October 28, 2006, 11:35 am


GHS pulled off a succesful offering this past week. But then of course we seem to be in the type environment in which a lemonade stand might be able to pull off a succesful ipo --- Not quite 1999 here, but we're seeing more enthusiasm for ipos across the board then anytime since early 2000.

The equity interest by Fortress in GHS got the deal done and gave it an initial pop. Fortress is a 'roll-up' specialist whose past success with BKD attracted investors to this deal.

One note here - While GHS has the trend of an aging US population at it's bac, BKD has the headwind shift away from print advertising trend to deal with. GHS is exactly the type of company that goes bankrupt during difficult economic times --- they're laying on hefty debt to acquire businesses that are annually not able to grow revenues in a 3%-4% GDP environment.

Again though we're in an ipo period here when 'little things' such as that are glossed over by investors as greed has begun to take over. Interesting the lessons that need to be repeated over/over and over again.


below is our pre-ipo piece for GHS.

GHS - GateHouse Media

GHS - GateHouse Media plans on offering 13.25 million shares at a range of $16-$18, assuming over-allotment is exercised. Goldman Sachs is lead managing the deal, Bear Stearns, Wachovia, Allen and Lazard co-managing. Post-offering GHS will have 34.5 million shares outstanding for a market cap of $587 million on a $17 pricing. The bulk of ipo proceeds will go to repaying debt. Both Goldman and Wachovia are creditors here so they will be receiving both underwriting fees and a portion of the proceeds as debt repayment.

Fortress Investment Holdings will own 61% of GHS post ipo. The segment of Fortress here is their private equity group. Fortress took control of GHS in 7/05. Fortress has recently brought two of their portfolio companies public in BKD/AYR. Both have done quite well in the aftermarket. Fortress plan appears to buy into a sector as a starting point. Then they'll utilize that initial purchase and begin 'rolling up' additional companies and/or assets in that sector with an eye towards becoming the leading player. They appear to be doing similar with GHS. On 6/6/06 GHS acquired all of the assets of CP Media and Enterprise NewsMedia, two Northeastern news publishing companies. These acquisitions essentially doubled GHS annual revenues. Each were brought into the fold by laying $400 million in new debt on GHS. Some of that debt will be paid off on offering, however GHS will be burdened with substantial debt post-ipo.

From the prospectus:

'We are one of the largest publishers of locally based print and online media in the United States as measured by number of daily publications. Our business model is to be the preeminent provider of local content and advertising in the small and midsize markets we serve.'

GHS current holdings include: 1) 75 daily newspapers with total paid circulation of approximately 405,000; 2) 231 weekly newspapers (published up to three times per week) with total paid circulation of approximately 620,000 and total free circulation of approximately 430,000; 3) 117 "shoppers" (generally advertising-only publications) with total circulation of approximately 1.5 million; 4) over 230 locally focused websites, which extend our franchises onto the internet.

This is a very curious offering in that print newspaper stocks have not performed well at all the past 2 years.

According to the Newspaper Association of America, total gross ad spending in local newspapers nationwide is still below total gross spending for the year 2000. In fact total local ad spending in all mediums is still below that of 2000. The growth in overall ad spending has been nationally, driven by two mediums: Cable TV and the Internet. Every other national/local advertising segments have been unable to significantly surpass gross ad spending from 6 years ago, with all local advertising performing the worst. GHS predominantly relies on local print advertising, a sector that has flatlined the previous 6 years.

Advertising accounts for 75% of GHS revenues.

In addition overall circulation of daily newspapers has declined annually this entire decade while overall circulation of weekly newspapers has flatlined for 10 years. GHS owns 75 daily newspapers and 231 weeklies.

The two blue chips in this segment are the Washington Post(WPO) and The New York Times(NYT). WPO's stock price is currently down 25% since the late 2004 highs, while NYT is down 40% from the highs in late 2004. The reasons are in the preceding two paragraphs. Note that GHS plans on achieving ad growth via the internet route for their dailies and even some of their weeklies. However both NYT/DPO has top of the line well trafficked websites, yet it has not been enough to a) overcome stagnant ad rates in and overall circulation of their newspapers and b) given any boost to the stock prices.

GHS strategy here seems pretty clear. They're attempting to consolidate a very stagnant sector and achieve operating growth through rolling up otherwise zero growth businesses. I imagine the endgame is to achieve operating efficiencies overall to squeeze out earnings growth. Still, we're looking at a stagnant(at best) sector here, with the two blue chips in the group not able to see their stocks gain any traction for two years.

