From his second quarter commentary:
Market Leader (LEDR) is an integrated software provider for real estate professionals. Founded in 1999 as a lead generation service for real estate professionals, the company has focused on providing end-to-end market and customer relationship management solutions. The company's comprehensive platform helps real estate brokers and agents attract new prospects, convert those prospects into clients, and manage their relationship with clients from first contact to final sale. The company's ActiveRain website is the leading social network for real estate professionals, with more than 200,000 members. RealEstate.com, which Market Leader acquired in September 2011 in a deal Domains.com described as "the buy of the century", provides the company with a valuable source of sales leads for clients.
Expanded Service and Reach
Market Leader has signed a series of deals, which provide stable and consistent payments for the next four years. And even more importantly, significant upside exists as users upgrade to the premium service. In January 2011, the company signed a deal with Keller Williams, the second largest residential realty franchise in the United States with more than 80,000 agents, to provide them with a fully-integrated platform through which they can manage all of their daily activities. In March 2012, the company announced a similar deal with Century21, making Market Leader's platform available to an additional 60,000 agents. Soon after, a third deal was announced, bringing Market Leader's software to 7,000 more agents. These deals are votes of confidence in Market Leader's product from some of the largest customers in the industry.
The Bloomberg of Real Estate
Five years into the real estate downturn, the industry continues to be challenged. And yet, Market Leader's management team has taken advantage of this environment to develop new products and transition from a lead-generation company to an industry-leading software-as-a-service platform. CEO Ian Morris, who is a top shareholder with 7% of shares outstanding, is focused on building the company into "the Bloomberg of real estate." He has the support of an impressive board of directors, including two software industry veterans who each own more than 5% of shares outstanding. Several strategic acquisitions have helped the company bolster its product offering and solidified its market position. As such, Market Leader is on track to generate positive EBITDA in 2012 for the first time since 2005, without significant improvements in the housing market. Market Leader is well positioned for growth when the existing home sales return to normalized levels, home prices grow, and realtors start to spend more on their businesses.
A Bargain Price
When we initiated our position in Market Leader, it was trading at a modest premium to its cash balance, which we perceived as very attractive downside protection. Based on the developments in the business since then, our estimates of its value have more than doubled. As of June 30, 2012, the stock was trading at $5.08, more than 40% below our estimate of intrinsic value.