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Internet Capital Group, Inc. (ICGE)

Q4 2006 Earnings Call

February 16, 2007 10:00 am ET

Executives

Karen Greene - VP of IR

Walter Buckley - CEO

Kirk Morgan - CFO

Analysts

Jeff Van Rhee - Craig-Hallum

Brad Mook - Boenning & Scattergood

Joseph Besecker - Emerald Asset Management

Charles Giaquinto - Henley and Company

Presentation

Operator

Greetings, ladies and gentlemen, and welcome to the Internet Capital Group Incorporated Fourth Quarter Results 2006 Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Ms. Karen Greene, Vice President of Investor Relations. Thank you. Ms. Greene, you may begin.

Karen Greene

Thank you and good morning. This is Karen Greene with Investor Relations, and I want to welcome you to Internet Capital Group's fourth quarter conference call. I would like to remind everyone that we are going to use presentation slides to accompany our prepared remarks today. These slides can be found on our website at internetcapital.com. Go to the Investor Information tab and you'll see an icon for our fourth quarter conference call. The slides can be accessed through that icon. For those of you without immediate access to our website, the conference call and the presentation slides will remain on our website and will be available for future reference.

On the call this morning, we will be discussing certain non-GAAP financial measures. For additional information on these non-GAAP financial measures, including a reconciliation of these measures to the most comparable GAAP measures, please refer to the press release that we put out this morning, including the attachments to the press release. The press release is also available on our website, which again is, internetcapital.com. To access the press release on our website, go to ICG Press Release tab and select the February 16th press release. The attachments to release can be accessed by clicking on the PDF file contained within the release itself.

In the fourth quarter of 2006, StarCite completed its merger with OnVantage, and ICG acquired a 40% ownership interest in Channel Intelligence. To aid in the comparability of the ICG Core Partner Company information, ICG is presenting pro forma financial information assuming those events occurred on January 1, 2005.

Before we begin, I'll briefly review our Safe Harbor language. The statements contained in our press release and those that we make on the conference call, as well as the slide presentation that are not historical facts are forward-looking statements that involve certain risks and uncertainties including, but not limited to, risks associated with the uncertainty of future performance of our partner companies, acquisitions or dispositions of interests in partner companies, the effect of economic conditions generally, capital spending by customers, development of the e-commerce and information technology markets, and other uncertainties detailed in the Company filings with the Securities and Exchange Commission. These and other factors may cause actual results to differ materially from those projected.

Now, let me turn the call over to Walter Buckley, ICG's CEO.

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Walter Buckley

Thank you Karen and good morning. Welcome and thank you for joining us this morning. I will begin by providing you with an overview of ICG and its partner companies for 2006, including fourth quarter highlights. Kirk Morgan, our Chief Financial Officer, will follow with ICG's financial results and review our partner companies' performance for the fourth quarter and year end.

In short, 2006 was an excellent year for us. We achieved and in a number of cases exceeded the goal we established at the beginning of the year. In addition, a number of important transactions were completed in 2006 that we expect to be cornerstone to value creation for our stockholders over the next several years.

Finally, we entered 2007 with good momentum across the board. And just recently retired all of our convertible notes, leaving us debt free and providing us with whole financial flexibility.

Listed on slide 4 and 5 are broad footprints of our overall growth. Our Core partner companies had aggregate revenue growth of 29% in the fourth quarter of 2006 versus 2005, and achieved annual revenue growth of 28%. Aggregate EBITDA of our Core companies also improved in 2006 over 2005. Excluding one-time items related to the StarCite, OnVantage transaction, EBITDA improved by 45% quarter-over-quarter to a loss of $5 million. We helped to engineer the successful mergers of CreditTrade and Creditex, as well as StarCite and OnVantage. Both transactions position the companies as market leaders, leaving them well situated with strong growth and value creation. We deployed approximately $50 million of capital for our stakes in Vcommerce, Channel Intelligence and Creditex. All three companies we believe have the ability to generate significant stockholder value.

We had $50 million of monetization for 2006, of which $40 million came from our non-Core holdings. We hired Carl Guarino as CEO of ICG Commerce, and Eric Danziger as CEO of WhiteFence, two outstanding executives. And finally, we significantly improved our deal flow, both in terms of quality and quantity.

