Cogint: An Emerging Player In Big Data

| About: Cogint, Inc. (COGT)

Summary

Cogint is anticipating 20% growth in revenue in 2017.

Market is assigning no value to idiCORE.

In the last nine months, insiders have bought a total of 3.34 million shares.

A potential spin-off could unlock value.

Cogint also an M&A target, given the valuation anomaly.

According to a report released by market research firm IDC in late 2016, the worldwide big data and analytics market is expected to exceed $200 billion by 2020. This would represent a double-digit increase from 2016. Big data has in fact become a buzz word in the business world. More and more companies are investing heavily in big data and analytics as they look to better manage risks and predict consumer behaviors.

Cogint Inc. (NASDAQ:COGT), formerly known as IDI Inc., is a Boca Raton, Florida-based data and analytics company. The company seeks to transform data into intelligence by using powerful analytics. The ultimate goal is to provide clients this intelligence in a fast and efficient manner, allowing them to focus on running their business. The results of this are there to be seen. According to an October 2016 Corporate Presentation, the company had a client retention rate of 90%. That is solid by any standard. This article seeks to focus on what the company is doing right, where it is headed and what risks it faces going forward. It also discusses an opportunity to unlock value through a potential spin-off. But first we need to focus on the growing importance of big data.

COGT Snapshot

Shares Outstanding: 53.23 mn

Current Price: $3.85

52-week Range: $2.90-$6.30

Market Capitalization: $207.60 mn (based on intra-day trading on January 23rd, 2017)

Insider Ownership: 36% (Source: finviz.com)

Institutional Ownership: 4.50% (Source: finviz.com)

Growth Estimates for EPS 2016: 89.89% (Source: Thomson Reuters)

Growth Estimates for EPS 2017: 50% (Source: finviz.com)

Debt/Equity: 0.22 (Source: finviz.com)

Price to Sales: 1.41

Price to Book: 0.89

Price to Cash: 19.50

Big Data is the Future

As I noted earlier, big data is the buzz word in the business world. Nearly every industry group is investing heavily in the big data space. Below is the market share of some industry groups' spending on big data at the end of the second half of 2015. The data was provided by IDC in its report "Worldwide Semiannual Big Data and Analytics Spending Guide."

Source: IDC

The concept of big data has been there for decades. However, in recent years, technology has allowed to collate the data in an efficient manner to improve the decision making process. And companies that can provide solutions that enable fast and efficient organization of this data will succeed in this business. This is where Cogint comes in with its powerful analytics.

About Cogint

"Cogint utilizes its two technology platforms, CORE™ and Agile Acquisition Engine™, to deliver solutions for its clients. The company creates comprehensive data-sets, which are delivered in real-time and offer insightful views on the interrelationship between people, businesses and assets. The company's database consists of public-records, proprietary and publicly-available information."

Source: Company Presentation

Source: Company Presentation

Cogint is in the middle of two major and fast growing markets. According to IAB Internet Advertising Revenue Report published in 2015, in the U.S. alone Internet advertising spending was close to $60 billion. The company's addressable market in the U.S. alone stands at $67 billion. The key driver of this market of course is the adoption of mobile devices. While growth of smartphone and tablets is expected to slowdown in the coming years, shipments are still expected to reach 1.84 billion by 2020, according to IDC. Areas such as Phablets are still expected to have double-digit growth until 2020.

The other growing market that Cogint is targeting is the Risk Analytics software market. In the U.S. alone, this market was estimated to be more than $8 billion, according to a 2016 report published by MarketsandMarkets. Overall, the Global Business Analytics market is expected to reach $161 billion by 2019, according to IDC. Growth, not surprisingly, will be driven by continuing migration towards cloud.

In terms of products, Cogint has four offerings. The products include idiCORE and Data Acquisition Solutions within the Information Services space, and Audience Solutions and Mobile Acquisition Engine within the Performance Marketing Space.

Source: Company Presentation

Cogint's client base currently includes companies such as Western Union, Cheapflights.com and Finish Line (NASDAQ:FINL).

Cogint has a major competitive advantage because of its comprehensive offering. The company is present at each point of the value chain from platform to generating actionable intelligence. None of the companies in the data mining space provide such a comprehensive product offering.

One of the biggest strengths of Cogint is its top management. The company is led by Derek Dubner. Dubner worked closely with Hank Asher, who is known as the "father of data mining." Cogint's COO Harry Jordan served in a range of roles at LexisNexis Risk Solutions (a division of Reed Elsevier). Jordan was in charge of LexisNexis Healthcare. He took the business from inception to more than $100 million in annual revenue. Cogint's Executive Chairman, Michael Brauser has been consistently buying shares in the company, which is always a positive sign. Brauser was the founder of Seisant, which was acquired by LexisNexis for $775 million.

Robust Revenue Growth, Strong Balance Sheet

In the third quarter of 2016, Cogint reported consolidated revenue of $52.2 million, up 27% on a sequential basis. In terms of segments, it was the company's Performance Marketing segments that contributed major portion of the revenue ($37.4 million). Adjusted EBITDA for the quarter was $3.2 million.

Cogint also has a healthy balance sheet. Its cash balance at the end of the September quarter was $10.4 million. In November, the company raised another $6 million through a stock offering.

But more important is to focus on Cogint's future growth. And that growth is most likely to come from idiCORE. In fact, once the product becomes a bigger part of the revenue mix, it could boost EBITDA margins, which were one of the disappointments in the third quarter of 2016.

