INTA - Intapp Q4 Preview: Expect Strong Trend To Continue But Stock Is Overvalued

2023-09-06 09:50:52 ET

Summary

• Intapp is expected to release its Q4 2023 earnings report, with analysts predicting a loss of 30 cents per share on revenue of $93.06 million.
• The company specializes in providing cloud-based solutions for professional and financial services firms, serving top accounting firms.
• Intapp has reported consecutive (Non-GAAP) profitable quarters and an increasing number of clients, but faces risks of competition and exposure to the financial sector.

Intapp, Inc. (INTA) is expected to release its FQ4 2023's earnings report after-hours on Wednesday, September 6th, 2023. Analysts expect the company to report a loss of 30 cents per share [GAAP] on revenue of $93.06 Million. Should Intapp meet the estimates, it'd represent an EPS growth (or narrowing loss) of 15% and revenue growth of 23%.

Introduction

Since this is my first coverage on Intapp, let's start with a quick overview about the company before previewing the upcoming results. In the company's own words " Intapp provides cloud software solutions that address the unique operating challenges and regulatory requirements of the global professional and financial services industry. "

In other words, Intapp is an Application Software company that specializes in providing cloud-based solutions that help professional and financial services firms modernize and streamline their operations. Its list of clients include Raymond James, BDO, and KMPG as the company proudly states that it serves 13 out of the top 20 accounting firms in the country.

The company was founded in 2000 and went public in June 2021. It started trading in the $25 range and the stock is up more than 50% since its IPO.

What to Expect and Look Forward to in Q4?

• Intapp has reported three consecutive, profitable quarters based on Non-GAAP EPS as shown below. The company is expected to report Non-GAAP EPS of 1 cent and should Intapp meet or better that, the company would have reported an entire year of non-GAAP profitability. These are still very early days for Intapp as a public entity and reporting a full-year of non-GAAP profitability in 2 years of being public bears mention.

• Intapp has reported increasing number of clients in at least each of the last 4 quarters. It will be interesting to see if this uptrend continues and while it has to stop/flat-line at some point, given the general uptrend in cloud spending, I expect Intapp to report an increase in number of clients yet again in Q4 with the number reaching 2,300. This would represent a 10% growth in this metric YoY.

• As someone who is very skeptical of companies reporting numbers in a way that benefits them, I was pleasantly surprised that the number of Intapp clients with Annual Recurring Revenue [ARR] > $100,000 has also been increasing but at a faster rate than the general clients count. In other words, potentially more profitable clients are being added to the mix. The number of clients with ARR > $100,000 has gone up 13% in the last 4 quarters. I am predicting that Q4 will show a small increase in this metric to reach about 585 clients with > $100,000 ARR.

• The company's strengths in adding clients in general and in specific, clients who send more money its way are showing up in its Free Cash Flow [FCF] history so far. Out of the 8 full quarters since going public, Intapp has reported positive FCF in 7, including the last 5. It will be interesting to see if this trend continues as well but based on the strength in two of the last four quarters (FCF of $8.2 million and $8.6 million), it is safe to expect another positive FCF quarter.
• Finally, being a young company, Intapp is not immune to the expenses conundrum. Companies generally need to spend more on talent and advertising at this stage of their life-cycle to bring more revenue. So, an increase is expenses is to be expected, as shown by the 13% jump YoY in the March quarter. However, revenue went up by 33% in the same quarter, meaning expenses did not over-ride the sales momentum. I expect Q4 to show a jump in expenses YoY but as long as revenue growth is at least 10 percentage points, I'd consider the company to be on the right track.

Risks and Conclusion

While most of the numbers in the section above seem to be in favor of the company and its stock, there are risks to be aware of. My biggest worry for Intapp is that the Application Software industry is always ripe for disruption despite being one of the most advanced fields. SaaS and cloud-based businesses are high-margin and this typically attracts a flock of competitors. LexisNexis , for example, is a well-established competitor in the Legal space. We cannot rule out larger companies like Oracle Corporation ( ORCL ) and Salesforce, Inc. ( CRM ) entering specialized markets like the ones Intapp operates in should they deem it profitable. In addition, Intapp is heavily exposed to the Financial sector and any major weaknesses there may have an outsized impact on Intapp.

Considering all the risks above, valuation is of paramount importance when it comes to stocks like INTA. After nearly doubling in the past one year, the stock appears to be ahead of itself and its fundamentals. Another example of the stock's overvaluation is the fact that it is trading at nearly 35 times 2022's revenue of $75 million.

In short, I expect Q4 to continue the company's recent strong showing in Non-GAAP EPS, client base, and FCF. But the stock appears overvalued here. I am rating the stock a weak hold.

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