Intralinks: Hyping the Cloud

by: Chimin Sang

The magic word "cloud" has been gaining popularity these days -- many companies are eager to claim that they have something to do with the ‘cloud,’ even though their whole knowledge of the cloud concept was limited to some natural phenomenon in the sky not long ago.

Intralinks (NYSE:IL), which IPOed in August of this year at $13/share, well below the initial $14 - $16/share marketing range, is a good example of cloud hype. Below is a quote from their most recent S-1 filing, “At our founding in 1996, we introduced cloud-based collaboration for the debt capital markets industry and, shortly thereafter, extended our solutions to merger and acquisition transactions.” The phrasing is somewhat confusing: It sounds as if Intralinks was aware of the ‘cloud’ concept back in 1996, way before Google (NASDAQ:GOOG) was born.

Intralinks is not exactly a newcomer to the public market. It tried twice to go public in 2000 and 2005, respectively. Each time it failed due to a lack of interest. In those old days, apparently the phrase “on-demand” was the buzzword since their old S-1 did not use the word ‘cloud’ even once, but ‘on-demand’ 82 times. In the new S-1, however, the word ‘cloud’ was repeated 32 times and the phrase ‘on-demand’ only 3 times.

Since coming public, Intralinks’ CEO, Andrew Damico, has been actively promoting his company. He had interviews with Bloomberg and CNBC, spinning the cloud concept and painting a $9 billion potential market size for the Company. The stock has done quite well, settling at $20.59 as of the last Friday.

Well, when a company tries so hard to associate its image with the latest business craze, expectations tend to rise too fast, and long-term outcomes tend to underachieve short-term results. My analysis shows that Intralinks may follow this same fate; the recent meteoric rise in its share price, makes the stock appear grossly overvalued based on the following points.

  1. Its business actually competes in a niche market of a size much smaller than the $9 billion suggested by the CEO.
  2. The market is being saturated and Intralinks is relying heavily on its sales force to push their products and services.
  3. Intralinks product line is very limited and it is met with intense competition from existing competitors and new innovative companies.
  4. After 13 years in business, this Company is still losing money each quarter. The lackluster business does not deserve the current extraordinary valuation.

Let’s learn Intralinks business first.

In its CEO’s own words from the Bloomberg Interview, “Intralinks helps its corporate clients exchange critical information in a secure, compliant and orderly fashion.” It provides solutions for secure file collaboration and exchange, a so-called virtual data room (“VDR”) service. Its largest customer sector is the financial services industry, in particular investment banks, which contribute more than half of its revenue. Its clients typically use VDRs to store, distribute and control access of sensitive information.

Its competitors include a multitude of service providers, including both VDR providers, such as Merrill Corporation, RR Donnelley & Sons Company (NASDAQ:RRD) and Bowne & Co., Inc. (BNE), and enterprise software providers, such as EMC Corporation (EMC) and International Business Machines Corp. (NYSE:IBM). A simple Google search for VDRs returns a multitude of other competitors vying for what appears to be a relatively commoditized product. It also expects to encounter increased competition, both domestically and internationally, from established software companies as well as new competitors such as Microsoft Corporation and Google, Inc.

Now how big is the market it competes in?

In its 2010 S-1 filing (page 2), the Company claimed that its target market size is $9.3 billion, defined as a combination of content management, team collaborative applications, search and discovery applications and enterprise portals. This is actually misleading. The Company has only two products: Intralinks Exchanges and Intralinks Courier. The former is the VDR product and the latter is secured FTP and email, a simpler and less value-added product than the VDR. These can be counted towards content management and team collaborative applications, but nothing close to enterprise portal, let alone search and discovery applications. The $9 billion market size claim holds a lot of water.

Gartner recognized Intralinks as the market revenue leader in the teaming and enterprise social software market with an estimated 22.5% share of the worldwide market in 2009. This sounds closer to the truth. Back the numbers out, the teaming and enterprise social software market, in which Intralinks competes in, was $600m plus global wide.

But even this relatively factorial view was spun for misleading promotion. The following Bloomberg interview screenshot shows the CEO’s about-face behind a jaw-dropping subtitle “Intralinks has 22% of the global cloud computing market.” If this were true, you should not buy Google (GOOG), but Intralinks instead.

Intralinks CEO, Bloomberg Interview Screenshot, Courtesy: Bloomberg

Is Intralinks competitive?

Intralinks is not an innovative company. Its product offering remains limited to two products. Its growth mainly comes from the Company’s effort to sell the products to customers from industries outside of financial services. The Company’s income statement shows that over 40% of the revenue was spent on sales and marketing, which really raised the question for the competitive nature of its business. A good and mature product sells itself and should not incur so much sales and marketing cost.