I'd like to provide greater detail on some of our accomplishments. Beginning with our partner companies' performance; all in all, our companies performed well in 2006. Taking a closer look at our companies let me spend a few minutes on how we view this group and give you some insight into our methodology.

Turning to slide 6; this illustrates ICG's Path to Value creation and also represents the lifecycle of our partner companies. First, we acquire. We make an acquisition in on-demand software and service companies such as Channel Intelligence, Vcommerce, and WhiteFence. We seek out companies that generally have $10 million in annual revenues, or near profitability, and are vendor capitalized. We typically purchase risk mitigating preferred stock that represents a 30% to 40% interest in the company. We also aim to be the largest stockholder.

Next, we build. And once we have an ownership interest, we roll up our sleeves and work closely with the management team to rebind, refine their strategy, build out their team, and launch appropriate growth initiatives. This is where companies like WhiteFence, Vcommerce, Investor Force, and Channel Intelligence are today.

As the companies grow, we continue to drive progress against the backdrop of the market, a competitive landscape, and potential M&A opportunities. You will see these efforts play out at ICG Commerce and StarCite, Marketron, CreditTrade, Metastorm, and Freeborders. As these companies mature, they evolve into the next phase of the lifecycle.

Capturing value, Blackboard and LinkShare were once in the build mode, but we expect considerable amount of time and energy helping them attain their market leadership positions. Finally, when circumstances dictate, we capture value, through consolidation within ICG, an IPO, or a strategic sale or merger. Today, Blackboard and LinkShare are shining examples of capturing value.

Turning to slide 7, this gives you a sense of how these companies were rewarded respectively. Blackboard went public at close to a three-time trailing revenue multiple, now trades at approximately five-time trailing revenue multiple. LinkShare was sold for $425 million, close to a nine-time trailing revenue multiple.

Mapping out our current Core companies against this lifecycle, Slide 8 illustrates where our companies are currently staged. Some of our more mature companies are applying for capturing value over the next 12 to 24 months. They are proven leaders in their respective markets with healthy revenues and strong margins. ICG Commerce, StarCite, Creditex, Metastorm and Marketron and slightly further out, Freeborders, a company you should pay close attention to.

We believe that from this group, significant value will be created and captured as a number of the companies will liquidate over the next 12 to 24 months.

Our younger companies, which are putting their capital to work to build their businesses and grow their market share are early in its build days, and will take time to grow. This is where great potential lies to create real value as we get involved in the ground level with these companies that are proven business models, but have not yet hit their inflection point. This is why we are excited about the potential that lies ahead for these companies in the outer ring, such as WhiteFence, Vcommerce, Channel Intelligence and Investor Force.

Listed on slide 9 to 14 are highlights from each of our Core companies. I'll just hit on few of them on this call. Turning slide 9, I'll start with service provider, ICG Commerce, who continued to make great progress in 2006 and is well positioned for a strong 2007.

In the fourth quarter, the company had a number of important customer signings including Microsoft, Global Crossing and Kimberly Clark. These contracts are significant multiyear and global in scope. Most notably, the Kimberly Clark deal is a five-year multimillion dollar agreement and represents ICGC's largest procurement BPO agreement in its history.

ICG Commerce has selected over some of the largest and most well-known BPO providers in the market. For the year, the company had revenue growth in excess of 30% and was EBITDA positive. Finally, and probably most importantly, contracted year-end backlog increased more than 83% to $114 million. We believe that this momentum and a strong pipeline entering 2007, positions it well for a strategic market leadership.

StarCite, a provider in on-demand global leading solutions, had an excellent 2006. As a result of the merger with OnVantage, its largest competitor, StarCite has emerged as the clear leader in on-demand Global Meetings market. The combined company grew 40% for the year and revenue for the company was north of $40 million.

In addition, the company generated 2.5 million registrations for the year and is projecting 3.5 million in 2007, for which they receive up to $10 per registrant. This represents over 9 million hotel rooms in 2007.

The company enters the year with accelerating momentum, a clear number-one position in a market that is only 3% penetrated. StarCite gained many new global customers in 2006, including Toyota, a second Japanese auto manufacturer, Nestle USA, Biogen, a major electronics company and large European financial organization. StarCite also continued to grow many of the existing customer relationships including Caterpillar, Eli Lilly, Medtronics, and Pfizer.

