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Commentary & Analysis

The "Inner Workings" of InnerWorkings

Since its IPO in August of 2006 and follow-on offering in January 2007, InnerWorkings Inc. (INWK) has been in the industry spotlight. Stock prices have been on a bit of a roller coaster ride, though the price is trending upward now.

By Gail Nickel-Kailing
Published: August 1, 2007

Since its IPO in August of 2006 and follow-on offering in January 2007, InnerWorkings Inc. (INWK) has been in the industry spotlight. Stock prices have been on a bit of a roller coaster ride, though the price is trending upward now.

The company is a $160.5 million print service provider, according to its annual report for 2006, released in March of 2007. InnerWorkings revenues appear to be approaching $200 million for 2007.

On the Graphic Arts Monthly 101 Top North American Printers, InnerWorkings would have been ranked 39th, the spot currently held by VistaPrint with 2006 revenues of $152.1. The Printing Impressions 400 would have listed them again in VistaPrint’s spot, 46th. And these rankings for a "printing" company with no presses!

Earlier this year, WhatTheyThink offered a series providing an in-depth look at print procurement, print management, and print business process outsourcing companies beginning with Print Brokering, Print Management, Business Process Outsourcing (BPO) - What’s the Difference? on February 27, 2007. This article and interviews senior executives at WorkflowOne, NewlineNoosh, Standard Register, InnerWorkings and AccessPlus is available as a compilation from the WhatTheyThink Store.

In today’s article, for the curious who want to know, we’ve gleaned some tidbits from InnerWorkings recent SEC filings: the company’s annual report for 2006 (Form 10-K), Schedule 14A (Proxy Statement), and first quarter report for 2007 (Form 10-Q). These notes on the "inner workings" fall into several categories:

  • Financials
  • Positioning
  • Growth Strategy
  • Acquisitions
  • Board and Executive Compensation
  • Related Party Transactions and Other Interesting Notes

Tomorrow we will present a "list of players" and a "map" of the various connections between investors, executives, and several other companies in Six Degrees of Kevin Bacon – Three (or fewer) Degrees of InnerWorkings. You will be able to download a PDF of the map for simpler viewing.

2006 and First Quarter 2007 Financials
Revenues for 2006 topped $160.5 million, with 22.8% gross profit, 8.0% income from operations, and net income of 5.2%. The number of clients increased 215.2% from 736 in 2005 to 2320 in 2006; enterprise clients increased 33.3% over the same period from 69 to 92.

Note: enterprise clients accounted for 60% of the company’s revenue while transactional clients brought in 40%. According to InnerWorkings, revenue from enterprise clients generates lower gross profit margins than revenue from transactional clients; however the company says, "… our enterprise business tends to be more profitable than our transactional business on an operating profit basis because the commission expense associated with enterprise jobs is generally lower."

Reported employees and independent contractors were 312 at the end of 2006, compared with 154 at the end of 2005, an increase of 102.6%.

The first quarter certainly appears to have been financially rewarding. Revenue up 162.7% over Q1 2006 to $58.9 million, a gross profit of $14.4 million (up 219.3%), $3.8 million recorded as income from operations (177.2% increase over last year), and net income of more than $2.6 million, up 222.1% over the same quarter in 2006.

On January 18, 2007, InnerWorkings sold 3,000,000 shares at $13.50 per share in a follow-on public offering for net proceeds of $37.7 million. That offering generated a nice cash infusion, both for stock holders and for the company’s checkbook. By the end of March, 2007, cash and cash equivalents had grown from $20.6 million at the end of 2006, to $32.4 million. Prudently investing some of the extra cash in marketable securities, InnerWorkings’ holdings of $9.9 million at the end of 2006 grew to $33.6 million at the end of the first quarter 2007.

In that same public offering, shareholders then holding stock sold more than 5,000,000 shares; options for over 451,000 shares were exercised at an average price of $1.99 per share and were sold for $13.50.

Positioning

InnerWorkings has been somewhat difficult to categorize along the continuum of procurement services. The company continues to position itself somewhere between Print Management and E-Procurement Outsourcing; "We focus primarily on print procurement outsourcing," says Steven E. Zuccarini, CEO, InnerWorkings. "With our outsourcing solution, we save money for our clients by providing people with deep domain knowledge and procurement expertise."

