|Shares Out. (in M):||120||P/E||0||0|
|Market Cap (in $M):||12||P/FCF||0||0|
|Net Debt (in $M):||-9||EBIT||0||0|
Posera develops and markets software solutions for the hospitality industry, primarily restaurants. After failing to meet investor expectations in 2018, shares have been crushed from over $0.30 one short year ago to only $0.10. With cash and notes receivable of $0.08 per share, the market is currently placing de minimis value on the operating business -- despite generating $10+ million in total revenues, $3+ million in recurring revenues, and possessing two exciting growth products that position the company to materially increase both revenues and EBITDA over the next few years.
Net of cash and notes receivable, shares currently trade for only 0.2x revenues and 0.8x recurring revenues. Considering the company’s strong growth prospects, significant cost cutting opportunities, and acquisition multiples in the industry, I believe that the company is worth at least $0.25 per share, which implies a valuation of 2.0x revenues, and thus represents a very attractive investment opportunity.
The company’s size and liquidity make it more suitable for personal accounts. Shares trade as PAY on the Toronto Stock Exchange in Canada and PRRSF on OTC Markets in the US.
Posera’s business is derived from three different products: Maitre’D, a mature Point-of-Sale (POS) platform, SecureTablePay, a Pay-at-the-Table (PAAT) payments solution, and Kitchen Display Systems, a kitchen management application.
Maitre’D is a leading POS/RMS software solution that has been installed at over 30,000 restaurants worldwide. It’s sold globally both directly and through channel partners, with installations in over 25 countries. Tier-1 clients include Hilton Hotels, Popeye’s Chicken, Quiznos, and St Hubert.
Maitre’D is responsible for the majority of revenues although management doesn’t explicitly break it out. Growth has been fairly stagnant, with minimal growth over the last five years, although it appears to have generated fairly consistent revenues of around $10 million per year over that period.
While Maitre’D is unlikely to deliver the sort of explosive growth that excites investors, over the past year management has started to focus on some new markets that should be capable of putting the product on a solid growth trajectory. First of all, as the RMS industry has consolidated, not surprisingly the mid-market -- 25-250 locations -- has been abandoned by the industry leaders. Management has recognized this emerging gap and been focusing more of their attention here. Secondly, they have been steadily expanding into the hotel market. They’ve already won Hilton Hotels as a client and have been adding around 10 hotels per quarter. Finally, Maitre’D has a large customer base that has been running the product for 7-10 years essentially without any upgrades. They are starting to focus more now on upselling new features to this install base.
SecureTablePay is the leading pay-at-the-table (PATT) solution in Canada with over 2,000 installations and around 5% market share. The business was launched in 2011 when the transition to EMV (i.e. chip debit/credit cards) was starting to occur in Canada.
SecureTablePay’s technology essentially takes a “dumb” pinpad (in Canada they have an exclusive relationship with Ingenico) and allow it to fully process a transaction from a handheld device without ever having to go to the POS. When it is time to close out a table, the server can pull up the check, accept and authorize the payment, and fully reconcile with the POS, all from the pinpad at the table. The only time the server needs to use the POS workstation is to place the order.
SecureTablePay’s technology is proprietary and is made possible in part by the many integrations that they’ve done with both POS systems and payment processors. To some extent the sheer number of these integrations that are required constitute a barrier to entry.
What makes SecureTablePay so exciting, however, is the opportunity in the US. While pay-at-the-table is commonplace in Canada and Europe, the technology still have not been implemented in the US despite its significant benefits.
First of all, PATT is simply a far more secure way of processing payments. The card never leaves the customer eliminating the possibility of identity theft/fraud for the customer. The restaurant also reaps the benefits of reduced chargebacks and potential fraud. Because the pinpad is now able to communicate directly with the payment processor, sensitive and at-risk data never even touches the POS system.
Secondly, PATT is more efficient. The server no longer has to run back and forth with the credit card to the POS workstation and then back again and can instead just complete the transaction right at the table in one stop.
The benefits are significant (particularly in terms of fraud prevention) with no real drawbacks, which in my opinion makes PATT adoption in the US an inevitability. So why hasn’t it happened yet? Well the US didn’t even implement EMV until late 2015, and when they did it was initially expected that this would help to catalyze adoption as it did in Canada. Unfortunately, the US ended up implementing the Chip and Signature form of EMV, instead of Chip and PIN like Canada and Europe -- while the handheld devices generally aren’t set up for signatures (although STP can handle both).
One year ago Posera shares soared above $0.30 per share driven by investor excitement for the launch of SecureTablePay in the United States. The company had lined up a number of payment processor reseller agreements and believed that they could rapidly generate $4.0 million in annual recurring revenues based on 2,700 licenses that they had “pre-sold” to processors. And that was just the expected start; through additional payment processors and other organic growth in the rest of the business, in mid 2017 they forecasted generating over $10 million in EBITDA in 2019 (including a QSR POS system that they later sold and which was roughly operating at breakeven at the time). Those projected levels of profitability were particularly staggering relative to the current market cap of $12 million and EV of $2.6 million. While I certainly would never forecast near-term profitability anywhere close to this high for the company, I think it helps to give an indication of how large the market opportunity for STP is, and how quickly the business could ramp if and when mass adoption of PATT in the US finally occurs.