The big risk for GHS going forward is an economic slowdown. The past few years during a 3%-4% growing economy, the local dailies/weeklies have not seen any real overall revenue growth. I would imagine a flat to slowing economy would mean pretty significant overall drops in local newspaper advertising. For a company like GHS whose strategy is to lay on hefty debt, rolling up acquisitions in the sector, a sharp drop in advertising revenues, could spell disaster. In fact it is a recipe for disaster, you do not want to be anywhere in the vicinity of a company like GHS in a slowing or stagnant economy.

GHS dailies and weeklies have been around for quite awhile, as is the norm in this sector. 70% of their dailies have been published for 100+ years. GHS generates revenues from 286 markets across 18 states with 1.75 million classified ads placed in the papers in 2005.


Debt is significant at $586 million. These debt levels to equity in a stagnant organic growth sector mean an automatic pass from me on this ipo. The annual interest rate on the debt is fairly low overall at 5% or so. GHS plans to continue to acquire, expect debt levels here to increase going forward.

GHS does plan on paying a dividend. It appears as if it may be in the ballpark of $0.50 a share annually. On a pricing of $17, GHS would be yielding approximately 3% annually.

Negative book value post-ipo.

Due to the recent large acquisitions, coupled with Fortress taking control in 2005, revenues/earnings are not comparable pre 2005.

Taking into account all acquisitions, revenues for 2005 were $384 million. Operating margins were 13%. Unfortunately interest expense wiped out 81% of operating earnings. When folding out all acquisition related expenses and other non-recurring expenses, GHS net margins for 2005 were 1 1/2%. Earnings per share were $0.17. On a pricing of $17, GHS would be trading 100 X's trailing earnings. This in a stagnant sector.

For 2006, through 9 months it appears revenue for GHS will be flat. I would expect 2006 revenues to come in around $390 million, a small increase from 2005's $384 million. GHS has experienced a bit of operating expense growth in 2006 though, predominantly SGA and depreciation. This has knocked operating margins down to 10%. Debt servicing through first 9 months more then ate up all operating earnings. Expect a loss for GHS in 2006.

Note there is approximately $0.70 a share in annual depreciation expense. So while GHS will be booking a small loss overall in 2006, cash flows will be a little bit better. the dividend will come out of these cash flows.

Conclusion - Fortress is attempting to do with GHS something akin to their operating strategy with BKD. With BKD though their strategy plays into the overall trends of an aging US population. The wind is at their back in that sector, high debt levels be darned. The wind is not at their back in the local print advertising sector. If anything it is a bit of a headwind. While overall economic conditions should not effect Fortress plan with BKD, a decent size US economic slump could very well derail GHS. Factor in too, that GHS is not growing revenues at all without acquisition and not booking a bottom line profit. I'm passing on this deal.

October 20, 2006, 6:42 pm


EXLS debuted strongly today. Following is the tradingipos.com pre-ipo piece available to subscribers over a week ago. Of note, on the tradingipos.com subscriber forums we provide pre-opening indications for nasdaq offerings to assist subscribers in after-market entry.

We also have a number of solid traders posting there throughout each market day and I post all position entries/exits on site same day(usually very close to realtime). We help subscribers make money period.


(disclosure) at time of posting on blog(10/20) tradingipos.com owned shares of EXLS from $16.

EXLS - ExlService

EXLS - ExlService plans on offering 5.75 million shares at a range of $10- $12, assuming over-allotment is exercised. Citigroup and Goldman Sachs are lead managing the offering, Merrill Lynch and Thomas Weisel co-managing. Post-offering EXLS will have 28.25 million shares outstanding for a market cap of $311 million on $11 pricing. 20% of IPO proceeds will be utilized to purchase preferred shares and repay insiders, the rest fro general corporate purposes.

Post-offering Oak Hill Capital Partners will own 35%+ of EXLS. Senior management will own 20%+ of EXLS post-offering.

From the prospectus:

“We are a recognized provider of offshore business process outsourcing services, primarily serving the needs of Global 1000 companies in the banking, financial services and insurance sector. We provide a broad range of outsourcing services, including business process outsourcing services, research and analytics services and advisory services. The business process outsourcing services we provide involve the transfer to us of select business operations of a client, such as claims processing, finance and accounting and customer service, after which we administer and manage the operations for our client. “

This is the 2nd Indian outsourcing IPO we've seen recently. The first has been the hugely successful WNS offering. BPO(Business Process Outsourcing) IPOs in general have done quite well, so that is reason alone to look closely at EXLS. We've seen onshore/offshore BPO firms run successful offerings the past couple of years including PSPT/WNS/INWK.