In their initial public offering, InnerWorkings positioned themselves this way:
We provide "print procurement services ranging from procuring, purchasing and delivering print products in individual transactions through a competitive bid process to offering comprehensive outsourced enterprise solutions…"

In that same document, InnerWorkings outlined its revenue model:
"Our revenue consists of the prices paid by our clients for printed products. These prices, in turn, reflect the amounts charged to us by our suppliers plus our gross profit. Our gross profit margin, in the case of some of our enterprise clients, is fixed by contract or, in the case of transactional clients, is negotiated on a job-by-job basis. Once either type of client accepts our pricing terms, the selling price is established and we procure the product for our own account in order to re-sell it to the client. We take full title and risk of loss for the product upon shipment. The finished product is typically shipped directly from the supplier to a destination specified by the client. Upon shipment, our supplier invoices us for its production costs and we invoice our client.

Such a description however, puts InnerWorkings directly in the "Print Broker" category based on a very clear, concise definition published by the State of California in its Revenue and Taxation Code:

PRINT BROKER: A print broker is a person who contracts to sell printed matter, but who does not actually engage in the printing process to produce the printed matter to be sold, instead purchasing the printed matter from a printer or from another print broker for resale to the print broker’s customer.

So is InnerWorkings a "print brokerage" by another name? Consider what "Hoosier poet" James Whitcomb Riley said sometime around 1883-1885, "When I see a bird that walks like a duck and swims like a duck and quacks like a duck, I call that bird a duck." (Thanks to Wikipedia.org.)

As InnerWorkings acquires smaller print brokerages and bring fiercely independent brokers into its fold, it continues to do business the old-fashioned way: face-to-face or at least telephone-to-telephone. At present, there is no web-based, customer-facing ordering tool in use to allow customers to place their own orders automatically and make the order process even more efficient. Unfortunately, without finding new ways to apply technology, the number of "procurement managers" will scale geometrically with the number of customers.

Growth Strategy
Regardless of InnerWorking’s positioning, the company clearly has growth plans, and expansion into new markets tops the list. The company currently has offices in Illinois, New York, California, Hawaii, Michigan and Missouri and has announced that their objective is to increase sales in other major print markets, such as Atlanta, Boston, Dallas, Los Angeles and Minneapolis.

Global expansion is also on the plate. In March 2006, InnerWorkings entered into an agreement with SNP Corporation Ltd. granting them a non-exclusive, non-transferable license to use certain non-core software applications in China, Singapore and Hong Kong. SNP paid $1,000,000 for this license and will pay 1% of gross revenue for all transactions processed through the software during the term of the licensing agreement. In addition, SNP bought 254,065 shares of Class A common stock to SNP at $4.92 per share (value: $1.25 million).

Who exactly is the SNP Corporation? SNP grew out of Singapore National Printers, which in turn had its origin in the former Government Printing Office. Operations began in 1867 when the General Printing Office was set up to produce official publications for the government.

In 1973, Singapore National Printers Pte Ltd was incorporated to take over the role of the Government Printer and has been operating on a commercial basis since. In 1987, SNP went public and became the first company to be listed on the Sesdaq (the Stock Exchange of Singapore Dealing and Automated Quotation System) and in 1990 SNP was upgraded to the Mainboard of the Singapore Exchange.

In recent years, SNP has transformed itself from a Singapore-based, Singapore market-centric company to one which has established beachheads in various markets in the Asia Pacific. SNP's core businesses in printing have expanded regionally with a network of eight principal subsidiaries: two in Singapore, five in Greater China, and one in Thailand.

Note: John R. Walter, Chairman of InnerWorkings Board of Directors, is also Chairman of SNP Corporation. He has been a director on SNP’s board since March 2001.

Acquisitions
InnerWorkings is targeting acquisitions to fuel growth, and most recently (July 9), announced the acquisition of Brown+Partners, Inc., a privately-held provider of print management services based in suburban Philadelphia. Adding to previous acquisitions, InnerWorkings hopes continue the trajectory that brought the company to more than $160 million in just a few years.

