MAM Software Group (MAMS.OB)

Summary

MAM Software (MAMS) is an under-valued software company that supplies software that supports the auto industry after-market in both the U.K. (70% of revenues) and North America (30% of revenues).  MAMS has a market value of about $36m and a $3m net cash position as of 6/30/12 for an Enterprise Value (EV) of about $33m.  In FY12 (ended 6/30), MAMS generated revenues of about $26m and close to 70% of these revenues were recurring, related to software maintenance and support contracts.  MAMS is trading at about 1.3x LTM revenues.  In FY12, MAMS generated adjusted EBITDA of about $6.4m, so MAMS is trading at about 5.1x LTM EBITDA.  In FY12, MAMS generated cash from operations of about $4.7m with minimal capital expenditures resulting in FCF of about $4.6m.  So MAMS is trading at about 7x LTM FCF or about a 14% unleveraged FCF yield.  We believe that MAMS can grow its highly sticky revenue base in FY13 as well as EBITDA and FCF.  For reasons discussed below, we believe that MAMS could generate $5m to $6m of FCF in FY13, resulting in an unleveraged FCF yield of about 17% based on the midpoint of our range.  As noted below, MAMS had an especially strong Q4 of FY12 (ended 6/30), which could bode well for FY13 if these trends prove sustainable.

We believe MAMS current valuation of 1.3x LTM revenues, 5x LTM adjusted EBITDA, and a 17% unleveraged FCF yield for FY13 is very cheap for a software company with over 70% recurring revenues, gross margins of close to 60%, a highly diversified customer base (over 5,000 customers), renewal rates over 90%, a 70% market share in the U.K. market, a balance sheet with a net cash position that is building, and a business model that generates sustainable free cash flow even in a recessionary environment in the U.K.  The lion’s share of MAMS revenues are software revenues related to contracts that are already on support and maintenance mode, with modest monthly maintenance costs to customers relative to the importance to their business models.  A major question is how strongly MAMS can grow new license sales in the U.K. market which is in recession and in the U.S. market where competitor Activant is well-entrenched.  Early indications are positive, as MAMS has had several recent customer “wins” in the U.S. to displace incumbent software systems.

MAMS is led by CEO Michael Jamieson and CFO Charles Trapp.  We think they have done an excellent job in building a high-ROIC, cash-generative business and in cleaning up a messy capital structure over past few years.  This is all the more impressive having been accomplished during a recessionary climate in both the U.K. and the U.S.  Mike Jamieson was formerly in charge of the U.K. operation.  We believe Jamieson was integrally involved in developing its strong software products that are highly focused on the auto-aftermarket industry as well as successfully building up its dominant U.K. market share.  Jamieson is now bringing the U.K. playbook over to the North American market.  CFO Trapp seems to have done a great job cleaning up MAMS’ capital structure, including a $3.3m right offering in October 2010 to help repay expensive debt.  In April 2012, senior mgmt received close to 1m shares of restricted stock in MAMS but we note that this restricted stock does not start to vest until share prices far above current share prices are achieved (from $5 per share on up to $8 per share); we would love to see them earn these shares.   

MAMS’s primary competitor in the U.K. is Activant.  Activant is a larger software company focused on retail and wholesale distribution businesses that (according to the MAMS’s management) has a much less robust software product for the auto aftermarket than MAMS.  Activant has a dominant market share in the North American auto-aftermarket and MAMS has had some success to date in winning business in the North American market.   In May 2011, Epicor and Activant were both acquired and merged together by APAX Partners for about $2b or 2.5x revenues.  Together, Epicor and Activant have revenue of about $850m and about 20,000 customers.  Over the past several years, Activant has reportedly not invested heavily in its software for the auto aftermarket, while MAMS has made substantial investments in its U.K.-developed software, which has allowed it to build up very significant market share in the U.K. market.  A major focus of MAMS is to replicate their success in the U.K. in the North American market.  The large enterprise software companies such as Oracle, Microsoft, and SAP have not focused on the automotive aftermarket industry to date and MAMS’ management believes they are unlikely to do so in the future given the size of the market, but this could be a risk.

Auto Aftermarket Industry

The company serves customers involved in the supply of parts, maintenance, and repair of automobile and light trucks in three key segments of the automotive aftermarket, namely parts, tires, and auto service.  The industry is currently experiencing consolidation in the lines that are sold, as the previous practice of having parts and tires provided by two separate suppliers is coming to an end, as customers need to offer their clients the widest range of products and services under one roof.

