Description

Symbility Solutions (SY CN)

At first blush, Symbility is a money losing, share issuing, TSX Ventures trading stock that normally screams, “run away!”  Having said that, its core business is rapidly growing with a high probability of future success, high margins, and high returns on capital.  This should become more visible in the next 3-5 years.  The company is on track for an EBITDA positive 2017, stock-based comp share issuance equal to about 1% of shares outstanding (compared to doubling shares outstanding in past 5 years), and is poised for several years of mid-teens revenue growth with high incremental margins.

The company has approximately 243m diluted shares outstanding and a share price of about $0.44 for a market cap of $107m and $8m of net cash for an EV of $99m.

Background: Symbility is a cloud-based provider of insurance claims software split among 3 segments - Property (65% of revenue), Health (20% of revenue), and Strategic Services (15% of revenue).  The Strategic Services segment provides app development for financial institutions, which leverages the skillset of the workforce. 

Investment Summary: Symbility looks to be transitioning to profitability in 2017, while still continuing to capture share in a market much larger than its current revenue.  Given the economics of software, incremental revenue growth should have very high incremental margins.  With a properly aligned management team that has a large stake in the company and a strong product offering, there is a high probability of future success with a high probability of profits that make the current valuation very attractive.  The company only trades at 3x EV/2017 Revenue compared to peers with much higher multiples.  As the company starts to report profitability in 2017 and rapidly grow earnings over the next 5 years, more investors will start paying attention.

Property: Property helps P&C insurers with a mobile cloud based platform for claims handling.  While these buzzwords usually amount to little value-add, the claims processing requires coordination between several parties, a lot of paperwork, and is a core component of an insurer’s business.  The platform allows claims adjusters, contractors performing repairs on property, and customers to seamlessly navigate the claims process.  Even something as simple as mobile is valuable to Symbility’s customers because it speeds up claim settlement, requires fewer trips for the claims adjuster, and saves time for everyone by keeping track of paperwork. 

The Property platform benefits from a few network effects.  First, contractors who would perform repairs to satisfy a claim sign up for the platform and then insurance companies can turn to them for work.  This creates an ecosystem of both workers and for the paperwork/platform.  This leads to the second network effect, which is that more insurers have rolled out the Symbility platform, attracting more contractors and generally proving to other insurance companies that the software works.  This is crucial in the insurance software space because there are legal ramifications and cost overruns when things go wrong, so established providers have a huge advantage.

The main competitor is the only visible competitor, which is Verisk.  Verisk has been slow to roll out a mobile offering and is working with legacy code systems.  This is a blessing and a curse.  It does indicate how slow to change the entire insurance industry is with its IT, but it also means that Verisk has been very comfortable in its position and slower to change.  With the soft P&C insurance market and the relentless pressures of capitalism, insurers are left with little choice but to change, cut costs, and adapt to the times, so a more effective package, which Symbility has, is slowly gaining acceptance.  Symbility reports a 60% win rate for its pilots, suggesting they are gaining share from Verisk. 

Symbility thinks this is an $800m market opportunity and they only have $22m in revenue, giving them a long growth runway.  Because Symbility is capturing share and is the only viable competitor in an industry that defaults to incumbent providers, there are unlikely to be any other additional entrants.  If one thinks about investments in probability weighted terms, a lot of cloud software providers in other verticals participate with more competitors and lower structural barriers to acceptance by customers, therefore it is fair to say Symbility has a lot of room to itself and a higher probability of success at capturing its target market.  Should someone want to enter the space, the cheapest way and only real option would be acquiring Symbility.  Even compared to a competing Verisk platform, Symbility has lower costs as it only has to maintain one source code for the product offering compared to Verisk worrying about compatibility across all the versions of claims software it has out there.

This segment has 80% gross margins.  The company is at EBITDA breakeven, with SG&A able to be leveraged for incremental revenue growth.  Given current segment growth rates of 20% YoY and further opportunities, incremental EBITDA on this business alone could reach 50% margins on the next $20m of revenue, which should be achievable by 2019 with the current growth rate.  This would generate $10m of EBITDA, putting the company at just 10x 2019 EBITDA without any credit for the other businesses. 

