I’m Waiting on a COVID Check (Q2 Numbers) on Intellicheck (IDN-NASD)

I just got my 2nd COVID shot, and I’m excited to see us all get back to a more normal, if not more cautious, lifestyle.

But I’m also looking at COVID checks for a few stocks.  What I mean by that is…will the next two quarterlies show a big jump in revenue and EBITDA as society opens up and gets shopping again.

One tech story that’s on my list for COVID checks (I have been following since late last year – and almost pulled the trigger on) – is Intellicheck (IDN – NASDAQ).

After the vaccine approvals in November Intellicheck had the look of a clear re-opening winner. I nearly added the stock late-last year but decided to go with larger names like Sabre Corp (SABR – NASDAQ) and Carnival Cruise Line (CCL – NASDAQ) instead.

I regretted that decision in early February.  But it has looked better since.

Intellicheck detects identity theft for retailers.  They verify the identity of customers when they open new accounts, make a card not present transactions, or return a product without a receipt.

Their retail ID verification platform is used in over 30,000 retail locations and in over 3,000 bank branches.

Today, with retail wide open, the stock should be a no brainer, right?

Maybe.  But so far, the market has ignored it, and I am undecided on the stock myself.  Here’s why.

Tackling Identity Theft

In a nutshell, Intellicheck prevents identity theft.

In the past year, one in five Americans fell victim to identity theft or attempted identity theft.

According to a Harris Research Poll, identity theft has become top-of-mind for 3 in 5 Americans this year.  60% expect that they will suffer financial loss as victims of identity theft.

Intellicheck’s ID verification platform works with your ID (usually a driver’s license) and the store’s existing point-of-sale (POS) scanners.

At checkout or customer service the bar code is scanned.  Intellicheck reads the embedded info which lets them verify that the license is legit and that it belongs to you.

Intellicheck can read any United States, Canada driver’s license, US state issued non-driver identification, and military IDs.

Source: Intellicheck Investor Relations

The bar code data comes from both the American Association of Motor Vehicle Administrators (AAMVA) and from individual states.

Intellicheck has a long relationship with the AAMVA.  They are the exclusive verification provider at all the DMVs.

For state data, Intellicheck works with each state, essentially reverse engineering the bar code to process the embedded data.

Now to be clear, Intellicheck does not have exclusive access to this data.  There are a handful of companies that have access, and the state data is there for anyone willing to reverse engineer it.

Instead, Intellicheck’s moat is compiling and integrating the data into a cheap and effective identity verification solution.

This is “back-of-card” verification, so not “front-of-card” facial recognition which is the focus of many other companies.  While Intellicheck does do front-of-card, they license that tech from a third-party.

At first glance, this seems like a negative.  Front-of-card facial recognition gets a lot of attention.

Yet front of card verification can be gamed.  It is subject to human error.  And fake licenses can be bought for a couple hundred bucks on the dark web.

Rusty Hanna, the Mississippi Alcoholic Beverage Control Enforcement Chief said: “they’ve become so good that a man can’t look at them with the human eye and say if they’re fake, or not.”

A Reopening Play

Intellicheck’s back-of-card solution is geared to work with retail Point-Of-Sale (POS).

Three of the four touch points for its application are geared to problems bricks-and-mortar retailers run into every day:  

1. New account openings
2. Card not present
3. Non-receipted returns
4. Omnichannel transactions

To generate scans, Intellicheck needs consumers out at the malls and big box stores—browsing new stores, making in-person returns. Ideally, consumers are going to new stores and opening accounts, or making unplanned purchases when they do have a card.

We saw the leverage to reopening during the short stints when the economy reopened during Covid

At the end of Q2, as lockdowns ended over the spring but before the summer wave began, Intellicheck saw scan volume grow 111%.

It all points to Intellicheck being an ideal reopening play.

What Will Growth Look Like Now?

Yet the stock has retraced its entire move up.  Why?

I think it’s The Growth Question; investors do not have a good sense of what Intellicheck’s true rate of growth is.

Here’s a little history about the company.  Before Covid, Intellicheck was hitting on all cylinders.

Their bank customers were on-ramping their own customers and branches with the Intellicheck platform.

In the third quarter of 2019 alone, Intellicheck’s five banking customers were deploying the ID verification platform to 6,000+ retail locations and 1,500 bank branches.

In the fourth quarter of 2019, Intellicheck signed up two additional bank customers.  A global bank, a Canadian point-of-sale lender with 5,000 retail locations and a Midwest bank with over 1,200 locations.  They also announced an extremely strong Christmas season – Black Friday scan volume had 125+% year-over-year growth.

