TransNet Corporation (TRNT) is currently selling for les than 60% of net current assets, has $.30 per share in cash and enjoys a solid reputation earned over three decades in the New Jersey IT market. The company has earned consistent revenues in the low $30 million range since 2003 and operating margins have been fairly consistent.The problem has been the SG&A costs which have been too high and have led to operating losses. Without significant revenue growth and as a tiny $4 million market cap company, TransNet cannot bear the costs of being public and of operating as a small regional player. The company clearly should not be public and would unambiguously benefit from being part of a larger organization which would allow the company to materially reduce its cumbersome over head costs. At their current valuation, the shares significantly undervalue the solid franchise value of the organization. We believe recent management actions and discussions demonstrate that they have recognized the issue and are determined to remedy the situation.
TransNet Corp has been in business for almost thirty years (and a public company since 1983) focused on providing information technology needs for customers in New Jersey. The company has adapted well over the years to changing technology and has remained a respected source for technology needs for the commercial, educational and governmental customers. The IT market has changed significantly as much of the support function traditionally provided by the company have moved off-shore. The company has responded well by transitioning its business from a contract-based business (help-desk) to a project-based approach, which although more volatile and less predictable has greater profit margins. During the last quarter the company was hurt by the economic slowdown as companies delayed their purchase decisions.
The company is a single-source provider of information technology ("IT") products and technology management services designed to enhance the productivity and security of the information systems of its customers. Through its own sales and service departments, TransNet provides IT products, technologies, solutions and services for its customers by combining a wide array of value-added professional technical services with the sale of hardware systems, network products, voice over internet protocol ("VoIP"), wireless and communication products, computer peripherals, and software. As a single source IT provider, the company partners with its clients through all stages of the"life cycle" of the client's information system network. The company will perform an analysis of the individual client's needs, plan and prepare a system to meet those needs, design the system and procure the equipment, implement the system, ensure its proper operation, and assist the client in optimization of the system to best serve the client's information requirements. As part of its single source approach, the company is a systems integrator, combining hardware and software products from different manufacturers into working systems. The equipment sold by the company includes computer hardware, network electronics, VoIP products, servers, monitors, printers, video surveillance equipment, and operating systems software. The company’s sales of wireless networking products have expanded significantly in keeping with industry developments and include wireless WANs. Because wireless networks provide for network access without traditional connections, the need for security of the data in these networks has dramatically increased. In keeping with the critical need for network security, the company markets network management and control software to provide greater security to its clients, allowing them to allow or restrict access to their networks as their businesses require, and also offers products for video surveillance.
The company is currently an authorized reseller for Apple, Cisco as a Cisco Silver Certified Partner, Citrix Systems, Inc. ("Citrix") as a Citrix Silver Certified Solutions Partner and Access Partner, Hewlett-Packard as an HP Gold Provider, a State/Local Government Specialized Partner, Certified Education Partner (k-12), and a Certified Education Partner (for higher education), IBM, IPcelerate, Inc. ("IPcelerate"), Lenovo, Lexmark International, Inc., Microsoft as a Microsoft Certified Solutions Partner, NEC, Nortel, Novell as a Novell Platinum Partner, Packeteer, Safari, Smart Technologies, Symantec, Toshiba, Websense, and 3COM. Obtaining these certifications and qualifications require various training, experience and performance requirements that give the company a competitive advantage.
Since 2003, overall gross margin has varied from about 15% to 19%, with the 19% experienced in the first nine months of fiscal 2008. Equipment margins have averaged over 9% and service margins have fluctuated from about 22% to 31%, with the 31% again experienced in 2008. It is clear margins are improving, but the thorn on the company’s side continues to be SG&A which has been consistently about 20% of sales from 2003 to 2007. Steve Wilk, the CEO, has clearly recognized the problem and commented in the latest press release that the company has already taken action to reduce its annual SG&A expense by $400,000. This is a beginning, but is insufficient. Pomeroy IT Solutions (PMRY), a company with a similar business to TRNT, but with a much larger and geographically diversified revenue base, consistently runs SG&A expenses of about 15% of sales. Assuming stable sales, TRNT would be consistently profitable at a 15% level of SG&A. This would require a reduction of about $1.5 million from the current annual level ($1.1 million in addition to the amount that has been announced.)
Obviously, a significant growth in revenue would help tremendously to offset the fixed over head costs and drive profitability. This appears to be a real possibility as the company has experienced record quotation volume as the demand for VoIP and security systems have surged over the past year. Even if this occurs, we believe a reduction in overhead is still the prudent course of action. Much of the overhead can be reduced with minimal impact on the revenue generating ability. A sale to a larger organization or a privatization of the company would lead to a material overhead reduction and would leave the company with all its growth prospects.
Despite recent losses the balance sheet remains solid with a current ratio of 5.0, no long term debt, $.30/share in cash and net current assets exceeding $1.20 per share. TRNT clearly has the resources to turn the company around. The critical issue is does management have the capability of turning the business around. We believe they do. They have successfully transitioned the business from a contract-based legacy business to a project- based business. The new model has higher margins but greater revenue volatility. As the business was transitioned, the new business has simply been structured with excess overhead which needs to be cut. Revenues have simply not risen to justify the large over head. In our opinion, the company simply has too many engineers. We believe Steve Wilk understands this and will take action to align expenses with current revenue. Whether the optimal strategy is a sale of the company, a privatization transaction or simply a significant over head reduction needs to be carefully evaluated, but what is unambiguous is that action is required. The current share price is significantly below the value of this franchise and does not reflect the excellent probability of a turnaround.
1) Sale of the company
2) Tender offer
3) Share repurchase program
4) Major over head expense reduction