Thursday, June 22, 2006

Interesting Call of The Day - Kintera (NASDAQ:KNTA)

Roth Capital's Nathan Schneiderman notes that over the past month, Kintera (NASDAQ:KNTA) insiders have been loading up on company stock; of note, Director Alfred Berkeley purchased 100k shares in late May at an average price of $1.40. While some of the other insider buying may have been symbolic, he thinks that Mr. Berkeley is buying for one reason and one reason only-to make $$$.

Firm is optimistic about Kintera's prospects for revenue growth and much sharper cost controls. They expect that new COO Rich LaBarbera will work closely with CFO Dick Davidson to hack away at the company's bloated cost structure. If need be, they think that Kintera could cut headcount in half. Furthermore, there is ample room for non-resource expense savings.

While it's certainly tempting to conclude that a stock in freefall is going to zero, the beauty of enterprise software companies with healthy recurring revenue is that it's damn near impossible to kill them off. They estimate that Kintera's 2006 recurring revenue will be $30 million, up nearly 20% y/ y. In firm's view, the current valuation of 1x recurring revenue (not total rev) will not last for long. Notes there have been takeouts of struggling vendors in the space at multiples of recurring revenue; for example, the current offer price on Onyx Software is more than 3x recurring revenue. In firm's experience, it is nearly impossible to kill an enterprise software company that has healthy recurring revenue and that should give Kintera investors considerable downside protection.

As Kintera executes, tey envision the stock rebounding nicely and thus maintain BUY rating and price target of $2.25, reflecting a multiple of 1x 2007E sales.

Notablecalls: KNTA looks like to be a deep-value idea. Some risk but lots of upside. One to watch.

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