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Summary

  • Amber Road goes public on March 21, 2014 priced at $10.50-12.50/share.
  • On an intrinsic basis, making some optimistic assumptions, Amber is worth $7.70-$12.40/share. But reducing its pre-tax operating margin to 13% cuts its value to $4.95/share.
  • Amber's products are not unique. It faces stiff competition, and it will continue to post losses for several years. Investors should sit this one out.
  • However, the stock could pop short term based on its relative valuation, which measures market sentiment. So Amber could be interesting to traders.

Amber Road, Inc. (AMBR), a provider of global trade management [GTM] software and associated professional services goes public on March 21, 2014 priced at $10.50-12.50/share. Founded in 1990 as Management Dynamics, the company made two important acquisitions in 2005 to complete its GTM portfolio: BridgePoint and NextLinx Corporation. NextLinx added 11 years of global trade compliance technology and content, which is Amber's key selling point to customers. The company was rechristened Amber Road in 2011.

In this article, I look at the company's business model, competitive advantages, threats and challenges, market size, growth potential and opportunities. Using this information, I conducted two intrinsic valuations and one relative valuation and I discuss their results below.

Business Model

The company uses the subscription model instead of charging a large, up-front license fee, which provides a recurring source of income and is potentially more attractive to smaller firms. It offers two lines of GTM solutions: Enterprise and Mid-Market, consisting of 7 and 4 modules, respectively. Both are available as suites or individual modules, allowing customers to upgrade their service as their businesses grow. Amber Road classifies its products as SaaS, software-as-a-service. Because its software is cloud-based, implementation is faster.

In addition to software subscriptions, Amber Road also derives revenue from professional services-on-site implementation and configuration of its solutions. These services are billed on a time-and-materials basis and sport a 70% gross margin vs. 33% for subscriptions.

As of the end of 2013, Amber Road had 463 customers: 172 enterprise companies contributing at least $100K each in annual revenue and 291 mid-market firms contributing less than $100K each in annual revenue.

Amber Road holds no patents and has none pending. It protects its intellectual property through a combination of trade secrets, trademarks, copyrights, confidentiality and proprietary rights agreements and multiple layers of firewalls and other security procedures. The company shuns patents because it believes policing them is difficult and too many countries offer little real protection.

Key Selling Points for Customers

The company's key selling points for its products are:

  • A complete GTM solution;
  • Improved efficiency through automated data collection and integration;
  • Reduced costs via optimized logistics, which includes examining shipping alternatives, leveraging applicable free trade agreements and improved regulatory compliance/penalty avoidance;
  • Supply chain velocity-keeping goods moving by having the required customs paperwork ready;
  • Supply chain visibility;
  • Compatibility of its software with enterprise resource planning (ERP) software offered by Oracle (NYSE:ORCL), SAP (NYSE:SAP) and IBM (NYSE:IBM).

Amber Road believes that many firms do not realize the expected savings by sourcing from low labor cost countries because of shipping delays and missed opportunities to reduce and even eliminate some fees and duties. These benefits should increase demand for its solutions.

Competitive Advantages

While the company mentions several competitive advantages in its S-1, in fact some competitors offer the same features. But Amber Road does have two apparent competitive advantages:

1. Global Knowledge®--The Most Comprehensive Database of Trade Regulations

Amber Road maintains that its Global Knowledge database contains records for 125 countries and is the most comprehensive and up-to-date database of trade regulations and agreements in the world.

It has more than 1.9 million tariff records, 1.1 million dutiable records, 23,000 import controls, 17,000 export controls, 13,000 tariff rule changes, 3,500 trade documents, 500 preferential programs, 200 restricted party lists containing 250,000 entities and 15 free trade agreement rules of origin.

Amber Road has 85 people (17% of its workforce) tasked with monitoring daily changes in trade rules, etc. and updating this database. They are considered part of R&D.

2. Flexible Technology Allows Customer Configuration without Affecting Core Software

The company's software uses its Enterprise Technology Framework, which enables its professional services people to configure its solutions to mesh with customer-specific configurations yet keep them separate from its core program. Consequently, customers can upgrade to new versions while retaining their specific configurations.

Being able to retain one's settings and configuration is a common feature of every program I use. But since none of Amber Road's competitors specifically mention this feature, I include it as a competitive advantage.

Competitive Threats and Challenges

1. Amber Road's Products and Model Are not Unique

There are at least 4 companies offering essentially the same solutions as Amber Road, some using the same model. Oracle is very profitable and has deep pockets.