Freeborders, a leading provider of technology solutions and outsourcing from China, signed significant new customers in the fourth quarter of 2006, including Expedia, Owens-Illinois, Bank of America, Credit Suisse, Taleo, and Profitline.

Year-over-year organic revenue growth was 43%. The company expects 2007 organic growth to be in excess of 50%. Over the next couple of years, the company plans to quadruple its workforce in China to 2,000 employees in response to its growing list of customers and pipeline opportunities.

Freeborders continues to be a leading provider in China and China's IT outsourcing market, which is expected to be a $4 billion a year business by 2009, according to Analysis International.

Next on our list of accomplishments, I would like to turn to merger activity we saw in the second half of the year. The mergers of StarCite and OnVantage, and CreditTrade with Creditex were game-changing events for both these companies and for ICG. ICG was highly instrumental in driving both of these mergers, and these transactions highlight the value add that ICG provides to partner companies.

I did some highlights on StarCite, but I will reiterate that by combining forces with OnVantage, its largest competitor, not only positions the company as a clear leader in the market, but also significantly enhances its capacity and shortens its time for value creation.

Turning to Creditex and the merger of our partner company CreditTrade, we think this is an important step forward for creating value. Combining these companies and purchasing an equity stake in Creditex, we jumped from owning a stake in the number fourth player in the credit derivatives market. Undeniably a hot market to be in, but not an enviable market share position to have, owning a stake as the market leader with an end-to-end credits derivatives platform and the largest player in electronic trading of credit derivatives.

The combined company had a pro forma 2006 revenues of $135 million and was net income positive. The company is pleased with the results of its integration effort so far, realizing substantial cost savings, as well as real revenue and market share growth.

Looking ahead, Creditex is highly focused on executing against the number of strategic initiatives and is targeting strong growth towards core brokerage business in 2007.

Additional highlights on the company are listed on slide 15. We view the CreditTrade merger and our ability to deploy an additional $9 million in Creditex to be one of the most significant accomplishments in 2006.

Last but not least, in terms of accomplishments for the year, we made good progress on the quality and quantity of deal flow we are seeing in ICG. To keep the lifecycle in motion, we must continue to make new acquisitions, recurring a strong balance sheet, and growing deal flow.

Kirk will talk to you about the balance sheet, but I would like to expand on the progress we have made on the deal flow front.

In 2006, we solidified our national footprint, expanding our network of contacts that stretched from Florida to Seattle. As a result, we reviewed over 300 deals last year, all of them companies in the on-demand sector, and up 100% from the prior year; most of which came to us by way of our network. Our market focus, national coverage, and expertise give us a good view of what's going on in the market. This perspective allows us to effectively analyze and assess these companies and their corresponding evaluations.

And this deal flow also provides ICG with a platform to help our companies evaluate and consummate acquisitions where it makes sense. As our track record for building leading on-demand companies continues to grow, we are increasingly sought out as potential partner in the on-demand space. I am excited about the footprint we are creating for ICG and hope to build on this momentum in 2007.

Just in terms of the general market observations, a year ago when I shared my thoughts in the on-demand software market, I referred to an accelerating transformation occurring across corporate America to outsource non-strategic functions often using on-demand applications to do so. I would say that in the last 12 months, we at ICG have seen a significant increase in the adoption of these applications, as well as a proliferation of on-demand or SAP companies in general.

We believe a 28% annual aggregate revenue growth that our partner companies experienced in the past year, the strong pipelines, and a robust deal flow we are seeing, are all examples of this market momentum.

Industry analysts, such as IDC and Triple Tree have stated that the on-demand software and services market is growing rapidly outpacing the software industry growth rate by 5x. We think that this momentum will continue into 2007 and beyond.

In summary, 2006 was a strong year for the company. We think that ICG and our partner companies are well-positioned to capitalize on the opportunities in the on-demand software and services market, and that ICG represents a highly liquid, diversified vehicle to participate in this rapidly growing sector.

