Category Archives: Company Analysis

Issuer Direct ($ISDR)

I originally met the CEO (Brian Balbirnie) about 5 years ago at a conference. I was impressed with his work ethic and how much focus was on the future of the company. I didn’t hurt that he owned over 20% of the company at the time. I’ve followed the company since then waiting for a decent entry point on the stock. I took an initial position during the covid sell-off.

There is a good overview of the company at CleverInvesting. Check it out here. I swear I have (some) original ideas, but sometimes someone else already has an idea that’s worth investigating.

Why now?

As you can see from the 5 year price chart, ISDR has essentially performed in line with the S&P 500.

The company has built out the Platform and Technology side of the business gradually and now it is the primary driver for earnings in the short and long term.

The services side of the business has seen top line slowly decline, though gross margins have been maintained. I would expect the services side to decline at a pace of 3-5% per year until it eventually troughs out.

Platform and Tech has more than doubled in quarterly revenue in the last 5 years with the combination of organic growth, migration of customers from services to platform and acquisitions.

Opportunity

I believe that along with Covid there are some temporary items that are suppressing earnings or otherwise preventing the shares from re-rating at a higher multiple on a trailing twelve month basis:

  • expanding sales team (gradually)
  • some development expenses used to integrate acquisitions
  • build out of new headquarters in 2018/19
  • lumpiness in services revenue decline masks the growth in the platform business
  • dividend cut a few years ago

Why I am long

  • my understanding is that Accesswire can get about 80% of the reach as the major players at 1/3 the cost
  • the company has a net cash balance of almost 16mil to weather the storm as well as potential acquisitions
  • they have demonstrated that they can run the business well through a lockdown and will likely run a small loss or profit in the near term
  • the company pivoted very quickly to get something quite useful out in time for virtual conferences, i think this speaks to how well they work as a team and adapt on the fly
  • they issued 800k shares at $15.50 and then bought back a little over 200k at $12.25 from a fund that wanted out of the stock – oppo
  • the company announced an increase to the share buyback recently

Risk

There are obviously risks associated with ISDR. I can think of a few that would lead to a gradual decline in share price, but nothing that I think would cause share prices to crash.

  • Covid-19 lockdowns continue or are reinstated
  • Accesswire never gains traction
  • Services decline accelerates
  • Acquisition of a sub-optimal business

Given how aligned the CEO is with the business and share price performance, I think ISDR is worth an initial position.

 

Thanks,

 

Dean

*the author is long ISDR at time of writin.

Leave a comment

Filed under Company Analysis

Getting caught off guard; Recro Pharma ($REPH)

If you’ve been in this game long enough you are going to get caught off guard once in a while (unless you are part of Fintwit where everyone bats 1.000). I would say that of all the executive functions, emotional regulation is probably my weakest. It is kind of funny given that I realize that it takes a higher EQ than IQ to be successful at this investing thing.

There are usually some minor positive or negative surprises on quarterly or annual financial statements. More often then not these lead to a minor reaction in the share price, say 5-10%. These “surprises” are usually easily explained on the conference call or in the MD&A. Once in awhile, you really get a surprise and the stock rises or drops by 25+%. The company releases numbers and the stock gaps up or down. You had no idea and where caught off guard. These are the moves that test your conviction in the company and in your process. It’s easy to take credit for the positive surprises and blame management for the negative ones. In reality it doesn’t matter who’s “fault” it is, but how you pick up the pieces and move forward is what is important. It’s so hard to remember that in 2 or 3 years, you won’t care about this specific quarter unless you did something you regret based on the results.

This recently happened to me with REPH as they released numbers and the stock gapped down 40%. I’m going to share how I am approaching the situation now.

Here is a good post on REPH. The author does a great job going over the business and valuation. Check it out before continuing.

Despite not being in an industry that I’m familiar with, the REPH investment thesis was fairly easy to articulate:

  • decently high barriers to entry
  • deep relationships with customers
  • producing drugs that are not going away anytime soon
  • split of the 2 businesses (CDMO and specialty pharma) to focus on core competencies
  • not immediately or materially affected by COVID (at least from what I understood)
  • discount to peers and previous buyouts
  • issued guidance for the business and previously beat guidance
  • there is likely to be a push for drugs to be produced in North America given some supply shortages of certain critical drugs during the Covid pandemic

There were some things to get comfortable with:

  • high cost debt
  • no CEO for the CDMO business
  • not cheap on an absolute basis
  • not expecting stellar growth (though I am not expecting negative growth either)
  • management communication has not been great
  • compensation seems high for a business of this size, but that does seem to be normal for pharma companies

Given all this, I took half a starter position or about 3%.

