IBEX - IBEX: Not Picking Up The Phone Yet

Summary

• IBEX has seen solid growth since its public offering in the summer of 2020.
• I like the steady growth, being positively surprised given my long-term concerns on its business model.
• I am impressed with the performance and like the modest valuation, yet continue to have doubts which prevent me from buying at today's levels.

In August 2020 I looked at IBEX ( IBEX ) , the customer experience company which went public at the time. Really being a business process outsourcing business, I saw the solid growth and profitability, yet felt that there were challenges to the long-term business model. This made me wonder if the company provided customer service to its shareholders as well.

The Thesis

IBEX's services are geared towards customer experience, allowing companies to more effectively engage with their customers. This is important as customers require more channels of interaction, with their demands and expectations being on the increase as well.

The company is really a business processing outsourcing organization, focusing on acquisition, engagement and customer experience, achieved through multiple channels like voice, web, chat and mail, with voice still being the dominant channel out there. The company requires heavily on cheap labor, found in the Philippines, Jamaica, Pakistan, and other countries, which brings certain geographical risks. Other risks include reliance on a few large accounts and the potential for new modes of communication to render voice no longer necessary, or as important as is the case today going forwards.

Nearly 5 million shares were sold at $19 per share, below the preliminary offering range between $20 and $22 per share. With 17.5 million shares outstanding, equity of the company was valued at $332 million, which worked down to a $300 million valuation if we account for a modest net cash position. Valuations dropped in a huge way as shares fell to $15.50 on the first day of trading, reducing the valuation to less than a quarter of a billion.

The company posted sales of $368 million in 2019, on which it posted a small operating profit of $7 million. For the first three quarters of the fiscal year 2020, the company saw sales up 9% to $304 million as operating profits rose to $20 million. This made that full year sales were on track to come in around $400 million with operating earnings seen just above $25 million, leaving potential for earnings around $20 million, or $1.20 per share. Given this earnings power and net cash position around $2 per share, the multiples came in at just 11 times earnings, which looked quite cheap, yet I was a bit skeptical on the business as well for the reasons mentioned before.

An Update

After shares fell to the high single digits soon after the public offering, shares rallied to the $20 mark by year-end, hit a high around $25 per share in 2021, and now trades at $19.

After posting 2020 sales around the $400 million mark, the company guided for modest growth in 2021 with sales originally seen around $433 million on which EBITDA around $60 million was expected to be generated. As it turned out, the company surpassed these expectations and posted a 9% increase in sales to $444 million late in 2021.

EBITDA came in at $66 million as non-GAAP earnings came in at $23 million and change, equal to $1.34 per share. This however excludes about a quarter per share adjustment in stock-based compensation expenses and adjusted for some other items, earnings came in around a dollar. Net cash was remained at $30 million, equal to more than $1.50 per share with nearly 19 million shares outstanding.

The company guided for modest growth in 2022 with sales seen up at a midpoint of 8% and adjusted EBITDA set to rise in a modest fashion to $70 million. After a solid start to the year, the company hiked the midpoint of the full year sales guidance to 11% alongside the second quarter earnings release, keeping the EBITDA guidance unchanged. Following double-digit growth continuing, albeit that margins were lagging a bit, the company has seen very strong results for the year.

In September, the company posted its fiscal 2022 results, a year in which full year revenues rose by 11% and change to $494 million. That was about the good news as EBITDA rose in a very modest fashion to nearly $67 million, up by less than a million compared to the year before. This made that net adjusted earnings were stuck around $24 million and change with adjusted earnings per share up a penny to $1.35 per share as stock-based compensation expenses fell to $0.10 per share.

With earnings realistically trending around $1.25 per share and net cash balances of $35 million translating into a net cash position of nearly $2 per share, valuations remain low. Trading at $19, the operating assets are valued around $17 per share, equal to 13-14 times earnings.

Moreover, good times are set to continue with 2023 sales seen at a midpoint of $550 million, this time accompanied by some margin expansion with EBITDA seen around $78 million. The additional $10 million might easily result in a net earnings number of $1.50 per share, which makes that the situation starts to look quite interesting here. This is certainly the case amidst strong cash flow conversion with capex of $20 million set to trail depreciation charges by a huge margin.

Concluding Remark

The truth is that I am quite impressed with the performance of IBEX so far, delivering on solid 10% growth for a couple of years now, amidst a non-demanding valuation, albeit that I remain unimpressed with the long-term potential of the business.

Hence, I am sticking to a largely neutral position here, albeit that the valuation argument starts to prevail if shares might fall-off to the mid-teens here.

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