In 2007, we will continue to take steps to get us closer to achieving our mission. We are pleased with the progress we made in 2006, and we believe 2007 will be an exciting year for our companies and for ICG. We look forward to reporting to you next quarter. And with that, I'll turn it over to Kirk.

Kirk Morgan

Thanks, Buck, and good morning. I will begin with our fourth quarter 2006 consolidated income statement as prepared under Generally Accepted Accounting Principles.

Turning to slide 17; revenues of our three companies that were consolidated for both periods, that is ICG Commerce, StarCite, and Investor Force, totaled $17 million compared with $12 million for last year's fourth quarter. For the year, we reported consolidated revenue of $64.7 million in 2006, up from $47.6 million in 2005. The quarterly and annual increases are primarily due to continued strong revenue growth at ICG Commerce and StarCite.

ICG reported a consolidated net income of $14.9 million or $0.37 per diluted share for the fourth quarter of 2006, as compared with the net loss of $12.7 million or $0.34 per diluted share for the fourth quarter of 2005.

Results for the 2006 quarter include $19.3 million in net after-tax gains, up from $5.2 million in net charges in the prior year. The $19.3 million, 2006 gains, are primarily due to a gain on the Creditex/CreditTrade transaction, and gains on the sales of our interest in three of our other holdings: eCredit, ComputerJobs, and Traffic.com. Additionally, results for the quarter include $1.8 million of stock-based compensation expense compared to $1.4 million in the 2005 quarter.

For the year, ICG reported consolidated net income of $15.6 million or $0.41 per diluted share, as compared with net income of $72.5 million or $1.73 per diluted share for 2005.

Results for 2006 include $41 million in net after-tax gains, primarily due to gains on the sales of ownership interest in partner companies and marketable securities. In the prior year, the company had a $107.4 million in net after-tax gains, which was principally related to gains from the LinkShare sale. Results for 2006 include $7.7 million of stock-based compensation expense, compared to $4.3 million in 2005.

Let me next review our Core company results on slide 18. As Karen stated at the beginning of the call, we are presenting aggregate pro forma financial information assuming that the StarCite/OnVantage transaction and our acquisition of a 40% ownership interest in Channel Intelligence occurred on January 1, 2005.

The information I'm about to share with you relates to ICG's nine Core companies, in which we had an average ownership interest of 45% as of December 31, 2006. All the following aggregate pro forma information is on an apples-to-apples comparative basis.

Now, as a reminder, this information excludes Creditex, which is reflected as another holding, given that we own less than 20% of the outstanding equity of Creditex.

Aggregate revenue of our Core companies was $51.5 million during the fourth quarter of 2006, which is an increase of 29% from last year's fourth quarter of $40 million. ICG Commerce and StarCite continue to contribute significantly to this aggregate increase as their markets and businesses continue to mature. Additionally, Freeborders and Metastorm are also demonstrating solid progress.

For the year, aggregate revenue of our Core companies was $190.1 million, an increase of 28% from last year's total of $148 million. Our Core companies reported an aggregate $7.9 million EBITDA loss during the quarter versus an EBITDA loss of $9.1 million last year. And I would estimate then on an aggregate EBITDA basis, the 2006 quarter was negatively impacted by approximately $2.8 million of one-time items, which are primarily related to costs directly associated with the StarCite/OnVantage transaction, and one-time items of Marketron. Excluding these items, EBITDA loss would have improved by $4 million, demonstrating encouraging leverage relative to the revenue increase.

And going to the bottom-line, the aggregate net loss for our Core companies for the quarter was $10.2 million, down from $12 million last year. For the year, our Core companies reported an aggregate $27 million EBITDA loss versus an EBITDA loss of $32 million last year. For the 2006 period, it includes approximately $3.1 million of one-time items, again primarily related to integration costs associated with StarCite/OnVantage.

Now slide 19 presents the movement of cash at the parent company level during the fourth quarter and total liquidity at December 31. We funded $49.3 million to new and existing partner companies, primarily with respect to the acquisition of ownership interests in Creditex for $28 million and Channel Intelligence for $15 million.

We received $43.7 million from cash monetization, principally from the sale of ownership interest in CreditTrade, our receivable LinkShare escrow release, and the sale of our interest in Traffic.com, eCredit and ComputerJobs. We also received $2.7 million in shareholder loan repayments and had operating costs of $1.5 million net of interest.