Since EXLS began operations, they've transferred more than 225 processes from 22 clients to EXLS operations centers. Most of EXLS outsourcing business to date has been focused on the banking, financial services and insurance sectors. These 3 sectors accounted for 85% of 2005 revenues. EXLS has 7800 employees Three largest clients are Norwich Union, American Express, and Dell(including Dell Financial Services).These three accounted for 63% 2005 revenues with Norwich accounting for 39% by itself. Each is under contract until at least 2009. Contracts typically range in length from 3-7 years.

Industry- BPO (Business Process Outsourcing) has been a worldwide trend. Companies can save salary and benefit costs by utilizing BPO firms to handle various operating segments. As EXLS puts it: 'BPO providers work with clients to develop and deliver operational improvements with the goal of achieving higher performance at lower costs.' Due to the large amount of time/effort/expense involved, when a company shifts to a BPO firm, it is usually with the idea of it being a long term relationship.

Offshore BPO is expected as a sector to grow 37% annually over the next 5 years to $55 billion by 2010. Banking and insurance are expected to make up 50% of this offshore BPO business. India outsourcing companies accounted for 46% of offshore BPO revenues in 2006. The Indian BPO business is expected to grow evenly with the rest of offshore BPO. Indian BPO's projected to have approximately 45%-50% chunk of that anticipated $55 billion in 2010 revenues.

EXLS recently acquired Inductis, a provider of research and analytics services. the acquisition closed 7/1/06 and EXLS is planning on using Inductis to grow into more outsourcing segments then Banking, Insurance and financial services.


3 1/2 X's book value at $11.

$2 per share in cash post-offering, no debt.

When factoring in the Inductis acquisition, 2005 revenues were $95 million, a 58% increase over 2004. Through the first 6 months of 2006, revenues appear on track to hit $125-$130 million, a 34% increase over 2005.

EXLS shifted into profitability in 2004. Gross margins the past 18 months have been 37%. Operating expense ratios have actually been ticking up, 27% in 2004, 28% in 2005 and 30% through first 6 months of 2006. This is mostly due to stock compensation expenses added in as EXLS got closer to IPO stage. However EXLS does note that a portion of this ratios growth is due to rising wages in India. Ideally you want to see operating expense ratios declining as revenues grow, we'll need to keep an eye on this ratio going forward with EXLS.

EXLS has a 10 year tax holiday which will not expire until 2010. With debt paid off on IPO and with no taxes, operating margins will equal net margins for EXLS through 2009. Operating/ net margins were 10% in 2005. Earnings per share were $0.33 per share. On an $11 pricing EXLS would be trading at 33 X's trailing earnings.

Through first 1/2 of 2006 operating/ net margins are down slightly due to the increased operating expense ratio. That should improve a bit the back 1/2 of the year; however I would expect margins to be a bit lower for full year 2006 then 2005. I would expect the bottom line to hit roughly $0.40 in 2006. On a pricing of $11, EXLS would be trading 28 X's 2006 earnings.

To really grow the bottom line, EXLS is going to need to bring in a 4th big revenue generating client.

Comparing EXLS briefly with two recent offshore BPO's WNS and PSPT:

EXLS, $311 million market cap on an $11 pricing. Trading 2.4 X's 2006's revenues and 33 X's '06 earnings.

WNS, $1.07 billion market cap. Trading 4 X's revenues and 46 X's 2006 earnings. WNS priced at $20 this summer and currently trades over $30.

PSPT, $349 million market cap. Trading 5 X's revenues and 31 X's 2006 earnings. PSPT IPO'd at $7 in 2004 and currently trades $18 1/2.

Risks- EXLS is going to need a few more contracts going forward they're heavily dependent on three clients. The big risk to this deal would be if EXLS not only does not bring in a new client, but losses one of their big three. Also Norwich has the option to purchase certain EXLS facilities in 2011. These would be facilities that service Norwich and accounted for 20% of 2005 revenues.

