|Shares Out. (in M):||3||P/E||9.2x||0.0x|
|Market Cap (in $M):||7||P/FCF||9.2x||0.0x|
|Net Debt (in $M):||-1||EBIT||1||0|
Asure was incorporated in 1985 under the original name of Forgent Networks. It was a successful multi-media conferencing equipment maker partnered with Intel under the brand name V-Tel. Competition in the early 90's followed by even more competition from internet-based conferencing in the late 90's led them to divest the teleconferencing business in 2001. Patent licensing revenue totaling more than $100 million sustained them through the 2000's decade. This revenue went away following some litigation losses resulting in a final $36 million legal settlement in 2007. Very small software companies were acquired in 2003 and 2007 and the company name was changed to Asure Software following the second purchase. These two acquisitions with combined revenue of $10 million is all that remains of this company that once traded at a split-adjusted price of $200 per share. An important aspect of this investment is that the company has racked up an accumulated deficit of over $200 million. This is important as the company has net-operating loss carryforwards exceeding $150 million with expirations as far out as 20 years.
In 2003 NetSimplicity, a maker of conference room management software called Meeting Room Manager was acquired. This perpetual software license product that ran on resident computers scheduled conference rooms for small and medium sized businesses. Revenues grew nicely from a small base following the purchase.
2004 $1 million
2010 about $5 million
The Meeting Room Manager Software has in recent years been converting increasingly to a software-as-a-service business model. In Q1 2010, about 60% of Meeting Room Manager revenue was from the SaaS version. In the most recent conference call the company announced that they will no longer offer the perpetual license locally installed version beginning in the 4th quarter 2010 (except to customers that demand it).
In September 2007, Forgent Networks acquired iSarla paying about 2 times revenue of $6 million for a total of $12.66 million ($7.4 million of which was goodwill). iSarla makes a line of work force management software employing a software-as-a-service model. Their comprehensive suite of offerings marketed under the iEmployee brand name includes applications for employee time and attendance, timesheets, human resource benefits, employee expenses, and most recently time-clock software employing biometrics to validate identity. The iEmployee product line had grown rapidly prior to the acquisition apparently justifying the two times sales purchase price with $7.4 million of goodwill. Growth weakened after the acquisition in part because of the recession but also because some of their lower-end application business has been lost to competition. A bit more on this later.
Historical financials for Forgent Networks (adjusted for the 2009 1 for 10 reverse split) are tabulated below. The quick summary is that they've lost lots of money for lots of years.
Fiscal Year Software Revenue IP Revenue Earnings/Share
2001 $0.103 million 0 million ($13.10)
2002 0 31 ($2.50)
2003 0 49 $3.20
2004 1.0 14.8 ($8.30)
2005 2.0 7.9 ($2.60)
2006 2.8 12.1 ($1.40)
2007 4.3 36.2 $4.70
2008 10.2 0 ($1.70)
2009 10.0 0 ($3.10)
2010 (9 mths) 7.63 (up 6% over 2009) 0 ($0.39)
Red Oak Partners is a New York area hedge fund with $24 million in assets. The Red Oak fund was founded by David Sandberg in 2003. It invests in underfollowed and/or mispriced micro-cap situations sometimes becoming an activist. Since inception the fund has a 17.44% CAGR net of fees. Prior to founding Red Oak Partners, David Sandberg managed the JH Whitney & Co Green River Fund from 1998-2002. Between these two stints David Sandberg shows a CAGR exceeding 20% net of fees employing a strategy with a long holding period (90% of realized gains were long-term http://www.autumngold.com/includes/latest.php?funds=1). The Red Oak fund began purchasing shares in Asure beginning on Oct 28th, 2008 and continued through the end of the year amidst the stock market crisis.
On January 30, 2009 Asure filed an SC 13E3 with the SEC detailing a plan to take the company private. They cited a $1 million per year savings in the cost of public filings as the reason. A one for 750 reverse split would reduce the shareholder count to below 300 with the small shareholders cashed out by the company at $3.60 a share (reverse split adjusted). This was a premium to the trading price of around $1.80 at the time.