We ended the quarter with $104.2 million of cash at the parent company. And additionally at December 31, the value of our Blackboard Holdings was $66.1 million, and the value of our GoIndustry Holdings was $29 million.

Now as you know, subsequent to year end, we repurchased the remaining balance of our $26.6 million outstanding convertible notes or approximately $37.1 million in cash. By repurchasing the notes, we have removed the future dilutive effect of approximately $2.9 million shares of common stock, into which the notes could have been converted. Additionally, the elimination of restricted covenants related to the notes, provide ICG with greater flexibility with respect to potential usage of our capital. We will record an approximate $10.9 million loss associated with this transaction in our first quarter results.

Let me now provide a high level view of the company on slide 20. For illustration purposes, I'll summarize the information as of December 31, 2006, updating where appropriate for the debt repurchase I just spoke of.

Using the closing price of $10.26 on December 31, 2006, our total market capital is $396 million after deducting our adjusted cash, the value of our Blackboard holdings, our GoIndustry holdings, including the contingent shares and the carrying value of Creditex at December 31, to yield implied value of our share of our Core companies of $209 million. Now, this represents an approximate 2.6 times multiple on our trailing 12-month proportional revenue. Additionally, these companies had net cash balances that aggregated about $42 million.

Now, I want to provide some additional color to ICG's path of value creation that Buck talked about earlier. How we acquire, build, and capture value. I have summarized on slide 21, both a look back over the last 24 months and a look forward.

First, we acquire. In the last two years, we have deployed almost $97 million to acquire ownership interest in WhiteFence, Vcommerce, Channel Intelligence, and Creditex and complete follow-on financings with a number of our existing companies. We would expect to complete two to three new acquisitions per year in 2007 and beyond and some follow-ons as well, deploying an estimated $50 million in total per year.

Next, we build. Evidence of significant progress in this stage over the last 24 months includes the Metastorm, StarCite, and CreditTrade transactions and revenue growth of 28% for our Core companies in 2006. As we look forward to 2007, we expect that our Core companies will grow aggregate revenues at least 25% for the year and demonstrate continuing improvement on the EBITDA front, while supporting growth and developing our technology platforms. As a reminder for us all is that Blackboard and LinkShare were both in the build mode for five to six years. This stage takes some time and a lot of hard work.

And the last stage is the stage we all like, capturing the value either through consolidation, an IPO, or a strategic sale or merger. Over the last 24 months, we've had a number of milestone events in this stage. From partner company monetization, we have netted over $192 million in net after-tax cash proceeds and over $158 million in accounting gains to ICG, clearly demonstrating an increase to our shareholder value.

This impact on shareholder value is further demonstrated by the $133 million increase in our book value from $165 million at the start of 2005 to over $298 million of shareholders' equity at the end of 2006. Over the next 24 months, I anticipate that we will have 3 or 4 events where we capture value in this stage.

With all that said, 2006 was a great year and we look forward to reporting on our further progress in 2007. Now back to Buck.

Walter Buckley

Now, I would like to open it up for questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, at this time we will be conducting a question-and-answer session. (Operator Instructions). Our first question is from Jeff Van Rhee with Craig-Hallum. Please state your question.

Jeff Van Rhee - Craig-Hallum

Sorry about that, I was on mute. Hi guys.

Walter Buckley

Hey, Jeff. How are you?

Jeff Van Rhee - Craig-Hallum

Good. Just a couple of questions. First of all the ICG Commerce, certainly very good year-over-year growth and excellent backlog growth, can you just talk to how that trend sequentially? It looks like it was a gradual performance improvement through the year and then it takes a big stair-step at the end of the December '05 quarter into March '06 and then kind of gradual progress through the course of this year. Is there anything structural about the way their contracts are designed that causes that big stair-step? How should we think about the progress in terms of the top-line at ICG Commerce?

Walter Buckley

I don't think there's anything structural. I think it's just about the timing of signing of the major accounts and when you get new accounts like Microsoft, Kimberly Clark, and Global Crossing, all occurring within a 60-to 90-day period and you had a number of customer signings in '05 in similar timeframe, you get that stair-stepped approach. I mean in a perfect world, we would like have to it more even, but it's just not the market today.