Conclusion- Notice the lofty multiples WNS/PSPT carry. This has been a very good sector to be and the growth going forward should continue to be strong. EXLS is coming public in the 'right' space. Is it the 'right' company? EXLS will need to bring in another large client or two over the next couple of years to justify appreciation from IPO price. With the India BPO businesses growing so quickly the odds are pretty favorable that will occur. Really all one needs to look at here though is large Indian BPO firm WNS IPO. WNS priced strong and is currently up 50% from pricing in just under 3 months. EXLS looks solid enough to recommend just on the WNS performance. There is demand for these offshore BPO stocks and I would expect EXLS to do well short and mid-term. Recommend .

October 18, 2006, 12:40 pm

full calendars

stacked ipo calendar here these two weeks....pre ipo analysis available on each offering at http://www.tradingipos.com

This week's free blog piece is another government contracting ipo. SAI was one of three strong ipos that debuted Friday. Tradingipos.com was quite high on both apkt/ehth. However each is now well above ipo price making a free blog posting of the pre-ipo analysis piece for each a bit late...pieces on each were available on the site to subscribers well ahead of ipo date. I will not post an analysis piece on the blog for free until after ipo date, usually at least 3-5 days after.


SAI, SAIC Inc plans on offering 89million shares (yes, that is 89 million) at a range of $13-$15, assuming over-allotment is exercised. Morgan Stanley and Bear Stearns are lead managing the offering, seven houses co-managing. Post-offering SAI will have a total of 401 million shares outstanding for a market cap of $5.8 billion on a $14 pricing.

SAI does not have a specific use for the offering proceeds. Note however that just prior to this offering SAI is utilizing all pre-IPO cash on hand to pay out a $1.6- $2.4 billion dividend to insiders. Post-offering then SAI will have roughly $1 billion in cash on hand and just over $1 billion in debt. SAI will have less cash on hand post-offering them pre-IPO.

Vanguard will own 38% of SAI outstanding shares post-offering.

From the S-1:

“We are a leading provider of scientific, engineering, systems integration and technical services and solutions to all branches of the U.S. military, agencies of the U.S. Department of Defense, the intelligence community, the U.S. Department of Homeland Security and other U.S. Government civil agencies, as well as to customers in selected commercial markets.”

A large Federal government IT contractor offering. SAI does not make weapons, they provide information technology services. SAI does most of their contracting with the Department of Defense. 89% of revenues are from the US government, 69% from the Department of Defense. SAI has over 43,000 employees and 9000 active contracts. 20,000+ Revenues from the Army account for 16% of revenues, Navy 14% and Air Force 11%.

SAI is ranked the #3 information technology (IT) Federal contractor behind Lockheed Martin and Northrop Grumman. Post 9/11, this has been a growth sector. Department of Defense budgets have increased annually and the creation of the Department of Homeland Security has also fueled government contractor growth. This area figures to continue robust spending regardless of the outcome of the 2006 or 2008 elections. SAI puts it quite well in the prospectus:

“Following the September 11, 2001 terrorist attacks, U.S. Government spending has increased in response to the global war on terror and efforts to transform the U.S. military. This increased spending has had a favorable impact on our business through fiscal 2005. Our results have also been favorably impacted by increased outsourcing of information technology (IT) and other technical services by the U.S. Government. However, these favorable trends have slowed in fiscal 2006 and 2007 as a result of the diversion of funding toward the ongoing military deployment in Iraq and Afghanistan.”

SAIs funded backlog has grown steadily the past 3 years due to acquisitions and Federal spending growth. Funded backlog was $3.65 billion in FY '05(ending 1/31/05), $3.89 billion in FY '06 and $4 billion through 7/31/06.

The defense contracting space has been consolidating rapidly the past few years. A number of defense contracting IPOs this decade have been scooped up by larger entities, General Dynamics recent purchase of Anteon being the latest. SAI has a long history of growth through acquisition and I would absolutely expect that to continue. Due to their size, SAI will definitely be an acquirer, not an acquiree. They've acquired over 70 companies in the last decade alone. My take is that SAI is coming public in order to be able to use their stock to make larger acquisitions.


SAI will have a little over $1 billion in cash and $1 billion in debt post-offering. SAI will not pay a dividend as public company, however as noted they will be giving insiders a pre-IPO payout of $1.6- $2.4 billion.

Revenues have grown steadily this decade, although the pace has slowed the past 18 months. Revenues for FY 2005 (ending 1/31/05) were $7.2 billion and for FY 2006 (ending 1/31/06) $7.8 billion an 8% increase. Through the first 6 months of FY '07, revenues appear to be on a pace for $8.1 billion, a 4% increase. Revenues have actually been quite flat the past 5 quarters. Again at this point I would expect SAI to attempt to grow through acquisitions going forward, most likely public companies in the Federal contracting space.

