Roumell Asset Management – Covisint: Takeover valuation, Strong technology platform in the automobile industry; Identity Management tools and its IoT platform are the best
Excerpts from the letters
We have followed the Covisint story since its 2013 IPO and engaged extensively with management over much of that time period regarding the company’s operations and prospects. While we are enthusiastic about Covisint’s leading position within the automotive industry and the strength of its core technology, we believe that the potential of these assets can only be realized as a private company with ample growth capital available and the ability to aggressively adapt to the market realities facing you today.
To be clear, Covisint boasts some compelling attributes. First, the company’s technology platform is strong and highly recognized in the automobile industry, underscored by long-term contracts. Second, it possesses a highly recurring subscription revenue stream, with 95% renewal rates, coupled with gross margins now over 50%, thanks to the company’s successful decision to outsource low-margin service work under the leadership of the company’s Chairman, Mr. Sam Inman III. Nonetheless, while it is true that the company has effectively replaced the revenue of the healthcare business it exited two years ago, the company has been unable to grow its subscription revenue sufficiently to justify its cost structure as a public company.
TU-Automotive Telematics conference, Novi, Michigan
Underscoring the company’s belief in the strength of its Identity Management tools and its IoT platform, we confirmed that industry leaders, partners and customers remain very positive in the platform’s capabilities. Industry contacts who are deeply familiar with competing platforms – Telit, Aeris, PTC’s ThingWorx, GE’s Predix and IBM’s Bluemix (the company’s chief competitor, as we understand, in last year’s Jaguar Land Rover contract win) – indicate to us the superior depth, complexity and sophistication of the company’s platform. A key industry participant said flatly that the Covisint platform was the best platform among these leading IoT platforms. We spoke directly to key customers who underscored their positive view of the platform’s capabilities, including a major automobile manufacturer who expects to expand its relationship with the company. We were also happy to learn that a major beverage manufacturer appears to be a likely new portal customer.
Nonetheless, the primary reasons put forth for the lack of new subscription revenue were a lack of brand awareness and insufficient marketing heft. Additionally, the 6 month delay in introducing the company’s IoT platform, finally rolled out in January of 2016, appears to have been a costly event. Competitors with less robust platforms are described as possessing superior marketing and brand strength. In the absence of new subscription revenue, we believe the company’s platform would be far better leveraged in the hands of a stronger, better capitalized entity. If you are interested to read insights like this, we are happy to offer you a free trial.