Description

Issuer Direct (Ticker: ISDR)

I.                Executive Summary

ISDR is a founder-led micro-cap company with ~80% gross margins that just hit an inflection point after ~2.5 years of business transition.  The crown jewel is Accesswire that fits into Clayton Christensen’s The Innovator’s Dilemma framework.  ISDR has such a high quality business that it has been paying dividends for the past 8 quarters.  Current DY is 1.6%.

II.              Capital Structure at a Glance

Here is a capital structure of ISDR at a glance:

We would point out the obvious: ISDR has a pristine balance sheet while cash equal to ~16% of the market cap.

III.            ISDR History

ISDR has humble beginnings.  In 2006 ISDR Founder and CEO started a company MyEdgar that was a full-service provider of financial print and related compliance communications both online and in print.  Shortly thereafter MyEdgar acquired Edgarization, LLC in March 2007 and Basset Press in July 2007.

In December 2007 the company “became publicly traded through a reverse merger transaction with Docucon Incorporated (“Docucon”), a Delaware company.  In December 2007, the company changed its name to Issuer Direct Corporation.” (3Q 2009 10-Q).

Since then ISDR completed a number of acquisitions and you can read about them in another VIC write up by mrsox977 from June 2016 here.  Mrsox977 also does an excellent job of providing background information on various products and services that ISDR offers.

We would point out two largest acquisitions:

(1)   Precision IR in August 2013 for ~$3.45M, including paying down Precision IR’s debt

(2)   Accesswire in October 2014 for $1.7M in cash and $140K worth of ISDR shares for a total consideration of $1.84M.

IV.           What Does ISDR Do?

ISDR provides technology platform and some low tech services to companies to address the following needs:

(1)   SEC filings

(2)   Press releases and other corporate communications

(3)   Communications with shareholders such as annual reports and others.

V.             Business Transition

Several years ago (2.5 – 3 years ago) ISDR started its transition away from project-based engagements (i.e., non-recurring revenue / non-subscription revenue) to recurring business model coupled with SaaS or SaaS like products and services.

VI.           Revenue Streams and Segment Reporting: 2013 – 2016

Historically (i.e., until the end of 2016) ISDR reported its revenue in three revenue streams:

(1)   Disclosure Management

(2)   Shareholder Communications

(3)   Platform and Technology.

1. Revenue Stream #1:  Disclosure Management

Disclosure Management revenue stream included legacy solutions and services and, not surprisingly, was declining since 2014.

As you can see, despite declining revenue gross profit margins declined only modestly – from ~72.1% in 2014 to ~69.6% in 2016.

2. Revenue Stream #2: Shareholder Communications

Revenue stream #2 included two sub-streams: (1) Accesswire and (2) Other Shareholder Communications Revenue which included “old” legacy business based on project based engagements as opposed to subscription services.

ISDR started including Accesswire results starting 1Q 2015 (after it was acquired).

It is worth noting that Accesswire revenue was never reported in a comprehensive format in 10-Qs or 10-Ks.  Instead ISDR’s press releases and earnings calls made brief, sporadic references to Accesswire growth rates and revenue numbers every now and then.  By putting all those “random” references together we have come up with Accesswire revenue.

Shareholder communications revenue as a whole was in a rapid decline starting 2015.  However, such decline had been masking very impressive growth experienced by Accesswire.  Accesswire’s quarterly revenue has increased more than 3x from 1Q 2015 until 2Q 2017.

It obviously also means that the rest of Shareholder Communications revenue (ex-Accesswire) has been declining even faster than a quick glance may imply.

3. Revenue Stream #3: Platform and Technology

Platform and Technology Revenue Stream includes revenue from new cloud-based, subscription solutions.  We need to keep in mind that it includes both revenue from brand new clients and revenue from clients migrated on these newer platforms.  In the past revenue derived from such “migrated” clients was reported under Revenue Stream #1 or Revenue Stream #2.

Platform & Technology Revenue has the highest gross profit margin.  Thus, every dollar migrated from old revenue streams (#1 and #2) generates higher gross profit contribution as long as such migrated revenue does not change.  Details about such migration are scarce and it is difficult to make 100% accurate judgement on this.

VII.         Revenue Streams and Segment Reporting: 2017

Starting 1Q 2017 ISDR changed the way it is reporting its revenue streams.  Instead of three revenues streams ISDR started reporting only two revenue streams:

(1)   Platform & Technology

(2)   Services.

1. Revenue Stream #1:  Platform and Technology

Platform & Technology covers all “new” and growing subscription businesses, including Accesswire, while Services covers all legacy businesses.

It is our understanding that management and some investors / shareholders believed that breaking revenue into “good & growing” and “bad & declining” will help observers better analyze ISDR.   We would probably agree with this view.  However, over the next several quarters it will be difficult to compare ISDR performance with its historical performance reported under the three revenue streams system.  Such change in reporting format has also made ISDR more difficult to model.  