Operating margins are relatively slim in this sector. SAI has been in the 6.5%- 7% historically. Net margins have been in the 4% range. Based on these margins and FY'07's revenue run rate, I would anticipate SAI to earn $0.90- $1.00 a share this year. On a $14 pricing SAI would be trading 15 X's current year earnings.

Going forward I would expect slow organic growth, mostly due to the sheer size of SAI. I would expect future revenue growth to be driven by acquisition. Again due to SAIs size, I would anticipate they'll be in the market for public companies in their sector that can be immediately accretive to the bottom line.

SAIs closest pure play comparables are CAI/SRX/MANT. This has been a very good sector to be in this decade with a number of highly successful IPOs including MANT/ SRX/ SINT/ MTCT. Also a number of other IPOs in this sector have been bought out at hefty premiums including ANT/VNX. This is a sector I'm quite familiar with having owned all seven of these companies stocks as various times, CAI's back when it was on the nasdaq as CACI. A quick comparison of a few with SAI:

SAI (on a $14 pricing) - $5.8 billion market cap, trading 0.7 X's revenues and 15 X's earnings. Net margins in the 4% range, expected revenue growth in the 5% ballpark.

CAI- $1.75 billion market cap, trading 0.85 X's revenues and 19 X's earnings. Net margins in the 5% range, expected revenue growth in the 8% ballpark.

SRX- $1.6 billion market cap, trading 1.2 X's revenues and 24 X's earnings. Net margins in the 5% range, expected growth in the 12% ballpark.

MANT- $1.1 billion market cap trading 1 X's revenues and 21 X's earnings. Net margins in the 5% range, expected growth in the 12% range.

SAI is coming cheaper on a PE basis, but due to size, the expected growth rates are a bit slower then CAI/SRX/MANT.

Conclusion- I'm neutral on this deal. I suspect the sheer size of the offering will mute short and mid-term performance. However they appear to be pricing it at an attractive multiple to 1) get the deal done and 2) have an opportunity for longer term appreciation. My preference in this niche is for the smaller players that have a good chance to be swallowed up at a premium by the likes of SAI. However SAI is a big player in a sector that has done quite well this decade. The 89 million shares being floated are a bit much for my tastes; however SAI should be a solid longer term play in a sector that should continue to perform well. Expect numerous acquisitions by SAI over their first year public, most likely a number of them being stock based acquisitions.

A Large offering coming at an attractive enough multiple to get it done successfully in range

October 9, 2006, 7:19 am

An overlooked recent ipo

5 on the schedule this week, 9 more next. Analysis pre-ipo on all as usual at:


ICFI - ICF International

ICFI, ICF International plans on offering 5.5 million shares at a range of $14-$16, assuming over-allotment is exercised. 1 million shares of this offering will be sold from insiders. UBS will be lead managing the offering, Stifel, William Blair and Jefferies will be co-managing. This is a rather weak underwriting team overall. Post-offering ICFI will have 13.6 million shares outstanding for a market cap of $204 million on a $15 pricing. IPO proceeds will be used predominantly to pay down debt.

CM Equity Partners will own 56% of ICFI post-offering.

From the prospectus:

“We provide management, technology and policy consulting and implementation services primarily to the U.S. federal government, as well as to other government, commercial and international clients. We help our clients conceive, develop, implement and improve solutions that address complex economic, social and national security issues.”

ICFI is an expertise as well as contracting company. 72% of '05/'06 revenues were derived from the US Federal Government. ICFI focuses their expertise and contracting business in 4 general areas: defense and homeland security; energy; environment and infrastructure.

ICFI pretty much defines their reason for existence thusly, “Increased government involvement in virtually all aspects of our lives has created increasing opportunities for us to resolve issues at the intersection of the public and private sectors.”

ICFI has provided consulting services to the U.S. Environmental Protection Agency [EPA] for more than 30 years, the U.S. Department of Energy for more than 25 years, and the DOD for over 20 years.

What does ICFI do? 3 things:

1) Advisory Services: ICFI provides advisory and management consulting services including needs and markets assessment, policy analysis, strategy and concept development, management strategy, and program design.

2) Implementation (contracting): based on the results of advisory services, ICFI provides implementation services including information technology solutions, project and program management, project delivery, strategic communications and training.

In other words, ICFI advises the Federal government that the Feds should hire ICFI to contract! In IFCI's words, “Because of our role in formulating initial recommendations, we are often well positioned to capture the implementation services that often result from our recommendations.”