Jeff Van Rhee - Craig-Hallum

And was there a change in the ownership stake price at Vcommerce, did I miss that?

Walter Buckley

Technically, yes. In reality, no. We actually bought out a small investor during the year, increased ownership stake by about 3%. What occurred was, we basically exchanged for the management team of Vcommerce, we took their options and gave them restricted stock, increasing divesting period and we thought that was a good way to align. And actually we keep the management team there and align them with us and the other investors. And so, it was really more reflective of our fully diluted ownership. With that said, we'll continue to look for ways to increase ownership. As a company, we think that they have grown well and a market leader.

Jeff Van Rhee - Craig-Hallum

Okay. So the difference is for your last quarter to this quarter, the decline in ownership percentage is just a fully diluted look as opposed to maybe a common look?

Walter Buckley

Exactly.

Jeff Van Rhee - Craig-Hallum

Okay, alright, great. And then, Kirk what is the diluted share count? I think you used it in your build up to the current market value of the company. Can you just talk about what else is outstanding? What's the all-in share count? How should we think about that? I know some are going away obviously with the repurchase of the convert here, but --

Kirk Morgan

Yeah. The way I think about it, Jeff, right now is we have the $38.6 million shares that are outstanding as of today. If all of the SARs were exercised that are invested right now, we'd probably issue around another 500,000 shares. So, I think adding 500,000 or 600,000 shares on top of our primary number right now, Jeff, would be a pretty good guide from a fully diluted basis.

Jeff Van Rhee - Craig-Hallum

Okay. And then one last question and I will let somebody else jump on. In terms of the charge that you explained, was related to the OnVantage combination with StarCite. The press release says it is 3.1 and then you have given pro forma EBITDA for both Core unconsolidated and Core consolidated. Where is that 3.1, which is outlined?

Walter Buckley

The 3.1 for the year, Jeff, would be in the Equity Method Core Companies where StarCite is placed.

Jeff Van Rhee - Craig-Hallum

Equity Core, and you said for the year, is that 3.1 in the quarter or the year?

Walter Buckley

3.1 is in the year, the 2.8 about is in the quarter.

Jeff Van Rhee - Craig-Hallum

Okay, great. Thanks.

Operator

Thank you. The next question is from Brad Mook with Boenning & Scattergood. Please state your question.

Brad Mook - Boenning & Scattergood

Thanks. Hi, guys.

Walter Buckley

Hi, Brad.

Brad Mook - Boenning & Scattergood

On the ownership changes, just a follow-up on that; did Vcommerce jump from 36% to 46%?

Walter Buckley

Yes. That was a follow-on in financing there where we had the opportunity to increase our ownership.

Brad Mook - Boenning & Scattergood

Okay. And can you give an update on Investor Force. It looks like with ICG Commerce being EBITDA positive that Investor Force is really putting a drag on the consolidated Core companies. And with the recognition as the build process sometimes takes a while, what are your thoughts there, and what's the outlook for improvement there over the next year or two?

Walter Buckley

Just on the EBITDA side Brad, the $2.6 million that we are showing for ICG Commerce and Investor Force for the fourth quarter, there are some charges in there from ICG Commerce related to their year-end bonus plans that increased their EBITDA or made them actually EBITDA negative for the quarter. So, the way I would think about it is, if you look at the prior quarters of about $1.02 million, $1.05 million on a combined basis for ICG Commerce and Investor Force is probably a good way to look at it. And the way I think of it, Investor Force ready didn't lose any more money in the fourth quarter relative to other quarters, it was more ICG Commerce and their approval for the fourth quarter.

Kirk Morgan

And just standing on that, as we look at Investor Force, though it isn't the build mode, and that said, we saw a good contraction in the fourth quarter with three customers up and running, and another three in the implementation processes as we speak, and a good pipeline behind. So, I think that this is the sort of the darkest part and now we're seeing good overall momentum and are excited about their prospects. But, again it's going to take time and we don't want to put any expectations out there that it's going to happen next year.

Brad Mook - Boenning & Scattergood

Okay, fair enough. And Kirk, you have mentioned a couple of times that at some point you guys might look to establish full ownership positions in portfolio companies. Is that still something you are thinking about?

