Tangoe is a play on mobile for the enterprise. Tangoe provides a solution for companies to manage the usage, devices and carrier relationships for their organization. Gartner and other industry analyst firms recognize Tangoe as a leader in this niche market. The company should do about $90m in revenue in 2011, generate $11m in EBITDA and a few million in operating income. Our intrinsic valuation analysis suggests a share price of $11 to $14 which compares to the IPO filing price range of $9 to $11 and the current price of $11.
Positives, Neutrals and Negatives
+ Enterprises spend a lot of money on communication and have always needed better methods to manage it. The increase of mobile has exasperated the challenge. Gartner sees this as about a $1B market today, which gives Tangoe plenty of room to grow.
+ Improved management of communications elements generally results in direct and fairly immediate cost savings and generates attractive ROI. Having a clear cost-saving benefit allows the company to grow consistently, even in tough economic times.
+ Industry analysts recognize Tangoe as a market leader in their niche and highlight their size, ability to handle all communication types and legacy systems and global support organization as key advantages.
+ The company has leveraged partners like Dell (DELL) and IBM (IBM) for distribution. IBM has accounted for 10-11% of revenue for the past two years. Both Dell and IBM hold warrants in Tangoe.
= Revenue growth slowed a bit for the year ending 2010 but has picked up in 2011. This may be due in part to the transition to more of a recurring revenue model, but the large size of the Tangoe customer may contribute to some lumpiness in terms of new contract signings and renewals.
= The company provided a target model that looks somewhat aggressive in terms of operating margins. Of particular concern is the planned reduction in R&D spend as a percentage of revenue.
= Management and insiders have substantial experience but are a bit of a “rogues gallery” of older executives with very diverse backgrounds.
= In addition to its warrants and distribution, IBM holds special rights that come into play should Tangoe become an acquisition target. This suggests that IBM may be the ultimate acquirer of the company but at the same time complicates any acquisition by someone other than IBM.
- Although a solid market, it’s certainly a niche within the mobile technology space. The fact that IBM has so far not decided to acquire the company may attest to the fact that this will never be large enough to support a $1B business.
- HQ in Orange, CT, puts the company in a bit of a backwater in terms of a technology ecosystem.
Stock and Valuation
A look at a broad peer group of stocks suggests the proposed price to sales ratio of 3.6x is below the average of 4.4x. The growth rates and operating ratios driving our intrinsic valuation model are all fairly reasonable. At $11 to $14 the IV doesn’t suggest huge upside for investors at the high end of the proposed price range.
We would be far more interested in these shares if they dip below the proposed filing range and/or the company demonstrates more progress to consistent increases in operating margins.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.