3) Evaluation and Improvement Services - ICFI provides follow-up evaluation to their advisory and contracting services.

The specific areas in which ICFI has provided these services include terrorism, federal budget deficits, emergency preparedness for natural disasters and national security threats, rising energy demands, environmental changes and an aging federal civilian workforce, among others. ICFI has consulted and provided services for Homeland Security, energy policy expertise, transportation infrastructure, immigration, population growth, and health care.

ICFI has made a few acquisitions over the past 2 years to expand their scope; however they're still a pretty small player in the government consulting/contracting space. There is one huge contract however that has not only opened up the window for them to come public, but makes this IPO an interesting and viable offering.

Road Home Contract - In June 2006, ICFI was awarded a contract by the State of Louisiana to serve as the manager for The Road Home Housing Program. This program, being funded by a Federal Block Grant (from HUD) of $8.1 billion, is designed to assist the population affected by Hurricanes Rita and Katrina to repair, rebuild or relocate by making certain reimbursements to qualified homeowners and small rental unit landlords for their uninsured, uncompensated damages. ICFI was awarded the contract due to a prior advisory relationship post-Katrina with the State of Louisiana. ICFI is managing this contract not receiving the $8.1 billion. However ICFI estimates that the maximum amount payable to ICFI and its subcontractors to the first four-month phase of the contract will be $87.2 million. ICFI will subcontract to itself 50-60% of this as well as derive fees for managing this contract. ICFI has $208 million in total revenues in 2005, so even if one were to lowball estimates here for the Road Home Contract just won, it is going to have a major impact on ICFI's top and bottom line going forward beginning with the 3rd quarter of 2006(the current quarter). Only the first phase (the $87.2 million) is guaranteed, but that is just business as usual and ICFI is in a great position to continue to derive significant revenues from this program over the next 3 years. I'm even more certain of this after looking at the Louisiana state website and reading, “The Road Home is now being administered by ICF International” which was contracted by the Office of Community Development to oversee the program through to its completion. A “big deal” for a little player like ICFI as they state, “by far our largest individual contract.”

So we've a small Federal government contractor that just landed a huge management contract win.


Note that revenues through the most recent reported quarter 6/06 do not include any of the Road Home contract revenues. Those will kick in beginning the 9/06 quarter. Prior to this contract ICFI has managed to post 9 straight quarter of sequential quarterly revenue growth.

No real cash on hand as the bulk of offering proceeds will go to pay down debt. There will be a bit of debt post-offering, $12 million; however this is down substantially from $50 million pre- IPO. Debt was laid on in acquiring complementary businesses.

Due to an acquisition revenues ramped in 2005 49% to $208 million. Gross margins were 41%. SGA expense ratio was 34%. Operating margins were a slim 4% and net earnings after tax/ interest payments were 3% rounded. Note as always I've folded out debt servicing costs for the debt paid off on offer. ICFI made $0.44 in 2005. On a pricing of $15, ICFI would be trading 34 X's 2005 earnings.

Growth looks to have been muted through the first 1/2 of 2006 at 6-7% or so. That obviously will change drastically when ICFI starts receiving the Road Home monies the back half of '06. Frankly until they post a quarter with these monies, it is difficult to say for certain how much revenues will be derived and how much will filter to the bottom line. The following forecasts for full year 2006 DO NOT include any projections from the Road Home contract. I'm not ducking out of a tough projection here either. ICFI themselves state, "Because the contract is in its start-up phase, it is not possible for us to predict the level of revenue or profit we will earn during the first four-month phase or through the balance of the contract”. I do believe revenues for ICFI from this contract will be significant in the 2nd half of 2006, in 2007, in 2008 and possibly beyond. An $8+ billion program is a big one and ICFI is the sole manager of the first phase of this program and would seem to be in line to manage the future phases as well.

So without the Road Home contract factored in at all, ICFI stood to being in roughly $220 million in revenues in 2006. Gross margins and SGA expense ratios would mirror 2005. Net margins again appeared to be headed for the 3% ballpark. Net earnings without the big contract win looked headed for approximately $0.55- $0.60 per share. On a pricing of $15 ICFI would be trading at 26 X's 2006 earnings.