Kirk Morgan

Absolutely, as we think about through the capturing value element of the lifecycle. The three key avenues for us are our sale, an IPO, or a 100% ownership stake. And, we certainly have significant ownership stakes today in Investor Force and ICG Commerce and as we look at new opportunities, that certainly is going through the sell-through. So, no, I don't want to put a timeframe or stake in the ground, but it is certainly something we think will happen over the next several years.

Brad Mook - Boenning & Scattergood

Okay. And then to follow-on that, you mentioned the five mature companies that are the next 12 to 24 month candidates for value recognition events. Is that something that you are pushing for or will you let it evolve naturally? Would you be content if something didn't happen and you continue to just hold them and build value?

Kirk Morgan

Well, I think each company has its own set of dynamics and market issues. So, from our perspective, companies like ICG Commerce and StarCite, who really are in our core sweet spot, we will be content to let them to continue to grow. And we think that they are still very early in their growth phase, 3% to 5% market penetration in an enormous market and they really are emerging as leaders. And so, we think there is tremendous value to be created going down the road. There are companies like Metastorm, Marketron, even Freeborders who may not be closely aligned with our strategic mission. Where we think there is great value being created and potentially to be created, where we may be a little more aggressive in driving the monetization.

Brad Mook - Boenning & Scattergood

Okay, fair enough. And then finally, as you look at the portfolio and talk about investing in on-demand companies. Certainly, there is a recurring element in terms of contractual element, in terms of subscription revenue or amortizing contracts. But, we're expecting also that there is a bit of a transactional element in some of your companies as well. How do you look at that mix and what do you look at as you are looking at acquisitions in terms of set dynamics?

Kirk Morgan

It’s a good question and you are absolutely right. When you look at companies like WhiteFence and Vcommerce, there is a transactional element to the business. But there is also a very important software element in terms of tying in deep integration and relationship with their customer base. And so, really as we look at this model, we really look for the defensibility and whether you can sustain that. And we think also the Vcommerce and WhiteFence are examples of real defensibility and whether the ongoing revenue streams of subscription or transaction, that's really based on the dynamics of the application. And we would like to see both. But that said, as long as we feel that there is real defensibility and long-term sticking of the application, that’s really the most important criteria for us.

Brad Mook - Boenning & Scattergood

Okay. And then just following on that, would you consider looking at any companies with mixed models that are moving towards on-demand?

Walter Buckley

Yes. We are looking at a couple as we speak.

Brad Mook - Boenning & Scattergood

All right, fair enough. Thank you.

Operator

Thank you. The next question is from Joseph Besecker with Emerald Asset Management. Please state your question.

Joseph Besecker - Emerald Asset Management

Good morning folks.

Walter Buckley

Hi, Joe.

Kirk Morgan

Hi, Joe.

Joseph Besecker - Emerald Asset Management

Couple of quick questions. Now, that you are debt-free, and you’ve removed that issue from the balance sheet, is there anything that you plan to do differently that you couldn’t do before?

Walter Buckley

I think, it feels good to be debt-free, and I think we felt that purchase of the bonds was a good outcome, overall. And that said, as we think about now having a very, very solid balance sheet and strong capital base, the four avenues we've been highlighting, deploying capital to existing companies whether they are for working capital or for M&A opportunities, number one. Number two, making new acquisitions; number three, improving our balance sheet, which we've certainly done over last two years, buying back $50 million of debt. And now number four, looking at either stock buybacks or distribution. The fourth one now really I think is on the table, as we really don’t have any restrictions and certainly will be a key factor in how we look at and analyze capital deployment. And so, I think that’s there is a change from our perspective.

Joseph Besecker - Emerald Asset Management

It certainly seems like there is a lot, and you've stated, there is a lot of opportunity for value recognition in 2007, and going forward, but with some of the more problem situations, are you planning to? And how do you plan to address those? And are you going to call some things out? How do you deal with the things and how do you plan to deal with things that aren't working all that well?

Walter Buckley

I think there are two things. By and large, I think across the board there is good growth. I think the only company that really didn’t see the growth we'd expect is Marketron. But other than that we are optimistic about the prospects for all remaining companies. And I think we've demonstrated where we see companies that are not taking that leadership position whether it was CreditTrade and merger in Creditex, or couple of years back into Metastorm. We will take companies that aren’t winning and try to find a proper partner for them to create really a leadership position, and we will do what we think makes sense. And if we can't do that, we will sell it.

