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ActivIdentity (ACTI): Significant Improvements and Exciting Prospects

Posted on February 9, 2007

Last evening, ActivIdentity (ACTI) reported financial results that demonstrated significant progress in the company´s turnaround. Specifically, the company generated nearly $8 million in free cash-flow during the quarter, it´s first positive cash-flow quarter since the company´s IPO. The company ended the quarter with a hefty cash balance of $136 million (no debt), or nearly $3 per share.

Importantly, unlike another turnaround pick Network Engines (NENG), ActivIdentity (ACTI) generated this cash-flow on the heels of significant revenue growth, with the top-line increasing by 27% year-over-year and gross margins reaching 69%.

The company´s forward guidance, though, for the upcoming quarter was less than stellar. However, our understanding, based on comments made on the conference call was that guidance is somewhat conservative and does not include the potential closing of several significant deals in the pipeline.

Overall, we are not too concerned about the quarterly fluctuations at ActivIdentity, since the software business is, in general, a bit lumpy. More importantly, however, is the fact that ActivIdentity is entering what we believe is a multi-year period of high double-digit growth. Specifically, the company is and should be able to continue to benefit from the increasing adoption of Smart Employee ID badge solutions by both both governments and large businesses.

Interestingly, as we have mentioned in the past, we still do not think ACTI´s shares fully reflect the potential for the company over the next few years. With $136 million in cash, and no debt, the company’s Enterprise Value is about $105 million. Security software still remains one of the hottest areas in software M&A with takeouts going at very high multiples of TTM revenue. With an estimated $60 million in sales in the coming year, we believe that ACTI should be worth about 3X EV/Sales, especially considering that it has now managed to reach profitability amidst strong top-line growth. That would imply a takeout price for ACTI at a price of at least $6.50 to $6.80 per share.

We think that as ACTI continues to demonstrate double-digit top-line growth and increasing cash-flow over the coming quarters, that it’s share price will rise to our target price. At the same time, with a pristine balance sheet and low relative valuation to other security software stocks, there does not seem to be much downside risk in the company´s shares.

Please Note: We first recommended ActivIdentity (ACTI) at $4.37, and still hold a position in the stock. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are
committed at your own risk, financial or otherwise.

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This site may include market analysis and we may own shares in the stocks mentioned in our reports. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise.

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