  • Precision Software
    • Acquired by publicly-traded QAD, Inc. (NASDAQ:QADA) in 2006, its TRAXi3 software includes trade compliance and documentation.
    • Like Amber Road, its SaaS software automates shipping, customs, compliance and supply chain visibility and integrates with ERP from Oracle and SAP.
    • QAD is 5 times larger than Amber Road on a sales basis and has 3 times as many employees.
  • Integration Point - privately-held
    • Claims the same capabilities for its compliance solutions as Amber does.
  • The Descartes Systems Group, Inc. (NASDAQ:DSGX)
    • Claims its Descartes Customs & Regulatory Compliance solutions have "the industry's widest array of customs and regulatory solutions."
    • Combined with its Global Logistics Network™, it competes directly with Amber Road.
    • Descartes is 2.5 times larger than Amber on a sales basis.
  • Oracle, Inc.
    • Its supply chain management [SCM] software sales were $1.453 billion in 2012 according to Gartner, up over 30% vs. 2011. (Amber Road's 2012 sales were only up 15.4% vs. 2011.)
    • While a small piece of its $37.6 billion trailing 12 months [TTM] sales, SCM's growth makes it important to Oracle, whose total TTM sales were only up 0.9%.
    • Oracle claims its Value Chain Execution is reinventing logistics excellence and can simplify compliance and mitigate risk.

2. Amber Road's Global Knowledge® Could Be Replicated by a Determined Competitor

Amber Road's most recent YoY sales growth was about twice Descartes'. If its growth continues to outpace its peers and its competitors believe that growth is largely due to its superior compliance solution, there is little to stop them from replicating Amber's database because much of its content is public knowledge.

3. Competition Is Very Intense and Likely Eroding Pricing Power

In addition to the 4 competitors mentioned above, Amber Road also competes with many other public and private companies that don't offer compliance solutions but do offer many of the same products it does. Here's a partial list:

  • Publicly-Traded:
    • SAP AG
    • Logility, a division of American Software, Inc. (NASDAQ:AMSWA)
    • Manhattan Associates, Inc. (NASDAQ:MANH)
  • Privately-Held:
    • JDA Software (formed by the acquisition of publicly-traded JDAS by privately-held RedPrairie in 2012)
    • GT Nexus
    • Kewill
  • Owned by Private Equity Firms:
    • Epicor, acquired by private equity firm, Apax Partners. Apax also owns another logistics company, Activant. (It is interesting that although Epicor is no longer a public company, it still files like one with the SEC.)
    • Unit4NV, which is being acquired by private equity firm, Advent.
  • Many private, regional GTM companies such as EasyCargo, which Amber acquired in 2013.

In such a competitive business, pricing power is likely to be weak, making it more challenging for Amber to reverse its operating losses.

4. Other Impediments to the Adoption of Amber's Products

  • Concerns about the security of cloud-based products
  • Existing investments in legacy systems

Market Size, Growth Potential and Opportunities

The company cites 2 studies it commissioned, one from Gartner and the other from ARC Advisory Group.

Based on a 2013 SCM survey, Gartner predicted a 9.9% CAGR in worldwide demand for SCM software over the 5 years from 2013-2017. Only 4% of respondents had fully automated systems.

According to the 2013 ARC Advisory Group study, the addressable global market for GTM solutions was $6.1 billion in 2012 with a market penetration of 6% or $366 million.

Separately, ARC predicted a CAGR for GTM software and services of 9.4% from 2010 to 2014, culminating in sales of $429.1 million in 2014.

Cognizant reported 2011 sales of GTM products was $287.8 million. Based on that, the CAGR would have to be 14.3% to reach $429.1 million in sales in 2014.

Using the 2011 and 2012 sales figures provided by Cognizant and ARC, respectively, the annual growth rate was 27.2%, suggesting sales of GTM products may be accelerating.

Valuations

Intrinsic Valuation Assumptions

Based on Amber Road's geographical sales breakdown from its S-1, capitalizing its operating leases, using 4.75% for its pre-tax cost of debt and 2.74% for the risk-free rate, its initial cost of capital (COC) is 8.85%. After ten years, there are no excess earnings and the firm earns its COC, which is 7.24% after 2023.

