Cabot Small-Cap Confidential Issue: January 5, 2023

The Big Idea

While most industries have moved to cloud-based solutions over the last decade the professional and financial services industry hasn’t fully converted.

One of the challenges is that there are unique organizational, relationship and compliance requirements at these types of companies, which include investment banks, private capital firms, consulting companies and law firms.

Experienced partners, those on partner track, and other senior professionals hold a lot of knowledge and have relationships that are critical to their success, and that of the company they work with.

This intellectual capital can’t just be thrown in a spreadsheet and sent around the office. Homegrown technology solutions don’t cut it anymore. And adopting generic solutions to a very specific need is just ineffective and annoying at best, and breaches regulatory and confidentiality requirements at worst.

Today we’re looking at a company that’s developed a cloud-based platform tailored for the specific needs of the professional and financial services industry.

This industry is proving to be resilient to macro pressures. And with a technology platform that’s getting better every month and addressing a larger target market – now valued at about $10 billion – through acquisitions, strategic partnerships and new product releases this company seems to be bucking the trend.

We’ll jump in today with a half-sized position and see where it goes.

The Company

Intapp (INTA) provides industry-specific, cloud-based software for the global professional and financial services industry.

The company’s front- and back-office SaaS applications help private capital, investment banking, legal, accounting and consulting firms drive digital transformation, adapt to changing client, investor and regulatory requirements, deliver insights to partners and other key leaders, replace legacy systems, and operate more competitively.

The business dates back to 2002 when it first launched the Intapp platform and entered the legal market. Since then, Intapp has launched five new modules (Operations & Finance, Risk & Compliance, Marketing & Business Development, Deal Management, Collaboration & Content), completed eight acquisitions and secured several partnerships, including with Microsoft (MSFT) and KPMG (both in 2022), to help accelerate growth.

Most of Intapp’s revenue comes from the U.S. (70% in the most recent quarter). The U.K. represents the second biggest market (16%) while the balance of revenue comes from the APAC and EMEA regions.

The company has over 2,150 clients around the world, including big names such as The Carlyle Group, Owl Rock, Raymond James, Stephens, White & Case, Linklaters, KPMG and FTI Consulting.

The stock is doing relatively well now because management keeps raising guidance, and revenue, earnings and cash flow are growing despite a challenging macro backdrop, and a transition from term licenses to a subscription SaaS revenue base is progressing very well.

Products & Services

The Intapp platform is a modern, cloud-based platform with data architecture tailored to the professional and financial services industry. All modules are built on this platform and are powered by an artificial intelligence (AI) engine.

The platform unites disparate data and people from across the company, and from third-party partners, into a single solution. The pitch is that doing so streamlines people, data and processes so that better work can be done more rapidly and with greater confidence.

Intapp’s investor slide deck has the following diagram showing how management sees the platform driving collaboration within the organizational structures common to its clients.

The company goes to market with two brands: DealCloud and OnePlace.

DealCloud: A deal and relationship management solution for financial services firms and deal professionals. It helps investors and advisors react faster and make better decisions as they execute deals.

OnePlace: A solution for managing all aspects of a professional services firm’s client and engagement lifecycle. People within the organization can make better decisions and leverage knowledge from across the firm.

Within these two brands Intapp offers several modules, including Deal Management, Collaboration & Content, Marketing & Business Development, Risk & Compliance and Operations & Finance.

As acquisitions are integrated there is some shifting in the go-to-market strategy and product lineup.

But big picture, the takeaway message is that Intapp has very specific solutions tailored to the unique operations and organizational structure of its target markets.

The combination of effective solutions and a SaaS delivery model is driving more customers to Intapp and creating deeper relationships with current customers too.

Growth Initiatives

Transition to SaaS: Intapp’s transition to a SaaS model began in 2017 and is progressing very well, as evidenced by rapid growth in annual recurring revenue (ARR). Total ARR grew by 24% in Q1 fiscal 2023, while SaaS ARR growth was 41%. Management says it has not yet seen clients lose enthusiasm to move to SaaS solutions.

Land and Expand Sales Strategy: Like a lot of software companies Intapp tries to grow relationships with customers after sealing an initial deal. Having multiple modules helps, as does the development of new value-added features. In Q1 fiscal 2023, the company had 522 clients with ARR of over $100,000, up from 466 clients a year ago and 506 clients at the end of June. Big clients spending more on Intapp solutions is a good trend.

Acquire New Solutions: Intapp has completed eight acquisitions over the years, including DealCloud (2018), Repstor (2021) and Billstream (2022). While there is always acquisition work to do, these deals are bringing valuable technology, talent and clients to Intapp, and helping to expand its target market.

