Osmium Partners – Intersections Inc. (INTX) – Activist Investing
Osmium has investors hopeful for a turnaround as Intersections’ legacy business continues to drag down the stock.
Osmium Partners finally went activist on Intersections Inc. (INTX). Osmium has held shares since at least 2010, though it aggressively started adding to its position in 2013 and now owns 16% of the Company. Since Jan 1, 2013, INTX has traded down over 60%, however, Osmium has bought all the way down and its cost basis sits at $6.07 (or 38% above the current trading price of $3.77). Osmium is a small-cap focused fund and its portfolio heavily favors tech companies, though Intersections is more of a services with a dash of technology play. The fund typically targets low value, net cash positive stocks with high insider ownership.
While on the surface, Osmium’s average return of 10% on 9 activist targets is nothing to get too excited about, its annualized return of combined active and passive investments is much higher (quoted in 2014 as 17%+ since inception) and it has scored some big wins with recent activist investments in zipRealty (85%) and Vitacost (48%), both of which were acquired. In fact, 5 of its 9 targets have ultimately been acquired (I’m counting Internet Patents as it sold substantially all its assets for more than its market cap at the time of sale, resulting in a large special dividend). Also, Osmium has been particularly effective at getting board representation in recent campaigns at Vitacost, Rosetta Stone and Spark Networks, where it seized control of the board. Osmium entered a 1 year standstill agreement with Intersections in exchange for confidential information, as it looks to engage with the Company and use its expertise to help turn around the business.
When digging into Intersections, the Alternative Activist first wanted to answer why the stock price has taken such a beating, leading to an LTM revenue multiple of only 0.2x. You can see in the snapshot that revenues have declined at an 8% CAGR for the past 5 years, and that decrease has accelerated to 14% in the past 3 years. Yikes.
INTX’s Personal Information and Identify Theft Protection Services business line has historically comprised 90%+ of total revenue. The service was primarily marketed through large financial institutions like Bank of America, Citibank and Capital One and customers would subscribe to INTX’s offering through their bank, resulting in a nice stream of monthly recurring revenue. However, amid regulatory scrutiny from the Consumer Financial Protection Bureau, Bank of America stopped marketing Intersection’s services in 2011 and Citibank and Capital One stopped in 2014/2015. This blog post (and this) do a good job quickly explaining the concerns raised over add-on services disingenuously marketed to consumers by big banks, which ultimately resulted in a large refund to customers of BofA and others. Intersections was not accused of misconduct, but has nonetheless suffered as these banks were driving the bulk of their revenue. Intersections has continued to service existing subscribers, but that number is dwindling every year and revenues will continue to shrink.
Intersections has been trying to go direct to the consumer, but the space is highly competitive with familiar names such as Equifax, Experian and TransUnion (but all three also double as a supplier of credit information to Intersections). Further, financial institutions are now offering credit score services for free, with some displaying the score on monthly bills, and successful startups with attractive UI’s like Credit Karma also offer free credit monitoring services through an ad-based model vs. subscriptions. With free services becoming the norm, the Alternative Activist expects fewer consumers willing to pay for credit monitoring services or to stay with the Intersections solution long enough to cover the customer acquisition costs.
In light of its legacy business declines, INTX is taking the necessary steps to re-position the company. It has overhauled the management team and reduced the workforce, resulting in cost savings of ~$14.0M/year. INTX is prepared to launch its VOYCE product line, a pet health monitoring solution. Think of a Fitbit band on your pet, which will monitor, collect and store actionable data for pet owners. It looks like Intersections developed some technology for VOYCE, but a critical component is licensed under an exclusive agreement and has royalty revenue share obligations. This is a call option that could be fruitful for investors.
If INTX management can stabilize operations and turn the business back to profitability, while absorbing the continued runoff of subscribers from financial institutions, value could be had. INTX has little debt and a net cash position that is 14% of the market cap. You would be investing alongside highly incentivized owners, as INTX has very high insider ownership of 47% (excluding Osmium), with 9% from the CEO and 34% from Loeb Partners, where the CEO previously served as a Managing Director and Bruce Lev was appointed to the INTX board in late 2014. INTX has returned value to shareholders in the past through a dividends and share buybacks, but in light of its legacy business struggles, its dividend has been suspended and it hasn’t bought back shares since 2013.
While the situation could get worse before it gets better, the Alternative Activist has added INTX to its watchlist. The turnaround should be watched closely as Osmium has a good history of squeezing value out of its targets, and if management can stabilize the business, the valuation is so low, it would be hard to ignore.