|Shares Out. (in M):||9||P/E||0||0|
|Market Cap (in M):||63||P/FCF||0||0|
|Net Debt (in M):||0||EBIT||0||6|
Concurrent is a small technology company operating in two fields: intelligent video streaming solutions (used by telecom carriers and other video providers like Netflix and Apple); and real-time operating systems and applications. In 2012, after a decade of unprofitability, the company was confronted by activist shareholders and did what was necessary to not only cut costs but improve on all levels, and continues to do that to this day. They’ve now had 11 straight quarters of profits and a doubling of the customer base. The turnaround is now basically complete and last week the reins were handed over to a new CEO who’s joining from Arris. But despite all that, CCUR is trading at the same levels as 2012. Today this translates to roughly 6.7x EV/FCF based on my estimates.
Concurrent provides software, hardware, services and customized solutions in its two areas of expertise. First area: video solutions, where CCUR enabls clients to intelligently stream video to consumers through a software system called MediaHawk. It also helps clients collect data in order to optimize performance and send out targeted advertising.
The real-time product line is a bunch of different systems. In the company’s own words, it: “consists of a real-time Linux® operating system, development tools and other system software combined, in most cases, with computer platforms and services. These real-time products are sold to a wide variety of aerospace, defense, energy, manufacturing and automotive companies seeking high-performance, real-time computing solutions for their simulation, data acquisition and process control systems.”
I will start by describing where CCUR was in 2012 and then discuss how they’re positioned today.
The Turnaround Story
In 2012, after an unprofitable decade, CCUR was subject to pressure from activist investors. They proceeded to cut costs and became profitable. They then put in place a $0.06/share quarterly dividend (later upped to $0.12) and also issued a $0.50 special one-time dividend, as well as appointed 2 board members selected by the more activist of the investors, as part of a standstill agreement. But more importantly, since then, CCUR made very nice advancements with their products and their profits. The shares have languished and have not reflected any of this improvement.
The first aspect of the proactive effort to grow the company was sales: the number of major service providers CCUR now serves in video has doubles, and the clients are more diversified globally. Before that, it mostly went after the U.S.
The second aspect is technological leadership vs. competitors. In the video business, the company’s main product is MediaHawk, which is a Content Delivery Network building solution (CDN). A CDN is a network – or rather a configuration of networking elements – designed to deliver content. And of course the heaviest Internet content is video. MediaHawk is a software-based tool that allows and helps the client to optimize the network performance and deliver innovative services based on, among other things, stats that are fed back to the system. The strength of MediaHawk vs. competition is that it’s the only software solution that unites two types of deliveries on a single platform: (older VOD and newer IP video) and allows to deliver to any screen type (phones, TVs, tablets..). By providing this hybrid platform, they are allowing their clients to migrate to IP over time without changing their system architecture. They expect the telecoms to continue this migration slowly and therefore to be MediaHawk users for many years. It must also be noted that some competitors don’t even have an all-software solution in the first place.
CCUR’s customers for video are divided into two groups: the telecom service providers which I’ve mentioned in the last paragraph, but also the Over the Top (OTT) video providers, which are companies like Netflix, Apple etc, who sell video over the Internet. The telecoms are increasingly worried about losing potential profits and the trend now is for them to invest in competing against the OTTs by developing video offerings - and ones that can reach any device. CCUR technology also allows telecoms to expand their VOD libraries by an order of magnitude. So CCUR sells to both sides in what is essentially an arms race.
CCUR also has a lot of valuable expertise and so they generate meaningful amounts of revenue from related services. For example, they launched their Video Assurance Services last year, a service that helps operators proactively identify issues affecting their quality of service. CCUR employees will get intimately involved with clients’ CDN configuration to implement such things as service interruption prevention or growth of the network in the correct manner.
During fiscal 2013 the company was awarded five video patents, a record pace of patent award for CCUR. Also, CCUR has been recognized multiple times as having the best solution in the space by a firm called Current Analysis.
As for their real-time products unit, things are doing well too. The big turnaround item to note here is that they went after the automotive industry in order to sell them various systems for real-time simulation and now 18 auto companies are using these products.
And last week, a new CEO was appointed, Derek Elder. Elder comes from an SVP role at Arris, a big acquisitive company in the cable space, and formerly worked at Cisco among other companies.
In 2013 revenues were $63mm and in 2014 they were $71mm. Product revenue in video is lumpy (customers’ capital spending tough to predict, potential consolidation such as Comcast + Time Warner) and a significant portion of real-time products’ revenues are from the defense industry (budget risks), so I will take $65mm as my revenue assumption.
The company has had roughly 7% EBIT margins, and cash EBIT has been even better but we’ll leave it at 7%. That’s $ 4.55mm in EBIT. If we add back $1mm in stock-based comp (which I account for by adjusting shares outstanding) that takes us to $5.55mm. No debt, so interest is zero. And cash taxes are zero for a while because they have NOLs for about $36mm worth of pre-tax income. So for quite a while, all EBIT will be flowing directly as free cash.
Shares outstanding are 9.06mm + 80k exercisable before the shares double, so that’s 9.14mm, for an adjusted EV of $37mm.
So that’s 6.7x EV/FCF during the years that they are using the NOLs.
The biggest risks are customer concentration in video and dependence on defense spending for real-time.
|Entry||12/07/2014 10:48 PM|
1) Sure, it would be a big blow. Such concentration is common for companies like this and I guess it deserves some kind of valuation discount. As far as TWC's acquisition, I think all major suppliers are scared right now but my sense is that Comcast will allow TWC to keep those suppliers that provide things TWC likes, especially if it's something unique. I have heard from another supplier to TWC that Comcast is being more than supportive right now.
2) The original activists are not involved. I think there's always a risk, to be frank. At the same time, I feel ok about it because they're doing well and they have embraced organic growth through this turnaround.