|Shares Out. (in M):||93||P/E||0||0|
|Market Cap (in $M):||25||P/FCF||0||0|
|Net Debt (in $M):||2||EBIT||0||0|
ProntoForms is a relatively unknown Canadian micro-cap SaaS company with ~65% insider ownership. Its primary product replaces traditional pen-and-pad forms with digital mobile ones. ProntoForms operating model, in which ~90% of its revenues are recurring, demonstrates attractive economics which will become more apparent once its business scales or the company reduces spending related to growth.
Extremely illiquid for most institutional investors, ProntoForms is also often dismissed by the investing community for being an undercapitalized company in the extremely competitive Field Service Management industry (e.g. direct/indirect competitors include Salesforce.com, Oracle and Microsoft). ProntoForms has been public since 2009 (through a SPAC conversion) and its share count has increased nearly threefold over this period. Additionally, ProntoForms has yet to produce a single period with an operating profit.
Despite competitive concerns, since 2009 ProntoForms has been able to grow its recurring revenue at a ~65% CAGR to ~C$10 million and at ~90% gross margins. During this time period, ProntoForms has also been able to secure distribution agreements for its products through AT&T and Apple. This suggests its products are competitive in the marketplace. Today, ProntoForms has 60,000 end-users from over 3,500 customers, which include a growing list of large Fortune 500 companies. According to its management team its untapped opportunity sits at roughly 42 million potential subscribers. Gartner estimates the size of the overall Field Service Management software market at approximately US$1.7 billion. Either measure implies ProntoForms market share today is less than 50 bps.
For investors who are able to look past the next 1-2 years (which I hope is everyone reading this), ProntoForms offers considerable value at today’s price. Consider the following key assumptions over the next five years:
Recurring revenue grows at ~35%/year. APRU is unchanged at ~C$185, implying ~45%/year subscriber growth and ~10%/year churn. Historically, recurring revenue growth has been ~65%/year
Customer acquisition costs remain at ~C$200 per subscriber and sales and marketing expenses (ex-customer acquisition costs) grow ~5%/year
G&A gradually declines from ~25% to ~20% of revenues and R&D gradually declines from ~33% to ~30% of revenues
If the above come to fruition, in 2021E ProntoForms will have ~290K subscribers and revenue just under C$50 million, implying a market share well under ~2%.
Assuming a 10x earnings multiple in 2021E (excluding customer acquisitions costs), we would expect ProntoForms to trade at ~C$0.90/share, equivalent to ~2.75x 2021E recurring revenue. This represents upside of ~350% (or ~30% IRR through 2021E) from today’s entry price. This assumes all growth is financed externally by equity raises (at a conservative $0.25 / share) and sees the share count increase by ~65% over the next 5-years.
Growth is the ultimate margin of safety. Not only do I believe the assumptions above may prove to be overly conservative (relative to both historical growth rates and the total addressable market), but ProntoForms has two other levers which may drive its top line even faster:
Pricing power: the ‘moat’ around this business is quite large given the stickiness of the customer base which is a result of business disruptions when switching SaaS providers. This should translate into price increases above inflation.
Additional product launches: ProntoForms collects and relays important operational data. Over time ProntoForms should be able to leverage this data further by charging customers a fee for providing new specialty functions (such as speciality reporting, analytics, etc.) The ~30% R&D spend I’ve modeled should be adequate to support this.
Of course, like all technology companies, ProntoForms is susceptible to technological innovation that could result in disruption. This is a fair argument against growth assumptions. However, it’s very difficult for customers to switch SaaS vendors once they’re embedded into business workflow. At today’s price, I believe ProntoForms existing book of business has considerable embedded value that’s being masked by growth spending. Consider a scenario where ProntoForms management believes it’s no longer prudent to grow:
Subscriber growth goes to zero and churn remains at ~10%/year
Selling and marketing expense goes to zero
G&A expense and R&D expense each go to ~20% of revenue (i.e. ~40% of total revenue)
Under this extreme scenario, after 15 years of managing ProntoForms’ book of business in run-off, we would earn a ~8% IRR. Alternatively, churn would have to rise to above ~15% in order to break even from today’s entry price. Worth noting, this does not take into consideration ProntoForms’ ~C$20 million in NOLs (expire between 2025-2033). While I am no way forecasting this as a likely scenario, I believe this illustrates the attractive valuation/downside protection today’s entry price offers.
Overall, I believe ProntoForms is an interesting opportunity. ~65% of the company is owned by insiders whose incentives are aligned to navigate the business in the right direction. The attractiveness of the underlying business will become apparent once further growth is achieved or spending related to growth is reduced.