Is Inteliquent an Intelligent Investment?

By Maxxwell A.R. Chatsko - June 5, 2012 | Tickers: CCOI, IQNT, LVLT | 0 Comments

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In today’s society we often take for granted the fact that we have instant access to a phone and the internet. The age of the cell phone has done little to slash demand for ground based communication networks as global demand for internet connectivity increased 528% from 2000 to 2011. Worldwide business growth would cripple communication infrastructure if new cables and lines weren’t built at a similarly impressive pace. Even then, global communication networks would remain largely unconnected if it wasn’t for network solutions providers such as Inteliquent, Inc. (NASDAQ: IQNT).

What the heck to do they do? Think of all global and local networks as isolated bubbles scattered across the globe. Individual users don’t realize that as reality, but communications carriers with footprints in multiple locals certainly do. Imagine spending millions or billions of dollars building out your network just to have geography get in your way. Ouch. That’s when Inteliquent steps in to provide links between fragmented networks to create a global, interconnected network. In short, they manage (route and reroute) a good chunk of global telecommunications traffic and act as the industry’s middle man. Here’s a small snip of cross-Atlantic connections provided by the company:

Intelligent growth?

In 2011 the company, formerly known as Neutral Tandem, was ranked second on the list of Forbes Top 25 Fastest Growing Technology Companies in America based on five year revenue growth. The company’s 2011 revenue was a 34% improvement over 2010, but analysts expect only 10% growth in 2012. Still, any temporary slowdown in growth may be offset by new synergies and capabilities created after merging with Tinet of Italy (thus the name change). As the following chart shows, management has made an effort to diversify revenue streams in the last five years while maintaining too-hot-to-touch growth:

Inteliquent is the fifth largest global IP transit network solutions provider and has plenty of growth left in the tank. It’s new EtherCloud product is a potential game-changer in terms of revenue. But how does that growth stack up against industry peers Cogent Communications (NASDAQ: CCOI) and Level 3 Communications, Inc. (NYSE: LVLT)? More importantly, is the growth sustainable?

First let’s look at the profitability and debt to assets ratios of the group to see which companies are most likely to continue fueling future growth.

Even though Inteliquent doesn’t have the revenue of its rivals it wallops Cogent and Level 3 in terms of profitability. This may be expected given recent troubles in the industry. Cogent has had connectivity issues and controversies in recent years, which has led to tension with customers. The company has reportedly made unauthorized peering connections between networks of its customers – raising questions about which customer pays for the bandwidth.

Level 3 has also had its share of problems in recent years (in case the table above doesn’t imply that), but things have been getting better. In the past 8 months the company acquired Global Crossing, completed a reverse stock split, and earned two big contracts from Voxility in Europe and the Defense Information Systems Agency in the United States. However, there are still too many questions about the financial health of Level 3 to make meaningful growth projections.

As for Inteliquent, healthy profitability combined with zero debt means management will have an easier time building sustainable growth in the next few years. Let’s dig a little deeper to investigate management’s ability to control costs in recent years:

Uh-oh. Despite the impressive growth in revenues, the company’s costs have been increasing and pushing profitability in the opposite direction. This is due to management’s determination to diversify the company’s revenue stream and expand internationally. Increased overhead expenses are a reality and a thorn in the side to growing businesses. Still, this raises questions about the sustainability of Inteliquent’s growth. Is the profitability beginning to stall or is this just a momentary slowdown caused by increasing the company’s portfolio of services?

Foolish bottom line

Investors will need to see a steady increase, or plateau, of profitability in the next several quarters to be reassured that Inteliquent’s sustainable growth engine is still in operation. The company started 2012 on the right foot by following four quarters of a flat or declining profit margin with a 77 basis point increase. With the fifth largest global IP transit network, impressive revenue growth, and absence of debt on its balance sheet I would certainly give Inteliquent a hard look. Even then I’m not sure I could put my concerns over the sustainability of the company’s growth to rest. Given the amount of growth companies left to investigate I think that is the smart, err, intelligent thing to do.

Did you enjoy this article? Follow me on Twitter to keep up with my future posts on value opportunities, energy, and sustainable chemicals @BlacknGoldFool. *All charts and financial data from Google Finance.

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