INIT Offers a Cheap Point of Entry

Interliant has grown rapidly through acquisition. The stock is down, but when the company pulls its businesses together, the stock could double.

See the calculations of the analysts at rationalinvesting.com in an MS Excel file here or here.

by Manish Aurora
of rationalinvesting.com

Interliant (INIT) is a full-service web and network-based applications hosting and deployment firm. Part of the management team came from AmeriData (which was sold to GE and was bankrolled by Softbank).

In the application hosting area, Interliant offers solutions for e-commerce, messaging, customer relationship management (CRM), intranets / extranets, and distance learning. The company also offers AppsOnline, a "self-service" source of online applications including collaboration and business tools (project management, expense report processing, scheduling, document management and private auctioning) and specialized applications for vertical markets (legal, mortgage and real estate, and sales). Plain vanilla (co-) hosting is a relatively small portion of the business. Interliant offers consulting for engineering networks, internet sites, and networked applications.

We'll show you the money
Revenues increased from $10.6 million for quarter ended June 30, 1999 to $38.6 million for the corresponding 2000 period, primarily due to a string of 13 acquisitions, which overshadowed organic growth of 24%. However, second quarter 2000 EBITDA was negative $19.1 million, compared with negative $5.8 million a year earlier. Gross margins were 27%, down from the 31% in the first quarter. The decline was attributable primarily to the inclusion of the lower-margin reSource Partner and Soft Link businesses.

The firm currently has integration activities underway to eliminate duplicate costs and will take the usual charges for them.

During the quarter, Interliant added 71 new ASP customers and commenced operations on the Dell OEM platform and Interliant Europe. For the six months ended June 30, 2000, on a pro forma basis, application hosting revenues comprised 29.5% of revenues, web hosting 14.2%, consulting 53.9%. At quarter end, the company had $154.5 million in cash, including $13.4 million held by Interliant Europe, a consolidated subsidiary that is 51% owned by them.

The true value of the firm
INIT stock was used as currency for takeovers of software and systems integration firms. Now that the stock has declined (from $55 to $5) further acquisitions seem unlikely. The stock's true value will remain unclear until all the difficult post-merger integration is over, but if the integration effort bears fruit, it will prove to be cheap. Gross margins could eventually hit 50%, and the stock, over time, could double.

Professional investors considering buying INIT stock should also look into the busted 7% convertible bonds, at a strike of $50+ (for which I would not hold my breath).

—End