It is clear that Accesswire is the key driving force behind Platform and Technology overall growth.

a.   Customer Count

In its 10Qs IDSR has disclosed the customer count for Platform & Technology.

During its 2Q 2017 earnings call ISDR mentioned Accesswire customer count at the end of 2Q 2017.  We calculated Accesswire customer count at the end of 1Q 2017 as the average between 4Q 2016 year end Accesswire customer count and 2Q 2017 customer count.

Then we calculated the Platform & Technology customer count ex-Accesswire by simple subtraction.  However, this approach has a significant flaw: it does not take into account customers that are consuming both Accesswire services and other Platform & Technology services.  Hence, once should view Platform & Technology ex-Accesswire customer count with a grain of salt.

b. ARPU

The limitation described above applies to the ARPU for Platform & Technology ex-Accesswire as well.

2. Revenue Stream #2:  Services

Services cover all legacy, project-based revenue.

Services revenue showed significant decreased in 2Q 2017 but the speed of such decrease significantly decelerated.  During  2Q 2017 earnings call CEO Brian Balbirnie also indicated that mid-teens decline in 3Q 2017 and 4Q 2017 is a “safe assumption”.

VIII.    Accesswire

Given that Accesswire is the fastest growing segment and the crown jewel of ISDR, it is worth spending more time on Accesswire.

1. Product and Customer Value Proposition

The simplest way to describe customer value proposition of Accesswire is to say that a customer can get ~85% of their press release distribution (i.e., media outlets that “pick up” press releases distributed by Accesswire) at ~1/3 of the price.

2. Industry Structure and TAM

Press release distribution industry is an oligopoly with few industry players controlling 80%+ of the market.  Such industry structure makes lots of sense given natural benefits of scale.

Without trying to be too precise, top 3 players PR Newswire, Business Wire, and MarketWired generate ~$600M, ~$300M, and ~$150M in revenue respectively.  Thus, the entire press release distribution industry is more than $1B industry.

3. Accesswire:  Key Data Points

Below we are showing key metrics for Accesswire that we were able to calculate by putting together various data points disclosed by ISDR in a fairly random manner.

Let’s dive into them.

4. Accesswire Customer Count

When ISDR acquired Accesswire, Accesswire was doing a lot of wholesale business and had lots of wholesale clients who paid lower prices.  It was not the direction where ISDR wanted to take the business.  Thus, starting in the middle of 2015 Accesswire was turning those low profitability clients away.  That’s why the customer count was declining.  Starting in late 2016 the Accesswire customer base started growing again.

As an area of potential concern, we would point out that the growth between 4Q 2016 customer count and 2Q 2017 customer count was very small (~ 15 customers only).

5. ARPU

Accesswire ARPU has been constantly rising which was driven by

(1)   Departure of wholesale clients

(2)   Decrease in promotional activity and reduced number of clients enjoying introductory rates.

6. Accesswire EBITDA and Operating Margins

Information about EBITDA and operating margin is very limited.  Let’s summarize what we know.

During 1Q 2016 earnings call management said that Accesswire EBITDA margin increased from 25% a quarter ago (i.e., in 4Q 2015) to 30%.

During 3Q 2016 earnings call management said that Accesswire “operating” margin was 67%.  Presumably, EBTIDA margin should be even higher but let’s treat them to be identical.

It is worth pointing out that Accesswire margins were never disclosed in 10Qs or 10Ks.  Thus, one can question how various costs have been allocated to Accesswire and whether such allocation is proper.  We do not know the answer to this question.  What we know is that management tried to run Accesswire fairly autonomously from the rest of the business.  Thus, such margin calculations should include all true Accesswire expenses while they probably ignore corporate overhead allocations.

7. Accesswire:  Conclusion

In our opinion, Accesswire is a low cost provider led by a committed and aligned CEO (more on this below) in a $1B+ oligopolistic industry where key players have nice and fat margins.  Yes, Accesswire product is inferior right now but it is already “good enough”.  This reminds us of a classical path of a disruptor described in Clayton Christensen’s The Innovator’s Dilemma.

We will not be surprised if Accesswire or even the entire ISDR becomes an acquisition target in a few years since one of the larger press release distribution players may decide that it is cheaper to buy ISDR than to defend their clients against ISDR.

IX.           Management and Culture

1. CEO

We have lots of respect for CEO Brian Balbirnie.  First, he has literally built this company from nothing into a ~$12M revenue business.  Yes, it is still tiny by any means but he has accomplished it through bootstrapping, modest share issuances (the biggest share issuance was to settle convertible notes which were used to raise capital to finance Precision IR acquisition), and he still owns ~21.06% per the last proxy statement (August 7, 2017).

Whenever we speak with CEO Brian Balbirnie, he always strikes us as a person who is really obsessed with his business and is fully committed to it.  He is incredibly driven and hard-working.  He really enjoys / feels proud to be a low-cost provider and is committed to be

2. Culture and Employee Engagement

Glassdoor reviews are mostly positive with a couple of negative reviews.

