Robert Kugel's Analyst Perspectives

Edgar Online (EDGR) and UBmatrix announced it will be merging, pending EDGR shareholder approval. In my opinion the merger is a good thing for the two organizations and good for their customers. The two companies are a good fit and the combination gives the consolidated entity a bit more economic heft, providing it with greater resources for continued development over the longer run. However, the subtext of the deal is: “It’s hard to make a buck in the XBRL business.”

EDGAR Online provides analytical services and distributes financial data for publicly traded assets such as equities and mutual funds. Its I-Metrix and I-Metrix Professional offerings enable clients to perform in-depth analyses, and EDGAR Pro offers access to publicly available financial data. It has strategic alliances with Microsoft, R.R. Donnelley & Sons, CNW group, Thomson Reuters, and Lexis Nexis. Revenues for the last full fiscal year (2009) were $19 million, flat with the prior year and the company continues to be marginally unprofitable on a reported income basis.

UBmatrix revenues were $5 million in its latest fiscal year, including $1 million of previously deferred revenue. About three-fourths of UBmatrix business is from the sale of software that manages and validates filings for some of the largest financial system regulators, including the U.S. Securities and Exchange Commission through its arrangement with Keane Federal Systems, the Banque de France and the FDIC It also licenses its software to software companies such as Oracle and SAP. (One of the most important drivers of demand for XBRL technology was the “interactive data” mandate by the SEC) I expect this business will grow over the next five years as XBRL is increasingly used as a core method of data acquisition by government entities. This should extend well past the financial regulators to include economic data, business census data and ultimately any repetitive data filing that uses a form and potentially even investment performance management. XBRL is not just for regulator, however. Lenders – banks or insurance companies – that require borrowers to file financial statements would benefit from receiving these in tagged format, a task that can be automated today.

Longer term, though, I continue to wonder about the business prospects for software that harnesses XBRL technology. This is not to confuse the value and importance of XBRL technology – which I think is great – with the ability of commercial software vendors to make money from it. I believe there is a limited but attractive market for XBRL servers and UBmatrix is likely to generate ongoing revenues from its licensing agreement with software vendors. Yet, I don’t see much sales potential for the merged company from the tens of millions of potential consumers of XBRL-tagged content. I believe that within five years the vast majority of users of analytical tools utilizing XBRL for equity analysis will be getting theirs either for free or bundled with a fee-based service. “Free” analytics will come from the SEC or as part of the offering by large data aggregators such as Yahoo Finance and MSN. Fee-based providers such as Bloomberg or Thomson-Reuters will offer tools as a value-added service, or it will be another feature offered by on-line brokerage firms such as Fidelity, Schwab, Scottrade or TD Ameritrade. As for the corporate market for tagging filings, I believe that within five years most companies in the United States will choose to create their own tagged filings rather than outsourcing it to a financial printer, which would limit the revenue potential of this market for the combined company.

To be sure, the merger is a good idea and there is a growing market available to Edgar Online/UBmatrix. But it’s not clear at this point that it’s a big one.

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Regards,

Robert D. Kugel - SVP Research