Value Investors Club / OPTIVA INC (OPT.)

Description

Summary

Optiva is a provider of mission-critical billing software to telecom companies. It is emerging from a

period of mismanagement and poor governance while under ESW control with a strong CEO, refreshed Board, and

high-quality shareholder base. Revenue should stabilize and return to growth over the next year as management

rebuilds the sales pipeline disrupted during the shareholder dispute over the past 18 months (more

broadly sales were not a focus under ESW management). Optiva is a potential long-term beneficiary of

the shift in telecom software to the public cloud and is beginning to look at M&A opportunities. The

company has no sell side coverage and has not held a public conference call in 18 months (will restart

next quarter).

This is not a situation to sharpen your pencil on your DCF. It’s a bet that an unusually strong

management, Board, and shareholder base for a company this size will make good things happen

against the long-term backdrop of a shift to the public cloud and potential for roll-up M&A. CEO John

Giere is highly aligned, having been granted 250k 10-year options at a C$42 strike while the two largest

shareholders aggressively opposed a takeover of the company at C$60 last year (though there’s some

nuance around whether the bid was bona fide).

Background

Founded in 1999, Optiva provides billing software to telecom companies. The software is mission-critical

because it underpins revenue generation for the telcos. The software is also sticky – it can take years to

switch billing providers. The company completed a couple large acquisitions, in 2012 and 2015, and ran

into financial trouble in late-2016 due to consistent underperformance on both revenue and

profitability.

Optiva was set to be rescued by Constellation Software before Texas-based ESW, controlled by

billionaire Joe Liemandt, swooped in with a slightly better offer in early-2017. ESW took control of the

company and pivoted the strategy towards public cloud. Revenue continued to decline under ESW

ownership, though restructuring boosted margins.

Early in 2020, Optiva announced plans for a large financing (US$100 million at a time when the market

cap was US$200 million) with no clear use of proceeds. The financing appeared to be an attempt by ESW

to entrench its control of the business. This set off a battle with two Toronto-based funds – Maple Rock

and EdgePoint. The Toronto funds ultimately prevailed, took control of the company, and then

successfully defeated an attempt by ESW to acquire 100% of Optiva at C$60 per share. See this article

for the full story on the shareholder dispute: https://chaptertwelve.substack.com/p/optiva-the-goose-

that-laid-the-golden-egg.

Optiva hired telco software veteran John Giere as CEO in December 2020, granting him 250k 10-year

options at a C$42 strike. Previous CEO Danielle Royston, a long time ESW employee, had left the

company mid-year.

In early March 2021, ESW sold its remaining equity stake in Optiva to other shareholders, including

Maple Rock, EdgePoint, and OceanLink. The sale was done at C$40 per share. With this transaction, all

ESW-related governance issues at the company are resolved. Optiva raised US$20 million in a financing a

few weeks later at C$30 per share, principally from shareholders EdgePoint and OceanLink.

Investment Thesis

1. Optiva was super hairy a year ago, now it’s a clean story

For the first time since 2017, ESW no longer has any role in the management or governance of the

company. Recently appointed CEO John Giere is a veteran of the telecom software space, the Board is

populated by several individuals with telecom and software experience (eg. Barry Symons from

Constellation), and the shareholder base is high-quality with three Toronto-based funds (EdgePoint, Maple

Rock, and OceanLink) controlling two-thirds of the equity (58% fully diluted).

Optiva did little investor outreach while under ESW control, has no sell side coverage and has not held a

public conference call in 18 months (will restart next quarter).

2. Revenue should stabilize and return to growth over the next 12 months

Revenue has been on a persistent downward trend at Optiva. High switching costs mean that customer

decisions to change billing providers, perhaps in response to prior periods of uncertainty at the

company, can take years to materialize in reported results. Under ESW control, Optiva’s strategy was

extremely focused on moving customers to the public cloud. While likely to be the long-term future for

the industry, the exclusive focus on public cloud was premature and may have deterred some customers

from making long-term commitments to Optiva. ESW also underinvested in sales.

With the latest quarterly results, the company noted that revenue is showing an “early indication of

stabilizing at current levels.” Management has also made progress rebuilding the sales funnel. About

80% of revenue in the latest quarter was from recurring support revenue. The balance is from licenses

and services.

3. Profitability should be consistent

Adjusted EBITDA margins have been 20-30% in recent quarters. I expect margins to remain consistent in

this range with perhaps a bit of downside pressure as management invests more in R&D.

4. Long-term opportunity from public cloud and M&A

The telecom industry is lagging in the transition to the public cloud. I believe the shift will eventually

occur and presents an attractive opportunity for Optiva to grow revenue. They appear to have an

industry-leading public cloud offering, developed on Google Cloud while under ESW ownership.

I expect Optiva will eventually look at M&A opportunities, adding a software “roll-up” angle to the

investment thesis. Acquisitions could be within the telecom software space or verticals outside of

telecom where Optiva’s core competency in billing would be applicable (eg. utilities).

5. Valuation

Optiva’s market cap is US$140 million, they have US$90 million of outstanding debentures, and US$26

million of net cash. There are 975k warrants outstanding to ESW (16% of fully diluted share count) with

a US$34 strike price. The debentures mature in 2025, carry a 9.25% coupon, and are majority held by

EdgePoint.

Annualized revenue based on the latest quarter is US$64 million and at a 25% margin adj. EBITDA is

US$16 million. The stock trades at about 3.2x revenue and 13x adj. EBITDA. This is a fair-to-rich multiple

for a legacy, declining software business, but revenue should (hopefully) be bottoming with good long-

term growth potential from public cloud and M&A.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Bottoming in revenue

Restart of IR activity

M&A

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			2021	2022
Price:	27.50	EPS	0	0
Shares Out. (in M):	6	P/E	0	0
Market Cap (in $M):	140	P/FCF	0	0
Net Debt (in $M):	64	EBIT	0	0
TEV (in $M):	204	TEV/EBIT	0	0