InterCloud Systems, Inc has a Unique Opportunity

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InterCloud Systems, Inc has a Unique Opportunity

By Ken Nagy, CFA

InterCloud Systems, Inc. (ICLDis a global single source provider of value added services for both corporate enterprises and service providers. The firm is made up of four operating subsidiaries and two pending acquisitions that will likely mold the firm into a significant player in both cloud and managed services as well as telecom infrastructure with revenues north of $85 million. The growth of the cloud and the outsourcing of services by telecom providers will act as a tail wind for the firm. Their unique combination of services sets them apart from competition. While we like growth story, investors should be aware that the firm faces the twin tasks of bringing the six firms together under one company and the prospect of an offering will add dilution to the shares.

The new firm will act as an end-to-end solution provider of cloud and managed service based platforms, professional services, applications and infrastructure to both the telecommunications industry and corporate enterprises. It will operate three divisions.  

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  • Cloud and Managed Services.  InterCloud’s  services offerings include platform as a service (PaaS), infrastructure as a service (IaaS), database as a service (DbaaS), and software as a service (SaaS). The Company’s experience in system integration and solutions centric services helps its customers to quickly migrate and adopt cloud based services. Managed services offerings include network management, 24x7x365 monitoring, security monitoring, storage and backup services. Cloud-based and managed services, which include both hardware solutions and professional services, enable corporate enterprises to integrate their applications and migrate various services into a web-hosted environment, as well as extend the ability of telecommunications and broadband service providers to provide cloud-based services.

 

  • Applications and Infrastructure.  InterCloud provides an array of applications and services, including unified communications, interactive voice response (IVR) and SIP based  call centers. , as well as structured cabling and other field installations throughout North America and internationally.  The Company will design, engineer, install and maintain various types of WiFi and wide-area networks, distributed antenna systems (:DAS), and small cell distribution networks for incumbent local exchange carriers (ILECs), telecommunications original equipment manufacturers (OEMs), cable broadband multiple system operators (MSOs) and enterprise customers large end-users. Service and applications teams support the deployment of new networks and technologies, as well as expand and maintain existing networks.  They also design, install and maintain sell hardware solutions for the leading OEMs that support voice, data and optical networks.

 

  • Professional Services.  InterCloud provides consulting and professional staffing solutions to the service provider and enterprise market in support of all facets of the telecommunications business, including project management, network implementation, network installation, network upgrades, rebuilds, maintenance and consulting services.  The Company leverages a recruiting database, which includes more than 70,000 professionals, for the rapid deployment of professional services.  On a weekly basis, Intercloud deploy’s hundreds of professionals in support of network infrastructure deployments worldwide.  Skilled recruiters assist telecommunications companies, cable broadband MSOs and enterprise clients throughout the project lifecycle of network deployments and maintenance

 

From a margin standpoint the division expected to grow the fastest (Cloud and Managed Services) has the highest corporate margin ranging from 45-50%. Applications and infrastructure is next with a margin range of 30-33% and Professional Services is the lowest margin business at 19-21%. Looking at expected growth rates margin expansion should be a part of the story.

  

 

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Concerns

Investors should be aware that integrating six companies into one firm is no small task.  Wharton School of business has conducted hundreds of studies on the long-term results of mergers. The range for failure is between 50% and 80%. Of course the term failure does not imply these firms will go bankrupt just that the end result is not what was expected from day one.  The kinds of problems companies face with mergers range from poor strategic moves, such as overpayment, to unanticipated events, such as a particular technology becoming obsolete.

An offering later in the quarter should provide the necessary capital to position the firm to profit from legacy telecom as well as international markets. While we feel in the long run the capital raise will be a benefit, in the short run the shares are likely to see negative impact from dilution.  

 

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