From the people who had experience with various VDR products, I heard positive opinions on Merrill Datasite, but feedback on Intralinks products was much less enthusiastic. Besides competition from its existing competitors, Intralinks face severe future threats from new innovators like Dropbox and Dropbox, a file sharing and synchronization service provider with over 4 million users and founded only in 2007 by two MIT students, has superior technology and vibrant culture. I believe that it is only a matter of time for them to reach into Intralinks’ market since it is their low-hanging fruit.

Nothing is more telling of a company’s reputation than by its own employees’ comments., a free career community where anyone can find and anonymously share an inside look at jobs and companies, helped us to have a peek into those opinions. Based on the ratings, the employees are “dissatisfied.” The CEO has a low approval rate of 38%. You may believe that employees would be happier now that the Company has gone public -- Wrong. Seven current or past employees commented about this company since its IPO in August, and nearly all of them had low opinions. The comments generally reflected frequent reorganizations, high turnover, low morale, and no long-term product roadmap.

A current sales employee who gave the best rating among the commentators said, “Stop turning over the workforce- there is only so many times you can rearrange sales people and territories before it blows up.”

A past employee commented, “Wake up. Who's in charge? Where is the company going? IPO... are you kidding who cares about a 1 trick pony SaaS company.”

A current sales person in Germany this month opined, “No long-term product roadmap / vision. No structure and strategy.”

The company is losing money every quarter.

In the interviews the CEO had with the media, he seemed most proud that the Company had been around for 13 years. One thing he never bothered mentioning was that the Company was losing money for all those years. Intralinks had $143m revenues in 2008 and lost $40m before tax benefits. In 2009, it had $141m revenue and again lost $43m before tax benefits. In the most recent quarter ended September 2010, Intralinks lost $7.5m before tax benefits. It had adjusted EBITDA $16m, but spent $19m on capital expenditures and capitalized software, leading to negative $3m of free cash flow.

The Company has an unsustainable valuation.

Intralinks valuation is extraordinarily high compared to its anemic growth. With 50 million shares outstanding, the current share price gives it a whopping $1 billion market capitalization. Its long-term debt stands at $160 million, making the enterprise value $1.16 billion. Its book value is $248m, and tangible book value negative $142m. Price / Book Value = 4x. Its current running rate annual revenue is $176m, making EV/LTM Sales 6.6x, and EV/ LTM EBITDA = 22x, assuming EBITDA margin of 30%.

Now let’s look at its growth. Intralinks had negative revenues and net income growth from 2008 to 2009. For the first 9 months of 2010, revenue increased from $101m to $132m, a 30% growth, and adjusted EBITDA grew from $35m to $41m, a 17% growth. Even if we do not normalize the 2010 growth and believe that it will continue, this EV/EBITDA still looks too pricey.

A quick comparison of Intralinks with its domestic peers in security software business using shows that Intralinks is expensive. It has the highest Price / Sales, Price / Cash and Price / Free Cash Flow and the second highest Price /Book Value. It has no Price / Earnings to compare with since it has negative earnings.

(Click to Enlarge)

Going forward the Company is forecasting anemic growth on a sequential quarterly basis. Revenue for Q4 2010 is forecasted to be in a range of $48 - $50m. We note that this is only a maximum of $2m in quarterly revenue growth from the previous quarter. Likewise, next quarter’s non-GAAP adjusted EBITDA is forecasted to be in a range of $17 - $19m, up from $16.3m last quarter. This hardly paints the picture of a rapidly growing company, yet with the stock price up 80% since the beginning of September, it appears investors are overestimating the Company’s growth prospects. Unless, of course, the Company is gaming the system and manufacturing easy projections with such a narrow forecast range, then I could be wrong. This would allow the Company to “beat” Street estimates, and continue to proclaim how well they are doing.

Insiders want to sell.

Last Friday, the Company announced that, merely 3 months after its IPO, it was going to have a follow-on offering for 9 million shares. It is a clear sign to the market reflecting how the current private equity investors and the management think about the current stock price level. The original private equity owners are clearly seeking to exit at this elevated price. Funds managed by TA Associates and Rho Capital own nearly 67% of the stock and are anticipated to be aggressive sellers at this price level.


Cloud is a sexy word now, but do not let it cloud your judgment. A one-trick pony with a 13-year business history, Intralinks will find its market shares encroached by younger and more innovative competitors. Intralinks has never made a profit, and may struggle to do so unless it aggressively reduces its operating cost structure. Since most operating costs are sales and marketing, Intralinks may sacrifice long-term competitiveness and growth for near term profitability to meet the Street’s increasingly elevated expectations. The Company’s profitability is also handicapped by the high amount of debt on the balance sheet ($158m as of Sept 30, 2010) and its limited free cash flow. Its current stock price reflects unrealistic optimism for the Company’s future growth prospects as a player in “cloud” computing. I will not be surprised if in due time Intralinks’ stock price drops far below $13, its IPO price. Insiders may well be thinking similarly, and taking advantage of today’s generous stock price level above $20 to unload in a secondary offering.

Disclosure: Author long GOOG and short IL

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