Amber has reported operating losses for the last 3 fiscal years, 2011-2013. The firm expects to continue losing money as it ramps up its sales and marketing. It also has $55 million in NOL's to carryforward, expiring December 31, 2019. The tax rate is zero for the first 6-7 years because the company continues to post losses and has operating losses to offset its taxable income. The tax rate gradually increases from 8% to the marginal US tax rate of 40% in perpetuity.

Based on the growth rate of 27.2% in global GTM sales in 2012 vs. 2011 and on the company's 21.2% sales growth in 2013 vs. 2012, I assumed that Amber's sales would grow at a CAGR of 25% from 2014-2018 and then gradually slow to the growth rate of the economy in 2023, which was the same as the risk-free rate, 2.74%.

Although a 3-year amortization period is more appropriate for tech R&D expenses, the company's R&D expenses were amortized over a period of 2 years because no data were available prior to 2011. This reduced its operating loss for 2013 by $2.1 million. Capitalizing its operating leases and amortizing its R&D expenses improved the company's 2013 pre-tax operating margin from -26.1% to -20.7%.

For Amber Road's pre-tax operating margin in 2023, I used two different targets:

  • 17.3% based on the average TTM pre-tax operating margins of 3 of its peers: Manhattan Associates, Descartes and American Software.
  • 25.0% based on Manhattan Associates' 2013 adjusted pre-tax operating margin of 25.13%.

Since Amber's gross margin is 28% lower than the worst of its peers and its key operating expenses, R&D, sales & marketing and G&A are the highest or among the highest of its peers, reaching either of these targets will not be easy. However, both targets are achievable.

Amber's Margins Are the Lowest and Its Operating Expenses Are among the Highest

Company

TTM Pre-Tax Operating Margin

Gross Margin

R&D as % of Sales

S&M as % of Sales

G&A as % of Sales

American Software (Logility)

13.90%

54.11%

8.47%

19.67%

12.39%

Descartes Systems

13.56%

67.30%

19.79%

12.61%

15.16%

Manhattan Associates

24.43%

56.30%

10.75%

10.75%

8.96%

Oracle

38.92%

81.64%

13.21%

20.46%

2.81%

QAD

2.90%

56.01%

15.87%

24.88%

12.40%

SAP

26.65%

70.29%

13.58%

24.52%

5.16%

Amber Road

-26.08%

42.35%

15.11%

30.93%

19.93%


For example, the company can reach a pre-tax operating margin in 2023 of 17.30% if it can increase its gross margin to 59.24% and reduce its R&D, S&M and G&A expenses to 14.96%, 14.96% and 12.01% of sales, respectively. Assuming the same gross margin of 59.24% in 2023, Amber can increase its pre-tax operating margin to 25.0% by reducing its R&D, S&M and G&A expenses to 12.05%, 12.05% and 10.14% of sales, respectively. There many other possible combinations, which would allow the company to meet the targeted pre-tax operating margin.

There weren't sufficient data to calculate a sales-to-capital ratio for Amber. So I used 3.02, Manhattan Associates' average for the last 7 years.

Intrinsic Valuation Results: Scenario 1-Pre-Tax Operating Margin in 2023 Is 17.3%

Based on the above assumptions, the company's projected sales are $275.8 million in 2023, resulting in a CAGR of 18.0% over the 10-year period. Sales in the terminal year are $283.4 million. The DCF results are summarized below.

Intrinsic Valuation Results for Scenario 1

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

Sales

65.66

82.07

102.59

128.24

160.30

193.24

224.34

250.46

268.48

275.83

Operating Income

(11.10)

(10.75)

(9.54)

(7.05)

(2.72)

4.06

13.24

24.30

36.24

47.72

Net Operating Income

(11.10)

(10.75)

(9.54)

(7.05)

(2.72)

4.06

13.24

24.26

30.45

36.27

Reinvestment

4.35

5.44

6.79

8.49

10.62

10.91

10.30

8.65

5.96

2.44

FCFF

(15.44)

(16.19)

(16.33)

(15.55)

(13.34)

(6.85)

2.94

15.61

24.48

33.83

The company's estimated value is $191.3 million, which includes $55 million in proceeds from the IPO, assuming it sells its 4,782,870 shares at $11.50/share, the midpoint of the price range. With 24,894,355 shares outstanding after the IPO, Amber's estimated per share value is: $7.68, just 73% of the low end of the price range, $10.50.

Intrinsic Valuation Results: Scenario 2-Pre-Tax Operating Margin in 2023 Is 25.0%

Amber Road's projected sales are the same as in Scenario 1. The amount reinvested is also the same since the sales growth and sales-to-capital ratio are the same as for Scenario 1. The difference between the two scenarios is when the company becomes profitable and how much it makes. The DCF results are summarized below.