According to SEC documents, David Sandberg communicated immediately to Asure management his opposition to this move noting that the remaining shareholders would lose quarterly reporting and liquidity. The company persisted with the going private transaction and the Red Oak fund persisted in buying shares disclosing a 5.87% ownership on February 23rd. Red Oak didn't stop there either continuing to buy shares upping the fund's ownership to 10.3% prior to a June 2, 2009 shareholder vote on the going private plan. On June 1st, Asure management conceded that they did not have the votes needed to approve the going private plan and cancelled the shareholder meeting "to save the associated expenses". A proxy contest for control of the company then followed with the Red Oak fund putting forth its own slate of directors. The annual meeting was delayed several times as Asure sued the Red Oak fund and they traded contentious letters you can entertain yourself with at the SEC website. When the long-delayed annual meeting was finally held at the end of August, 2009, the Red Oak slate won. The 64 year-old former CEO had retired prior to the annual meeting and the company officers resigned shortly after. David Sandberg became chairman of the board and installed his own officers.
The primary complaint David Sandberg cited in the proxy battle was that corporate SG&A expenses had not been downsized as the company's revenues had fallen. He hired Dave Serglio as a consultant and later as CFO. Dave's Linked In page describes him as a specialist in reducing unnecessary costs. The company set about reducing expenses eliminating the COO position, reducing head count by 25%, implementing a 10% temporary salary reduction (still in force today), breaking the lease on the corporate headquarters and moving it into a smaller space, moving the regional offices into less expensive office space, and divesting non-core businesses for cash. The goal was to operate the two core businesses, iEmployee and NetSimplicity, profitably at current revenue levels (which has been achieved).
Another important strategic move was to break a reseller agreement related to the iEmployee product. Ceridian had been contracted as a reseller of these services and about 20% of iEmployee business was through Ceridian. Asure wanted direct contact with these clients to allow cross-selling of their other products as well as products to be acquired in the future. This reseller arrangement was terminated in the Summer of 2010 with Asure signing direct contracts with more than 93% of the end users. While breaking the Ceridian contract was a strategic move, it was also essential. Ceridian was creating software of their own to replace some of the simpler iEmployee applications and taking that business for themselves. When Asure ended the reseller agreements, clients had to choose Ceridian's product or Asure's. Ceridian's products weren't well developed so most clients signed directly with Asure. The weakness in iEmployee revenues in recent years is due at least in part to competition poaching business away from lower end applications.
Value & Strategy to Realize It
So what value is left for the $6.2 million enterprise value ($7 million market cap - $0.8 million cash) an investor has to pay today? You get two profitable high margin software businesses with 2010 revenues above $10 million. Revenues in 2010 are up 6% from 2009 and real growth is better than that as we'll discuss shortly. Asure could probably sell out conservatively for 1.2 times revenue or $12 million or almost $4 a share right now. The board of directors is led by a hedge fund manager that owns more than 10% of the company and is obviously motivated by return on his investment. So why doesn't David Sandberg just sell now and move on to the next one?
A change in control would destroy the value of the NOL's. In the 2nd quarter 2010 conference call the company noted that their financial models put the present value of their NOL's at between $10 million and $13 million ($3.23 to $4.19 a share). Remember, the enterprise value of this business at the current share price is just $6.2 million so if you believe the company's financial models the NOL's are very significant. In fact, the company instituted a poison pill rights plan that activates if any shareholder acquires more than 5% of the outstanding shares. This is intended to prevent any change in control that would invalidate the NOL's. To realize the value of their NOL's, however, Asure needs to make money.
The software as a service industry is relatively new but growing rapidly. Small and medium businesses that lack IT staffs especially are embracing SaaS applications. Some Asure prospective customers, in fact, now have policies to buy only SaaS applications unless a site-installed program is the only thing available. Small businesses do not wish to deal with the installation and maintenance issues required by traditional software. You can see the conversion trend in Asure's own Meeting Room Manager product, for example. It has gone from 100% resident application to 60% SaaS revenue in Q1 2010 and will soon be 100% SaaS.
