Integral Systems: Back on trajectory
Based on recent contracts that Integral Systems Inc. (Nasdaq:ISYS) has won, the company seems poised for upward trajectory, but this wasn’t always the case. The supplier of satellite ground systems suffered from several problems and scandals a year ago, and by January 2007, the Lanham, Md. company faced opposition from its largest shareholder, Fursa Alternative Strategies, which owned 12% of the company’s stock.
Fursa thought the company was on the wrong trajectory. Integral Systems had some shaky times under previous management. Its CEO resigned in April 2006 for sexual misconduct involving a minor (and later pleaded guilty to a misdemeanor in exchange for probation and counseling), but was kept on as a consultant, continuing to draw a salary. The former CEO’s hand-picked successor lasted just a year before resigning as CEO and board member to become EVP for New Business and Technology Development.
Then in March 2007, the company learned that the Securities & Exchange Commission had issued a formal order of investigation over the role played by a company consultant, Gary A. Prince, who became a company EVP in August 2006. The SEC was investigating whether he had been a de-facto executive before that time, and whether he was acting as an accountant before the SEC after becoming an employee at Integral. He had been permanently barred from such activity in 1997 by the SEC because of activity while working at Financial News Network and United Press International. Prince was fired on March 30, 2007, but still managed to get back pay and legal fees from Integral.
The stock retreated from about $33 in September 2006 to about $22 the following March as company growth slowed. Throughout all this turmoil, revenues and profits had also suffered, rising just 10% and 4%, respectively, in fiscal 2007. Still, providing contracts to the government tends to be a lumpy business as contracts come and go, and the sell-off seemed excessive.
In January 2007, Fursa decided to take action, saying it found the company’s inability to improve shareholder value “troubling” and that it would “like to see the company's corporate governance significantly improved.” It demanded representation on Integral’s board, which it got a month later. Fursa pressured Integral into a stock repurchase program and the CFO was replaced in September 2007.
But what Fursa really got out of the deal was the ability to cash out. On March 3 2008, Integral agreed to buy back all of Fursa’s outstanding shares in the company at $22 per share (the stock closed at $25.63 that day). Fursa’s representative has since resigned his board position.
Still, it’s a good deal for shareholders, boosting per-share earnings. With the company’s troubles behind it, the focus can now return to Integral’s actual business results, and the company’s last quarter soared. Revenue for the second fiscal quarter ended in March was up 55% over a year earlier, to $44.9 million. Earnings were up 86% to $4 million, or $0.44 per share. Feltl & Co., the only firm currently covering the stock, had expected just $29.7 million revenues and $0.20 EPS. The strong EPS growth was partly due to the stock repurchases, which added about $0.09 per share in the second quarter and $0.20 per share to date this fiscal year.
Earnings were released on March 28, but the stock market seemed to anticipate the results. From a close of $29.08 on April 22, it shot up to a close of $35.13 on April 28. (One institutional investor noted that fact on the earnings conference call.) It closed at $35.84 on Monday. The market cap is $302 million.
With that strong showing, Feltl & Co. raised its F2008 EPS estimates to $1.92 ($0.02 above guidance) from $1.72, and raised its revenue estimate to $157.8 million, up from $165.5 million. Feltl rates the company a “buy” and raised its price target to $39 from $36.
Another possible upside: now that the company appears through with buying back stock, it’s on the lookout for acquisitions. On April 22, it announced the hiring of a new vice president of mergers and acquisitions. The company has not indicated what kinds of acquisitions it might make, other than to say it keeps an eye out for technology and people.
This is still a lumpy business. While management is projecting strong growth for fiscal 2008, much of that growth was front-end loaded. While revenues should be up 23% for the year, that represents a slight decline in year-to-year comparisons for the second half of this year.
But Feltl is projecting another increase in FY 2009. Based on recent contracts the company has won, revenues should be up another 16%, to $184 million. And that’s much better news than hearing about another scandal.
About the Author
Richard L. Brandt is a journalist and author with more than 20 years' experience covering science, technology and business.
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