Description

AIFS is a library automation SaaS software company with a 97%+ gross retention rate that trades for 5x EV/EBITDA and a mid-teens FCF Yield and just over 1x recurring revenues and a clean balance sheet with over $2M cash and no debt.  While the founder and his family control the company via a 50% ownership stake, there does appear to be an interest in creating shareholder value given the recent dividends and management is increasing awareness with press releases.

The investment thesis

-          AIFS is a SaaS software business with sticky customers and a leading market share with its SHAREit product (6,000 library customers) that has no following by the investor community

-          Cash flows are stable and growing moderately at 3-4% annually (over the last few years AIFS has consistently grown annual recurring revenue by ~$150K)

-          Company can reinvest cash flows into acquisitions or return the capital , likely that one or both of these happen

-          3x upside in a sale of the business to an acquirer at a reasonable valuation of 3-4x EV/revenues

-          Balance sheet and recurring revenues mean limited downside, but if status quo continues this could be dead money for some period of time

Recently, PE sponsors and strategics have acquired assets in library software space. These include Clarivate buying ProQuest for 6x revenues (announced May 2021) and Francisco Partners acquiring Follet Systems (September 2021). We believe that AIFS is an attractive acquisition as it has 33% share of ILL software and in fact is the market with nearly 100% share of the non-open source ILL market. We suspect an acquisition happens around 3-4x.

Company’s products and business description

80% of the company’s revenues are derived from its ILL or resource sharing product, SHAREit, the balance is predominantly Verso, its ILS (integrated library system) product, which is the software that manages circulation and the catalog and is targeted towards mid-size public libraries. Verso is ~20% of the business but has very limited market share in a crowded market, but our sense is that the company expends a significant percentage of its resources on Verso, which is not a great use of its selling and development resources. These expense investments could be cut and diverted to its ILL product (SHAREit) where they are dominant and could increase customer count. AIFS has 6,000 library customers in BC (Canada), Florida, Louisiana, Tennessee, Pennsylvania, New Jersey, South Dakota, Vermont, New Hampshire, Massachusetts, Wisconsin, Illinois and Indiana. Obviously, the opportunity for cross-selling is significant given the existing customer relationships, which is why acquisitions or being acquired are both upsides here. The company has a single tenant architecture. All of its software is cloud subscriptions.

The software is extremely sticky based on our conversations with competitors, an industry consultant and customers. Once a library installs ILL or ILS software, once all the materials are catalogued and entered into the database, and once library staff train on it, there are few reasons to switch. Having said that, one negative is that price growth is harder to come by given that most of AIFS’s customers are state governments.

Competitors of SHAREit: OCLC, Libris; Verso competitors: Sirsi-Dynix, III (which was previously owned by Vista Equity Partners)

Management : CEO, CFO, and there is a VP of sales (with a few sales people below him) and now a CTO. Total employees is ~30.

Shareholder dynamics and management

The CEO, Paul Cope (owns 50%+ of the shares including his family’s stake), is the son of the founder and is product savvy but has not focused on shareholder value creation until more recently. Paul is capable and knows his business and industry well. Driving shareholder value through capital allocation and strategy has not been his focus area, although there are signs of this changing. They have never attended conferences or really marketed the company in any way. Nor have they done much recently in terms of reinvestment. We believe they are starting to realize that the company has to do something with its cash as they recently initiated an annual dividend ($0.035 per share per year). One investment firm owns ~15% of the company and is likely focused on catalyzing value creation.

This management team is solid given the size of the company, but they do need help on capital allocation and reinvestment. Recently, AIFS added a CTO, Cheryl Slinkard, which is also a good sign that the company is being run more professionally. They are also beefing up their engineering and developer staff as they roll out more product features.

Catalysts

-          Sale of company

-          Special dividend of excess cash

-          Reinvesting cash in acquisitions

Risks

-          Open source could erode market share of AIFS’s flagship product

-          Poor capital allocation

Catalyst

See above