Description

This is a very simple idea so I will keep this write-up very brief.  Also, please note that this stock is a small market cap and not very liquid and therefore likely only of interest to investors with small capital bases.

Mind CTI (MNDO) is a tiny Israeli company that provides billing and customer service and enterprise call center software, primarily to telecom carriers.  Over the ten years from 2007 to 2016, MNDO has consistently produced annual revenue in the $18-25 million range and has produced operating cash flow between $4.1M and $6.3M over that time, with an average of about $5.2M per year.  Cap-ex runs less than $200K per year on average, such that FCF has averaged about $5M per year, with a ten year low of $3.6M and a ten year high of $6.1M. 

MNDO has been written up on VIC twice before, one in 2014 and once in 2009.  These write-ups provide some additional history and background on the company.  

MNDO was established in 1995 and introduced a real-time billing and mediation solution for IP prepaid phone carriers called MIND-iPhonEX in 1997.  In 2005, MNDO acquired a U.S. company called Sentori, since renamed MIND Software, which provided customer care and billing software to rural wireless carriers.  In October 2007, MNDO acquired UK-based Omni Consulting (Abacus Billing), renamed MIND Software Ltd, which provides billing and customer care software to European carriers using web-based reporting and billing. The company is based in Yoqneam, 50 miles north of Tel Aviv, but the vast majority of company revenues are generated outside of Israel.  In 2016, 70% of revenue came from clients in “the Americas” with 18.5% in Europe and about 5% from Israel.  MNDO has customers in 40 countries, and the company has sales and support offices in Silver Spring, Maryland in the US and in Reading, UK.  In addition, MNDO has a technical support office in Romania.

Overall, approximately 80% of sales are derived from billing and customer care software, and about 20% comes from the company’s enterprise call center software offerings.  MNDO is a niche competitor and primarily competes with large global enterprise software companies that have acquired telecom billing software specialists over the years.   

Depending on the schedule for new product releases and major product upgrades, MNDO typically reports revenue from new licenses of about 20% of sales, with 80% coming from maintenance and other.   As noted above, the company has been a consistent FCF generator, and aside from the acquisitions noted above, has generally returned cash to shareholders by way of a series of large annual dividends. The company paid out a total of $2.98 per share in dividends from 2007 to 2015 (which included a large special dividend at the end of 2009) and has recently announced the 2016 year-end dividend of 32 cents.  The company’s stated dividend policy is to distribute its annual EBITDA (with a few adjustments) every year, with the actual number corresponding having historically corresponded very closely with true free cash flow.   The stated dividend yield is therefore 11.9% given the recent stock quote of $2.70, but investors outside of Israel are subject to a 25% Israeli withholding tax on the dividend, such that the adjusted dividend is 24 cents and the effective yield falls to 8.9%.

The company has bought back shares on occasion, but really only when the stock was super cheap. In late 2008, the company also initiated a share repurchase program, and bought just shy of 2.4 million shares through June 2009 for $1.8 million, or an average price of around $0.75 per share. 

After trading in the $4-5 range in back in 2006-2007, in late 2008 and early 2009 the stock fell to well below $1, likely due to the company’s reported GAAP losses of nearly $12 million in 2007 and $6.5 million in 2008.  However, there is a good explanation for this. Prior to 2007, the company invested a good portion of its cash in an auction rate security with a par value of $20.3 million. Due to the auction failures for such securities, MNDO was unable to sell its ARS and had to mark it down in value by $15.2 million in 2007, $4.2 million in 2008, and $870K in 2009.  As of June 2009, the fair value of the security was reported as only $55K, despite the fact that MNDO had received all the contracted interest payments on the security. The company then sued Credit Suisse for selling them the security, and in Q3 2009 MNDO won a settlement for $18.5 million.  With the help of this recovered cash, MNDO paid out a very large $1.00 per share dividend to its shareholders at the end of 2009. 

The investment thesis on MNDO at $2.70 per share is rather straightforward.  The market cap is roughly $52M and the company had roughly $19.3 million in cash and no debt at year-end 2016, such that the EV is about $33 million.  The company will pay out its dividend with a record date of March 9^th with the payment made on March 23^rd.   This will require $6.16 million to pay. 

The 2016 year was not one of MNDO’s best years, with revenue coming in at $18.05M, operating income at $5.2M, and FCF of $5.18M.  Still, the valuation is just 6.5X my best guess of $5M per year in annual FCF generation.   The stock was as high as $4 back in mid-2014 when MNDO appeared to growing rapidly (sales for that year were $25M) but it turned out to be just an above-average year with a couple of big new contracts.  The business has since reverted back towards its 10-year average, though 2016’s full year revenue is at the low end of the range.  MNDO has reduced headcount over the past 18 months and was running with 262 employees at year-end 2016 versus a high of 350 in late 2014/early 2015. 

MNDO continues to invest in R&D and product development and has recently released major upgrades to its product lineup, with a new version of its PhonEX ONE (unified communication analysis and call accounting software) and expects to launch a new version of its billing software, MINDBill, in 2017. 

In summary, MNDO is not a great business, but it’s a decent, well capitalized, conservatively run little company with decent products, solid cash flow profitability and a consistent policy of paying out excess cash in dividends.  The company has managed to carve out a modest niche in a competitive industry, and once installed, core business software like customer billing tends to be pretty sticky.  

A lot of your standard caveats apply to this situation: MNDO has a history of trading pretty cheaply, it’s a small company, small market cap and not very liquid.  The business likely has some customer concentration, which leads to a bit of lumpiness in revenue year-to-year.  It’s based in Israel and therefore may carry certain geo-political risks, etc.  It also has to carry a bit of excess cash on the balance sheet in order to demonstrate viability to large potential telecom customers who want to ensure their mission-critical software vendors will be reliable and solvent.  On the other hand, it’s a solidly profitable and cash flow positive company that trades at a legitimate 6.5X FCF multiple and where that cash is likely coming back to investors in the form of dividends every year.  Though I don’t count on it, I could see a company like MNDO getting bought out by one of the big software consolidators at a much higher price.   

Catalyst

• Stock is just too cheap
• Company may grow off what was a relatively low level of revenue in 2016
• Acquisition could happen at surprising price
• Dividend probably helps support the stock