  • In March 2007, InnerWorkings acquired Spectrum Printing Services, a provider of print management services as well as promotional products, apparel and complete warehousing and fulfillment services for approximately $2.8 million in cash and up to an additional $2.6 million subject to Spectrum Printing Services achieving specified EBITDA targets in 2007 and 2008.
  • In October 2006, the company acquired Applied Graphics, Inc., a provider of print management and print-on-demand services headquartered in San Rafael, California for approximately $7.0 million in cash and up to an additional $4.9 million contingent upon the attainment of specified gross profit and EBITDA targets by Applied Graphics on or prior to September 30, 2008.
  • In September 2006, InnerWorkings acquired CoreVision Group, Inc., a provider of end-to-end marketing solutions, including design, print, promotional products and fulfillment services for approximately $1.1 million; $10,000 paid in September 2006 and the remaining $1.1 million to be paid in monthly installments through August 2007. In addition, the former owner of CoreVision is eligible to receive up to an additional $2.5 million in acquisition consideration based on gross profit generated by CoreVision on or prior to December 31, 2009. In accordance with the terms of the agreement, $666,000 of additional consideration was paid to the seller in January 2007 as the acquired Company met the gross profit target of $1.7 million from September 1, 2006 to December 31, 2006.
  • In May 2006, the company acquired Graphography Limited LLC, a provider of production management services, including print procurement and promotional services for approximately $4.5 million in cash paid and, in addition, the former owners of Graphography will receive up to an additional $3.0 million in cash contingent upon revenue generated by Graphography from certain accounts on or prior to May 31, 2010.

Board Make Up and Executive Compensation

Board Make Up

InnerWorkings’ Board of Directors is fairly small, consisting of the following six members, five of whom are outside directors:

  • John R. Walter, 60, Chairman, 1,222,617 shares. Mr. Walter has served as President/COO of AT&T Corporation, and Chairman, President, and CEO of RR Donnelley & Sons.
  • Peter J. Barris, 55, Director, 8,127,067 shares. Mr. Barris serves on the board of directors of Vonage Holdings Corp.
  • Sharyar Baradaran, 39, Director, 700,682 shares. Mr. Baradaran is a private investor.
  • Jack M. Greenberg, 64, Director, 56,202 shares. Mr. Greenberg serves as Chairman of The Western Union Company and retired as Chairman and CEO of McDonald's Corporation.
  • Linda S. Wolf, 59, Director, 50,000 options. Ms. Wolf retired as Chairman and CEO of Leo Burnett Worldwide and is a director of Wal-Mart Stores.
  • Steven E, Zuccarini, 50, CEO, President and Director, InnerWorkings.

Executive Compensation

  • Steven E, Zuccarini, 50, CEO, President and Director, InnerWorkings, previously with RR Donnelley. Mr. Zuccarini currently controls 1,216,115 shares of stock, has a 2007 base salary of $450,000, and was compensated a total of $558,794 in 2006. In the event of a change of control, he will be paid $50K per month for 24 months and 750K options will become fully vested, at a value of $8,280,000.
  • Nicholas J. Galassi, 34, CFO, previously with Wolverine Trading and HA-LO Industries. Mr. Galassi currently controls 266,339 shares of stock and has a 2007 base salary of $250,000. In 2006, his total compensation of $245,519 included a bonus of $25,000. In the event of a change of control, he will be paid $16,667 per month for 12 months and 80K options will become fully vested, as if employment continued for 24 months after termination, at a value: $612,400.
  • Scott A. Frisoni, 35, EVP Sales, previously with PurchasePro, Magnitude Network, and Procter & Gamble. Mr. Frisoni currently controls 454,489 shares of stock and has a 2007 base salary of $275,000. In 2006, his total compensation of $276,770 included a bonus of $25,000. In the event of a change of control, he will be paid $18,750 per month for 12 months and 50K options will become fully vested, as if employment continued for 24 months after termination, at a value: $765,600.
  • Eric D. Belcher, 38, COO, previously with MAN Roland. Mr. Belcher currently controls 153,725 shares of stock and has a 2007 base salary of $300,000. In 2006, his total compensation of $368,432 included a bonus of $120,500. In the event of a change of control, he will be paid $18,750 per month for 12 months and 120K options will become fully vested, as if employment continued for 24 months after termination, at a value: $1,972,800.
  • Neil P. Graver, 36, CTO, previously with CAEL and Sega North America. Mr. Graver currently controls 7,883 shares of stock and has a 2007 base salary of $130,000. His 2006 compensation of $134,945 included a bonus of $7,500. Mr. Graver joined InnerWorkings on March 1, 2006.

On June 24, InnerWorkings announced two additions to the management team:

  • Brian Secord, CIO, previously with The Nielson Company and Accenture.
  • Brian Carlson, VP of Procurement, previously with A.T. Kearney, Emerson Electric Co., Diamond Management & Technology Consultants, and Accenture.

Tomorrow look for Six Degrees of Kevin Bacon – Three (or fewer) Degrees of InnerWorkings where we will present a "list of players" and a "map" of the various connections between investors, executives, and several other companies. You will be able to download a PDF of the map for simpler viewing.

 

 

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