RealMoney Silver - Muted INTV Can Outpace the Market

Muted INTV Can Outpace the Market
By Jonathan Moreland
RealMoney.com Contributor
1/17/2008 9:39 AM EST

The remarkable turnabout in sentiment on shares of InterVoice (INTV) is another indication of just how bearish investors are leaning now. I highlighted InterVoice a few months ago, and the stock had a nice run up until mid-November, as sales and profit margins in the company's second quarter (ended Aug. 31) both improved.

InterVoice's third quarter (ended Nov. 30) was also decent, and I believe the firm's turnaround is firmly intact. The stock's insider-buying profile has remained bullish as well. But this stock's sudden weakness over the past two months, and the line of questions on its recent earnings conference call, indicate that fears of a recession-led slowdown in business are dictating INTV's near-term price action. Appreciation of InterVoice's longer-term prospects has vanished.

InterVoice is a well-established vendor of interactive voice recognition (IVR) systems, which answer phone calls and attempt to direct callers to the proper place. InterVoice appears well positioned to take advantage of the major trends in IVR, which include enterprise-wide application of such systems and the move toward IP Multimedia Services (IMS) that integrate IVR with Web chat, and email response applications.

InterVoice's third-quarter revenues were up 8.6% sequentially to $52.9 million. Though sales were merely flat year over year, sequential growth is more telling given the turnaround that new management is engineering. Illustrating the increased efficiency, InterVoice even managed a GAAP profit of 7 cents a share, which beat expectations by a penny.

Unfortunately, solutions backlog at the end of the third quarter fell 13% sequentially, and management was only willing to guide for fourth-quarter sales in the range of $51 million to $56 million. That seems to indicate that the recent string of sequential sales gains could end, which lends credibility to concerns that InterVoice is as sensitive as any enterprise technology vendor to an economic slowdown.

But that is not management's belief or experience. Sales did not slow down markedly when recession hit in the early '90s, and management asserts that the "extraordinary compelling ROI" for businesses installing their products argues against a marked sales slowdown during any recession of 2008. After all, when business gets tough, there is an even bigger incentive to make the business more efficient. Considering that management guided for increased bookings in the fourth quarter, the backlog decline of the third quarter may well end up being seen as confirmation that InterVoice's business is merely lumpy, not deteriorating.

This is what Wedbush Morgan analyst Scott Sutherland appears to be banking on. In reiterating his strong buy rating on the stock after the third-quarter fall, he wrote: "While backlog growth took a breather after seven consecutive quarters of growth, we expect growth to resume in Q4. We continue to believe InterVoice will see solid revenue and EPS growth."

Danielle Ives at Friedman Billings Ramsey still isn't ready to commit to the stock, however. He was on the sidelines with InterVoice last summer, and remains there now.

"It's a good story," he admits. "Brandenburg [the ex-chairman who returned last summer to run the firm] is back, and cost controls are going well. But it's a matter of consistency. Over the last few years, the company has been an inconsistent performer, and bookings being down in Q3 showed that again."

I actually agree with both analysts' opinions. In the short term, the tenor of this market is unforgiving to any whiff of a slowdown in growth. So Ives is right to point out the third-quarter backlog decline as enough of a reason to keep INTV from rebounding strongly in the very near future. But longer-term investors can easily latch onto Sutherland's arguments to justify trickling some money into the stock, or for present investors to hold onto the position.

I've decided to hold on, and am emboldened to do so by another recent move I've made: shorting Riverbed (RVBD) , as I relayed in yesterday's column.

The two make a decent, though admittedly imperfect, pairing. Both INTV and RVBD are technology stocks that make enterprise sales. And though Riverbed's products may be sexier than InterVoice's, the macro forces on both companies should be similar. Not only is RVBD pricier than INTV on a PEG basis, but RVBD still trades for 8 times trailing sales after its recent demise. INTV only trades for 1.2 times trailing sales.

So if the Fed tosses out an intrameeting 50-basis-point rate cut in coming days, I would expect INTV to rebound much more than RVBD. But if the economy continues to tilt downward, I would expect pricier RVBD to suffer much more.