Risks- The biggest is should ICFI lose the Road Home contract. As is typical, the contract itself and ICFI's involvement is only guaranteed through the first phase with both needing renewal before phase II and then before phase III. I see this as typical oversight and checks and unless ICFI grossly mismanages Phase I, they should be in line to receive significant revenues from this contract for the next 3-5 years. Keep in mind though, should something occur and they lose this contract, the stock price will tumble fast and far. 26 X's current earnings is expensive for a company this size in this space. Without this contract, those are the projections for ICFI and should that contract evaporate, so will the stock price.

Conclusion- The big contract win makes this deal work. Also keep in mind the government consulting/contracting space has been consolidating rapidly this decade. There have been at least four government contracting IPOs this decade that have been bought out way, way up over IPO price in the past few years. The most recent was Anteon, which IPO'd in 2002 at $20 a share and was bought out by General Dynamics earlier this year for approximately $56 a share. Anteon was a much larger/ stronger player then ICFI, however the buyout trends in this space have been strong this decade. ICFI is definitely a buyout candidate themselves, especially with this large Road Home contract in Louisiana. I honestly don't know what ICFI will earn in 2006 and 2007 as I'll need to see at least one earnings report reflecting revenues from the Road Home contract. However it appears automatic to me that this contract will bulk up both the top and bottom line substantially for ICFI the next 3-5 years beginning this quarter. The combination huge contract win and existing in a rapidly consolidating space (consolidating at a premium) makes this deal work.

Without the big contract win I would be neutral to pass in range on this offering. With the contract win, I like this deal in range quite a bit. Even more so should it get overlooked in a crowded IPO field and price below range, which I think is possible. Why possible? Without looking closely here, ICFI looks average at best....and the IPO market often does not closely initially.

October 6, 2006, 9:00 am

lackluster week in the ipo market

DAC...didn't take too long for that one to break....even with market doing well, they're not hesitating to overprice ipos and break them if they can get away with it. The high fee generating hedgies have really altered the ipo landscape.


1 - they can get size on these offerings because they do so much volume biz at the houses...and for the most part they're looking to take size and flip them. This has resulted in a number of ipos pricing stronger then they otherwise would..and then being unable to sustain that pricing. we've seen the after effects of this recently as more ipos by % have broken pricing past year or so then anytime since 2000. This during a pretty solid market environment.

2 - shorting. I've been checking short interest on ipos for years and until 2005 or so it always went like this: first month out there would be some short interest, pretty much the underwriting team responsible for that in the normal course of making a market in a new issue....after that for first year there would NEVER be much of any short interest. Near zero really across the board outside of the larger cap offerings.

Then sometime in '05 or so we started seeing hefty short interest as a % of float in a ton of ipos, some from first week public right on through....many though started seeing significant rises in short interest on any move up, no matter the company or valuation.

Hedge funds have changed the market landscape in many ways the past few years, most definitely with ipos.

frankly playing the ipo market is dangerous....even more so now with really no pricing support to speak of. The pay-offs can be quite nice of course as the beta with ipos in terms of volatility is way above the average stock....you've got to pick your spots though and now it is even more important to avoid deals that come public priced artificially high due to the hedgies grabbing allocations in size on anything decent..in order to flip usually.

interesting times..........a big part of what we do at tradingipos.com is help people avoid specific ipos as well as recommending others. The good thing is we've absolutely no incentive to recommend an ipo. This week was an awful week on the ipo schedule. We had 5 scheduled, only 2 came out the door and both broke pricing day. I recommended none of the 5, urging subscribers to avoid every deal this week both in allocations and aftermarket. If it isn't there, it isn't there. Next week however is a much different story. As usual a full analysis pice on every ipo every week at:


October 1, 2006, 10:32 am

SFLY - Shutterfly

5 more on the calendar this week. As always we'll have a an analysis piece on each prior to pricing/open. http://www.tradingipos.com

SFLY - Shutterfly

SFLY, Shutterfly plans on offering 6.7 million shares (assuming over-allotment) at a range of $13- $15. Insiders are selling 0.9 million shares of the offering. JP Morgan is lead managing the offering, Piper Jaffray and Jefferies co-managing. Post-offering SFLY will have 23.6 million shares outstanding for a market cap of $330 million in a $14 pricing. IPO proceeds will be used for general corporate purposes.

3 venture capital entities will own approximately 55% of SFLY post-offering.

From the prospectus:

“We are an Internet-based social expression and personal publishing service that enables consumers to share, print and preserve their memories by leveraging our technology, manufacturing, web-design and merchandising capabilities.”

