|Shares Out. (in M):||33||P/E||0||0|
|Market Cap (in $M):||110||P/FCF||0||0|
|Net Debt (in $M):||-15||EBIT||0||0|
GNSS (Formerly LRAD)
GNSS is a leader in critical communications. Its history dates back to the tragic USS Cole attack. For those that don’t remember the USS Cole was a Navy warship that was attacked by a foreign combatant, and a number of US Servicemen died in the attack. After this attack the Navy understood their existed a gap in their capabilities. They needed an effective way to communicate and deter before engaging in lethal counter measures. An example might be instructive. Imagine a speed boat approaching a Navy ship at highspeed (see videos below). It could be a pleasure boat or something worse. The ship’s commanders don’t know, and they don’t have a way to communicate with the ship effectively. Simple loudspeakers don’t have the distance and clarity to communicate until it is too late.
Long Range Acoustic Hailing Devices were born out of the USS Cole event and so was the company LRAD. The Navy refers to these devices as LRAD’s and there is only one credible player in the market - them. Think of devices that can project audio in crystal clear format for over many miles away. The original incarnation of these devices were mounted on Navy ships and would deliver a message or noise to an approaching UFO, and instruct them to turn away or something else, giving the Navy the ability to deter before using a lethal counter measure – increasing safety for serviceman around the world.
Like many small companies they made an amazing product that became a must have for the Navy. They were long on engineering but short on a business plan. The stock was depressed for many years and the board after some agitation brought in a “grown-up” to fix and grow the company three years ago. Enter Richard Danforth, who worked and ran large defense programs at big companies. He understood how to scale an organization and also how the DDD of worked. Richard took over when the stock was at about $1,50. He saw a core product that was best in class, but a company that was not positioned to exploit the opportunity and technology advantage it had.
Richard – began to expand the product suite to range from a small hand held product to the aforementioned Rolls Royce, ship mounted product. This expanded the opportunity set to more than just multimillion dollar navy vessels but also the Army etc in the US. Second it allowed him to sell into law enforcement, emergency prep etc and finally he began expanding into Military and law enforcement markets worldwide.
In tandem, he acquired a small Spanish company focused on critical communication technologies (think text to cellphone, although that over simplifies the technology) and began efforts to reposition the combined company from a hard product provider to a recurring revenue SaSS type company or at least aspects of their business to SaSS. The fruits of these labors are paying off as municipalities are buying the system as a way to communicate with their communities in times of stress. Fire, hurricane, Shooter etc. The Army, Airforce, and military arms across the world are adopting the product.
While clearly the market has caught on with a doubling of the stock price we believe the combination of products, the large market opportunity and the fact that we find limited competition in these markets makes us believe that within five years this organization will be bought at a price close to triple the current price.
The balance sheet is clean, sits with plenty of cash, and Richard knows how to deploy capital effectively.
Valuation/What’s it worth?
For the first nine months of this year they did about 29 mm of revenue and that exceeded all of 2018. We believe they will end the year with about 38 mm of revenue, and grow that at about 20-25% a year for the foreseeable future. They sport Gross margins above 50%. They have some very big irons in the fire and are just beginning to get traction. In three – four years we see about 80 mm of revenue and 30% EBITDA margins. When you adjust for the 15 mm of cash sitting on the balance sheet, and some cash generation and put a reasonable multiple for this kind of growth we get a share price close to $10.
The key to owning this company is believing that they will get a lot of leverage on the SGA and R&D line. We believe that to be true, given recent performance, but that is not completely evident from historical financials – its just a product of tech investing dynamics. Lots of leverage on R&D and large competitive moat coupled with adoption. It will take some time to show through the financials but this is why we believe forward earnings will grow much much faster than revenue.
At the $80 mm number and 30% margins – that’s about 24mm in EBITDA. There is little in the way of cap-ex. Assigning at 10X multiple to this leads to 240mm of Enterprise Value, and then adding in another 30 mm in existing and pro-forma cash is 270m of value. Divided by 33 mm shares get us to $8/share. Using a 12 X multiple in a takeout we get closer to a $10 share price. It’s a little more growthy than we are use to but we think the competitive position of the product is unrivaled and the momentum is just starting.
Here are some good videos