGR’s software, both internal and client-facing, for less than $1.7m.” Gee-whiz, if that’s true, one would think that Yahoo, Google, Thomson Reuters, Moody’s, S&P, Nasdaq, Morgan Stanley, and some other of EDGAR Online’s 300 data clients would have sufficient internal resources to, as Swift says, “replicate” EDGAR Online’s software. What’s lost on Swift by selectively referencing only capitalized software, is that EDGAR Online’s non-capitalized product development costs alone were $15.7 million in just the 2005-2009 period, compared with total SG&A of $78.6 million over the same period. As of September 2009, the company had $35+million of NOL carry-forwards (more than the company’s present $33 million market cap!).
As an aside, I don’t mean to suggest that it is appropriate or even relevant to use booked expenses and costs to establish the value of intellectual property and proprietary products. EDGAR Online has had a highly experienced team of advanced IT professionals who conceived and created the company’s XBRL database and related software products. And, to further its marketing reach, the company has struck strategic partnership agreements with leading firms. (Nov. 2009 investor presentation, page 13).
It is true that EDGAR Online has lost money, year after year, but during that time the company was tirelessly working to fully convert financial statements of SEC-reporting companies into an interactive, machine-readable database as well as simultaneously developing analytic tools (I-Metrix) to be powered by that database.
About 450 companies have now filed financial reports in XBRL with the SEC for just two quarterly periods, but the SEC’s database needs to receive far more corporate filings before the database covers most U.S. public companies. By having two quarters of interactive data on 450 companies is far different than EDGAR Online’s having more than five years of XBRL-formatted data on over 10,000 companies. Yet, filing progress by companies is impressive, and the timetable has been set.
So, to sharpen this discussion, it will not be until August, 2011 when basically all U.S. companies will have converted their first SEC report to XBRL format. To get five years of fully comparable balance sheet, income statement, and cash flow, footnotes, etc. on U.S. companies, the market will have to wait until approximately April, 2015.
EDGAR Online: More than a ‘Parser’?
Swift states, “I can tell you that creating this type of [XBRL] parser is far from rocket science.” Well, I guess there is a difference of opinion here. It has taken many years for companies like EDGAR Online, Bowne, Fujitsu, Rivet Software, Thomson Reuters, UBmatrix, IRIS, Merrill, EDGARfilings, CoreFiling, Clarity Systems, Altova, SAP, Business Wire, Just Systems, IRIS, and others to develop solutions compliant with the latest SEC filing rules.
To get a sense of the depth of the SEC taxonomy and technology required, the SEC has carefully estimated the cost for filers to report in XBRL-formatted data. Here is a page from the actual mandate that breaks down the conversion costs. Note page 6804 from the Federal Register.
First XBRL SEC filing: $40,510 - $82,220
Subsequent XBRL filings with block-text footnotes: $13,450 - $21,340
First XBRL SEC filing with Detailed Notes: $30,700 - $60,150
Subsequent XBRL filings with Detailed Notes: $21,075 - $37,940
Using these cost estimates, just the U.S. market alone of over 10,000 companies appears to represent a significant market opportunity for advanced XBRL filing services, software solutions, and database services.
The recent article in the Nov. 19, 2009 Journal of Accountancy might suggest the complexity of the XBRL filing process and the multitude of variations that conversion tools have to address. The article states, “Typically, companies take between 30 and 50 hours to complete their first-year submissions in XBRL, with about 10% of companies taking less than 10 hours and 10% taking more than 80 hours, according to Paul Penler, executive director of assurance services for Ernst & Young. In year two, when companies will be required to detail tag footnotes, they might expect the process to take between 200 and 250 hours if the company does it itself or with a filing agent.”
Creating an auto-magical parser for quick and easy filing in XBRL may not be rocket science, but it’s not a snap either. Companies must carefully comply with the SEC’s taxonomy and meet stringent filing requirements. Since EDGAR Online has now converted over 1,000 financial reports to XBRL format for the large accelerated filers (and 10 years of their own 10,000+ database companies), their experience in this area will serve them well as the standard becomes more broadly adopted. Obviously, the revenue potential in providing this SEC-required report is very large. The jury is still out as to which vendor will gain dominant share. So far, the EDGAR Online I-Metrix Xcelerate is the #1 filing solution in the U.S.
EDGAR Online’s I-Metrix Xcelerate engine “utilizes a proprietary data parsing and mapping technology to identify and extract relevant information within source documents and then map that information to a user’s custom XBRL identifiers. It also includes a sophisticated and dynamic taxonomy management system as well as an extensible business rules validation engine.” For reference regarding the SEC taxonomy, see SEC Taxonomies. Further information about EDGAR Online's tool can be found here.
Swift leaps, reductio ad adsurdum, to the conclusion that all dot-com companies using open standards end up in the dot-com graveyard because some some dot-coms have failed. He states, “It is just not possible to create the highly profitable software business that is implied by EDGR’s valuation based on a free, open, ubiquitous standard.” I guess he thinks that Cisco Systems [TCP/IP], Hotmail [SMTP], Red Hat and IBM [Linux], Sungard [SWIFT & FIX], and GoDaddy [DNS] are just barely limping along.
It is clearly a validation of EDGAR Online’s business model and technology base that the following tech companies (they themselves well-acquainted with computer programming and processing) chose the I-Metrix Xcelerate solution to comply with the new SEC mandate:
Microsoft, Apple, Google, Amazon, EMC, eBay, Lockeed Martin, Yahoo, Ratheon, Salesforce, Fiserv, Citrix, BMC, Electronic Arts, Verisign, and Akami.
What Mr. Swift may have missed is that EDGAR Online built its systems and converted substantially all the SEC-reporting companies’ financial reports to XBRL before the SEC mandated the standard. They have the only hardware store in a gold rush. The number of U.S. companies in 2011 subject to the mandate is more than twenty times the number now filing, suggesting that EDGAR Online has a major market to serve.
Early XBRL Patent Applications
It is probably not widely known known that--in addition to its XBRL database and analytics platform noted above--the company filed early U.S. patent applications related to the rendering and viewing of XBRL data as well as for formatting XBRL in spreadsheet applications. Long before the SEC mandated XBRL for reporting companies, EDGAR Online was simultaneously building a massive XBRL database, defining advance protocols for using XBRL, building analytics tools that use the database, and filing patents to protect the company's proprietary technologies.
Here are what I believe to be EDGAR Online's main patent applications. Note the dates of filing:
- Add-in tool and method for rendering financial data into spreadsheet compliant format (Aug. 29, 2005, patent application #20070050698)
- System and method for rendering of financial data (March 1, 2007, #20070050702)
- System and method for rendering data (Aug. 16, 2007, #20070192265)
EDGAR Online is the only publicly traded pure play on XBRL. They have a continuously updated XBRL database, proprietary XBRL data-set delivery systems, Excel add-in analytics tool, automated engine for converting statements to XBRL, partnerships to leverage their core technologies, and their own critically important data center to handle the future scaling up due to the SEC mandate. Worldwide, XBRL is changing both external and internal financial reporting methods, leading experts like Deloitte Partner Rob Hillard to ask, "Is XBRL Finally the Next Big Thing?"(Dec. 8, 2009)
As to the valuation for a company with 70-80% gross margins and a major tailwind of rising secular demand for XBRL compliance solutions, EDGAR Online seems greatly undervalued. Running with the elephants, the company's shares are only modestly priced:
[source: Yahoo Finance]
Disclosure: Other than the licensing of EDGAR Online’s data feeds by my company and its affiliate, I have no connection to EDGAR Online, Inc. I am long EDGAR Online, Inc. common stock.