Looking ahead, Cogint sees 2017 revenue to come in between $230 million to $235 million. This would represent growth of around 20% from the estimated revenue range for the full year 2016. If this revenue growth can be combined with significant margin expansion then we have a strong investment case. The company's long-term EBITDA margin target is between 20% and 25%.

Investment Case: Unlocking the Value

The investment case for Cogint is based on the increasing adoption of big data analytics. The company stands out because of its unique product offering. As I noted earlier, it is present at every point of the value chain, which gives it a huge advantage over competitors. Based on the 2017 estimate for revenue, Cogint trades at just under 1x sales. According to Barrington Research, Criteo, a peer in the performance marketing space, trades at a multiple of 2.6x sales. Even if you assign a discount of 30% to Cogint's multiple, we are talking about a multiple of 2x estimated sales. That translates to a valuation of more than double from current roughly $210 million.

Even after applying the industry multiples though, there is a significant valuation anomaly. And this is where the COGT story gets even more interesting. Currently, the valuation for COGT is based on just its Fluent product offering. In fact, in the third quarter, Fluent generated 97% of the company's sales and nearly all of its gross profits. The valuation of COGT is essentially based on Fluent at the moment. The consensus price target for COGT currently stands at $6, which translates to a market value of around $310 million. That is roughly 1.5x 2017 sales estimate. Like I noted this is just valuing the Fluent business. The market is not assigning any value for idiCORE. This is understandable as the product is currently not contributing to the financial results. However, the future for COGT will be in idiCORE. As idiCORE operations expand in the next two-three years, valuation is expected to enhance. In fact, the product saw an encouraging launch in mid-2016. In the first month of its launch, the company had 2,800 users for idiCORE, which is an impressive number considering that the product is still evolving.

The valuation anomaly has also led to significant insider buying activity. Since November alone, insiders have bought a total of 630,000 shares, which translates to around 1% of total outstanding shares. In the last nine months, insiders have bought a total of 3.34 million shares. Back in May 2016, insiders purchased at price as high as $5.25 per share, highlighting the fact that insiders considered COGT undervalued even then. The table below gives the insider buying transactions at Cogint since November alone.

Insider Name

Insider Title

Shares Purchased

Date Purchased

Price

Robert N Fried

Director

2,000

11/07/2016

$3.75

Jeff Dell

Chief Information Officer (NYSE:CIO)

2,000

11/07/2016

$3.20

Robert Swayman

Director

10,000

11/07/2016

$3.68

Ryan Schulke

CEO of Fluent LLC

20,679

11/07/2016

$3.51

Derek Dubner

CEO

3,000

11/07/2016

$3.66

Matthew Conlin

President of Fluent LLC

21,812

11/07/2016

$3.51

Daniel Maclachlan

CFO

1,000

11/07/2016

$3.45

Michael Brauser

Chairman

18,000

11/07/2016

$3.64

Phillip Frost, MD

Director (10%)

35,000

11/04/2016

$3.17

Harry Jordan III

COO

155,000

11/07/2016

$3.97

Ryan Schulke

CEO of Fluent LLC

5,000

11/08/2016

$4.01

Matthew Conlin

President of Fluent LLC

5,000

11/08/2016

$4.01

Michael Brauser

Chairman

6,500

11/08/2016

$3.79

Matthew Conlin

President of Fluent LLC

5,000

11/09/2016

$3.73

Ryan Schulke

CEO of Fluent LLC

5,000

11/09/2016

$3.72

Michael Brauser

Chairman

5,000

11/09/2016

$3.69

Ryan Schulke

CEO of Fluent LLC

2,000

11/29/2016

$3.79

Michael Brauser

Chairman

3,500

11/29/2016

$3.71

Michael Brauser

Chairman

3,000

11/30/2016

$3.35

Harry Jordan III

COO

5,000

11/30/2016

$3.25

Michael Brauser

Chairman

3,500

12/09/2016

$3.43

Michael Brauser

Chairman

1,500

12/14/2016

$3.29

Robert Swayman

Director

50,000

01/20/2017

$3.12

Matthew Conlin

President of Fluent LLC

100,000

01/23/2017

$3.15

Ryan Schulke

CEO of Fluent LLC

150,000

01/24/2017

$3.15

Ryan Schulke

CEO of Fluent LLC

15,000

01/27/2017

$3.95

I believe that at some point COGT should consider spinning off the business to unlock its value. In any case, at current valuation, COGT also looks an interesting M&A target, especially given the growing importance of big data and the fact that the market is valuing a key growth driver in idiCORE at nothing.

It is also important to note that with Cogint there is no near-term dilution risk. The November offering has strengthened the company's balance sheet.

The major risks I foresee for Cogint at the moment are operational. The company needs to improve its EBITDA margin. The idiCORE product becoming a bigger part of mix could help the company in this regard. In fact, in a shareholder letter late last year, CEO Dubner noted that the company reverted to historically higher margins at the beginning of the fourth quarter. Another risk is the lack of liquidity with the COGT stock. However, this could improve with the company's move to the NASDAQ. COGT was previously listed on the NYSE MKT but made a move to NASDAQ in September when it also changed its corporate name. The move to NASDAQ, combined with the growth prospects for big data, should bring in more institutional investors.

Disclosure: I am/we are long COGT.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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