focus on just the next 12-18 months.
The company is in the middle of a large restructuring as a result of CNSI once being a much larger
organization even before the sale of BSS (which was the bulk of of what was left) and adding to that the
Acision deal. Needless to say – there is/was a lot of fat and inefficiency everywhere as MESG even after
the Acision deal is only a small portion of what was a large troubled enterprise only a few years ago. The
company guidance is that by 3q next year they will be through all the restructuring and starting from a
clean q they will be at a $400 million revenue run rate, $100-$120 EBITDA run rate and have $100 million
of net cash on the balance sheet. EBITDA to FCF conversion should be 80+% as the business has little
working cap or cap ex needs, it has a net cash balance sheet and a $800 million NOL along with $200
million tax credit. So just based on that it would seem a screaming buy –
Based on 2016 YE RR - $120*8x=$960+100=1060/25=$42.40 based on 3q 2016 run rate.
And that might be low as at $120 million of EBITDA would be about $100 of FCF and $4.00 of FCF – so
only roughly 10x FCF excluding the cash on the balance sheet. Upon executing, starting to buyback stock
and given its strategic value as a take-out candidate rerating to 10x does not seem s stretch adding
another $10 of value or around a $52 stock price, but lets ignore that.
Now what makes this even more compelling in that according to the company’s 3q report this week, the
pro forma EBITDA for the q was $23…there was some confusion about this as the company did not
properly explain the effect of the conversion of Acision from IFS to GAAP – but you should think of the
company as currently on a $23/q or $92 million run rate as of today on a GAAP basis. This should be the
starting point to building to 3q 2016. Even the limited sellside coverage seemed to get confused about
the right way to think of converting an IFS company to GAAP. The company also highlights another 650
headcount reduction it is going to take before 3q 2016. At a cost reduction of between $100k-$90k per
head all in (CNSI was really bloated) that is another $62 million in costs to come out very shortly. Adding
that to the run rate and you get roughly $150 million of EBITDA on a run rate basis before you include
more Acision deal synergies and revenue growth.
Based on 2016 YE RR - At $150*8x=$1200+120=1320/25=$52.80. ($64/share at 10x)
Now this is assuming a totally overcapitalized balance sheet. At $150 million of EBITDA you would be
looking at around $4.75+ of fcf a share on top of the net cash balance sheet. Once you start looking at
buybacks or accretive M&A deals where they can buy small bolt on products that they can then blow out
to all their telecom carriers – you can create some nice upside to $50 by this time next year. They turn
fcf even with restructuring in 2016 and I would look for M&A or buybacks to start then. This company
could generate its enterprise value in almost 3 years here - and that is with a net cash balance.
Management recognizes some amount of debt debt is good to optimize returns. If you look at the balance
sheet capacity and assume buybacks or deals, you can make the stock look really compelling 2 years out.
Just with the excess cash on the balance sheet and fcf in YE 2017 you could almost buyback 1/3 the shares
and still have no net debt.
Lastly, there is a free call in getting taken out. There is an activist on the Board, and the CEO and CFO
have a resume of stepping into messy situations, turning them around and then selling them to a strategic
buyer. This is not an unreasonable expectation for Xura and something that could drive further upside.
In short, Xura is a company that has undergone a lot of change in 2015, with little buy or sellside
coverage. The stock price does not reflect these changes which you can see in their current numbers and
while their guidance would make the stock very attractive – it looks like their guidance is quite
conservative. Given the history of the prior CFO constantly missing numbers – such conservatism makes
a lot of sense. There is a lot of balance optionality to create value and Xura itself is a strategic target with
a willing management team. Given the current balance sheet and current results – there is a fair margin
of safety as it is trading cheap on current metrics and there are real cost reductions which are very much
in the company’s control.