Intrinsic Valuation Results for Scenario 2

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

Sales

65.66

82.07

102.59

128.24

160.30

193.24

224.34

250.46

268.48

275.83

Operating Income

(10.59)

(9.49)

(7.17)

(3.10)

3.45

12.99

25.33

39.72

54.85

68.96

Net Operating Income

(10.59)

(9.49)

(7.17)

(3.10)

3.45

12.99

24.42

33.37

41.69

46.89

Reinvestment

4.35

5.44

6.79

8.49

10.62

10.91

10.30

8.65

5.96

2.44

FCFF

(14.94)

(14.92)

(13.96)

(11.60)

(7.17)

2.08

14.12

24.72

35.72

44.46

The company's estimated value is $308.9 million, which includes $55 million in proceeds from the IPO. Amber Road's estimated share value is: $12.41, nearly equal to the top end of the price range of $12.50.

Sensitivity of Amber Road's Value to Its Sales Growth and Operating Margin

Amber Road's intrinsic value depends greatly on its sales growth and pre-tax operating margin.

If its sales over the next 5 years grow at 21.1% (same as in 2013) instead of 25% and its pre-tax operating margin is 13.5%, comparable to Descartes', its value drops to just $4.41/share.

Relative Valuation

Relative valuations gauge how the market currently values similar companies. Amber's peer group consisted of: American Software (Logility), Descartes Systems, Manhattan Associates, Oracle, QAD and SAP. All data are as of the close on March 7, 2014.

1. Price/Sales Regression

For the Price/Sales (P/S) regression, the regression variables chosen to represent growth, profitability and risk were: TTM Sales Growth, Net Margin and Beta, respectively. Expected earnings growth could not be used because Amber Road posted a loss in 2013.

The constant was not significant. Ideally the t-statistic for significant variables should be 2 or higher. However, the t-statistic for TTM sales growth was close enough at 1.79.

The R Squared was 0.635, meaning that 63.5% of the variations in the P/S ratios of these 6 firms was explained by the chosen variables. In addition, the signs of all the variables were as expected: positive for TTM sales growth and net margin and negative for beta. The model is:

Price/Sales = 64.59 x TTM Sales Growth.

Plugging in Amber's TTM sales growth of 21.12%, the predicted P/S for Amber is 13.64:

Price/Sales = 64.59 x 0.2112 = 13.64.

Amber's value based on its TTM Sales of $52.53 million is $716.5 million or $28.78/share. This is considerably higher than the intrinsic estimates and suggests that the market today places a higher value on firms in this industry with high sales growth than an analysis of their fundamentals would warrant.

2. Price/Book Value of Equity Regression

It was not possible to value Amber on this basis because its book value of equity is negative.

3. Price/Book Value of Assets

For the Price/Book Value of Assets (P/BVA) regression the variables were: TTM sales growth, ROA and Beta. None of these variables were significant.

Other Considerations

While it is common for young growth companies to lose money for several years, Amber Road is not a young company. It is 24 years old and has had ample time to become profitable. Potential investors should ask themselves these questions:

  • Why isn't this company profitable yet?
  • What is the likelihood that management can rein in costs enough to reverse its losses and achieve a pre-tax operating margin of at least 21.7%? (The minimum required to justify valuing Amber Road at $10.50.)
  • Why buy Amber Road when I can own Manhattan Associates, which is up 117% or QAD or Descartes, which are both up over 40% over the last 12 months?

Comparing Amber Road to King Digital Entertainment PLC (NYSE:KING) (which goes public on March 26) is like night and day. King is less than half as old as Amber Road, very profitable and one of the best run companies in its industry. If you want to buy an IPO, wait 5 days and buy King.

Conclusions

1. Based on the DCF valuations, the estimated value of Amber Road is $7.68 to $12.41/share. Both estimates are below the high end of the price range and the first is 73% of the low end of the price range. These low estimates reflect the very real challenges the company faces in growing its business and becoming profitable.

2. Based on a relative valuation, Price/Sales, Amber appears to be undervalued in today's market by 130% vs. the high end of the price range. Relative valuations reflect current market sentiment about sectors and the companies within them and can be better indicators of current value. This could make the company attractive to traders.

Source: Pre-IPO Valuation: Investors Should Avoid Amber Road