The trend was up.

BUT… here is the thing.  Over the course of 2019 Intellicheck was also putting together price increases to its customer base.  Some of its customers were paying WAY too little for the service.  They were transitioned from a flat fee per store model to a per scan model.

This comes back to the “per scan” model I just mentioned.

In 2018 Bryan Lewis joined as CEO.  Lewis transformed Intellicheck from struggling to grow to growing like a weed.

Lewis flipped the switch with two changes to the selling model:

1. From flat fee to per scan pricing
2. From direct to retail sales to banks and credit card issuers partnerships

In the past, Intellicheck had priced their product on a per store model.   It was a flat fee.  Regardless how much their product was used, Intellicheck gave the same invoice.

This was a missed opportunity.  In 2018 scan volume more than doubled – to over 22 million scans.  And in 2019 scans were up another 46%.

Change #2 was the selling channel.  Rather than selling directly to retailers, Intellicheck partnered with the banks and issuers that had these retailers as clients.   After all, it is the bank that usually takes the hit when identity theft occurs.

The question is – how much growth was from price increases –– and how much was true organic growth?

On the 2019 fourth quarter call, Lewis provided a bit of color:

The change in our pricing to a per scan model with monthly minimums from a per store pricing model certainly propelled much of the revenue growth during the fourth quarter.

Another indication comes from the 2019 10-K.  One disclosure notes:

Revenues from our ten largest customers accounted for 66% of total revenues in 2019 and 52% of total revenues in 2018. 

That means that revenue from the top 10 customers was $5.1 million in 2019 versus $2.3 million in 2018.  It also means that revenue from customers not in the top-10 was $2.5 million in 2019, only up ~20% from $2.1 million in 2018.

Albeit it is not direct evidence – we have no idea which customers were in the top-10 each year – but it points to a significant amount of the revenue increase in 2019 coming from existing large customers, likely from price hikes.

Then the pandemic hit.

Growth plummeted during Q2 and Q3 last year as shutdowns impacted the business and Intellicheck’s biggest strength – its billing model – became its biggest weakness.

The pandemic just muddied the picture further.  Now there really wasn’t growth, but not to any fault of Intellicheck.

Adding Customers

All this makes pinning down a true growth rate extremely tricky.  But let me be clear – Intellicheck has been adding new business over that time—a lot of it.

By mid-2019 Intellicheck had four of the Top-Ten banks as customers.  Today Intellicheck has five of the Top-Ten issuers.

Those banks continue to add stores.  In the third quarter of 2020 Intellicheck rolled out to the following:

• A 3,700-location beauty supply retailer that will use the service for a account openings and account lookup
• A 350-store women’s clothing company for account openings and account lookups
• A gourmet kitchen retailer for account lookup
• A financial services company that will use for person-not-present transactions to stop account takeovers.
• A Baltimore-based credit union that will use for account openings and lookups.
• Analysts expect Intellicheck to grow about 35% this year, from $11 million in revenue to $15 million.

Those estimates were $17 million before the release of first quarter results.

Estimates came down because of questions about the pipeline, which only muddies the picture more.

Since Lewis came aboard, Intellicheck had been very good at disclosing implementations – new customers that have or are about to onboard the product.

In past quarters they went so far as to give firm numbers.  In Q4 2019, for example, Lewis said they did 35 implementations during the year with another 33 on cue.

But on the Q1 call no implementations estimate was forthcoming.  When asked by an analyst, Lewis replied that they were “growing” and that they “would get back” to the analyst on a firm number.

This just adds to my uneasiness with growth.

Because Intellicheck has negative EPS and generates only a small amount of EBITDA, like many other SaaS growers, you must value them on Price to Sales.

The stock trades at 9x P/S.  This is not out of line with the SaaS universe, and you could even call it cheap.

The average multiple of high-growth SaaS is 20x+ Price to Sales.  Mid-growth SaaS is 12x+.

But it is only cheap at the right growth rate.

When I look at the discounted cash flow model for Intellicheck what I find is not surprising.

If Intellicheck can put in a few years of extremely strong growth – say 50-60%, before slowing, the stock could be worth double its current level.

But if growth is only in the 20-30% range before dropping to 10%, its probably fairly valued right here.

Now I am sure you could argue the finer points of the model and tweak the numbers up or down a point or two.   But taking a step back, the point is clear.

The stock is buy – if it grows like it has in the past.  If it does not, then it really is not worth my time.

And right now?  I just don’t know which scenario plays out.

So I passed on Intellicheck, at least for now.  I’ll wait to see those Q2 numbers – the first post-Covid test, before I look to buy.

Keith

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