X.             Valuation

Valuing ISDR is a difficult exercise.  We need to keep in mind that we are analyzing and valuing a company that is about to complete its transition from a legacy business model to a subscription model (and did it quite successfully!) and just returns to high single digit revenue growth.  We expect that ISDR’s revenue growth will accelerate going forward.

Below we provide some valuation metrics at a glance:

We need to keep in mind that LTM EBITDA does not include capitalized software and stock-based compensation that was capitalized together with capitalized software.

Thus, “true” operating income will be quite lower and will bring the multiple significantly higher.

Why do we like the stock despite this high adjusted multiple of operating income?

First, we have already discussed qualitative factors and why we like the company and the management.

Second, we do believe that ISDR has significant strategic value.  DFIN or CISN can be logical acquirers.

Third, we are looking at EV/Gross Profit multiple and ISDR is very-very cheap on that metrics.  Why is this metric relevant here?  Why do we prefer it over EV/EBITDA or EV/EBIT?

The answer is simple: we believe that ISDR would continue grow its top line without significantly increasing its G&A, S&M and R&D.  In other words, ISDR has its cost base pretty much in place and ISDR would be able to leverage this cost base well.

XI.           Areas of Concerns

We would point out several areas of concern that we would be watching out for.  Such areas of concern include:

(1)   Capitalized software and SBC capitalized software

(2)   CEO

(3)   CFO

(4)   Capital allocation

(5)   The largest shareholder – Red Oak Partners, LLC – has been an aggressive seller.  

1. Capitalized Software SBC Capitalized Software

As we already mentioned, ISDR capitalizes some software development expenses.  Some of such expenses show up in the investing section of the statement of cash flows.  However, some software development costs are actually SBC that is also capitalized and it shows up only in Supplementation Information to the statement of cash flows.

While such treatment is allowed under GAAP rules, we generally do not like it when companies capitalize software development costs.  Furthermore, capitalizing SBC is even trickier as we believe that most investors may not even notice that.  It also does not show up in screens.  Thus, our concern is that ISDR may look cheaper that it actually is.

2. CEO

While we have tremendous respect for CEO Brian Balbirnie, we must admit two things.

First, his abilities and skills are likely to be challenged every single day as he has never done it before.  He is doing great so far but what if he approaches his limits …

Second, CEO Brian Balbirnie is not a SaaS guy and he is trying to build a SaaS or SaaS like company.  He is a hassler but not a coder.  Can he build such business?  Time will tell.

3. CFO

Current CFO Steven Knerr used to a controller until a couple of years ago.  CFO is quite a different role.  Can he be an effective CFO?  It is something that we will need to be watching.

4. Capital Allocation

ISDR did multiple M&A transactions.  As we mentioned, two of them really stand out – Precision IR and Accesswire.  Accesswire has been a home run while Precision IR was a failure.  

Does it mean that CEO Brian Balbirnie has learned from Precision IR failure?  Or did he just get lucky and his next deal would be a coin flip?  It is also something that we will be watching very closely.

5. Red Oak Partners, LLC Has Been Selling

Red Oak got involved with ISDR after Red Oak provided convertible debt financing to ISDR to pay for Precision IR.  During 2Q 2015 the note was converted into ISDR shares.  At the time of convertible debt financing, David Sandberg got joined the BoD.  

Several months ago he stepped off the board and subsequently Red Oak started selling its shares.  The ownership dropped from ~23.28% to ~11.23% and is looking to sell the remaining stake (e.g., ISDR filed Form 424B3 on May 25, 2017; as far as we understand such sale has not been completed it yet).  

What is very interesting is that despite a large number of shares hit the market, all the supply has been absorbed and the share prices has actually increased.  

XII.         Catalysts

Potential catalysts include:

(1)   Continuous client wins and revenue growth

(2)   Acquisition by incumbent industry players.

DISCLOSURE: We and / or our affiliates (“Author”) currently hold a long position in ISDR stock, and may buy additional shares or sell some or all of our shares, at any time.  We have no obligation to inform anybody of any changes in our views of ISDR.  This is not a recommendation to buy or sell shares.  Please consult your financial, legal, and/or tax advisors before making any investment decisions.  While Author has tried to present facts it believes are accurate, Author makes no representation as to the accuracy or completeness of any information contained in this note.  The reader agrees not to invest based on this note, and to perform his or her own due diligence and research before taking a position in ISDR.  READER AGREES TO HOLD HARMLESS AND HEREBY WAIVES ANY CAUSES OF ACTION AGAINST AUTHOR RELATED TO THE NOTE ABOVE.  As with all investments, caveat emptor.

We do not hold a position with the issuer such as employment, directorship, or consultancy.

Catalyst

Potential catalysts include:

(1)   Continuous client wins and revenue growth

(2)   Acquisition by incumbent industry players.