IBSG International: The World's Cheapest Software Stock? (IGII)

| About: IBSG International, (IBIN)
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The Microcap Speculator submits: Let the TV pundits keep pumping large cap tech stocks; I'm hunting smaller game. One of my favorites is a little software stock called IBSG International (ticker: IGII.ob).

IBSG primarily sells enterprise software to government small business development associations and private business groups like Chambers of Commerce. It's a niche product to be sure, but the niche is more than large enough to justify IBSG's meager $8.45M market cap. The company earned $.10/share over the first 9 months of 2005 (versus a loss of $.09 for the first 9 months of 2004).

IBSG sells for less than $1.5M more than its cash and accounts receivable (roughly $.65M and $6.5M respectively according to the latest 10-Q). Usually this indicates that the receivables are worthless, but this case is different. Nigeria's Corporate Affairs Commission accounts for just over half of the receivables. This organization is partially funded by grants from USAID, and stands to benefit from the $31 billion that Nigeria has received in foreign direct investment. I think that IBSG will collect most or all of the money remaining on its 5-year contract with Nigeria, but let's be conservative and assume that receivable is worth only cents on the dollar. The remaining receivables are rock solid. They include amounts owed by the States of California, New Hampshire, Connecticut and the United States Veterans Corporation.

IBSG should see healthy growth from two sources. First, a joint venture between IBSG and its South African partner, Global Eagle, just inked a $37M deal to implement IBSG's software to support small and medium sized business entities in the Johannesburg region of South Africa. Second, IBSG subsidiary Secure Blue, which sells Sarbanes-Oxley and other compliance and security software, could itself become a $3M business in the near future.

I took a decent-sized position in IGII.OB on Friday just above $.17. With these fundamentals, I think the risk-reward is fantastic. A few caveats though: (1) IBSG has issued a lot of shares over the past year. If share count growth begins to outpace growth in earnings, the upside could be capped; (2) due largely to the discrepancies between when it books revenues under long-term software contracts (largely dictated by FASB rules) and when it is paid, the company was cash flow negative last quarter. This should abate over the coming quarters; a failure to do so will be a warning sign.

DISCLOSURE:
I am long IGII.OB. Not a recommendation to buy or sell any securities. For informational and educational purposes only.

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