Automated voice solutions provider Intervoice (NASDAQ:INTV) turned in a dandy of a quarter yesterday and appears to be continuing its winning ways after a tough period that stretched from fiscal 2000 to 2003.
Life as a smaller, focused company seems to be benefiting Intervoice in its competition for customers with IBM (NYSE:IBM), Avaya (NYSE:AV), and Nortel (NYSE:NT). Sales grew 11% for the year, and net income nearly doubled, but the gain in net income was aided by tax benefits from previous losses, so the operating income increase of 31% is more representative of the company's performance.
To get where it is today, Intervoice started to cut costs and streamline operations in 2003, and those steps are proving to be extremely fruitful -- margins have improved across the board the past three years. Another reason to be optimistic is that Intervoice's free cash flow and owner earnings have improved substantially in each of the past two years as well. The company expects this performance to continue into next year.
Intervoice's growth appears to be very high-quality, and that's a pleasant sight for these weary eyes. The benefits of focusing on recurring services growth can be seen in the company's cost of goods sold, which for fiscal 2005 is still 8.6% below the levels of 2003, despite revenue having grown by 17.3% over the same period. And with all this growth, Intervoice's cash conversion cycle is flat, inventory is down, all long-term debt has been paid off, and the company has a $60 million cushion of cash.
The immediate negative for investors looking at Intervoice is a Securities and Exchange Commission inquiry into transactions from 2000 to 2002 in which the company improperly recognized revenues to meet analysts' expectations. Although this is a concern and bears watching, it's important to realize that a different CFO is in place now, and the company does not have the debt load or business structure it did at that time.
Dilution is another item to watch when the company files its proxy statement in a couple of months. The diluted-share count expanded by 10% this year as previous year's options came "in the money." However, as long as future grants are reasonable, options should not have a huge impact on shareholder returns.
Based on last night's earnings report and the past two years, Intervoice is a solid small cap that warrants more research as an investment. The trailing P/E of 24 is a bit high, but on an enterprise value-to-owner's earnings basis, the company trades at a more reasonable multiple of 17. Given the company's lighter business model and its prospects, the shares appear to offer growth at a reasonable, but not cheap, price.
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Fool contributor Nathan Parmelee has no financial interest in any of the companies mentioned.