Asure's CEO, Pat Goepel addresses a question about the acquisition environment in the 2nd quarter conference call
"From an acquisition perspective, we're now at a point where we feel like we've simplified the business, we got rid of the brush, and now we're focusing on the two lines of business, both iEmployee and NetSimplicity. We feel like we're in two outstanding markets. Both are growing, they are big markets, and relative to a technology shift, many of the companies that are out there don't have the ability to invest in the SaaS platform, or to take their business in that way. Our management team, product team, and technology team is deeply experienced in the SaaS model, and we feel that riding the wave of the future and the cloud we feel that it's a very prudent strategy. There are businesses that, instead of making that investment, will look to potentially be acquired. We are going to be active in those conversations.
We also feel like we have some assets in the net operating losses that we have. Over the next 20 years we have well over $100 million in net operating losses that shield net income. So now that we're profitable, and we're growing, we're going to look to organically grow, but we're also going to look to put more business on our existing platforms, and we feel like the bottom line will grow exponentially when we have those opportunities."
Pat continues "We also think with the uncertainty in the marketplace today, and the economy, some companies haven't weathered the storm, or haven't made the transition, and we are going to be active in those companies that are in the space that we feel have potential where we can add customers to our platform or grow those businesses and have synergies with our core business. And we can now really take a product line or a business and merge it with Asure, whereas Asure can take advantage of its assets, its products, its technology and grow that business for the shareholders, for the clients, for the employees alike. And we are looking for acquisitions that are accretive in nature as we move forward."
CFO, Dave Serglio, gave me more details in a phone call. They are looking to acquire companies with revenue in the $2 million to $20 million range. They seek products for the small and medium-sized business market that they can cross-sell to their existing customer-base of over 3500 businesses. They intend to finance acquisitions primarily with debt and he was confident that they could get financing. Dave noted that acquisitions on the larger size with equity issuance would have to take into account any change in control that would invalidate the NOL's.
Asure holds a competitive advantage as an acquirer in that the earnings of any acquisition goes up as soon as Asure buys them. Income taxes paid by the current owners are significantly reduced under Asure ownership. This space has acquisition opportunities and Asure, with a Nasdaq-listed equity, a debt-free balance sheet, huge NOL's, SaaS expertise, and low-cost programming talent in Mumbai, is a natural consolidator.
The strategy of the company now that restructuring is complete is articulated in the third quarter conference call. They are increasing R&D expenditures to make their SaaS platform more scaleable and to improve primarily the iEmployee product line but also the NetSimplicity. This is in preparation to add new software applications and the company is actively looking for acquisitions. They are also adding salespeople as they believe there is opportunity for organic growth in their two existing product lines. Further, they will commit entirely to a SaaS strategy and begin immediately to market only the SaaS version of Meeting Room Manager. This will hurt near-term financial results.
Earnings and Valuation
In fact, the 6% revenue growth in 2010 year-to-date results understates the growth in the business. Perpetual license sales recognize full revenue and profits at the time of software installation on the local machine. SaaS revenue recognition is spread over potentially years of service while much of the marketing cost is up front. New Meeting Room Manager sales have been converting from perpetual license revenue increasingly to SaaS revenues in 2010. Real business growth is more than 6%, but much of the new customer revenue is deferred. New customer acquisition in the most recent Q3 period was up 36% from the prior year according to the 3rd quarter conference call.
2010 Year-to-Date Financials (Excluding one-time charges)
2010 Sales Increase EBITDA/Share Earnings/Share
Q1 NetSimplicity 0%
Q1 iEmployee 5%
Q1 Consolidated 2% $0.03 ($0.06)
Q2 NetSimplicity 23%
Q2 iEmployee 5%
Q2 Consolidated 13% $0.15 $0.06
Q3 NetSimplicity 12%
Q3 iEmployee 2%
Q3 Consolidated 7% $0.08 ($0.01)
Q4 Guidance $0.02 to $0.04
The company appears to be just marginally profitable. Financial statement footnotes, however, explain that Asure is expensing nearly $0.06 a share ($0.174 / share in 9 months 2010) each quarter on amortization of intangibles from the iEmployee acquisition. While some depreciation and amortization represents real economic costs, the intangible amortization from the acquisition does not. So excluding this amortization and using the middle of guidance for Q4 results in a profit of $0.25 for the 2010 year. The stock is trading at about 9 times "real" earnings. Pretty cheap considering that sales are growing and profitability is highly leveraged to sales; very cheap compared to other SaaS companies which are currently in favor with investors. With a little continued revenue growth their earnings could be up significantly in 2011. Earnings won't actually be up much, however, as the company is increasing R&D and new Meeting Room Manager sales in 2011 will be 100% SaaS. This will depress revenues and earnings but the company still forecasts profitability going forward despite the intangibles amortization (that will increase modestly in 2011). The depressed 2011 financials may provide an opportunity to acquire shares at favorable prices for a while.