The company believes growth in the auto aftermarket will continue to be driven by:

• Gradual growth in aggregate number of vehicles in use;
• An increase in average age of vehicles in operation;
• Fewer new vehicles due to uncertainty in economy and available credit; and
• Total number of miles driven per vehicle per year

Business Description

MAMS develops a range of business management solutions, data solutions and e-commerce solutions that help companies conduct their business more efficiently, encourage customer loyalty, and increase revenue.  Business management software includes wholesale & retail sales, purchasing & inventory, integrated accounting, and business analysis and CRM.  E-commerce solutions software includes B2B web portals, B2C web sites, and A2A connectivity solutions.  Data products & services solutions include all makes auto parts catalogs, data management, and on-demand services.

MAMS targets the U.K. and U.S. aftermarkets, including tires, parts, and accessories.  It also started to recently target U.K. vertical markets including construction materials supply and general wholesaling.  The company possesses a range of solutions designed for all the links in the auto after-market supply chain – supplier/manufacturer to warehouse distributor to wholesaler/jobber to installer/retailer.

MAM Software Ltd provides software to the automotive aftermarket in the U.K. and Ireland.  All MAM Software programs are based on the Microsoft Windows family of operating systems and each program is fully compatible with the other applications in their range, enabling them to be combined to create a fully integrated package.

Aftersoft Network develops open business management systems and distribution channel e-commerce systems for the automotive aftermarket supply chain.

MAM Software Inc. provides software solutions to the North American automotive aftermarket, basically bringing the company’s highly successful software systems in the U.K market, where it has achieved a dominant market share, to the North American market.  It targets jobbers and warehouse distributors, supplying a localized version of the U.K. developed software. 

In North America, Aftersoft Network focuses on selling systems to the service and tire segment of the market, while MAM Software Inc. focuses on the warehouse and jobber segment of the market.

Software Products

Autopart is a U.K. developed product sold in both the U.S. and U.K.  In the U.S., it is sold by MAM Software Inc. and in the U.K. by MAM Software Ltd.  The product is designed for and targeted at parts store chains that seek to manage multiple locations and inventories on a single system for a regional area.  It provides point of sale, inventory mgmt, electronic purchasing, and a fully integrated accounting module.

VAST is a product designed for and targeted at large to medium sized automotive services and tire chains that seek to manage multiple locations and inventories for a regional area.  VAST is also suited to managing single location stores that are part of a franchise or buying group.  VAST provides point of sale, inventory mgmt, electronic purchasing, and customer relationship mgmt capabilities.

Autowork Online is a U.K. developed cloud computing solution that is sold by MAM Software Ltd.  This product is designed for and targeted at small single location automotive installers.  The Autowork Online product provides estimate, job card, parts procurement, and invoice capabilities.  It also allows the automotive installer to connect with parts distributors to purchase components.  Autowork Online is delivered as a service over the internet, allowing customers to purchase the solution on a monthly basis without the need to manage the system.

Growth Strategy

MAMS has several key strategies to grow its revenues, EBITDA, and FCF in FY13:

• Accelerate the rate of growth of Autopart in North America;
• Maintain healthy U.K. Autopart revenues;
• Continued growth of Autowork Online in the U.K.;
• Launch of Autowork Online in North America;
• Increased penetration of the U.K. tire sector;
• Increased penetration of the North American tire sector;
• Introducing Autocat+ into North America; and
• Accelerating the growth of Trader in the U.S.

In North America, the Company is marketing Autopart to warehouse distributors or WD’s as a solution for them to deploy and promote downstream with their retail customers.  These WD’s are larger companies and it makes sense for MAMS to target them since their average system purchase is about $100,000 versus $25,000 for jobbers/retailers.  MAMS has targeted one of the largest automotive aftermarket buying groups in North America.  Prior to MAMS entry into North America, incumbent software provider Activant serviced almost 100% of this buying group’s members.  Recently, MAMS has won several new licenses with this group’s members, which bodes well for its potential in North America.  MAMS invested heavily in upgrading its software systems in the U.K. over the past four or five years and these investments allowed it to achieve a dominant market share in the U.K.  According to MAMS’ management, its new software systems have a payback of less than two years and many attractive features that competitors currently cannot match.  Management believes it has a substantial lead time, up to one year, in the event competitors seek to improve their system offerings.

There appears to be substantial growth potential for MAMS software products.  In fact, FY12 revenues in U.S. grew about 22% (which more than offset a 4% decline in the U.K.).  MAMS is using its Autopart software product to penetrate auto aftermarket factors or jobbers in the U.K. and North America.  In the more-developed U.K. market, Autopart has penetrated about 1,200 factors or jobbers out of a total of 3,500.  In the more-recently-entered North American market, the company has penetrated about 74 warehouse distributors out of a total of 637 and has penetrated about 20 factors or jobbers out of a total of 27,500.