Joseph Besecker - Emerald Asset Management

Okay.

Walter Buckley

And so really, from our perspective, time is very important, and then making the appropriate determination based on market circumstances.

Joseph Besecker - Emerald Asset Management

And you also said, you've looked and I don’t remember the exact timeframe, when the 300 deals, I thought you said over the past year. Does the overall market seem to be coming to you or the on-demand space has the landscape as far as convincing companies to come on to your type of platform, are people getting that better? Give me just a sense of what's going on in the deal area, where you are getting and how you are handling that? And also getting companies convinced to do it with you rather than somebody else.

Walter Buckley

Yes. Couple of questions in there. I think number one, we spent a lot of time over the last 12 to 24 months going out, meeting within the major cities across the country, meeting with early stage venture capitalist, bankers, legal folks, entrepreneurs, and really building a network of partners who understand our model, understand our focus, and are generating deal flow. And, I think we made significant progress in '06. We certainly have a lot of work to continue to do, but I would say that the ICG brand has come a long way over the last 12 months and we certainly have work to do. But I think we are pleased with what we are seeing in the results and how we have the best deal flow we've had since '90s. And so, the overall brand, I think, is increasing effectively.

From a competitive standpoint, our model, which is a little bit different than a traditional venture capital has been, it's really our focus strictly on-demand, our experience, it's really all we've done for the last ten years. Our long-term view, it takes time to build these businesses and we are not going to liquidate our fund. And so, we are often viewed as partners with venture capitalist. So, the long-term capability and the resources we have at ICG that are traditionally above and beyond what venture capitals have, I think when you put all that together and put the operating mentality and culture at ICG, it gives us a very good competitive position in the market. And I think that, head to head, we do more than to win our fair share from that perspective.

Joseph Besecker - Emerald Asset Management

Well, keep up the good work. You guys have done a great job.

Walter Buckley

Thanks, Joe.

Operator

The next question is from Charles Giaquinto with Henley and Company. Please state your question.

Charles Giaquinto - Henley and Company

Hey, Buck, how are you doing?

Walter Buckley

Great. How are you, Charles?

Charles Giaquinto - Henley and Company

Not too bad. I had a question. I think you said that you had $42 million in cash in your Core companies on the books?

Walter Buckley

Yes.

Charles Giaquinto - Henley and Company

And with that, do you anticipate any cash need to any of your companies, or do you expect to be cash flow positive out of these companies or are you expecting to see more of an injection of cash?

Walter Buckley

I would say for the mature companies, they are going to be generating cash and that should continue to grow. And I would say on a selected basis, there maybe some small cash needs for the Vcommerce's and WhiteFence's, but nothing substantial. The lion's share of our capital in 2007 will go to new acquisitions or strategic initiatives at existing companies.

Charles Giaquinto - Henley and Company

Okay. And you said that two of your companies were EBITDA positive. Are you anticipating more companies to be EBITDA positive in '07?

Walter Buckley

The way I think about that for 2006 for the full year, ICG Commerce, Metastorm, Marketron, were all EBITDA positive. StarCite would have been absence the OnVantage transaction. So those Core companies consistently throughout the year have been our mature companies and have been EBITDA positive and we'd expect that aside from the StarCite transaction, which we will see improvement in '07, I'd expect to see those three companies continue to lead the way in the EBITDA side.

Charles Giaquinto - Henley and Company

Okay.

Walter Buckley

And then the other companies are continuing to build out and we would continue to see improvement there.

Charles Giaquinto - Henley and Company

Great, okay, good. Thanks guys. Keep up the good work and looking forward to next quarter.

Walter Buckley

Great.

Kirk Morgan

Thanks.

Operator

Mr. Buckley, we have reached the allotted time for the conference. I'd like to turn it back over to you for closing comments.

Walter Buckley

I'd like to thank you all for joining us this morning and we look forward reporting first quarter results in May. Thanks.

Operator

Thank you, ladies and gentlemen. This does conclude today's conference. Thank you for your participation.

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