Miles P. Jennings, Jr.'s  Instablog

Today, EDGAR Online, Inc. [EDGR $1.25 Nasdaq, $33.3 million cap, 52-week range: 2.83 - .60] started reporting 'XBRL Filings' revenue as a separate line item.  As previously noted, EDGR is the market's "only pure play on XBRL."  Other XBRL software and service providers are either privately held or very small parts of publicly traded companies like Bowne (BNE), Microsoft (MSFT), RR Donnelley (RRD), Hitachi (HIT), SAP (SAP), Fujitsu (FJTSY), and Oracle (ORCL).  Private companies include Rivet Software, Merrill Corporation, JustSystems Corp., and EDGAR Filings.

Companies don't separate out long-standing financial reporting formats unless, with their auditor's concurrence, they deem the new business area to be potentially material.  EDGAR Online's first release of the 'XBRL Filings' revenue today makes sense since the SEC's XBRL Accounting Standard was just mandated in February of this year.  Since there are more than 12,000 companies now required to file in XBRL and that EDGR garnered about 48% of 2008's SEC filings, the revenue potential is significant (See page 6804 of the Federal Register).  

Today, EDGAR Online reported a year-over-year 192% increase in its 'XBRL Filings' revenue in the first quarter for 2009.  Revenue was $242,000 vs. $83,000.  They also reported that XBRL conversions (10-K and 10-Q filings with the SEC) increased to 340 vs. 275 at the end of 2008, a 24% increase.  As of March 31, 2009, the company had been engaged by over 200 companies (representing over $4 trillion of market cap).  Since the lion's share of the company's clients are the 500 largest market cap SEC-reporting companies, it appears that EDGR is getting about 40% of the XBRL filing business.  This first 'XBRL Filings' revenue line is small but not inconsequential. Even at this initial reporting level, 'XBRL Filings" revenue represented 5.7% of EDGR's first quarter total revenue.  See the company's website, recent investment presentation, and the joint-venture website with R. R. Donnelley for further information regarding the XBRL market potential.

EDGAR Online is playing their cards close to the vest.  Today, in the conference call, management was asked:

• what they meant by considering equity and other options to capitalize on the XBRL opportunity,
• which firm had been engaged to represent them, and
• were the potential candidates limited to the financial information companies.

All these questions were stonewalled---except to say that shareholders' interests would be protected.  Then, after stating that their gross margin was down to 73% from 84% due in large part to increased staffing to prepare for the XBRL ramp-up, an analyst asked how many IT professionals had been added to handle this XBRL conversions business.  To this question, once again, the company refused to provide the number of new IT professionals hired to meet this new XBRL business---citing competitive reasons for non-disclosure.  

In the context of the first quarter's decline in legacy subscription business and the generally weak financial services market, EDGR recorded a small decline in positive Adjusted EBITDA from $175,000 to $32,000.  And earnings per share declined from $(0.03) to $(0.04). They noted that last year they had a large non-recurring revenue item from the Nasdaq 144a reference database work.

Looking at the valuation of EDGAR Online today, the company is trading at 2.0x's revenue in a market of giant competitors in the financial information business.  For instance, here are the main financial information competitors of EDGR and their respective Price-to-Sales Ratios:

• FactSet (FDS) 4.1x's
• Moody's (MCO) 4.1x's
• Thomson Reuters (TRI) 2.1x's
• McGraw-Hill (MHP) 1.5x's
• Morningstar (MORN) 4.1x's
• MSCI (MXB) 5.2x's

Unlike the large analytics and financial information companies above, EDGAR Online has a one-of-a-kind database which suddenly, due to the SEC mandate of XBRL, has taken on great value.  For more than five years, EDGR has been converting its corporate financial information database to usable, interactive XBRL format and has built analytics programs using that database.  In that process the company has accumulated about $35 million of NOLs (more than its current market cap).  In a word, EDGR bet the company on the financial integrity and functionality of the eXtensible Business Reporting Language standard.  Now, after the recent SEC mandate, EDGR is the leader in XBRL and positioned to deploy its proprietary products and services using its over 10 years of XBRL corporate financial data (each company to the depth of over 6,000 data-points) on over 10,000 SEC-reporting companies.  There are companies vying to provide deep financial information and analytics to the marketplace, and EDGR has the only XBRL formatted database.

Given the mandated XBRL compliance schedule and the very large market opportunity in XBRL filings and services, it is no wonder that the EDGR management refuses to disclose any information regarding their staffing, pricing, joint ventures or potential equity financing/strategic alliances.  EDGAR Online also requested and received the SEC's Confidential Treatment Order ("CT Order 2/23/09" only PDF here) regarding their contract with R.R. Donnelley (noted on page 17 in their 10-Q dated Nov. 6. 2008.)  Also, the company filed, starting in 2005, basic U. S. patents on the rendering and viewing of XBRL data and the add-in product to Excel.  Beyond the patents, EDGAR Online has deep proprietary data-mining methods regarding the use of the SEC company files (the "EDGAR" system). For comments on the XBRL standard and worldwide activities, see XBRL.org.

EDGAR Online, Inc. is well advised not to disclose their strategies and competitive position.  There are many and broad applications of XBRL in other areas---even larger than the equity markets (e.g., municipals, 144a, mortgage-backed securities, foreign securities, and relational database opportunities).  The company may well have decided to dramatically expand their equity base to address the worldwide opportunities in XBRL.  There would obviously be potential merger opportunities with users of financial data.  The fact that the Company has not drawn on its $2.5 million credit line---and is still saying it is considering some deal of some kind---may well suggest that their plans are of a grander scope than the market's expectation.  They are in a good intelligence position to evaluate strategic options regarding XBRL.

---Looks to me like they've got the only hardware store in a gold rush.

Disclosure: I am LONG EDGR stock, and I use their XBRL data sets in my company's OV Metrics' XBRL-powered portfolio analytic tool.