The company’s Autowork Online SAAS software product is being used to penetrate service and repair centers.  In the U.K., the company’s presentation indicates Autowork Online has penetrated about 4,000 service and repair centers out of 25,000 and about 20 tire retailers out of 5,500.  In North American market, Autowork Online has penetrated about 221 service and repair centers out of 76,200 and 103 tire centers out of 19,000.

Customer Base and Sales and Marketing

The company has a highly diversified customer base with the top 10 customers representing about 17% of total sales in FY12.

U.K. auto customers include Group Auto, Brown Brothers, Parts Alliance, Rapid, Bosch, Wilco, Caar, Unipart Automotive, and Arnold Clark.  U.S. auto customers include Autopart International, Auto Value, Mighty, Romaine Electric, Part Value, Cancore, Hanson Distributing Co, Bennett Auto Suppy, and Eastern Automotive Warehousing.  U.S. tire customers include Monro Muffler/Brake, Goodyear, Sullivan Tire, Meineke Discount Mufflers, Virginia Tire & Auto, AutoZone, Tuffy Auto Tire Centers, and Matthews.

The company’s sales and marketing strategy is to acquire customers and retain them by cross-selling and up-selling a range of business management systems, information products, and online services.  Within the parts, tire, and auto service provider segments, each division sells and markets through a combination of field sales, inside sales, and independent representatives.  MAMS seeks to partner with large customers or buying groups and leverage their relationships with their customers or members.  Incentive pay is a significant portion of total comp package for all sales reps and sales managers.

Corporate Background

MAMS has a messy history as a public company which has been a factor in obscuring the attractive underlying business model.

In December 2005, W3 Group did a reverse acquisition and changed its name to Aftersoft Group.  In November 2008, ADNW distributed a dividend of the 7.1m shares of MAM common stock that it owned to complete the spin-off of MAM’s businesses.  Prior to the spin-off, ADNW owned about 77% of MAM’s outstanding common stock and this entire amount was spun off.  MAMS currently has two wholly owned direct subsidiaries, MAM Software in the U.K. and ASNA in the U.S.  In April 2010, shareholders approved the change in company’s name to MAM Software Group from Aftersoft Software. In October 2010, MAMS completed a successful rights offering for $3.3m to help retire expensive debt.   In March 2011, the company effected a one for one hundred reverse split, followed by a forward ten for one forward stock split.  In addition, there were several litigations related to previous management that MAMS has settled over the past couple years (at a cash cost of about $2m to $3m).

Strong Cash Flow Generation and Solid Business Model

MAMS has a solid business model with limited capital expenditure and working capital investment requirements.  In FY12, MAMS generated about $4.6m in FCF with adjusted EBITDA of $6.4m or a 25% EBITDA margin.  We think the business model retains a high ROIC (over 100%) with very limited capital expenditures and working capital requirements.  Most major investments are in sales and marketing and R&D and these are funded by the company’s high-margin gross profit dollars.  MAMS’ business model should continue to be highly cash-generative in FY13 and beyond.  Noteworthy, FCF in FY11 was depressed by approximately $2m in extraordinary expenses.  We think MAMS can generate $5m to $6m in FCF in FY13.  Based on MAMS’ EV of about $34m and our mid-point FCF of $5.5m for FY13, MAMS has an unleveraged FCF yield of about 17%.

Stable Business Model in a Recessionary Climate with 70%+ Recurring Revenues

We think MAMS has a stable business model which is fairly reliable in a recessionary environment, such as that in the U.K. and possibly in the U.S.  In a difficult economy, customers are unlikely to make a large investment in a new software system, which can cost from $25k to $200k, depending on the size of the customer.  Customers are more likely to retain their existing systems that are paid for and keep them on a maintenance and support mode.  The almost 70% of MAMS revenues that are recurring from existing systems give the company a stable base of reliable revenues, even in a weak economy.   We believe MAMS’s revenues are highly “sticky” with management reporting renewal rates in the 90%+ range.  We believe MAMS’s software is highly disruptive for customers to remove and this does not appear to happen often.

High Gross Margin Software Revenues

We like to invest in software companies because they have very high gross margins, which help fund the build-out of a stronger competitive position.  MAMS gross margin in FY12 was 59% and in FY 11 gross margin was 58%.  These high gross margin dollars allow MAMS to fund significant amounts of: (1) sales and marketing expenses and (2) research and development expenses, both of which we believe represent investments in building up the customer base of the company and building up the company’s software products.  In effect, these high gross margin dollars help fund an investment in strengthening the competitive position or “moat” which supports the company.