Now with shares about 45% lower than when I bought, I’m left with a pretty small position.  At a this point REPH is about 2% of my portfolio. When the shares crashed, REPH occupied way more than 2% of my bandwidth. I needed to take a step back and reassess. I could average down, hold or lick my wounds and blow out the position.

Here are some questions I ask myself whenever I get one of these surprises:

  1. Is this a temporary bump in the road or is this quarter indicative of the long term prospects of the business getting worse?
  2. Is there a reasonable explanation for the surprise? Did management do everything in their control?
  3. When communicating bad news, did management take accountability?
  4. If you didn’t already own shares, what would you do?

Here’s what I came up with:

  1. I don’t think the long term prospects of the business have changed and the barriers to entry have lessened.
  2. Yes and No. They were expecting a re-entry of a competitor into their market (Mylan) and seemed to have the underestimated the impact. Covid has led to delays in reorders as customers have worked through some inventory on hand. As well, business development efforts were paused due to Covid.
  3. I do feel that they took accountability for what they could control and revised guidance was issued. They have set up a Covid task force to help navigate the pandemic. They adjusted costs and are looking to save 2 mil.
  4. If I didn’t own shares, I would likely wait on the sidelines.

Given that the position is quite small and I don’t have a better use of the capital at the moment, I’m going to hold on to my shares and not add or sell. I realize that this means that I am missing out on a potential rally in the shares.

I have come up with tangible milestones to build confidence in management before adding to my stake and working towards a full position. To me, these should all be complete by the end of the year.

  • Have a better idea of how the new competitor in one of main markets
  • Hire new CEO for the CDMO business
  • Refinance high cost debt
  • Signs of significant growth in new products to fill existing capacity
  • Meet previously issued guidance

When’s the last time you got a negative surprise? What did you do?

Dean

*the author owns shares of REPH at time of writing

4 Comments

Filed under Company Analysis, Investing Lessons, Random Thoughts

OneSoft Solutions ($OSS.v)

I’vs had some shares of OneSoft for a few years. I thought it was a good idea to put down some of my thoughts on the company to instigate conversation. This is not a typical investment for me as this was pre-profit when I purchased shares and always trades at a expensive TTM revenue multiple.

I think it makes sense to stop and appreciate something this company does. The company probably has the best MD&A of any microcap that I have come across. Each quarter they go into very deep detail on how the quarter went and what they are working on.

Since purchasing shares, I’ve been able to witness the company hit a few major milestones and pivot a few times.

  • reaching commercialization of their product
  • partnering with a large US pipeline company to adapt their internal integrity management to CIM
  • continuing to expand the functionality of CIM with additional modules that are high value for customers
  • raise capital to fund growth initiatives at opportune times
  • pivot their sales strategy from a fixed fee per mile of pipe to a consumption based model that is easier for customers doing project based work
  • get to ebitda breakeven (tbd if it is for the full year)

Valuations

 

As you can see, not cheap. 10x forward sales is super expensive.

Business Background (pasted from AIF)

OneSoft Solutions Inc. is a provider of software solutions for select markets, all of which are built using Microsoft’s Cloud technologies. Its mission is to acquire, manage and build next-generation software businesses that will provide specialized, mission-critical cloud-based software solutions to address customer needs. OneSoft develops software technology and products that have the capability to transition legacy, on premise licensed software applications to  operate on the Microsoft Cloud using Microsoft Business Intelligence software (“Microsoft BI”) and Microsoft Azure Data Sciences functionality including Machine Learning and Predictive Analytics. OneSoft’s business strategy is to seek opportunities to convert legacy business software applications that are historically cumbersome to deploy and costly to operate, to a more cost-efficient subscription-based business model utilizing the Microsoft Cloud platform and services, with accessibility through any internet capable device.

