Onvia Is A Diamond In The Rough

Jan.26.12 | About: Onvia, Inc. (ONVI)

In my opinion, Onvia (NASDAQ:ONVI) is worth $5 per share. Yes, that's almost a 70% premium to the closing share price of $2.96 on January 24th. Onvia is a Seattle-based provider of business information and research solutions. More specifically, the company helps its subscribers intelligently plan, market, and sell goods and services to public sector buyers. You can explore the company's service offerings in greater detail on the Onvia Website.

Onvia's management is currently in the middle of executing a turnaround plan crafted by the company's CEO, Hank Riner. Hank was hired in October of 2010 to take Onvia to "the next level" in the gBusiness (the intersection of business and government) marketplace. His plan consists of five key initiatives: 1) Reduce costs (which he has done successfully) 2) Transform the "SMB" sales organization from a transactional team into a consultative sales force (in process) 3) Expand the distribution of Onvia's content through channel sales programs and partnerships (positive early signs) 4) Develop and execute an enterprise sales and marketing program (in process) and 5) Institute a market-driven product development process to enhance subscriber value (new product rollouts are scheduled for early 2012). Management's most recent update regarding these initiatives can be found in the Q3 Earnings Press Release.

Oddly enough though, Onvia's share price does not reflect its greatly improved profitability. Onvia's shares traded in the $6 to $9 range back in 2007 when the company generated ($300k) of EBITDA. The company's shares traded in the $3 to $8 range in 2008 when the company lost $2.2 million of EBITDA. Currently, on a LTM basis, Onvia has generated positive adjusted EBITDA of roughly $3.85 million (adjusted for the amortization of stock-based compensation totaling approximately $300k). The company is also sitting on $11.3 million of net cash and investments. Yet, Onvia's shares are trading below $3, representing an enterprise value of $13.8 million or an Enterprise Value to EBITDA ratio of a mere 3.6x. This seems pretty backwards to me. Onvia deserves to trade at a reasonable multiple that reflects not only improved profitability but much better leadership, a subscription-based business model that has significant operating leverage going forward, and tax NOL carry-forwards of $75 million.

Are there any other data points out there which help us value Onvia? In late 2010, one of Onvia's primary competitors was acquired (see INPUT Buyout Details). Deltek acquired INPUT, Inc. for $60 million of cash. At the time, INPUT was generating annual revenue of $26.2 million with 2,100 customers. That means Deltek paid INPUT shareholders roughly 2.3x revenue. Currently, Onvia is generating $24.1 million of annual revenue with 4,700 subscribing customers. If we applied the same revenue multiple to Onvia and added its net cash value, the company's shares would be trading at well over $7 per share (even after accounting for dilutive stock options which can be found in the Q3 2011 Report).

Well, what's the story here? What's the market missing? I believe the market is focusing on Onvia's top-line performance and ultimately missing the big picture. In fiscal year 2010, Onvia generated $27 million of revenue. On a LTM basis, Onvia has generated $24.1 million. The decline in revenue is directly related to the company's turnaround plan. Under Onvia's previous transactional sales model, its target market was very broad. Because of that, it acquired a number of non-strategic customers which were not profitable. The company's new consultative sales force is much more focused on acquiring strategic customers with a long-term commitment to the public sector. As a result, the company's customer base has declined from 6,800 in Q3 2010 to 4,700 in Q3 2011. According to management, however, revenue is expected to decline at a decelerating rate beginning in Q4 2011 and should stabilize in early 2012. Why should we believe management? I believe management because Hank Riner is doing exactly what he said he was going to do when he was hired. He is helping Onvia regain its focus, and in doing so, he is improving the company's bottom-line performance (which is what should matter to shareholders) and creating significant additional value for Onvia's customers.

The company's directors and management have been purchasing shares over the past year. They understand the real opportunity here and are putting their money where their mouth is.

Disclosure: I personally own shares of ONVI. The accounts that I manage also own shares of ONVI.