So what's this company worth? Most profitable SaaS companies trade at between 2 and 5 times revenues. Asure lacks scale, however, so conservatively value the business at 1.2 times sales or $12 million ($4 a share). Take the middle of the companies $10 to $13 million estimate of the present value of the NOL's and cut it in half to be conservative for another $5.75 million. That puts the value at $17.75 million or almost 3 times the current enterprise value. If they grow and achieve scale they could trade significantly higher than this.
And what about the downside? The company is debt free, generates cash from recurring revenue, has healthy customer renewal rates, and is in the hands of motivated shareholder friendly management with significant ownership. It's hard to imagine how an investor can lose money at the current price. Some new competitors could crush both businesses, I suppose, and then you're left with near zero book value. If they take on significant debt for an acquisition that flops then you could lose all your money. A major security issue with SaaS could scare businesses away from the SaaS model.
Why is it so cheap?
1. It's tiny so nobody is paying attention.
2. The stock has performed horribly historically and it takes a while for investors to realize there's a whole different business now with an entirely new management team.
3. Larger holders that are familiar with the story are limited by the 5% poison pill rights plan. James Gladney, who owns just under 5% of Asure, complains that the rights plan is stopping his further purchases in the 2nd quarter 2010 conference call. When I inquired if a rights offering had been considered to raise acquisition capital, Dave Scoglio noted that a significant number of shares are held by near 5% owners. An interesting 5% owner that VIC members might provide some insight on is James Simons of Renaissance Technologies. Why is he messing around with this little thing?
4. Finally, if you have realized some capital gains this year, dumping your Asure Software purchased at $200 a share some years ago will offset them nicely.
|Entry||12/13/2010 04:40 PM|
Just looking at a quick spread of the numbers, it looks to me like they've only generated cash in one quarter out of the last ten (the most recent), and that cash generation was de minimis. Moreover, even after adding back intangible amortization they're awfully close to just breakeven on an operating basis, and while they grew revenue in the most recent quarter year-to-year, they were down on a sequential basis. How do you get comfort that there's a real positive trend in place here, and not just statistical noise around a flattish business?
|Subject||RE: CF positive?|
|Entry||12/16/2010 05:27 AM|
Asure has been eating cash for some time now. The company's cost structure was too high still from the days when they had licensing revenue from their patents. The new management team has been sacrificing cash to get out of expensive deals. In the last couple of years they've moved into less expensive office space paying cash to break leases in some cases. There was an office space relocation in the most recent quarter that you cited as only cash flow break-even. I suspect the relocation may be responsible but Dave Scoglio noted on the phone that there are a lot of moving parts affecting the free cash flow. Restructuring is done now and the software business is not capital intense. I would expect they will begin generating cash going forward. The onlz encumberance might be their decision to sell only the SaaS version of meeting room manager.
Dave Scoglio noted in our phone conversation that revenue from perpetual license sales of Meeting Room Manager is lumpy. The revenue is substantial when an order hits but it is one time. The decline in revenue from Q2 to Q3 probably reflects this lumpiness. They broke their Ceridian agreement this Summer also which likely had some unusual effects. New customer acquisition is healthy.
I think this can be a decent business but it's not a great one. It was priced like it was garbage.
Finally, I apologize for being slow to get back to you. I'm in Luxembourg this week and could not reply using my iPad.