Their Product (pasted from AIF)

Cognitive Integrity Management (“CIM”) is a software-as-a-service (“SaaS”) application that uses the Microsoft Azure Cloud Platform and services including machine learning (“ML”), predictive analytics, business intelligence reporting and other data science components to assist pipeline companies to prevent pipeline failures. Fees charged to access and use the software are variable and dependent on key metrics such as the miles of pipeline data analyzed, number and type of pipeline assessments ingested, Azure usage costs and the functionality that clients choose to use.
CIM features revolutionary Pattern Detection and Interacting Threats algorithms to detect and report on threats to the pipeline’s integrity. CIM was designed to ingest inline inspection (“ILI”) pipeline data using a simple “drag and drop” routine after which the data is normalized, anomalies are aligned to prior ILI data sets, and predictive analytics calculates anomaly growth rates, resulting in detection of threats to pipelines. CIM provides advanced business intelligence, intuitive graphical presentations, dashboard reporting and natural data query language capability that enables operators to manage their pipeline infrastructure with more efficiency than legacy systems and processes that do not utilize cloud computing.

Opportunity

As you know, pipeline failures are costly and bring a lot of bad press.

They specifically add value to the customer by:

  • reducing the staffing required to analyze pipeline cell wall anomalies, which is usually done by a team of engineers
  • increase the predictability of potential cell wall degradation
  • reduce unnecessary costs from digging up pipe that doesn’t need to be dug up
  • reduces the time to analyze the ILI data (from weeks/months to hours/days)
  • increase the effectiveness of a company’s repair work
  • most important from a regulatory standpoint; help companies identify high risk anomalies that will lead to pipeline failure
  • can give smaller companies a cost effective way to analyze ILI data if they don’t have the internal resources to hire engineers to look at the data

There is about 600,000 miles of pipe that gets “pigged” and has ILI data. This is the initial target for OneSoft. There are another 2.7 mil miles of pipe that doesn’t get “pigged”. They are currently adapting their platform to be able to handle non-pigged pipe in the future.

The largest hurdle so far is getting customers to buy into going to software performing the work of in house engineers. They industry is not known for being innovative with predicting failures.

Management has estimated that ARR (annual recurring revenue) will double the year. That means that we should see 5.4 mil ARR in 2020.

The company went through a Microsoft Accelerator program in 2016 to help bring the technology to market quickly. It sounds like they are a few years ahead of any potential competitors and management has made it clear that they will continue ton invest in the platform to stay ahead of any competitors.

Future Opportunities

The company has recently set up an internal innovations lab. The lab will be focused on growing their TAM and increase (or at least maintain) the head start they have on competitors. I think this speaks to their focus on growing the business, but doing it in an intelligent manner. It doesn’t seem like unabashed top line growth for the sake of growth. As the company has grown, some resources that were designed for development were likely borrowed to help operations onboard new clients. The innovation lab should minimize or eliminate that form happening.

Current opportunities identified by management:

  • working with ILI tool vendors to automate some manual tasks
  • Collaborate with parties to see if there are specialized engineering knowledge to integrate into CIM
  • Explore integration of additional data sets
  • Investigate new industries (water and sewer have been identified)

Covid-19

The company has been doing the work from home thing for years, so there are no real risks to operations. There is the obvious economic risk from covid, but they are somewhat insulated being focused initially on mid-stream pipe. The biggest impact so far has probably been a slowdown in sales and perspective customer trials.

There are some potential positives as the work from home movement continues and the need for a cloud based solution like OneSoft’s CIM is desired.

Risks (I’ll let you judge the likelihood of each)

  • the regulation push from PHIMSA could be delayed or eliminated
  • sales may take way longer than anticipated and share price could see a multiple contraction
  • new competitor could emerge
  • they could continue to develop new solutions and be unable to market them

Tangible Milestones

I like to think in terms of tangible milestones for a company like OSS. Given that they are focused on growing the business, I think traditional profitability focused metrics do not apply in the near term. Here are some milestones I’ve identified over the next 9-36 months that I think are possible.

  • continue to see top line growth 50%+ yoy
  • obtain revenue from non-piggable pipe
  • enter new vertical(s)
  • derive revenue from their Canadian partnership with Worley Parsons
  • expand internationally by partnering with someone

Conclusion

I think of an investment in OneSoft as an asymmetrical risk/reward. There are many risks with a company this size that is pre-profit. Having said that, this company: has a large current and future TAM, is shareholder accessible and customer focused.

I believe I can manage the risks with an extended timeframe (2-3 years) and position sizing.

What do you think of OneSoft? What are you favorite SaaS companies?

 

 

Leave a comment

Filed under Company Analysis