Might not be able to tell from that sentence, but SFLY allows users to upload, edit, enhance, organize, find, share, create, print and preserve their digital photos. Print revenues are derived from sales of photo processing of digital images, including sales of 4x6 prints, and the related shipping revenues from these sales. Other then prints, SFLY also offers photo-based merchandise, including calendars, greeting cards, scrapbooks, mugs, mouse pads, bags, puzzles, playing cards and apparel. 4X6 photo prints however account for the majority of revenues.

In addition to online printing and ordering, SFLY also enable customers to develop on-line photo albums to share with others.

SFLY derives approximately half of their entire annual revenues in the 4th quarter of each year. Based on surveys, SFLY believes their customer base consists of approximately 84% female, approximately 63% in the 25-44 age range and approximately 53% with children. 98% of all customers are in the US. Since inception in 1999, SFLY has fulfilled more than 12 million orders, sold approximately 370 million prints and stored approximately one billion photos in the image archives.

SFLY has a major problem. Digital photo printing has essentially been commoditized. Competition is everywhere from online portals such as yahoo to large big box retailers such as Wal-Mart. Literally everyone will print your digital photos and online photo communities are pervasive. SFLY was an early mover in this space, but they've absolutely no price leverage nor anything approaching a barrier to entry. The numbers point this out, as gross margins are deteriorating and operating expense ratios are growing. This is the opposite of what one wants to see in an IPO.

A prime example of what is occurring to SFLY, in the 2nd quarter of 2005 a number of SFLY's competitors dropped their prices for printing 4X6 digital photos from $0.29 to $0.12. That is a huge drop and to attempt to continue competing SFLY dropped their 4X6 prices to $0.19. Big box retailers and online portals both have a myriad of other revenue sources and can use digital photo printing as a loss leader to drive traffic. They can essentially give them away to increase customer flow, while digital photo printing is the only game in town for SFLY. Yahoo is currently $0.15 or less for 4X6 prints undercutting Shutterfly's $0.19. Why would anyone pay more for Shutterfly? It is a good question. Yahoo is the #1 site on the web and Shutterfly is #1,100. How can SFLY compete by charging more per pricing then Yahoo?

The March and June 2006 quarters were SFLY's lowest gross margin quarters in their operating history. Through the first 6 months of 2006, gross margins declined 2% from the first 6 months of 2005 while R&D, sales & marketing and general & administrative expense ratios were ALL up over the corresponding 6 months of 2005. SFLY's margins and expense ratios are all trending the wrong way, a direct result of digital printing prices failing swiftly. This is enough to pass on this offering right here. I'll summarize the financials and forecast, but you want to avoid an IPO whose metrics are all trending the wrong way.


$4 per share in cash post-offering, no debt.

Revenues grew 54% in 2005 to $84 million. SFLY's revenues this decade have benefited from the growth of the digital photo market. Gross margins were 56%, operating expense ratio was 50%. Net margins after tax were 3.5%. This was not a high margin model to begin with, let alone when digital print costs begin falling rapidly. Earnings per share in 2005 were $0.13. On a $14 pricing, SFLY would be trading 108 X's trailing earnings.

Because SFLY derives approximately 50% of revenues in the 4th quarter, revenues through the first 6 months of 2006 are not comparable to full year 2005. Instead we need to just compare to first 6 months of '05 and it isn't real pretty. Revenues do appear as if they will rise in 2006 overall by 25%-30% to $105- 110 million. That is the good news. Gross margins slipped to 49% first 6 months of '06 compared to 51% first 6 months of '05. The larger concern is that operating expenses have increased to 66% of revenues from 57%. Not good, that is a huge increase, especially when factoring in the 30% revenue increase. In fact the deteriorating gross margins and the big increase in operating expense ratio will make it very difficult for SFLY to be net positive in 2006. Through the first 6 months SFLY lost $0.25 a share compared to a $0.06 loss the first 6 months of 2005. I think SFLY will lose money in 2006, at best break even.

Spurred by strong pricing in a newer market digital photo printing, SFLY has made a profit each of the past 3 years. Pricing in the digital photo printing space have dropped significantly and there is the very real possibility SFLY may never earn a bottom line profit again. SFLY margins are all trending the wrong way as SFLY just does not have any pricing power in a competitive sector. What SFLY does have currently are unique visitors and users and the internet sector is one flush with cash. SFLY then does have value; however I'm passing here easily in range. SFLY is going from profitability to operational losses; I don't have any interest here. I've liked a number of the internet deals this year, I don't care for SFLY.

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