INVESTools Sinks

Originally Published In the News May 2, 2008 1:38 PM
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INVESTools, Inc. (SWIM-NASDAQ) has a lot of friends in the trading community, but its shareholders are not too thrilled today with the stock, even though they beat Kaufman Brothers earnings estimate:

INVESTools reported record revenue of $90.99 million and EPS of $0.17 after imposition of a 17.6% tax rate. The taxes plus about $1.5 million in one-time technology costs, and $1.5 million in legal fees for the resolution of a dispute, equated to $0.05 in EPS. Our estimates had been $91.6 million in revenue and EPS of $0.19. We had not included any income tax in our estimate as the company has NOLs. It is phasing in its tax rate for reporting purposes, at approximately 17% per quarter in 2008, although cash taxes paid in the quarter were only $400,000.The company beat our estimate of net income, reporting $13.995 million, compared to our estimate of $12.827 million.

The stock is down 35% due to a SEC inquiry:

Management revealed the Securities and Exchange Commission (SEC) has launched an informal inquiry relating to certain representations by certain presenters in portions of their presentations at some of the company’s educational seminars. The company did not comment on the content or nature of the inquiry, and so we have no idea what is involved. In addition, it incurred $1.5 million in legal fees in the quarter for the resolution of a dispute with a California locality in which some of its seminar language in some sales did not conform to state standards.

Their ads seem to be all over the financial blogosphere, and they should be able to buy more love from bloggers, planning to allocate an additional $6 million to marketing later this year as they make the trading platform the focus of their operations, and rebrand the company.

KBRO is stepping to the sidelines, and downgrading the stock:

We are downgrading the stock to a HOLD from a BUY, due to lack of visibility on these issues and the potential effect on the income statement. We are also lowering our EPS estimates to $0.74 in 2008 and $0.97 in 2009 from $0.79 and $1.16, respectively. Our revenue estimates for 2008 remain essentially the same at $379.3 million and for 2009 our revenue estimate is increased to $507.90 million from $480.90 million as we believe that by that point, education will begin to generate more sales transaction volume and revenue as price elasticity at the lower pricing schedule achieves its desired results in added volumes.

Kaufman Brothers Research Note

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