This type of business is comparable to Verisk, as well as other software providers to the insurance industry such as Guidewire, Solera, and Eagleview.  The public comps trade for 7-10x revenue and the acquisitions have occurred at 5x revenue.  Symbility currently trades at just 4x 2017 Property segment revenue and shows little sign of slowing down and shows more sign of profits each day. Only Verisk is a direct competitor, but valuations reflection the attractive economics of software companies combined with the persistent and sticky position of providing mission critical products to the insurance industry.

Health: This is a similar platform, but focused on health insurance claims for Canadian insurers.  It has been growing double digits as well, but focuses on Canadian insurers.  In addition to being sticky, they have a patent in Canada for mobile claims submission, which should further entrench their competitive position.  This is only a $100m market in Canada, which is less attractive than the Property revenue runway.  There is optionality on this product being taken internationally, but given local differences in health insurance markets, this is a tougher sell.

The platform helps will claims submission, payment, administration, and adjudication.  Insurance companies, customers, brokers, and benefit consultants all incorporate it into their workflow, making it quite sticky once implemented.  There are the same barriers in Property with legal and financial implications to improperly handling claims making customers very reluctant to work with any old vendor.

This segment has roughly 60% gross margins, so incremental margins on growth won’t be as attractive as in the Property segment for the next several years.  Gross margins could expand in later years as the business reaches more scale.  It grew at 17% in 2016, so it could eventually reach that point.  The Property segment is where most of the visible profit growth will come from, although this segment will contribute to profitability down the line.

Strategic Services: This is essentially Symbility’s way of maximizing utilization of their development workforce.  They design mobile apps for other companies in addition to their work for the other segments of the company.  They work on the apps for a range of insurance companies – beyond claims – such that it gives them another “in” to organizations that are notoriously difficult for newcomers to get traction.  They further leverage their expertise working in highly regulated, security sensitive environments by doing development work for banks as well.

Ownership - An important milestone in developing the Symbility Property product back in 2014 was selling 28% of the company to CoreLogic in exchange for part of their claims handling business and access to their database of labor and repair costs.  It gave institutional credibility to the product as well as a partner which had some relationships with insurance companies that could be leveraged.  They have several board members, which is important.  There is historically a lot of share issuance and CoreLogic has participated in 2 capital raises, with the last one in April 2015.  The company is now EBITDA breakeven and has a net cash balance, so they are unlikely to need additional capital.  Further, they are unlikely to issue options like a lot of tech companies out there as CoreLogic won’t want to see their stake constantly diluted.  Corelogic had a standstill agreement preventing an unsolicited takeover, but that expired at the start of April 2017, so there is the protection that they might just come in and buy the company at a premium to current levels, but there is the risk they don’t pay as full of a premium as they would in a more competitive auction.

The counterbalance to CoreLogic trying to takeunder the company is that the CEO owns 4% of the company worth about $5m, which dwarves his total comp of $429k.  It’s unlikely Corelogic could lowball him on his equity holdings and make up for it with a cushy compensation plan once they are full owned.  The Chairman owns another 4% of the company worth $4.5m, the CTO owns 2% worth $2m, and a few other executives have decent stakes as well relative to their comp.  While the counterbalance to a takeunder is nice, this also points to the entire team being aligned properly with outside shareholders to have the business succeed over the long term and not just sell out for a low bid.  The board and management overall own about 15% of the company.

Important Disclaimer:  This report does not constitute a recommendation to buy or sell the security discussed herein.  The report is an example of the author’s company write-ups / research process; its breadth and coverage may differ materially from other such reports.  Certain statements reflect the opinions of the author as of the date written, are forward-looking and/or based on current expectations, projections, and/or information currently available.  The author cannot assure future results and disclaims any obligation to update or alter any statistical data and/or references thereto, as well as any forward-looking statements, whether as a result of new information, future events, or otherwise. Such statements/information may not be accurate over the long-term.  The views are those of the author acting in his individual capacity and not as a representative of any other person or firm; in no way does this report constitute investment advice on behalf of any other such person or firm.

Catalyst

Time and potential takeover