With the company failing to achieve those lofty targets, investors have abandoned the company over the past year, driving the share price down to 15 year lows. There are a number of signs, however, that the ramp up in SecureTablePay’s business in the US is finally starting to happen -- and the market doesn’t seem to have noticed yet.
First of all, the company landed their first major US client in November 2018, Briad Group. Briad announced that they were installing STP in their Fridays (formerly TGI Fridays) and Zinburger restaurants. They didn’t disclose the number of locations this comprised, but I believe it should be in the 50-100 restaurant range. These revenues should start appearing in the financials in 2019. Management expects most pilots to last 3-4 months, but Briad actually piloted STP for a year, so it can take quite a while to get a larger chain to sign up.
More significantly, they are currently in pilot with five other large restaurant chains in the United States -- with an average location count of around 400, and all banners apparently being household names. A customer win of this size would be very significant to the company. The company’s previous guidance appears to have suggested they were targeting $25 per terminal per month for STP, or $300 per year. A chain with 400 restaurants and 7 terminals per restaurant (management claims that demand in the US is 5-10 terminals per restaurant and that they are currently averaging 7) would thus generate $840,000 in recurring revenues.
Management has more recently stated that the agreements with chains would be more of a upfront license model with annual support fees. We can obviously only guess at the economics at this point, but if I had to wager a guess I’d expect that might imply something like $1.5 million in license fees and $300k per year in annual support revenues. Given the extremely high contribution margin of software revenues like this, it’s not hard to see how winning just one of these five current chains would dramatically increase both revenues and EBITDA.
Thirdly, management is starting to see increased momentum in the business. They specifically commented on the last conference call that within the last 3-4 months they were starting to see more pull from merchants for EMV pay-at-the-table solutions. Obviously investors have to take what management says with a grain of salt here, but when viewed in conjunction with the recent customer win and five large pilots, I think the comment is notable.
Fourthly, the company is planning to introduce a new hardware UI in 2019 that is more modern -- color screen, essentially more like a smartphone. Management believes that this upgrade to the product could serve as a catalyst for restaurant adoption, which seems reasonable to me. A significantly upgraded UI adds another meaningful incentive to restaurants to finally upgrade their POS devices, and realistically could serve as a tipping point for a lot of restaurant chains.
Kitchen Display Systems (KDS)
KDS is a kitchen management system -- essentially a software system for relaying, tracking, and prioritizing orders for kitchen staff. It was originally just an add-on to Maitre’D, but after strong reception they decided to unbundle it and have seen strong traction in the market since.
Over the last year and a half, they’ve steadily been selling 200+ units per quarter of the product. They haven’t disclosed pricing that I’m aware of, but based on their financial results I believe that the license fees for KDS have been in the $500 - $1000 per unit range.
While KDS has been a big success for the company and they continue to add new customers, the upside certainly pales in comparison with STP. This product should continue to drive organic growth for the company, but it isn’t going to have the transformational impact on revenues and EBITDA that STP has the potential to do.
EBITDA poised for significant growth over the next few years
The company has been consistently running EBITDA losses every quarter, and that is certainly the largest explanation for investor apathy towards the company despite its exciting prospects. TTM adjusted EBITDA losses were $1.7 million, and they lost $336k in the most recent quarter.
I believe a number of factors should drive the company from operating losses to profits over the next few years -- in the near term from cost-cutting, and in the longer-term from organic growth.
I believe that Posera has a particularly bloated cost structure. With a $10-11 million revenue software business that largely sells through channel partners, the company quite frankly should be already profitable. Part of the reason for the bloat is that they divested their QSR POS business, Fingerprints, in September 2017 which contributed around half of the revenue base, but they have not reduced their overhead commensurately. This is fortunately now a focus for management. In the most recent quarter they finally exited their high cost lease in London, Ontario which management said should reduce facilities costs by 40% starting in Q4. Just to give you an idea of how much fat there is that could be cut -- the company has generally has generally spent around 50% of revenues on G&A, which is ridiculously high. The $1.1 million in occupancy costs is certainly one culprit that is now being addressed. Professional and regulatory fees, where they spent $1.4 million last year, is another. The company is addressing this and headcount is down by 8% since last fiscal year end, with room for further reductions IMO.
In terms of organic growth, the reality is that if SecureTablePay sees the strong traction in the US that I expect it to, the ramp up there is going to overshadow every other part of the business. As illustrated in the example above, I think the company could conceivably generate ~20% revenue growth at very high incremental margins with a single 400-unit customer win. Investors should be able to garner a better understanding of the economics as the Briad revenues roll into the financials this year. This growth in STP should be supplemented by continued KDS expansion and Maitre’D’s hotel business and upsell initiatives.
Posera has a large amount of cash due to selling Fingerprints -- a POS for QSRs -- in September 2017 for $12.2 million, or around 1.5 - 2.0x revenues. This was a solid price considering Fingerprints had very significant customer concentration with Tim Hortons.
Net of cash and notes receivable, shares currently trade for only 0.2x revenues and 0.8x recurring revenues. Considering the company’s strong growth prospects, significant cost cutting opportunities, and acquisition multiples in the industry, I believe that the company is worth around 2.0x revenues, or at least $0.25 per share.