Update: EPIQ Systems Q2 Earnings Reveal 10% Revenue Growth And GAAP Loss On One-Time Costs

| About: EPIQ Systems, (EPIQ)


EPIQ’s revenue reached $115.5M, up 10% Y/Y while GAAP EPS turned negative on one-time restructuring costs. Non-GAAP EPS slightly down, EBITDA up Y/Y, within expectations.

The long thesis worked well, based on fast growth of electronic data discovery, EPIQ’s leading market position and strong customer base. Stock fluctuation will continue due to lumpy sales.

I reiterate my long thesis but lower my target price to $17 per share within 12 months. EPIQ has a ~20% upside within a year plus ~15% the following year.

EPIQ Systems, Inc. (NASDAQ:EPIQ) reported Q2 2014 earnings results in line with expectations (SEC filing, conference call, press release). The company reported operating revenue of $115.5M, up 10% Y/Y. For the first half of 2014, operating revenue was $231.7M, up 11% over a prior year. Q2 operating revenue of $78.5 million for the technology segment represented a 12% Y/Y organic growth, reflecting EPIQ's continued global leadership position in the electronic document discovery market. For the first half of 2014, technology segment operating revenue increased 28% Y/Y to $159.7M. Adjusted non-GAAP net income was $7.4M, slightly down from $8.7M Y/Y. Non-GAAP EPS was $0.21 compared to $0.24 a year ago but in line with expectations. Adjusted EBITDA was $24.7M, u from $23.4 Y/Y. GAAP net loss per share was negative $0.10 per share versus a positive $0.08 a year ago. Quarterly dividend remains unchanged at $0.09 per share.

The second quarter numbers show a sequential slowdown in sales growth, but nothing alarming, given the usual sales lumpiness. They also show that when adjusted for the one-time events, the margins remained solid as the company continues to focus on margin maintenance and improvement while strongly growing the top line. EPIQ's eDiscovery business remains in a leadership position in a highly fragmented and growing market as the company continues to increase its international presence, including the recent launch of processing and hosting capabilities in Toronto. EPIQ also continues to maintain market leadership in the bankruptcy services despite the current cyclical downturn in bankruptcy filings, which is expected to continue throughout 2014. However, if the current mature economic cycle starts to roll over, and/or if the interest rates start rising, the bankruptcy market may spring back to life, and EPIQ would be an excellent play for such trend, which could deliver stock gains above my current expectations.

The stock rose ~25% since my long thesis, but later gave back some of the gains, and is now ~10% up since my call. Sales are very lumpy due to project-based nature and timing of large litigation cases. Despite the current quarter's weak GAAP earnings caused by one-time reorganization charges, I reiterate my long thesis. I am also lowering my 12-month target price to $17 from $19, but maintaining a $19 target price within two years, offering a ~20% and 35% upside respectively.

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