Strong FY12 Results Should Bode Well for FY13 and Q4 Results were Especially Strong (Q4 EBITDA up 62%)

FY12 results (ended 6/30) showed a strong performance, despite the tough economic climate in the U.K. and U.S. with improved gross margins and higher gross profit dollars.  Revenues for FY12 were $26m versus $25m in prior year while FY12 gross margin was 58% versus 57% in prior year, resulting in gross profit of $15m in FY12 versus $14m in FY11.  FYE 6/30/12 adjusted EBITDA was about $6.4m versus $5.4m in prior year.  FY12 cash from operations was $4.7m with only $0.1m in capital expenditures, which highlights MAMS highly cash generative business model.  We expect at least a modest increase in revenues, adjusted EBITDA, and FCF in FY13. 

FY12 Q4 revenues were $7.1m vs. $6.8m prior year; Q4 gross profit was $4.5m vs. $3.8m prior year; Q4 operating income was $1.9m vs. $1.0m prior year; and Q4 net income was $1.8m vs. $0.7m prior year.  Q4 EBITDA was $2.3m vs. $1.4m prior year, up 62%. These strong results were largely driven by a 66% increase in Q4 sales in United States (from $1.5m to $2.5m) as MAMS’s sales and marketing programs started to bear fruit.  While we would be very cautious on extrapolating only one strong quarter, if these Q4 results are sustainable, they could indicate a stronger FY13 than we expect.

Share Repurchase Program and Excellent Potential for Share Repurchase or Dividends

MAMS spent about $2.4m to repurchase its shares in FY12 and currently has a $2m share repurchase program in place which represents about 8% of the current market cap.  We believe management is well aware of the current depressed relative valuation of its stock.  We believe that if MAMS’s share price remains undervalued, there could be an acceleration of the share-repurchase program and/or a major dividend program.

Highly Diversified Customer Base is a Strong Competitive Advantage

MAMS has a highly diversified base of customers, with close to 5,000 customers in the U.K. alone and no one customer exceeding 5% of total revenues.  MAMS top 10 customers represented about 17% of total sales in FY12.  We believe these customers in the U.K. and North America are unlikely to change their existing software systems without a compelling reason to do so.  New software systems can run $25k to $200k, depending on the size of the customer, and we don’t think these expenditures will be made lightly.  We do not believe it will be an easy task for a competitor to replace a meaningful portion of MAMS installed base.  We believe that MAMS has a superior software product at this point and it will be incumbent on competitors to displace its deployed software systems.  For this reason, we believe a large portion of MAMS’ revenue base is likely to be fairly recurring and stable, which is attractive in a tough economic climate.  Further, as MAMS builds its customer base with wins in North American, this adds to its credibility with potential new customers.

Industry Consolidation Prospects

We believe that MAMS’s software system product and services and its substantial and growing installed base in the U.K. and increasingly in North America are all valuable assets.  We think there could be strategic purchasers who might be attracted by the successful software products and growing customer base.  We believe MAMS’ current valuation at close to 1.3x LTM revenues and about 5x LTM adjusted EBITDA is well below the valuations at which similar software companies have been acquired.  

Solid Balance Sheet and Expected Steady Build Up in Cash Position.

MAMS has a solid balance sheet, which has been consistently improving its net cash position over the past eight quarters.  At 3/31/09, MAMS had a net debt position of about $5m and this has steadily improved to a net cash position of $3m as of 6/30/12.  This included about $3m in a rights offering in mid-2010 with the remaining improvement due to FCF generation.  (Note, there appear to have been about $2m to $3m of non-recurring cash payments during this period).  We believe MAMS’s FCF is currently running at close to $5m or more per year.  We believe MAMS can build its net cash position to $8m or more by FYE13.

Conclusion and Target Price

Based on 10x our estimated FCF of $5m to $6m for FY13 and including a projected $8m net cash position at FYE13, we believe MAMS could trade for an EV of $58m to $68m or $4.15 per share to $4.85 per share versus $2.60 per share today (+60% to +85%).  Based on 8x our average EBITDA estimate of $7m to $8m for FY13 and including $8m of net cash projected at FYE13, MAMS would have an EV of $64m to $72m or about $4.60 per share to $5.15 per share (+ 75% to +98%).  If MAMS’s management team continues to execute and its aftermarket software performs as we expect, we think our target prices will be achieved.  If MAMS is able to take meaningful market share in the North American market, growth in revenues, adjusted EBITDA, and FCF could outpace our estimates, resulting in a higher valuation.