Imagine that you started a business. In your business you build a product once. And you sell that same exact product a hundred, thousand or million times. Regardless of how many times you sell it, the cost to build it remains the same.
This is how a subscription-based business works. Sure, it’s a bit of an oversimplification (there are always R&D, marketing and other costs involved), but you get the point.
On Monday I discussed why I like subscription-based businesses. Today, I want to talk about one of my favorites.
The company is IHS (NYSE:IHS).
It has a market cap of $9.1 billion. Its clients include businesses and governments in over 170 countries around the world. They all rely on IHS for critical information to help them make the right strategic decisions, quickly.
IHS has been in business since 1959. And today, business demand for energy, transportation and consumer data is at an all-time high.
The vast majority of IHS’ revenues, about 75%, comes from subscriptions – a very reliable revenue source. The remaining 25% comes from consulting services, which can be a bit more lumpy quarter to quarter.
It has what we like to call a “sticky” business model, meaning that once customers sign up with IHS, they tend to stay on as subscribers.
The value of this can be seen in the company’s 90%+ renewal rates. In fact, it says that its top 1,000 customers have nearly a 100% renewal rate. These 1,000 customers account for over 70% of the company’s revenues. That’s sticky.
IHS achieves this stickiness by imbedding itself in its customer’s everyday lives, typically through application software. And because there is a lot of information overlap between the energy, chemicals, electronics and transportation industries, IHS is able to give its clients a breadth of services that is virtually impossible for the competition to replicate.
By far, IHS’s energy business is the cash cow, generating nearly 50% of revenues. It owns production information on more than 90% of the world’s oil and gas wells.
It maintains datasets – including past, present and future seismic, drilling and development activities throughout the world. If you’re a company that wants to drill for oil, you’re more than likely relying on at least some information from IHS.
This well data is impossible for competitors to duplicate, and that gives IHS a distinct advantage. It made the move to acquire the data in 1996 and 1997 with the acquisition of Petroconsultants and PI/Dwights, and at a time when oil was trading for less than $20 a barrel.
Revenue in the most recent quarter was an impressive 36%, considerably higher than the company’s trailing 10-year average growth rate of 18%. And EPS was also very good in the most recent quarter, growing by 25%.
Much of IHS’ growth has come through acquisitions. Most recently the company completed its largest acquisiton to date when it acquired privately held R.L. Polk for $1.4 billion. Polk is a leader in automotive information and analytics solutions.
The acquisition looks like another good match; Polk also generates around 75% of its revenue from subscriptions, has a 90%+ renewal rate and is growing in the mid to high single digits.
IHS stock has been a strong performer, rising by 180% over the past five years. Like many growth stocks with reliable revenue, it tends to trade at a premium. That keeps many investors on the sidelines, but with the stock trading at 20-times expected earnings, it’s not in nosebleed territory.
In short, IHS is a thriving subscription business with a near-monopoly, low costs and high margins. That’s exactly the kind of investment I want to own for the long haul.
The company was one of my top selections for steady growth in 2014, and we’ve held it in the Top Stock Insights growth portfolio since November 2013. We’re up 18% so far, and I believe we have a legitimate chance to be up 50% by the end of this year.
“I love companies and business models with safe revenue streams.” Read more here: This Subscription Business Is Paying Off In 2014
“Choosing investment strategies isn’t like dating – you can’t try them out for a little while to see if there is a potential match.” Read more here: “The Only Investing Strategy That Works Is The One You Stick To”
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