Partnerships: In 2022, Intapp announced partnerships with KPMG and Microsoft to drive more cloud adoption in its target markets. As part of the deals, Intapp has integrated its applications with Microsoft 365 (Teams, SharePoint, Office apps) as well as other Microsoft solutions (LinkedIn, Cortana, etc.). Over time these partnerships should allow bigger deals given the combined power and reputations of the three companies. Intapp also struck a partnership with Cherre, a real estate data management and analytics firm, to integrate Cherre data directly into DealCloud.

The Business Model

The majority of Intapp revenue is derived from subscriptions to SaaS solutions and related support (71% of fiscal 2022 revenue). Price depends on the number of modules and users. Subscription licenses, a legacy revenue stream that’s shifting to the SaaS model, drove 16% of fiscal 2022 revenue while professional services drove the remaining 13%. Intapp sells through a direct enterprise sales force. No customer represents more than 10% of revenue.

The Bottom Line

Intapp’s fiscal year ends in June so the company is currently in Q3 fiscal 2023.

In fiscal 2022 revenue grew by 27% to $272 million, and adjusted EPS came in at -$0.12, a big improvement from -$0.80 in fiscal 2021. In the last two quarters, revenue has grown 23% and 28%, respectively, while EPS has been -$0.04 and $0.01, respectively. Earnings results have surpassed expectations for several quarters.

For fiscal 2023 consensus estimates call for revenue to grow 21% to $330 million and for EPS to be -$0.04. Revenue estimates are lower than management’s raised guidance from November 7, which calls for revenue in the range of $332 - $336 million.

Revenue growth is seen around 18% in fiscal 2024 when Intapp is expected to deliver its first full year of positive EPS ($0.05 expected).

Risk

SaaS Transition: SaaS revenues deserve a higher valuation premium than license revenue and with Intapp’s SaaS transition going well the stock is benefiting. There’s no reason to think the positive momentum won’t continue. However, if issues pop up with the SaaS transition the stock will likely suffer.

Market Demand: Management has sounded very bullish (raising guidance) for several quarters now and says it’s not seeing longer sales cycles. This is great … for now. Any change in tone could lead to less confidence in recently raised guidance.

Foreign Exchange: About 20% of Intapp’s revenue is affected by currency exchange rates. While this shouldn’t be a big deal given the varied timing of payments, it’s worth mentioning.

Macro/Weakening Economy: There is a long list of macro concerns. We’ll have to monitor these as we move forward and try to determine which, if any, undermine the big-picture bullish trends for Intapp.

Competition

Intapp competes with a wide range of firms providing software solutions to the professional and financial services industry. While there is no perfect public comparison, two small-cap stocks, Clearwater Analytics (CWAN) and Enfusion (ENFN), provide decent peer comparisons in the financial software space.

The Stock

Trading Volume: INTA trades an average of 64,000 shares daily, around $1.6 million. We could have a slight impact on the share price.

Historical Price: INTA came public at 26 on June 30, 2021. The stock rallied into the fall (with the broad market), peaking just shy of 41 in late August. A 45% drawdown pulled INTA down to 22.5 by mid-October 2021. There were a couple of decent, multi-week rallies heading into summer 2022 but the drawdowns were larger and by mid-June 2022 INTA was trading below 14. The stock hung out between 13.5 and 17 then on September 7 the Q4 fiscal 2022 report ignited a rally that pushed INTA above its 50-day line and kicked off an uptrend that is still going today. INTA is now up about 70% since the September 7 report and hasn’t fallen back below its 50-day line. The next milestone is to break above the May 4 high of 28 (roughly 10% above current share price).

Valuation: INTA trades with an EV/Forward Revenue multiple of 4.7. That’s far less than the same multiple for CWAN (9.2), and above the multiple for ENFN (3.9). ENFN also appears undervalued as compared to CWAN but I think INTA is a “safer” choice right now.

Buy Range: Expect to buy between 23 and 27 over the next two weeks. BUY HALF

The Next Event: Q2 fiscal 2023 earnings in early February.

Current Recommendations

Please email me at tyler@cabotwealth.com with any questions or comments about any of our stocks, or anything else on your mind.

Glossary

Buy means accumulate shares at or around the current price.
Hold means just that; hold what you have. Don’t buy, or sell, shares.
Sell means the original reasons for buying the stock no longer apply, and I recommend exiting the position.
Sell a Half means it’s time to take partial profits. Sell half (or whatever portion feels right to you) to lock in a gain, and hold on to the rest until another ratings change is issued.

Disclosure: Tyler Laundon owns shares in one or more of the stocks mentioned. He will only buy shares after he has shared his recommendation with Cabot Small-Cap Confidential members and will follow his rating guidelines.

The next Cabot Small-Cap Confidential issue is scheduled for February 2, 2023.